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Oil Industry Consolidation Heats Up As Jobs Disappear

Demand, oil demand, oil

By: David Blackmon – Forbes – A pair of new reports issued on Monday portray a domestic oil and gas industry entering into a new consolidation cycle even as it is shedding tens of thousands of jobs that won’t be coming back anytime soon. It’s a scenario the industry has repeated often in the past.

Deloitte’s new report, titled “The future of work in oil, gas and chemicals,” posits that the great preponderance of the 107,000 industry jobs lost this year (per U.S. Department of Labor statistics) will not be staging any sort of a comeback before the end of 2021. In the most likely, “business as usual” scenario used in its statistical analysis, Deloitte projects that only about 30% of those jobs would be restored during that time frame.

That’s good news. The bad news is that, should oil prices remain depressed and drop back down below $35 per barrel, the firm’s experts project that 97% of those lost jobs would remain lost.

Deloitte notes that the industry is plagued during this downturn not only by depressed commodity prices but also due to the rapid up and down cycling in the shale industry, which is now going through its second downturn in just the last six years. This rapid cycling has created a high degree of sensitivity to oil price levels in oil and gas industry hiring practices, leading to the most rapid layoffs in recent history this year in the upstream and oilfield services sectors. “Such large-scale layoffs, coupled with the heightening cyclicality in employment, are challenging the industry’s reputation as a reliable employer,” the firm says in its report.

oil

The firm concludes that the oil, gas, and chemicals sector is currently in the middle of what it calls a “great compression” in which “multidecade-long low prices, unforeseen demand destruction, and changes in end-use consumption due to mass telecommuting, mounting debt loads, and a renewed focus on health from COVID-19” will heavily restrict the ability of companies to not only attract new talent but also to retain the talent they currently have on staff.

If you are “experienced” like I am, and lived through the multiple busts of the 1980s and early 1990s, this will all sound pretty familiar to you. As the industry during that time went through layoff after layoff and made little effort to really attract and develop top new talent, a situation evolved in which the typical company’s workforce contained only a handful of technical and professional employees who graduated from college during the years from 1984 through 1994.

When the industry started rebuilding company staffs in earnest during the mid-1990s, high-quality college graduates willing to go to work in such an unreliable industry were few and far between. I don’t remember the exact number, but there was one year – I believe it was 1996 – when the entire U.S. university system produced fewer than 300 men and women with degrees in petroleum engineering.

As the pre-1984 graduate employees aged and began to approach retirement age, this decade of non-hiring followed by another half-decade of young people being reluctant to enter the industry resulted in what came to be referred to as the “great shift change.” Simply put, when a 60-year-old petroleum engineer decided to retire a few years early, there was no one with anything like the same experience and perspective waiting in the wings to replace him or her. All that was there within most companies was a 15-year void in the employee pool.

Thus, here we sit in 2020, with the industry creating a very similar situation for itself all over again.

The second report issued Monday comes from Enverus in the form of its quarterly U.S. Upstream M&A Review. Noting that the third quarter’s pace of deal-making remained slow – roughly equal to that of Q1 2020 – Enverus goes on to state that the total, $21 billion value of those deals was actually quite robust by historical standards.

Oil

Following a moribund second quarter during which just $2.6 billion in total deals were struck in the Upstream sector, Q3 included two big deals: Chevron’s CVX -0.6% $13 billion acquisition of big independent Noble Energy NBL +1.4% and last week’s announced $5.6 billion deal in which Devon Energy DVN -4.1% will acquire Permian producer WPX Energy.

So, is the long-speculated rash of upstream M&A activity finally about to come about?

Maybe, maybe not, according to Andrew Dittmar, Enverus’s Senior M&A Analyst: “There is a broad consensus that consolidation is a net positive for the industry,” Dittmar said. “Including the corporate deals from 2019, that process looks to be well underway. There is room for further mergers, but it can be a challenge to find the right asset and balance sheet fits for accretive deals. It may take several more years for consolidation to play out.”

“Regardless of the targeted play, mergers have so far focused on companies with reasonable debt loads,” added Dittmar. “Companies with impaired balance sheets are being left to find their own way, resulting in a spate of Chapter 11 filings.” In the current depressed price environment for oil, it is likely that companies with impaired balance sheets are so numerous that it will prevent any big wave of new M&A filings from coming about.

Still, good fits of properly accretive deals no doubt remain to be made, and it is worth noting that every one of those additional deals will almost certainly only serve to exacerbate the industry’s overall hiring and employment situation. Obviously, one of the first steps surviving management teams take to cut costs following any such deal is to eliminate redundant headcounts.

Devon and WPX, for example, project that their deal will result in $575 million in cost savings. No one should doubt that a significant percentage of those cost savings will come from headcount reductions, thus increasing the upstream industry’s rate of talent drain.

This is all a problem that the upstream industry has faced before, and I often point out that this is an industry that is in fact run by problem solvers. This particular issue is especially tough, though, since the industry’s problem solvers represent such a significant segment of the talent that is being drained.

It’s a looming crisis that is not likely to resolve itself anytime soon.

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