Shale drillers have been crippled by pipeline constraints, rising prices for oilfield supplies, and rogue and rig shortages. But there’s another reason the highest oil and gas prices in years haven’t spurred American drillers to increase production: Their executives aren’t being paid anymore.

Executives of companies such as Pioneer Natural Resources Co.

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Western Petroleum Corporation.

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and Range Resources Corp..

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were once encouraged by compensation schemes to produce certain volumes of oil and gas, regardless of the economy. After years of losses, investors demanded changes in the way bonuses are formulated, pushing for a greater focus on profitability. Now, executives who were paid to pump are being rewarded more for cutting costs and returning cash to shareholders, according to filings.

The shift contributed to a big turnaround for energy stocks, which surged in an otherwise declining market. Energy stocks led the 2021 bull market and this year, those included in the S&P 500 are up 46%, compared to an 18% drop in the broader index.

The focus on profitability over growth also helps explain drillers’ mixed response to the highest oil and natural gas prices in more than a decade. Although U.S. oil and gas production has risen from lockdown lows, production remains below pre-pandemic levels even as crude prices have since doubled to around $113 a barrel, and gas natural has quadrupled, to more than $8 per million British thermal units.

“We don’t hear a lot from management teams talking about ramping up production or drilling new wells significantly,” said Marcus McGregor, head of commodities research at fund manager Conning. “They won’t be paid to do it.”

Analysts expect oil and gas prices to remain high, in part due to the reluctance of U.S. producers to drill more.


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Joe Raedle/Getty Images

Shale drillers have told investors in recent weeks that they will stick to drilling plans made when commodity prices were much lower and will keep production stable. Instead of chasing higher fuel prices by drilling, shale executives say they will use profits to pay down debt, pay dividends and buy back shares, which will increase the value of shares that remain outstanding.

Nine shale oil companies that released their first quarter results in the first week of May collectively said they paid out $9.4 billion to shareholders through buyouts and dividends, or about 54% more than they had invested in new drilling projects.

Among them, Pioneer’s production fell 2% from the previous quarter, after adjusting for a divestment. Meanwhile, the West Texas driller is pumping $2 billion into shareholders with dividends of $7.38 a share it will pay next month and $250 million in first-quarter buyouts. The company now grants bonuses that are primarily tied to cost containment, achieving free cash flow and meeting performance targets. In years past, 40% of Pioneer’s bonuses were tied to production goals.

At Range Resources, chief executive Jeffrey Ventura received a $1.65 million cash bonus in 2019, more than half of which stems from the Appalachian gas producer exceeding production and growth targets. reserves, even in a context of falling gas prices. This year, like the previous two, production and reserves are out of Range bonus calculations, replaced by incentives to reduce costs and increase yields. Range, who declined to comment, told investors he was paying down debt, repurchasing stock and later this year would restore the quarterly dividends he cut off during the pandemic as he cut back on drilling to meet the budget.

Production was considered in less than half of bonus plans disclosed last year, compared to 89% of big shale drillers’ incentive packages in 2018, according to Meridian Compensation Partners LLC. The weight given to production volumes in annual cash bonuses fell to 11% from 24% three years earlier, compensation consultants found. Meanwhile, there have been large increases in the prevalence and weight given to cash flow targets, return on capital measures and environmental targets.

“Companies were burning cash and trying to maximize output,” said Kristoff Nelson, director of credit research at investment manager Income Research + Management. “That’s not what investors are looking for anymore.”

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Should US shale companies ramp up drilling?

In the decade before the pandemic, American shale producers spent big money claiming domestic oil and gas deposits that new drilling techniques had made accessible. Companies competed for the rights to exploit sweet spots of shale, then drilled to secure long-term leases and reserve additional oil and gas reserves, allowing them to borrow and drill even more. .

The flood of oil and gas allayed concerns that the United States was running out of fossil fuels and flooded markets, driving down Americans’ energy bills. The bounty was a mess on Wall Street, though.

From 2010 to 2019, shale companies spent about $1.1 trillion, according to Deloitte LLP, while losing nearly $300 billion, measured as free cash flow, or revenue minus capital expenditures and current expenses. The company expects producers to make up most of the losses with profits from this year and the previous two.

When the Organization of the Petroleum Exporting Countries launched a price war in late 2014, oil crashed and bankruptcies mounted among North American free-market producers. Shareholders and activist investors opted for compensation plans that rewarded production growth, regardless of the price of barrels. Investors threw lifelines at many companies, buying more than $60 billion in new shares that producers sold to alleviate debt and stay afloat.

However, shale producers picked up steam once prices rebounded. Critics of compensation paid at the pump have redoubled their efforts.

Activist investor Carl Icahn has taken aim at Occidental Petroleum executive pay and criticized the company’s spending on drilling after announcing it would acquire rival Anadarko Petroleum Corp. in 2019.

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


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F. Carter Smith/Bloomberg News

Occidental and Anadarko executives were paid to meet production targets. Now, the company’s combined production, which declined in the first quarter, has no impact on annual bonuses.

CEO Vicki Hollub told investors earlier this month that Occidental is not likely to increase production given the high cost of drilling and oilfield supplies. “It’s almost value destruction if you’re trying to speed anything up now,” she said. Last year, the bulk of Ms. Hollub’s $2.4 million annual incentive compensation was based on keeping Western costs per barrel below $18.70, according to the company’s recent proxy.

This year, Occidental’s stock is one of the best performers in the S&P 500, up 118%.

Analysts expect oil and gas prices to remain high, in part due to the reluctance of U.S. producers to drill more. A big test comes in the fall, when 2023 spending plans are being drafted and executives could feel pressure to increase market share, especially if supply chain issues ease, said Mark Viviano. , which has prompted boards to rewrite bonus plans for managing partner and chief public. shares of energy investment company Kimmeridge.

“We just don’t know how long capital discipline will hold at $100 oil,” said Viviano, who previously oversaw an energy stock portfolio at Wellington Management Co. not their production because they have found religion or because do they have real operational constraints?

Electricity bills in the United States have skyrocketed and are expected to rise as households smash their air conditioners. The WSJ’s Katherine Blunt explains why electricity and natural gas prices have risen so much this year and offers advice on how to manage expenses. Illustration: Mike Cheslik

Write to Ryan Dezember at [email protected] and Matt Grossman at [email protected]

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