Friday, December 11, 2015

friday fretting - the downturn continues

One of the things I have found most peculiar throughout this downturn in the oil and gas industry was how long it took SLB executives to admit how extended this downturn would be. It was only in October during the Q3 earnings call, was it finally conceded that the downturn would stretch well into 2016.

I'm not saying 'I told you so', but for as long as OPEC has held their line about not cutting production, the fundamentals were not favorable to a turnaround in oil prices. And OPEC has definitely been holding the line. A week ago, one of the representative nation ministers admitted there was "no ceiling now" the group affirmed the position they've held for the past year that there would be no cuts at this time. This is a position they have held since at least November of last year and affirmed again over the summer. If anything, member production will trend higher as individual nations in tough financial situations will inch up their production in attempt to make up for the low prices.

Frankly, most of the OPEC members have gotten sloppy and undisciplined over the sustained high oil prices. We have lived in a generally long term oil boom since the early 2000's. The 2009 blip, while noteworthy, was not driven by sector fundamentals. Instead, it was driven by a lack of available credit and while the price of oil underwent a sharp decline during that time, it ultimately made just as sharp a recovery. Oil exporting nations (many of whom are in OPEC) have used these fat years to push various domestic programs and subsidies to their populations as a way for leadership to maintain power, but now many are struggling. Venezuela is the poster child for this and now the country is roiling as a result. But it's not just Venezuela. By some estimates, many OPEC nations need substantially higher oil prices in order to balance their budgets. Some of them, like Saudi Arabia, have large cash reserves to fall back on during this time, but most do not.

With OPEC refusing (or unable to internally agree) to cut production, US shale has become the swing producer. And the US market is highly responsive to market conditions. However, already sunk costs and financial obligations make it reasonable for many producers to keep producing even at lower prices. US production technically peaked in March of this year, but it has remained stubbornly high despite $40/bbl pricing levels. However, the spread in YoY production is shrinking and getting close to prior year levels. It is almost certain that US 2016-Q1 production will be lower than 2015-Q1 levels. In fact, that cross-over may occur for the current quarter, but the data is not yet available.

US production will finally drop in 2016 so prices will bounce right back and that's what SLB had been expecting all along, right? Maybe. I won't pretend to know what the C-suite is thinking (other than "transformation") but it's pretty clear activity is not going to bounce back in early 2016. Part of the supply/demand problem is that even with reduced US production, others will increase production, especially Iran which is eager to get back to pre-sanction production levels. On the demand side, the outlook is also murky. Part of this year's demand has been goosed by countries taking advantage of low prices to top off their strategic reserves. China has been a big participant in this trend. That's unlikely to continue much further so what happens when everyone's tanks are full and the ships have nowhere to go because there are no buyers?

If I knew the exact answer, I'd be making a killing on the futures markets. However, it does seem like the grim reality has fully set in for the oil and gas services sector. In discussions with friends of mine still in the game, it looks very grim. In SLB's case, going from 120K to 80-90K people is a tough process to be a part of and I wish my friends luck through this coming round of cuts.

Thursday, December 10, 2015

thursday's trawling - more cuts coming

Last week, Schlumberger Schlumberger announced another round of job cuts that would be coming soon. (Also here for a presentation from a top executive.) No number was provided for the number of of job cuts, but it can be estimated based on the $350 million restructuring charge that was announced as part of the cuts. At the beginning of the year, a $390 million charge was taken to coincide with 11,000 job cuts. If a similar cost/cut ratio holds, then this round will be good for about 10,000 more cuts.

Let's look at the numbers:
120,000 peak employment
-9,000 cuts in late 2014
-11,000 cuts in early 2015
-10,000 cuts in late 2015 and/or early 2016
90,000 remaining employees

