The Department of Government Efficiency is scrutinizing government operations to reduce the size of the bureaucracy, eliminate fraud and wasteful spending, and improve efficiency to lower government cost. Suddenly, companies across the oil patch are announcing similar steps. The latest to announce layoffs and cost cuts were Chevron and Schlumberger.
Oilfield service giant Schlumberger is reorganizing certain functions within its business and reducing its workforce following last year’s actions that resulted in a $237 severance charge to earnings. One step the company is taking is to create a new performance function led by a new chief performance officer. A company spokesperson stated, "Adapting our operating structure and accelerating our efficiency programs are proactive, continuous processes that we follow as business conditions and volume of activity across our geographies and business lines dynamically change."
Oil major Chevron announced plans to cut 15-20% of its global workforce over 2025-2026. Last fall, management tipped this profitability-boosting step when it announced it was targeting between $2 billion and $3 billion in “structural” cost savings from asset sales, applying technology, and making workflow changes. This plan follows Chevron’s move from its historical home of California to energy-friendly Texas.
Across the Atlantic, European oil companies are announcing revised business strategies involving shuttering unprofitable operations, disposing of assets, reorienting capital spending focus, and boosting shareholder returns. These companies struggle to attract attention from local investors who have shunned hydrocarbon producers over their climate change roles. Higher returns are the key to winning that support.
If “drill, baby, drill” is the new U.S. mantra, why are energy companies cutting workers? Management understands that drilling will only pick up when global oil market fundamentals improve and support higher oil prices. Even in a low $70s-a-barrel oil price range, finding and producing domestic oil can be profitable. However, companies worry that President Donald Trump’s plan to boost the oil supply will drive prices down and reduce consumer inflation.
Ongoing oil oversupply and sluggish economic growth threaten oil prices and industry profitability. This year, we could experience low oil consumption growth, stagnant oil prices, and reduced capital spending. Oilfield activity levels will remain flattish in that environment.
Management also realizes the way to gain investor support is to practice capital discipline. Production growth at the expense of profits may put CEOs on the cover of industry magazines, but their stock options depend on higher share prices. Investors will accept drilling to sustain output and grow it modestly. They want lower debt to insulate earnings from commodity price volatility. Operating costs must be kept under control. Returning surplus cash to investors via growing dividends and share buybacks will produce loyal shareholders. Investors will reward “the kings of capital discipline."
