Can the Boom Continue?

[swtsig]

Not everybody's cutting back in the face of lower oil prices:

http://www.bizjournals.com/houston/news/2014/12/05/phillips-66-boosts-2015-budget.html

Chevron Philips is also looking at another $3B expansion in addition to Chevron Chemicals 110ac purchase on the grand parkway for their possible HQ. Motiva (shell/Aramco) is growing like crazy as well. And that's without mentioning Dow's massive expansion in Lake Jackson. Its easy to focus on solely the upstream side of things but far too many folks are forgetting what cheap natgas AND oil mean to the downstream guys.

In unrelated news, geico recently announced they were going to hire up to 500 more at their new Katy office.

I'm shocked that slick Vik doesn't so much as mention any of the above when he's preparing his honest constructive criticism of Houston.

[IronTiger]

I'm shocked that slick Vik doesn't so much as mention any of the above when he's preparing his honest constructive criticism of Houston.

Don't forget his mission of "only spreading truth", then dumping a bunch of unsubstantiated rumors on this thread. 

[bobert]

I feel bad about saying this but there will be some pain. Rigs out in the oil patch are down 15% and new permits are down 40%,  That and the Bloomberg article calling bull on shale at<$80 is a good (bad) sign that some pain will come. I work in the field now, our work has slowed down a bit, and some people are starting to get worried. Not end of the world, but enough to  end the craziness of the boom for sure.

[swtsig]

Oh a slowdown is definitely upon us... Only the foolishly optimistic would argue that. The question is to what extent? We added 120k jobs oct 13 - oct 14... A 50% drop (which is a huge YTY decrease) still puts houston at 60k jobs. Whether or not that is the number I have no clue. What I do know is landlords have had all the leverage of late and that is about to change.

[bachanon]

like the other, more local, cracker facilities coming on line soon; this one will also benefit the region's economy.  cheap natural gas makes facilities like these feasible.

 

http://fuelfix.com/blog/2014/10/27/sasol-approves-plan-for-8-1-billion-ethane-cracker-near-lake-charles/

[Slick Vik]

Oh a slowdown is definitely upon us... Only the foolishly optimistic would argue that. The question is to what extent? We added 120k jobs oct 13 - oct 14... A 50% drop (which is a huge YTY decrease) still puts houston at 60k jobs. Whether or not that is the number I have no clue. What I do know is landlords have had all the leverage of late and that is about to change.

I agree on your last point

[Triton]

Despite the precipitous drop in oil prices, new companies are still finding the capital to exploit the shale:

 

http://www.bizjournals.com/houston/morning_call/2014/12/houston-energy-company-snags-220m-to-expand-in.html

 

And Southwestern Energy is still drilling the Marcellus:

 

http://www.bizjournals.com/houston/morning_call/2014/12/southwestern-energy-expands-in-marcellus-with-300m.html

 

You are pointing to firms that are late to the game. Battlecat Oil & Gas LLC is simply riding on the coat tails of the Eagle Ford formation success. 

 

 

Look, forget OPEC. The reason this collapse in oil is happening is that the forecasted economic growth that was supposed to occur in Europe, Japan, China, India and many other places just isn't happening. There's been a gut of bad economic data coming out of these regions. The two bright spots in the developed world are the United States and the United Kingdom (with several other countries to a lesser extent). When the world looks terrible economically, the price is sure to go down, especially with the 3M barrels of American produced oil. There are several regions where another recession is either forecast to occur or is already taking place. China has been stuck at 7-7.5% annual growth for far too long which isn't great compared to its 9-10% growth rate last decade, Abe has been trying to reform Japan while tackling a large tax increase that has absolutely killed economic growth in Japan for several quarters now, and India is hoping that its new president will get them out of their slump as well. And with its horrid economic growth now, not even the great manufacturing base of Germany can bail out the rest of the EU. The EU is still walking a fine line between tepid growth and possible recession, thanks to the terrible policies of austerity. If any of these regions can start picking up again, then I am sure the price of oil will start picking up as demand increases.

 

 

Projects will be cancelled. How can't people see this? I'm not in a doom and gloom crowd as Slick Vik appears to be, but I feel like there are a lot of people in denial on this forum.

