By Sheila Dang and Arathy Somasekhar HOUSTON (Reuters) -ConocoPhillips must sharpen its focus on capital discipline and investment priorities in order to regain its competitiveness against peers as oil prices and revenues fall, investors and analysts said, after the company announced last week it would lay off up to 25% of staff to cut costs. […]
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Analysis-ConocoPhillips’ deep layoffs highlight need for capital discipline, analysts say
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By Sheila Dang and Arathy Somasekhar
HOUSTON (Reuters) -ConocoPhillips must sharpen its focus on capital discipline and investment priorities in order to regain its competitiveness against peers as oil prices and revenues fall, investors and analysts said, after the company announced last week it would lay off up to 25% of staff to cut costs.
The third-largest U.S. oil producer joins majors Chevron and BP, and the world’s largest oil service providers SLB and Halliburton, in cutting staff as increased output from OPEC+ and economic uncertainty due to unpredictable U.S. trade policy have contributed to a slump in crude prices, pushing down oil company earnings to their lowest since the COVID-19 pandemic.
Crude prices, which have fallen around 12% this year, are expected to decline again in 2026 as supply outpaces demand, according to the U.S. Energy Information Administration.
“If you’re cutting 25% of your workforce, that also tells me how inefficient things are,” said Michael Alfaro, chief investment officer at Gallo Partners. Alfaro was among the investors and analysts who told Reuters they were surprised by the extent of ConocoPhillips’ layoffs, which could impact up to 3,250 employees globally.
On top of the gloomy oil market outlook, ConocoPhillips’ specific challenges include big-ticket projects that will benefit the company in the long-run, but are capital intensive upfront.
And after a string of acquisitions in recent years, including Marathon Oil for $22.5 billion last year, the company lost focus on controlling costs, CEO Ryan Lance told employees last week.
ConocoPhillips needs to prioritize major projects like its Willow oil project in Alaska and developing its liquefied natural gas business, two efforts that will drive future cash flow, said Stewart Glickman, director of equity research at financial intelligence firm CFRA. That meant it needed to cut costs elsewhere, he added.
Still, some investors said the company should do more to control rising capital expenditures.
“They’re solving the staff problem instead of solving the capital allocation problem,” said Josh Young, CIO at Bison Interests, which has exposure to ConocoPhillips. “They’re not judicious enough in their capital allocation, in my mind.”
The company does, however, hold high-quality assets, Young added.
ConocoPhillips declined to comment for this story.
Capital expenditures this year are expected to be between $12.3 billion and $12.6 billion, about 10% lower than ConocoPhillips and Marathon’s pro forma capex last year. In August, executives said they expected next year’s capex to be lower.
ConocoPhillips’ capex totaled $11.2 billion in 2023 and $10.2 billion in 2022.
COST SAVINGS OPPORTUNITIES
In its second quarter earnings, the company said it had identified $1 billion in cost reduction opportunities, on top of the more than $1 billion in cost savings after acquiring Marathon.
It also raised its asset sales target to $5 billion by 2026, after achieving its previous target of $2 billion ahead of schedule.
In a video message to employees last week, Lance said controllable costs had risen by about $2 per barrel since 2021, making it harder for the firm to compete and putting it behind peers.
Higher inflation over the past few years and tariffs on imports imposed by the U.S. government are adding cost pressures for oil producers like ConocoPhillips, said Simon Wong, energy portfolio manager at investment firm Gabelli, which met with the company last week.
Lance said during a town hall meeting last Thursday that a review of the business identified roughly 600 processes or activities where the company could take steps to simplify work.
“It’s not about trying to do more with less. We really have to take out the things that aren’t adding value in this company,” Lance said.
The oil industry has seen a wave of mega-mergers in recent years, including Exxon Mobil’s acquisition of Pioneer and Chevron’s purchase of Hess, as producers have consolidated to secure areas of lower-cost production. That has also meant a steady stream of layoff announcements.
After incorporating Marathon, ConocoPhillips has a significant presence in key U.S. shale basins such as the Permian, Eagle Ford and Bakken. Technology and operating efficiencies likely mean fewer staff are needed in those fields, CFRA’s Glickman said.
The company needs to simplify and remove any overlapping positions, said Bill Smead, founder and CIO at Smead Capital Management, which holds a $169 million position in the Houston-based company, according to data from LSEG.
“This is exactly what (ConocoPhillips) should be doing,” he said.
(Reporting by Sheila Dang, Arathy Somasekhar and Georgina McCartney in Houston; Editing by Nathan Crooks, Simon Webb and Marguerita Choy)