Exxon Mobil: Plastics Strategy, A Well-Worn Theme (NYSE:XOM)

Coverage of Exxon Mobil (NYSE:XOM) focuses almost exclusively on short term supply/demand misalignments which mean rapid increases (or decreases) in the price of oil and/or gas. The big issue in 2022 was the Russian invasion of Ukraine and effective removal of Russian oil and gas supply to Europe. This was a cataclysmic change in supply which led to dramatic oil and gas price increases and a 60.8% increase in XOM’s stock price year on year. The response to disappearance of a huge slice of Europe’s (fossil fuel) energy supply is interesting. A hot winter in Europe is helping, but so is a massive effort in Europe to address the Russian shortfall. It has not been solely about replacing the missing oil & gas, although XOM CEO Darren Woods is on the record that XOM could help Europe rapidly get into fracking. Instead Europe is doubling down on expanding investment in renewable energy and its management, based on the view that the transition already underway now needs to be accelerated. On the other hand, a big freeze and massive storms in the US this winter have helped keep oil & gas demand up. All of the above is short term-focused and some investors have been successful in focusing on this. I’m more long term focused and I’m pretty sure that many investors have a longer term view. This requires a different mindset and paying attention to the company’s longer term strategy becomes of critical importance. Here I address XOM’s downstream Product Solutions business because a number of commenters have suggested that this will become a key part of XOM’s future business as the world electrifies both energy and transport. I think that this aspect of XOM’s business is facing challenges that are not being addressed by the company. I conclude that, just as XOM is challenged by the need to reduce fossil fuel production, similar challenges is faced by downstream plastics business. Investors might consider these issues as they are relevant to considering investment in XOM at a time when its share price is elevated.

How Exxon Mobil positions itself

How a company projects itself is revealing. Looking at the XOM website, one sees that the company has three business divisions : Low Carbon Solutions, Product Solutions Company and Upstream Company. The engine of the company (expanding oil and gas production) hides under the term “Upstream Company”. Here I focus on The “Product Solutions Company”. This is about taking the fossil fuel products and making various chemical products such as lubricants and plastics. The issue for this business is less about emissions and more about managing the products once they have outlived their usefulness. The big one is plastics, which have become a massive pollution issue. A UN report suggests that “business as usual” would lead to massive amounts of plastic entering aquatic ecosystems, from annually 9-14 million tons in 2016 to a projected 23-37 million tons by 2040. I argue here that XOM’s response is to fly a distraction rather than address the issue. It is about “style over substance”, which is a well-worn theme for the company.

Plastics

I recently saw a garbage disposal truck indicating that by 2050 there will be more plastics (by weight) in the oceans than fish.

Exxon Mobil has extensive web coverage of its huge range of polymer products in its Product Solutions business, which it states is one of the world’s largest chemical companies. It produced 5.9 million metric tons of single use plastics in 2019, which is just one section of their overall plastics production. The number for single use plastics production in a single year puts into context a recent XOM press release concerning “Large Scale Advanced Recycling”. This release used “pounds” rather than metric tons to indicate the scale of their activities. Translating the numbers in the press release to metric tons gave the following for XOM’s Baytown Texas facility which it describes as “one of the largest advanced recycling facilities in North America”. The amounts recycled in metrics tons are : 6,800 in 2021, 36,300 in 2022, plans for up to 0.45 million in 2026. This means that in 2022 XOM will have recycled 0.06% of its 2019 production of just single use plastics, and by 2026 this could rise 12 fold to 0.7% of its 2019 single use plastics production. The point is that XOM’s Product Solutions business (plastics, performance chemicals, lubricants, lower emissions fuels) projects a tripling of its earnings between 2019 and 2027. This puts projections about its plastics recycling into an even clearer perspective. The term “greenwashing” seems appropriate because it is clear that the recycling efforts are more promotion than a real solution.

My point is that XOM’s claims about recycling will have a tiny impact on plastics pollution, even if their ambitious plans to scale up recycling are implemented successfully. This is the lens that experts interested in addressing the enormous problem of single use plastics are using. XOM’s use of numbers that appear large, but are actually of little relevance to plastics pollution, is no longer a strategy that is working as the scale of the plastics problem becomes clearer.

