Shale drills have been hampered by pipeline constraints, rising oil supply prices, and shortages of pits and rigs. But there is another reason why the highest oil and gas prices in recent years have not tempted American drillers to increase production: their executives are no longer paid.

Executives of firms including Pioneer Natural Resources Co.

PXD 0.40%

Occidental Petroleum Corp.

OXY -1.09%

and Range Resources Corp.

RRC 0.21%

were once encouraged by compensatory plans for the production of certain volumes of oil and gas, with little regard for the economy. After many years of losses, investors have demanded to change the way bonuses are formed, seeking greater emphasis on profitability. Now executives who have been paid for pumping are rewarded more for cost reductions and refunds to shareholders, securities documents show.

The shift has contributed to a significant turnaround for energy stocks, which have increased through the downturn. Energy stocks topped the bull market in 2021, and this year shares in the S&P 500 rose 46% compared to a 18% decline in the broader index.

The emphasis on profitability over growth also helps explain the muffled response of drillers to the highest oil and natural gas prices for more than a decade. Although U.S. oil and gas production has risen from a minimum of blockades, production remains below pre-pandemic levels, despite the fact that oil prices have since doubled to about $ 113 a barrel and natural gas quadrupled to more than $ 8 per million British thermal units.

“We don’t hear a lot of management teams talk about a significant increase in production or drilling of new wells,” said Marcus McGregor, head of commodity research at Money Manager Conning. “They don’t get paid for it.”

Analysts expect oil and gas prices to remain high, in part because of the reluctance of American producers to drill more.


Joe Riddle / Getty Images

In recent weeks, shale drillers have told investors they would stick to drilling plans made when commodity prices were much lower and maintain stable production. Instead of chasing rising fuel prices through drilling, shale business executives say they will use profits to pay off debts, pay dividends and buy back shares, which raises the value of shares that remain in circulation.

Nine shale oil companies, which reported first-quarter results in the first week of May, together said they paid shareholders $ 9.4 billion in buyouts and dividends, about 54 percent more than they invested in new drilling projects.

Among them, Pioneer’s production fell 2% from a quarter earlier with an adjustment for sales. Meanwhile, a drilling company in West Texas is returning $ 2 billion to shareholders with dividends of $ 7.38 per share, which it will pay next month, and $ 250 million as a result of first-quarter buyouts. The company is now awarding bonuses that are mostly tied to restraining costs, achieving free cash flow and achieving return targets. In previous years, 40% of Pioneer bonuses were tied to production targets.

At Range Resources, CEO Jeffrey Ventura in 2019 received a cash prize of $ 1.65 million, more than half of which is due to the fact that the Appalachian gas producer has exceeded plans to extract and increase reserves even amid falling gas prices . This year, as in the previous two, mining and stocks go beyond the Bonus Math Range, replaced by incentives to reduce costs and increase profitability. Range, which declined to comment, told investors it was repaying debt, buying back shares and later this year resuming quarterly dividends suspended during the pandemic as it cuts drilling to stay on budget.

According to Meridian Compensation Partners LLC, production accounted for less than half of the disclosed bonus plans for the past year, compared to 89% of the incentive formulas for large shale drills in 2018. According to wage consultants, the weight of production in annual cash bonuses fell to 11% from 24% three years earlier. At the same time, there is a large increase in the prevalence and weight of cash flow targets, return on capital and environmental targets.

“Companies were burning money and trying to maximize production,” said Christoph Nelson, director of credit research at investment manager Income Research + Management. “This is no longer what investors are looking for.”

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Should American shale companies accelerate drilling?

In the decade before the pandemic, American shale producers spent large sums of money claiming domestic oil and gas fields that made new drilling methods available. Companies competed for shale rights and then drilled to secure long-term leases and reserve additional oil and gas reserves, allowing them to take and drill even more.

The flood of oil and gas has dispelled concerns that the U.S. lacks fossil fuels, and it has flooded markets, reducing energy bills for Americans. However, on Wall Street, the award was vague.

From 2010 to 2019, shale firms spent about $ 1.1 trillion, according to Deloitte LLP, losing nearly $ 300 billion when measured by free cash flow, or income minus investment and ordinary expenses. The firm expects manufacturers to offset most of the losses from this year’s profits and the previous two.

When the Organization of the Petroleum Exporting Countries launched a price war in late 2014, oil collapsed and bankruptcies increased among North American free market producers. Shareholders and investor activists included wage plans that rewarded production growth no matter what the price of barrels. Investors have thrown lifebuoys at many firms, buying more than $ 60 billion in new shares that manufacturers have sold to ease their debt burden and stay afloat.

However, shale producers rose again as prices jumped. Critics of the compensation paid have redoubled their efforts.

Investor activist Carl Aikan aimed to compensate Occidental Petroleum and criticized how much the company spends on drilling after announcing it would acquire rival Anadarko Petroleum Corp. in 2019.

Occidental Petroleum CEO Vicky Hollub says there are currently no incentives to increase production.


F. Carter Smith / Bloomberg News

The heads of Occidental and Anadarko were paid to ensure that they achieved production estimates. Now combined production, which declined in the first quarter, does not affect annual bonuses.

CEO Vicky Holloub told investors earlier this month that Occidental is unlikely to boost production, given how expensive supplies of drilling and oil fields are. “It’s almost a valuable destruction if you’re trying to speed things up now,” she said. Last year, according to a recent trustee of the firm, much of Ms. Holloub’s incentive salary of $ 2.4 million was based on keeping Occidental’s barrel costs below $ 18.70.

This year, Occidental shares are the best in the S&P 500, up 118%.

Analysts expect oil and gas prices to remain high, in part because of the reluctance of American producers to drill more. The big test comes in the fall when spending plans for 2023 are being developed and executives may feel pressured to increase market share, especially as supply chain problems ease, said Mark Vivian, who pushed for advice to rewrite bonus plans as managing partner and public leader. shares in energy investment company Kimmeridge.

“We just don’t know how long the $ 100 oil discipline will last,” said Mr. Viviana, who previously oversaw Wellington Management Co.’s energy portfolio. do they have real operational limitations? ”

Electricity bills in the U.S. have risen and are likely to rise as households run air conditioners. Catherine Blunt of the WSJ explains why electricity and natural gas prices have risen so much this year, and offers tips on how to manage costs. Illustration: Mike Cheslick

Email Ryan Dezember at and Matt Grossman at

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