Analysts say that ConocoPhillips’ deep-seated layoffs demonstrate the need for capital discipline.

Investors and analysts have said that ConocoPhillips needs to focus more on its capital discipline and its investment priorities to be competitive against its peers, as oil prices are falling and revenues are also declining. This comes after the company announced it was laying off up to 25 percent of its staff in order to reduce costs. ConocoPhillips, the third largest U.S. oil company, has joined majors Chevron, BP and SLB, as well as the world's two largest oil service companies, Halliburton and SLB, in cutting its staff. The slump in crude oil prices is due to increased production from OPEC+, economic uncertainty caused by unpredictable U.S. Trade Policy, and an increase in output.

According to the U.S. Energy Information Administration, crude prices are expected to fall again in 2026, as supply will outpace demand.

Michael Alfaro is the chief investment officer of Gallo Partners. He said, "If you are cutting 25% of your staff, it also shows me how inefficient everything is." Alfaro is among investors and analysts that were surprised at the scale of ConocoPhillips layoffs. The company could affect up to 3,250 workers globally.

ConocoPhillips faces a number of challenges, including the oil market's gloomy outlook and large-scale projects that are both capital-intensive but will be beneficial to the company over the long term. After a series of acquisitions, including Marathon Oil, which was purchased for $22.5 billion in 2012, the company has lost focus on cost control, CEO Ryan Lance said to employees last week. ConocoPhillips must prioritize major projects, such as its Willow oil project, in Alaska, and develop its liquefied gas business. These are two initiatives that will help drive future cash flows, according to Stewart Glickman. He is the director of equity analysis at CFRA. He added that the company needed to reduce costs in other areas.

Some investors still believe that the company needs to do more to reduce its capital expenditures. Josh Young, CIO of Bison Interests which is exposed to ConocoPhillips, said that the company was focusing on the problem with the staff instead of the problem with capital allocation. They're not being judicious in their capital allocation.

Young said that the company has high-quality assets.

ConocoPhillips refused to comment on this article. ConocoPhillips' and Marathon Oil's capital expenditures are expected to fall between $12.3 and $12.6 billion this year, or about 10% less than their pro forma capex from last year. Executives said in August that they expected the capex for next year to be lower.

ConocoPhillips capex is $11.2 billion for 2023, and $10 billion for 2022.

COST SAVING OPPORTUNITIES The company reported in its second quarter earnings that it had identified $1 Billion in cost-saving opportunities. This is on top of more than $1 Billion in cost savings following the acquisition of Marathon.

The company also increased its target for asset sales to $5 billion in 2026 after exceeding its previous goal of $2 billion. Lance told employees in a video last week that controllable costs have risen about $2 per barrel from 2021. This has made it more difficult for the company to compete, and it is now behind its peers. Simon Wong said that higher inflation in the last few years, and the tariffs placed by the U.S. on imported goods, are increasing costs for oil producers such as ConocoPhillips. Lance stated at a town-hall meeting on Thursday that an analysis of the company identified 600 processes or tasks where it could simplify its work. It's not a matter of trying to get more done with less. Lance stated that "we have to remove the things in this company that don't add value." In recent years the oil industry has witnessed a wave mega-mergers. Exxon Mobil acquired Pioneer, and Chevron purchased Hess. Producers have consolidated in order to secure lower-cost areas. This has led to a constant stream of announcements about layoffs. ConocoPhillips, after incorporating Marathon has a significant footprint in the U.S., including key shale basins like Permian and Eagle Ford. CFRA's Glickman noted that technology and operational efficiencies may mean that fewer employees are required in these fields. Bill Smead is the founder and CIO of Smead Capital Management. The firm holds a $169-million stake in Houston-based Smead Capital Management.

He said, "This is exactly the right thing (ConocoPhillips should be doing)." Reporting by Sheila Dang in Houston, Arathy Sommesekhar, and Georgina McCartney; Editing by Nathan Crooks and Simon Webb.

(source: Reuters)