Analysis: Using tech playbook, oil drillers shower employees with stock
NEW YORK (Reuters) - U.S. energy exploration companies leading a domestic oil boom increasingly are using stock options to find and maintain employees, evoking comparisons to the dot-com bubble of the late 1990s.
Some compensation experts and investment analysts worry that employees of small- and medium-sized firms that are still searching for sizeable profits could be lulled by a false sense of financial security.
Options and stock awards can give cash-poor companies a powerful retention tool and foster employee loyalty, but they can also dilute earnings and employees often have to wait years to cash in options. Volatile oil and natural gas prices add an extra layer of risk - and potential reward.
"There's a lot of people in Silicon Valley who became millionaires because they were in the right place at the right time and worked for a company that handed out stock options," said Paul Hodgson of BHJ Partners, a governance consultancy.
"The fracking industry at the moment is in a similar place, almost like a gold rush," he said, referring to hydraulic fracturing, the technology to unlock oil and gas deposits, which has revitalized U.S. production.
Energy XXI Ltd (EXXI.O), an eight-year-old company which drills for oil in the Gulf of Mexico and Louisiana, gives all 271 workers - from secretaries to roughnecks - stock or options three times a year, based on salary and seniority. Energy XXI's stock price has risen 51 percent in the past six months as its proven reserves jumped.
"This is me being able to retire when I want to retire," said Melissa Castro, who analyzes oil well data for the Houston-based company. "It's definitely the cherry on top of my salary."
Energy XXI puts stock options worth roughly 15 percent of Castro's salary into her retirement account at the end of every year, in addition to matching her own cash contributions, up to 6 percent of her salary. She also gets two stock bonuses during the year, one worth roughly 5 percent to 10 percent of her salary, and another worth less, depending on several variables.
Six-figure salaries tend to be the norm for many professionals in the industry.
Smaller and mid-tier exploration and production (E&P) companies that need to preserve cash for seismic studies, drilling and other expenditures, have been particularly active with options, according to a 2013 survey by Mercer, a benefits advisor and subsidiary of Marsh & McLennan Cos (MMC.N).
Roughly 88 percent of E&P engineers across the industry are eligible for some type of long-term incentive award, typically restricted stock or options, the Mercer study found.
Though that is up just five percentage points from Mercer's earliest study in 2010, the awards became an integral part of compensation packages when the fracking boom took off in 2008, said Ann Manal, a partner in the Houston office of Mercer.
Before the boom, they weren't typical industry practice, she added.
The surging domestic energy sector will turn the United States, a country long criticized for its heavy reliance on foreign suppliers, into the world's top oil and gas producer this year, the U.S. Energy Information Agency says.
For companies scrambling to find and keep good employees, stock options are a key tool.
"It's a type of golden handcuff," said Mike Reger, chief executive of Northern Oil & Gas Inc (NOG.A), which puts vesting restrictions on stock grants to its 23 employees to keep rivals from poaching talent.
Abraxas Petroleum Corp (AXAS.O), Apache Corp (APA.N), W&T Offshore Inc (WTI.N), Linn Energy LLC (LINE.O) and dozens of other companies also award options or stock to all employees.
Some 81 energy companies have launched initial public offerings since 2007 as investors steer funds to companies leading the American energy boom. That's 9 percent of all U.S. IPOs in that timeframe, according to Thomson Reuters data, and a 60 percent increase from 2000 to 2006.
Odessa, Texas, which sits near some of the largest oil projects in the nation, ranked first among U.S. cities in 2011 for personal income growth, with a rise of 11.9 percent, according to data published this June by the U.S. Bureau of Economic Analysis.
GOOGLE OR ENRON?
Options give employees the ability to buy stock at a predetermined price. Restricted stock must be held for a period of time, typically four years in the energy industry.
David Kudla, an investment advisor at Mainstay Capital Management, advises employees to not let their company's stock become an outsized part of their portfolio, typically no more than 10 percent.
"If you rely on your company's stock or options, you really are putting all your eggs in one basket," he said.
By definition, many companies that explore for oil and gas are speculative bets. While many do develop lucrative projects, some strike out and collapse, leaving shares and options worthless.
The energy industry acutely remembers Enron, the energy giant that famously contributed company shares to retirement accounts and encouraged its employees to hoard its stock before succumbing to bankruptcy protection in 2001.
Halcón Resources Corp (HK.N), which drills for oil in several U.S. shale fields, spent $6.7 million on its stock and options program for employees in 2012, an 86 percent increase from 2011.
But company shares fell more than 60 percent over that period, in part because Halcón was also selling new stock to investors, increasing the number of traded shares roughly six times.
Halcón CEO Floyd Wilson stands behind the practice, viewing stock and option awards as a way to husband cash for drilling and as a motivational tool for the 435 workers to achieve his goal of growing the company and selling it within a few years.
"All of our employees can get in on the money," he said. "Everyone we hire knows we have a limited shelf life."
Lynn Peterson, CEO of Kodiak Oil & Gas Corp KOG.N, which operates primarily in North Dakota's Bakken shale formation, also backs rewarding employees with stock.
"It's been a great tool to retain people," he said. Kodiak's stock has jumped 77 percent in the past six months on rising production.
While the promise of riches for all echoes dot-com companies of the late 1990s boom, energy firms say their own rise is assured by global demand for their product, especially exports to emerging markets.
"This is a boom time for the energy industry because of technological innovation," said Kudla, the investment advisor, waving away comparisons to dot-bombs like now-defunct Pets.com.
"We're not talking about shipping 50 pounds of dog food ordered on the Internet," he said.