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"There's No More Fat To Be Cut:" Desperate Oil Producers Cut Salaries To Save Mission Critical Jobs
Early last month, Citi “exposed” what it said was shale’s “dirty little secret.”
In a nutshell, the entire business model is uneconomic and thus the only reason a lot more drillers aren’t bankrupt is because capital markets are still wide open. “Capital markets plugged shale’s ‘funding gap’ from 2009 through the first half of 2015, but they are now tightening, reducing access to liquidity for some producers and shaping their ability to drill,” Citi said, adding that “with eight bankruptcies already announced this year, weaker producers may live or die by the whims of capital providers.”
Well, yes. When free cash flow is negative, you’ve dug yourself a hole (no pun intended) and it has to be filled somehow, so you turn to capital markets. It’s just that simple.
But when rates are at zero and when the hunt for yield generates a perpetual bid for anything the provides investors with any semblance of income, the market never gets to punish uneconomic business models by putting them out of business. Therefore, these same producers just produce, and produce, and produce some more, driving prices ever lower, rendering their business models even more economic than they already were. What you end up with is a collection of zombie companies desperately trying to stay afloat any way they can.
Of course the perpetually low prices that this dynamic engenders affect the entire space, which is why you’ve seen capex cuts and layoffs even among the industry’s stronger players. Now, it would appear that all of the proverbial fat that can be trimmed, has been trimmed which means that, as WSJ reports, further cost cuts will now have to come from salary cuts because going forward, cutting jobs altogether would imperil companies’ ability to operate.
Here’s more:
As layoffs become the energy industry’s main response to low oil prices, a handful of producers are aiming to trim personnel costs without pink slips by spreading the pain among their employees.
Companies including Occidental Petroleum Corp. and Canadian Natural Resources Ltd.are employing hiring freezes, caps on bonuses, and even across-the-board wage cuts to preserve jobs. They and others that already have reduced payrolls—including many drilling and well servicing firms—are reluctant to slash further, say energy-industry experts.
In part, they’re trying to avoid the type of skilled worker shortages that followed mass job cuts in prior downturns. But it’s also because their businesses can’t succeed without sufficient staff, especially if the downturn in oil prices reverses course.
“There’s no more fat to be cut,” said Deborah Byers, a partner at consultants Ernst & Young in charge of its U.S. oil and gas practice.
More than a year after oil prices began their descent to under $50 a barrel from over $100, the number of energy-company layoffs world-wide has topped 200,000, says Graves & Co., a Houston consulting firm. More cuts are expected because crude shows little sign of rebounding soon.
Occidental Petroleum has avoided mass layoffs so far. The Houston-based company told its employees last month it will cap bonus payments this year and freeze salaries into early 2016, according to an email reviewed by The Wall Street Journal.
Noting that annual cash flow drops by $120 million for every $1 decline in the price of oil, Chief Executive Steve Chazen warned in the email that bonuses “may be further reduced or eliminated” and some jobs could still be cut if oil prices don’t bounce back. In the latest quarter, the company’s cash flow was $1.5 billion, down from $2.1 billion a year earlier. Spokeswoman Melissa Schoeb confirmed the action and said Occidental is “taking aggressive action to ensure the company’s long-term success.”
In other words, these companies are now at the breaking point.
There's a limit to how many people can be fired and how much capex can be cut if you intend to stay in business. Once you bump up against those limits, the only cost cutting option that remains is to gamble that essential employees would rather get paid less and keep their jobs than risk venturing out into an uncertain economy in search of other employment. If you're right, you get to realize a little more in the way of savings.
If you're wrong, and critical employees leave, you're in a tough spot operationally or, as one partner at Deloitte put it, "the undercurrent here—and companies are very careful how they talk about this—is chipping away at the entitlement mentality that has developed over time within the industry."
So for all of the petroleum engineers out there, get ready to make a decision, because it looks like "lower for longer" applies to your salaries just as it applies to crude prices.
