Today’s Labor Updates:
Refiners Top Off Their Storage Tanks
More layoffs coming to energy services sector
Five most important labor issues for your 2015 “to do” list
U.S. refinery workers, oil firms start talks for new contract
Refiners Top Off Their Storage Tanks
Inexpensive Crude Fuels Glut of Gasoline in U.S., Slicing Pump Prices
By Alison Sider
Jan. 21, 2015 4:47 p.m. ET
The global glut of crude oil is turning into a U.S. glut of gasoline.
As oil prices have tumbled during the past few months, U.S. refiners have been sucking up as much of the abnormally inexpensive crude as they can, turning it into gasoline, diesel and other fuels. Prices at the pump have plunged to almost $2 a gallon, the lowest nationwide average in more than five years.
Even though U.S. drivers are filling their tanks more often, they can’t keep pace with surging gasoline supplies. So a lot of the fuel that refiners are producing is sitting in storage tanks. Gasoline inventories stood at 240.3 million barrels as of Jan. 9—the highest they have been at this time of year since at least 1990, according to weekly federal figures.
This has some refining experts scratching their heads. The fuel makers “are running at pell-mell rates that are not justified,” said Tom Kloza, head of energy analysis at the Oil Price Information Service. But before they cut back, he added, “Refiners are going to have to basically say, we’re just choking on it.”
All of this is great for American drivers. The U.S. Energy Information Administration expects gasoline prices to average $2.33 this year, down 31% from 2014. It predicts the average U.S. household will spend roughly $750 less on gasoline this year.
Companies that do the expensive work of discovering oil and natural-gas deposits and extracting resources from the ground are cutting spending and trying to curb new production amid the slide in prices, which are down about 55% since June.
But refiners have been running their equipment full out. Over the four weeks ended Jan. 9, refiners processed an average of 16.3 million barrels of oil a day—unusually high for this time of year—and are using more than 93% of their operating capacity.
They have been doing this even though the margin between what they pay for crude and what they get for gasoline was negative in some of the country during parts of last month.
“The mentality is, ‘I’m not making as much money as I’d like to, but if I cut the only thing that will happen is that everybody else is going to be making more money,’ ” said Cowen & Co. analyst Sam Margolin. “That’s why they don’t stop until they absolutely have to.”
When U.S. oil was, on average, much cheaper than crude from the Middle East and North Sea, American refiners were able to make sizable profits refining low-cost U.S. crude and selling fuel abroad. But as oil prices plunged, the differential between benchmark American oil and Brent crude has narrowed to less than $2 a barrel, and the U.S. advantage has dimmed. Refiners also could face competition from new plants in Latin America and the Middle East that are ramping up production.
As a result, analysts are predicting an end to the streak of blowout earnings performances when refiners start reporting their results next week. While refining stocks haven’t been pummeled as heavily as exploration and production companies, shares of independent refiners have fallen sharply. Shares of Valero Energy Corp. , Marathon Petroleum Corp. and Phillips 66 , some of the largest independent refiners, are down 5% to 10% since the beginning of the year.
Some refineries have started to slow down production, and more will probably pull back in the coming weeks, because refiners typically spend the late winter months performing maintenance work.
But even more fuel is coming in from overseas. Cheap oil has given struggling European refiners a new lease on life, and they are also churning out fuel as fast as they can. That continent largely runs on diesel, so the extra gasoline produced is shipped to the U.S. East Coast.
Fuel manufacturers are hoping that U.S. consumers will spend some of those savings on more fuel by driving more, and that demand from other fuel-consuming industries such as trucking will pick up—even as refiners record higher profits on secondary products such as asphalt. “We’ll probably see some increase in consumption,” said Tom O’Malley, executive chairman of refiner PBF Energy Inc., in an interview last month.
Some analysts are dubious that will be enough to shrink the flood of gasoline. “Although we are optimistic on gasoline demand for 2015, on low prices in the U.S. and some other countries, supply growth is far greater,” Amrita Sen, chief oil analyst at Energy Aspects in London, wrote in a recent research note.
More layoffs coming to energy services sector
Halliburton, Baker Hughes to cut thousands
By Ryan Holeywell and Robert Grattan|
January 20, 2015 | Updated: January 20, 2015 11:31pm
Two of Houston’s biggest employers, Halliburton and Baker Hughes, are poised to lay off thousands of workers as the production companies they serve continue to slash spending and slow drilling.
Baker Hughes announced Tuesday it will cut 7,000 jobs, mostly in this quarter of 2015, amid a crude oil price slump and drilling slowdown it expects to deepen. Halliburton suggested layoffs would be forthcoming too, but company officials didn’t say exactly how many jobs could be lost.
“This is really the crappy part of the job, and this is what I hate about this industry, frankly,” Baker Hughes Chief Executive Martin Craighead told analysts during a conference call to discuss the company’s fourth-quarter results. “This is the industry, and it’s throwing us another one of these downturns, and we’re going to be good stewards of our business and do the right thing. But these are never decisions that are done mechanically.”
