Driving Value: COP & Shareholder Alignment

Throughout 2025, I will explore a theme in greater depth: Compensation and Shareholder Alignment. Let’s start the year on a high note with a company that truly has shareholders’ interests in mind—ConocoPhillips.

The Gist (1) Returns on capital drive O&G share price outperformance, so management compensation should reflect this. (2) ConocoPhillips has aligned its compensation with ROCE over the past decade, aligning management and shareholder interests. (3) The next step for the energy sector is to tie compensation to Shareholder Value Add or returns exceeding the cost of capital.

Long-time readers know that I believe returns on capital (measured using NOPAT ROCE) drive relative outperformance within the energy sector.

This has been true for ConocoPhillips since Frank Phillips first sold shares in its predecessor, Phillips Petroleum, to the public over 100 years ago.

A metric like NOPAT ROCE shows more correlation over time to relative share price outperformance than cash flow based metrics like FCF ROCE shown below.

Despite this historical lesson, boards, management teams, companies, and entire industries can lose their way. The energy industry was no exception. After a decade of outperformance from 1998 to 2008, the energy sector—including ConocoPhillips—began to underperform relative to the broader market.

Despite this underperformance, compensation packages continued to rise while shareholders continued to underperform the broader market as shown in the chart below.