At the risk of raising topics that have been comprehensively flogged to death here, Bigstockpunter and I took it upon ourselves to follow up FAR's remuneration and funding measures directly with the Company. Our Chairman, Nic Limb, and Managing Director Cath Norman took the time to answer our questions and offer further discussions should we wish. (We declined: We'd rather they spend time on furthering our commercial interests.)
In undertaking this action, BSP and I did not set out to defend FAR, but simply to try to understand why certain decisions were taken. Nic and Cath did not ask that we publicise their replies, but kindly assented to it once we asked if we could quote from their emails.
We think the following account provides shareholders with a better understanding of the rationale behind the Board's decisions.
Funding
Nic Limb:
"We are now a top 300 company and not far off the top 200. As a result a whole raft of new obligations arise. We can not prosper from here with out strong support from financial institutions due to the size of the task ahead.
"What Cath and team have achieved this past year is widely considered to be amazing. These capital markets are very tough for resource companies and it is only Cath's relentless energy and travel schedule that has made this possible.
"The reality is we need big raisings. Last time we went to a lot of trouble to give shareholders the opportunity to participate. In the end the retail shareholders took up $4m. The balance of the retail fell to the underwriters. So given the obvious lack of fire power at retail level it's hard to justify an entitlement issue structure. I doubt this time around it would have raised much more than $2-3m. In addition without fail every issue we have done to institutions including this one has been done close to market due to Cath's outstanding promotional work. What has followed every time is a short period where the share price trades below the issue price where retail can buy it cheaper than the issue price. Then we get complaints from retail that the share price went below issue and we have cheated them. It's pretty much a no-win situation and our job is to do what we judge the best outcome for the entire shareholder base."
Remuneration
Cath Norman:
1. "The executives in the company do not set their own salaries
2. " With respect to fixed remuneration, across the board in FAR and regardless of the fact that our company has outperformed all of our peers in 2015, there have been no increases to fixed remuneration for the year other than a CPI based increase, and no STI’s (short term incentives/bonuses) paid. The main reason for this is, as you have observed already, that the industry is not in great shape and we felt it inappropriate.
3. "With respect to the LTI’s (long term incentives/options/performance rights), let me give you some colour. We are now a top 300 company and not far off the top 200. We cannot prosper from here without continued strong support from financial institutions due to the size of the task ahead. We are acutely aware of our requirements with respect to governance and remuneration policies and more particularly for the proxy advisors who control the votes of the institutions. The LTI/STI structure we are implementing is about as standard as you can get and the performance rights being proposed are truly ‘at risk’ remuneration. Remember 50% of these rights only turn into shares in 3 years time if the share price has grown at 25% compound for 3 years. So effectively the share price has to have grown by around 95% by then. Similarly the other 50% only turn into shares if our share price has outperformed 75% of the other top 300 energy index companies. These are tough hurdles by any standard and much tougher than our peers (I urge you to take a look at the Cairn executive incentive scheme and also the schemes and salaries for our Australian peer group companies)
4. "Both Nic Limb (non exec Chairman) and Reg Nelson (non exec director) sit on the Remuneration Committee for FAR and earlier in the year spent a couple of days with the proxy advisors and reviewing peer policies and plans before putting together the FAR Remuneration plan.
5. "Given FAR does not generate income, we feel strongly that incentivising our staff and management through options/performance rights is more appropriate than increasing salaries and using our cash for STI’s/bonuses.
"I understand it’s an emotive issue when the general oil and gas market is not performing well."
Nic Limb adds:
"The complex remuneration policy structure we are implementing is about as standard as you can get and if you research most in the top 300 and below you will find much the same structure. In detail ours is miserly and I am now being criticized from some in that caucus that our structure is too miserly.
"The reality which I will show at our AGM is that Cath and Ben are paid even after this grant well below their peer group. They both now have considerable international reputations and are constantly being sought out for other Chief Exec roles at much bigger pays. They both of course remain very committed to FAR but it is not right that they should be penalized for this loyalty.
"To turn to specifics. The performance rights have been granted and only require shareholder ratification at the AGM. The other staff don't need such approval and have theirs. The date chosen is the VWAP of the 20 days before Feb 1. If you research most companies they have a similar date relative to their balance date for a very good reason. Each year for the purposes of the remuneration report in the accounts these rights have to be valued and the only way this works practically is to use this date system so to get the accounts formalized. It is not some randomly selected date but founded in the needs of the legislated financial system. This is also relevant to the the 50% of the rights that vest on a relative basis to our peer group. This is not easy stuff to make work given the variables.
Timing of release of RISC Report
Cath Norman:
"With respect to the timing of the RISC release, quite frankly, it was not ideal and we recognise that. I would have much preferred to release a couple of days earlier but the whole point of having an independent auditor is that they remain exactly that and RISC are extremely sensitive to their professional reputation. We cannot dictate the timing of the receipt of the final report and in this case, it was not ideal. Under our continuous disclosure obligations and given we were in the middle of a capital raising, it was absolutely imperative that we announced immediately after receiving. I hope you understand our position here."
FAR's future
Cath Norman:
"I will add one point and that is that we are playing a longer game here than a few days here or there and putting out news as it becomes available is foremost on our minds."
Finally, OOO's takeouts
I have worked on Investor Relations matters for an ASX Top 100 company and I know just how influential these proxy advisers can be. Rightly or wrongly, they are the guard dogs for very large institutions - hard money - now on board FAR's register. As Nic said elsewhere, these guys play by the golden rule - the one with the gold makes the rules. These big investors now have skin in the game and therefore have an obvious interest in how FAR's Board proposes to retain the Company's biggest asset - no, not SNE, but Cath and her Executive team. If we lose them, we risk losing the lot, so it's hardly surprising to see the heavy hitters leaning on the FAR Board to provide the golden handcuffs needed to retain key people.
We retail people are not even at the perifery of the sector and it was illuminating to read Nic's observation that "what Cath and team have achieved this past year is widely considered to be amazing". While we wail and gnash our teeth about raising capital at 8.5 cents, the fact is the capital was raised (basically in a day) and from institutions with the firepower to stump up more if need be.
I don't know about you, but my 'reading between the lines' is that FAR is now fair dinkum about staying in the game all the way to production if need be. Yes, the Chairman told last year's AGM we expect not to get there, but the oil environment is probably now one in which FAR suddenly has a chance if it can source the finance required. Well suddenly it has on its register shareholders who might just hold a key to that finance, and with DOC probably less than a year away, bank finance too comes into play.
Nic's email was an eye-popping insight into the life and times of Cath Norman. While most of us think of Cath as a geo hunched over SNE data, the reality is that like any great MD - and I worked for one - her most important role is as Chief Salesperson for the company. If you've tried to get hold of Cath, you'll know she's 'never home': She's in Senegal talking to government, or London talking with the JV, or elsewhere across the globe talking to investors. It's pretty easy to sit behind a HC nom de plume and fire barbs about how well paid she is, but I'd love to see any of us try to match the effort and expertise she puts in.
Finally, I'm no saint: If you trawl back through my posts you'll see the odd time where I've thoughtlessly stuck the boot in during our bouts of price frustration. My reading of the defence Nic and Cath mounted, though, suggests FAR is doing a good job of walking that impossible tightrope strung between the interests of Big Money and retail investors.
Looking forward to the AGM. Again, look for a balding midget with a white beard and bright green notebook - you can't miss me!
OOO
FAR Price at posting:
8.1¢ Sentiment: Buy Disclosure: Held
(20min delay)