In its most recent annual report, Ophir Energy plc (LSE: OPHR) made a simple but bold statement: “We are making NAV per share growth the strategic driver for the business.” And that should be a good thing – as generally, the most widely used valuation metric for European-listed oil exploration and production (E&P) companies is net asset value (NAV).
So why should stating the obvious be so bold?
Because, as it turns out, Ophir is to use that metric, and that metric alone, as the performance measure for a newly designed long term incentive scheme for employees.
But to completely ignore the market valuation of a company is to imply the market is (almost always) wrong in terms of value – something that is rarely the case in the fullness of time. It also creates the potential for unintended outcomes which could ultimately result in the misalignment of management and shareholders.
We delve deeper into Ophir’s new LTIS to understand how well it fits with Ophir’s exploration-focused story and look at the wider implications of a remuneration package at a public company which will drive strategic decision but that is largely immune to share price performance.