Pain Points and Problematic Trends

Part
01
of two
Part
01

Pain Points and Problematic Trends - E&P Specific

Two pain points or problematic trends affecting cost performance issues specific to the upstream Exploration and Production (E&P) segment of the Oil and Gas industry are workforce size and executive compensation. These trends have increased the general and administrative (G&A) budgets of E&P companies which ultimately make them less profitable. Below are examples of how E&P companies have responded to these known trends.

Workforce Size

  • In order to improve their profitability, or in response to mergers, several E&P companies have reduced their workforce size or headcount. Laredo Petroleum cut their staff by 20% in 2019. They reported a decrease in cash G&A of $13.3 million and a total savings of $30 million. In contrast to this Oasis Petroleum increased their G&A budget in 2018 by $29.5 million due primarily to "increased employee compensation."
  • In addition to headcount reductions many E&P companies have specified that the reductions they make are in their corporate headquarters or at an executive level. Laredo Petroleum did not fill two positions in which executives retired and let go of a third executive officer.
  • Due to a decrease in workforce size, organizational restructuring was a common theme amongst E&P companies. This has led to one time charges in relation to restructuring, such as severance pay. Laredo reported a one time charge of $16.4 million.
  • Many E&P companies have reported that they are shrinking their spending on facilities spending in relation to cutting their workforce. Pioneer National Resources Company reported that they reduced their facilities spending by $100 million in 2019.

Executive Compensation

  • In addition to reductions of executive positions, E&P companies have also had to look at the compensation their executives receive. Some have chosen to reduce or restructure executive salaries. Tidewater reduced the base salaries of their CEO, EVP, and CFO by 15% in 2018.
  • A recent report found that an average of 83% of an E&P executive's compensation package comes from incentive programs. For this reason E&P companies have been more closely monitoring and restructuring their incentive programs.
  • Metrics for incentives differ from company to company. Recent reports found that production and production growth remains the most prevalent metric used for Annual Incentive Plans (AIP) followed by health and safety. Tidewater more closely aligned their incentives with cash flow from operations (CFFO) and safety performance in 2018. Oasis Petroleum took feedback from their shareholders and added a Total Shareholder Return (TSR) cap for their executives.
Part
02
of two
Part
02

Pain Points and Problematic Trends - Oil and Gas

Two problematic trends affecting cost performance issues in the upstream Oil and Gas industry are situations causing companies to unload their assets and the cutting of capital expenditure due to inexorable circumstances. These directly affect the general and administrative costs of US oil companies, which, in turn, cause drastic changes to budgets and production rates. Below are examples of how O&G companies have responded to these trends.

Assets

  • Placing focus mainly on core profitable projects, major oil companies are aiming to unload millions of dollars in assets. An example being Exxon Mobil, which plans to offload $15 billion in assets by 2021 and focus on the Permian Basin in West Texas. The company has estimated the selling of assets to generate $15 billion in cash through 2025, also noting a percentage will go towards stock repurchase from shareholders.
  • Demanded by investors to adhere to the goals of the Paris climate accord while simultaneously generating revenue, BP and its counterparts have sold high-cost and high-carbon projects to other companies. Including a $5.6 billion sale of the company’s stakes in the Trans Alaska Pipeline and the Prudhoe Bay oil field. BP has also announced $7 billion of a $10 billion disposal program linked to shale fields bought from BHP Group.
  • Oasis Petroleum Inc. signed agreements to sell 65,000 noncore net acres and production of 4,400 barrels of oil equivalent per day for $283 million to an undisclosed buyer to make payments towards their 2017 acquisition of Forge Energy. This enabled them to realize over 50% of targeted divestiture proceeds while selling only 33% of earmarked noncore acreage.

FALL IN SHALE PRICE

  • Because of shale prices dropping exponentially, oil companies are cutting capital expenditures to cover unexpected costs. An intelligence firm that analyzes oil companies expects most to cut spending by about 7% from 2018.
  • The CEO of Parsley Energy claimed the company planned to increase production while simultaneously cutting CAPEX by 15% when compared to 2018.
  • The majority of spending cuts are from smaller companies with budgets below $1 billion a year such as PDC Energy and Whiting Petroleum, cutting capital expenditures by 17% in 2019. Big companies such as EOG Resources and Pioneer Natural Resources are only expected to have their budgets fall by 4.5% because of being able to pump out nearly four times more than their smaller competitors even after spending five times as much.
  • Realizing that pricing hasn’t been near levels seen in 2016, while service costs increased by 35% simultaneously, CEO of Diamondback claims the company cut three rigs and plans on operating only 18 to 22, down from an original 24. Centennial Resource Development and Parsley Energy also canceled drilling rig additions set for 2020 in response to prices being off by 40% and fear of oversupply.
  • To help pay the debt accumulated by buying out Anadarko Petroleum, Occidental Petroleum plans to slash capital spending by 30% to $5.4 billion.



Sources
Sources

From Part 01
Quotes
  • "Almost all major U.S. explorers cut their capital budgets after oil prices fell at the end of 2018. The goal: Show they were willing to pay back shareholders at a time when their stocks were under-performing the broader market. But it didn’t stop there, investors are now increasingly focused on general and administrative budgets, or G&A, used for everyday costs."
Quotes
  • "We have reduced our total employee count by approximately 20 percent, including a greater than 40 percent reduction at the vice president and above level, resulting in annualized savings of approximately $30 million."
Quotes
  • "Mr. Rynd, who joined us as CEO on March 5, 2018, agreed to reduce his initial salary by 15% to put him on equal footing with the continuing executive officers."
Quotes
  • "To understand annual and long-term incentive (LTI) compensation pay practices in the energy sector, specifically for exploration and production (E&P) companies, the Compensation and Benefits Practice of Alvarez & Marsal (A&M) examined the 2018 proxy statements of the largest E&P companies in U.S. "
Quotes
  • "We continue to drive down costs as demonstrated by a further reduction in our 2019 capital budget, including achieving our goal to reduce facilities spending earlier than we had expected, and realizing our first full quarter of reduced G&A spending."
Quotes
  • "Our G&A expenses increased $29.5 million for the year ended December 31, 2018 from $91.8 million for the year ended December 31, 2017. E&P G&A increased $24.9 million year over year primarily due to increased employee compensation expenses as a result of organizational growth."
Quotes
  • "We continued to improve upon our pay program for 2019, based on shareholder feedback. We have continued to evolve our pay program to embrace market best practices, making modifications to our 2019 PSU awards to improve upon their already strong alignment to our performance. "
Quotes
  • "Occidental Petroleum is initiating a broad layoff effort this week that will stretch from Houston to Denver as the Permian Basin’s leading oil producer aims to cut costs in the aftermath of its massive $38 billion acquisition of Anadarko Petroleum last year."
Quotes
  • "The Houston-based E&P said the layoffs are part of the company’s reorganization efforts that were first announced in October."