Our last update brought attention to the energy sector’s recovery, as a 12-year low in per barrel oil prices caused 2016 earnings to plummet. As a result, bonuses in the sector were lower than all other economic sectors for 2016. This post highlights expectations for 2017 and how the first half has fared, which could point to how incentive plans may be impacted. For more details of our last analysis, see “Pay-for-performance update for the energy sector: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.
The expectations for the energy sector in 2017, as shown in Figure 1, demonstrate a stark contrast to the previous year. Revenue is expected to increase by 17% in 2017, which contradicts the negative growth seen in 2016. Similarly, earnings and cash flow growth are expected to increase by 9% and 13% respectively. Additionally, the sector is expected to restore ROE to positive levels.
Figure 1. Analysts’ growth expectations for 2017 in the energy sector
Figure 2 compares the first six months of 2017 to the first six months of 2016. Overall, the scorecard shows an improving income statement. Revenue appears to be on pace to surpass expectations for 2017, but earnings (EBIT and EPS) both lag the expectation at the mid-year point. Relatedly, total shareholder returns (TSR) in 2017 have been underwhelming at best. It’s not out of the realm that improved earnings in the latter half of the year will help propel better TSR.
Figure 2. First half financial scorecard for the energy sector
Overall, the data makes it very clear that the energy sector is recovering. Performance in the first half of the year was driven by restructuring efforts and improving oil prices. The likelihood that the price per barrel will return to its 2014 level of $90-$100 is dubious. However, the dramatic changes demonstrated by revenue and profit margins during a time when oil prices remain relatively low, demonstrates a sector looking to pivot. It is likely that if the sector continues this trend through the end of the year, it could lead to substantially improved bonuses for improved 2017 performance. For a look at 2017 expectations and first six-month results in the broader S&P 1500, see “Pay-for-performance update for the S&P 1500: a strong first half”, Executive Pay Matters, October 5, 2017.
It is likely that the performance for the rest of 2017 will have implications for 2018 incentive plans. In many cases, fluctuation in industry performance can prompt companies to adjust incentive plans to better align executive pay with changing incentive targets. Willis Towers Watson helps companies calibrate incentive plans goals using predictive analytics, namely with our proprietary predictive performance model (PPM). To learn more about our model, follow the link here.
John Rhew is an executive compensation consultant in Willis Towers Watson’s Houston office, and Daniel Nimri is an executive compensation analyst in the company’s Houston office. Email firstname.lastname@example.org, Daniel.Nimri@willistowerswatson.com or email@example.com.