Crude price slump jumbles company rankings
Many that depend on production of oil and natural gas descend, while those that don’t come out ahead
THE oil bust is shaking up the pecking order of Houston’s elite companies, elevating those with less exposure to unstable prices for the region’s milk and honey — oil and gas.
Electricity providers, pipeline operators, a major auto dealer and a mattress company took winning scores on this year’s Houston Chronicle 100 list of top-performing public companies.
Meanwhile, many of the oil producers that speckled the top of last year’s list have fallen, nursing their wounds after the deep oil downturn began last summer. Economists say the fallout could be felt throughout the corporate ecosystem. But that’s not to say Houston’s star faded all that much last year.
“There may be some shortcomings, but I think you’re still going to see Houston be a dominant player,” said David Zalman, CEO of Houstonbased Prosperity Bank, whose holding company, Prosperity Bancshares, ranked No. 48 on the list. “I’m really optimistic about it. What happened may not be all bad for Texas. It makes things more stable.”
The Chronicle 100 ranking, tabulated by S&P Capital IQ, is based on four financial metrics from 2014: total revenue, revenue growth, earnings-pershare growth and one-year total returns to shareholders.
The data show that, collectively, the 100 best-performing companies in Houston amassed 7 percent more revenue than they did in 2013, even with the sudden collapse of oil prices weighing on their balance sheets in the second half of 2014.
Pipelines and power lines
In a remarkable climb from dead last to the No. 1 spot on the list this year, power generator Calpine Corp. proved that a mix of corporate pruning and providence in the form of cheap natural gas can be a power- ful combination. Its earnings soared. And electric rivals NRG Energy and CenterPoint Energy joined it in the Top 10, coming in at No. 4 and No. 9.
Nine energy infrastructure companies, including the No. 2 Targa Resources Corp. and No. 3 Enbridge Energy Partners, landed among the top 30 companies on the list, buoyed by a fee-based business model that doesn’t fluctuate with energy prices. Car dealership owner Group 1 Automotive, with a boost from cheap gasoline, climbed up 20 spots to land at No. 29 on the list.
“You’re seeing an interesting diversification in the energy sector,” said Praveen Kumar, a University of Houston finance professor.
‘Much more exposed’
Regulated power markets, he said, have kept electricity companies stable, and infrastructure companies will collect fees for pipelines and terminals, no matter what the price is for oil or gas. The companies that pump oil out of the ground, however, “are much more exposed to prices, and are much more risky because the prices are outside of anyone’s control.”
NRG and Calpine, though they do business in Texas’ deregulated market, also have assets in other more regulated regions across the U.S.
Project pipeline
The Chronicle 100, which reflects both the prosperous first half of 2014 and the oil bust in the second half, appears to capture a shift in the concentration of economic power from the west side of Houston, the corporate domain of oil producers and their equipment suppliers, to the east, where pipelines, crude terminals, oil refineries and petrochemical plants abound.
“We have this extraordinary energy boom in east Houston because of cheap natural gas,” said Bill Gilmer, who directs the Bauer Institute for Regional Forecasting at UH. Inside the
metro area alone, companies that turn oil and gas into everyday products are planning $25 billion to $30 billion in big new construction projects.
And they’ll likely be spurred on by cheap feedstock and the availability of construction workers and other laborers, who have been let go by the thousands from oil producers and oil field tool makers, Gilmer said.
All told, around $100 billion in new power generation and industrial development projects are lined up around the U.S. for the next several years, primarily along the Gulf Coast, said Kimberly Dang, chief financial officer of pipeline and terminal giant Kinder Morgan.
Kinder Morgan has an $18 billion backlog of projects aimed at meeting U.S. demand for natural gas, which could increase nearly 40 percent by 2025, Dang said in an interview.
“We have a model that can do well in almost any environment,” Dang said. “We’re largely insulated from commodity price fluctuation because we have long-term contracts with all of our customers or are close to achieving those.”
Truck town
Zalman, the Prosperity Bank CEO, said while layoffs may be putting pressure on real estate markets, the extra pocket change people have because of cheaper gasoline is starting to benefit the retail sector.
One area that saw an unquestionable surge in growth last year was automotive sales. In part because of cheap gasoline, in part because of still-low unemployment, Houston’s vehicle sales jumped to an annual record in 2014, with 374,000 cars driven off the lots, local automotive analyst Steve McDowell said.
Toward the end of 2014, when the effect of cheap gasoline was just peaking, Houstonians also showed affection for gas guzzlers. The Houston area market share for trucks and SUVs edged up 2.5 percentage points to 60.8 percent in December, McDowell said.
Higher truck sales meant the average sales price for vehicles in the market also went up, because they’re more expensive than smaller, more fuel efficient cars.
“That was an outstanding year,” he said. But McDowell believes auto sales will decline roughly 3 percent this year.
Looking to the future
Last year, overall revenue growth among Houston’s top performing companies was 20 percent, down from 29 percent the year before. But the full effects of the oil slump didn’t really hit corporate finances last year — most of those are playing out here in 2015, with thousands of oil company layoffs and idled drilling rigs.
Robert Dye, chief economist at Comerica Bank, says Houston is showing early warning signs that it could slip into a shallow recession in the second half of this year, if oil stays cheap.
Commercial and residential property markets are cooling down, as are auto sales and job growth. If employment trends play out the way they have this year, the area’s payrolls could decline 2 percent in the second half of 2015.
‘So many people’
“The upstream sector is the major accelerator for the Houston economy; it creates so much revenue and jobs, it employs so many people and reaches into so many companies, from restaurants to legal services to anything you can think of,” Dye said. “The key question for Houston regarding oil is: How low for how long?”
West Texas Intermediate, the U.S. crude benchmark, averaged about $98 a barrel in 2013, roughly $93 a barrel last year and about $52 a barrel in the first five months of 2015.
Gilmer, the regional economist, said that despite the rough patch in the energy economy, he believes the massive expansion in the petrochemical sector on the east side will probably just barely keep Houston from falling into recession this year.
Still, “2014 is really going to look good in the rearview mirror,” he said.
“The upstream sector is the major accelerator for the Houston economy. ... The key question for Houston regarding oil is: How low for how long?” Robert Dye, chief economist at Comerica Bank