The cuts come on the heels of last week’s announcement by Schlumberger – the only services company larger than Halliburton and Baker Hughes – that it would cut 9,000 jobs worldwide. Halliburton said last month it would lay off 1,000 people in the Eastern Hemisphere, and it has cut some jobs in the Houston area.
Analysts who follow the companies say Tuesday’s announcements are likely only the start of job losses in the oil field services sector.
“This will continue,” said James West, an analyst at Evercore ISI. “This is probably the biggest cut. It’s just the first round of headcount reductions as the rig count slides.”
The number of land rigs operating in the U.S. has dropped by nearly 14 percent in just two months, an indication of a rapid slowdown in drilling activity.
The price of U.S. benchmark West Texas Intermediate crude oil fell $2.30 to $46.39 a barrel Tuesday on the New York Mercantile Exchange. Brent crude, the international standard, dropped 85 cents to $47.99 on the London-based ICE Futures Europe exchange.
Those declines followed news that the International Monetary Fund revised downward its projections for global economic growth.
“When you look at those numbers and you look at the supply we have, you really have to ask the question, ‘How are we going to use all this oil?’ ” said Phil Flynn, a senior market analyst at the Price Futures Group in Chicago.
11 percent cut
The announced Baker Hughes layoffs represent an 11 percent cut to the 62,000-plus workers it employs globally, company officials said. About 8,000 work in the Houston area, according to a Chronicle survey last year.
A Baker Hughes spokeswoman declined to say when layoffs will occur, where they’ll be concentrated or what types of positions will be cut. The company also said it is reviewing facilities for possible closures.
Halliburton officials suggested Tuesday more layoffs could be forthcoming.
A Halliburton spokeswoman declined to elaborate on Miller’s comments or say how many employees may face layoffs. Earlier this month, the company acknowledged it has cut some workers in Houston but didn’t provide numbers.
Marshall Adkins, an analyst at Raymond James, speculated that most of the cuts announced Tuesday will affect field workers. That’s in contrast to layoffs resulting from Halliburton’s planned acquisition of Baker Hughes, which are more likely to hit employees in middle management, accounting and other back-office functions.
When they announced the deal in November, the companies said it would yield $2 billion in “synergies,” which analysts say almost certainly will include job cuts as the companies scrap employees with overlapping functions.
But Halliburton CEO Dave Lesar struck an upbeat tone as he discussed the outlook for workers at both businesses.
“Employees at all levels in both organizations are excited about creating a new industry leader and the opportunities they will have as part of a larger company,” Lesar told analysts on the call.
The two companies posted rising profits – quarterly results that belied the pain almost certainly ahead for the services sector as oil prices plunge.
‘One heck of a quarter’
Halliburton reported $901 million in earnings, or $1.06 per share, for the October-December quarter, up from $793 million, or 93 cents, during the same period in 2013.
Baker Hughes reported net income of $663 million, or $1.52 per share, up from $248 million, or 56 cents per share during the fourth quarter of 2013. In a note to clients, energy investment bank Tudor, Pickering, Holt & Co. called the past months “one heck of a quarter” for Baker Hughes.
Halliburton shares rose 70 cents Tuesday to $39.83 in New York Stock Exchange trading. Baker Hughes rose 70 cents to $57.26.
But hurdles loom for both companies, whose activity is driven largely by the capital budgets of the oil and gas producers that use their services.
Exploration and production companies will spend 40 percent less on drilling and completion in the U.S. in 2015 than they did last year if oil prices average around $55 per barrel, said Scott Mitchell, upstream supply chain analyst at energy research firm Wood Mackenzie.
Several production companies have revised their budgets downward multiple times this winter as oil prices continue to slide. Baker Hughes and Halliburton executives said those moves have fostered uncertainty in their businesses and made it hard for them to know what their activity will look like in 2015.
“You have customers coming back and asking for new pricing fairly often in order to get their budgets lower,” said Rob Desai, an analyst at Edward Jones. “It makes it hard to plan, and it makes it hard to get projections.”
Officials at both companies also said they’re in discussions with producers to reduce the costs of their services.
“Price reductions are now occurring across all product lines,” Lesar said.
Halliburton officials said they expect their profit margins to decline over the first half of the year and remain stable in the second half.
Analysts said services companies may have to cut their costs by as much as 20 percent in some areas to suit their customers.
“There’s certainly some room there,” Mitchell said.
Merger comes later
Halliburton and Baker Hughes leaders offered no new details about the progress of their merger but reiterated that they expect the deal to close in the second half of the year, despite the headwinds facing both companies this year.
Lesar expressed confidence in the company, noting it overcame expensive difficulties including asbestos litigation, its cement work on the BP Macondo well that blew out in the Gulf of Mexico in 2010, and legal troubles arising from former subsidiary KBR’s military contracts. Halliburton spun off KBR in 2006.
“We’ve been through asbestos. We’ve been through Macondo. We’ve been through the Iraq war,” Lesar said. “None of those distracted us from making sure our business franchise remains strong.”
