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 "There's No More Fat To Be Cut:" Desperate Oil Producers Cut Salaries To Save Mission Critical Jobs

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RR Phantom

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"There's No More Fat To Be Cut:" Desperate Oil Producers Cut Salaries To Save Mission Critical Jobs Vide
PostSubject: "There's No More Fat To Be Cut:" Desperate Oil Producers Cut Salaries To Save Mission Critical Jobs   "There's No More Fat To Be Cut:" Desperate Oil Producers Cut Salaries To Save Mission Critical Jobs Icon_minitimeTue Oct 13, 2015 7:09 pm
Early last month, Citi “exposed” what it said was shale’s “dirty little secret.”

In a nutshell, the entire business model is uneconomic and thus the only reason a lot more drillers aren’t bankrupt is because capital markets are still wide open. “Capital markets plugged shale’s ‘funding gap’ from 2009 through the first half of 2015, but they are now tightening, reducing access to liquidity for some producers and shaping their ability to drill,” Citi said, adding that “with eight bankruptcies already announced this year, weaker producers may live or die by the whims of capital providers.”

Well, yes. When free cash flow is negative, you’ve dug yourself a hole (no pun intended) and it has to be filled somehow, so you turn to capital markets. It’s just that simple.

But when rates are at zero and when the hunt for yield generates a perpetual bid for anything the provides investors with any semblance of income, the market never gets to punish uneconomic business models by putting them out of business. Therefore, these same producers just produce, and produce, and produce some more, driving prices ever lower, rendering their business models even more economic than they already were. What you end up with is a collection of zombie companies desperately trying to stay afloat any way they can.

Of course the perpetually low prices that this dynamic engenders affect the entire space, which is why you’ve seen capex cuts and layoffs even among the industry’s stronger players. Now, it would appear that all of the proverbial fat that can be trimmed, has been trimmed which means that, as WSJ reports, further cost cuts will now have to come from salary cuts because going forward, cutting jobs altogether would imperil companies’ ability to operate.

http://www.zerohedge.com/news/2015-10-13/theres-no-more-fat-be-cut-desperate-oil-producers-cut-salaries-save-mission-critical
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