Oil industry braces for downside of economic cycle
When Ross Craft graduated from Texas A&M as a petroleum engineer in 1980, everything was great and the oil business was blowing and going.
Then the bottom fell out. By 1983, Craft said the bustling Houston office he worked in had become a ghost town – where there used to be 21 engineers, there were only three.
So when oil dipped below $50 a barrel last week for the first time since 2009 – a spectacular drop from the $107 price tag it achieved in June – he didn’t panic. He just started to hunker down.
“I’ve lived through these cycles,” said the 58-year-old Craft, chairman and chief executive officer of Approach Resources, a Fort Worth-based oil and gas exploration company. “It’s not going to be comfortable, but we will survive and come out of this stronger.”
Others may not be so lucky. While the industry has a history of feasts or famines connected to the ephemeral price of oil, some companies have overextended themselves, running up debts that will be difficult to pay off because of what they are getting paid for the oil coming out of the ground.
On Friday, Houston oilfield services company Baker and Hughes reported that the number of rigs exploring for oil and natural gas nationwide dropped by 61 to 1,750 after falling 26 the week ending Jan. 2.
“You’re fixing to see a dramatic impact in the oil and gas business,” said George Rogers, chairman of the Texas Alliance of Energy Producers and an oilman based in Graham. “You’re going to see a lot of drilling rigs laid down and service companies shut down for lack of work.”
“You’ll see your larger companies cutting their budgets 20 to 40 percent so that is going to translate into a lot less drilling activity,” he said. Rogers said his company, Bettis Boyle and Stovall, which drills all over the United States, has already reworked its budgets.
As each company falters and cuts back, it will send shock waves throughout the economy. Several economists predict that Texas may lose around 30,000 jobs in the oil and gas exploration and production sector alone. Then there is the ripple effect that will roll through the economy as those workers stop spending money to buy a house, a new car or even go out to eat.
Robert Dye, chief economist at Comerica Bank in Dallas, released a Texas economic activity index on Thursday showing that the state’s economy expanded at a “robust rate” in the last quarter of 2014. But he predicted that the lower oil prices will be a “game changer” this year, calling it a “drag on Texas economic activity.”
The Fort Worth-Dallas economy – with its defense contractors, retailers and varied industries – is diversified enough so an impact like what occurred after the 1980s oil plunge is unlikely to be repeated, Dye said. Houston and San Antonio, with a bigger concentration of energy jobs, will be hit much harder, while Austin is the least exposed, he added.
Price correction
Rex Tillerson, chairman and chief executive officer of Irving-based Exxon Mobil, which owns XTO Energy in downtown Fort Worth, said in early December on CNBC’s Squawk Box that oil was in a “correction.”
“It’s not the first time we’ve been through a price correction,” Tillerson said. “It really means a return to fundamentals for us. … It’s important about watching your cash. Watching your investment decisions, being very disciplined about everything.”
Craft, whose company has 850 wells on 166,000 acres in the Permian Basin, has cut his capital budget 55 percent this year, from $400 million to $180 million. Instead of running three or four drilling rigs, Approach will be running only one or two.
His company has a strong balance sheet because 64 percent of its 2015 forecasted oil production is hedged at about $82 a barrel, meaning that no matter what the current market price that’s what they’ll get paid. Craft, and others, say that a shale well must make at least $60 a barrel to “make an acceptable return.”
Craft said he may make further adjustments to his budget at the end of the first quarter, depending market conditions. Approach Resources employs 45 people at its downtown headquarters and 102 at its Ozona field office.
Karr Ingham, an Amarillo-based petroleum economist for the Texas Alliance of Energy Producers, said the downturn in oil prices could last 18 months to two years. In the meantime, some companies, because of the reduced activity and revenue stream, will not be able to support the debt they took on when the price of oil was higher and that “there will be some companies that go along the wayside,” he said.
“We’ve had a 50 percent plus decline (in price) and we don’t know if that is done yet. We don’t know where it is going to end,” Ingham said.
Rogers, an old hand in the oil field who been through downturns in 1986, 1999 and 2008, recommends patience.
“We kind of know how this is going to work. We’d like to think we do,” Rogers said. “The lessons learned are to stay out of deep debt, manage the cash flow and don’t get too excited about $100 oil and don’t get too low on $50 oil. We’ll all get a little leaner and come out on the other side better.”
This story was originally published January 12, 2015 at 12:16 PM with the headline "Oil industry braces for downside of economic cycle."