Oil Search Wields The Axe On The Back Of Crude Crunch

By Glenn Dyer | More Articles by Glenn Dyer

Earlier this year Oil Search revealed big cuts in investment and other spending as global oil prices collapsed, taking LNG prices with them. The cuts were so deep that to achieve them, the company would have cut staff.

Oil Search had a review underway and yesterday it told the ASX in a statement on the first day of the company’s second-half (its financial year is December ending) that it would chop 34% of its staff, or over 550 positions in Australia, PNG, and a few other places.

The company will slash staff numbers from 1,649 to 1,222 immediately and a further 137 positions to be culled by December.

Oil Search’s move came less than a day after Shell revealed plans to slash the value of its assets by $US22 billion. BP revealed plans earlier in June for a cut of up to $US15 billion and Occidental also revealed in June write-downs of up to $US11 billion.

Analysts say those companies asset values because of the weakened outlook for oil and gas – their have cut their estimated future prices meaning the earning capacity of assets have been reduced, which in turn means write down in book value of those assets.

That’s why Oil Search and its local peers like Santos and Woodside face write down decisions in their June 30 accounts (half years in the case of Santos and Woodside, full-year for Beach Energy).

Oil Search’s newish CEO, Keiran Wulff said the job cuts would be “extremely challenging” and made more difficult by the pandemic. He said Oil Search was committed to treating its outgoing employees with care and respect, providing termination payments, and help for them to reskill.

“The painful decisions we have taken to optimise our organisational structure, enhance efficiencies, and reduce operating costs have not been made lightly,” Dr. Wulff said.

“They are the result of extensive studies aimed at ensuring we have an organisational structure that not only makes us more resilient to oil and gas price fluctuations but also embeds a culture of continuous improvement, operational excellence, and strict fiscal discipline,” he told the ASX in a statement yesterday.

Oil Search has slashed its expected investment spending this year by $US675 million, suspending all non-essential projects and activities in Papua New Guinea and deferring exploration work it had planned.

In Alaska, work to begin early oil production at its Pikka project has been put on hold and the company suspended formal talks to sell off a 15% stake that and other projects in the area.

There are few buyers for oil and gas assets these days and lots and lots of sellers, especially in North America.

Wednesday job losses resulted from an extensive review of Oil Search’s organisation and cost structure, Dr Wulff said, and would ensure Oil Search had the resilience, capability and financial strength needed to withstand a “prolonged period of subdued oil prices”.

“We have reviewed how to make our company stronger by prioritising activities and focusing on the capabilities that are required for us to be successful under a range of economic conditions,” he said on Wednesday.

Meanwhile, it looks as though Shell’s Australian LNG assets will again take the brunt of the oil major’s cuts of up to $US22 billion.

Shell paid $US53 billion for BG Group and has already cut $US9.6 billion from the value of its Queensland coal seam gas and LNG business.

The value of its integrated gas business, most of which is based in Australia, will see a cut of between $US8 billion to $US9 billion. Its oil refinery assets are likely to face a charge of between $US3 billion to $US7 billion while the value of its “upstream” exploration and production assets fall by $US4 billion to $US6 billion, largely the fall in value in its Brazilian fields and in its North American shale business.

Oil Search shares rose 0.6% to $3.19. They are down 55% so far in 2020.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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