Dropping oil prices will lead to consolidation, pain

Falling oil prices may reveal who is “swimming naked” in the energy industry, but Cullen/Frost Bankers CEO Dick Evans said the overall Texas economy is resilient enough to survive the downturn in oil prices.

Evans, speaking at the Fort Worth Club, said a more diversified economy will help the state avoid a repeat of the oil bust in the 1980s and predicted that prices will stay in their current range for a while, resulting in more consolidation in the energy sector.

“At the beginning of this year, I said we would know what’s happening really quickly, or as I phrased it, ‘When the tide goes out, you find out who’s been swimming naked,’” Evans said, referring to companies that might have too much debt to survive lower prices.

But Evans said the state’s leadership in manufacturing and exports in industries such as aerospace and healthcare, as well as continued job growth, will help cushion the blow from plummeting oil prices.

As examples, he noted Toyota’s decision to move its U.S. headquarters to Plano and State Farm’s new regional hub in Richardson, which will lead to the relocation of 8,000 workers.

“I expect that American ingenuity and innovation will again lead the way,” Evans said.

Recent turmoil in financial markets has seen the stock market plummet by more than 10 percent in recent days and oil move below $40 a barrel.

In an interview, Evans cautioned against jumping to any conclusions after watching oil’s wild fluctuations. In his speech, he said crude was selling for about $93 a year ago, then settled in the high $50s and low $60s this year before the latest drop.

“I think oil will continue to be very volatile and it could hit low points and who knows where. But what is important is to watch where it stabilizes in the next 60 to 90 days,” Evans said.

Mergers and acquisitions will no doubt continue, as well as all the talk about the $150 billion in energy industry debt, Evans said. While some companies are too leveraged, he said, others are financially strong and looking to buy.

“We have many in Texas that are extremely strong and have plenty of liquidity, and let me tell you, they are looking for the opportunity to buy things. There is a lot of money on the sidelines to come in and invest,” Evans said.

As a banker, Evans also had strong words for Washington and the Federal Reserve, saying it’s “way past time” to “raise interest rates and let natural market forces work.” Analysts speculate that the Fed may keep interest rates at record lows after the recent market meltdown.

“I believe that the Fed lacks the courage to allow businesses to work in a market-based economy,” Evans said. “They have what I call ‘analysis paralysis.’”

Evans, who has led Cullen/Frost Bankers, the parent of Frost National Bank, for 18 years, announced his retirement this year. He has been with the San Antonio-based company for 44 years.

This story was originally published August 25, 2015 at 4:35 PM with the headline "Dropping oil prices will lead to consolidation, pain."