Itβs been a busy month on the road in Texas, West Virginia, and New York, but Iβm back with another issue of Carbon-Adjusted EBITDAX, the only (as far as I know) newsletter for emissions-focused finance professionals in the oil and gas industry.
Letβs get into it.
π Not-So-Current Events
Exxon and Engine No. 1
Last week, I went to the Climate Risk and Returns conference hosted by the CFA Institute in NYC and listened to Jennifer Grancio β CEO of hedge fund and activistic investor Engine No. 1 β speak on the firmβs boardroom coup-dβetat at ExxonMobil
In 2021, the firm captured 3 of Exxonβs 11 board seats with the support of BlackRock, Vanguard, and State Street, spending ~$15M in marketing to create a PR force multiplier of its $40M stake, or ~0.02% of the company
The campaign was to βRe-energize ExxonMobil,β and it was orchestrated not as a green campaign, but one that equated climate risk with financial risk in terms of shareholder value
The objective was to refresh the board with diverse energy experience, impose greater long-term capital discipline, and play a larger role in the energy transition
ExxonMobil: One Year Later (Engine No. 1)
Engine No. 1 published the above-linked after action report in 2022
The high points include a timeline from 11/21 to 3/22 of progressive investments in a Low Carbon Solutions business unit, emissions reduction targets and milestones, and significant CapEx reductions.
My Opinion: I appreciated Jenniferβs candid view that fossil fuels will be with us for quite some time, therefore asset managers should take an active role in decarbonizing and investing in, not divesting from, the industry
Your Opinion: Do you think Engine No. 1 was a catalyst for change with Exxon? Let me know in the comments.
π The Tabs Iβve Had Open All Week
Oil & Gas News
π Leading Investor Group Toughens Stance on New Upstream O&G Projects (Reuters)
The Net Zero Asset Owner Alliance (NZAOA) β a group whose members control $11 Trillion (with a βTβ) in assets but canβt get a better acronym β is directing its members to make no new direct investments in upstream O&G infrastructure projects for new fields
The alliance is calling on O&G companies to set science-based emissions reduction targets and implement transition plans
This means that public O&G companies held by these investors will start to feel the implications of this guidance in the coming months.
Highlights Include:
Setting science-based, absolute- and intensity-oriented emissions targets covering scope 1, 2, and 3 emissions, evaluated by a 3rd party against a reputable framework
Addressing fugitive methane emissions
Mandatory climate reporting that informs investors in a standardized, comparable format, including:
Scope 1-3 emissions by individual greenhouse gases
Identify the split of emissions between estimated, measured, and assured
Provide forward-looking targets covering absolute emissions and emissions intensity
π Diamondback Joins Oil and Gas Methane Partnership 2.0 (Hart Energy)
In 2022, Diamondback ($FANG) announced its commitment to add continuous emissions monitoring systems for 90%+ of operated oil production by the end of 2023
By 2024, they plan to reduce methane intensity levels by 70% compared to 2019 levels
Capital Markets
π Sources: Japan's Three Megabanks Face Votes on Climate Change (Hart Energy)
A coalition of climate groups filed shareholder resolutions to be voted on in Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group
However: Hurdles are high for climate resolutions because they commonly push for amended articles of incorporation of a company which, under Japanese law, requires a 2/3 majority vote.
In previous votes, climate resolutions have received up to 35% support
The stakeholder proposals dealt with amending the articles to require transition plan disclosures that align with the Paris Agreementβs 1.5 degree goal
Opinion: Iβll reserve judgement until the meetings in June, but I generally think more data and transparency is a good thing.
π Hong Kong Stock Exchange to Tighten Climate Disclosure Rules (Bloomberg)
New rules are expected to start in January 2024, strengthening the current βcomply or explainβ framework
Under the new rules, companies will have to report:
Details of energy transition plans
Measure and disclose Scope 3 emissions
Elaborate on risks and opportunities presented by climate change
For the first two years, companies will not have to quantify these risks, but starting in 2026, they will have to be fully compliant.
IPO applicants will have to disclose material ESG info in their prospectus
According to Google, the latin plural of βprospectusβ can also be βprospectusβ
What does this mean for O&G?: There are 43 energy companies on the HKSE all located in the Asia-Pacific region. It will be interesting to see how they comply. Iβll follow up in a later issue with any updates.
Takeaway: Weβll watch this as a bellwether for other stock exchanges.
βοΈ Drilling Deeper - Hot Topics
π£ More Activist Investors! - βDecarbonisationβ (with an βsβ) and Australian M&A
*οΈβ£ Brookfield / Grok Ventures takeover proposal for AGL Energy - AUS$4B
This is old news from last year, but I thought it was pretty interesting and keeping with the theme of board activity
AGL Energy is Australiaβs largest electricity generator, involved in both the generation and retailing of electricity and gas for residential and commercial use
Tech billionaire Mike Cannon-Brookes (co-founder of Atlassian) made two non-binding takeover proposals in early 2022 as an alternative to AGLβs proposed demerger of its electricity generation and retail assets
The takeover would have involved a $20B transition plan for AGLβs generation fleet
Each proposal was rejected by the board and Brookfield / Grok stopped pursuing, but MCB went on to control 11.28% of AGL. The demerger proposal was withdrawn in May 2022.
MCB then nominated 4 directors to the board, all of whom were approved by shareholders.
Fun Fact: As part of the ongoing feud between Substack and Elon Musk / Twitter, you can no longer embed tweets on Substack.
π£ The Hotchpotch World Of Financed Emissions: A Case Study Of Top Four US Banks In The Energy Sector (Forbes)
You should give this article a read. It is a very in-depth analysis where only an incredibly long summary would do it justice, but here are the high points:
Financed emissions are subject to the Partnership of Carbon Financials (PCAF), but there is considerable dispersion in how banks report financed emissions
This article looks at J.P. Morgan Chase, Morgan Stanley, Goldman Sachs, and Citi, whose individual analyses include a discussion around methods, impact rank, dollars committed, and data quality
These banks report a mixture of absolute emissions and emission intensity
Citi the only bank to set targets in absolute emissions, others report in emissions intensity
Methodologies vary:
Industry Coverage: βEnergyβ is defined differently by bank.
For example, Morgan Stanley doesnβt appear to include commodity traders in its definition
Goldman doesnt define the subsectors in O&G
Variety of Net Zero scenarios are used as the bullseye for their commitments, but the writer had a hard time seeing which one was most conservative
The banks had many different ways of calculating financed emissions ranging from multiples of committed capital to enterprise value
Banks report on their physical and transition risk exposure, but the stress tests are very opaque and not comparable without banks posting their Excel models onlineβ¦whichβ¦yeah right
All this makes cross-bank comparability very difficult, but credit should be given to Citi for providing several versions of their emissions measures
Overall, these comparisons are very interesting but nowhere comparable to the uniformity of financial reporting
π΅ πͺ΄ Sustainability-Related Finance Update
Diversified Energy ($LSE:DEC) - $244M / $125M
The Company completed an acquisition-related redetermination of the borrowing base of its sustainability-linked loan, resulting in a 50% or $125M increase in the borrowing base to $375M
This was related to their $244M acquisition of upstream assets from Tanos Energy Holdings LLC, a portfolio company of Quantum Energy Partners
Diversified funded the acquisition with proceeds from its recent equity raise, cash-on-hand, and the Companyβs enlarged borrowing base of the sustainability-linked loan
π One Fun Thing
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