Why Shale Drillers Are Pumping Out Dividends Instead of More Oil and Gas

Shale drillers have been hampered by pipeline constraints, soaring oil supply prices and shortages of docks and rigs. But there’s another reason why the highest oil and gas prices in years aren’t appealing to American drillers to increase output: Their executives are no longer paid.

Executives at companies including Pioneer Natural Resources Co.

PXD 2.07%

Occidental Petroleum Corp.

OXY 3.41%

and Range Resources Corp.

RRC 3.76%

was once encouraged by compensation plans to produce a certain amount of oil and gas, without regard to economics. After years of losses, investors are demanding a change in the way bonuses are formed, promoting a greater emphasis on profitability. Now, executives who get paid to pump are more rewarded for reducing costs and returning cash to shareholders, securities filings show.

The change contributed to a big swing for energy stocks, which have surged through a bear market. Energy stocks lead the 2021 bull market, and this year those in the S&P 500 are up 50%, compared with a 17% drop in the broader index.

The focus on profits versus growth also helps explain drillers’ muted reaction to the highest oil and natural gas prices in more than a decade. Although U.S. oil and gas production has risen from its lowest levels, production remains below pre-pandemic levels even though U.S. crude prices have doubled since then, to about $110 a barrel, and Natural gas quadrupled, to more than $8 per million British thermal units.

“We don’t hear many management teams talking about increasing production or drilling new wells in a significant way,” said Marcus McGregor, head of commodity research at money manager Conning. “They won’t get paid to do so.”

Analysts expect oil and gas prices to remain high, partly because US producers are reluctant to drill more.


Photo:

Joe Raedle / Getty Images

Shale drillers have told investors in recent weeks that they will stick with drilling plans implemented when commodity prices are much lower and production remains steady. Instead of chasing higher fuel prices by drilling, shale operators say they will use the profits to clear debt, pay dividends and buy back shares, which will boost the value of their shares. circulate.

The nine shale drillers that reported first-quarter results in the first week of May said they spent $9.4 billion on shareholders through buybacks and dividends, more than about $9.4 billion. 54% of what they invest in new drilling projects.

Among them, Pioneer’s output fell 2% from a quarter earlier, adjusted for divestments. Meanwhile, the West Texas holding company is injecting $2 billion back to shareholders with a $7.38 per share dividend it pays next month and $250 million in first-quarter buybacks. The company currently awards bonuses mainly tied to cost control, achieving free cash flow and achieving profit goals. In previous years, 40% of Pioneer’s bonuses were tied to production goals.

At Range Resources, CEO Jeffrey Ventura in 2019 received a cash bonus of $1.65 million, more than half of which stemmed from Appalachian gas producer Appalachian gas exceeding targets production and reserves growth even amid falling gas prices. This year, like two years ago, production and reserves are no exception to Range’s bonus math, replaced by incentives to reduce costs and increase profits. Range, which declined to comment, told investors it was paying down debt, buying back shares and later this year reinstating the quarterly dividend it paused during the pandemic as it reduced drilling to get a bank. book.

Production was included in less than half of the bonus plans disclosed for last year, down from 89% of the big shale drillers’ incentive formula in 2018, according to Meridian Compensation Partners LLC, according to Meridian Compensation Partners LLC. . Payroll consultants found that the share of production volume in annual bonuses had fallen to 11%, from 24% three years earlier. Meanwhile, the popularity and share of cash flow, return on capital, and environmental targets have increased significantly.

“Companies are burning cash and trying to maximize output,” said Kristoff Nelson, chief credit research officer at Investment Research + Management. “That’s not what investors are looking for anymore.”

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Should US Shale Companies Accelerate Drilling?

In the decade before the pandemic, U.S. shale producers spent big to protect the interests of domestic oil and gas fields that were already accessible to new drilling techniques. Companies compete for the rights to sweet spots from shale and then drill to secure long-term leases and book more oil and gas reserves, which allows them to borrow and extract more.

The oil and gas spill raised concerns that the United States was running out of fossil fuel resources, and it flooded the market, pushing down Americans’ energy bills. However, the bonus is just a bargain on Wall Street.

Between 2010 and 2019, shale companies spent about $1.1 trillion, according to Deloitte LLP, while losing nearly $300 billion when measured in free cash flow, or earnings minus expenses. investment and normal costs. The company expects manufacturers to cover most of the loss with profits from this year and two years ago.

When the Organization of the Petroleum Exporting Countries launched a price war in late 2014, oil collapsed and North American free-market producers went bankrupt. Active shareholders and investors look for pay plans that help grow production regardless of the price of the crates offered. Investors threw lifelines to many companies, buying more than $60 billion in new shares that manufacturers had sold to ease their debt burdens and stay afloat.

However, shale producers rebounded shortly after prices recovered. Critics of the compensation paid to the pump have redoubled their efforts.

Activist investor Carl Icahn took aim at the compensation of Occidental Petroleum executives and criticized the amount the company spends on oil drilling after it announced it would acquire rival Anadarko Petroleum Corp. in 2019.

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Occidental Petroleum CEO Vicki Hollub said there is currently little incentive to increase production.


Photo:

F. Carter Smith / Bloomberg News

Executives at Occidental and Anadarko are paid for production achievements. For now, the company’s combined output – which fell in the first quarter – has no effect on the annual bonus.

Chief Executive Officer Vicki Hollub told investors earlier this month that Occidental is unlikely to increase production due to how expensive drilling supplies and fields are. “It’s almost a destruction of value if you try to speed anything up,” she said. Last year, much of Hollub’s $2.4 million annual incentive pay was based on keeping Occidental costs per barrel under $18.70, according to recent company authorization.

This year, shares of Occidental topped the S&P 500 index, up 126%.

Analysts expect oil and gas prices to remain high, partly because US producers are reluctant to drill more. Mark Viviano, who has pushed boards to rewrite spending plans as managing partner and head of public, said: stake in energy investment firm Kimmeridge.

“We don’t know how long capital discipline will hold up at $100 oil,” said Viviano, who previously oversaw the energy portfolio at Wellington Management Co.. do they have real active bindings? “

U.S. electricity bills have skyrocketed, and are likely to go higher as households tear down their air conditioners. WSJ’s Katherine Blunt explains why electricity and natural gas prices have risen so much this year and offers tips on how to manage costs. Illustration: Mike Cheslik

Write to Ryan Dezember at ryan.dezember@wsj.com and Matt Grossman at matt.grossman@wsj.com

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Edmund DeMarche

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