The outlook for the oil industry turned darker Friday as the CEO of Schlumberger, the world's largest provider of oil field services, warned that the crude price slump will lead to more layoffs among his company's employees and hasten a retreat from the oil patch.
Paal Kibsgaard said he expects oil companies will slash spending again next year, marking the first time since the ruinous 1980s collapse that exploration and production investments tumbled two years in a row.
Schlumberger did not reveal how many jobs it will cut, and a company spokeswoman said it's premature to speculate on the number of job losses.
But the decision probably will affect the Houston area, where the company operates its U.S. headquarters and employs more than 12,000 people.
The company already shed 20,000 jobs worldwide, or about 15 percent of its workforce, since oil prices started falling. Besides Houston, Schlumberger has main offices in Paris and The Hague.
Falling oil prices initially battered producers in North America, where a technology-driven surge in production from dense shale helped feed an oversupply of oil. Now, Kibsgaard said, the slump is starting to take a toll on international oil field activity, with revenue declining across the globe.
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Exploration spending halted
Exploration spending has been "basically eliminated," he said, and financially pinched oil companies spooked by the downturn will wait until crude prices appear stable before investing again. Even then, it will take awhile for that spending to translate into upticks in oil field activity, delaying the recovery for beleaguered oil field services companies, Kibsgaard said.
He said he doesn't expect a recovery before 2017.
That spells bad news for Schlumberger and its smaller rivals that provide equipment, crews and services in the oil patch. They had been holding out hope for a recovery in the second half of the year.
"I think the market is underestimating how long this period is going to take," Kibsgaard told investors in a conference call Friday morning in which he discussed the company's third-quarter earnings.
Revising his prediction
Kibsgaard previously had predicted that the market was close to reaching the bottom. But Schlumberger now projects that the coming months will be worse than expected following a fresh plunge in oil prices in the third quarter coupled with increasing pressure from oil companies for deeper discounts and an ongoing slump in the U.S. rig count.
Drillers shut down 10 more oil rigs this week but added three natural gas rigs for a net tally of 787 - down 63 percent from its peak last October, oil field services company Baker Hughes reported Friday.
The pessimistic tone from Schlumberger notwithstanding, U.S. benchmark West Texas Intermediate crude climbed 88 cents Friday to $47.26 a barrel. It was $82.70, though, on Oct. 16, 2014.
On Thursday, Schlumberger reported a 49 percent decline in its third-quarter profit, and Kibsgaard told analysts on the call Friday that the fourth quarter probably will be worse, as companies continue to throttle activity in the oil patch.
Beyond that, the picture gets murkier, he said. Exploration and production companies have indicated that they plan to cut spending next year, but they haven't finalized their budgets, making it difficult for services companies to predict how much further activity could fall. Amid this uncertainty, many of the smaller companies with high debt loads that have been struck especially hard by the pullback in oil field activity may go bankrupt, Kibsgaard said.
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As Schlumberger braces for an extended downturn, the company said it's planning the additional job cuts and consolidating offices and plants as it revamps its global manufacturing and distribution network. Kibsgaard said the company will post a restructuring charge in the fourth quarter, which will include severance pay for laid-off workers.
"The likely timing gap between the oil price recovery and the subsequent increase in oil field services activity, in combination with a more conservative spending outlook from our customers is causing us now to take further action," he said.
The bleak narrative coming out of Schlumberger, long considered a leader in the oil field services industry thanks to its strong balance sheet and global footprint, heralds worse news for other services providers who will unveil their third-quarter earnings in the coming weeks.
"It's not good for Schlumberger, and it's worse for the others," said Rob Desai, an analyst at Edward Jones.
Rival company Halliburton will report its earnings Monday, followed by Baker Hughes and Weatherford on Wednesday.
Comparison with 1980s slump
Kibsgaard's grim predictions added heft to growing speculation that the downturn could be the most severe in decades, a sentiment that holds special significance in the energy capital of the world, said Matt Marietta, equity research analyst at Stephens.
"That comparison to the 1980s will strike a chord with any investor and really anyone who pays attention to the energy markets," he said.
The nagging crude slump will force the services industry to shrink, as companies lay off more workers, scrap older equipment and some go bankrupt, Marietta said. The layoffs that started in oil fields earlier in the year will start to creep up the corporate ladder, striking middle management, administrators and even top executives, many of whom are in the Houston area, Marietta said.
"That's when you start to get a little more pain in the city of Houston, when these sort of cuts start to happen, and I think we're at that point in this downturn," he said.
Shares of Schlumberger's stock fell $1.65 to $74.51 Friday.