Morgan Stanley says keep buying Exxon as new board members speed up clean energy transformation

Published Thu, Jun 3 202112:30 PM EDTUpdated Thu, Jun 3 202112:45 PM EDT

Morgan Stanley is doubling down on its bullish outlook for Exxon in the wake of activist firm Engine No. 1 claiming a third board seat at the oil giant. Morgan Stanley said that with 25% of Exxon's board now made up of activists pushing for environmental, social and corporate governance criteria, the company will be forced to prioritize spending around the transition in energy. "We believe the updated results of this activist campaign may accelerate these changes, increasing emphasis on low carbon growth over increases in oil & gas spending," Morgan Stanley said Thursday in a note to clients while reiterating its overweight rating on the stock. Exxon said Wednesday evening that based on preliminary results, a third board candidate nominated by Engine No. 1 had gained shareholder approval. The announcement came after the activist firm secured two board seats at Exxon's annual shareholder meeting on May 26 . The vote over the third seat was previously too close to call. Engine No.1, which has a 0.02% stake in Exxon and has been targeting the company said December, has said the oil giant is jeopardizing its financial stability by not investing more heavily in low-carbon technologies. One of the firm's four nominees was not elected, but Engine No. 1 now controls three of Exxon's 12 board seats. "It is significant not just for the company, but also for the broader sector: if this can happen at the largest U.S. Energy company, arguably no public company's strategy is immune from ESG influence," Morgan Stanley's analysts led by Devin McDermott said. He pointed to some of the steps Exxon has taken during the last year to reposition its business, including cutting capital spending to defend its dividend, while also committing $3 billion toward carbon capture and other emissions-reducing technologies. The firm noted that Exxon's size means it's "well positioned to implement low carbon technologies at scale — helping mitigate energy transition uncertainty while also offering new attractive growth options for the company." Morgan Stanley upgraded Exxon to overweight in January in a note titled "Better Days Ahead." The stock has gained 48% this year, and the firm sees shares jumping another 16% to hit $71. Underlining the firm's bull case is Exxon's cost and capital spending cuts, upside to consensus free cash flow estimates and yield compression thanks to improving dividend coverage. Other Wall Street firms are less convinced that the board reshuffle will bring meaningful changes. Following last week's vote, when Engine No. 1 secured its first two board seats, Bank of America said it will have "no impact" on Exxon's investment case. "The activist additions are unlikely to change XOM's strategy which is anchored on investment in its best ever project queue," the firm said. "We see the practical implications as largely inconsequential." Bank of America has a buy rating and $90 target on the stock, representing 48% upside from Wednesday's closing price. - CNBC's Michael Bloom contributed reporting.

A view of the Exxon Mobil refinery in Baytown, Texas.

Jessica Rinaldi | Reuters

Morgan Stanley is doubling down on its bullish outlook for Exxon in the wake of activist firm Engine No. 1 claiming a third board seat at the oil giant.

Morgan Stanley said that with 25% of Exxon's board now made up of activists pushing for environmental, social and corporate governance criteria, the company will be forced to prioritize spending around the transition in energy.

"We believe the updated results of this activist campaign may accelerate these changes, increasing emphasis on low carbon growth over increases in oil & gas spending," Morgan Stanley said Thursday in a note to clients while reiterating its overweight rating on the stock.