| NEW YORK
NEW YORK Oct 24 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, 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
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.
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
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, which puts vesting
restrictions on stock grants to its 23 employees to keep rivals
from poaching talent.
Abraxas Petroleum Corp, Apache Corp, W&T
Offshore Inc, Linn Energy LLC 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
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
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, 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
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
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, 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
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.
(Reporting by Ernest Scheyder; Editing by Terry Wade, Peter
Henderson and Tim Dobbyn)