In The Oil Business, Everything Flows Downstream, Including The Pain

When I had the opportunity to interview Jeff Miller for a magazine article in late 2016, a few months before he was named Halliburton’s CEO in early 2017, the service industry giant was still in the process of fully recovering from from the industry’s downturn that began in 2014. In the course of that interview, Miller talked at length about the challenges of trying to maintain a stable, qualified work force through the boom and bust cycles of the oil and gas industry.

During that previous downturn, Halliburton had found it necessary to reduce its staff by almost 40% from its level prior to the bust, a painful process no one in any company’s management has any desire to experience. “As we’ve gone through the downsizing the past couple of years, which has been so disappointing – I mean it just takes such a toll,” he told me then. “Many of these folks are the same people I grew up with in the organization. This is nothing any executive ever wants to do. Unfortunately, we’ve had to cut through the fat, through the muscle and into the bone here, so there are a lot of wonderful people who aren’t employed today that, if the market would get to where it needs to be, we would love to have them back.”

Miller talked about the fact that the retained employees and the company’s human resources department do their best to keep up with key employees who have been laid off, so they can be contacted and hopefully brought back into the work force when the bust ends and business begins to ramp back up. As successful as Hallburton has been over the years in managing through these inevitable cycles, this is a process management would obviously rather avoid if at all possible.

Thus, it was not surprising to see the company announce Wednesday morning that, at least as an initial response to the current bust in crude prices, it would furlough 3,500 employees from its Houston -based facilities. As reported by the Houston Chronicle:

“Staff will alternate working one-week on and one-week off during the two-month period, the report said. They will keep their benefits during the furlough, but workers will not be paid for the weeks not at work, a spokeswoman told Reuters.”

Thus, the company is able to reduce expenses without incurring the potential loss of contact with employees that would result in many instances from a full layoff. This strategy provides a 60-day window during which leaders in Saudi Arabia and Russia might think better of their apparent effort to harm America’s oil and gas sector by intentionally depressing oil prices for a period of time.

Halliburton’s move comes in the wake of announcements by many large shale producers that they will be dramatically cutting their own capital budgets in 2020. Already this week, we have seen the following:

• Pioneer Natural Resources is cutting its oil drilling rig count in half over the next two months. This will lower its active rig count in the Permian Basin from 22 to 11 and also cut its number of contracted completion crews from 6 to either 2 or 3;
• EOG Resources, another major Permian producer and the largest oil producer in the Eagle Ford Shale, plans to cut its 2020 capital budget by 31%;
• Permian producer Concho Resources is cutting spending by between $600 million and $800 million for 2020, reducing its capital budget for the year to $2 billion.

These major cuts in capital spending, coming on the heels of earlier announcements by fellow shale producers ExxonMobil, Marathon Oil and Apache Corporation, will have significant impacts on service companies like Halliburton. The slowing of the upstream sector and the overall economy will also inevitably impact pipeline companies and refiners, who are already cutting volume output of refined products due to falling demand.

In this industry, everything, including the pain, flows downstream. Sadly, the flow is just beginning.
Source: Forbes