Current State of the Industry: A Recruiting Agency’s Perspective
The day after Thanksgiving, the oil and gas industry was dealt a crushing blow. Already facing a downward market, it was then met with news that members of the Organization of the Petroleum Exporting Countries had collectively made the decision to not cut production, with Saudi Arabia leading the agenda.
The remainder of last year was throttled by plummeting share prices from the publicly traded exploration and production (E&P) companies and the continuation of price slides on the oil indexes, both West Texas Intermediate (WTI) and Brent. Through December and into the new year, companies were faced with an unfortunate reality, which was to cut capital expenditures in order to weather the storm of uneconomic oil prices, an uncertain rebound forecast, and a correction to profitable levels.
In an opinion piece, “Who Will Rule the Oil Market?,” published in The New York Times on 23 January, renowned analyst Daniel Yergin wrote, “By leaving oil prices to the market, Saudi Arabia and the Emirates also passed the responsibility as de facto swing producer to a country that hardly expected it—the United States. This approach is expected to continue with the accession of the new Saudi king, Salman, following the death on Friday [23 January] of King Abdullah. And it means that changes in American production will now, along with that of Persian Gulf producers, also have a major influence on global oil prices.”
Commenting on it, Reed Rogers, Parkwood International’s executive vice president of downstream refining and chemical manufacturing practices, notes that, “The US does not have a cartel of oil producers who will act in concert, so expecting the US to act as a swing producer who will lower production to increase price is not realistic. What is more likely is that lower oil prices will weed out higher-cost US producers, which will be a random, rather than concerted, event. In either case, higher prices would be the outcome. However, we don’t see many US producers being ‘weeded out’ so far so I agree with Barclay’s latest survey that a USD 50/bbl price will be maintained for much of 2015.”
Low Oil Prices Lead to Leaner Companies
The direct and unfortunate effect of uneconomic prices and 40% to 50% cuts in capital spending is that companies will need fewer employees. In the first quarter of the year, we have seen layoffs from Schlumberger (estimated 9,000), Weatherford (8,000), and Baker Hughes/Halliburton (7,000) on the service side, and Noble Energy (220), Chaparral (121), Sandridge (256), and Apache in the operating category. Others have closed regional offices, such as SM Energy in Tulsa and Laredo Petroleum in Dallas. Many others have similar circumstances and comparable stories.
Many, including our analysts at Parkwood, believe we saw the bottom of prices when WTI fell below USD 45/bbl. Despite this, there will continue to be layoffs and shutdowns through the rest of the year even if prices improve to USD 65/bbl, largely considered an economic price for most oil plays in the US.
Our business is predicated on contracting with oil and gas companies who have urgent and strategic hiring needs and facilitates the efforts to search, vet, introduce, and onboard the most qualified individuals for those positions.
Since November, we have seen the majority of our resource play/unconventional shale clients cease all hiring for their organizations. Most companies have significantly decreased their needs for new employees and many others, as aforementioned, have already gone through initial rounds of layoffs.
Drilling and Completion Budgets Affected Most
Due to capital constraints, the lion’s share of expenditures that have decreased are drilling and completion (D&C) budgets. Oil shale D&C costs can range from USD 5 million per well up to USD 10 million per well on average. Resource play development is fiscally demanding, which can create difficulty for many operators in a USD 50/bbl market. The cost of drilling and completing a well significantly diminishes any positive internal rate of return. In addition, many shale operators have taken on significant debt in order to increase their drilling efforts while chasing production goals.
The employees most affected in the current state of the industry are the professionals tied to D&C projects. Last year, the US rig count was as high as 1,931 and as of 2 April, it was down to 1,028. It would be shocking if that number did not continue to decrease through the middle of the year and maybe even into the third quarter.
As a result of the decline in rig count and drilling activity, our unit has been inundated with calls and inquiries from drilling engineers, completion engineers, operations geologists, in-house landmen, drilling supervisors, and countless field operations personnel tied to the rig lines who are now without work and seeking advice and assistance.
