Exxon’s Board Faces A Crisis

Inflation, Climate Change & Struggling Restaurants

Quick Facts From Around The Market

💰🤯 New jobless claims for unemployment benefits decreased for the fourth straight week. It fell to an adjusted 406,000, which is the lowest it has been since mid-March 2020.

🚗⚡️ Boeing is in hot trouble again and has to pay a fine of $17 million to the FAA after installing censors that were not approved on the 759 Boeing 737 MAX and NG aircraft.

💸📉 Americans borrowed more for longer in the first quarter, so they could buy more expensive trucks and sport utility cars, according to a study done by Experian. Credit scores are also higher and delinquencies rates are lower.

🧬 In January, Germany passed a law to require certain companies to have women on the board for 30% of the positions available. However, of the 66 companies subject to the regulation, only 6 have hired women since the announcement.

Engine No. 1’s Massive Win Over Exxon

Last December, a week-old hedge fund named Engine №1 tried to force Exon Mobil to change their ways and better confront the growing challenge of climate change. Their arguments fell on deaf ears and they were laughed at by Wall Street. At the time, the fund did not even own a stake in one of the world’s largest publicly traded energy companies.

Six months later, Engine №1 have become the ones laughing, after forcing Exxon to accept new board members who could help address the companies business strategy and the risk they pose to climate change, which Exxon has been long reluctant to address.

A company as large as Exxon, with a market cap of $250 billion, very rarely faces (and loses) shareholder battles. However, stakeholders who are familiar with Exxon said that the defeat was years in the making. The company has continued to post weak returns and has become reliant upon debt to pay their quarterly dividend.

Engine №1’s campaign started when they noticed that Exxon was in trouble due to their disastrous 2020, where they lost $22 billion. Engine №1 saw this as a prime opportunity to push for changes on the company board with arguments about Exxon’s spending and lack of energy transition plan. Since Exxon had taken such a beating that year, investors were primed to listen.

Engine №1 searched for candidates who had experience in the energy sector that could be potential directors at Exxon and would be up to challenging Exxon. They also built a strong network of allies including the New York Common Retirement Fund and California’s teacher’s retirement fund, which have $255 billion and $300 billion respectively. In addition, they pushed for a climate referendum that would cost Exxon $65 million.

Now Exxon has started to take the threat more seriously after conceding 2 board seats under pressure from Engine №1. Analysts do not think Exxon will be able to maintain their existing dividend, despite major refinancing campaigns in 2020, which will continue to add negative pressure to the Board.

The end of the battle is far from over. Climate change is hardly a favorite conversation at an oil & natural gas company. However as BP, Chevron, and Shell have all invested in more renewable projects, Exxon is the last to make a monumental shift; and it seems like that time is coming closer.

China’s Commodity Price Increase Effecting Small Businesses

The world is going through a massive surge in commodities prices and China’s small business are seeing increased pressure due to these increases. The problem is so large that the Chinese Premier, Li Keqiang and other leaders stated in a meeting Wednesday that they would be increasing support for private businesses. Their plans consist of dealing with the issue of financing and dealing with the rising of commodity prices.

The statement is the latest by the government in the past few weeks where commodities have hit record highs. The government is rushing to try to limit the impact on the economy. Since one of the competitive advantages China has is cheap pricing of exports, if they were to raise prices, the fear is that they would lose customers to other developing nations. This creates a Catch 22 for China, because if they maintain their existing prices despite rising commodity prices, then they’ll cut into profit margins.

Perhaps as a result, on Thursday the Chinese Statistics Bureau stated that industrial profit growth has slowed to a 57% year over year increase in April from a 92.3% in March. However, this is also due to how the coronavirus impacted the economy last year. The bureau did state that rising commodity pricing was one of the reasons for this slow growth.

The cost of raw materials, which is measured by the producer price index, rose 6.8% from a year ago in April. This is the fastest growth in over three years. In tandem with this increase, consumer prices only increased .9%. This massive difference in pricing changes has drastically affected the profitability of companies.

One of the main drivers of the Chinese economy are small business that rely on raw materials. There are 139 million small business in China according to the State Council. They believe that many companies are seeking loans to continue operating and hire new employees as the pandemic fears wane. The Chinese government has made this process easier and most applications are approved or denied within 2-weeks, which has helped the country maintain stability despite the pandemics impact.

Covid Relief Grants Running Dry for Restaurants

Many restaurants, bars, and other food businesses are struggling to get the Covid relief that they need as part of the $28.6 billion grant program. What’s worse? The money is set to run out well before most of the restaurants can get the relief needed as stated by the head of the Small Business Administration on Wednesday.

The fund originally had $28.6 billion in it, however, it received 372,000 applications looking for roughly $76 billion. This exceeds the allotted $28.6 billion by almost triple according to Isabella Casillas Guzman, who is the administrator of the fund. Ms. Guzman continued to say that when the program closes that there will still be businesses seeking additional grants. The grant application closed on Monday this week.

The Restaurant Fund was created in March and was designed to prioritize women and veteran owners as well as minority owners who met certain income thresholds. Of the 372,000 applications that were received 208,000 met the qualifications and will receive funding first.

Representative Angie Craig from Minnesota said she was disappointed that many restaurants are not receiving any aid. She stated “Our government asked them to shut down during a public health crisis. We need to work together to uphold our ongoing commitment and replenish the fund.”

However, a second grant program run by the Small Business Administration created the Shuttered Venue Operators Grant, which was designed for live-event business like music clubs and theaters, has enough money for all of its applicants. The grant is for $16 billion and is still accepting applications as they only received 13,000. However, the venue grant program has been moving much slower than the restaurant one as they have not even sent out approvals to companies yet after 5 months.

This was confirmed by the National Independent Venue Association, which said none of their members had received a decision yet. Unfortunately it seems the decision process is dramatically slower than China’s 2-week approval process.