WALL STREET JOURNAL.
Oil Companies Are Still Paying Their CEOs to Pump
Many big production firms still base executives’ bonuses largely
on how much crude they find and extract
Chesapeake Energy CEO Doug Lawler received $1.56 million last
year for exceeding production and reserve targets, more than
half his total bonus of $2.69 million. PHOTO: BRETT DEERING
FOR THE WALL STREET JOURNAL
Updated May 16, 2016 11:11
If investors hoped the
biggest oil bust in decades would change the way oil industry
executives are getting paid, they are probably disappointed.
Many large production
companies last year continued to incentivize their executives based,
in large part, on how much crude they found and extracted, according
to a Wall Street Journal review of filings from the largest U.S.
sizable cash bonuses for finding and producing more oil and gas than
the year before, even though plummeting commodity prices made it
unprofitable to keep drilling many wells.
Corp., one of the country’s largest producers, Chief Executive Doug
Lawler received $1.56 million last year for exceeding production and
reserve targets, securities filings show. That was more than half his
total bonus of $2.69 million, according to the filings.
rose 4.9% last year, more than twice its 2% target. But its earnings
plummeted, and its stock lost 77%.
A Chesapeake spokesman
declined to comment.
“There needs to be a more
returns-focused element in this industry,” said Paul Grigel, a
Macquarie Group Ltd. senior analyst who tracks pay-policy changes
among energy producers. “This is an issue for a lot of longer-term
investors; it’s something they’re becoming very impassioned about.”
Mr. Grigel found that 14
of the 25 companies he studied either made no change in 2015, or
didn’t disclose the details of their bonus calculations. Four
companies increased their emphasis on production and reserve growth
last year, while seven lessened the importance of these factors.
Exploration and production
companies in recent proxy filings have disclosed their formulas that
determined last year’s cash bonuses. These will be followed by annual
meetings, where shareholders will have a say on pay practices.
observers warn that investors won’t tolerate big bonuses based on
increased production if earnings and share prices are down.
“Many shareholders hope
that [bonuses] reflect the pain that investors are feeling in their
portfolio values,” said John Roe, managing director at ISS Corporate
Solutions, a unit of investment adviser Institutional Shareholder
Incentive pay in the oil
patch helps explain why U.S. producers have been slow to dial down
their output despite a global glut of crude and domestic natural-gas
U.S. oil production has
declined about 7% since peaking at a four-decade high of about 9.7
million barrels last year. Natural-gas output, meanwhile, has remained
on an upward trajectory despite a yearslong price slump.
Rewarding executives for
growth at any cost is rooted in Wall Street’s treatment of exploration
and production shares as growth stocks. Since the advent of shale
drilling more than a decade ago, analysts and investors tended to
favor future prospects over profitability.
The collapse in commodity
prices has put that practice into question, though, as many companies
struggle under debt they piled up acquiring land and drilling. Yet
producers are hesitant to stop incentivizing growth all together.
These companies’ borrowing abilities hinge on how much oil and gas
they have discovered but not yet extracted and sold. If they don’t
replace enough of the volumes they sell each year with new
discoveries, they risk losing funding.
Overall, bonuses, which
usually account for less than a third of total compensation, broadly
declined last year because low commodity prices crimped profits and
sent stock prices tumbling.
Continental Resources Inc.,
which drills in North Dakota and
Oklahoma, reduced the weight given to production and reserve growth in
its bonus math from 75% in 2014 to 34% last year, replacing its
incentives to simply find more oil and gas with one aimed at keeping
down the cost of doing so. Continental didn’t respond to requests for
Approach Resources Inc.,
which idled rigs on its West Texas
drilling land last year in response to low oil prices, eliminated
reserve and production targets. It increased the importance of capital
efficiency and debt relative to profits. In 2014, production and
reserve goals accounted for a quarter of possible bonuses.
“We made the decision,
given commodity prices, that what was more important was achieving
attractive rates of return with shareholder capital, preserving
balance-sheet liquidity and living within cash flow,” said Sergei
Krylov, Approach’s finance chief.
Devon Energy Corp.
in its proxy filing urged shareholders to
reject a shareholder proposal to eliminate reserve growth metrics from
its bonus formula. “Exploring for and developing undiscovered oil and
natural-gas reserves is fundamental to the company’s business and
critical to its ability to build and sustain value,” Devon said.
The Oklahoma City company
made production and reserve growth each worth 15% of possible bonuses,
up from 10% and 5%, respectively, in 2014. Though Devon exceeded its
production target, low commodity prices prompted the company to write
down the value of its drilling fields by $19.2 billion last year as
many of its drilling properties became uneconomical. That led to a net
reduction of reserves.
Missing its goal of adding
the equivalent of 140.4 million barrels of oil to its reserves cost
CEO David Hager more than $200,000, Devon’s proxy shows. Mr. Hager’s
2015 bonus was $1.55 million, about half what his predecessor earned
the year before.
Ryan Dezember at