Exxon capital structure arbitrage/impact trade idea

2 minute read

Buy Exxon equity, short the credit. We suggest to engage to reduce hydrocarbon capex and leverage up the balance sheet with the cash-flow benefits being distributed to shareholders at the cost of creditors.

With current equity holder activism around Exxon Mobil, we believe it could be opportune to take an advantage of the pricing dislocations in equity compared with the debt of the company while also trying to reduce the company’s capital expenditure in hydrocarbons. We propose the following trade idea, where trade weightings are designed to be carry neutral: (1) buy USD1mn of Exxon equity (XOM US) @ 58.84, indicated dividend yield of 5.91%; and (2) buy USD15mn EXXON 5y CDS protection @ 38bp.

This should be in parallel with the following engagement commitments: (1) field/support proposals for significantly reduced cap-ex spending and use resulting positive cash flow for dividend payments and/or stock buybacks; and (2) field/support proposals for leveraging up and targeting a BBB rating through additional debt issuance for purposes of enhanced equity dividend payments and/or stock buybacks.

The equity leg provides no more capital to Exxon but gives a right to engage for the orderly unwind of the company’s hydrocarbon business model and to avoid further capital expenditure on soon-to-be stranded assets. The short CDS position raises cost-of-capital for existing production, incentivising earlier closures and dissuading from further explorations. As such, both legs are climate impact positive.

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