Oilfield services giant Schlumberger Ltd. (SLB) has begun laying off hundreds of workers in the U.S. and around the world in the first of what experts say will likely be a wave of job cuts in the energy industry.
Halliburton Co. (HAL), Schlumberger's largest rival, said Thursday that it also will be cutting jobs, but provided no details.
Schlumberger, the world's largest oilfield services firm by market capitalization, said Thursday that it plans to lay off about 1,000 workers in North America, about 5% of its workforce there. The company also is cutting some of its 65,000 overseas workers but said it does not yet have exact figures.
The company said the cuts, which began Wednesday, are in response to a global slowdown in oil and gas drilling due to slumping energy prices and falling demand for oil due to the weak economy.
"It's the result of reduced levels of activity," Schlumberger spokesman Stephen Harris said, adding that the cuts would affect everyone from workers in the field to administrative support positions at the company's Houston headquarters.
Stephen Gengaro, an analyst with Jefferies & Co. in Houston, said Schlumberger's cuts are a sign that the industry now anticipates a longer slump.
"You try not to cut staff until you're sure this is either a deeper decline or a longer decline than you'd previously expected," Mr. Gengaro said.
Falling oil prices have cut deeply into revenue for oil majors such as Exxon Mobil Corp. (XOM) and Chevron Corp.(CVX), as well as smaller producers such as Apache Corp. (APA) and Devon Energy Corp. (DVN). Services firms - a broad category that includes companies that drill wells, provide equipment and shoot the seismic images that show where to look for oil - aren't directly affected by falling oil prices because they don't actually produce or sell oil.
But as the downturn has deepened, producers have responded by slashing spending and drilling fewer wells - meaning less business for services firms like Schlumberger, Halliburton and Weatherford International Ltd. (WFT).
The falloff in activity has been especially sharp in the United States, where the number of drilling rigs operating has tumbled 20% since its September peak, according to Baker Hughes International Inc. Wells drilled in the U.S. tend to be smaller and faster to drill, making it easier for companies to react quickly to changes in commodities prices.
In recent weeks, however, the slowdown has spread overseas, where Schlumberger does about 75% of its business. The rig count outside of North America has fallen 3% since September, according to Baker Hughes.
The drop-off in drilling has been predicted for months, as oil prices plummeted from more than $145 a barrel in July to about $42 a barrel today. Last month, Schlumberger warned investors that its 2008 earnings would fall short of analysts' expectations.
"We have been consistent in our view that our results would be affected in the event of a severe global economic downturn, which we are now facing," Schlumberger Chief Executive Andrew Gould said at the time.
But services companies, wary of being short on workers if prices rebounded quickly, have until now been hesitant to cut staff.
"The tough part had been finding enough skilled labor, so making the decision to reverse course and lay folks off is a tough one," said Byron Pope, an analyst with energy-focused investment bank Tudor Pickering Holt & Co. in Houston.
Analysts expect other service companies to make their own cuts in coming weeks, especially because most of Schlumberger's competitors are more focused on North America.
"The smaller companies generally have a higher percentage of their revenues from North America, so I would expect that many oilfield service companies will follow suit," Mr. Pope said.
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