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
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Wolf,
Are we to assume that the shares are bought with borrowed money, entirely? I would imagine that after such a disastrous year, they would have almost no cash reserves.
Thanks in advance.
Right P. another drunk in the gutter looking for a meal today, to be repaid next week. Who funds these zombies? This sucker is going down and hard.
…and screw the Fed.
Good question. Now it gets complicated.
In 2015, long-term and short-term debt increased by a combined $5.7 billion. But cash also increased by $5.5 billion. Receivables and other current assets dropped about $3.4 billion. Receivables are falling because business is falling. So that’s a source of cash. They also disposed of some assets. So that’s another source of cash. And so on.
Money is fungible. It’s impossible to say where that money for share buybacks is coming from. But my guess is that long-term and short-term debt will increase this year and next year, as they did in 2015. If they didn’t blow $10 billion on share buybacks, their debt wouldn’t increase. That’s sort of the answer to your question.
No doubt shedding 30,000 employees will make the cash flow statement look – at least temporarily – better, so they can get better financing rates in the bond market in order to carry out this share buyback.
“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,”
” It’s impossible to say where that money for share buybacks is coming from.”
But it’s not impossible to say where or to whom that money is going, because, in Q1 and Q2 of 2015, company officers and directors were dumping massive amounts of company stock at prices well north of $90 a share. Schlumberger may be pumping less oil, but its insiders have done an excellent job of pumping and dumping more Schlumberger stock.
More of the same over and over again in perpetuity. Althought this one is on a pretty grand scale in the oil sector. But it will undoubtedly not be the last as these large players like cvx, xom etc. get more amd more…desperate. It’s a mad scramble to financial oblivion.
I was a Director of Payroll Services for a Fortune 500 company before I retired in 2007.
Just for kicks, I took a look at SLB’s (Schlumberger) career site. It looks like they have 108,000 employees, soon to be 98,000, and they show exactly 21 job openings for experienced workers.
UNP’s (Union Pacific) quarterly results were released today and they were absolutely abysmal. The volume of tangible goods being transported around the country and/or the world is plunging, and it is those tangible goods that create value in the economy.
I think the President’s statement about ‘Anyone claiming that America’s economy is in decline is peddling fiction’ is going to go down as Barack Obama’s biggest lie.
As I have been watching buybacks go from unreported news to the forefront of news (at least in the financial blog-o-sphere), I always wondered – who was selling to the company at these volumes?
If these numbers weren’t so big, I would presume the company just soaks up some shares off the market without really pushing price or action around. But when companies start doing this in the billions and billions, quarter after quarter, I feel like the insiders are using buybacks to unload in a big way.
More to the point, ZH and other sites often discuss the complete collapse of liquidity. Shouldn’t massive share buybacks push price UP in a light liquidity setting? Curiously, prices are just going sideways.
I get that buybacks may make sense in some cases, but this is too extreme, too many companies, and for too long. And I don’t buy the EPS gaming theory – it makes as much sense to me as SA trying to push frackers out of the market by refusing to cut production.
If I was cynical (and I am) I think this is the deep pocket money elite cashing out of companies they know are going down – and when mom and pop aren’t there to offload to – they just coordinate with the boards and have them vacuum up the volume they need to unload though debt funded buybacks.
Once they are out of the picture, it is the company that is stuck with the debt, they got cash at par, and can probably re-buy their stake after the crash at 10 cents on the dollar.
Sort of fixes that “small exit” problem, huh?
Regards,
Cooter
Don’t forget that companies also issue a lot of new shares, for example to buy other companies and for executive compensation packages, which dilutes existing shareholders. So a big part of the buybacks just mop up those shares. This is how cash-less stock-based compensation turns into a cash drain.
I ran the numbers on IBM back in 2013 and wrote about the whole scheme. Here is the relevant excerpt from that article (and they’re all doing it). The numbers have gotten a lot bigger since then, but the principles are the same:
http://wolfstreet.com/2013/10/18/stockholders-got-plundered-in-ibms-hocus-pocus-machine-2/
So far in 2013, IBM spent $14.2 billion to repurchase 72 million shares. In 2012, it spent $12 billion on 61 million shares. In 2011, it spent $15 billion on 89 million shares. Since January 1, 2011, IBM spent $41.2 billion to buy back 222 million shares. But the math doesn’t quite work out….
On January 1, 2011, there were 1.228 billion shares outstanding; on September 30, 2013, 1.098 billion shares: IBM lowered the share count by 130 million shares – not 222 million. What happened to the remaining 92 million shares it bought back?
