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Chevron to Lay Off 6000-7000 Employees

Investopedia logoInvestopedia 03-11-2015 Shiv Mehta
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Slumping oil prices continue to have a ripple effect on the oil and gas companies, as the second largest oil producer in America, Chevron Corp. (CVX), on Monday unveiled a cost cutting strategy to lay off more than 10% (6000-7000 employees) of their workforce. The news comes after more than 87,000 employees have been laid off from companies in the oil sector this year. Chevron stated that they will require fewer employees because they are looking to slash capital investment. Chevron plans to reduce capital expenditure by about 25% to $25 billion-$28 billion in 2016 and further slash it in 2017 and 2018.

John Watson, Chairman and CEO of Chevron, said, “With the lower investment, we anticipate reducing our employee workforce by 6,000-7,000 [and are] focused on improving results by changing outcomes within our control.”

Weak Q3 Results

Oil prices have declined by more than 60% over the last year, causing a decline in Chevron’s reported earnings from $5.6 billion or $2.95 per share in Q3 2014 to $2.04 billion or $1.09 per share in Q4 2014. This fell short of Thomson Reuters earnings per share forecast of $1.16 per share. The primary reason for the decline in profits as compared to the previous year was a significant decline in average price of crude oil, from $87 per barrel in Q3 2014 to $42 per barrel in Q4 2015. As a result, the profits from exploration and production division fell from $4.65 billion in Q3 2014 to $59 million in Q4 2015, partially offset by 15% reduction in capital spending and higher foreign currency gains.

On the other hand, the company also benefited from slumping crude oil prices in their refining, marketing and chemical operations, for which they recorded a 59% jump in profits. The refining business uses crude oil as a raw material and falling oil prices have a positive impact on profit margins of the refinery business.

Impact on Share Price

Immediately after the weak earnings result, the stock price of Chevron initially declined by 1.5%; however, it recovered after analysts had time to look at the capital spending and cost cutting plans. Chevron shares have declined by about 20% this year. Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis, said, “The concern for investors has been that they’ve been outspending cash flow, so anything they can do to alleviate those concerns will be looked upon favourably.”

The Bottom Line

Chevron has joined other oil and gas companies in cutting jobs and reducing capital expenditure amid tumbling oil prices. The company believes that lower oil prices will remain at lower levels for a longer period of time due to oversupply and falling global demand. John Challenger, CEO of outplacement firm Challenger, said, “[Low oil prices] saw a big round of layoffs at the beginning of the year; entering into round two may signal that conditions haven’t improved and further consolidation is necessary. Chevron and undoubtedly other companies are facing similar conditions where their workforce conditions aren’t consonant with their business level.” 

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