Shale drillers have been plagued by pipeline constraints, rising oilfield supply prices, and a shortage of rough necks and rigs. But there’s another reason why the highest oil and gas prices in the last few years haven’t tempted US drillers to increase production: their executives are no longer paid.
It was once encouraged by compensation programs to produce certain amounts of oil and gas. Little consideration of economics.. After years of losses, investors have demanded a change in the way bonuses are created, putting more emphasis on profitability. Now, executives paid for pumps can get more rewards by keeping costs down and returning cash to shareholders.
Shift contributes to A major shift in energy stockOtherwise, the market is sluggish. Energy stocks led the bull market in 2021, with stocks in the S & P 500 up 46% this year, while the broader index fell 18%.
Focusing on profitability rather than growth also helps explain the modest reaction of drillers to the highest oil and gas prices over a decade.US oil and gas production Blockade lowSince then, oil prices have doubled to about $ 113 per barrel, and natural gas has quadrupled to over $ 8 per million British thermal units, yet production is below pre-pandemic levels. I am.
Marcus McGregor, Money Manager Conning’s Head of Product Research, said: “They don’t get paid for doing so.”
Analysts expect oil and gas prices to remain high, as US producers are hesitant to drill further.
The shale liler Told investors For the past few weeks, they have adhered to the drilling plans created when commodity prices were much lower and maintained stable production. Instead of chasing fuel price increases through drilling, Cher executives say they use profits to pay off debt, pay dividends, and buy back shares to increase the value of issued shares.
Nine shale oil companies that reported their first-quarter results in the first week of May summarized: Invested $ 9.4 billion in shareholders Buybacks and dividends were about 54% more than we invested in new drilling projects.
Among them, Pioneer’s output decreased by 2% from the previous quarter, adjusting for sales. Meanwhile, Western Texas excavators will return $ 2 billion to shareholders, pay a dividend of $ 7.38 per share, and repurchase in the first quarter to $ 250 million. The company is currently awarding bonuses primarily related to cost control, achieving free cash flow, and achieving return goals. Over the past few years, 40% of Pioneer bonuses have been associated with production goals.
At Range Resources, CEO Jeffrey Ventura received a $ 1.65 million cash bonus in 2019. More than half of this is due to Appalachia’s gas producers exceeding their production and reserves targets, even as gas prices have fallen. This year, as in the previous two, production and reserves have been removed from Range’s bonus calculations and replaced with incentives to keep costs down and increase revenue. Range, who declined to comment, told investors to repay debt, buy back shares, revive quarterly dividends suspended during the pandemic later this year, reduce drilling and stay within budget.
According to Meridian Compensation Partners LLC, production was included in less than half of last year’s disclosed bonus plans, down from 89% of the 2018 Big Sher Liller incentive formula. Wage consultants have found that the weight given to annual cash bonus production has shrunk from 24% three years ago to 11%.Meanwhile, cash flow targets, rate of return indicators, and Environmental goals..
“Companies were burning cash and trying to maximize production,” said Christoph Nelson, Credit Research Director, Income Research + Management, Investment Manager. “It’s not what investors are looking for anymore.”
In the decade before the pandemic, US shale producers spent a great deal of time claiming domestic oil and gas deposits made available by new drilling techniques. Companies competed for the right to shale sweet spots, then drilled to secure long-term leases and reserve additional oil and gas reserves.
The oil and gas flood overturned concerns that the United States was running out of fossil fuels, which overwhelmed the market and pushed down American energy bills. But the benefit was that of Wall Street.
According to Deloitte LLP, between 2010 and 2019, shale companies spent about $ 1.1 trillion, but lost about $ 300 billion in free cash flow, income minus investment and daily costs. rice field. The company expects producers to make up most of their losses with two profits this year and earlier.
When OPEC started price competition in late 2014, oil crashed and Bankruptcy increases Among North American free market producers.With shareholders Activist investor We focused on paid plans that reward production growth, regardless of what price the barrel got. Investors have thrown lifelines to many companies, Buy over $ 60 billion in new stock The producer reduced their debt burden and sold it because it was floating.
But as soon as prices recovered, shale producers surged again. Critics of paid pump compensation have doubled their efforts.
Activist investor Carl Icahn aimed Occidental Petroleum Executive Compensation He criticized how much the company was spending on drilling after announcing its acquisition of rival Anadarko Petroleum Corp. in 2019.
Vicki Hollb, CEO of Occidental Petroleum, says that there are currently few incentives to increase production.
It was once encouraged by compensation programs to produce certain amounts of oil and gas. Little consideration of economics.. After years of losses, investors have demanded a change in the way bonuses are created, putting more emphasis on profitability. Now, executives paid for pumps can get more rewards by keeping costs down and returning cash to shareholders.
Shift contributes to A major shift in energy stockOtherwise, the market is sluggish. Energy stocks led the bull market in 2021, with stocks in the S & P 500 up 46% this year, while the broader index fell 18%.
