Investors pushing shale firms to separate pay from ‘drilling’

No reward for executives

HOUSTON, Oct 2, (RTRS): Activist investors are taking aim at US shale producers, the companies most responsible for turning the nation into a global energy powerhouse, pushing them to stop rewarding executives for spending billions of dollars on new wells when crude prices are depressed.

US crude output has surged past 9 million barrels a day largely because of the shale sector, whose output this year is up 27.5 percent. The gains are fueled by a boost of about 50 percent in capital spending, benefiting executives come bonus time but crimping shareholder returns. Investors want the higher spending to go to dividends and buybacks, not more drilling.

The shift they are seeking could dampen spending on new wells, chilling a shale boom that has benefited US motorists and consumers. It could help the Organization of the Petroleum Exporting Countries, Russia and other producers who are trying to drain a global crude surplus. Booming US shale production has largely thwarted OPEC output cuts aimed at lifting prices. Low oil prices, in turn, have hurt shareholder returns.

Activists point to the lopsided split between pay and returns. The 10 biggest US shale producers paid their chief executives $2.2 billion over the past decade despite shareholder returns of 1.7 percent. These companies include Apache Corp and Devon Energy Corp.

Integrated

Contrast this with Exxon Mobil Corp and other integrated oil companies that produce, transport and refine oil all over the globe. These companies as a group paid their executives a total of $600 million during the same period and achieved a stronger 3.5 percent return, according to analysts at Evercore ISI.

Paying executives to produce more oil and gas has encouraged drilling. US shale output this year averaged nearly 6.1 million barrels per day (bpd), up from 4.5 million bpd a year ago, according to US government data.

The broader oil industry’s returns have not even approached the performance of the S&P 500, which delivered a 7.4 percent total return for the past decade. The split widened this year, with shares of shale producers down 20 percent or more and the S&P 500 up about 16.7 percent.

Some investors have had enough and begun to put money only into companies that compensate leaders for returns.

“Management teams have been rewarded far too long for destroying value,” said Todd Heltman of wealth manager Neuberger Berman, the seventh-largest investor in shale producer Cabot Oil & Gas Corp, a company whose executive pay policy emphasizes shareholder returns. “Now, there’s a paradigm shift happening.”

EQT Corp is among those feeling the heat. Hedge fund Jana Partners LLC attacked the shale company’s $6.7 billion bid for rival

past two months, leaving spending 1.5 percent below the May level.

Housing construction was up 0.4 percent. Nonresidential activity increased 0.5 percent, reflecting strength in hotel and office building. The August rebound was also helped by a gain in spending by state and local governments, which helped offset a further decline at the federal level.

Economists believe that construction spending will get a boost in coming months as rebuilding efforts get under way from the recent devastating hurricanes. Government analysts Rice Energy Inc in part over the potential for its executives to get a $130 million windfall by doubling its natural gas output. In September, EQT agreed to remove that bonus and focus pay more on efficiency and cost, not production.

“It has always been EQT’s philosophy to align its compensation programs with shareholder value creation,” said EQT spokeswoman Natalie Cox.

Hedge fund SailingStone Capital Partners LLC last year prodded Range Resources Corp to add two directors with compensation experience. Range also agreed to meet annually with shareholders to discuss executive pay, and add a drilling rate of return metric to its executive compensation calculation.

“We believe Range’s approach creates a strong alignment of both long and short-term incentives with the creation of shareholder value,” Range spokesman Michael Mackin said.

SailingStone declined to comment.

The more companies acquiesce to investors’ demands, the more pressure on their peers to follow.

“We believe the industry is on the cusp of a gradual, long overdue shift to returns-focused investing,” said Tim Rezvan, an oil industry analyst with Mizuho Securities.

But change will not come easy. Companies will expand production despite low returns to collect cash flow needed to pay debt and other expenses, said analysts, and as long as executives are paid to produce, they will.

Shale executives continue to earn higher pay despite mixed records. Noble Energy Inc paid Chief Executive David Stover $10.1 million last year, up 40 percent from 2015 even as the company’s TSR ranked last among peers chosen by the company’s board and reported in regulatory filings.

SandRidge Energy Inc gave CEO James Bennett an 86 percent pay boost for 2016, awarding him $18.8 million in the year the company exited bankruptcy protection.

Noble Energy referred requests for comment to a regulatory filing in which it said Stover’s pay encouraged “the continued achievement of short-and long-term goals necessary for stockholder value creation.”

Respond

SandRidge did not respond to requests for comment.

Companies like Cabot that have put returns at the forefront of pay decisions have delivered better performance. Its shares are up more than eight-fold since moving away from a production-heavy model in 2004.

Among Cabot’s shareholderfriendly policies: executive share awards vest after three years compared to peers that allow immediate vesting or at most a year. That encourages managers to focus on long-term goals. The company also puts the most emphasis on cost controls when calculating executive pay.

said that Hurricane Harvey only affected construction activity in Texas for the last week of August, while Hurricane Irma did not have any impact until September.

The overall economy grew at a 3.1 percent annual rate in the April-June quarter, the best showing in more than two years. Analysts believe activity slowed a bit in the July-September quarter to around 2.5 percent GDP growth. But they expect the impact of reconstruction efforts to start boosting GDP as soon as the current quarter.