Shale plays, oil patch see tens of thousands of layoffs across the industry

David Wethe March 20, 2020

Correction—The previous version of this wire service story contained a serious factual error. It said that Recoil Oilfield Services had laid off 50 people. This is not correct. According to the company, “our employee count has only fluctuated up or down 3-6 employees any given month for the past and current quarter. Even now we have not had a single lay-off.”  We apologize for the error and urge the Bloomberg wire service to check its facts more accurately before sending out such stories.

HOUSTON (Bloomberg) --One of the most painful busts in the history of crude oil happened just six years ago, when a sharp price drop cost 200,000 industry professionals, almost half the entire workforce, their jobs.

And now, the spread of the coronavirus, coupled with an oil-price war between Russia and Saudi Arabia, threatens to devastate the oil services industry and its workers once again.

Tens of thousands of Texans are being laid off across the state, in places like the Permian basin shale fields of West Texas, as companies shut down drilling sites and rigs, according to Texas Railroad Commissioner Ryan Sitton, a state oil and gas regulator. Announcements are starting to trickle in. Drilling service company, Canary LLC, cut 43 workers last week. But the biggest blow, so far, came from Halliburton Co., the world’s leading fracing-services provider, which said this week that it would furlough 3,500 workers at its Houston headquarters.

The cutbacks follow a precipitous drop in the price of West Texas Intermediate, the U.S. benchmark crude, falling to as low as $20.06/bbl last week from $52.05 just one month ago.

While workers in just about every industry are threatened by the economic slowdown, few are more at risk than those in the oil patch. The Midland-Odessa region of West Texas, where Occidental Petroleum Corp. and Parsley Energy Inc. have been dominant players, could be decimated, according to a report from the Brookings Institution. More than 40% of Midland’s workforce is in high-risk industries, mostly oil and gas, the highest of any region in the U.S., it said. Overall, the services workforce today stands at about 316,000, down about 30% from its peak in 2014.

The shrinking workforce is the direct result of a torrent of capital spending cuts from U.S. explorers, some $12.6 billion, so far. All told, nearly two-thirds of the $100 billion in global spending cuts could come in U.S. shale fields, according to Rystad Energy. For the contractors, no service business will feel that pain more than the one that blasts water, sand and chemicals underground to release trapped hydrocarbons—also known as hydraulic fracturing.

And this time around, the financial wreckage could permanently sink parts of an industry that were able to stay afloat half-a-decade ago, thanks to bank loans.

”There’s definitely blood in the water,” said Dan Eberhart, chief executive officer of Denver-based Canary. “The weakest oil and gas companies, oilfield service companies and banks with heavy energy exposure might submerge beneath the waves before the end of the cycle, never to surface again.”

Halliburton, which generates most of its sales in North America, is expected to see its earnings before interest, taxes, depreciation and amortization fall by 40% this year, to $2.2 billion, said Scott Gruber, an analyst at Citigroup Inc., in a March 19 note to investors. And that’s expected to drop another 30% next year.

Earnings cuts. Citi sees a 40% contraction in the U.S. oil services market, the result of the quick drop in global demand, combined with the expectation for a protracted price war. It’s also led to reduced international expectations, meaning larger service rivals Schlumberger Ltd. and Baker Hughes Co. should also see double-digit cuts to their earnings this year and next, Gruber wrote.

“The reality is sobering,” Luke Lemoine, an analyst at Capital One, wrote last week in a note to investors. “Even before the coronavirus pandemic and the Russia/Saudi crude price war, a number of companies were teetering on the edge of survival.”

The combined market capitalization for the world’s five biggest oilfield servicers and equipment makers today couldn’t surpass the $49 billion size in 2008 of just Transocean Ltd., the world’s biggest owner of deepwater drilling rigs. A single share in the VanEck Vectors Oil Services ETF “can now barely buy a Happy Meal,” he added.

Pricing power. The next four years will be critical for the services sector, with $32 billion in debt for North American service firms coming due between now and 2024, according to Moody’s Corp. The lack of pricing power for service companies is beginning to show up, as their clients look for discounts.

“I encourage you, as a valued supplier, to reconsider your pricing in line with this mission, and to inform us of your adjustments at your earliest convenience,” David Dell’Osso, chief operating officer at explorer Parsley Energy, wrote March 11 in a letter obtained by Bloomberg News. “We are focused on a mission to develop our assets in a safe, efficient and environmentally responsible manner in 2020 while lowering costs by at least 25%.”

Occidental Petroleum President and CEO Vicki Hollub warned her employees last week of the “aggressive steps” that the explorer would be taking, without offering details. “In the coming days, we plan to provide you with more specifics,” Hollub said in an email sent to staff Tuesday. “Some of the measures we take will be temporary through this crisis, and others may be permanent.”

Free tools. Basic Energy Services Inc. is trying to get creative, albeit on a small scale, by offering to throw in free rental tools for clients leasing one of its service rigs, Trey Stolz, a spokesman, said.

Meanwhile, Liberty Oilfield Services Inc. is returning to its old playbook that got the fracing provider through the last downturn in 2015 and 2016 by first slashing executive salaries 20%, said Chief Executive Officer Chris Wright. And yet, Wright said this downturn also feels very different than the last one.

“There’ll be huge reductions in spending and, therefore, customer fracing,” he said. “This will bring structural change to the industry that was coming, but slowly and gradually before.”

The waiting won’t be easy for the mental psyche of oilfield workers, who are extremely stressed about both a global oil-price war and catching the virus. “They’re severely rattled,” said Christiane Spitzmueller, a psychology professor at the University of Houston, who’s studying the oilfield workforce. “It seems like the perfect storm that has brewed up.”

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