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Oil Search cuts

workforce by a third

COMMENTARY THE global pandemic and recession have caught woes would be the pandemic’s destruction of
Sydney-listed Oil Search off guard, forcing ongo- global energy demand, the fact is the company
ing budget cuts and mass layoffs. had already begun its company-wide strategic
WHAT: As with other upstream explorers, Oil Search review before the full extent of the virus was felt.
The company intends was buffeted by the March collapse in oil prices. Oil Search announced it was conducting the
to lay off 34% of its OPEC+’s inability to agree on supply cuts fol- review, which is expected to wrap up in the sec-
workforce by the end of lowed by the global coronavirus (COVID-19) ond half, last February. While crude prices had
the year. pandemic left the market painfully oversupplied. begun to experience some downwards pressures
The company moved quickly to respond from the early effects of COVID-19 in Asia that
WHY: the economic challenges, promising first to cut month, it was not until Russia’s refusal to back
Economic woes have hundreds of millions of dollars from its budget Saudi Arabia’s proposed production cuts on
forced a 40% budget cut before launching a $700mn capital raising exer- March 6 that the collapse began in earnest. The
for the year. cise. These were, apparently, just the first steps two sides began a short-lived price war, helping
in its journey that has now seen the company to drive Brent for a brief time below $20 per
WHAT NEXT: slash 427 jobs since March, with more cuts in barrel.
Asset write-downs the pipeline. The ensuing market volatility forced the com-
seem inevitable, while pany to abandon plans to sell a stake in its Alas-
divestments are not Cost review kan assets, unveil a 40% cut to this year’s budget
unlikely. Oil Search said on July 1 that an ongoing from $710m-845mn to $440-530mn and even-
“detailed and systematic review” of the compa- tually hold a $700mn capital raising exercise in
ny’s costs had prompted it to reduce its work- May.
force from 1,649 in March to just 1,222. The company was in trouble before the March
The cuts will not stop there, however, with oil collapse, the arrival of which forced it into
the company noting that a further 137 posi- rapid and decisive action. With Brent projected
tions would be phased out by the end of the year. by the US Energy Information Agency (EIA)
According to these targets, the company plans to to average just $48 per barrel in 2021, possible
reduce its total workforce by around 34%. Board asset write-downs seem likely, as does a possible
members and executive staff salaries, mean- divestment.
while, will be lowered by 20% over the next six
months. What next
The company added that it had created a ded- Commenting on the company’s ongoing initi-
icated division – dubbed Pathfinder – to focus atives, Wulff said it was “confident that … Oil
on streamlining corporate performance. This Search is positioned to deliver long-term share-
office will drive overseas ongoing cost reduction holder value”.
initiatives that will include cutting third-party However, the company’s shares have already
outlays, improving operational efficiencies and lost 70% of their value this year and it may be
using technology to reduce outgoings. gearing up to unveil significant asset write-
Oil Search said it had already managed to downs. Macquarie Capital issued a report this
reduce this year’s production costs to $10.50 per week noting that Australian developers have
barrel of oil equivalent (before one-off restruc- been calculating the value of their production
turing costs) from a previous guidance of $11- assets based upon an oil price of $70-75 per bar-
12 per boe. It said that further cost savings were rel. Given Brent’s roller-coaster ride since early
expected as other initiatives were rolled out. March and the industry-wide projections of
Guidance on one-off restructuring costs longer lasting international oil price weakness,
will be provided in the company’s first-quarter auditors are widely expected to object to any
results report, to be published on July 21. company account that does not lower their price
While managing director Keiran Wulff forecasts.
acknowledged the inherent challenges associ- Oil Search’s depressed share price coupled
ated with such a restructuring, he pledged that with mounting resource nationalism in Papua
the company would emerge more resilient “while New Guinea (PNG), home to the company’s
retaining all the capabilities required to operate most prized assets, have put the developer in a
our production assets safely and efficiently”. tough spot. It may be the company has to pursue
a strategy of portfolio rationalisation to become
Market volatility even leaner if it is to avoid an opportunistic take-
While the most obvious target for the company’s over bid.™

Week 26 02•July•2020 www. NEWSBASE .com P11