Global virus, local pain
There’s more to it than energy’s struggles — each sector is showing signs of a disaster
As the pandemic spreads, oil and gas isn’t the only industry showing signs of disaster.
The economic toll of the coronavirus grows exponentially each day. Four years of stock market gains have been erased. The price of crude oil has plummeted to a nearly 20-year low. Bars and restaurants have been ordered closed. People are working from home and avoiding large gatherings and most kinds of travel.
In Houston, the effects are easily seen rippling through the oil and gas industry. But there’s more to the local economy than energy, and each sector is showing signs of a growing economic disaster. Houston Chronicle business reporters explored how the fallout of the global pandemic is affecting the local economy.
Oil and gas
There were already cracks in the armor for the oil and gas industry when the coronavirus hit and a price war between Russia and Saudi Arabia exacerbated a global supply glut that sent crude prices tumbling into the low $20 per barrel range.
Before those simultaneous supply and demand shocks, the industry had endured more than a year of crude oil prices in the range of $50-$60 per barrel, just slightly below the break-even price for many companies.
With millions of people around the world under lockdown or cutting back their activity, the coronavirus outbreak has dramatically cut global demand for crude oil and natural gas. That has set the stage for what some experts are a calling a “once in a generation clearing” of the industry, which is bracing for tens of thousands of layoffs, numerous bankruptcies. The shakeout may rise to a level not seen since the 1986 downturn emptied office buildings in Houston.
Out in the field or in the office, the industry is grappling with “social distancing,” the public health practice of increasing the distance between people to slow rates of infection. Concerns about the coronavirus has thousands of office workers from companies such as Enbridge, Kinder Morgan, Schlumberger, Halliburton and Baker Hughes working from home while their employers restrict business travel and face-toface meetings.
So far, nine of the most prolific drillers in Texas have cut a combined $9.2 billion from their 2020 budgets.
In just one example of how companies are cutting back, Halliburton last week placed 3,500 employees at its Houston headquarters under furlough. Viewed by observers as a measure to stave off layoffs, furloughed employees will work one week and take another week off for the next two months. Though employees won’t be paid for the week they don’t work, they will continue to
receive benefits such as health insurance.
The outbreak is also taking a toll on refining and petrochemical companies who normally benefit from lower prices because they can pick up deals on crude, ethane, propane and butane to make fuels, plastics and numerous other products. But with people working from home, avoiding flights and otherwise sheltering in place, demand for refiners’ products like jet fuel, gasoline and diesel has collapsed. Sergio Chapa
Manufacturing
It’s a bad time to be a manufacturer in the U.S., but it’s a worse time to be a manufacturer in Houston.
Manufacturing contributed $83.1 billion to the Houston area’s $490 billion economy in 2017, according to the Greater Houston Partnership. At 17 percent, it is the largest piece of the local economy. Between a quarter and a third of the Houston region’s manufacturing jobs are tied to the oil and gas industry, according to the GHP.
For two years, manufacturers in Houston and the U.S. that rely on China for materials and markets have been caught in the crossfire of the Trump administration’s trade war. Many were barely breaking even as tariffs increased the price of components from overseas, and companies were unable to pass those increased costs on to consumers.
Then, the coronavirus outbreak began.
Manufacturers were the first hit by the economic fallout of the virus, as China’s economy rapidly began to shut down, and those in Houston that depend on supply chains integrated with China had to re-organize sourcing and suffer price-gouging or face massive delays.
Now, the pandemic is hitting the demand side of the equation. As oil prices plummet, energy companies, which usually buy products from Houstonarea manufacturers, are scaling back to bare-bones operations in an attempt to stay alive.
“2019 wasn’t the most pleasant year for manufacturers, so this will have significant damage to manufacturers,” said KC Mathews, chief investment officer with UMB Bank. “It’s really a case of duration. It could be very detrimental.”
The damage may be longlasting if firms are already strapped for cash following the increased costs from the trade war. If companies don’t have enough cash on hand to withstand a prolonged oil price bust, bankruptcies are more likely than mergers and acquisitions in energy and manufacturing this year, Mathews said.
“Cash is king, and would anyone with waning demand want to step in front of this freight train and buy something else?” Mathews said. “It might be the best deal of the century, but I would imagine M&A activity dries up. It’s survival of the fittest.” Erin Douglas
Retail
Brick-and-mortar retailers faced an uncertain future long before “social distancing” entered the popular vernacular, as online and big-box competitors squeezed sales, closed stores and put many companies out of business.
But the novel coronavirus outbreak will compound the challenges facing Houston’s retail industry, likely leading to more closures, layoffs and bankruptcies.
“Brick-and-mortar retailers will be affected significantly,” said Venky Shankar, research director of Texas A&M University’s Center for Retailing Studies. “People are avoiding going out in public places, especially malls. The industry is going to go through a severe period of pain.”
The fallout has been swift and widespread. Shopping centers, normally bustling with buyers, diners and movie-goers, have been eeriely quiet as many residents stay home, following public health recommendations to prevent the spread of the virus.