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Neptune in Pisces (until 2026): oil & gas found everywhere, by nearly everybody
And chicks for free!
The problem with running on a treadmill is you collapse and fall off the back before the machine even begins to tire.
I predict these companies will soon discover 29.9 hour work weeks, with no benefits. Sorry, no bonus or raise this year, but here are your walmart coupons.
And the Klingons are in Uranus.
Thanks for playing...
This is like that movie Alive.
I see where this goes. And it tastes like chicken.
pods
Good. Maybe this will slow down the pollution of the ground water caused by fracking. At the very least we may start seeing fewer earthquakes.
But earthquakes and illness drive demand. What are you thinking???
The problem with layered cuts is similar to the "hey, wait a minute" problem of raising the minimum wage. People making $100K will lose 10% putting them at $90K, but the people making $99K will only lose 5% putting them at just under $95K. I wonder if that comes with a promotion too?
FMC Corp - 800 to 850
A few technologies assure a throw-away world because it isn't fit for life after they have had their day.
Energy values distorted to shit. Ckeck!
Labors value distorted to shit. Check.
Players like Chesapeake has been screwed up for a long time, but they keep floating bonds and people keep buying them. How this all ends is anybodies guess, but the one thing for sure, it will end badly......
Ha! Yes, the Chesapeake massacre was noted in a company-wide e-mail telling us that the company was strong and that we're in good shape. Uh huh.....
Aubrey ran over the investors but he sure took care of the workers. $550.00 /day. Safety inspectors made 1200.00/day.
Gold price distorted to shit. Check.
No news of MH17 then ZH? Thought you might have done a little piece dissecting the evidence of the experts, ask a few questions(???), confuse a few peeps, and generally leave everyone with the impression that it's all a megadeath conspiracy?
Itch; Huuuh?? What does MH-17 have to do with salary cuts, in the petroleum sector?? Oh boy.
Itch,
The MH-17 story will come out here, and this in NOT it's place. So why bring it up. And why bring it up when you have Zero, Zero, to offer. What did your post offer? Nothing. So why even make it? When the time comes, ZH will post on MH-17. You can amaze us with you knowledge then. Have you even read the report? It's classic case of an empty shell, hollow.
The findings will be debunked by the Pootin lovers shortly.
Better Putin than Obama! Good luck...
MegaDeth
You got the wind, I got the gas
We can get together, and have a blast . . .
Just wait until all the hedges completely roll off.
Bingo! Hedges have been keeping many companies alive, they are fast running down and will be over. Then TSHTF.
We would like to know your feelings about working for minimum wage. Hey, at least you have a job.
“exposed” what it said was shale’s “dirty little secret.”
I've tried over a series of posts, even before the oil price crash, to reveal the dirty laundry of the Fracking Miracle. It seemed obvious to me that oil production on the high margine of production costs, and heavily dependent on Fed cheap money and Junk bonds to operate, we always vulnerable. $80 dollar a barrel is not enough long term for fracking, it steady $100-120 a barrel was more like what frackers needed long term. What everyone was so excited about was Short Term, the beginning of the boom, the most profitable wells being drilled first, just as any sane businessman would. It's all down hill form there. Even the folks who believe in the falling costs of production as saviour are not so vocal. Why? Well, just look at the companies who Frack.
This Fracking was never going to make the USA a Saudi Arabia, no matter the hype. It was wishful thinking. People with direct financial and employment connections to Fracking did make an excellent case on ZH. They almost made me believe I was wrong, but their self interest can't overcome the accounting. Books are books, sooner or later they will win out. Accounting is an evil bitch, it blows up the dreams of those not sound in their business model.
So you’re saying that the companies were better “oiled” than the ground they sat upon!
The fact that the big oil companies stayed out of it for the most part, is also another reason to have been suspect.
So dump truck drivers aren't worth $150K a year?
