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.

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