 

My forecast is that the Houston market needs this correction to take place. We need this market to become a buyers market yet again... for far too long have the landlords and sellers enjoyed this shortage of apartment units and housing here. The median price of homes skyrocketed in this city, with most of the growth occurring from the higher income segment of our population. In the long run, the fundamentals for this city are still great. We need a slow down every once in a while. The last thing we need is a bubble waiting to pop. And, as we are seeing now, the belief that this boom will last forever was just idiotic. What I worry about more now is shale oil related... how long these smaller companies will be able bare this lower oil price. 

[kdog08]

You are pointing to firms that are late to the game. Battlecat Oil & Gas LLC is simply riding on the coat tails of the Eagle Ford formation success. 

 

 

Look, forget OPEC. The reason this collapse in oil is happening is that the forecasted economic growth that was supposed to occur in Europe, Japan, China, India and many other places just isn't happening. There's been a gut of bad economic data coming out of these regions. The two bright spots in the developed world are the United States and the United Kingdom (with several other countries to a lesser extent). When the world looks terrible economically, the price is sure to go down, especially with the 3M barrels of American produced oil. There are several regions where another recession is either forecast to occur or is already taking place. China has been stuck at 7-7.5% annual growth for far too long which isn't great compared to its 9-10% growth rate last decade, Abe has been trying to reform Japan while tackling a large tax increase that has absolutely killed economic growth in Japan for several quarters now, and India is hoping that its new president will get them out of their slump as well. And with its horrid economic growth now, not even the great manufacturing base of Germany can bail out the rest of the EU. The EU is still walking a fine line between tepid growth and possible recession, thanks to the terrible policies of austerity. If any of these regions can start picking up again, then I am sure the price of oil will start picking up as demand increases.

 

 

Projects will be cancelled. How can't people see this? I'm not in a doom and gloom crowd as Slick Vik appears to be, but I feel like there are a lot of people in denial on this forum.

 

My forecast is that the Houston market needs this correction to take place. We need this market to become a buyers market yet again... for far too long have the landlords and sellers enjoyed this shortage of apartment units and housing here. The median price of homes skyrocketed in this city, with most of the growth occurring from the higher income segment of our population. In the long run, the fundamentals for this city are still great. We need a slow down every once in a while. The last thing we need is a bubble waiting to pop. And, as we are seeing now, the belief that this boom will last forever was just idiotic. What I worry about more now is shale oil related... how long these smaller companies will be able bare this lower oil price. 

 

This is going to happen and it's not exactly a terrible thing unless global demand is slow for many years. Houston will still have strong population growth that will require the supporting infrastructure and services. Workers from the oil patch will return to construction while oil prices are down helping to meet demand in single family. Hopefully in the future the LNG exporter capacity will spur the world to move to nat gas (it certainly seems a lot of the major are setting themselves up for this) along with the downstream side of the O&G in general. Houston is a global city that requires growth to fuel a large manufacturing and exporting base that will hopefully also learn to invest in education and luring more VC investment into Houston (bio and/or nano tech hub). 

Edited December 7, 2014 by kdog08

[IronTiger]

Projects will be cancelled. How can't people see this? I'm not in a doom and gloom crowd as Slick Vik appears to be, but I feel like there are a lot of people in denial on this forum.

No one has said that projects won't get cancelled. In fact, there was a discussion earlier that the bust has already set in when giant grandiose plans get drawn up (circa 2008, it was the Hardy Yards redevelopment and the Astroworld redevelopment). Development will definitely slow down, but unless things go seriously south (like worldwide depression), things won't be like in the 1980s. While the suburbs will continue to extend their reach, we won't see anything like "neighborhoods get permanently damaged" like Gulfton or Sharpstown or something. Older multi-family developments, for instance, will likely stay as-is, instead of being wrecked for denser, nicer structures (boom) or become shitholes (bust). Oil companies likewise won't be firing people en masse, just not hiring as much.

Edited December 8, 2014 by IronTiger

[UtterlyUrban]

Here is my prediction:

If oil drops below $55 for 6 months or more residential real estate will drop by 20%.