The Galleria, Houston’s largest mall, Memorial City, Houston Premium Outlets and Katy Mills mall on Wednesday said they will temporarily close until the end of March in response to the coronavirus. Other major malls in the Houston area, including Baybrook, Deerbrook, First Colony, Willowbrook and The Woodlands malls, reduced their hours of operation.
More than a dozen major retailers, including Apple, Nike and REI, also are closing their doors during the pandemic. Gyms, including Equinox,
Gold’s Gym, 24-hour Fitness and Lifetime, are also temporarily closing.
Movie theaters — including AMC Theaters, Regal Cinema, Star Cinema Grill, Studio Movie Grill and Alamo Drafthouse — have also temporarily closed. Theaters, already challenged by the rise of online streaming videos and home entertainment systems, have seen a sharp drop in attendance.
“This is something no business wants to do, but it makes sense,” said Daniel Loria, editorial director of Boxoffice Media, a New York-based trade publication. “The whole world is on pause, and the industry will be deeply impacted.”
Ultimately, retailers fear the coronavirus will fundamentally change the way consumers shop, pushing more of them online and away from brick-andmortar stores.
“Coronavirus has just compounded an already challenging situation,” said Reshmi Basu, a restructuring editor with Debtwire, a New York publication focused on distressed companies. Paul Takahashi
Real estate
Houston’s sluggish office market had been seeing signs of recovery after the oil bust of 2014-16, which put an end to major corporate expansions and left new towers empty.
But now that the coronavirus pandemic has most people working from home and the price of oil has crashed again, the prevailing concern is: Will the people come back?
If a company has systems in place that allow its employees to work from home and be productive, it may reconsider the number of people who need to be at the office.
“We’re going to really have to work hard to get people to come back,” said Andrew Segal, chairman and CEO of Houston-based Boxer Property.
The same could be true for retail real estate. The longer consumers avoid shopping malls and neighborhood centers in favor of ordering what they need online, brick and mortar stores will suffer and many could shut down.
If retail landlords evict tenants that can’t pay rent, they may not be able to find new ones to fill the empty space.
“Owners will have to work with some of those groups because if they don’t, they’ll all go out of business,” said Tim
Dosch, principal of Houstonbased Dosch Marshall Real Estate.
Hotels have been especially hard hit by the global pandemic. Conferences and business travel have all but disappeared.
Properties in markets with “coronavirus-clusters” could see negative cash flows, according to a report from Fitch Ratings.
“Destination resorts, large conference hotels and those catering to inbound international visitation will see an immediate, outsized effect,” the report read.
On Wednesday, the head of Marriott International said demand at the company’s hotels has fallen considerably as COVID-19 affects the travel industry in unprecedented ways.
The company is reducing staff as it closes food and beverage outlets and, in some cases, entire hotels.
“I think there will be longterm changes that come out of this with such a significant disruption of the economy,” Dosch said. Nancy Sarnoff
Banking
As the novel coronavirus takes a toll on the economy, banks are preparing for losses.
“Their world is rapidly changing in a couple of ways,” said Jeff Davis, managing director of the financial advisory firm Mercer Capital.
The first change is falling interest rates, which have driven down revenues on the money banks lend. In addition, as the economy declines, banks may see more missed loan payments and defaults.
“Loan losses or credit losses are going to be higher in 2020 than they were in 2019 — potentially much higher,” Davis said. “And if the economy does not bounce back, then losses in 2021 may be higher than 2020.”
To deal with expected losses, some banks have stopped buying back stocks in order to put more money into their loan-loss reserves. Banks also have begun offering special assistance to customers to prevent defaults. Wells Fargo is providing fee waivers and payment deferrals to loan customers who reach out. BBVA USA has deferred and extended payments on existing consumer and small business loans and credit cards, waived ATM fees and allowed penaltyfree CD withdrawals until April 17. Frost Bank said it is putting together a special assistance plan similar to the one it rolled out after Hurricane Harvey.
Frost Bank had not closed locations or reduced hours as of Wednesday afternoon. BBVA USA announced Friday it was closing most of its 637 bank lobbies and instead servicing customers and closing all bank locations on Saturdays until further notice. R.A. Schuetz
Health care
Experts said the health care sector is slightly more immune to a recession than other sectors such as the oil and gas industry.
“People still do get sick and need health care even if they’re unemployed,” said Ken Janda, an adjunct professor in health care management at Rice University.
The constant flow of patients also means health care workers are more likely to keep their jobs. Employment in the Houston-area’s health care sector inceased by 41 percent to 275,000 in 2018 from approximately 196,000 in 2008, according to the Center for Houston’s Future, a local think tank.
If the last recession is any indicator, employment will hold steady.
“The health care sector recorded employment growth every year during this 10-year period,” despite economic downturns in 2008 and 2014, said Steven Scarborough, the center’s manager of strategic initiatives.
Not every part of the industry is immune, though.
Less-urgent services like optometry and dentistry may see less demand as patients choose what they can afford to pay for. And the first thing to go for most people when they lose their jobs is their health insurance plan, said Vivian Ho, a health economist at Rice University’s Baker Institute of Public Policy. Gwendolyn Wu