Efficiency gains called ‘mostly cyclical’
$70-a-barrel oil as the new $100.
It probably isn’t going to work out that way, analysts and consultants for oil companies and their services providers say, because once the downturn ends — they always end — and drilling activity picks up again in the United States, companies will have to rehire rig crews and other oil field workers.
That may take a year or more, but it eventually will wash out most of the new efficiency the oil industry is expecting.
“The efficiency gains that we’ve seen are mostly cyclical, andnot structural,” said Raoul LeBlanc, a managing director at research firmIHS.
IHS believes U.S. producers will be able to get 25 percent to 30 percent more oil for each dollar they spend in their onshore investments this year, and twice that when comparing the fourth quarter of 2015 to the same quarter last year, in part because of lower drilling and completion costs.
Around the world, the oil industry’s job losses reached 150,000 at the end of May, increasing by one-fifth since March, and the job cut rate was fastest in the United States, according to oil recruiting firm Swift Worldwide Resources.
Consultants say oil field services companies often have given in to the temptation of laying off thousands of workers in broad strokes as a quick fix during downturns and after mergers, and haven’t done enough to make fundamental changes to their businesses.
Historically, these companies have done their work through scores of branches scattered throughout the country, networks that have little internal cohesion in such fundamentals as management, repair and maintenance practices and accounts payable, said Robert Sullivan, a consultant and managing director at AlixPartners in NewYork.
“There’s a lack of basic process discipline with a lot of these companies out in the field,” Sullivan said. That’s why mass layoffs are tempting in hard times: They’re measurable, don’t take long and calm shareholders. Centralizing or harmonizing branchbased functions, by comparison, takes time and often-tedious executive effort.
But the workers laid off in those far-flung branches have valuable institutional knowledge that departs with them.
“When business starts to come back, you end up having to pull bodies back in,” Sullivan said. “Costs creep back in.”
Besides cutting jobs, services companies may cope with the downturn through mergers and acquisitions.
Halliburton, the world’s second-largest oil field services company, is acquiring third-largest Baker Hughes in a $35 billion deal they expect will close later this year, and the two companies say they’re making progress in planning the integration.
When companies merge, they don’t just want to get bigger. They want to make a dollar go further. Halliburton and Baker Hughes told investors last November they’ll get $2 billion in synergies out of the deal, cutting overlapping expenses and combining revenue.
But historically, lasting efficiency gains have been elusive in oil field services mergers, according to consultants at North Highland.
When Baker Hughes acquired BJ Services Co. in 2010, its operational efficiency ratio — a financial measure that divides expenses by revenue to find the cost of each revenue dollar — fell after the deal, but costs eventually returned, in part because of layoffs during the integration of the companies, said Thomas Royce, with North Highland in Houston.
Typically in mergers, he said, big public companies have been more focused on keeping revenue up, and less on savings, in contrast with private equity firms, which focus on costs.
Rank-and-file shareholders often don’t pay much attention to creeping costs at oil field services companies.
“Generally, when things are going well, the market is going well, you don’t really pay attention to what’s below the covers, thinking, ‘We don’t have to change anything,’ ” said Gary Fletcher, another North Highland consultant.
“People get complacent, because shareholders aren’t complaining,” he said, but inefficiencies can be “festering underneath the surface.”
Still, for all the costs that return to the oil industry because service companies rehire rig crews and hydraulic fracturing teams, some efficiencies have staying power. Innovation in the oil field, as well as a migration to sweet spots, has given oil producers a 15 percent gain in well productivity so far, alongside the 30 percent cost reductions from service providers, according to IHS.
Tricoli, the private equity manager, says he expects roughly twothirds of the gains his companies have seen to evaporate when the oil bust ends and activity picks up, but about a third will still be around.
Ben Carey, a consultant and managing director at Accenture in Houston, pointed out efforts to get at seemingly intractable problems — citing, for example, FMC Technologies’ partnership with Technip to deal with unnecessary costs in the construction and design of subsea equipment. Those gains, he said, will stick.
“Each successive cycle leaves the industry slightly more efficient,” Carey said. “Not all the gains are permanent, but it forces them to be more reflective on their processes.” collin.eaton@chron.com twitter.com/CollinEatonHC