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Moody’s has slammed the current model used by oil companies to remunerate executives as too dependent on growth and as such, outdated and not in line with the current price environment. According to the ratings agency, the focus should be moved from growth to value preservation, as is more appropriate for the current and midterm future situation in the industry.
Moody’s said the current compensation model that is used by U.S. and Canadian production companies encourages production expansion and target-exceeding, when it should instead focus on capital preservation and debt reduction. The current model, the agency added, is particularly bad for bondholders in light of the current outlook for the growth prospects of the oil industry.
These conclusions and recommendations were based on the study of 15 integrated oil and gas companies. What Moody’s found was that production and reserve growth were the foundations of the companies’ bonus and incentive policies for executives, and that while the control of expenses has become more important for them, not enough attention is being given to credit-enhancing goals.
Moody’s said the growth focus was still apparent in the types of compensation and bonuses. For short-term compensation, companies have increasingly shifted to cash, but for long-term awards, they are still relying on share-price movements in a favorable direction to motivate executives to stay with the company by offering them stock options.
This overreliance on stocks, however, can be dangerous for bondholders, as it can serve as a reason for “aggressive share repurchases”, an unnecessary focus on share performance and a determination to keep on paying dividends instead of cutting costs, Moody’s also said. Still, the agency acknowledged some attempts of E&Ps to preserve shareholder value by introducing changes to their management compensation policies.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.