Armand Hammer was a real American Hero.
Sho nuff, LOL.
Did I miss the sarcasm tag or was it removed by NSA?
Did I miss the sarcasm tag or was it removed by NSA?
By the way – you have the perfect name to make such a statement.
That makes it even funnier.
" But when rates are at zero and when the hunt for yield generates a perpetual bid for anything the provides investors with any semblance of income, the market never gets to punish uneconomic business models by putting them out of business."
Well put! And that is why the USA is a totally FUCKED. When, I ask, is the last time bad actors have been punished as the market would if it were free, fair and open? Don't look for capitalism in the USA, you won't find it except at the bttom of the food chain, down where small business and labor competes to live. I can assure you, capitalism is alive and well down here! We get punished and go out of business for the slightest failure. Not so for the top, who own the Government. They are on the Communist Iron Rice Bowl program. You fail, we bail!
Amen to that Jack. We (little guys in the trenches) can get fired, put out of business, etc. as in the blink of an eye. Meanwhile, I am pretty sure that it takes an act of God to get someone out of any Public position.
I've got a family member whose father-son owners of an oil service business has taken a cumulative 35% pay cut while key personnel are rotating between 3 and 4 day work weeks. It's really looking ugly out there.
Posh Mommy is very upset that her days at the country club are curtailed as she watches her grand-daughter so her mother can work to make the mortgage on her lovely pool-home.
It seems Posh has forgotten about those long ago days when her husband was just another greasy oil patch hand with a weekly paycheck and a rent-due notice.
She has no inkling of the sea that washes her King Canute's feet.
I appears that most of the "college educated" will not work for less money.
Quit.
Getting rid of the high priced "non producers", will make fracking viable at $20.
Another self nomination for the Nobel prize in finance. (Piped in cheering sound.)
Isn't it funny how you can still make an oil profit at two thirds less per barrel than it used to be. You can't hide the rip off.
The point is that most can't without borrowing to cover losses.
Yes, and the only reason they're doing that is because of ZIRP. If this was a "real" market they and many other would be out of business,,, as well they should be.
When the cost of money is zero then the value of that money is also zero. This stupid shit is not going to end well.
Apparently you don't even need, "most".
No shit. They'll still be tripping over themselves at 10$ a barrel !!!!!!!!!!!!!!!
Interest Rate Perversion...along with Wall Street Perversion...going to destroy many industries and lives! When will people find the root cause?
Who are we going to be forced to rescue? I bet it will be some firm on Wall STreet....Social Losses=Private Profit
Got a feeling these frackers are goinig to live to drill another day. Shares are cheap here.
salah------how could one reach you ??????????????????astro
I think that gold has some bullish momentum for the short term. Especially now that gold broke out of the declining trend-channel that it has been in. Furthermore when gold is able to close above the previous top of $1,158.50 it will add to the bullish momentum. However, I myself am not a profound believer that gold will soar up a whole lot from this point onward, especially with potential negative revearsal on the RSI, and an expected wave down on the Elliott Wave in the near future.
tripstrading.com/2015/10/12/gold-brea...
stupid prick - fuck off.
"Skill shortage"?? Where? On what planet? It's GRUNT LABOUR.
GAwwwd...those companies are GREEDY. Hire some UNSKILLED people and TRAIN THEM!!!!
After they let go of the real tallent? Good luck training people in skills you dont have any more. Training costs real money too.
Why unskilled? Surely there's a few ex-Pemex workers amongst the recent Mexican arrivals?
Sounds deflationary :)
If only Barry cold speed up moar layoffs he might be able to get the unemployment rate down to 3.5% before Christmas.
The sand,gravel,and water now cost more than the $45 per barril return on the product..So these aren't really oil companies anymore (their giving that away for free),their Utility companies,whose profits come from selling bonds,and ervicing debt..
Easy solution: H1B visa--because labor is the biggest cost.
