Tesla and Exxon cannot both be right
Elon Musk makes cars that don’t use fossil fuel, which Darren Woods produces, but both claim the future as theirs
The future of energy boils down to the competing visions of a self-styled Technoking and a man so low-profile that Wikipedia isn’t sure which year he was born.
Elon Musk, the CEO of Tesla, and Darren Woods, his counterpart at ExxonMobil, could hardly be more different. Musk’s symbiosis with the publicity industry drives much of the conversation about Tesla’s electric vehicles and his other ventures, from rockets and neural implants to tunnel-boring machines and the odd flame-thrower. Woods’s most headline-grabbing gesture so far was the time he showed up for an earnings call.
Neither CEO lacks for confidence. In March 2020, Woods assured Wall Street analysts that despite some immediate challenges for Exxon, including that whole coronavirus thing, “the longer-term horizon is clear”. The next month, with much of the US in Covid-19 lockdown, Musk voiced similar optimism during a Tesla earnings call. “It’s a bit of a bumpy road,” he said of the pandemic, “but I think the long-term prospects are extremely good.”
Given the distance between the two men’s game plans, they can’t both be right. The past year has leant hard, for the time being, towards Musk.
When Woods spoke a year ago, Exxon was predicting that oil demand would keep rising for the next two decades. By 2040, the company estimated, modest adoption of electric and fuel-cell passenger vehicles would barely change the industry’s demand for oil. But those projections understate the likely pace of transformation, according to analysts at BloombergNEF. The analysts expect roughly 60% of sales and a third of the fleet to go electric by then, meaning passenger-vehicle fuel consumption will drop by 20%. Musk’s predictions make those numbers look conservative.
Woods joined Exxon in 1992, the year the company, reeling from the Exxon Valdez oil spill in Alaska, rolled out a rigorous, safety-orientated regime with the studiedly beige name of Operations Integrity Management System. Combined with Darwinian performance rankings, the system inculcated a culture of discipline and operational excellence. Until the latest tech boom, Exxon regularly topped lists of the world’s most valuable companies. Woods’s attitude can be viewed as that of an engineer who has run the numbers repeatedly and had colleagues cross-check his model before concluding that the answer is X.
Tesla does not work that way. Doug Field, the company’s former chief of engineering and production, once said: “We take leaps of faith that are like jumping out of an aeroplane and designing and building the parachute on the way down.” That may sound like classic Silicon Valley hooey, but Tesla has certainly executed a few miracle jumps. This is the company that staked its future on its Model 3 car, then struggled to manufacture it, eventually jury-rigging an assembly line inside a glorified tent. (Tesla built hundreds of thousands of Model 3s last year.)
Tesla’s cars have been dogged by complaints about quality, yet they inspire a fierce loyalty that rival carmakers can only envy. Musk’s confidence speaks to a conviction that, even if the evidence isn’t supportive at the moment, he knows better than any model.
Exxon historically traded at a big premium to other oil majors. Think of that premium as the market’s belief. Belief that Exxon spends money far more wisely than its competitors. Belief that it divines the future more clearly. Belief that the Operations Integrity Management System works.
This premium began collapsing in 2016, just before Woods took the top job. A series of earlier missteps, such as an ill-timed foray into shale gas, eroded faith in Exxon’s tactical instincts. Woods’s strategy of spending heavily through the downturn in oil prices did not help either. By the end of 2020 Exxon’s stock had been removed from the Dow Jones Industrial index and traded at a discount to Chevron. Activists were calling for a board revamp.
Meanwhile, saying Tesla commands a premium is like saying Musk likes to tweet. The company’s market value surpassed Exxon’s in 2020 and is now higher than that of Toyota, Volkswagen, Daimler, and General Motors combined, despite selling a fraction of the vehicles those carmakers pump out.
This is the belief premium raised to a kind of fanaticism. It is belief not in Tesla’s minimal profits; analysts expect the company to report less than $1bn of first-quarter earnings later this month, compared to a market value of more than $700bn. Rather, it’s belief in Musk’s ability to appropriate Steve Jobs’s old reality-distortion field.
This is a propitious time for reality distortion fields. To mollify investors, Exxon paid out almost $15bn in dividends in 2020, borrowing to do so. The company’s share price fell by more than a third anyway. Tesla announced three equity sales, holding out its hand for $12bn more and getting it. Its share price rose sevenfold.
Tesla, along with other cleantech companies, has benefited from low interest rates, which encourage long-term, speculative bets. Growing pressure to take on climate change fosters supportive policy, including subsidies, and environment-minded mandates for money managers. That Tesla looks vastly overvalued relative to its bottom line is not to play down its achievements. The Model S unquestionably redefined people’s expectations of what an electric car could be.
Musk has distorted reality enough already that traditional carmakers now race to electrify their own fleets. Still, today’s SPAC-tastic market favours companies judged less on the last set of financials and more on the next set of aspirational headlines.
Exxon is in the opposite position. Rather than invent the future, Woods’s job is more about preserving the past, or even trying to revive it. His commitment to that giant dividend is supposed to signal both that the oil age is not done yet and that Exxon has rediscovered its discipline.
Yet the momentum behind climate change action presents an inescapable challenge to a company that defines the fossil fuel industry. Woods’s latest analyst day, hosted virtually last month, touted spending restraint and nascent low-carbon businesses, so he clearly had to refocus his vision a little over the past year. But Exxon is not plunging into renewables. Peers have yet to prove they can really make a go of going green, and investors demanding dividends are generally wary of Exxon investing in any kind of expansion, be it wells or wind turbines.
Though the company’s discipline informs rigorous planning, a recipe for free thinking it is not. When Woods was appointed effective CEO-in-waiting in late 2015, one Wall Street analyst basically shrugged, saying that at Exxon “you don’t rise to the higher levels by rocking the boat, so the next person to be put in charge isn’t going to be rocking the boat”. That is not necessarily a problem until there is a sea change.
Tesla’s world, of course, is not here just yet. Musk has a habit of setting improbable targets and frequently missing them. Worse, the products do not always work as advertised. Customers can buy Tesla’s “full self-driving” upgrade for thousands of dollars even though it does not deliver what that name promises and has been linked to several fatal accidents. It is as if drivers are helping to build that particular autonomous parachute on the way down.
On this front, Exxon’s habit of touting safety statistics may seem mundane, but that stuff matters in a business where virtually anything is liable to explode or pollute if mishandled. Exxon’s confidence in its system leaves it vulnerable to being blindsided, but Musk’s confidence in his sheer invincibility makes him vulnerable to overplaying his hand. And his approach to manufacturing or even speculating in bitcoin displays a gambler’s mentality.
Though investors have proved comfortable gambling on that in turn, they can be even more mercurial than Musk. The recent tussle between growth and value investors, buffeted by factors including stop-start vaccination and inflation concerns, shows just how malleable the market’s belief system can be. Exxon’s stock is up 40% so far this year; Tesla’s just 3%.
Tesla’s rise has provoked scepticism, fear and finally greed on the part of other carmakers, which have tried some reality distortion of their own. VW’s share price hit an all-time high after it staged a “power day” in March, outlining a decade’s worth of planned battery innovation in a press event shamelessly similar to Tesla’s own “battery day”.
Tesla will fight back, of course, but its inflated value offers little tolerance for competition. If Tesla’s stock does tumble under such pressure, though, it would offer little comfort to Exxon — a cut-throat market for electric vehicles would savage oil demand. Both men cannot be right, but neither wholly owns the future, either.
Bloomberg Businessweek. For more articles like this please visit Bloomberg.com
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