Fossil Fuel Companies Don't Understand That They No Longer Have Free Reign

| About: BP p.l.c. (BP)
This article is now exclusive for PRO subscribers.


Peabody Energy management wants up to $11.9 million for bonuses for 6 key executives.

BP is seeking to explore in The Great Australian Bight in an area that overlaps a Marine Park.

Investors managing $1.15 trillion assets seek better disclosure in SEC filings, especially about increased fossil fuel exploitation in the light of COP21.

With the dramatic changes happening in the energy environment, sometimes it is good to step back and think about how the fossil fuel companies are being managed. Here I give examples from the coal and oil industries which suggest to me that senior executives in these industries are not necessarily understanding the new context that they operate in. I've chosen recent actions by Peabody Energy (BTUUQ) and BP (NYSE:BP), but these are not isolated examples.

Peabody bonuses

Peabody Energy is seeking bonuses of up to $11.9 million for the CEO and 5 other executives (CFO, CLO, Pres Australian Div, Pres Americas Div, Group Exec Marketing & Trading). Exact details of the bonuses are hard to sort out as they are buried in short term and long term rewards. However, based on short term bonuses alone it looks like the increased remuneration is in the range 100% to 175% of base salary. In other words the salary will be more than twice that reported if the bonuses are granted. And this is just for doing one's job.

It started as a plea for retention bonuses because there is a big job ahead of management to clean up the mess and survive. When it became clear that this wouldn't work in bankruptcy, the plea to the bankruptcy judge now revolves around what I would have thought were normal business issues that management already gets paid well for, such as financial performance, safety, environmental and restructuring goals.

To argue that bonuses are needed to maximise returns for debtors, overlooks the people (shareholders) who own the company who will get nothing. If there is a spare $12 million, perhaps the company might consider rewarding shareholders?

A recent report in the Harvard Business Review "What if all US coal workers were retrained to work in solar?" has some interesting findings with respect to the sense of entitlement argument.

The findings suggests that most coal industry workers would be paid more in the solar industry than they are paid as coal workers (see Appendix 3 of the full report). And the numbers on which these conclusions are based are big. In 2015, the solar industry employed 208,859 workers compared to ~150,000 in the domestic coal industry. No doubt the gap has widened since (i.e. more solar, less coal industry workers). The study concluded that the coal industry workers could be easily accommodated in the rise of the solar industry. Note that the study was detailed as each worker in the coal industry was matched with an equivalent job in the solar industry. Of course retraining is needed, but that was addressed, including how it would be funded.

The exception to this finding is in the remuneration of managers and senior executives who are better paid in the coal industry (CEOs paid 61% more in coal vs solar and I assume that is base salaries, not including bonuses). I understand how this happened, as at one time the coal industry was in a privileged position as an essential service. So they had power to look after themselves (but not necessarily their workers). With rise of gas and renewables all of this has changed.

BP exploration in the Great Australian Bight

After the Deepwater Horizon disaster in the Gulf of Mexico, one would expect BP to be sensitive about safe exploitation of offshore assets.

It has just come to light that BP's plans to exploit new reserves in the Great Australian Bight involve drilling at depths up to 2.5km within the Great Australian Bight Marine Park. While not as deep as the Deepwater well, these are deepwater wells.

BP is saying that there isn't a problem managing the issue around exploiting a Marine Park for oil recovery. It will be interesting to see if they win that argument, as it is being suggested that the same issues that arose in Mexico are pertinent in the Australian plans.

Both of the above actions are predicated upon expansion of coal and oil production by Peabody Energy and BP.

Investors are pushing back

In a July 20 letter to the SEC, 45 investors, representing $1.15 trillion assets, asked the SEC to seek improved reporting of material sustainability risks in SEC filings. In their letter they say, among other things, the following:

.".the business plans of many oil and gas, electric power, and coal companies appear to pose material financial risks to investors, because they are based on forecasts for increasing demand that fail to take into account the accelerating transition to a low carbon global economy."


In both of the above cases, one wonders who in the companies is looking at what is possible in today's environment. Both Peabody and BP proposals smack of management teams who think that they can dictate the terms under which their companies operate.

I'm not convinced it is like this anymore. I suggest to potential investors that it brings into question judgment about sensible expenditure, as both of these projects would seem to be heading for controversy.

Why invest in companies that don't seem to be able to discern when they are heading for trouble or have a good appreciation of the environment that they operate in?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.