Everybody loves a parade. I sure did when I was a child, but I’m paying attention to a very different type of parade today. The parade that I’m talking about is the long, long parade of businesses in the oil industry that are cutting jobs, laying off staff, and digging deep into economic survival mode. The list of companies chopping staff is long, but two more major players in the oil industry joined the parade last week.
Pink Slip #1: Houston-based Dresser-Rand isn’t a household name, but it is a very important part of the energy food chain. Dresser-Rand makes diesel engines and gas turbines that are used to drill for oil.
Dresser-Rand announced that it's laying off 8% of its 8,100 global workers. Many Wall Street experts were quick to point the blame at German industrial giant Siemens, which is in the process of buying Dresser-Rand for $7.6 billion.
Fat chance! Dresser-Rand was crystal clear that the cutbacks are in response to oil market conditions and not because of the merger with Siemens. The reason Dresser-Rand cited for the workforce reduction was not only lower oil prices but also the strength of the US dollar.
If you’re a regular reader of this column, you know that I believe the strengthening US dollar is the most important economic (and profit-killing) trend of 2015.
Pink Slip #2: Oil exploration company Apache Corporation reported its Q4 results last week, and they were awful. Apache lost a whopping $4.8 billion in the last 90 days of 2014.
No matter how you cut it, losing $4.8 billion in just three months is a monumental feat.
Of course, the “dramatic and almost unprecedented” drop in oil prices was responsible for the gigantic loss, but what really matters is the outlook going forward.
CEO John Christmann, to his credit, is taking tough steps to stem the financial bleeding, and that means:
- Shutting down 70% of the company's drilling rigs.
- Slashing it's 2015 capital budget to between $3.6 and $5.0 billion, down from $8.5 billion in 2014.
I don’t mean to bag on Dresser-Rand and Apache, because they’re far from alone. Schlumberger, Baker Hughes, Halliburton, Weatherford International, and ConocoPhillips have also announced major layoffs. And don’t make the mistake of thinking that the only people getting laid off are blue-collar roughnecks. These layoffs affect everyone from secretaries to roughnecks to IT professionals.
In fact, according to staffing expert Swift Worldwide Resources, the number of energy jobs lost this year has climbed to well above 100,000 around the world.
From Global to Local
Sometimes it helps to put a local, personal perspective to the big-picture national news.
In my home state of northwest Montana, a huge number of men moved to North Dakota to work in the Bakken gas fields. Montana is a big state; it takes about 14 hours to drive from my corner of northwest Montana to the North Dakota oil fields, so that means those gas workers don’t make it back to their western Montana homes for months.
Moreover, the work was six, sometimes seven days a week and 12 hours a day, so once there, they couldn’t drive back home even if they wanted to. This meant long absences… and a good friend of mine who is a marriage counselor told me that the local divorce rate was spiking because of them.
Now the northwest Montana workers are returning home because the once-lucrative oil/gas jobs are disappearing. That news won’t make the New York Times, but it’s as real as it gets on Main Street USA.
From Local to National
Of course, the oil industry's woes aren’t a carefully guarded Wall Street secret. However, I do think that Wall Street—and perhaps even you—are underestimating the impact that low oil prices are going to have on economic growth and GDP numbers going forward.
Let me explain.
Industrial production for the month of January, which measures the output of US manufacturers, miners, and utilities, came in at a “seasonally adjusted" 0.2%.
A 0.2% gain isn’t much to shout about, but the real key was the impact the mining component (which includes oil/gas producers) had on the industrial-production calculation.
The mining industry is the second-largest component of industrial production, and its output fell by 1.0% in January. It was the biggest drag on the overall index.
However, the Federal Reserve Bank said, “The decline [was] more than accounted for by a substantial drop in the index for oil and gas well drilling and related support activities.”
How much did it account for? The oil and gas component fell by 10.0% in January.
Yup, a double-digit drop in output in just one month. Moreover, it was the fourth monthly decline in a row.
Last week’s weak GDP caught Wall Street off guard, but there are a lot more GDP disappointments to come as the energy industry layoffs percolate through the economy. Here’s how my Rational Bear readers are getting ready for GDP and corporate-earnings disappointments that are sure to rattle the markets.
Can your portfolio, as currently composed, handle a slowing economy and falling corporate profits? For most investors, the answer is “no.” Click above to find out how to protect yourself.
30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.
To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.
The article Connecting the Dots: Oil, Divorce, and Bear Markets was originally published at mauldineconomics.com.
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