http://oilpro.com/post/9743/9000-jobs-schlumberger-cut-just-start-takeaways-management-discus In the second to last paragraph of its lengthy earnings press release Thursday, Schlumberger (SLB) disclosed 9,000 job cuts with little explanation or clarification (our initial take can be seen here).
Today, we received some insight on the cuts as the company held its quarterly management discussion with investors. The most important takeaway for folks in the oilfield is that this massive workforce reduction at SLB is likely only the beginning.
5 Things We Learned About The Jobs Cuts This Morning
1.The 9,000 cuts are just for the first quarter slowdown. The 9,000 lay-offs will largely be completed by the end of 1Q. SLB is tightening their reaction time on operating cost and business decisions to a quarterly basis from an annual or bi-annual basis previously. SLB is now in constant contact with its customers. What SLB learns about its customers' plans and outlook quarter to quarter will dictate their decisions this year. SLB will re-calibrate the organization on a quarterly basis to match the outlook.
2.More workforce reductions are likely this year. While SLB believes the 9,000 cuts are a reasonable starting point given their 1Q outlook, management said: "If activity is lower, we have the ability to quickly cut more." We believe 2Q will be more challenging than 1Q, and expect SLB will be forced to make several more rounds of layoffs this year. SLB's management is committed to "controlling what they can" in this downturn, and salary costs are a key lever they will pull to react to the new oil price reality.
3.The incremental workforce reductions seem to have come largely in the US onshore business. While SLB did not explicitly break down the jobs lost into international vs. US (or by segment), management said: "The impact on NAM land will be significantly more dramatic than what we see in the rest of the world." Because they are re-calibrating their business based on their 1Q outlook, this suggests the majority of the incremental jobs cut were US positions. SLB's seismic business shouldered a large portion of the reductions, as previously reported on Oilpro. The seismic scale back is a direct result of the coming industry cutback in exploration.
4.SLB will save over $300mm this year because of the reductions. SLB took a $296mm charge on the workforce reductions. On the call, management said salary cost savings would net them more than this amount during 2015.
5.SLB raises dividend while axing worforce at the same time? Business is business, and the management teams of public companies work for their investors not their employees. We understand that. However, SLB raised their industry leading dividend by 25% this quarter even as they cut workers on a scale not seen for many years. The optics of this dual strategy are negative and should be taken seriously. This is bad for company morale, and it could end up hurting the company in the long run even though it is good for the share price right now (seen as a vote of confidence by investors). Specifically, SLB raised their dividend to a total of $2 per share yesterday. That means they will pay out cash to shareholders to the tune of about $2.5 billion this year. The dividend increase announced yesterday equates to about $500mm per year in cash payments, potentially more than the savings SLB expects this year on the headcount reductions (they have yet to quantify the salary save completely). Again, we don't expect SLB to wipe out their dividend to pay workers that aren't needed in the new oil price paradigm. That is not how business works. But the juxtaposition of a big dividend raise the same day a massive workforce reduction is announced will surely raise some eyebrows. While SLB is the industry leader for a reason, a dividend raise of this size in today's uncertain environment could be taken as a sign of overconfidence or overcompensation to appease shareholders. All that said, SLB has a pristine balance sheet and is a FCF machine - allowing excess cash to pile up on their balance sheet is not a sound finance practice.