Good swig of financial engineering to make results go down better.
The warning came on December 1, 2015 in an SEC filing in which Schlumberger, the world’s largest oil-field services company, disclosed a charge of $350 million for the fourth quarter. It would cover the costs of an unspecified number of new job cuts in 2016 – as the filing said, “in light of expected reduced activity for 2016 and to streamline its support structure.”
At the time, Patrick Schorn, president of operations, explained in a speech that “it has become clear that any recovery in activity has been pushed out in time,” and that therefore, those job cuts would “further right-size the organization based on the activity outlook for 2016,”
Today, Schlumberger, when it reported fourth-quarter earnings, put a big number on those job cuts.
It’s tough out there, in the oil and gas sector. The company reported that revenues in the fourth quarter plunged 39% year-over-year, income from continuing operations plunged 58%, earnings per share plunged 57%. This includes North America, where revenue plunged 55% and operating income plunged 84%. If I use “plunge” a lot, it’s because it was that kind of earnings report.
After it was all said and done, the company had a net loss for the quarter of $1.01 billion.
To make those bitter results go down better, and to add that special little extra that Wall Street analysts like to hear, it offered a good swig of financial engineering: a new share repurchase program of $10 billion.
That’s on top of the repurchase program of $10 billion that was started in Q3 2013, and which “is about to be completed.” It was that buyback program that helped propel SLB from just over $90 a share in late 2013 to $120 in mid-2014, before it all came unglued. Shares have now lost nearly half their value since then, closing today at $61.45.
During that entire time, the company bravely repurchased nearly $10 billion of its own shares. Today it disclosed that in the fourth quarter alone, it bought 5.4 million shares at an average price of $73.86 per share for a total of $398 million. On that tiny slice of the $10-billion repurchase program, it has already lost – although that’s a rubbery concept with share repurchases – $67 million.
If it bought the shares of the entire program since Q3 2013 at an average price of $90 a share, it would have lost nearly $3 billion on that program, which is not the ideal way of confronting one of the worst oil busts in recent history. So now, it’s going to blow another $10 billion on repurchasing its own shares.
And it offered another special little extra that Wall Street analysts fawn over: it’s going to ax and additional 10,000 people.
That’s on top of the 20,000 job cuts it had announced last year. This brings total layoff announcements to 30,000. For 2015, its “workforce reduction” expenses amounted to $920 million. Cutting expenses this way can get expensive.
The oil and gas sector is in a depression. Global overproduction, uninspiring demand, and ballooning inventories have created a monstrous glut. In a glut, fundamental factors, such as the cost of production, become irrelevant to the price. The price can go down to silly low levels. And it can stay there until the glut is getting burned off. But that’s not happening yet.
So the survivors are preparing for the long haul. Hence cuts in capital expenditures, payroll expenses, and a million other things. Costs have to be brought down, cash has to be preserved, facilities have to be shut, assets have to be jettisoned. And, at Schlumberger, for what purpose? To financially engineer earnings per share via very costly, utterly wasteful, and ludicrously ill-timed share repurchases.
But those share repurchases are coming under fire. They’re an outgrowth of QE. Easy credit didn’t lead to corporate investment and economic growth, but to share buybacks, according to Natixis, one of the largest asset managers in the world. Since they’ve caused companies to load up their balance sheet with debt, they’re now increasing financial instability. And they’re among the top reasons QE is a net-negative for the economy. Is Natixis saying, any more QE, and it’ll kill us all? Read… Mega Investment Bank Suddenly Pooh-Poohs QE