[samagon]

Oh a slowdown is definitely upon us... Only the foolishly optimistic would argue that. The question is to what extent? We added 120k jobs oct 13 - oct 14... A 50% drop (which is a huge YTY decrease) still puts houston at 60k jobs. Whether or not that is the number I have no clue. What I do know is landlords have had all the leverage of late and that is about to change.

 

This would pan out to be a bigger issue than potential layoffs predicted by slick vic, those are small potatoes, which until he can come up with credible references, are just hearsay from people who work at those companies and are concerned about how the price shift will effect them.

 

The number of jobs created in this town over a year may contract (will contract very likely), we may (probably will) still end up creating more jobs than are lost, but that doesn't take into consideration if people have been conditioned for the last 5 years (I'd even go as far as saying a decade) that "Houston is hiring anyone and everyone!!!" they'll continue to migrate here at a 120k+ clip/year.

 

120k people and 60k net new jobs, that's 60k people who will move here and not have a seat at the table. Next to that, oil companies laying off a few thousand employees (and not even all of those jobs in Houston) is nothing, small companies with hundreds of employees going under is nothing.

 

This could be a blessing though, are those people going to give up and run away home when it gets tough to find a job, or are they going to stick around and create? Are people going to see niche markets and fill them in? that would be a good outcome. Better than coming in with 3-6 months of income, renting an apartment (so they keep building new ones based on demand), not getting a job, then leaving. Now we're left with false demand and a lot of people aquariums with no one to fill them. 

 

Anyway, I think anyone that assumes Houston is going to revert back to 1980s style collapse is off their rocker, anyone who thinks Houston will keep booming in perpetuity is being unrealistic. Houston will keep growing, it may not grow at the breakneck speed we're seeing now (and have seen for the last few years), but it will continue to grow. Even as oil slims down, health care is still growing strong (as an example).

[Triton]

 

And now, the top stories on Monday:

1. Crude oil hit five-year lows on Monday. The price of Brent crude oil fell to $66.22 while WTI futures fell to $63.05 as crude resumed the plunge that really began in earnest on Thanksgiving day after OPEC declined to curb production. Meanwhile, the average price of a gallon of gas i the US fell to $2.67 on Monday morning, according to AAA, down from $3.27 a year ago. 

2. Oil prices continue to make new lows, but the price of oil has been depressed now for months since peaking in June, and shale projects around the world are starting to feel the pinch. As Business Insider's Shane Ferro reports, international shale projects in Argentina, China, Mexico, and Russia haven't gotten off the ground as these projects are more capital intensive, and the current state of the oil market doesn't make pursuing these projects economically viable. 

3. And while fracking projects are facing financing pressure, oil giants ConocoPhillips and BP have also moved to cut expenses amid the drop in oil prices. ConocoPhillips announced on Monday that its projected capital expenditures budget for 2015 is down 20% from 2014, while reports over the weekend said BP would move to cut staffing levels across all of the company's layers above operations. On Monday, shares of ConocoPhillips lost more than 4% while BP shares were down more than 2.5%. 

4. As the decline in oil put the major stock indexes under pressure, "safe haven" assets like gold and Treasury bonds rallied on Monday. The price of gold spike violently during afternoon trade, quickly gaining more than $10 an ounce to move back above $1200. Treasury yields, meanwhile, fell on Monday with the 10-year falling back below 2.25%, an almost 10 basis point decline from its highs following Friday's big jobs number. 

(Deleted 5)

6. In an afternoon email, NYSE floor governor Rich Barry gave an overview of how traders in the floor were feeling about the action in the stock market and some of the commentary floor traders are looking at. Barry wrote: "For the record, we feel that both Brent and WTI are very close to a 'capitulation-move' to extreme lows ... Be that as it may; this morning we received an extremely Bullish note from one of the top technical analysts on the Street who loves the market in 2015. His words: 'We currently have a large number of stocks breaking above past tops to new all-time highs. All-time highs leave just two types of sellers, shorts and profit takers, meaning stocks can accelerate to the upside. These breakouts, and neutral bullish trends are not necessarily at buy junctures, however both patterns can drive the equity markets higher quickly. Add to this the number of bullish names versus bearish names, and the odds favor we trade to the upside.' We like the way this guy thinks, which is why we shared his views with you."

