Energy industry finds itself waiting in ‘no man’s land’
Oil prices too low to spur growth, too high to cause panic
The state of the Houston energy sector might be summed up in one word: Meh.
Oil prices are hovering around $50 a barrel, not high enough to spur much growth, but not so low that panic sets in. As a result, the region’s oil and gas companies are mostly watching and waiting, spending conservatively, moving ahead cautiously and holding onto what’s left of the optimism from 2018, when prices mostly rose until cratering in the last three months of the years.
“This is a kind of purgatory,” said Mike Bradley, managing director at the Houston energy investment firm Tudor, Pickering, Holt & Co. “But at least it’s not death and despair.”
The suffering should be minimal for now as oil markets and companies keep watch on the Organization of the Petroleum Exporting Countries and its allies, as well as the cartel’s determination to head off another oil glut. The number of drilling rigs working in shale fields in Texas and beyond will slide a bit. Some jobs will be lost — from the Permian Basin oil fields near Midland to the corporate offices in Houston — but the reductions shouldn’t be widespread if oil prices hold steady, Bradley said.
“It’s so-so for the Houston economy,” Bradley said. “We’re going to see some job cuts — no doubt about it. But it’s not going to be a giant ax.”
Oil prices plunged by nearly half in the fourth quarter of 2018, from about $76 a barrel in early October to $42 on Christmas Eve, before regaining the $50 a barrel mark recently. The indicators now point to a slowdown in the energy industry.
Well completions — the final step before wells begin producing — in U.S. shale plays dropped by more than 10 percent from their peak in mid-2018 to November, according to the Norwegian research firm Rystad. The number of operating rigs in the nation fell by about 175 over the past two
months, sliding below 1,100 for the first time since July , according Drillinginfo, a data analytics and consulting firm in Austin.
A survey of Texas energy executives by the Federal Reserve Bank of Dallas found the first negative outlook in the industry since early 2016, when prices during the last oil bust hit bottom at $26 a barrel. The Texas Workforce last month reported that oil and gas employment in the state fell by 500 jobs in November, ending nearly two years of consecutive monthly growth.
‘It will take a while’
In general, an oil price of $60 a barrel is considered healthy for the industry’s growth while anything below $50 a barrel leads to retrenchment. Some companies can still profit at $55, but few can do so at $50, energy analysts said.
For instance, top Permian producer Occidental Petroleum said it would likely increase its capital spending in 2019 if oil rises above $60 per barrel. At $55, it would cut spending slightly, but at $50, the Houston company would slash its capital budget by more than 10 percent. Already, several companies have said they’re reducing rig counts for 2019.
“For now, we’re sort of in this no man’s land,” said Sandy Fielden, director of oil and products research at Morningstar, the Chicago investment research firm.
The good news for the Houston energy sector is OPEC, Russia and other producers agreed in December to reduce oil production by a combined 1.2 million barrels a day for the first half of 2019. That deal likely prevented a free-fall in prices.
Three key international developments could determine the trajectory of the energy industry, Fielden said. If the U.S.-China trade war is amicably resolved, oil prices would rise to match the expected increase in Asian demand. If talks collapse, crude prices would tumble again.
In March, the Trump administration will decide whether to extend waivers to many of the top buyers of Iranian crude, including China and India. Last year, the prospect of sanctions on Iran boosted oil prices only to have them retreat when, at the last minute, the White House issued the waivers, keeping a significant amount of Iranian oil on the market.
After that, the so-called OPEC+ group, which includes non-OPEC producers such as Russia, will decide whether to maintain, or even broaden, their cutbacks for the second half of 2019.
“These things don’t get straightened out overnight,” Fielden sad. “It will take a while to see where the market is going.”
How far and how fast U.S. production rises also will influence the direction of the market. The country will surpass 12 million barrels of daily oil production this year — up from less than 10 million barrels a day in Jan. 2018 — but it’s debatable how much higher it can go. The Permian is already pumping 3.8 million barrels daily, according to the U.S Energy Department, essentially one-third of the nation’s supplies.
Still, adding to traders’ anxieties is the possibility of a flood of Permian oil coming on the market later this year when new pipelines come online. Pipeline shortages in West Texas, which forced producers to deeply discount crude in the Midland market, spurred a 25 percent increase in the number of uncompleted wells in 2018.
Once new pipelines go into service, companies could turn on the taps, potentially creating another glut of oil — destined for export or refineries — along the Gulf Coast.
Big fish
Even deal-making has come to a halt after last year’s $85 billion in oil and gas mergers and acquisitions — the most since 2014. The largest included British supermajor BP buying the Texas shale assets of Australian mining company BHP Billiton for $10.5 billion.
When and if oil prices stabilize, deals could surge again, especially in the second half of the year, said Andrew Dittmar, a Drillinginfo analyst. Other Big Oil companies such as Exxon Mobil, Chevron and Royal Dutch Shell are looking to further expand their holdings in the Permian, he said.
“It’s a particularly tough environment to get deals done when you have high volatility,” Dittmar said. “We expect to start the year with relatively sluggish deal activity and potentially pick up dramatically once we hit a stable oil price environment.”
But mergers also mean fewer companies and fewer jobs, Bradley added. With little new land available around U.S. shale plays, especially in the Permian, the only way to increase acreage is to acquire competitors. In other words, bigger fish gobbling smaller ones.
“There’s just too many shale companies,” Bradley said. “The only way to add value now is to buy companies and cut heads, cut jobs.”