Raymond James update on ESG
Posted: Mon Jun 21, 2021 7:31 am
In our E&P Industry ESG overview back in April, we showed that while oil and gas producers have the highest exposure score of any industry (measure of inherent ESG risk) on Sustainalytics, their Management Scores (the measure of how well you manage that risk) were the second best among all 42 industries. In today's energy stat, we take a deep dive into E&P executive compensation structures for our coverage universe and demonstrate how CEO pay structures have not only helped drive the strong results on ESG risk management, but also the shift to a FCF/Returns driven business model. We also look at changes in ESG scores since our last overview and reveal why we believe Diamondback Energy (FANG) saw the biggest improvement since then. Lastly, we highlight a multitude of other interesting results in our analysis of the oft forgotten "G" (Governance) in ESG, summarized below.
* Gone are the days of large growth - Short-term incentive programs (ie. annual bonuses) have seen a seismic shift away from volume/growth metrics used to measure performance towards returns/FCF metrics.
* ESG performance metrics are now used at 90% of our covered E&Ps to determine annual bonuses. This further underscores the E&P industry's commitment to sustainability.
* Since our last ESG report (April), Diamondback Energy leads the E&P pack in terms of ESG score improvement due to announcement of the firm's zero net Scope 1 emissions initiative ("Net Zero Now").
* Beyond just the improvement of raw ESG scores, we highlight the financial gains E&Ps have realized from ESG initiatives (classic win-win scenario) and point out that water recycling, electric frac crews and other ESG initiatives have helped drive LOE ~20% lower since 2018.
* SMID cap shareholders reap rewards of falling executive pay - SMID cap CEO median pay declined an astounding ~59% between 2018 and 2020 while G&A per Boe costs have fallen by ~30%
* E&P Say-on-Pay approval falls for the third consecutive year to 84% for all RJ E&Ps in 2020, ~5% lower than the S&P 500 average.
* It's all relative; Relative total shareholder return most frequent metric used for LTIP
* Best of both worlds: Roughly half of companies that utilized relative TSR as a metric for LTIP, capped payout at 50% (most common) or saw a payout reduction if absolute TSR was negative.
June 18, 2021
Raymond James Equity Research
* Gone are the days of large growth - Short-term incentive programs (ie. annual bonuses) have seen a seismic shift away from volume/growth metrics used to measure performance towards returns/FCF metrics.
* ESG performance metrics are now used at 90% of our covered E&Ps to determine annual bonuses. This further underscores the E&P industry's commitment to sustainability.
* Since our last ESG report (April), Diamondback Energy leads the E&P pack in terms of ESG score improvement due to announcement of the firm's zero net Scope 1 emissions initiative ("Net Zero Now").
* Beyond just the improvement of raw ESG scores, we highlight the financial gains E&Ps have realized from ESG initiatives (classic win-win scenario) and point out that water recycling, electric frac crews and other ESG initiatives have helped drive LOE ~20% lower since 2018.
* SMID cap shareholders reap rewards of falling executive pay - SMID cap CEO median pay declined an astounding ~59% between 2018 and 2020 while G&A per Boe costs have fallen by ~30%
* E&P Say-on-Pay approval falls for the third consecutive year to 84% for all RJ E&Ps in 2020, ~5% lower than the S&P 500 average.
* It's all relative; Relative total shareholder return most frequent metric used for LTIP
* Best of both worlds: Roughly half of companies that utilized relative TSR as a metric for LTIP, capped payout at 50% (most common) or saw a payout reduction if absolute TSR was negative.
June 18, 2021
Raymond James Equity Research