Bloomberg pointed out in early June that Whiting Petroleum’s (NYSE:WLL) CEO, Brad Holly, got a $900,000 pay raise when the company filed for bankruptcy. While that was good news for Holly and his family, it was terrible news for the long-term owners of WLL stock.
That said, the shareholders could have seen the news coming.
I’m not going to provide some technical explanation about oil and gas prices or something along those lines. For that, you can read one of the many excellent InvestorPlace articles on the subject.
What I want to talk about is compensation. How much did Holly make during his tenure as CEO and more importantly, why did he make so much? Because it’s clear that his managerial talents weren’t much better than mediocre.
Whiting Pays Up
To make matters worse than they already are, Whiting is paying up to ensure Holly remains onboard during its bankruptcy, a problem that he had a hand in creating.
“It’s this bizarre world where the CEOs drove the company into bankruptcy, but it’s important that the company pays them bonuses because they’re the only ones who can get them out of bankruptcy,” said Kelly Mitchell, an analyst for Documented, a corporate watchdog group.
“For some executives it’s resulted in massive payouts, far and above what they would have ever received if the company hadn’t filed for bankruptcy.”
Bizarre is right, especially considering that the CEO eliminated one-third of the company’s jobs in 2019.
Unfortunately, the alternative for bankrupt companies is to pay dearly to bring in forensic accountants to take care of preserving as much of the company’s assets as possible. It’s a double-edged sword.
How Much Did Holly Earn?
We already know that Whiting’s CEO got a cash bonus of $6.4 million before it filed for bankruptcy on April 1. That was close to $1 million higher than his total pay in 2019. Holly hasn’t been with the company very long. He became its CEO on Nov. 1, 2017.
According to Whiting’s 2019 proxy, Holly earned $16.1 million of compensation between November 2017 and December 2019. Add in the $6.4 million he received in March 2020, and his total compensation balloons to $22.5 million in less than three years.
Of course, Holly won’t get all of that money because much of the stock options he received are very much underwater at this point. However, he did receive $871,000 from options and shares that vested in 2019. In 2018, he obtained $2 million from stock.
Excluding the stock he received, Holly earned $13.6 million in 29 months on the job. According to the company’s proxy, in 2019, he earned 34 times the median pay of all other employees.
That tells me something important about Whiting.
The company’s median compensation of $159,308 shows that most of the people who work at Whiting are well-compensated. Considering that its business is at the mercy of commodity prices, it pays its employees a great deal.
No wonder it went broke.
WLL Stock Was Doomed to Failure
As I suggested above, Whiting’s expense structure was too high for a business operating at the whim of oil prices. Also, it seems ludicrous to pay out so much per employee and ultimately get so little in return after accounting for its debt.
In late April, the company agreed to a restructuring deal that would give creditors 97% of its business in return for the elimination of more than $2.3 billion of its debt. Under the agreement, existing shareholders would get 3% of the company’s new equity.
InvestorPlace columnist Mark Hake does an excellent job of explaining what the value of shareholders’ 3% stake may be. In a best-case scenario, Hake argued that the shares were worth only 66.6 cents.
WLL stock is trading at $1.03 this morning, well above the implied value. And as Hake reminded his readers, the company could have more debt than its books show.
While it’s rare for shareholders to remain in the game after bankruptcy, it could happen in this scenario. But they will probably not be made whole.
The Bottom Line on WLL Stock
In the meantime, longtime Whiting investors ought to ask themselves whether the sexual misconduct allegations leveled against Brad Holly while he was an executive at Anadarko Petroleum were a sign of troubles to come.
At the time the news hit the internet, WLL stock was trading at $30. By the end of 2019, it was still above $7. There was plenty of time to assess whether Holly was the right person for the job.
As I like to say, where there’s smoke, there’s usually fire. Whiting’s shareholders could have seen it coming.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.