Energy Business

Lower Oil Prices and the Initial Impact on Houston

If there is one major city in the United States that doesn’t want oil to remain at or under $50 per barrel for very long, it has to be Houston, Texas. Now that oil’s serious dive is becoming more of an expected case rather than a temporary shock, it turns out that the fallout has started to build momentum in the Houston economy. This might not be a surprise to many people around the nation, but the implication for what lies ahead is that the economic spillover has not yet been fully felt locally in Houston — nor in many of the energy-dependent cities and towns around the United States.

We are already seeing evidence that business, spending and hiring levels are starting to hit a tipping point in Houston and elsewhere. 24/7 Wall St. has created a montage of the most recent business developments in oil and gas from oil and gas companies and from outside industry and government sources. At the time of this writing, West Texas Intermediate (WTI) crude oil was trading at $47.21 per barrel.

A Dallas Federal Reserve report from earlier this week noted that Texas and other energy-dominant regions were starting see an impact from the big drop in oil prices. A Kansas City Fed report noted that about half of energy firms in its region see capital spending cuts of more than 20%, with several firms anticipating sizable layoffs. Also, a January 8 report from the Houston office of the Dallas branch of the Federal Reserve indicated that the economic picture was already softening in November — and energy prices were much higher in November. That report said:

The Houston Business-Cycle Index growth rate slowed to 6 percent in November from 7.4 percent in October. The oil and gas industry posted solid job gains in November, and refining and plastics continued to perform well. Lower oil prices and declines in drilling activity will likely take considerable steam out of the region’s economic engine in coming months. While prospects for the Houston region are more uncertain, the outlook is for positive, though weaker, growth.

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So, what about the big oil and gas players with exposure in Houston, the United States and even internationally?

Halliburton Co. (NYSE: HAL) had previously laid off 1,000 workers outside of the country in late 2014. Now multiple reports in recent days have pointed to unquantified layoffs taking place in Houston. All in all, Halliburton employs over 80,000 workers.

Apache Corp. (NYSE: APA) has now reportedly begun a 5% staff reduction. The Houston-based company appears to be laying off those workers outside of the country, but that is what Halliburton did with its first round of cuts. Apache employs more than 5,000 workers in total.

Lennar Corp. (NYSE: LEN), a nationwide homebuilder, showed with its most recent earnings that 2014 total sales in Houston were up to 768 units, versus 670 units in 2013. The gain was also seen in the fourth quarter in units and in total dollar values, at $206.38 million versus $185.96 million. Still, the average sale prices in 2014 were $269,000 per home versus $278,000 in 2013. Lennar was noted by The Wall Street Journal as saying that it expects a further reconciliation amid the oil slump, with a little pullback at the higher end.

Back in early December, ConocoPhillips (NYSE: COP) warned that it was going to cut capital spending by 20% in 2015. We have not yet seen whether this includes layoffs, but the company said that it would defer its significant investment in the emerging shale plays in the Permian Basin of Texas and elsewhere. Note that WTI oil was trading above $60 per barrel at that time.

Sanchez Energy Corp. (NYSE: SN), a Houston-based independent exploration and production player, which also has extensive exposure and operations in the Eagle Ford Shale region in Texas, announced a 60% cut to its capital spending in 2015.

UPDATE: Schlumberger Ltd. (NYSE: SLB) disclosed with its fourth quarter earnings that capex would be $3 billion in 2015, versus $4 billion in 2014. In response to lower commodity pricing and anticipated lower exploration and production, Schlumberger decided to reduce its overall headcount (to better align with anticipated activity levels for 2015) and it recorded a $296 million charge in the fourth quarter associated with a headcount reduction of approximately 9,000 versus its 120,000 or so global workers. Still, the oil field services giant announced a 25% dividend hike.

ALSO READ: 5 Top Independent Oil Producers in the Permian Basin

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