As expected, the dramatic drop in crude oil prices is having a deep impact on the American Oil industry. As prices for Brent Crude dropped to $44.13 on January 13th, daily industry reports began to reveal the bleak picture for producers and related companies. Despite prices seeming to recover and level off around the $60 range throughout February, the reports of losses, layoffs, and CAPEX cutbacks continue.

A report by the Greater Houston Partnership released in December 2014 revealed that “the nation’s 14 largest publicly traded exploration companies have lost a combined $308.4 billion in market capitalization” in the previous six months.

According to Citi Financial, exploration and production companies will cut their capital spending by an average of 25 percent in 2015. Mid-sized independents however may be averaging reductions as high as 68 percent in expenditures as estimated by Christopher Melillo of Kaye/Bassman International Corp in an OilPro.com article in late January.

The “Big Four” oil services companies primarily responsible for the upstream activities of drilling and production (Baker-Hughes, Halliburton, Schlumberger, and Weatherford International) combined to account for over 25,000 layoffs as of early February according to the Houston Chronicle. As of mid-February, Bloomberg News indicated that over 100,000 layoffs had been announced worldwide in the oil and gas industry alone since oil prices began to drop. Stock forecasting website, The Motley Fool, believes that more the 100,000 jobs could be lost in the United States across the entire economy.

For every energy job eliminated, four other jobs in related sectors will be lost

Companies which provide a multitude of services in support of drilling and production are at the most risk as the top producers cut expenditures. Dailyfinance.com estimates that of the 2.1 million people employed in the energy industry, at least 1 in 100 will be affected by the drop in oil prices. Another bleak indicator of potential jobs lost comes from a report out of the University of Houston’s Bauer School of Business where a researcher estimates that for every energy job eliminated, four other jobs in related sectors will be lost.

Layoffs and cutbacks are what most Americans can best relate to, but the real impact of oil prices may be what is quietly happening in the markets. The energy industry relies heavily on the stock market and bank loans to expand and enrich operations.

In the recent past, getting a multi-million dollar loan for a Bakken or Permian project was a slam dunk as the plays were seen as virtual money machines for companies and the banks willing to loan them money. But as these money machine plays are delivering half of what they did in terms of price per barrel, companies that have over-leveraged their assets to attain multi-million dollar loans are at risk of default as their ability to pay on them is quickly dissipating.

In The Spotlight

Business Wire reports that the entire market may be greatly affected despite the energy sector only making up 4 percent of the loan market. As bankruptcy rolls begin to swell, the level of loan defaults will be felt heavily by 2016. So-called "High-yield energy defaults could top 20 percent in 2016 if oil stays below US$60 a barrel" according to a Reuters report. Fears of another market collapse are real.

“We think this is an opportunity to upgrade,” claimed executive vice president Mark Berg of Pioneer Natural Resources, a large Texas based independent producer during a recent conference as reported by the Midland Reporter-Telegram. While cutting its “drilling and infrastructure budget” by 45 percent this year, Berg stated “We believe we can improve service quality in this environment because we are going to be migrating to the best partners we have on the service side.”

During the days of high oil prices and quick cash, the VP explained that finding workers and material created situations of, “degradation in quality and safety.” The slowdown is a chance for the industry to catch up and get its collective house in order now that the frenzy of making cash hand over fist is over.

In this environment, renegotiation of inflated costs of materials and contractor rates are now the focus of many companies, including Pioneer. Simply, less competition for everything will bring production and completion prices down, somewhat cushioning the blow of lower profits from depressed oil prices.

Stated in a more sterile manner, Dennis Cassidy, managing director at AlixPartners, a global consulting firm, stated that in a press release that “Strong energy prices in recent years have allowed companies to delay putting an emphasis on project management, as they focused instead on the urgent need of achieving greater throughput… But that was then and this is now.”

In other words, saving money through efficiencies takes time and effort. When profits are off the top of the chart, that time and effort doesn’t seem worthwhile. Now that profits are off the bottom of the chart, companies are being forced to find more efficient ways of doing business, which ultimately, will benefit the entire industry.

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Eric Sharpe
About The Author Eric Sharpe
Eric Sharpe is editor and feature contributor of Energy Ink Magazine, which covers the energy industry in the Rocky Mountain West and Northern Plains. He holds a Master’s degree in Educational Technology from Pepperdine University.




www.energyink.us


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