How Badly do Job Cuts Affect the Value of Texas Energy Companies?
Texas energy companies continue to cut jobs at a shocking rate. According to the Houston Business Journal, nearly 40,000 people working for three of the world’s largest oilfield services firms have lost their jobs in the last six months, and even more layoffs are anticipated in the near future. Cuts have also occurred in the upstream and manufacturing sectors.
About the Cuts
Halliburton Co. has already cut 9,000 jobs, which amounts to 10 percent of its workforce. Schlumberger Ltd. has cut 20,000 jobs, which is approximately 15 percent of its workforce, and Baker Hughes Inc. has cut 10,500 jobs, which accounts for 17 percent of its workforce. All of these companies also reported losses or a significant decrease in earnings for Q1.
In the upstream sector, Newfield Exploration Co. has announced that it plans to merge two of its units and close its Denver office. Hercules Offshore Inc. has cut its workforce by almost 40 percent, and Linn Energy LLC plans to close its Denver office, eliminating 52 jobs in the process.
Are These Layoffs Necessary?
For oilfield service providers, recent job cuts have been largely unavoidable. Oil prices have been declining in recent months, leading to significant revenue loss for companies in this sector. In fact, the Wall Street Journal reports that prices for U.S.-traded crude oil reached a six-year low in mid-March of this year.
For companies in the upstream sector, however, layoffs may not have been a necessity. These companies have not been affected by oil price declines as dramatically as oilfield service providers, so it’s possible that they are simply using the declines as an excuse to “shed fat” and boost efficiency.
Effects on Valuation
Layoffs may impact a company’s performance and value in a number of ways. Some of the possible effects of layoffs include:
- Bad Press: Job loss is associated with a number of negative implications for employees, which can lead to bad press for the company.
- Uncertainty: Downsizing inspires feelings of uncertainty among remaining employees, investors and any other party with a stake in the company’s future.
- Employment Restructuring Expenses: Layoffs often involve employment restructuring expenses, which leads to increased expenses and decreased profits. In fact, several of the companies discussed reported losses after implementing job cuts.
The immediate effect of job cuts on company values is undoubtedly negative. However, cuts are often made in the hope that lower overhead costs and increased efficiency will eventually boost profits and, hence, the company’s overall worth. Thus, the effect of these cuts on the future of Texas energy companies remains unknown.
Looking into the Past
This is not the first time oil prices have dropped enough to have a noticeable impact on the industry. After peaking in 1980, crude oil prices fell steadily for the next six years. The demand for oil was greatly reduced, and businesses in this industry were losing money. In response, they cut back on exploration and drilling significantly, leading to tens of thousands of layoffs.
Oil prices eventually rebounded after the 1980s oil glut. However, because companies had laid off so many workers, they were not prepared to handle the boom that followed. This caused a number of problems for companies in the industry, as they were forced to scramble for employees with the experience and expertise necessary for success in the open positions. Unfortunately, many of the best workers had left oil for good, and potential recruits were wary of joining an industry that seemed so volatile.
In light of this history, some companies with cash reserves are attempting to curb the number of job cuts in order to prevent staffing issues when prices improve. However, for many of the smaller companies, layoffs are unavoidable.
No one can say for certain what the future holds. If the market rebounds quickly, companies that have implemented heavy job cuts may find themselves struggling. If prices remain low, however, companies in this industry that have tried to curb job cuts may have no choice but to cut even more workers loose. Regardless of what happens, achieving a complete recovery from this crisis will not be easy.
This article was originally published in Valuation Viewpoint, May 2015.