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A True Jobs Massacre Spreads in US Oil & Gas
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
It’s been tough for US oil companies. And even tougher for their investors. The hero du jour is Marathon Oil.
Wednesday afterhours it reported an eye-popping 48% plunge in revenues in the second quarter and a net loss of $386 million. To stem the bleeding, it slashed capital expenditures by 40% from the prior quarter. “Importantly,” as it said in the press release, it was able to reduce production costs in North America by over 30% per barrel of oil equivalent from a year ago. And it cut is general and administrative costs by more than 20%.
The key to survival in this environment of plunging revenues is conserving cash and slashing expenses, including “workforce reductions,” as the company calls them. And something else….
Marathon proudly said that its global production from continuing operations (excluding Libya) rose 6% from a year ago, with its US production soaring “nearly 30%.” And it’s not backing down either: Total company production would increase 5-7% year-over-year, with a 20% jump in production in the US.
Thus it joined the cacophonous chorus of oil and gas companies that have been bragging about production increases despite the oil glut, despite the oil price plunge, despite the mayhem in the oil markets, just when investors are desperately waiting for the ever elusive production cuts.
BP’s debacle is even worse. Last week, it announced a loss of $6.3 billion and warned of more layoffs to come. It raised the restructuring charges for those layoffs from $1 billion, put forward in December, to $1.5 billion. “We will continue to identify more opportunities for simplification and efficiency,” is how CEO Bob Dudley put it in perfect corporate-speak. And cuts are now coming at “a faster pace.”
Dozens of companies in the oil & gas sector have announced job cuts since last fall, with some of the global players, like Baker Hughes, pushing their layoff numbers into the low five-digits. It has been a relentless litany.
In its June Job Cut Report, Challenger found that US employers had announced 287,672 job cuts during the first half of 2015, up 17% from the same period in 2014, the worst first half since 2010. For a reason:
The first-half surge was due largely to the decline in oil prices, which rippled through the energy and industrial goods sectors. All told, the drop in oil prices was blamed for 69,582 job cuts in the first half of 2015. That is second only to the 86,978 job cuts attributed to “restructuring.”
But the announcements of global companies don’t always make clear how many of these cuts are going to happen in the US. And given the vast US economy, these energy-related job cuts don’t readily stick out in the various reports on the US employment situation.
ADP, in its National Employment Report today, guessed that the economy in July created 185,000 new jobs, including whatever jobs it destroyed in the energy sector. It disappointed those who’d expected 215,000. But that’s still quite a few jobs. And new unemployment claims have been bumping along multi-year lows. So nothing particularly alarming in these numbers.
The Bureau of Labor Statistics figured that the number of jobs in “oil and gas extraction” peaked in October last year at 201,500 and has since fallen 4% to 193,200. Total employment in oil & gas extraction and support activities peaked at 538,000 and has since dropped 7%.
Among the nearly 142 million total non-farm jobs in the US, half a million oil & gas jobs isn’t a big portion. But for folks working in the sector, it’s a different story. On an anecdotal basis, it sounds like this (from David in Texas):
A friend’s son went to work for BP right out of college a couple of years ago for what to my friend was a shockingly high salary. At the moment, he’s still employed there, but we’ll see how long this lasts. Another friend’s son who worked for Baker Hughes has already been laid off.
This has been the pattern: a careful trickle of layoffs here and there, spread out over months, not the mass extinction of jobs that we saw during the Great Recession. And this strategy has one big side effect: by now, hardly anyone pays attention to it anymore.
Moody’s Analytics, in conjunction with the ADP National Employment Report, came up with its own estimates of the bloodletting. Chief economist Mark Zandi told reporters today that the oil & gas sector has been laying off 10,000 to 15,000 workers a month so far this year. Unless the price of oil suddenly experiences a miraculous recovery, layoffs would likely continue for the rest of the year at this rate, it said.
Alas, West Texas Intermediate is now in its eighth week in a row of declines. At $45.21 a barrel, the lowest since March 20, it’s just a hair from setting a new low for this oil bust. Not a whole lot stands in its way.
So if Moody’s estimate for the oil & gas sector pans out, it would translate into a range of 120,000 to 180,000 job cuts this year, in an industry that at the beginning of the year had barely over 500,000 jobs. At the upper end of the range, it would represent the elimination of 36% of the oil & gas jobs in the US. Though it doesn’t stick out in the national figures, it would be a true jobs massacre.
