OVER A BAR­REL

Small Per­mian Basin pro­duc­ers feel­ing the pinch as slide in oil prices be­comes ‘the ele­phant in the room’

Houston Chronicle Sunday - - FRONT PAGE - By Collin Ea­ton

MID­LAND — Small oil com­pa­nies are be­gin­ning to feel the im­pact of the re­cent slide in oil prices, warn­ing they could post­pone ex­plo­ration and pro­duc­tion plans, slow hir­ing and spend less on oil field ser­vices that un­der­pin thou­sands of jobs in Hous­ton.

Even as larger com­pa­nies plow full speed ahead in the nearby Per­mian Basin, these smaller, pri­vately held firms are send­ing up the first sig­nals that the in­dus­try’s re­cov­ery may be los­ing steam as oil prices re­main stub­bornly be­low $50 a bar­rel. Many oil pro­duc­ers had ex­pected prices to reach about $55 a bar­rel by mid-2017 and built bud­gets around the ex­pec­ta­tion; now, with prices near $45, they are mak­ing ad­just­ments.

Ea­gle En­ergy Inc., a small Cana­dian oil com­pany that drills in Texas and has of­fices in Hous­ton, re­cently said it plans to cut jobs, ex­ec­u­tive com­pen­sa­tion and other costs as oil prices lan­guish far lower than the firm ex­pected.

Jack Byrd, pres­i­dent of Byrd Op­er­at­ing Co., a small pro­ducer in Mid­land, said oil prices slid far be­low lev­els needed for his com­pany to ex­pand op­er­a­tions, so in­stead, his firm has sold off some un­prof­itable prop­erty, steered away from drilling ven­tures with other com­pa­nies and has avoided bor­row­ing.

“We’re back in a hold­ing pat­tern at these lower prices,” said Byrd. “We won’t do any work that’s not ab­so­lutely nec­es­sary, and we won’t spend any money we don’t have to. It has to make eco­nomic sense.”

Oil prices have fallen 20 per­cent since reach­ing a re­cent high of $54 a bar­rel in Fe­bru­ary as global sup­plies re­main abun­dant and mar­kets worry about in­creas­ing pro­duc­tion in the United States and other coun­tries — de­spite prom­ises by OPEC and its part­ners to cut out­put by 1.8 mil­lion bar­rels a day.

So far, lower oil prices haven’t slowed big drillers in the Per­mian. Here in Mid­land, sev­eral oil field ser­vice com­pa­nies said they haven’t seen dra­matic drops in de­mand for tools and crews. An­other re­li­able mea­sure of oil patch ac­tiv­ity also re­mains ro­bust: the long lines of road-weary truck­ers, who drive mil­lions of pounds of sand and wa­ter to

oil wells, aren’t get­ting shorter at truck stops like Stripes and Pi­lot.

“We haven’t seen any­one pull back yet,” said Dave Bai­ley, an oile­quip­ment sales­man from Cor­pus Christi who re­cently stopped at the Mid­land Beer Gar­den, a lo­cal wa­ter­ing hole for oil work­ers.

Signal ahead

Still, af­ter surg­ing for months, the growth of drilling rigs in the Per­mian Basin has flat­tened over the past month, ac­cord­ing to Hous­ton oil ser­vices com­pany Baker Hughes. The En­ergy Depart­ment on Tues­day low­ered its fore­cast of U.S. oil pro­duc­tion next year by 1 per­cent be­cause crude prices have stayed be­low $50 a bar­rel.

Small oil pro­duc­ers tend to be more sen­si­tive to fall­ing prices be­cause they don’t have the same ac­cess as larger com­peti­tors to cap­i­tal through stock and bond mar­kets to cush­ion the blow. Most of their cap­i­tal comes from the oil they sell. And be­cause of their smaller size, they strug­gle to ne­go­ti­ate the same dis­counts that oil field ser­vice firms give to larger com­pa­nies. Still, the larger com­pa­nies even­tu­ally might face the same pres­sures to scale back, an­a­lysts said.

R.T. Dukes, an an­a­lyst at en­ergy re­search firm Wood Macken­zie, said small oil com­pa­nies pro­vide an early sign of what may be ahead for broader in­dus­try if low prices per­sist.

“The big guys have some ag­gres­sive plans, but they’ll slow those down, and un­der $40 a bar­rel, they’d start to cut back,” he said. “They’re get­ting a price signal to­day that they won’t get quite as much growth next year.”

In the Mid­land-Odessa area, the oil in­dus­try makes up nearly two-thirds of the re­gion’s eco­nomic ac­tiv­ity, and af­ter crude prices crashed three years ago, more than 20,000 peo­ple — 11 per­cent of the re­gion’s work­force — lost their jobs, ac­cord­ing to the Fed­eral Re­serve Bank of Dal­las. Con­sumer spend­ing plunged by al­most a third, and hous­ing and com­mer­cial con­struc­tion fell. Non­prof­its that pro­vide food and cloth­ing faced de­clin­ing do­na­tions and ris­ing needs.

