Chevron Corp. is cutting close to 10 percent of its workforce and sharply trimming back its budget. On Friday, Chairman and Chief Executive Officer John Watson gave a modest view of an industry under pressure by low oil prices.
Crude oil declined more than 55 percent since last year, and this descend is felt throughout the global energy industry, forcing many producers and their suppliers to make tough choices.
In an attempt to deal with the plummeting oil prices, Chevron is cutting its budget by 25 percent next year by spending less in places like Angola, Australia, and the U.S. Gulf of Mexico, where the second largest U.S. oil company has major growth projects.
Chevron’s five new projects are costing the company more than $20 billion. The company hopes these projects will boost production by 20 percent by 2017.
However, Watson said, in the Gulf of Mexico, the Big Foot deepwater oil project is now not expected to produce any oil at least through 2017. The Big Foot project, which was scheduled to be online this year, was substantially delayed due to a huge setback last summer with the sinking of at least nine giant tendons that were designed to connect the platform to the sea floor.
On a conference call with investors and analysts, Watson expressed the need to be more resourceful.
“We need to be more efficient at what we do.”
Watson added prices should rise eventually; however, he is “sober about the current realities of lower prices” for the next few years.
Chevron also reported a sharp drop in third-quarter earnings that still beat Wall Street’s expectations due to cost cuts and strong refining margins, according to a report by Reuters.
On the other hand, the stark news about Chevron’s layoffs and budget cuts is in sharp contrast with one of their main competitors, Exxon Mobil Corp. On Friday, Chevron’s larger rival not only posted stronger-than-expected results, but also had not announced that they expect to lay off any portion of their workforce.
According to Reuters, Chevron plans to spend $25 billion to $28 billion next year and expects to slash further spending in 2017 and 2018. This expectation is a sign that Chevron does not anticipate oil prices to rebound very soon.
Representatives at Chevron’s headquarters, based in San Ramon, California, also said it would lay off somewhere between 6,000 to 7,000 workers — the deepest cuts since the 2001 Texaco Inc. merger.
However, Watson said the company is committed to keeping Chevron’s dividend, now at $1.07 a share.
“Our first priority is to maintain the dividend and grow it as a pattern of earnings and cash flow permit.”
The company earned $1.09 a share — 33 cents more than the average of 21 analysts’ estimates compiled by Bloomberg. However, Chevron’s stock has fallen 19 percent this year.
Chevron reported net income of $2.04 billion, or $1.09 per share, compared with $5.59 billion, or $2.95 per share last year. In addition, production fell 1 percent to 2.5 million barrels of oil equivalent per day.
The good news for Chevron comes in the form of refiners. Refiners are inclined to be more profitable when oil prices are low. Chevron’s profit at the downstream unit, which is smaller than the oil-producing part of the company and which makes gasoline, lubricant, and other refined products, jumped 49 percent.
Bloomberg reports that the price of Brent, the typical crude used by most of the world, spiraled down by nearly half since June 2014 to an average of $51.30 during the months July to September. After a short recovery, oil entered its second bear market in a year after a flood of supplies from U.S. shale fields and the Persian Gulf inundated markets at a time of fluctuating demand growth in China and other developing economies.
According to data compiled by Bloomberg, the nearly 45 percent drop in Brent crude during the past year represents the steepest 12-month decline since 1988, forcing Chevron to reduce spending and reduce the company’s workforce.
Chevron Corp. CEO Watson says, “We expect further reductions in spending for 2017 and 2018. We are focused on improving results by changing outcomes within our control.”
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