5 Oil Services Companies--Who Serves Shareholders Best?
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Management matters. I will look at 5 oil service companies: Baker Hughes, Inc. (NYSE: BHI), Halliburton Co. (NYSE: HAL), National Oilwell Varco, Inc. (NYSE: NOV), Schlumberger NV (NYSE: SLB) and Weatherford International Ltd. (NYSE: WFT) and show that those with CEO compensation practices more attuned with investors delivered higher returns over the previous 3-year period and also YTD.
Total Shareholder Return during 2009-2011 and Year-To-Date (YTD)
Total Shareholder Return (TSR) includes both price appreciation and dividends received. Of these five companies, four pay dividends, only Weatherford does not. Of the four dividend payers, two—National Oilwell-Varco and Schlumberger--increased their dividends between 2009-2011. The chart below compares the 3-year TSR with total CEO compensation.
Of the five, National Oilwell Varco provided the highest TSR while paying its CEO the least, while Weatherford delivered the lowest TSR and paid its CEO the most. This performance trend is continuing this year also.
CEO Compensation Practices in 2009-2011
All five companies divide CEO compensation into two parts—short-term, generally cash and perks, and long-term, stock and option grants and pension benefits. Our top performers, National Oilwell Varco and Halliburton use more investor friendly metrics. Although NOV bases short-term compensation on EBIT as does Baker Hughes, they adjust the bonus paid by as much as 25% depending on whether Capital Employed (which they define as total assets – cash – total liabilites + debt) exceeds the target (bad), or is less than the target (good). Halliburton employs a similar approach, using Return on Capital Employed (ROCE). Schlumberger and Weatherford use EPS targets which have been criticized for being easily managed.
Performance relative to one's peers is commonly used for objective determinants of long-term compensation. BHI and NOV use EBIT growth over a multi-year period. Schlumberger and Weatherford didn't specify their metrics in their most recent Def 14A's.
Halliburton is unique in using Cash Value Added (CVA), which was developed in 1996 by Swedish economists to allow past financial performance to be measured based on discounted cash flow. CVA is much superior to EBIT growth or ROCE from the investors' perspective. As investors, we have a stake in these companies' strategic decisions. Thus, a compensation metric which causes management to focus on the best investments for the company's future is in our best interests.
Bottom Line
Of the 5 oil services companies, Halliburton and National Oilwell Varco delivered the highest 3-year total shareholder returns and are also performing well YTD. Both companies also share a focus on closely aligning CEO compensation with shareholder's interests which has clearly paid off for their investors.
p366 has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company and National Oilwell Varco. Motley Fool newsletter services recommend Halliburton Company and National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