More than 420 drilling rigs that had tow­ered above the sprawl­ing oil patch — more than three-quar­ters of the re­gion’s rig fleet — were taken apart piece by piece and hauled to nearby rig yards to sit idle for 18 months. Thou­sands of work­ers who lived in tem­po­rary hous­ing and ho­tels fled the re­gion.

‘Feel it slow­ing down’

In many ways, the eco­nomic im­pact of fall­ing oil prices stung worse in West Texas than it did in Hous­ton, which lost tens of thou­sands of jobs in the throes of the oil bust.

“It was a blood­bath out there,” said Karr Ing­ham, a Texas econ­o­mist based in Amar­illo. “There’s a re­cov­ery in full swing down there, but the ele­phant in the room is oil prices. The big­ger guys are still spend­ing, but they’re go­ing to stall out at some point. And they’re in the process of do­ing that.”

For small firms that de­pend on ra­zor-thin mar­gins to make ends meet, the eco­nom­ics of the oil patch have fallen apart in a mat­ter of weeks. If crude re­mains cheap, Fasken Oil & Ranch, a small Mid­land oil pro­ducer, may have to “cut back pretty sig­nif­i­cantly,” pos­si­bly paus­ing plans to run two or three rigs this year, even though it owns the min­eral rights on its acreage and doesn’t have to pay roy­al­ties as most firms do, said Tommy Tay­lor, direc­tor of oil and gas devel­op­ment at Fasken.

“There is a huge dif­fer­ence between $40 oil and $50 oil,” Tay­lor said. “If we don’t have the cash flow, we don’t do it.”

James Mayer, the founder and chief ex­ec­u­tive of Green Cen­tury Re­sources, agreed. A few months ago, when crude prices were com­fort­ably above $50 a bar­rel and pro­jected to go higher, the pri­vate Mid­land oil com­pany con­sid­ered an oil-pro­duc­tion project, which Mayer de­clined to de­tail. Now, he said, that project may no longer make fi­nan­cial sense.

“You can feel it slow­ing down,” Mayer said.

Many of the big­ger firms locked in higher prices for fu­ture pro­duc­tion ear­lier this year through a con­tract­ing process known as hedg­ing, and drilling to fill those con­tracts hasn’t slowed. For ex­am­ple, No­ble En­ergy, a Hous­ton oil com­pany that has amassed a large foot­print in the Delaware Basin, in the western part of the Per­mian, plans to ex­pand its drilling fleet there later this year even if oil stays cheap.

The com­pany ex­pects to boost do­mes­tic oil pro­duc­tion 40 per­cent in the sec­ond half of this year, said Don­nie Moore, vice pres­i­dent of the No­ble’s Mar­cel­lus and Texas busi­ness units.

“We’re re­ally push­ing for­ward,” Moore said. “We’ll al­ways be look­ing at the mar­ket, and ac­tiv­ity, and what’s needed, but right now, we’re still at five drilling rigs, two frac crews, and we’re plan­ning a sixth rig later in the year.”

Seek­ing sta­bil­ity

But there’s no guar­an­tee that new oil pro­duc­tion that isn’t cov­ered by oil hedg­ing con­tracts will go for­ward.

“That’s where you start to see the pinch,” said Chris Gat­ja­nis, who runs Hal­libur­ton’s op­er­a­tions in the Per­mian Basin.

Sur­rounded by the husky voices of oil work­ers and wait­resses scram­bling out of the kitchen of a decked-out Cracker Bar­rel restau­rant in Mid­land, Mark Patin, a sales­man at the Louisiana drilling equip­ment com­pany DrilTech, picked at his break­fast of bis­cuits and gravy, wish­ing the oil boom hadn’t taken him to such an iso­lated city. His oil-pump­ing cus­tomers are hope­ful the mar­ket will bounce back but wor­ried that prices will stay low or bounce around un­pre­dictably, mak­ing it dif­fi­cult to set firm plans.

“They’re sit­ting on ev­ery­thing, just wait­ing to see what oil prices are do­ing,” he said. “They’re look­ing for sta­bil­ity more than any­thing else.”

Steve Gon­za­les photos / Hous­ton Chron­i­cle

Af­ter heavy overnight rains, Hal­libur­ton em­ploy­ees look over a Sand­cas­tle at a frack­ing site op­er­ated by Dal­las oil com­pany RSP Per­mian last month in Mid­land.

Steve Gon­za­les / Hous­ton Chron­i­cle

Hal­libur­ton em­ploy­ees move pipe at a three-well­head hy­draulic frac­tur­ing site last month in Mid­land.

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