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The 19-month-old dive in the price of oil has left few options for oilfield services companies, which provide energy companies with the nuts and bolts they need to be productive.
The choice for companies such as the Houston-based giants Schlumberger and Halliburton is stark: Either refuse to offer customers further discounts on expertise and equipment, which could lose them critical business, or offer even greater discounts and lose revenue.
The average global price of oil has plunged from more than $110 per barrel in the summer of 2014 to around $30 per barrel today, a decline of more than 60 percent. Fully 15 percent of that loss has occurred in this first month of 2016.
That means dramatically lower revenues for oil and gas companies, which nevertheless want to continue exploring for energy and producing it even as they cut capital expenditures, or capex. Oilfield services companies have responded by offering these clients discounts sometimes exceeding 30 percent for onshore operations such as hydraulic fracturing and up to 50 percent for offshore operations.
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This naturally has led service companies such as Schlumberger Ltd., the world’s largest, and the Halliburton Corp., both based in Houston, to make their own spending cuts, which are perhaps best illustrated in personnel layoffs.
Schlumberger said Jan. 21 that it cut 10,000 jobs in the fourth quarter of 2015. Company spokesman Joao Felix said total job cuts for the company since the third quarter of 2014 now total 34,000, or 26 percent of the company’s work force before the cuts began.
Meanwhile, in October, Halliburton said it had cut 18,000 jobs from its own work force in 2015, and on Jan. 25 it announced 4,000 more layoffs.
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Both companies disclosed the latest layoffs in their announcements on their performance records during the fourth quarter of 2015. Schlumberger reported a net loss of just over $1 billion in the period, compared with a net income of $302 million in the same period of 2014. Halliburton reported a net loss of $28 million, a reversal of its net income of $901 million in the fourth quarter of 2014.
To help rectify matters, Schlumberger plans a $10 billion stock buyback program, a move applauded by some analysts. “It’s always nice to know the company is investing in itself,” Matt Marietta, a Houston-based analyst at the investment bank Stephens Inc., told Bloomberg. “All things considered, I think their cost-savings program can be viewed positively.”
Related: Rumors of OPEC-Russia Coordination Send Oil Prices Surging
Halliburton, meanwhile, is hoping regulators approve its bid to buy a smaller rival, Baker Hughes, for $35 billion in an effort to expand its operations and cut costs further by eliminating redundancies in the combined company. But that deal has been delayed by questions from both U.S. and European regulators.
Given the bind faced by oilfield services companies, they may simply have to end their current practice of ever-greater discounts to their customers and hope that the resulting drop in energy exploration and production could lead to a more equitable alignment of supply with demand.
That is how OPEC sees it. In its Monthly Oil Market Report issued Jan. 18, it said its strategy of driving prices down could “rebalance” the oil markets and restore oil prices to more realistic levels. It said that “2016 is set to see output decline as the effects of deep capex cuts [by non-OPEC producers] start to feed through.”
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com