 

[toxtethogrady]

On the other hand, there are others who see opportunity. In previous years, all the trading floors were downtown:

 

http://www.bloomberg.com/news/2014-12-10/why-asia-traders-move-to-texas-spells-trouble-for-opec.html

[Slick Vik]

BP to restructure as oil plunge hits revenues

London (AFP) - British energy giant BP on Wednesday announced a major restructuring of the company's operations faced with sliding revenues from plunging oil prices.

BP said it would take a restructuring charge totalling about $1.0 billion (800 million euros) over the next year "as part of its wider ongoing group-wide programme to simplify across its upstream and downstream activities and corporate functions".

It added it would provide further details in upcoming earnings statements. Reports say BP could cut jobs as part of the restructuring plan.

[august948]

BP to restructure as oil plunge hits revenues

London (AFP) - British energy giant BP on Wednesday announced a major restructuring of the company's operations faced with sliding revenues from plunging oil prices.

BP said it would take a restructuring charge totalling about $1.0 billion (800 million euros) over the next year "as part of its wider ongoing group-wide programme to simplify across its upstream and downstream activities and corporate functions".

It added it would provide further details in upcoming earnings statements. Reports say BP could cut jobs as part of the restructuring plan.

Why stop there?  It's a short article.  Here's the rest...

 

 

The company has been hit hard in recent months by plunging oil prices, which have collapsed by more than 40 percent since June to strike five-year low points this week.

It comes after BP -- which was devastated by the catastrophic Gulf of Mexico oil spill in 2010 -- has been forced to sell off billions of dollars of assets to meet the clean-up bill.

 

"We have already been working very hard over these past 18 months or so to right-size our organisation as a result of completing more than $43 billion of divestments," chief executive Bob Dudley said in Wednesday's statement.

 

"We are clearly a more focused business now and, without diverting our attention from safety and reliability, our goal is to make BP even stronger and more competitive.

"The simplification work we have already done is serving us well as we face the tougher external environment. We continue to seek opportunities to eliminate duplication and stop unnecessary activity that is not fully aligned with the group’s strategy."

Read more: http://www.businessinsider.com/afp-bp-to-restructure-as-oil-prices-plunge-2014-12#ixzz3LYKuwgoX

 

As you can see, and as has been pointed out, BP has been working on a restructure for the last 18 months.  Far before oil prices tanked.

[Triton]

Yea, BP is probably the worst example. They haven't had the best of runs....

 

Anyway, here are two separate but interesting articles on Houston Chron today:

 

 

Next year's industry downturn is almost certainly going to spark a wave of layoffs, hiring freezes and corporate mergers between oil field service companies and oil producers, Nichols said. Big acquisitions mean oil companies are "able to reduce costs, which generally means letting people go," he added.

Wednesday's crude price slide lead to declines across energy stocks. And overall, the S&P 500 dropped 33.68 points to close at 2,026, while the Dow Jones Industrial Average fell 268 points to close at 17,533.

Shale drillers are able to respond quickly to crude price fluctuations, and there's already evidence that they're slowing down activity based on recent declines in drilling permits, Downey said, adding: "I have this feeling that this can be the fastest shut-in process in history."

He expects crude oil prices to bounce between $60 and $80 over six months to a year - or longer - as shale drillers start and stop activity. "They're very nimble," he said, adding that barring a major world event, it would be unlikely for crude oil prices to rise above $80 any time in the next year.

http://www.houstonchronicle.com/business/energy/article/Crude-s-slide-prompts-concern-of-sector-slowdown-5948995.php#/0

 

This is just one economists but it is interesting nonetheless.

 

 

Houston’s housing market posted another month of positive gains in November, but a local economist predicts home sales will fall by 10 to 12 percent over the next 12 months as lower oil prices lead to significantly slower job growth.

The forecast by Ted C. Jones, chief economist of Stewart Title, was cited in a monthly home sales report released Wednesday from the Houston Association of Realtors.