So the oil & gas sector isn’t exactly in a rosy environment, with a number of companies entering a “liquidity death spiral.” Read… Oil Re-Bloodies the “Smart Money”
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Oil being the most important source of fuel in the world for first world countries is TOO BIG TO FAIL.
Right?
So the FED and Treasury, like it did for the Jewish Mafia on Wall Street, and other environs, will just give a trillion or quadrillion newly minted prestidigitations on Lew's and J Yell's laptops to the biggest of the Producers in order to save them.
No problemo.
Once the Tankers and on land storage facilities are drawn down in a few years, the hring and the cry for all kinds of employees will resume.
We wil once again have to line up at BP service stations just to get enough petrol to run our machines until the next glut and as Steely Dan and Jackson Browne say, " Do it Again".
For every one person out of work, there are three or four that have taken major haircuts in overtime hours and sales commissions. All these 20-30 year olds that haven't lived through an oil crunch were piling up bills and counting on 70+ hours a week to pay them. It will get ugly fast.
Haven't noticed any EXECS from the Oil Companies who are panhandling on the street. I guess the "jobs massacre" doesn't affect the people with decision-making roles. Right?
How is North Dakota doing? I read masses of articles about the great boom times and such. Now it is a news blackout it seems.
More media manipulation. Tell America all is great.
Lots' of small slashes. Salary cuts as they move from Rig to Rig and the end of perks.
http://www.startribune.com/north-dakota-rigs-take-a-big-hit-from-oil-s-s...
http://www.grandforksherald.com/news/3669060-north-dakota-oil-workers-se...
http://www.bloomberg.com/news/articles/2015-04-15/oil-s-new-boomtowns-he...
Now when it's a train wreck we will see the stories but stories about crappy hours and crappy perks
doesn't sell
The great savings from cost reductions and layoffs sounds good. But if you look deeper, you will learn that these savings look best right after they are made. A couple years down the road and the effects of no capital expenditures and mass layoffs has ruined their competitivesness and production levels, and only new investment and hiring can return productivity to the company.
I maintain this is short term savings, long term this is the way to go out of business.
If you go out of business in the short term, there is no long term.
Sure there is. In the aviation biz you just find some new investors, paint the same airplanes a different color, hire the same pilots, flight attendants, mechanics, and ground staff at much lower wages and much fewer benefits for lots more hours and keep on a keepin' on.
At least these are not good high paying jobs that support the rest of the community....and the whole country...
...we'll do fine unless McDonalds starts layoffs...
Crazy Cooter,
I appreciate your posts, but I have a different view. long post, sorry. What you said is true:
1) In the end, low prices are the cure for low prices, BUT
2) At the beginning of the bust of a debt fueled bubble, low prices may lead to low prices.
In the book, The Worst Hard Times by T. Egan written about the dust bowl, when wheat prices dropped, the farmers, especially the "suitcase farmers," actually "double downed"and broke more sod (turning desert in cultivated land) and planted even more seed the next season in order to pay their debts.
Example: they borrowed $6,400 to buy 640 acres of land, but could only use a small part of the land until tractors/ mechanization started to come into play.
They first plowed and planted 50 acres, got 40 bushels wheat per acre, $4 a bushel (not accurate in the numbers, just giving a context.) and made $6000, minus expenses of $1000. They paid the bank $1000 and pocketed around $4000.
The next year, wheat is $2 bushel. No problem, I'll double the land in cultivation and produce MORE with the lower prices, and I pay the bank, and make some money: 100 acres at 40 bushels per acre at $2 a bushel.
This stops working when the price falls low enough and production has been jacked up higher by everyone. Eventually a bushel of wheat on the ground at the railroad shipping depot waiting to get shipped to market was <10 cents a bushel. (Not sure I remember right nor remember the source, but wheat may have briefly gone to - 5 cents, a NEGATIVE 5 cents. Briefly, they paid you to take ownership!)
My point: Eventually, as cooter said, the price will rise, after the liquidations, but until then, perhaps these oil producers have to pay the "bank" a payment, and to do that they INCREASE their oil production to obtain the $, the OPPOSITE of what an oil well owner, with full owner ship, would do. If you owe nobody, you shut down your oil well until prices rise.
Now, in USA, the amount of debt on each oil well is amazing, and that's assuming there is no hypothecation, manipulation, or other interference (Obama and Coal mining). Sure there are oil well owners and companies who will sit this out and do well, but they are the exception.
Similar to a stock market bubble with people playing it with margins/ debt. Lower prices result in more people wanting to sell.
