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.
- 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.
- 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.