European Majors Brace for AGM Grilling

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  • Rising oil and gas production, bumper pay packages and lingering connections to Russia could all be flashpoints for activists at this year's annual general meeting (AGM) season in Europe.
  • Greater backing for activists' shareholder resolutions would show that such proposals remain a key engagement tool, whereas a further drop in support could suggest they are no longer relevant.
  • Behind the scenes, the real action will see executives and investors trying to solve the great mystery of when — and how — the European majors might close the valuation gap on their US rivals.

The Issue

Annual general meetings (AGMs) are a difficult day on the calendar for international oil companies. The meetings expose them to a wide range of social and shareholder pressures as investors — and activists — inside and outside the events take advantage of this rare opportunity to air their grievances so publicly and ask awkward questions. BP begins the European AGM season on Thursday — and its experience will give fellow majors Shell and TotalEnergies some idea of what to expect.
Directors and Divestment

Over the past few years, climate-focused investors have threatened to shift away from wielding their clout by backing shareholder initiatives and toward voting against individual board members. At BP, five large UK pension funds have already said they will vote against chairman Helge Lund's re-appointment after seeing the UK major’s decision to produce more oil and gas — and emissions — for a longer period as a betrayal of its shareholder-approved climate plan.

BP's pivot "raises a significant governance question, given the high proportion of investors that supported the original target," Bruce Duguid, head of stewardship at US-based investment manager Federated Hermes, told Energy Intelligence. Duguid was referring to the ‘say on climate' ballot at BP's 2022 AGM last May, when almost 90% of shareholder votes backed its transition strategy.

Whether protest votes actually have a strategic impact remains an open question. Without enough widespread dissatisfaction to get buy-in from the largest index fund managers, as was seen in the 2021 unseating of three directors at Exxon Mobil, such votes are unlikely to rise beyond the level of protests. However, the longer-term consequences could be more significant. If investors begin to feel that their engagement is no longer affecting the change they would like to see, they may view divestment of their shares in a company as their only recourse.

Hard Act to Follow

The climate strategies of the European majors have been pushed forward by a steady stream of shareholder resolutions seeking more ambitious emissions reduction goals. But support for such requests slowed last year. Activist group Follow This has filed resolutions at all three European majors seeking to force them to adopt more ambitious medium-term emissions reduction targets, arguing that current goals are not aligned with the Paris Agreement.

Unlike last year, BP and Shell are not putting their climate strategies to a vote. However, Shell — which has chosen a different venue for its London AGM this year after major disruption last May — and Total are asking shareholders to support the progress made toward their goals in 2022. Like other initiatives, the Follow This proposals cannot pass without support from index fund managers, which are among the biggest shareholders in major oil companies. Larry Fink, the CEO of one such manager, BlackRock, has moderated his enthusiasm for corporate climate intervention.

To earn more support, Follow This founder Mark van Baal will have to overcome what he called a “false dilemma” some shareholders think they face: one where they will lose the ability to influence company behavior through engagement if they vote for a Follow This resolution. The Dutch activist group must "convince them that engagement is only effective if you really vote,” van Baal told a recent symposium. Mustering more support than last year, which could potentially yield future climate concessions from majors, would show that resolutions still have a place in the engagement toolbox. A further decline in support, meanwhile, could indicate that the climate resolution era has reached its end.

Russia Revisited

All three European majors have moved to dramatically reduce their exposure to Russia, giving up lucrative trade in Russian barrels and at least trying to walk away from assets. But none is fully free from entanglements there. BP faces the biggest questions: it has renounced its 19.75% stake in Russia's state oil firm Rosneft but has not found a way to sell its shares, which are still worth more than $8 billion at the Russian giant’s current share price.

Shell, meanwhile, could receive as much as $1.2 billion from the approved sale of a stake in the Sakhalin-2 project it used to hold, according to Russian media reports, which prompted a Ukrainian official to ask CEO Wael Sawan for the proceeds to go to Kyiv. And Total continues to fend off criticism of its Russian LNG interests despite Europe’s increasing reliance on that form of gas.
Profits and Payouts

Executive remuneration is another issue with potential to flare up at the annual meetings. Bernard Looney saw his proposed pay package for 2022 more than double, prompting UK media headlines slamming the “fat-cat BP chief.” The company reportedly reduced Looney’s payout after pushback from some shareholders. Shell’s former CEO Ben van Beurden, who stepped down at the end of last year, and Total's Patrick Pouyanne also bagged significant pay rises.

It will be difficult for a majority of shareholder votes to go against bumper payouts for executives who have just delivered record corporate earnings. But the profits that drove the pay increases, as well as lucrative shareholder returns through dividends and share buybacks, have been a flashpoint for activists intent on portraying oil companies as profiteering at the expense of a public struggling with the rising cost of living. Such a framing is hard for the industry to accept after it received not a dime of a bailout when it was hemorrhaging billions of dollars during the Covid-19 pandemic.

No-Man's Land

Arguably the most pressing issue in shareholders' minds may not even bubble to the surface at the AGMs, but it is sure to be a powerful undercurrent. The European majors are trading at historic discounts to their US peers — to the dismay of European executives and their investors. Research by analysts such as those at Jefferies indicates that the majors' strategies leave them in no-man’s land: too oily for climate-focused European funds and not oily enough for fossil-friendly US investors.

Lydia Rainforth, head of European integrated energy research at Barclays, believes investors will begin to value such businesses but admits “it may take time” for this to happen. “The challenge for investors is how to value businesses that are designed to provide value post 2030,” she said. Investors purchasing BP, Shell or Total shares at today's prices are either getting a bargain — if the stock manages to climb to the levels of the trio's US peers — or throwing away good money if the gap persists. That conundrum is likely to be the subject of many a quiet conversation between fund managers and executives on the sidelines of the upcoming AGMs.

Corporate Strategy , ESG, Equity and Debt Markets, Majors
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