We witnessed a similar situation in 2009 when the US rig count dropped from its height of 2,031 in 2008 to 876 in June 2009. Like then, it is now difficult to help many who were sidelined in the wake of the slowdown. Parkwood’s agenda in these circumstances is to make sure we are following the financial groups that are associated with the upstream market in order to be aware of any and all capital influence activity that might suggest a need for a team of (D&C) professionals.
Follow the Money to Find the Jobs
With pricing decreases from the service companies and discounted acquisition opportunities, we continue to hear a buzz from private equity groups and investment banks about being opportunistic. We have also had conversations with operators that received backing last year and are now seeking purchases, which will lead to development through the drill bit.
For example, a Bloomberg article in January reported that Blackstone and its subsidiary, GSO Capital Partners, have “committed as much as USD 500 million to fund oil and gas development for Linn Energy LLC… Under the 5-year agreement, Blackstone would fund drilling programs at locations selected by the Houston-based Linn for an 85% working interest in the wells.”
We reached out to Linn immediately to promote our services for hiring needs that would likely result from the large capital influence from GSO. The same article noted that Blackstone, Carlyle, KKR, and Apollo had recently raised USD 15 billion in funds for energy investments. If we follow the money, we will typically find the jobs.
In 2010, during the recovery from the 2008–2009 price swing, we began seeing significant investments from financiers, and operator budgets were directed toward the gas-rich Marcellus Shale window of the Appalachian Basin. In turn, our company focused business development there and successfully filled the largest percentage of our 2010 jobs in that part of the US. When gas prices started sliding and production lessened demand on the East Coast, we decreased our activity there and looked for diversification in other up-and-coming plays such as the Eagle Ford and the Bakken.
A large portion of our work in the current market is with private E&P operators that leverage conventional portfolios, work within cash flow, and carry little to no debt. In this case, there is no real geographic preference given that conventional projects are still active nationwide. For industry professionals, in these cases, it is very important and beneficial to be flexible with where one will consider working—those who restrict themselves to one city will find far fewer options and much more difficulty.
Changing Market Type
Another result of the down market is the 180-degree transition from what is called a “candidate-driven market” to a “client-driven market.” In a candidate-driven market, companies are faced with the reality that the majority of prospective candidates are currently working, well-paid and appreciated, and disinterested in considering a new career option. If someone is open to making a move, he or she will typically meet with five to eight companies and consider three to four job offers simultaneously.
What we have seen over the past few months is that companies now have only five to eight open positions and are not usually in competition with more than one or two other companies. This is the direct result of layoffs or candidate concerns about the stability of their current employer. Things will likely change back to a candidate-driven market, but for post-2006 graduates, the job market will still be competitive.
Robert Chase of Marietta College shared his compilation of data on the US petroleum engineering graduates from 1972 to the current year:
- Early 1980s had the highest graduation numbers ever, with 1,529 new college graduates in 1986, which is still the highest to date.
- The downturn in the late 1980s through the 1990s decreased the graduate numbers drastically, and in 1998, only 200 petroleum engineers graduated in the US.
- The numbers ramped up after 2006 with the success of hydraulic fracturing such that 1,527 engineers graduated per year by 2014, making the market much more saturated for younger engineers.
Going forward in 2015, it will likely get worse before it gets better. Companies’ net present value (PV10) will decrease over the next two quarters and we will certainly see additional Chapter 11 filings, layoffs, and a decrease in hiring activity. The PV10 is the present value of a company’s estimated future oil and gas revenues, after the deduction of estimated expenses, discounted at an annual rate of 10%.
The horizon, however, gives signs of optimism. The cash-heavy private equity and investment banking communities are poised and positioned to take advantage of the acquisition market and it is certain that we will see an influx of capital, with billions of new dollars backing E&P initiatives.
For industry professionals, it is very important to remember that the only sustainable competitive advantage that an organization can have is the quality of its people. Great companies understand that great talent is not expensive—it is priceless.
Bodie Nowak is senior vice president of oil and gas–upstream/midstream recruiting business division at Parkwood International and leads its investment banking and private equity practices. Nowak and his team are focused on building long-term business relationships with leaders in the E&P industry by engaging senior level management and assisting them in filling critical positions through market and industry trend analysis.
12 February 2018