If anything, the 90K estimate is too high because of natural attrition and retirements which would have also occurred over the past year. The reality is that in a high turnover industry like oilfield services, this could account for another 5K-10K people. It is quite possible that when this is all said and done, roughly 1-in-3 people who were working for SLB in early/mid-2014 will no longer be there by the end of Q1-2016. In fact, there are two other factors in play which could make it feel even more severe:
1) Contractors - When times are good in the oilfield services industry, they are really good and it is nearly impossible to be properly staffed. (Definitely a post for another time.) Thus, contractors are hired to fill the gaps, but they come at a high short-term price. Everything was humming along quite well at the beginning of 2014 and there were probably several thousand contractors on the payroll (perhaps 5K, but I don't have a good estimate). When it is time to cut, the contractors are almost always the first to go. This population was never part of the employee figure and didn't have restructuring charges tied to it, but they were nearly all let go early on in the downturn.
2) Lower separation costs per person - Some of the early 2015 layoffs were almost certainly packaged retirement deals. I know for sure this happened in 2009 when several people I knew from my time working in New Mexico and Texas who were at or very near retirement age (and thus eligible for full pension) were given a separation package. Those packages would have been relatively expensive. This time around, the ready-to-retire and nearly-ready populations are probably very thin now and so oustings will come from much less senior employees. These will cost the company less on a per person basis. Thus, $350 million might end up being close to 12K or 15K job cuts when the smoke clears.

To an industry outsider, this might seem terribly harsh, but it is actually completely normal for the industry. Times are tough so it is time to retrench. If I told people in the Bay Area that every few years, there would be a tech downturn that would lead to 1-in-3 people getting canned, they would look at me like I was crazy. And they'd be right to do so. However, oil and gas (and any resource extraction business for that matter as the miners are also having a rough go of things) cannot innovate itself into creating more demand for its product.

Tuesday, December 08, 2015

tuesdays not in turkmenistan - long gone

Wait, there hasn't been a post in nearly 18 months. And I haven't been in Turkmenistan in over two years. Why this? Why now? I am long gone and I will not be going back. At this point, nearly all the other expats I worked with are no longer in Turkmenistan and I have minimal contact with anyone still there.

I have always pulled my punches with this blog. There was always a reluctance to write too critically about any location I was in, especially when I was in Turkmenistan (though the Turkmen President falling off his horse was too good to not write about). After all, it is essentially North. Korea. Lite. Perhaps I should say "was" since I haven't been there for two years, but my former colleagues have assured me it is as dysfunctional as ever.

Doing a quick check and review of an older post of mine on Turkmenistan's place in various rankings around the world, not much has changed. The country is still pulling in awful marks from essentially everyone:
* Human Rights Watch (Turkmenistan profile link)
* Freedom House (Turkmenistan profile link)
* Reporters Without Borders (Turkmenistan profile link)
* Transparency International (Turkmenistan profile link)
Yep, still not a great place when the only places you beat are Eritrea and the actual North Korea (as per the Reporters Without Borders report).

Turkmenistan's great struggle is not that it is terrible, but that it will continue to be terrible. It sits atop the fourth largest natural gas reserves (direct link to .pdf of the 2015 BP Statistical Review and go to page 20). But all this wealth will not reach the vast majority of the people while it has such a petty and vainglorious leader. Yes, petty enough to insist upon a yacht as a bribe. This was actually semi-openly discussed among expats in at least one of the client offices while I was there. It was never much discussed in front of Turkmen nationals since you could never be certain who actually supported the president as opposed to those who paid lip service to his ego-centrism. And with visas so difficult to come by and deportations so legitimate a threat, the trend was towards discretion around locals.

In the past, I was pulling my punches about the potential of the country. I laid out two main stumbling blocks to developing the country's resources: distribution of wealth and available labor. The labor issue is straightforward enough. People there are not well educated and the nature of the education they receive is very dogmatic and rigid. There are gains, but people will be educated only just enough to perform the work needed, not well enough to create what one might call a creative class. In its current form, the education system there will never lead to an innovative or entrepreneurial society. Additionally, Turkmen nationals need an exit visa to leave the country and get a foreign education. This further restricts which type (and how loyal) of a person is allowed out. As for the distribution of wealth, well, this report sums it up well when it says:
"Twenty percent of the Agency’s revenues go into the State budget. The other 80 percent disappear into the murky, shadow economy that President Berdymukhamedov has built though a legal, but highly unethical, system of law that he created under the noses of western officials, but which has never been analyzed, until now."

With leadership like that, Turkmenistan will never prosper. It will improve in some ways, perhaps many ways, but it will fall deeply short of its potential as long as it is led by such a petty and insecure person.