Oil Services Firms Face A Long-Term Challenge Ahead

Lessons from History

Those of us who have worked in or with companies in the oil & gas sector for many years have experienced more than one major downturn: 1980 thru 1985, 1990, 1997, and 2014. It’s the nature of the business, and for us “Boomers” familiar with the industry, the current commodity price crash is not our first rodeo. However, there is reason to believe that the double-whammy of massive oversupply and cratering demand due to the global COVID pandemic may be our roughest rodeo yet—and one with more profound long-term impact.

Some of us have vivid memories of the impact of those past down-cycles: companies trying to remain focused on maintaining operating continuity, keeping the best people, maintaining equipment and other hard assets, and seeing to needs of all stakeholders (employees, customers, lenders, property owners, and shareholders), and doing so with less cash at their disposal. We have seen companies across the industry grappling with these same issues ever since early 2015, but the balancing act has been greatly complicated by the persistent nature of that downturn. Companies that were already planning incremental changes to address a new industry reality have had their hand forced—a situation which will result in deeper cuts and more rapid change.

Current market prices are the lowest we’ve seen since the early 1970s. IHS Markit experts predict that up to 10 million barrels per day will be shut down at least until June, in part due to storage capacity that is close to bursting at the seams. We admit, the situation does seem dire. However, our past experience has shown us that the oil & gas industry is resilient—finding new technologies and operating efficiencies—and we expect that the same will be true this time, even if the recovery takes longer and even if the industry as we know it looks very different on the other side. 

How will this perfect storm potentially impact the oil services sector?

• With crude pricing well below average lifting costs, many of the independent E&Ps will take a fatal hit. The majors and large independents will pull in their tentacles—hunker down for the long term, lay off large sections of their workforce, lose stock value and profits plus billions in share equity value, but will generally fare better than other members of the food chain.
• No doubt that there will be more bankruptcies, mergers, and consolidations.
• The independents and oil services sector will be the main recipient of these forces.
• The times will pass in stages with new financial and human capital for the renewed prosperity.

What makes this down-cycle so challenging for the juggling and stewarding of human and financial capital is not only the severity of the drop in crude prices, but the length of the downturn. What the oil services sector is facing is, in length and severity, most like the downturn[s] of 1980 from a crest downward through 1986 at a tad over $30bbl. A very slow climb started after that. The time frame changed the face of many service companies, drillers and supporting appendages to the E&P market. Many of the hallmark drillers and service companies went thru bankruptcy or disappeared into other competitors.

What to Consider Early On:

Very similar to maintaining a good work climate and culture, keeping communications open and maintaining employee connectivity and trust in the workforce is key. The solutions that apply for the impact of COVID-19 coinciding with the record oil price drop and oversupply crisis discussed here involve unique challenges in the above areas. For management and executives, both for motivation but also for retention, some basic tenets are:

1. Frequent and honest communications at all levels
2. Make a concerted effort towards a “Maintaining the Team” concept – whether by tower or work schedule, product line, supply chain, engineering, and tech support.
3. Highlight wins and talk about losses, be open about the unknowns and that “things will change.”
4. Encourage management in staff and operations to make periodic outreaches to individual employees.
5. Use chat rooms and video conference calls whenever possible.
6. Plan and involve operating leadership in resource planning and plan out for lay-offs, furloughs, or reductions in force.
7. Employ retention bonuses for key or critical staff in advance of or in conjunction with RIFs.
8. Determine the best path for reducing payroll costs via early retirement incentives, lay-offs, and other RIFs.
9. Balance these plans against the necessary near- and long-term retention considerations for the key employees and staffing for workforce continuity.
10. Keep your high potential workforce motivated, connected with leadership, and incented.
11. Lean towards one larger layoff or RIF as opposed to two smaller ones close in proximity.
12. Assure that HR is well versed in plant layoff rules as well as the new rules of the CARES Act. 
13. Set reasonable, achievable goals and, where necessary, aim for recognition, if not for compensation.
14. Rely more heavily on cash than equity for the non-management professionals in times like these.
15. Rely on and work closely with the board, compensation committee, or special committee in discussing strategy, programs, shareholder and market implications, and associated risks.

In this ongoing series of blogs on the oil services sector, our team will be drilling deeper into the issue, discussing potential steps and actions that we have seen and are seeing as best practices and likely applicable to this challenge for the industry and our economy.