My 2 cents.
I second The Worst Hard Times; a remarkable chronicle. I had no prior idea of the depth of misery those people underwent; nor the strength of character it developed in those that made it without throwing in the towel.
“Strength does not come from winning. Your struggles develop your strengths. When you go through hardships and decide not to surrender, that is strength.”
– Gandhi
Both of my kids, a son and a daughter, are Petroleum Engineers wih Marathon Oil; both are in their 20's, both graduated either Summa or Magna cum Laude, both are very concerned about their futures with the company. My older son has a)an associate degree in electrical technology, b) BS in Management and his MBA......he is a landman in the DJ/Niobrara and Bakken.
It's a tense time for sure.
I can see they would be tense right now. And young people have short term horizons. But long term, I would stay in the field if I could weather these hard times. Oil has to come back, it is the world's energy source, nothing is going to replace it for 50 years.
"I can see they would be tense right now. And young people have short term horizons. But long term, I would stay in the field if I could weather these hard times. Oil has to come back, it is the world's energy source, nothing is going to replace it for 50 years."
Only in a very contstrained range, highlighted by even bigger swings to the upside and downside. The world is at peak everything. Peak Cheap Energy, Peak Population, Peak Agriculteral Land, Peak Cheap Debt, Peak Overall Debt, Peak Student Debt, Peak Auto Debt, Peak Marginal Debt, Peak Leverage, Peak Government Control, Peak Corruption.
And what is beginning to Peak is Peak Derivative Debt, Peak Wage Slave Arbitrage and Peak Automation (Software, A.I., Robotics, Analytics, Deep Database Mining, etc.
There will ALWAYS be plenty of oil for the eiltes. But for the rest of humanity, there is not enough CHEAP, READILY AVAILABLE and EASY TO EXTRACT and REFINE energy to keep the Forever Growth model of global humanity going at the pace it is.
Eventually it will all roll over into a global reset probably picking up steam in the 2020-2025 timeframe and excelerating after that.
We aren't at peak anything except peak cowardice.
Lots and lots of studies suggesting you are correct. Most of this has been wargamed, think-tanked, etc. to death as far back as the 70's, if not further.
I have some follow up question if anyone is here to answer.
Globalism, Financialization of USA, Shipping of Jobs Overseas with our National Technology, the Replacement of Jobs with Automation, Computers, and Robots, the End of the Middle Class, the Creation of a Criminal Class since 1980, the Suppression of Wages with Illegal Immigrants, ... and the National Security Issue of Tax Revenue from Oil & Gas Industry and the Stable Supply of Oil & Gas...
Have these all be predicted and "Gamed"?
I mean no one really provides answers to lack of jobs, lack of education, and expensive predatory education system.
And the use of Finance at such high levels, debt at such high levels... with commodities prices of Oil coming from outside of our Domestic Economy... it is really an Act of War at some point.
It IS an act of war. A war between the Owners and Labor.
Now, I don't won't to get into an argument over what I just said, because it is very LOADED language. So no debate over Owners and Unions. However, ownership IS getting more and more CONSOLIDATED in the hands of a few simply because RESOURCES of all types are becoming more constrained.
And while it will be rare to see old school monopolies make a come back, you will see more and more Duopolies, Triopolies and Quadopolies in the future. Oh, there will be THOUSANDS of brands and permutations of the same product from these 'opolies.
But what you will have defacto are CARTELS. Ad Hoc Cartels to be sure.....but still....Cartels. With Cartel pricing. Very little difference between the groups.
In the words of George Carlin....."It's a BIG CLUB....and YOU AIN'T IN IT !!
The cure for low prices is ... low prices!
Someone (lots of someones actually) will have to BK, downsize, cut back, etc to bring supply down and prices up. But right now they are all desperate to over produce to keep the cash coming in so they can stay afloat.
This is a cycle in the oil bidness and this is not the first go around ... but I do think it is going to get much worse if CBs lose control and deflation geuinely sets in.Or, as Hugh Hendry put it, "wise men do not invest in over-capacity".
There will be a recovery at some point, and when demand then outruns supply (given the long timelines for oil production) it is going to be high prices time.
And so it goes ...
Regards,
Cooter
They can't fight deflation. And they aren't really in control.
Shit will happen and everybody caught in the shit storm will have a helluva time digging themselves out.....
Looks like it was planned, doesn't it?
There will be blood.
https://www.youtube.com/watch?v=hKoLsqnKRKw