Ratings firm Moody’s issued a report on the governance of independent exploration and production companies this week, and it wasn’t exactly flattering to the men and women who sit on the board’s of those companies.
In a study of the key governance features of the 13 investment-grade North American independent exploration and production (E&P) companies that it rates, Moody’s Investors Service finds E&P boards generally well stocked with members with solid E&P experience, but slow to change and therefore with perspectives that may fall behind industry developments.
“Say that to our faces, Moody’s. We dare you.” Apache chairman Ray Plank and former board member Jay Precourt.
E&P companies are shifting their portfolios away from international assets, in part to reduce geo-political risk, and tending toward so-called “unconventional” prospects, like oil sands, the deepwater Gulf, etc.
Moody’s says the directors are these companies are pretty well-positioned to oversee the transition since most boards are deep with oil and gas industry experience. But the risk of rising project costs, volatile commodity prices, and new reputation risks, particularly on the environmental front, may not be things these directors are as well suited to handle, says Moody’s Assistant Vice President Drew Hambly.
“E&P boards would benefit from having more directors with large company experience to help management deal with external changes. Faster turnover of directors would provide an opportunity to broaden the geographic scope of directors and introduce new perspectives,” says Hambly.
E&P boards tend to be relatively “provincial,” Moody’s says, with directors drawn from relatively small business networks because the pool for talented directors remains limited.
Moody’s is concerned these boards may make them susceptible to “group think,” with board members rendering similar opinions based on their similar backgrounds.
The outlook for the investment-grade E&P industry is generally stable, Moody’s says, but still…. ouch!
* the average tenure of E&P directors 9.5 years, compared to an eight-year average for the boards of all large cap companies.
* The average age of a director on the E&P boards is 64 years, compared with an average of 60 for all the large-caps.
* E&P companies seem to favor awarding stock options in executive
compensation, a weakness these days because of the focus it puts on short-term goals.
Are the directors at the independent E&P companies not ready for prime time? What do you think?
The company’s included in Moody’s report: