Bullish Amid Oil Majors' Lay Offs

More evidence global oil production is being shuttered...

ConocoPhillips (COP), the third-largest U.S. oil company, said Friday it is cutting 4 percent of its overall work force, reducing the number of contractors it works with, cutting capital spending by 18 percent and writing off $34 billion in non-cash assets because of plummeting energy prices. These are the first announced job cuts by an oil major, about 1,300 in this case. ConocoPhillips said it has approved a capital spending program of $12.5 billion for 2009, down from the $15.3 billion it projected to spend in 2008.

Just last week, Schlumberger (SLB), the world's largest oilfield services company, said it would eliminate up to 1,000 jobs in North America, or about 5 percent of its work force, and is looking at cuts elsewhere globally. Halliburton (HAL) also said it would begin laying off workers but didn't say how many or when.

We are positioning ourselves in the current business environment to live within our means in order to maintain financial strength," ConocoPhillips Chairman and Chief Executive Jim Mulva said in the statement. "We're doing this by reducing our cost structure, addressing our balance sheet and continuing to manage the company through prudent capital discipline.

Translation, "we aren't drilling anywhere near what we were before."

In November, ConocoPhillips and the state-run Saudi Arabian Oil Co. postponed construction of a multibillion-dollar refinery in Saudi Arabia because of the deteriorating global economic situation, which has eaten away at energy demand.

Oppenheimer & Co. analyst Fadel Gheit has said he expects spending cuts to average 10 percent for large producers and 30 percent for smaller companies.

Chevron (CVX) spokesman Don Campbell said Friday the company had no plans to cut its work force. Exxon Mobil (XOM) hasn't announced any work force changes either.

In addition, ConocoPhillips said it likely would replace only about 25 percent to 30 percent of its 2008 production with new reserves. Reserve replacements represent the ratio of reserves found over production for a given period. Analysts typically say a company's reserves replacement should average more than 100 percent over a three- to five-year period to indicate growth.

This is very bullish for oil prices longer term. When demand returns (you have to believe we are in a global depression for it not to) prices will spike as excess supply dries up and this shuttered production lags the upturn.

If you want to play oil other than the individual companies, the ETF symbols are (DBO), (USO) and (DXO).


Disclosure: Long DXO

Comments

[wingfootedg...:]

Discussion with Total management in a key overseas location. They are slashing their 2009 drilling budget by 65% and rigs from 5 to 1.

Their top economic gurus see todays oil prices response as a 'panic' and global energy shortages / $200 oil et al emerging in 2012 versus 2018 the 2018 prediction based on a normal industry investment spend, 2012 on the panic scenario we are seeing today.

Quite a bit of development and exploration spending is being dismantled globally as the operators go into 'hunker down' mode, it will be difficult, costly and take as long as two years to ramp it back up again.

So either the global economy goes into Great Depression II or if you don't buy into that scenario, energy prices will rebound rather rapidly.

Longs today TBT, GLD, CHK, DVN, HPQ and short most of the February calls.

Jan 19 05:20 AM

[longoil:]

The one good thing about collapsed oil prices is we are now mainly draining the reserves of hostile nations like Venezuela, Saudi Arabia, Russia, Iran, etc where the marginal cost of production is under $30.00.

Unfortunately, high cost producers like the Canadian oil sands and deep sea oil (i.e Brazil Tupi) have shelved many projects.

I concur with the opinion that when the economic crisis recedes, oil prices will skyrocket due to the heavily reduced investment in E&P.

Jan 19 08:53 AM

[john s. gordon:]

whatever happened to drill drill drill, larry kudlow?
> jack

Jan 19 09:08 AM

[BlueOkie:]

What will this do to alternative fuels? Cheap oil let's us feed our addiction.

Jan 19 09:40 AM

[toobad41:]

Cycle is as cycle does. Oil company budgets are set in the fall. Money is spent in the first three quarters. If budgets are cut (which they have) then production will be down. Simple. Inventory has to come down as well. When prices go back up budgets go up, spending goes up, production goes up and the cycle begins again.

Jan 19 10:18 AM

[ddannywms:]

Everybody's waiting for that chicken to cross the pipeline. Cuts have been made, rigs laid down and storage tanks at Cushing are brimming. So, which comes first, the price chicken lands on a solid floor, or the supply/demand egg sees the yearly seasonal fuel blend switchovers, refinery turnarounds and spring driving increases, the former two of which restrict supply while the latter pushes up demand. Chicken in a basket anyone?

Jan 19 01:53 PM

[Belfast2LA:]

So, lets get this straight. COP's CEO is quoted as saying, "We are positioning ourselves in the current business environment to live within our means in order to maintain financial strength."
So far so good, but a reported part of this plan equates to laying off 5% of its US workforce?
Great move.
If benefiting from the past several years of rising oil prices wasn't enough, we now have COP's CEO adding insult to injury by placing more workers on taxpayer paid entitlements.
Is there another apparent 'bailout' on the horizon (hah!) or just nimble leadership at the helm of COP?
We all know this industry for the great independent thinkers that they are. Although reported otherwise in Todd Sullivan's article should we expect and subsequently pay for copy cat lay-offs from other oil firms to follow suit?
Oil prices will rebound, short term thinking CEO's at the expense of stakeholders may not.

Jan 19 02:14 PM

[Urbane Gori...:]

If I remember correctly, only Saudi Arabia and Iran have costs in the $30 and below range.

I'm not even sure if Saudi Arabia qualifies as an enemy of the US. I suspect they have to cater to their constituents the same was we have to cater to ours, but all in all, they seem like pretty good business partners.

Lastly, even though it may make us feel good about **screwing** the terrorists, we need to understand that low oil prices also mal-affect our friends. Notably Canada, Mexico and Brazil, all of whom use oil revenue to support their progressive social programs. Or, Louisiana, Alaska, Texas, California and other States that are feeling the impact of low oil prices.

In effect, we need oil to retain a certain value for the benefit of everybody. jegan





On Jan 19 08:53 AM longoil wrote:

> The one good thing about collapsed oil prices is we are now mainly
> draining the reserves of hostile nations like Venezuela, Saudi Arabia,
> Russia, Iran, etc where the marginal cost of production is under
> $30.00.
>
> Unfortunately, high cost producers like the Canadian oil sands and
> deep sea oil (i.e Brazil Tupi) have shelved many projects.
>
> I concur with the opinion that when the economic crisis recedes,
> oil prices will skyrocket due to the heavily reduced investment in
> E&P.

Jan 19 04:35 PM

[beenburnedt...:]

All oil majors can stand some pruning since their administrative processes tend to be bloated and government-like. The distinction between the majors and governments is that they can reduce the number of regulations that they impose on themselves, whereas the government can not.

Jan 19 06:19 PM

[donzelion:]

Jegan writes: "I'm not even sure if Saudi Arabia qualifies as an enemy of the US...they seem like pretty good business partners."

Calling Saudi a "hostile nation" makes no sense. In the 90s, Saudis (and other Arab Gulf states) subsidized U.S. automakers, aerospace, information systems, and financials in a massive way. But ever since 2003, Saudis and others have turned toward Europe and Asia - cutting out American middle men.

The ConocoPhillips deal might have helped reverse this trend. Way I see it, layoffs or restructuring will tell more about the political ties of the oil majors and minors, rather than expectations about supply or demand.

Jan 20 07:40 AM

[einstein p ...:]

Seems like we are setting up a slingshot effect --- one that will launch oil and natural gas prices much higher in the future.

The question is not if this will happen, but rather when.

Alternative energy and deep water drilling will be put on hold, along with oil exploration. It will take a while to ramp up again.

In the meantime, we do have a surplus floating in tankers and in storage which currently amounts to the equivalent of one day. I'm not sure if I would be comfortable if I only had enough money in the bank to get me through the next day if I was in danger of losing my job.

Countries like Venezuela and Iran need far higher oil prices than 30 dollars a barrel to break even --- I believe the number is closer to 70. Aside from their own social programs, these countries fund a great deal of outside activities. In the case of Iran, it's terrorism.

Russia merely had to turn off the spigot to set the price of natural gas for the next ten years. Maybe the world should set the price of oil at 75 dollars a barrel for the next ten years, before more drastic measures occur.

It's going to be very difficult to fight rising oil prices with the Fed funds rate at virtually zero. One day of surplus oil is not enough of a cushion if geo-political events cause shortages and production is laid idle.

Jan 23 09:45 AM

[jepittman:]

An awful lot has been made of 'geopolitical events' limiting oil flows. Has anyone really calculated how much oil has NOT come to market because of 'geopolitical events'? IMO this is more fear than reality.

I am in agreement that supply cuts now will bring higher prices later. Perhaps sooner than many think. Markets anticipate quite well and the discounting can begin long before the fundamentals are obvious. Supply cuts by producers are REAL unlike imagined or feared forced cuts caused by 'geopolitical events'.

Jan 25 09:51 AM