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Adding Downside Protection To Exxon Mobil


Exxon Mobil shareholders face a new risk as the company comes under investigation by the New York state attorney general.

The NY attorney general's probe is investigating whether the company misled investors about the risks to its business associated with climate change.

We discuss a secondary risk associated with the investigation, a response to related claims by Exxon Mobil, and ways to add downside protection to the stock in light of this.

A New Risk for Exxon Mobil Shareholders

As The Financial Times reported over the weekend ("Exxon investigated over climate change statements"), news broke on last Thursday that New York state attorney general Eric Schneiderman was investigating Exxon Mobil (NYSE:XOM)

over whether it had misled investors with its statements about the risks to its business posed by climate change.

According to the Financial Times, the attorney general's office is also investigating whether Exxon committed consumer fraud regarding climate change. As the article notes, New York state's Martin Act, which dates back to 1921, makes it a crime to mislead investors; the Martin Act, and subsequent case law that expanded its scope was used by Schneiderman's predecessor, Eliot Spitzer in prosecuting financial fraud. Although the only other energy company currently being probed by Schneiderman's office over climate change claims is Peabody Energy (NYSE:BTU), the Financial Times argues that other energy companies could be at risk.

Potential Scope Of The Risk

To give an idea of the potential scope of the risk, the Financial Times cites legal experts who argue that the probe into Exxon could

eventually grow into a case similar to the landmark tobacco settlement in 1998. Cigarette manufacturers agreed to pay more than $200bn over 25 years to resolve deceptive sales and marketing practices, and allegations that smoking contributed to health problems.

In a post over the weekend at Washington news site The Hill ("What Exxon didn't tell their shareholders"), Andrew Behar, CEO of As We Sow, offered an ominous parallel for Exxon Mobil shareholders: Volkswagen (OTCQX:VLKAY):

We are learning from the Volkswagen emissions scandal that misleading the public and shareholders can result in enormous destruction of a corporate brand and shareholder value.

In light of Behar's Volkswagen comparison, it's worth mentioning a secondary risk associated with these sorts of investigations: lawsuits by asset managers. A November 8th Financial Times article reported that the largest asset manager in the Nordic region, Nordea Asset Management, was considering suing Volkswagen over losses the asset manager occured due to the drop in Volkswagen shares as a result of the emissions scandal. If New York's attorney general gains traction in his Exxon probe, and Exxon shares fall as a result, it's possible Exxon might could be sued by asset managers as well.

Exxon Mobil's Response

Exxon Mobil's vice president of public and government affairs, Ken Cohen, responded to Behar's post (and, by implication, the New York attorney general's probe) in a post of his own over the weekend ("Setting the record straight on climate"; the image directly above comes from Exxon Mobil's site):

ExxonMobil scientists have been studying climate science for more than three decades. As we have said quite publicly for years - and as our CEO Rex Tillerson reiterated in a speech to a major conference in London the same day the column in The Hill appeared - climate change is a serious problem that requires research for solutions and effective policies that balance society's need for energy and environmental protection.

Cohen went on to note that Exxon Mobil's scientists had contributed research on climate change to peer-reviewed journals for years and had participated in U.S. and United Nations in reviews on climate change, so their...