“I have been asked whether falling oil prices could impact housing in 2015, and Stewart Title Chief Economist and former HAR Chairman Ted C. Jones, Ph.D., has forecast a 10 to 12 percent decline in home sales in the next 12 months, with about a 6 percent increase in prices,” Chaille Ralph, the association’s chairwoman, said in the report.

 

 

http://blog.chron.com/primeproperty/2014/12/report-houston-area-homes-sales-to-take-a-tumble-along-with-oil/

[bachanon]

http://www.houstonchronicle.com/business/energy/article/Exxon-Mobil-sees-sharp-turn-ahead-for-N-America-5946539.php#/0

 

 

[august948]

http://www.houstonchronicle.com/business/energy/article/Exxon-Mobil-sees-sharp-turn-ahead-for-N-America-5946539.php#/0

 

From the article above....

 

 

The world's energy markets will change dramatically around 2020, when North America shifts from being a major energy importer to an important fuel source for the world's middle class, according to Exxon Mobil Corp.'s annual energy forecast.

 

 

The Irving-based company predicted that global energy demand would by grow 35 percent by 2040, driven by 2 billion additional people and the rise of energy-hungry middle classes in developing countries. Continued growth in North American and supply growth and gains in global efficiency are critical to meeting the future's energy needs, the report concluded.

So what this tells us is that the long-term forecast is higher demand and thus prices.  There will be fluctuations...there always are...and we're in one of them now.  But that's short-term.  Long term is bullish.

[swtsig]

slightly more favorable news due to the decline in oil prices:

 

http://fuelfix.com/blog/2014/12/11/shale-boom-spurs-chemical-industry-expansion/

 

The surge in domestic oil production has ignited a building spree in the petrochemical industry. In recent years, more than 215 new production projects worth $135 billion have been announced as companies scramble to take advantage of the cheap U.S. shale gas that gives them a cost advantage over their foreign competitors. Production, which grew in all regions this year, will accelerate as these projects start to come online in 2017, with the Gulf Coast seeing the biggest surge, the council said.

 

“We’re in the midst of a historic expansion and the U.S. remains the most attractive place in the world to invest in chemical manufacturing,” council CEO Cal Dooley said in a statement.

 

Falling oil prices will only add to the economic boon. As crude plummets to its lowest level in five years, manufacturers will spend less to produce products while cheaper gasoline pumps money back into consumer’s pocketbooks, spurring more disposable spending, the council said.

[toxtethogrady]

If anything has the possibility of derailing the boom, it's local inflation. Just about everything is getting more expensive than the national average - especially rents:

 

http://blog.chron.com/primeproperty/2014/12/spike-in-houston-rents-outpaces-national-average/#29112101=0&29114103=0

 

There was some sobering news yesterday that Houston job creation next year will decline sharply - to 60,000. As it is, the Houston labor force is about the same size as metro Washington, DC.

[Triton]

Hopefully this pans out...simply slower growth:

 

 

Texas could have the best of both worlds when it comes to gasoline and crude oil, according to the Energy Information Administration's short-term energy outlook that projects energy production and prices for 2015.

It looks like $2 a gallon gasoline could be the norm and the Texas shale drilling boom will continue, though it will slow down, the EIA reported.

The average national gasoline price will be $2.60 a gallon for 2015. That's 35 cents lower than the EIA's projection even a month ago. Then, consider that Texas typically pays lower gasoline prices than the national average. The current national price is $2.639 while Texans are paying $2.41 and Californians pay $2.953, according to AAA.

........................

"Oil prices are expected to remain high enough in 2015 to support new drilling in the major shale areas in North Dakota and Texas, which account for most of the growth in U.S. oil production," Sieminski said.

 

http://www.bizjournals.com/houston/news/2014/12/11/can-texas-have-2-gasoline-and-abooming-shale-too.html?page=all

 

 

[samagon]

If anything has the possibility of derailing the boom, it's local inflation. Just about everything is getting more expensive than the national average - especially rents:

 

http://blog.chron.com/primeproperty/2014/12/spike-in-houston-rents-outpaces-national-average/#29112101=0&29114103=0

 

There was some sobering news yesterday that Houston job creation next year will decline sharply - to 60,000. As it is, the Houston labor force is about the same size as metro Washington, DC.

