Oil’s slip could send Texas economy sliding

There will be fewer rigs operating in 2015, like this one photographed south of Odessa in September.
There will be fewer rigs operating in 2015, like this one photographed south of Odessa in September. Midland Reporter-Telegram

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 now only three.

So when oil dipped below $50 a barrel last week for the first time since 2009 — a spectacular drop from $107 in June — he didn’t panic. He just started to hunker down.

“I’ve lived through these cycles,” said Craft, 58, 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 feast-or-famine history connected to the ephemeral price of oil, some companies have overextended themselves, running up debts that will be hard to pay off because of what they are getting paid for the oil coming out of the ground.

On Friday, the Houston oil field services company Baker Hughes reported that the number of rigs exploring for oil and natural gas nationwide plummeted by 61 to 1,750. That figure had already fallen by 26 rigs in the week that ended Jan. 2.

Last week, Texas reported the biggest loss, with 30.

“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 & Stovall, which drills all over the U.S., has already reworked its budgets.

As each company falters and cuts back, it will send shock waves throughout the state. 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 on the economy as those workers stop spending money to buy a house or a new car or even to go out to eat.

Robert Dye, chief economist at Comerica Bank in Dallas, released a Texas economic activity index Thursday showing that the state’s economy expanded at a “robust rate” in the last quarter of 2014. But he predicted that lower oil prices will be a “game changer” this year and a “drag on Texas economic activity.”

The Dallas-Fort Worth economy — with its defense contractors, retailers and varied industries — is diversified enough that a repeat of what occurred after the 1980s oil plunge is unlikely, Dye said. Houston and San Antonio, with bigger concentrations of energy jobs, will be hit much harder, while Austin is the least exposed, he said.

North Texas will still feel the sting. While jobs in the resources and mining sector account for just 2 to 3 percent of the state’s employment, they are high-paying and interconnected with the rest of the economy, making their loss disproportionately large, he said.

“All of Texas and nearly the entire state economy will feel some drag from falling oil prices,” Dye said in an interview. “We’ll see significantly cooler job growth in Texas and possible stagnation if prices drop even more.”

Magic number

For Craft and others, what’s happening in the Texas oil fields didn’t come as a total shock.

In the past few years, the “shale revolution” has dramatically increased production, adding to the world’s oil supply. From 2013 to 2014, oil production jumped by 1.2 million barrels a day to bring domestic output to about 9 million barrels a day, said Bernard Weinstein, an economist at Southern Methodist University’s Maguire Energy Institute.

The hustle to extract oil from new fields like the Eagle Ford in South Texas and the re-energized Permian Basin in West Texas, as well as the Bakken formation in North Dakota, Montana and Canada, fed the frenzy that boosted oil above $100 a barrel. It was a price that many privately thought was over the top.

Then, as everyone was sitting down to Thanksgiving turkey, the OPEC nations met in Vienna and decided to leave their production target at 30 million barrels a day because they feared losing market share if they cut back.

Analysts worried about how that decision would add to the oil glut when demand from the world’s big economies was weakening. Domestically, demand was flat. And Citibank analysts wrote a report saying that global supplies exceeded demand by about 700,000 barrels a day.

In the days after OPEC’s decision, prices fell by 10 percent to $66.15 a barrel. Then they continued to tumble, dipping below $50 a barrel last week, a price many felt was a magic number that would bring aftershocks in the energy industry.

“I do not think there is one magic number. I view it as more of a slide than a cliff, and we’re further down the slide than we would like to be,” Dye said in an interview. “And the farther we go, the bigger the drag on the economy.”

Rex Tillerson, chairman and CEO 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.”

Concho Resources in Midland, a major player in the Permian Basin, cut its drilling program in 2015 to $2 billion, a 30 percent drop, according to The New York Times.

“In the current environment, we intend to prudently manage our 2015 capital program around anticipated cash flows and retain significant flexibility to scale our activity up or down depending on our service costs and commodity prices,” Chief Executive Tim Leach told the Times.

Houston’s Hercules Offshore, another rig operator, announced in November that it will cut 324 jobs, while the oil field services company Halliburton said it fired 1,000 workers in the Eastern Hemisphere, according to the Houston Chronicle.

What now?

Returning to fundamentals may be tougher for some than others.

Craft, whose company has 850 wells on 166,000 acres in the Permian Basin, cut his capital budget 55 percent this year, from $400 million to $180 million. Instead of running three or four drilling rigs, Approach will run only one or two.

His company has a strong balance sheet because 64 percent of its 2015 forecast oil production is hedged at about $82 a barrel, meaning that’s what Approach will be paid no matter the current market price. Craft and others say a shale well must bring in at least $60 a barrel to “make an acceptable return.”

Craft said he may further adjust his budget at the end of the first quarter, depending on market conditions. Approach employs 45 people at its downtown headquarters and 102 at its Ozona field office.

XTO, which has about 2,000 employees in Fort Worth and occupies 10 buildings, is a big investor in the Permian. In the third quarter, the company had 16 rigs drilling in West Texas — about triple what it had in the third quarter of 2013 — and 65 other work-over rigs to enhance conventional production, according to Jeff Woodbury, vice president of investor relations.

Tillerson said on CNBC that the company tests the price of oil on a broad range of $40 to $120.

“We are uniquely positioned to invest in new energy supplies throughout the business cycle. Our capital spending plans are unaffected by the recent reduction in oil prices. We use a range of pricing to evaluate our investments,” XTO spokeswoman Suann Guthrie said.

Fort Worth-based FTS International, one of the nation’s largest hydraulic fracturing service providers, said it’s closely watching market conditions but expressed confidence that it can ride out the storm.

In April, FTS announced that it had completed the refinancing of a $1.06 billion loan that Michael Doss, senior vice president of finance, said would improve the bottom line.

FTS has more than 4,400 employees in the United States, with 800 in Tarrant and Parker counties. It has its corporate headquarters downtown, an operations center in Aledo and a pump-manufacturing facility in southeast Fort Worth. It would not go into detail on whether the lower price of oil will lead to cutbacks.

“FTS International, like many other companies in the oil and gas business, is monitoring market conditions and analyzing how they might impact our business,” spokeswoman Pam Percival said. “Our operating platform continues to provide flexibility for us to respond to market changes as needed to support our customers’ plans and activities.

Karr Ingham, an Amarillo-based petroleum economist for the Texas Alliance of Energy Producers, said the oil downturn could last 18 months to two years. In the meantime, he said, some companies, because of the reduced activity and revenue stream, will not be able to support the debt they took on when the price was higher. “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 endured 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 report includes material from the Star-Telegram archives.

Max B. Baker, 817-390-7714

Twitter: @MaxBBaker

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