Five most important labor issues for your 2015 “to do” list
Vorys Sater Seymour and Pease LLP
Nelson D. Cary nuary 20 2015
Looking at the developments in the labor law field during 2014, a few stand out as worthy enough to find a place on a labor professional’s “to do” list for 2015. Here are the five that I would suggest should be on the list of every management representative:
- Prepare for the quickie election. The changes to the election procedures that the NLRB adopted at the end of last year will clearly shorten the time between petition filing and secret ballot election. Today, there is usually 35-42 days between those two events. Under the rule, the time could drop to as few as 14 days, but probably more likely around 21 days. If an employer is not ready for an election petition the moment it is filed, it will present significant tactical and strategic challenges for the employer. While there will be litigation over these changes, the NLRB has given no indication that it will delay the implementation of the rule pending the outcome of those lawsuits.
- Assess the impact of “micro-units” in your workforce. Have you read (or read about) the NLRB’s Specialty Healthcare, Macy’s, and Neiman Marcus decisions? If not, you are already behind on this issue. These decisions provide unions a tool to subdivide an employer’s workforce into smaller pieces and either (a) organize small pieces at a time; or (b) permit multiple unions to represent various parts of your workforce. Every employer should be looking at what impact this has on their workforce, and whether any proactive steps are available to respond.
- Review your handbook. Regular readers of this blog know that the NLRB has been on a rampage when it comes to rules that govern the conduct of employees. The NLRB has a keen interest in striking down rules that it believes, from a very employer unfriendly point of view, limit employee exercise of rights under the NLRA. Revisions to the handbook, or adopting a disclaimer, are possible approaches to compliance for employers to consider in 2015.
- Prepare for the NLRB’s new deferral standard. In Babcock & Wilcox Construction Co., Inc., 361 N.L.R.B. No. 132 (Dec. 15, 2014) (pdf), the NLRB altered the circumstances under which it would defer to a labor arbitrator’s resolution of a statutory issue. Specifically, it held that it would only defer on an issue under Section 8(a)(1) or (3) of the NLRA if the party advocating deferral (usually the employer) could prove that the arbitrator was (a) explicitly authorized to decide the unfair labor practice issue; (b) the arbitrator was presented with and considered the statutory issue; and (c) NLRB law would reasonably permit the award. Clearly, this new approach will require employers with union-represented workforces in 2015 to reconsider not only their labor arbitration strategies in individual cases, but perhaps also the language of their union contracts themselves.
- Watch for the Supreme Court’s decision in M&G Polymers. This is also a development for employers with existing unionized workforces, especially those for whom retiree health care benefits are a significant bargaining issue. The Court’s decision will, hopefully, provide guidance on the language that must be used and where that language must appear to establish a “vested,” i.e., unchangeable, right to receive health care benefits into retirement. These issues can have significant cost implications for employers with large numbers of retirees.
So, there you have it. Given the NLRB’s activism, the list could be easily be longer. But, if you are looking for a few changes where you can have the greatest impact, these are the places you should start.
U.S. refinery workers, oil firms start talks for new contract
Wed, Jan 21 2015
HOUSTON (Reuters) – Union and oil company negotiators began talks on Wednesday for a new nationwide contract covering hourly workers at 63 U.S. refineries that account for 64 percent of national refining capacity, according to a union spokeswoman.
The current three-year agreement between the United Steelworkers union (USW) and oil companies is set to expire on Feb. 1.
Royal Dutch Shell Plc is leading the talks on behalf of companies ranging from supermajors such as Exxon Mobil Corp and BP Plc to smaller companies such as HollyFrontier Corp and Delek.
USW International Vice President Gary Beevers will be across the negotiating table on behalf of hourly workers along with the union’s Administrative Vice President Tom Conway.
The Steelworkers are seeking annual pay raises double what was gained in the last agreement. The union also wants work given to non-union contractors to go to its members, a tighter policy to prevent fatigue and reductions in members’ out-of-pocket payments for health care.
A Shell spokesman declined to discuss negotiations in detail.
“We are optimistic that a mutually satisfactory agreement can be negotiated with the USW,” said Shell spokesman Ray Fisher.
The last national refinery workers’ strike was in 1980.
“I’m going into this round of bargaining like I have every single one, with the hopes that we’re going to come out with a contract that’s mutually agreeable and beneficial to all the parties,” Beevers said in an interview before the start of negotiations. “If we don’t get there, our members are mobilized.”
Oil companies have prepared for a possible work stoppage by training managers and non-union workers to take over refinery operations if Steelworkers walk off jobs beginning Feb. 1. Refiners have also placed trailers on the grounds of their refineries for replacement workers to stay in.
Beevers said the union’s 30,000 oil industry workers seem more prepared conflict with the industry.
“The membership of this union is more mobilized and ready for a fight in my history in this position,” he said. Beevers has led the USW’s National Oil Bargaining Program for nine years.
Starting pay for a USW member at a U.S. refinery is about $37.50 an hour, according to the union.
The agreement being negotiated sets the floor on pay, benefits and other issues for refinery workers across the United States.
(Reporting by Erwin Seba; Editing by Terry Wade)