 

This is why it's an overall good thing that things may be slowing down. Moving forward still, but at a slightly slower pace.

[Triton]

Here's the bright spot I've been looking for:

 

 

 

While high oil prices are boon to west Houston's upstream petroleum sector, low oil prices benefit east Houston's midstream and downstream sectors, Wilson said. As the oil cycle changes, more office buildings and industrial projects may be built on the east side of Houston, he said.

http://www.bizjournals.com/houston/news/2014/12/12/houston-developers-keep-wary-eye-on-falling-oil.html?page=all

[Houston?]

Triton, what's the percentage and importance of upstream in our economy compared to midstream and downstream?

[jgriff]

I've been working in downstream engineering since about 1993. So far every time crude prices have gotten low since then it has decimated our industry. I still hold out some hope that things may be different this time. I don't foresee any layoffs in the department I manage anytime soon but that cold change with just one project cancellation.

[CoolBuddy06]

I don't work in the oil industry but I'm interested in the dynamics nonetheless. Here's my question: how can we have a boom when the price is high and not have a bust when the price is low, as some of these articles are suggesting?

[UtterlyUrban]

I don't work in the oil industry but I'm interested in the dynamics nonetheless. Here's my question: how can we have a boom when the price is high and not have a bust when the price is low, as some of these articles are suggesting?

A recent article in the WSJ referenced the "collapse" of oil and suggests that at least one source is predicting $50 oil. It is an insightful article about the global demand for oil and market share. It was in Saturday's WSJ.

A sustained period of profitable oil development in North America has created this boom in Houston. If it happens, A sustained period of $50-ish dollar oil will, indeed, cause a big problem the local economy here in Houston.

[UtterlyUrban]

I've been working in downstream engineering since about 1993. So far every time crude prices have gotten low since then it has decimated our industry. I still hold out some hope that things may be different this time. I don't foresee any layoffs in the department I manage anytime soon but that cold change with just one project cancellation.

I wish you well.

But, the boom/bust cycle has been going on in the oil patch since it was founded. Nothing new here.

Hopefully, oil will not fall further and there will be only a limited number of projects cancelled. That would certainly be a good (and quite possible) outcome.

[Houston?]

No one has answered my question.

[RandomHero]

I don't work in the oil industry but I'm interested in the dynamics nonetheless. Here's my question: how can we have a boom when the price is high and not have a bust when the price is low, as some of these articles are suggesting?

 

 

No one has answered my question.

 

Imagine that you are Exxon, Conoco, Chevron or one of the other major Exploration & Production Oil companies. Right now you are being hurt because the profit margin for every well you are pumping oil from is decreasing with the price of oil. These "upstream" operations become less profitable with lower oil prices. This is especially true of wells in "unconventional" plays (shale, oil sands etc.). However remember that all of these large companies also have "downstream" operations like transport, refining and selling retail gasoline and other petrochemicals. Transporting oil costs the same no matter what the price of oil is so there is no real impact to companies who are primarily engaged in transport via pipeline and rail. For a refinery a barrel of oil is actually a cost to them so the lower price is actually a benefit for refining operations. Also, the lower cost of gasoline means people are going to drive more and visit the gas station more often. They will have extra money in their pocket from cheap gas to go in the gas station and spend on soda's and food. This helps offset some of the upstream losses if they company has a lot of retail (i.e gas stations) exposure. Also keep in mind that these huge multinational producers are well diversified up and down stream as well as across multiple energy sectors (nat gas, renewable etc.). They own billions of dollars worth of physical assets (real estate, heavy equipment etc.) that they can consolidate and leverage to weather this storm.

