Pioneer struggles; CEO gets raises

Company lost place on NYSE after share price dipped to under 16 cents

Times have been tough for San Antonio-based Pioneer Energy Services. They’ve been much better for President and CEO Stacy Locke — at least as far as his compensation.

Pioneer, which leases drilling rigs to oil and gas producers, has posted losses for 19 consecutive quarters, a time period totaling four years and nine months. In late July, the company reported its latest loss, nearly $13 million in the second quarter.

On Wednesday, Pioneer lost its place on the New York Stock Exchange after its share price dipped to under 16 cents. Its stock now trades on the over-thecounter QX exchange. Pioneer shares opened Thursday at 6 cents, inching up to 11 cents by day’s end.

Despite Pioneer’s ongoing troubles, Locke’s cash compensation has increased every year since 2014.

Locke made $2.3 million in salary, bonuses and long-term incentive awards last year, according to Pioneer’s 2019 proxy statement. That was a 4.4 percent increase from 2017 — and a 39.4 percent increase from two years ago.

Locke’s cash compensation was up by more than 73 percent between 2014 and 2018, according to proxy statements.

The 2018 compensation calculations don’t include another $2,374,666 in stock grants awarded to Locke when Pioneer was trading at more than $3 a share. However, Locke won’t be able to cash in those new shares for as long as three years, so if the stock doesn’t go up from its current price, they could be worth a fraction of their original value.

Locke’s total compensation in 2018, including value of the stock grants, was $4.7 million.

Other top executives at Pioneer Energy have also gotten substantial pay raises.

The second highest paid executive, Chief Financial Officer Lorne Phillips, earned $980,340 in cash compensation in 2018, up 1.4 percent from 2017 and almost 40 percent from 2016.

Locke did not return phone calls or emails seeking comment. He joined Pioneer as CEO in 1995 after a career as a geologist.

In 2011, speaking at a business forum at St Mary University, Locke said, “This was going to be the ultimate challenge: to see if I could make something of this company.”

Pioneer has had financial

peeks and valleys that have roughly tracked the oil industry’s boom-and-bust cycle — and both are subject to larger economic trends. The company, which owned 15 drilling rigs in 2001, expanded to 69 by 2008, just as the global financial crisis hit.

It’s been a tough time for the oil-field service industry in general as oil barrel prices have dropped significantly — despite modest rebounds over the last year. Analysts say too many of these companies are chasing business from oil producers who are being squeezed themselves. Producers are pressuring service companies like Pioneer for lower prices.

The PHLX oil-field service sector index, which tracks 15 oil companies bigger than Pioneer, was down by 57.25 percent between Aug. 14, 2018, and Aug. 14, 2019. Pioneer’s stock saw a steeper decline. Its closing price of 16 cents on Aug. 14, 2019, was down 90 percent from the stock’s close of $1.56 on Aug. 14, 2018.

Increasing a CEO’s pay, even at companies facing financial challenges, is not uncommon, said Steven Clifford, a former CEO of KING Broadcasting in Seattle and author of the book, “The CEO Pay Machine.” But he was struck by what’s happened at Pioneer.

“The magnitude of Pioneer financial problems make Locke’s compensation more unique,” he said. “This is a very odd case. Generally, when a company has lost 99 percent of its (stock) value over the last five years, the CEO doesn’t keep on getting pay increases.”

Five years ago, in mid-August 2014, Pioneer traded at more than $15 a share as the company notched its last profitable quarter.

By the end of 2018, Pioneer’s stock price had dropped down to $1.21 a share. In mid-May, it slipped under $1 a share. The New York State Exchange warned Pioneer that it would be delisted if the stock price did not recover to at least a $1 a share for 30 consecutive days within six months.

Officials of the exchange decided not to wait six months, saying last week that the company was “no longer suitable for listing based on ‘abnormally low’ price levels.”

No options

Locke has benefited from a switch in 2015 and 2016 away from stock option grants to direct cash incentives.

