OVER A BARREL
Small Permian Basin producers feeling the pinch as slide in oil prices becomes ‘the elephant in the room’
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.”