Focusing on profitability rather than growth also helps explain the modest reaction of drillers to the highest oil and gas prices over a decade.US oil and gas production Blockade lowSince then, oil prices have doubled to about $ 113 per barrel, and natural gas has quadrupled to over $ 8 per million British thermal units, yet production is below pre-pandemic levels. I am.
Marcus McGregor, Money Manager Conning’s Head of Product Research, said: “They don’t get paid for doing so.”
Analysts expect oil and gas prices to remain high, as US producers are hesitant to drill further.
The shale liler Told investors For the past few weeks, they have adhered to the drilling plans created when commodity prices were much lower and maintained stable production. Instead of chasing fuel price increases through drilling, Cher executives say they use profits to pay off debt, pay dividends, and buy back shares to increase the value of issued shares.
Nine shale oil companies that reported their first-quarter results in the first week of May summarized: Invested $ 9.4 billion in shareholders Buybacks and dividends were about 54% more than we invested in new drilling projects.
Among them, Pioneer’s output decreased by 2% from the previous quarter, adjusting for sales. Meanwhile, Western Texas excavators will return $ 2 billion to shareholders, pay a dividend of $ 7.38 per share, and repurchase in the first quarter to $ 250 million. The company is currently awarding bonuses primarily related to cost control, achieving free cash flow, and achieving return goals. Over the past few years, 40% of Pioneer bonuses have been associated with production goals.
At Range Resources, CEO Jeffrey Ventura received a $ 1.65 million cash bonus in 2019. More than half of this is due to Appalachia’s gas producers exceeding their production and reserves targets, even as gas prices have fallen. This year, as in the previous two, production and reserves have been removed from Range’s bonus calculations and replaced with incentives to keep costs down and increase revenue. Range, who declined to comment, told investors to repay debt, buy back shares, revive quarterly dividends suspended during the pandemic later this year, reduce drilling and stay within budget.
According to Meridian Compensation Partners LLC, production was included in less than half of last year’s disclosed bonus plans, down from 89% of the 2018 Big Sher Liller incentive formula. Wage consultants have found that the weight given to annual cash bonus production has shrunk from 24% three years ago to 11%.Meanwhile, cash flow targets, rate of return indicators, and Environmental goals..
“Companies were burning cash and trying to maximize production,” said Christoph Nelson, Credit Research Director, Income Research + Management, Investment Manager. “It’s not what investors are looking for anymore.”
In the decade before the pandemic, US shale producers spent a great deal of time claiming domestic oil and gas deposits made available by new drilling techniques. Companies competed for the right to shale sweet spots, then drilled to secure long-term leases and reserve additional oil and gas reserves.
The oil and gas flood overturned concerns that the United States was running out of fossil fuels, which overwhelmed the market and pushed down American energy bills. But the benefit was that of Wall Street.
According to Deloitte LLP, between 2010 and 2019, shale companies spent about $ 1.1 trillion, but lost about $ 300 billion in free cash flow, income minus investment and daily costs. rice field. The company expects producers to make up most of their losses with two profits this year and earlier.
When OPEC started price competition in late 2014, oil crashed and Bankruptcy increases Among North American free market producers.With shareholders Activist investor We focused on paid plans that reward production growth, regardless of what price the barrel got. Investors have thrown lifelines to many companies, Buy over $ 60 billion in new stock The producer reduced their debt burden and sold it because it was floating.
But as soon as prices recovered, shale producers surged again. Critics of paid pump compensation have doubled their efforts.
Activist investor Carl Icahn aimed Occidental Petroleum Executive Compensation He criticized how much the company was spending on drilling after announcing its acquisition of rival Anadarko Petroleum Corp. in 2019.
Vicki Hollb, CEO of Occidental Petroleum, says that there are currently few incentives to increase production.
Occidental and Anadarko executives have been rewarded for achieving the production mark. Currently, the combined company output, which declined in the first quarter, has not affected the annual bonus.
CEO Vicki Hollb told investors earlier this month that Occidental is unlikely to increase production. Expensive drilling and oilfield supplies I got it. “If you try to accelerate something now, it’s almost a destruction of value,” she said. Last year, most of Hollub’s $ 2.4 million annual incentive compensation was based on keeping accidental costs per barrel below $ 18.70, according to the company’s recent agent.
This year, Occidental’s share price is the top performer of the S & P 500, up 118%.
Analysts expect oil and gas prices to remain high, as US producers are hesitant to drill further. When a major challenge comes in the fall, executives may feel pressure to increase market share, especially if spending plans for 2023 are drafted and supply chain issues are alleviated, managing partners and Mark Viviano, who urged the board to rewrite the bonus plan as a public head, said the shares of energy investment company Kimmeridge.
“I don’t know how long capital discipline will last with $ 100 of oil,” said former Viviano. Oversaw a portfolio of energy stocks Wellington Management says, “Are these companies expanding their production because they found a religion or because of actual operational constraints?”
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