Chris Earnest, a partner with Compensation Advisory Partners in Houston, said the boards of Pioneer and other oil-field service companies worried about the volatility of their stock prices as the price of oil dropped in 2015 and 2016. He also said directors didn’t want stock options given to executives to dilute the existing stock held by shareholders.

So companies began replacing executives’ stock options with direct cash incentives payments, Earnest said.

His firm is hired by Pioneer’s board of directors to help develop Pioneer’s compensation plan.

Pioneer’s most recent proxy statement showed Locke received no stock options last year, compared with 576,028 stock options in 2017 and 301,957 in 2016.

The options give him the opportunity to buy shares of Pioneer stock at a predetermined strike price, usually the price of the stock at the time they were granted. They can be cashed in one to three years later. The options are worthless if they are below the strike price.

Instead of the options, Locke saw long-term cash incentives grow from $225,400 in 2016 to $796,400 in 2018.

Earnest said the 2018 cash award was actually three years’ worth of awards that were all paid in 2018, saying it would be misleading to conclude that there was a massive jump in long-term compensation from 2016 to 2018, the first year under the new incentive plan.

Just how is Locke’s compensation calculated?

One measure is to look at the compensation of senior executives at other oil-field service companies. Earnest said the point is to offer competitive pay to keep top talent from leaving.

Clifford questions such pay comparisons, saying they assume the talent of a CEO — who might take years to become an expert on his or her company — could be easily transferred to another company. In any case, he said it’s doubtful another company would want to hire the CEO at a firm with persistent financial troubles.

“No one is trying to hire these CEOs,” he said. “Do you think someone is saying, ‘Here is an CEO losing 99 percent of shareholder value. I am going to hire that person’?”

Clifford said Pioneer’s sixmember board of directors is part of the problem. The board, which includes Locke and approves his compensation package, appointed last month its first new director in years — Tamara Morytko. The company’s first female director, she’s the chief operating officer of New York-based Norsk Titanium and previously worked at oil-field services giant Baker Hughes.

Prior to her appointment, the last time a new director was seated was in 2008.

Clifford said given Pioneer’s financial challenges, the company was in need of new insights.

“With Pioneer not performing well, its surprising there have been so few changes on the board, “he said.

A Pioneer spokeswoman did not respond to a request to speak to Scott Urban, an former energy company executive who chairs the Pioneer board’s compensation committee. The committee sets the compensation for Locke

and other top executives. Urban has served on the Pioneer board since 2008.

It remains to be seen how Pioneer will fare in the long run.

Pioneer has $475 million in debt payments coming due in the next several years, according to company filings with the Securities and Exchange Commission. Given its stock price drops, the company's market capitalization was only $12.5 million as of last Wednesday.

Locke has argued that the company’s financial picture had been improving. It full-year net loss in 2018 amounted to $14.5 million compared to a $49 million loss the year before.

Results for the first quarter of 2019 weren’t encouraging. Pioneer reported a loss of more than $14 million — about 2.5 times the loss in the same quarter a year earlier.

In the second quarter, ending June 30, Pioneer saw a small rebound, reporting a $12.9 million dollar loss, around 35 percent less than the second quarter the year before.

The company’s earnings guidance for the rest of 2019 was downbeat.

Pioneer officials said the utilization rates of its domestic drilling rigs, the company’s biggest revenue generator — which were at 95 percent in the second quarter — would drop to 88 percent to 92 percent in the third quarter.

They also expect a slowdown in international operations in Colombia due to drilling-rig contract uncertainty.

In an earnings call earlier this month, Locke said Pioneer is considering merging with another company. But he said before the company could interest partners, it would need to reduce its debt load. He didn’t say how that would happen — Pioneer has $30 million in cash on hand.

“Other than companies that have gone bankrupt or disappeared, that is bad as it can be,” said Clifford of Pioneer’s financial performance. He said given that, he finds Locke’s growing compensation, “peculiar.”

“What is occurring at Pioneer doesn’t fit in our idea of capitalism — we are supposed to reward good performance,” he said.