"THIS DOWNTURN COULD BECOME WORSE THAN 1986" - Wall Street Journal
SUDDEN DROP IN CRUDE-OIL PRICES ROILS U.S. ENERGY FIRMS’ REBOUND
By Lynn Cook July 26, 2015 5:30 a.m. ET wsj.com
More job cuts, asset sales are expected; layoffs extend to engineers and scientists
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 a 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.
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Replies to This Discussion
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Permalink Reply by Steve on
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Israel will sooner than later have to bomb Iran - oil prices will immediately surge - a more distinct possibility now than ever - so, don't be suckered into any "low ball" lease agreements, which I am sure the E&P operators and their landmen are already salivating over - at least those left standing. Wait to see what happens in the next 24 months.
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Permalink Reply by Skip Peel - Mineral Consultant on
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I wouldn't count on any international crisis changing the market conditions in the near future. Besides being relatively unlikely it's hard to root for something like a war to improve crude prices. Energy companies have much larger concerns than trying to acquire discounted leases.
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So you think war in the Middle East is "relatively unlikely" and you think energy companies aren't always planning to reduce lease prices whenever spin makes it possible? I wouldn't bet on either of those assumptions. Even if there are no supply disruptions due to wars the Saudi's could change their minds and order production cutbacks before you blink your eyes. They already are at their daily production capacity and not able to keep up with anticipated future demand, despite the self induced in part, current over supply, while they and other OPEC members are losing tens of billions of $s in an attempt to control market share. It is hard to take seriously anyone's prediction of "sustained" low oil prices a la the 1980's. I didn't see any of the same commodity futures pricing experts or oil business geniuses for that matter predicting $48 oil 12 months ago. Also, the banks who allowed the E&P companies to over-leverage based on assumed reserve valuations some how missed their projections on pricing also. So, to believe this articles author, using their crystal ball, can predict where oil is headed more than a few months out is ridiculous and nothing but baloney used to manipulate investors. They should just admit they don't really know - especially after just totally missing the drop from $100 to $45.
Short term it does look bad for over -leveraged companies and their creditors/investors due to low prices, but, all I am saying is I wouldn't let an oil man convince me that I better accept a crappy lease because oil prices will be in the tank for years to come citing a 1980's look alike scenario,especially knowing that oil men are always looking to screw landowners so they can brag to investors later about how low a price they paid for their leases - even when they have bigger immediate problems - this dynamic never changes.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Yes, that's my opinion. Do you have knowledge of "crappy" leases being offered by companies using the depressed price of crude as a reason? If so, please post an example. As far as the areas I cover there is very little leasing activity with the exception of Lincoln Parish and I can assure you there are few crappy leases being offered there. The reverse is in fact the case as most offers are for a quarter royalty (except those by speculators) and bonuses are in the $1000 to $4000/acre range depending on specific location.
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You may have worked their too long if you think the industry is above suspicion Jay. I have a couple mineral agent friends who tell me that they have seen many examples of operators screwing their clients in leases and royalty payments and that has been their experience for the past 30 years watching this industry - and at least one of those agents monitors many 100's of thousands of acres with various operators in leases all over Louisiana and has been doing it for over 30 years. Maybe this website should offer an opinion poll about honesty in the oil patch. Any disdain for the industry is not misplaced but merely a product of watching it in action - BP and the gulf oil spill as a recent example. My point is to remind every landowner: 1.)Do not to take at face value anything you are told 2.) All predictions of where the oil market is headed are based on assumptions that can collapse at any moment. Beware of the agenda of the author.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Perceptions of agenda may or may not be accurate, they are however the prerogative of the reader. Yours is so noted, Steve. Since I work for mineral owners and not for the industry, my agenda includes alerting mineral lessors to the possibility/probability of their operator seeking bankruptcy protection and the actions they need to take to protect their interest. My agenda also includes helping clients, and GHS members, get reasonable lease terms. If have thirty pages of "friends" most of whom have sought me out for that type of assistance. The industry is responsible for my ability to make a living and I'm appreciative. However I regularly call them out when I consider their actions unethical or not in the public interest. There are dozens of examples in the archives that long time members will recall. I have testified against one Haynesville Shale operator as an expert witness in a court case. From my experience I can state that the actions of a relatively small percentage of bad actors influences many negative opinions of the industry that are not warranted, or based in fact. The bottom line is the same in dealing with O&G companies as with any other business transaction: don't expect or depend on the other party to protect your interests. In matters of mineral assets it is always best to seek professional counsel.
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Permalink Reply by ME on
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Steve, It's much bigger than Israel and Iran (Radical Islam) I'd imagine that the industry insiders already have a pretty good idea of where this is going; and are prepared.
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The industry insiders know very little when it comes to where the price of oil is headed long term - more than a few months out that is. Sometimes they guess right and sometimes they guess wrong. Apparently these insiders were not prepared for $45 oil. Had "insiders" been so prepared and so smart they would have foreseen that OPEC would make the move it made to make oil prices plummet. We wouldn't be seeing so many operators on the verge of bankruptcy and so many bankers sweating bullets,projects costing billions being shelved and tens of thousands of layoffs if the insiders had a pretty good idea of where things were going. It sure looks like to me that they didn't have a clue and I would bet they still don't and never will.
It would be very naive to underestimate the potential dramatic impact on the oil market should a major war break out in the Middle East. The oil market is not bigger than Israel bombing Iran and the potential disruption of the flow of oil worldwide. The insiders couldn't even predict the impact of Saudi not curtailing their production. Give me a break!
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Permalink Reply by Henry on -
Get your spare cash ready! This will be a buying opportunity similar to that around 1990. I'd be buying XOM hand over fist if it gets in the low $70's. You don't find XOM paying a 4% dividend often. But at $73/share, you can get it. Buy it and sit back and wait 20 years. Reinvest those dividends. You'll be happy.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Good point, Henry. There will be buying opportunities for those acquiring reserves and those getting a good long term investment on depressed stock prices.
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Permalink Reply by kittycatmama on
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Another great company to buy with strong balance sheet is Abraxas. We buy it on the dips
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Permalink Reply by Skip Peel - Mineral Consultant on
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When fate hands you lemons, make lemonade.
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