At the prevailing price over the period, that’s a cool $17 billion in cash.
Those were shares that IBM issued for executive compensation and acquisitions during that time and then turned around and bought them back. In the process, $17 billion changed ownership, from IBM stockholders to the executives of IBM and to the owners of the acquired companies.
http://www.ibmandtheholocaust.com/
Ever read that.
If ever there was an American company, that deserved to go into bankruptcy, and be broken up for ever, it is IBM.
IBM knew what it was helping to organize, J Edgar knew, and FDR knew. What was going to happen, long before the first jew was ever loaded onto a train, for “relocation”, to the East.
The way the US govt, allowed IBM to protect their Machines and their profits from Hitlers Germany, is even by today standards, Obscene.
I wonder if the people who control IBM have deliberately gutted it, before the compensation litigation starts.
Maybe this could prove an interesting subject for an article. Take the top ten, twenty, whatever “buybackers” for the last several years, give or take, and then compare that to their float.
If you are correct (and I had IBM specifically in mind – I just wasn’t aware of some of the internals) then float should be steady to shrinking rather than significantly expanding.
Should make a pretty nifty chart (or set of charts).
Now that I think about it … didn’t the TrimTabs guy (Biderman) have an ETF based on float (shrinkage)? Would also be curious to see how that fared along the way as well. I think he used to carry on about float back in ’12 in articles posted on ZH, but folks in the forums at ZH didn’t like him for some reason.
Regards,
Cooter
These days, many if not most companies are going in debt to buy back their stock shares. Then they layoff thousands if not tens of thousands of employees to further fluff the stock price. The top execs and board cash out and the cycle repeats until the company craters.
Reminds me of goodfellas… Soak the restaurant for every penny, then torch it for the insurance.
Or, as Dave states in ‘Breaking Away’, “Everybody cheats. I just didn’t know.”
You are so absolutely right. Ape descendants have perfectioned social, Financial and genetical engineering to the levels we are seeing right now in the world.
Now for a minute stop and think my time is doing this at the planetary scale.
Cheating death through progress in medicine.
Cheating the markets through all kind of derivatives and toxic new processes
Nobody out there is asking the right question…. the big WHY to Mankind’s with a big “M”
Over 15.000 wars in 5.000 years, the permanent “genetic” state of delusion in every corner of reality.
The economy and the markets, are just a part of it ….. But … WHY
And there is an extremely simple answer that explains it all ….
No big surprise. Nothing more than ringing the cash register, until the company is nothing more than a shadow of it’s former self.
As those “carpet bagger’s” make off with the loot and board their private jets or boats. Making way to their private high security, gated compounds.
The big topic of conversation at Davos this weekend, is not about the global economy, or any socially responsible, moral good work. But about where they are going, to ride out the coming global economic/social cataclysm that they caused in the first place with their hubristic greed.
Now the sheep are waking up. It doesn’t matter how diluted the visuals get, and they can massage the numbers all they want, the fact is, insiders have been selling back for a long time now. I brought this very subject up to a friend of mine recently. Until I put it into that light, he never thought of it that way. You could see the light bulb go off instantly. All this has been, for years, is a legal buy low, sell high for the insiders, with borrowed zero percent money, more or less. Check the insider action on most stocks using bigcharts dot com or something like that, and it’s been going on for years. It’s even been on the mainstream media for years, people aren’t making this important connection. My friend checked the stock of the company he works for, and low and behold the biggest action was top brass of the company unloading at the their stocks at the top. Cooter nailed it about the market going sideways, this has been a very long distribution phase for the market. (do it too fast, and it’s too noticeable)
( four phases- accumulation- markup- distribution- markdown)
Looks like it is taking some time to hand off this mess to John Q public via pension funds – 401- ect. Make no mistake, the markdown phase is underway and brokers will be preaching buy the dip until every dime can be siphoned off, and everyone will soon be wondering- how did we get here, that’s not what my broker said.
The idea of share buybacks, if done responsibly (a key point), is to be used with excess funds if the company can’t find a good investment and doesn’t want to commit to a higher dividend. The ideal time is AFTER the market price falls. So I would suggest that for SLB to make share repurchases now (without considering any other factors) is a net positive.
It’s when the other relevant factors are considered that it turns into a net negative.
