A long-lived season of low prices has caused capital efficiency to motivate some rapid changes across the oil and gas industry. The enduring oil glut has forced production companies into operational and economic experimentation.
Companies looking to reduce spending are downsizing staff, consolidating resources, reducing capex and merging with bigger, more stable companies. Chapter 11 is no longer a negative last resort, but a smart and effective restructuring tool.
Focus is shifting from expensive, complex deepwater projects to cheaper, quicker turnover projects like onshore shale oil and gas, and lasting advances in technology are coming out of the drive to get higher yields with less work - innovation that might not have happened but for the glut.
The resilience of the U.S. oil and gas industry continues to prove that downturns can be just as important for the business as upturns.
Workforce Cuts: Lowering Costs, Concentrating Talent
Downsizing is unfortunately one of the first reactions to an ongoing bearish market. In response to prices hovering around $45 per barrel since late 2014, the industry has cut back its workforce. Since the price drop, over 195,000 U.S. jobs have been eliminated, 95,000 of those in 2016 alone. National Oilwell Varco laid off 13,445 workers in 2015 and another 6,000 in 2016. Weatherford International cut 8,000 employees, while DuPont dropped approximately 6,000 jobs in 2016. Schlumberger has laid off 24,000 workers since late 2014 and announced an additional 10,000 job cuts in early 2016. Halliburton’s staff numbers went from 80,000 in late 2014 to 50,000 in 2016. Layoffs are rough on everyone, yet the necessary evil is destined to wane when prices return. On the upside, downsizing tends to concentrate talent and expertise.
Restructuring: Transferring Debt to Equity
Maximizing access to capital is a big motivation in the downturn, and many smart oil and gas companies are responding by deleveraging and converting their debt into equity. On December 9, Fort Worth, Texas’ Basic Energy Services obtained court approval to equitize over $800 million of its unsecured debt, eliminating over $60 million in annual cash interest. The plan completes a new capital raise of $125 million.
On December 7, the court approved a reorganization plan for Houston, Texas-based oil field services contractor, Key Energy Services Inc. Key Energy will reduce its debt by $725 million and exit bankruptcy with a balance of at least $80 million. In August, Oklahoma-based Seventy Seven Energy’s restructuring plan cut its debt by $1.1 billion, allowing the company to double its rig counts in the last five months.
Mergers: Diversifying Assets, Expanding Expertise
Stronger, more stable companies have been merging with smaller, more vulnerable companies during the low price environment. This move allows both companies to diversify assets, cut average costs, jump into near-term projects and expand technical expertise.
During the first two weeks of November, upstream deal-making rose to $56.7 billion, more than double the $26.8 billion seen in November 2015.
Capex Reduction: Faster Projects with Higher Returns
Cutting capital expenditures is a necessary move during price lows. Well completion contracts and other quick turnover, high-return projects become more attractive than long-term exploration projects in unproven or undeveloped regions. In an effort to reduce debt and increase returns, ConocoPhillips plans to decrease its capex budget to $5 billion in 2017, down 4% from 2016.
Chevron cut its 2016 capex to $26.6 billion, down $8.4 billion from its estimated $35 billion. Chevron reports a 2017 capex budget of $19.8 billion, a decrease of 42% from 2015.
“Our spending for 2017 targets shorter-cycle time, high-return investments and completing major projects under construction,” Chevron chair and CEO John Watson said in a statement. “Over 70% of the company’s planned upstream investment program is expected to generate production within two years.”
Onshore shale oil and gas is more appealing than offshore projects in a low price environment, and many companies are pulling out of more expensive, deepwater projects to concentrate on shale oil and gas in promising regions like the Permian Basin and the Bakken Shale. Shale development cycles are shorter and projects come with reduced execution risks than many deepwater projects.
ConocoPhillips, Chevron and Hess are among the several companies who have drifted out of deepwater projects into onshore shale production during the downturn.
Contractor Consolidation, Joint Ventures: Top Talent at a Lower Price
Low prices have pulled vendor rates down, allowing upstream companies to bid for optimal prices. Producers are now able to sign up with larger, more specialized operations contractors to manage their operations. Larger vendors’ proximity to projects can mean access to valuable vendor expertise and R&D. Likewise, companies are increasingly forming joint ventures with service producers rather than hiring on landmen, engineers and geologists as independent contractors or employees, pulling down capital expenses and increasing access to talent, expertise and innovative technologies.
Technological Innovation: Cleaner, Safer, Cost-Effective
Perhaps the most significant change arising from the push toward capital efficiency in the oil and gas industry is the unprecedented rate of technological advance. Low prices create an urgent need to experiment with faster, cheaper ways to produce. Rystad Energy reports that the average wellhead break-even price has fallen by 22% year-over-year from 2013 to 2016. Since 2013, U.S. shale breakeven prices have fallen from over $80 per barrel to between $25 and $30 per barrel. While some of this drop is due to downsizing, much is due to improvements made in drilling, extraction and refining technologies, creating cleaner, safer, more cost-efficient methods of production.
Digital solutions are replacing dangerous jobs, new extraction technologies are extending well life. Seismic imaging, digital surveillance technology and enhanced reservoir modeling are simultaneously decreasing drilling and completion costs while increasing recovery.
Drilling a wellbore takes one-tenth of the time it took just 10 years ago. Fracking efficiency and completion designs continue to improve.
While industry trends like downsizing, resource consolidation, capex reduction, mergers and restructuring may change as prices recover, the technological advances, expertise and talent that has come out of the low price environment isn’t going anywhere.
Meanwhile, as long as prices remain low, capital efficiency will continue to drive the energy sector to explore new and better means of meeting our nation’s energy demands in cleaner, safer and more cost-efficient ways.