Investors Push US Shale Firms to Separate Executive Pay from Drilling

A boost in capital spending benefits executives at bonus time but crimps shareholder returns. Investors want the higher spending to go to dividends and buybacks, not more drilling.

Activist investors are taking aim at US shale producers, pushing them to stop rewarding executives for spending billions of dollars on new wells when crude prices are depressed.

US crude output exceeds nine million barrels a day largely because of the shale sector, whose output this year is up 27.5 percent. The gains are fueled by a boost of about 50 percent in capital spending, benefiting executives at bonus time but crimping shareholder returns. Investors want the higher spending to go to dividends and buybacks, not more drilling.

Activists point to the lopsided split between pay and returns. The 10 biggest US shale producers paid their chief executives $2.2 billion over the past decade despite shareholder returns of 1.7 percent, according to Reuters.

These companies include Apache Corp and Devon Energy Corp, the agency said, drawing a contrast with Exxon Mobil Corp and other integrated oil companies that produce, transport and refine oil all over the globe. These companies as a group paid their executives a total of $600 million during the same period and achieved a stronger 3.5 percent return.

The broader oil industry’s returns have not even approached the performance of the S&P 500, which delivered a 7.4 percent total return for the past decade. The split widened this year, with shares of shale producers down 20 percent or more and the S&P 500 index up about 16.7 percent.

“Management teams have been rewarded far too long for destroying value,” Todd Heltman of wealth manager Neuberger Berman, an investor in shale, told Reuters. COG's executive pay policy emphasizes shareholder returns. “Now, there’s a paradigm shift happening.”

But change will not come easy. Companies will expand production despite low returns to collect cash flow needed to pay debt and other expenses, said analysts, and as long as executives are paid to produce, they will.