Just another Fed fiat bubble. Isn't that it's true mission -- Serial Bubbles -- as cyclical wealth transfer mechanisms?
People never learn, nor do they truly understand math.
"In a nutshell, the entire business model is uneconomic..."
In a nutshell this analysis is nothing more than a lie using selected factoids to support it.
"BUT EVERYONE KNOWS THAT SHALE IS A LOSING PROPOSITION AT THESE PRICES!!!!", some will say.
Yes.
But so are Aramco and Rosneft.
"Uneconomic" is only half an expression. "At these prices", is the other half.
But without a comparator, this only means that prices must rise.
So what are the comparators?
Saudi Aramco ...who, whether booked as such or not, counts the Saudi social expenditures amongst its expenses. And those expenses are in DEEP DEFICIT.
And Rosneft...who, again whether booked as such or not, counts the Russian social expenditures amongst its expenses. And those expenses are in DEEP DEFICIT.
As a result this article provides no information of substance and constitutes little more than a non-Shale Oil cheerleading chant.
"Entitlement mentality."?
Are you fucking kidding me?
Oil will never bounce back in the next 1000 years, Mr Exon Valdez. Better take a page from CAT, or Baltic Dry Index, and start laying off left-right-and-center, BuckO.
Look who is holding the BIG bag of odorous excrement, Mr. Blankfein. Time to short out-of-existence, methinks.
Bwahahahahahahaha..
Dude so clueless about russia oil/gas industries.
Here dude, the info on how much it cost to extract oils in russia
https://www.rt.com/business/318527-rosneft-sechin-oil-shale-us/
Not even saudi's oil fields cost THAT LOW!!
Don't believe that numbers?
Well.. i give you... from BLOOMBERG (Russia bashing MSM) their own word!!
http://www.bloomberg.com/news/articles/2015-09-07/move-over-exxon-russia...
Dude, tell me WHICH COMPANIES performs best this year in oil & gas fields??
Next, even with low oil price? Who got the most oil output in the world??
http://www.eia.gov/todayinenergy/detail.cfm?id=22392
https://www.rt.com/business/317663-oil-russia-record-saudi/
And STILL Russian companies INCREASE THEIR PROFITS!! (Why? Cause oil is priced in rubel dude. And the rubel value in plunging. This offset the oil price fall in int'l market)
Quote:
" Gazprom’s oil subsidiary, Gazprom Neft had earlier reported a 47 percent increase in second quarter net profit and its output was up 25 percent.
Russia’s second-largest oil producer, Lukoil boosted output in the first half of the year by reducing spending as a weaker ruble cut costs. The company stated capital expenditure was cut by 31 percent to $5.32 billion mostly due to the ruble devaluation."
Do ANY of your western oil companies performs this BEST, in the LOW OIL PRICE, dude??
And now? That Lukeoil (private russian oil company, that's sanctioned by US.)? Searching for LARGE OIL CONTRACTS, in Iran!!
http://www.iran-daily.com/News/128124.html
Now dude, isn't that STRANGE? How a company under US SANCTIONS. Can make a BUSSINES EXPANSION OUTSIDE THE COUNTRY EVEN!! Well..??
Oh btw dude, YOUR OIL & GAS COMPANIES CAN NOT INVEST IN IRAN!! aren't your conggress haven't pass that Obomba's Iran Deals, eh dude??
While china, russian, my country, india, are all queuing up fetching those ENORMOUS iran's ields!! Bwahahahahahaha!!
But, where do you have money to finance it!! You forgot about that BRICS bank dude??
Afte spending more than >6 B$ in syrian war, dude. WHO get the contract to explore Syrian NEWLY DISCOVERED OIL'S FIELDS??
https://www.rt.com/op-edge/syria-russia-war-oil-528/
So, Dude, you think Russian oil & gas companies get HURT by US SANCTIONS?? Eh Dude?
Bwahahahahahahahahahaha...