Risks linger for oil patch, but some hope the worst is over

At the beginning of the year, Karr Ingham was braced for the worst.

An economist for the Texas Alliance of Energy Producers, he worried that the price of oil would dip as low as $30 a barrel by May or June. Chaos would follow. The oil patch would blow up.

Things were tough the first six months — the rig count plummeted, tens of thousands of people lost their jobs, some companies went belly up. But when Ingham heard estimates that oil will average $55 a barrel this year and $62 in 2016, he said a slow recovery might be at hand.

A little over six months into the great oil bust of 2015, is the industry climbing out of its hole?

“There is some reason for optimism because the worst that could have happened didn’t,” said Ingham, who lives in Amarillo, where oil is king. “It looks like the worst might be over.”

Others are not ready to breathe a sigh of relief just yet, saying the market is still too volatile. The price for benchmark crude sank 4 percent last week as concerns over Greece and China weighed on the market, leaving the closing price for West Texas Intermediate crude at $52.74 on Friday.

“Production is still up, and guys are bringing back rigs. … No one is laying down more rigs,” said a cautious Ross Craft, chairman and CEO of Fort Worth-based Approach Resources, which drills in West Texas. He doesn’t predict a broad recovery just yet. “But my crystal ball broke in the 1980s.”

Scott Mitchell, an analyst with Wood MacKenzie, a research firm, is willing to concede that the worst of the slump may be over. But he said the high level of market uncertainty worldwide could keep the price down.

“A lot of things could send it slipping down quickly,” Mitchell said. “I’m less clear that we’ve reached the other side yet.”

Cautiously optimistic

There are some signs that oil markets are stabilizing.

Prices rose in the second quarter, with the benchmark climbing 24 percent to finish at about $60 a barrel. The climb was not steady, as prices bounced up and down from week to week, according to a report from the Federal Reserve Bank of Dallas.

The decline in the national rig count also slowed significantly in the second quarter.

In the first quarter, 792 rigs were pulled from the nation’s fields, a 43 percent drop. But in the second quarter, the rig count fell 18 percent, with only a few lost in the final weeks, the report stated.

The count continued to rebound, albeit slightly, in the first two weeks of July. On July 3, rigs targeting oil in the U.S. rose by 12 to 640, the first increase since Dec. 5, according to Baker Hughes, a Houston oil field services company. Five more were added last week.

Production did remain high, with the U.S. Energy Information Administration predicting an output of 9.5 million barrels a day in 2015, a factor that contributes to lower prices.

But the EIA also reported a decline of 50,000 barrels a day in May from April, which doesn’t surprise those who predicted that the drop in production would not be immediate.

Part of the increased output may be due to greater efficiency by energy companies, which are using modern technology to cut their costs and stem the anticipated drop-off in the productivity of shale wells, said Mine Yücel, director of research for the Dallas Federal Reserve.

While the oil and gas industry has lost about 20,000 jobs in Texas this year, that’s still below the 30,000 that several economists predicted. The widespread shutting of businesses also did not occur.

“The industry has been a lot more resilient this time around. Part of that may have been that they learned from the last bust,” Yücel said.

Lower bottom line

David Martineau, exploration manager for Dallas-based Pitts Oil Co., said he just returned from a meeting in West Texas, where it appeared that “most of the companies are slowly coming back.” On Friday, Baker Hughes said 311 rigs were looking for oil in Texas, four more than in the previous week.

Rigs are moving back into the field because keeping them inactive is hard on the equipment, Martineau said.

Service companies providing such things as rigs, drilling mud and pipe are slashing what they charge by 25 to 30 percent, Martineau said. When the price of oil was over $100 a barrel last year, producers were paying a premium for services, he said.

With the economics in the Permian Basin, at least, wildcatters can make money with oil at $55 a barrel, he said.

“If we hold in this range, we are slowly going to creep back up,” said Martineau, former chairman of the Texas Independent Producers and Royalty Owners Association. “I believe we’re going to be stable at this $50-to-$55-a-barrel level for a while. But drillers are finding ways to make money.”

Robert Dye, chief economist at Comerica Bank in Dallas, said that the rig count is leveling out and that the anecdotal evidence is that drillers are getting ready to return to the field on a limited basis. But Dye is not convinced that the worst is over or that oil will even stay in the $52 range.

He said the market has a glut of oil. And with China’s economy cooling down and Greece’s debt problems causing concerns, he wonders how quickly demand will ramp up to absorb all that oil.

There’s also the specter of a nuclear deal with Iran, which could lift sanctions and put 700,000 to 1 million more gallons of oil on the market, although not immediately.

“Low oil prices are going to be with us for a while and driving consolidation in the energy sector,” Dye said.

Yücel would agree that “there is still quite a bit of risk out there” and that the “risks are still on the downside of prices.”

That may be why Craft is being so careful. Earlier this year, he said, his company had 850 wells on 166,000 acres in the Permian Basin. He cut his capital budget from $400 million to $160 million, and instead of running three or four rigs, his company would run one or two.

But prices “will rebound at some point,” he said, and drillers are keeping their crews busy to be ready when they do.

“I’ve talked to other CEOs and nobody is making any real money. They are not growing the revenue base. They are treading water,” Craft said. “This is a crazy business we’re in.”

This story was originally published July 11, 2015 at 11:39 AM with the headline "Risks linger for oil patch, but some hope the worst is over."