Layoffs Announced by Multiple Companies as Cost of Cheap Oil Hits Home

Oil prices keep falling,
and companies are reacting

From Bloomberg:

The first thing oilfield geophysicist Emmanuel Osakwe noticed when he arrived back at work before 8 a.m. last month after a short vacation was all the darkened offices. 

By that time of morning, the West Houston building of his oilfield services company was usually bustling with workers. A couple hours later, after a surprise call from Human Resources, Osakwe was adding to the emptiness: one of thousands of energy industry workers getting their pink slips as crude prices have plunged to less than $50 a barrel. 

“For the oil and gas industry, it’s scary,” Osakwe said in an interview after he was laid off last month from a unit of Halliburton Co. (HAL), which he joined in September 2013. “I was blind to the ups and downs associated with the industry.” 

It’s hard to blame him. The oil industry has been on a tear for most of the past decade, with just a brief timeout for the financial crisis. As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago, according to data kept by Rigzone, an employment company servicing the energy industry.

Stunned by the sudden plunge in the price of oil, energy companies have increasingly resorted to layoffs to cut costs since Christmas, shocking a new generation of workers, like Osakwe, unfamiliar with the industry’s historic boom and bust cycles. 

Workers who entered the holiday season confident they had secure employment in one of the country’s safest havens now find themselves in shrinking workplaces with dimming prospects.

 From Forbes:

We’ve already seen thousands of oilpatch layoffs. How bad could it get for oil and gas workers? Pretty bad. 

On Thursday morning came the news that Apache Corp. will lay off about 250 people, or 5% of its workforce. Later in the day a bigger shoe dropped: oil services giant Schlumberger said it was in the process of slashing 9,000 workers worldwide. These are only the latest blows to land on an oil industry already staggering under $50 oil. So far there’s been at least 24,000 cuts announced in North America alone by the likes of Shell, Pemex, Halliburton HAL +4.82% and Suncor (full list compiled at the end of this piece) and they will only get worse. It’s not just Houston. In North America, Midland, San Antonio, Sweetwater, Oklahoma City, Williston, Pittsburgh, Alberta, Mexico City, and even Bakersfield, Calif. will feel the pain. But Houston is the energy capital of the world, and will unfortunately take the brunt of the cuts. 

Prof. Bill Gilmer of the University of Houston has crunched the numbers on some worst-case scenarios for Houston. Assume an average 33% reduction in oil company capital spending this year, followed by 5% growth in 2016. That, figures Gilmer, would result in the loss of 75,000 Houston jobs. This would be an enormous shock considering that Houston has added 100,000 new jobs every year since 2011.

That article later added:

A less appreciated impact of oil’s plunge will be on the ranchers and farmers who have leased their land for drilling, and have been the beneficiaries of billions of dollars of royalty income in recent years. Texas produces more than 2 million barrels of crude oil per day. The average royalty rate for landowners is at least 20%, which means that landowners’ accounts get fattened by the market price of roughly 400,000 barrels of oil every day. When oil was at $100 that amounted to $40 million per day, or $14.6 billion a year. At today’s prices that means a lot less mailbox money sloshing around the Texas economy.

Business Insider reported on some of the information contained in the latest Fed Beige Book, a report of economic anecdotes gathered by members of the Federal Reserve's 12 districts:

Cleveland 

Our contacts are fairly optimistic and expect moderate to strong growth in 2015, though some expressed concern about weakening foreign economies and a decline in the price of oil.

Activity in the Marcellus and Utica shale formations remains at a high level. However, a sustained decline in oil and gas prices may pose some downside risk to drilling and production, and it is uncertain what the effect will be on hiring and wages in the near term.

Yahoo News reported more in depth on the mass layoffs at Schlumberger:

Schlumberger disclosed the job cuts as it reported sharply lower fourth-quarter earnings in the wake of a more than 50 percent fall in oil prices since June. The job cuts account for about 7.5 percent of Schlumberger's global workforce. 

Schlumberger's fourth-quarter earnings came in at $302 million, down 82 percent from the year-ago level. Revenues rose 6.2 percent to $12.6 billion.

 From the Washington Post:

From Royal Dutch Shell Plc canceling a $6.5 billion project in Qatar to Schlumberger Ltd. firing about 9,000 people and Statoil ASA giving up exploration in Greenland, the oil industry this week concluded that the slump is no blip. Top producers follow U.S. shale developers such as Continental Resources Inc. in unraveling a boom that produced more oil and natural gas than the world is ready to buy. 

And there’s certainly more unwinding to come. For most of this month, crude oil has traded below $50 a barrel, a level few predicted even two months ago when OPEC signaled it wouldn’t cut production to defend prices. If the market stays this depressed, global spending on exploration and production could fall more than 30 percent this year, the biggest drop since 1986, according to forecasts from Cowen & Co., a New York-based investment bank. 

“Not too many people expected these levels of oil prices, not even the companies themselves,” said Dragan Trajkov, an analyst at Oriel Securities Ltd. in London. “Now they have to deal with this new situation and the first impact will be on new investments.” 

Shell, BP Plc, Chevron Corp. and other top producers will signal plans for this year when they present 2014 earnings to investors this month and in early February. Their chief executive officers are faced with the challenge of assuring shareholders they can see through the depression without cutting dividend payments.

While it's nice to be able to pay prices at the pump that we haven't seen in many years, most have no doubt been fearing the negative fallout that would come from OPEC's move to drive down oil prices and hurt U.S. shale producers.  This would appear to be just the beginning of the layoffs and cuts.  It's a rough way for many people to start the year.

Connect with us on Facebook and Twitter!
Follow @EnergyNewsBlog