Halliburton announced that it would lay off 650 workers across four U.S. states due to the slowdown in shale drilling.
The oilfield services giant blamed “local market conditions” for slashing payrolls. “Making this decision was not easy, nor taken lightly, but unfortunately it was necessary as we work to align our operations to reduced customer activity,” Halliburton said in a statement. The job cuts were concentrated in Colorado, New Mexico, North Dakota and Wyoming.
The cuts are not the first for Halliburton. Over the summer, the oilfield services company announced job cuts equivalent to 8 percent of its North American workforce. At the time, Halliburton CEO Jeff Miller said that the company would be “removing several layers of management” and that it would be “emphasizing a return on capital approach.” Notably, the company stacked idled equipment, as the market for oilfield services crashed amid a surplus of rigs and services.
In July, when Halliburton last cut jobs and sidelined equipment, investors cheered. “Kudos for being proactive on stacking equipment in this market versus fighting for share,” Angie Sedita of Goldman Sachs said to Halliburton CEO Jeff Miller on an earnings call. Halliburton’s share price soared by 9 percent on the news.
This time around, the stock bounce did not materialize. Sinking oil prices, a deeper decline in drilling activity and increasing skepticism from investors has put Halliburton – and other service companies – in a bind. Halliburton’s share price has fallen by more than half in the last 12 months.
Pessimism is very apparent from both oil producers and the oilfield service companies. In the most recent quarterly survey from the Federal Reserve Bank of Dallas, anonymous comments from industry executives revealed a deep sense of anxiety. “U.S. oil production is about to fall significantly. The rig count has declined dramatically from one year ago (down 170 rigs), and our customers are not completing wells in order to save cash flow. This all equals a big shift down,” one executive said.
“Oversupply of hydraulic fracturing capacity and reduced activity by customers have put extreme pressure on pricing. Most hydraulic fracturing providers feel that the current pricing is unsustainable over the medium to long term,” another unnamed executive from an oilfield services company said.
The problem for the industry is that WTI is lower than it was a few months ago, and the prospect of a rebound is also questionable. The global economy continues to weaken, and successive cuts to demand forecasts are coming on a monthly basis. OPEC just lowered its demand numbers for the third month in a row, although only by a modest 40,000 bpd.
As Reuters notes, industrial demand has declined as the economy has weakened. Consumption of natural gas and diesel is off because of a recession sweeping over the manufacturing sector. U.S. oil production is not growing at the blistering rate that many analysts had expected, but it has flattened out at a time when demand has contracted.
The most important factor affecting this trajectory in the short run will be the outcome of the latest round of trade talks from the U.S. and China. At the time of this writing, there were mixed signals coming from both sides.Related: Is This The Next $170 Billion Energy Industry In The US?
There is a bit of momentum for a modest trade deal that could stave off further tariffs. Trump said that he was set to meet with China’s vice premier on Friday, which raised speculation that there could be some sort of a breakthrough. At the same time, Chinese press said that there was no progress on negotiations. The Trump administration is also considering a more aggressive crackdown on Chinese companies and capital flows between the U.S. and China.
An accommodating and de-escalation could provide a jolt to oil prices, but because a grand bargain is extremely unlikely, it’s not clear that simply pushing off a planned hike in tariffs will be enough to rescue the deceleration in the global economy. For now, WTI is trading between $53 and $54 per barrel for November delivery.
Worse, oil futures for November 2020 are at just $50 per barrel, which is an indication that the market thinks things will only get worse next year. That is bad news for oil producers, and the oilfield service companies like Halliburton that support them.
By Nick Cunningham of Oilprice.com