Via The Wall Street Journal
U.S. energy companies are planning more layoffs, asset sales and financial maneuvers to deal with a recent, sudden drop in U.S. crude-oil prices to under $50 a barrel, the lowest level in four months.
The companies had been banking on a rebound in oil prices in the second half of 2015 after falling sharply late last year. Prices began to regain ground in the spring, rising so quickly that some American producers started hiring back drilling rigs to pump more crude. That speedy return to the oil patch and the threat of new Iranian oil production have pushed down prices more than 20% over the past six weeks to $48.14 as of Friday , bringing storm clouds back to the energy patch.
Oil-field services providers that help drill wells have quietly revealed job cuts that were deeper than initially announced, and warned of more layoffs to come. Halliburton Co. and Baker Hughes Inc., two big service companies that plan to merge, disclosed last week that they had cut 27,000 jobs between them, double the 13,500 they announced in February.
Initially, Halliburton expected to reduce its workforce by 8%, but ultimately cut it by 16%. Baker Hughes first announced it would cut about 10% of its jobs, but cut 21%.
“We continue to evaluate our operations and will make further adjustments as required to adjust to market conditions,” Christian Garcia, Halliburton’s acting chief financial officer, told investors.
Baker Hughes management called the layoffs a difficult decision and said other cost-cutting measures have been rolled out across the company, too.
Nearly 50,000 energy jobs have been lost in the past three months on top of 100,000 employees laid off since oil prices started to tumble last fall, according to Graves & Co., a Houston energy consultancy. Initial rounds of layoffs this year tended to be blue-collar jobs, such as roughnecks on drilling sites, fracking crews and workers at industrial-equipment manufacturers.
Now the job cuts are starting to extend to engineers and scientists.
ConocoPhillips, one of the world’s largest oil-and-gas exploration companies, has already cut nearly 1,500 jobs so far this year, according to Graves. But the Houston-based company is planning more layoffs for this fall that could number into the thousands, according to people familiar with the matter.
“We are currently reviewing and adjusting our workforce levels in light of an extended period of low prices,” said Daren Beaudo, a spokesman for the company. “We’ve informed our workforce that reductions should be expected. It would be premature to speculate or estimate at this time.”
Many oil-exploration companies hesitate to lay off geoscientists and other highly skilled workers, said Dennis Cassidy, the Dallas-based managing director of oil and gas at Alix Partners, a global consulting firm. That reluctance stems from the oil crash of the mid-1980s, when so many educated workers were let go that it created a talent gap the industry struggled to fill for 20 years.
“The last thing a company wants to do is dismantle the dream team they took a decade to put together,” Mr. Cassidy said.
U.S. energy producers proved surprisingly resilient in the first half of the year amid languishing crude prices, aided by a flood of investment from Wall Street that was counting on an industry rebound. Hedging programs, which lock in a guaranteed minimum price for oil, also helped protect sellers against the price drop.
But many are likely to run into trouble as the year progresses if prices don’t rebound, Mr. Cassidy said. “Everybody was hopeful, but it feels like the hangover is dragging on.”
The problem is partly of the companies’ own making. Even as they slashed their budgets and drilled fewer wells, they coaxed more fuel out of the ground than ever before. American oil production finally appears to be flattening out after climbing sharply for five years, but U.S. Energy Department now pegs it at 9.7 million barrels a day, the highest since 1971.
Of course low energy prices are a boon to consumers—from American drivers to international airlines—who have been buying more cheap gasoline, diesel and jet fuel. But their purchases have hardly been enough to sop up the global glut of oil. And if a sanctions-ending nuclear deal with Iran goes into effect, the OPEC nation could put as much as a million barrels a day into the already saturated market sometime in the next year.
Oil-hedging programs that protected many companies from falling prices will begin expiring this fall, leaving them exposed to the low price of crude. Those with lots of debt and poor liquidity could be forced into bankruptcy; others with valuable pipelines or oil-and-gas fields might have to start selling off assets to raise cash, according to Simmons & Co. International, an energy investment bank.
U.S. producers have typically hedged 50% of their projected annual oil output, but most are heading into 2016 with hedges that cover just 15% of the oil they expect to pump.
Terry Marshall, an analyst at Moody’s Investors Service, said hedges panned out for companies as oil prices plunged from $100 a barrel to $50, but going forward many producers need higher crude prices to turn a profit.
“Hedging for 2016 isn’t a panacea for these companies,” he said. “Without an improvement in price, they run out of time.”
Energy producers have been able to forestall many effects of oil’s downturn in part because investors still wanted to put money into the industry, because many banks were forecasting that oil prices would rebound in the second half of 2015. During the first half of the year, 57 energy companies issued $21 billion in new equity, and 58 more issued $73 billion in new debt, according to Moody’s.
That now looks unlikely and easy access to capital is ending, said Lloyd Byrne, an energy analyst at Nomura Group, a financial services company. Recent offerings haven’t been well received, debt is no longer low-cost and share prices are languishing.
In the past two weeks several smaller companies have filed for bankruptcy protection, including Sabine Oil & Gas Corp. and Milagro Oil & Gas Inc., both based in Houston.
In another sign of stress, Chesapeake Energy Corp. said last week it would eliminate its annual shareholder dividend. The U.S. shale driller said the move will save it $240 million in payouts that it can plow back into capital spending to help it survive 2016.
Morgan Stanley warned recently that the current downturn could be even worse than the one that crippled the industry in 1980s. If Saudi Arabia and Iraq keep running full tilt and Libya and Iran get their oil production back on track, crude prices could languish below $60 for the next three years, said Martijn Rats, an analyst.
“On current trajectory, this downturn could become worse than 1986,” he said.
Chevron announces more layoffs
Chevron Corp, the second-largest U.S. oil company, said on Tuesday it would lay off 1,500 employees, about 2 percent of its global work force, as it trims costs to offset declining crude prices.
Nearly all of the layoffs will be in Texas, where the company has expanded in recent years to develop land in the Permian shale formation, and California, where Chevron is headquartered.
Fifty international employees will be laid off and roughly 600 contractor positions will be canceled, the company said in a statement.
Of the 1,500 jobs being eliminated, 270 are currently empty and will not be filled, Chevron said.
Chevron had previously labeled the Permian as one of its premium assets.
Oil prices have plunged by about 55 percent in the past year due to oversupply concerns both in the United States and internationally.
“In light of the current market environment, Chevron is taking action to reduce internal costs in multiple operating units and the corporate center,” Chevron spokeswoman Melissa Ritchie said in a statement.
Shares of Chevron rose 3.6 percent to close Tuesday at $92.40. The stock has lost 17 percent of its value so far this year.