High Ambition Coalition to End Plastic Pollution (HAC)

Recently 50 countries formed HAC to formalize ways to address plastic pollution by 2040. The countries are: Rwanda, Norway, Canada, Peru, Germany, Senegal, Georgia, Republic of Korea, UK, Switzerland, Portugal, Chile, Denmark, Finland, Sweden, Costa Rica, Iceland, Ecuador, France, the Dominican Republic, Uruguay, Ghana, Monaco, Slovenia, the United Arab Emirates, Republic of Ireland, Seychelles, the Netherlands, Belgium, Luxembourg, Cabo Verde, Burkina Faso, Australia, Azerbaijan, Colombia, Austria, Greenland, Jordan, Panama, Mali, New Zealand, Bulgaria, Montenegro, Cook Islands, Mexico, Guinea, Antigua and Barbuda, Armenia, Maldives and the European Union. The USA, China and India are notable absences.

The HAC coalition has 3 concrete goals and 7 deliverables defined.

The goals are :

1. Restrain plastic consumption and production to sustainable levels

2. Enable a circular economy for plastics that protects the environment and human health

3. Achieve environmentally sound management and recycling of plastic waste

Key deliverables are :

1. Eliminate problematic plastics, including by bans and restrictions

2. Develop global sustainability criteria and standards for plastics

3. Set global baselines and targets for sustainability throughout the lifecycle of plastics

4. Ensure transparency in the value chain of plastics, including for material and chemical composition

5. Establish mechanisms for strengthening commitments, targets and controls over time

6. Implement monitoring and reporting at each stage through the lifecycle of plastics

7. Facilitate effective technical and financial assistance, scientific and socio-economic assessments

A recent article makes the point that the plastics are becoming a big issue and that there is controversy about the approach, with the HAC looking to reduce the levels of plastics produced with binding targets for reduction, while some major fossil fuel producing countries (including the US and Saudi Arabia) are more focused on recycling and voluntary targets. The article makes the point that recycling is ineffective and environmental treaties which directly address the problem, rather than band-aid solutions aimed at recycling, have some history of success (notably addressing the ozone layer problem).

The above program is but one of a number initiatives, and the UN Environmental Programme has a committee aiming to develop a legally binding instrument on plastic pollution by end of 2024. A big focus is on marine pollution.

Montreal protocol addressing the ozone layer

A recent report “Scientific Assessment of Ozone Depletion: 2022” documents the success of global action to address ozone depletion. This report is worth paying attention to because it catalogues how environmental challenges can be successfully addressed.

Note that the history of the development of the successful Ozone-depletion program managed resistance from industry participants (notably DuPont (DD)) responsible for production of the ozone depleting chemicals.

Conclusion

I continue to be astonished when I read much of the commentary on Seeking Alpha concerning XOM. An uninformed reader could conclude that XOM’s market opportunities are undergoing dramatic expansion and any clouds on the horizon are distant and unspecified. XOM’s management is part of this story as they resolutely refuse to acknowledge the issues confronting the company. How can a company producing products (oil and gas) that comprise a significant amount of global emissions, not even mention Stage 3 emissions? It doesn’t take much to see clouds on the horizon from many directions. These clouds come from direct competitive threats to fossil fuel production (e.g. electrification of transport, electrification of power through renewables, electrification of heating through heat pumps replacing natural gas), challenges to claims about carbon sequestration, international efforts to finance exit from fossil fuels globally, international efforts to address emissions reductions, international efforts to address biodiversity). These are all big issues for XOM, but I raise another issue concerning a major part of their business, that of plastics pollution. I see a common theme running through the management of XOM’s business being to double down on existing businesses and spend a lot of effort on distractions (carbon capture for emissions, recycling for plastics pollution) even though it is clear that things are changing.

XOM closed at $110.09 yesterday, close to an all-time high. The company pays a fine dividend and it has a track record of sustained dividends. This dividend policy is hugely important for management, but sustaining the dividend requires continued success with both fossil fuel expansion and a licence to continue expanding plastics production. Neither of these major business activities have a long term future and carbon capture and recycling are not going to stop exit from fossil fuels and serious controls on plastic production. These issues won’t come to a head overnight, but they are becoming increasingly urgent and no amount of obfuscation by XOM management is going to stop them. This probably means that these issues will enhance a likely correction in stock price as the European crisis gets resolved. The question for new investors is how many years of dividend are needed to make up for a substantially lower stock price if you invest in XOM now?

I am not a financial advisor, but I do pay attention to massive changes as the end of the fossil fuel era approaches and everything gets electrified. I hope that my perspective is helpful to you and your financial advisor as you consider investment in XOM.