(MENAFN - Gulf Times) For US drillers under pressure from investors over executive pay, life is about to get a lot tougher.
Institutional Shareholder Services Inc, the world's biggest proxy adviser, next year will add new metrics to a screening process it uses to flag companies that overpay executives who underdeliver for investors. ISS's advice is bought by investors managing more than $25tn, and can sway as much as 20% of the shareholder vote, research shows.
Instead of just focusing on total shareholder returns, companies now will be judged on their return on invested capital as well as their assets and earnings growth. It's a move that intensifies investor-led efforts to force financial discipline on an industry that overspent on production growth before the 2014 oil rout, and now is struggling to provide meaningful investor returns.
'Given the continued underperformance of the sector and focus on production growth at any cost, investors like us are saying enough is enough and it's time for the industry to change, said Todd Heltman, who helps manage $284bn at Neuberger Berman Group, in a telephone interview. 'ISS has been called out by investors.
The top 15 oil companies paid their executives $2.8bn in the past decade, while delivering less of a return to shareholders than other industries. Their average annual return over the period was 2.7%, compared with 8.7% for companies on the S & P 500. The gap has continued this year with the S & P 500 Energy Index underperforming the main gauge by 24 percentage points, even as oil prices climbed.
ISS recommendations often come into play leading up to annual general meetings when investors are asked to approved executive pay options.
'Traditionally we've employed total shareholder return because it's transparent and that's what many investors focus on, said John Roe, head of analytics at ISS, in a telephone interview. 'Sole reliance on TSR can be a bit dangerous because there are excursions on stock prices that happen from time to time, especially with commodity-price volatility.
The new metrics will be introduced in ISS's so-called quantitative analysis, an initial screening process designed to highlight company pay proposals that may concern investors. All ISS's final recommendations are made by a team looking at the facts and circumstances of each case, Roe said.
In response to investor demands, multiple companies have already announced changes to their compensation models. EQT Corp, which is in the middle of a $6.7bn takeover of Rice Energy Inc, changed the way it will base executive compensation to focus on returns, not just growth.
'We removed volume growth as a metric from future compensation plans, and we'll replace it with return on capital and operating and development cost metrics, Steven Schlotterbeck, chief executive officer, said on a conference call in October. 'In short, we've listened to our shareholders and we've acted.
Range Resources Corp also heeded the warning from investors and added the drilling rate of return to compensation metrics, meaning part of how much top brass is paid will be tied to how many molecules actually flow out of wells compared with how much money was spent on it.
Shale drillers hit pause as focus shifts to boosting returns
Shale explorers refrained from adding oil rigs for a second week as they turn their focus to fracking uncompleted wells and boosting investor returns, according to Bloomberg. The tally remained unchanged at 747 rigs, after falling by four last week, according to Baker Hughes data reported on Friday.
Despite a rally in crude prices, this year's drilling ramp-up has slowed since peaking in August as investors in the oil industry are pushing for returns over growth, a large backlog of drilled wells still needs to be fracked and technology increasingly allows producers to tap more from each hole.