Priority number one is to operate the business itself. Unfortunately, this is where the layoffs come in handy. (Pardon the sarcasm: It’s completely intentional) The business should have kept more cash on hand so it wouldn’t have to borrow, even at near-zero interest rates, to funnel it out the back door for buybacks. And it should be noted that approximately $13 billion is going out the door to buy Cameron International, which was having even more trouble holding onto its cash. The timing may have been good on that acquisition, but not perfect. But it’s hard to catch a falling knife, or to know when the exact bottom will come.
Looking as an outsider, I would prefer that more businesses stop looking at massaging current-period EPS numbers just for Wall Street. In fact, FWS on this issue. The stockholders of the company should recognize that business cycles happen, and that they will also go away after time. But the company doesn’t need to cozy up to the banksters to continue to operate its businesses.
Msft has 8 billion shares outstanding.. world population 7 billion. 60% of our population live on two dollars a day and dont buy stock. this is one company out of thousands that cant float all their shares in the markets so they create their own bag holders.
JOHNNY LUNCHBOX
I used to work at MSFT. Morale tanked with stock price in decline (2000-2003) so bad that they bought out our underwater options in late 2003 to improve the morale and got rid of awarding options with stock grants.
What is really funny is that MSFT used to send a floppy disk (remember those?) containing an Excel file with a written job offer pkg where one gets to “play” with future stock appreciation (given past performance as well). It showed that I can be a millionaire in 8 to 10 yrs (and there were plenty of those folk retiring early). So I left the company I was wroking for 2 months before annual bonus payout and MSFT made that up with more options granted as part of offer – well boy that was DUMB move and lesson for me is bird in hand CASH is better than stock options. BTW – MSFT stopped sending that floppy disk in 2001.
Thank God there are still places like Panama and Grand Cayman where the Masters of the Universe can safely put their well-deserved profits earned by their foresight.
Bumper sticker recently seen in Oakland:
“Eat the Rich”
Buybacks make lots of sense if: the borrowing cost of the funds employed is virtually $0, if the stated policy of the government is to debase the currency over the long term, and if management is convinced that future business prospects are unattractive.
Put it this way: a storm is brewing, the ship has hit a rock, the pumps can not keep pace with the water rushing in – what now? Grab a life vest and your wallet and get a seat in the lifeboat while there”s still time.
Buybacks are the ultimate vote of no confidence in the future by people who should know. They are a survival technique employed by the fittest who are wise enough to know that the time has come to take the money and run.
Simple as that.
Sigh – ruins the life of 30k+ families yet buys shares back to make earnings look better…
Is this the best BOD and upper management do now days to screw the workers to pad their stock options?
Sadly I’m afraid more companies will resort to this short term financial engineering option…
Buy backs have averaged $500B/yr , the last few years. Corp debt is huge and this is probably where they’ve spent much of the money.
January is the slowest month for buy back purchasing. So the market may bounce later, but the earnings are so low now that there may be very little buy backs this year.
I think reasons for buy backs are boost share prices to enrich few and either use the cash war chest in soon to be NIRP world not to mention cannot find use for that money or borrow while they can at lower rate – never mind that share price based on piss poor earnings due to Great Recession II will decline. I mean look what IBM and AAPL did among others buying back like crazy in 2015…
“Anyone saying America’s economy in decline is peddling fiction”
“Never believe anything until it has been officially denied.”
Claud Cockburn – British journalist
In this election year our country is approaching a critical mass. Whether you are on the left or right the only thing that can be agreed on is everybody is really pissed as evidenced by the divergent solutions proffered by the candidates of both parties.
Share buy backs have helped float this now overvalued market for years and unfortunately continues. We have advised public companies on market management for 45 years and have and witnessed a deepening departure from managing to the benefit of the shareholders to short term, short sighted what ever it takes to manipulate EPS, unfortunately many times only enriching management. This short sided viewpoint has bought about a stamped of individual investors permanently departing the market exacerbated by false liquidity generated by computer driven markets.
Officers and directors wake up, the capital you are wasting and the debt your are creating on ill advised buy backs is not your money it belongs to your shareholders and as such should be managed to the fiduciary responsibility you and your BOD have been entrusted.
“But those share repurchases are coming under fire.”
Why? If you were a CEO, what would you do? Would you do the hard thing and invest in a struggling, over indebted and overregulated economy, or the easy thing – put your money into the one investment “endorsed” by the money printers – the stock market? Let’s see…a downhill 25 footer with a double break, or a tap-in? Hmmm…
After this treason http://www.justice.gov/opa/pr/schlumberger-oilfield-holdings-ltd-agrees-plead-guilty-and-pay-over-2327-million-violating-us
after years of Jamie Gorelick dirction, I’m surprised there’s anything left to buy stock with.