Kimmeridge Publishes White Paper: "Bringing Alignment and Accountability to the E&P Sector"

NEW YORK and DENVER, Nov. 17, 2020 /PRNewswire/ -- Kimmeridge Energy Management Company, LLC ("Kimmeridge"), a private equity firm focused on upstream energy, with an investment philosophy underpinned by fundamental research, today published a white paper entitled, "Bringing Alignment and Accountability to the E&P Sector."

The U.S. E&P sector is broken and a root cause is the lack of alignment between company executives and shareholders. This misalignment begins with skewed incentives and low insider ownership – a corporate governance crisis. It is further compounded by boards who appear unwilling to hold management teams accountable, while continuing to increase executive compensation irrespective of performance. With virtually no threat of dismissal and little financial incentive for consolidation, executives are focused on extending their tenure rather than preserving and maximizing long-term value for shareholders.

Kimmeridge notes that unless accountability and alignment are restored, the sector will continue to struggle to attract capital, remain unprepared for the energy transition, and be rendered essentially irrelevant. Effective governance necessitates investor engagement and reform requires that shareholders urge boards to provide independent oversight, while voting against misaligned compensation plans.

Ben Dell, Founder and Managing Partner of Kimmeridge, said, "In our prior white papers, we outlined core operating components that would make the public E&P sector investable again. While we have witnessed some progress in evolving the operating model and intensifying the conversation around environmental performance in boardrooms, we have yet to see an acknowledgement of the need to meaningfully reform incentive structures. Without these critical reforms, the industry will remain mired in quicksand."

Mr. Dell continued, "Over the last several months, Kimmeridge's active engagement team has established stakes in three public E&Ps with a view towards constructive engagement, fully in line with the principles outlined in our research."

In this white paper, Kimmeridge outlines several conditions that can immediately be implemented to strengthen board oversight:

• Mandated upfront stock purchases.
• Directors' fees paid in equity that must be held for the duration of board tenure.
• Minimum ownership thresholds for directors over five and seven years.
• Directors no longer designated as independent after nine years.

Additionally, Kimmeridge offers four key principles that could promote alignment with shareholders:

• Eliminate growth metrics and subjective discretion from short-term incentives.
• Establish 100% performance-based long-term incentives that are only settled in shares.
• Deemphasize relative TSR in favor of long-term financial measures, as relative performance breeds a herd mentality with little incentive to evolve.
• Increase change of control payouts with improved shareholder alignment.

Mark Viviano, Head of Public Equities at Kimmeridge, added, "When compensation becomes a right rather than an award, the entire relationship between management and shareholders breaks down. Despite being one of the worst performing sectors on a 3, 5, and 10 year basis, E&P executive compensation continues to rise. The threat of irrelevance in the face of the energy transition requires a sense of urgency yet to be observed in E&P boardrooms. The only solution is comprehensive reform that addresses board oversight in parallel with realigning executive compensation."

To view more of Kimmeridge's research and thought leadership, please visit http://kimmeridge.com/research-archive/.

About Kimmeridge

Founded in 2012 by Ben Dell, Dr. Neil McMahon and Henry Makansi, Kimmeridge is a private equity firm focused on making direct investments in unconventional oil and gas assets in the U.S. The Firm is differentiated by its direct investment approach, deep technical knowledge, active portfolio management and proprietary research and data gathering.  In addition to its New York headquarters, Kimmeridge maintains a fully-staffed, in-house operating and geology team in Denver, with experience across all major upstream functions and disciplines. For additional information on Kimmeridge and its proprietary research, please visit www.kimmeridge.com.

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SOURCE Kimmeridge Energy