Exxon Mobil Corporation (XOM)

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Why Exxon Is the Top Holding in an Energy Transition Fund
By: Barron's | July 10, 2024

Beauty is in the eye of the beholder. So too, at times, is sustainability.

Big energy companies have long been seen as antithetical to the transition away from fossil fuels toward more green energy solutions. That's a justifiable position, given these players for years actively worked against climate change action and suppressed information about the issue, prioritizing their own carbon-emitting business model over science and popular support for renewable energy.

However, even if aggressive action were taken to move the world toward more options, like wind and solar, some oil and natural gas would remain in use; in addition, making the switch is a costly one. In that regard, some investors may see big oil as a necessary partner, even if they remain wary of "green-washing" campaigns to try to rehabilitate its image.

That backdrop makes it easier to understand why Exxon Mobil is the largest position in the Hennessy Energy Transition Fund, which also counts ConocoPhillips and Chevron among its top 10 holdings.

Barron's recently spoke with one of its portfolio managers, Ben Cook, to discuss how companies like Exxon fit with the fund's mandate, and he notes that Exxon "is pursuing practical pathways to transition."

That includes things like carbon capture and storage and lithium extraction for batteries. Cook notes that the company's priorities have remained firmer than others: "Unlike some of its peers that are now reversing course on some renewable endeavors, Exxon is taking a reasonable approach that remains shareholder-focused and should continue providing solid returns during the move to more climate-friendly fuels."

Exxon's balance between shareholder interest and its renewable initiatives speaks to how the fund seeks to identify companies that can handle both, given that some companies that may lead the energy transition and be truly revolutionary aren't always the best bet from an investor standpoint.

Likewise, the Exxon's deep pockets mean that its renewable projects aren't beholden to the political situation, be that tariffs or tax credits, which can often hamper smaller operators.

Cook highlights the company's ongoing, long-term commitment to lithium, which management has spoken publicly about, even in the face of lithium price weakness — a headwind to pure play companies in the arena, like Albemarle. "Exxon's integrated business model provides stability during times of price volatility as financial results of varying/different business units tend to offset one another, ultimately providing for consistency in financial results through the cycle."

He argues that the shares, which change hands for about 12 times forward earnings, are attractive, and that the company has the wherewithal to continue pursuing renewables from multiple angles (rather than focusing on just solar, for example, as some smaller companies do). "Exxon's total capital expenditures in 2023 were around $23 billion," he says, so committing a sum like $100 million to a green energy project is like "a rounding error" for the company.

ESG, which stands for environmental, social, and governance, has grown in popularity in the investing community, but there aren't any hard and fast criteria for what makes a company fall into this category. For example, one ESG-focused fund may include a company like Philip Morris International, given that it's a leader in reduced-risk tobacco products, while another may exclude it because it still sells traditional cigarettes.

Given the latitude with which investors and funds can judge ESG, it's easier to see how Exxon could be considered under this umbrella.

Cook says that focus on ESG could help motivate Exxon to continue to fund greener products, as the company clearly "has an incentive to broaden the company's appeal with investors that place emphasis on clean energy initiatives. While selling pressure associated with mandates to shed fossil fuel exposure seem to have reached a peak, attracting new investor capital obviously remains a key focus for any integrated oil company and Exxon's pursuit of low carbon solutions can certainly be a means to that end."

Of course, others disagree; blood may be boiling along with temperatures as much of the country struggles with historic heat, which scientists attribute to climate change. Still, baby steps may be better than no steps at all.

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