 

The companies that are really getting crushed are small cap oil producers. These are the companies that came onto the scene when oil prices were high and borrowed a ton of money for drilling equipment and land using the future profits as collateral for these loans. If the price of oil stays at current levels or goes lower these small companies will not be able to repay their creditors. This is actually of some concern because this could affect the financial credit markets beyond just the energy sector. Some are drawing comparisons to the subprime crisis and resulting financial meltown of 2007. The difference between energy companies defaulting now and banks defaulting then was that in 2007 there were no well capitalized entities to swoop in and buy up the cheap assets. In this current energy crash, large companies like Exxon and Conoco will be able to swoop in and buy the assets of these small over-leveraged drilling companies at bargain prices as they go belly up. In the long term this will strengthen the big producers despite the short term pains. 

 

Finally you may be asking why the stock prices of the best oil companies like Exxon, Kinder Morgan, Haliburton etc. are getting crushed along with the smaller and riskier companies. Without getting into a discussion about finance with the rise of ETF's most investors trade energy as a whole sector by buying an energy ETF as opposed to doing the research and buying individual stocks. Therefore when oil crashes people panic and sell the entire sector out of fear and all the stocks get hammered. In the coming months there will be some great buying opportunities in the stock market for the best run oil companies once oil finds a floor and some stability returns to the market. 

[Houston?]

This is my question.

Triton, what's the percentage and importance of upstream in our economy compared to midstream and downstream?

 

[Ross]

Imagine that you are Exxon, Conoco, Chevron or one of the other major Exploration & Production Oil companies. Right now you are being hurt because the profit margin for every well you are pumping oil from is decreasing with the price of oil. These "upstream" operations become less profitable with lower oil prices. This is especially true of wells in "unconventional" plays (shale, oil sands etc.). However remember that all of these large companies also have "downstream" operations like transport, refining and selling retail gasoline and other petrochemicals. Transporting oil costs the same no matter what the price of oil is so there is no real impact to companies who are primarily engaged in transport via pipeline and rail. For a refinery a barrel of oil is actually a cost to them so the lower price is actually a benefit for refining operations. Also, the lower cost of gasoline means people are going to drive more and visit the gas station more often. They will have extra money in their pocket from cheap gas to go in the gas station and spend on soda's and food. This helps offset some of the upstream losses if they company has a lot of retail (i.e gas stations) exposure. Also keep in mind that these huge multinational producers are well diversified up and down stream as well as across multiple energy sectors (nat gas, renewable etc.). They own billions of dollars worth of physical assets (real estate, heavy equipment etc.) that they can consolidate and leverage to weather this storm.

 

 

None of the majors has any real retail exposure these days, the stations are now owned and operated by other companies. There is very little money to be made in the retail side. Lower oil prices may or may not be a benefit to the downstream operations, since they make their money on the differential between the cost of the crude and the wholesale value of the products.

 

[IronTiger]

At the risk of sounding dumb, the oil will still be shipped in overseas, the Panama Canal is still getting expanded, and the predicted boom in freight (and trains) will still happen, right?

The oil companies know the worst-case scenarios, the economy will still keep going (barring some other nationwide/worldwide catastrophe), some projects get cancelled, and the world keeps turning. Again, who agrees/disagrees with my "not doom" prediction (edited for some more info)?

No one has said that projects won't get cancelled. In fact, there was a discussion earlier that the bust has already set in when giant grandiose plans get drawn up (circa 2008, it was the Hardy Yards redevelopment and the Astroworld redevelopment). Development will definitely slow down, but unless things go seriously south (like worldwide depression), things won't be like in the 1980s. While the suburbs will continue to extend their reach (and the Grand Parkway continues to be built), we won't see anything like "neighborhoods get permanently damaged" like Gulfton or Sharpstown or something. Older multi-family developments, for instance, will likely stay as-is, instead of being wrecked for denser, nicer structures (boom) or have their rents drop so much they become shitholes (bust). Oil companies likewise won't be firing people en masse, just not hiring as much.

[Houston?]

I agree with it. People act like the oil industry is the sole industry in Houston. Granted that the oil industry plays a big part in Houston, Houston still has TMC (medical industry), manufacturing, NASA, engineering (not oil related), etc. These industries will keep Houston afloat.

[IronTiger]

I agree with it. People act like the oil industry is the sole industry in Houston. Granted that the oil industry plays a big part in Houston, Houston still has TMC (medical industry), manufacturing, NASA, engineering (not oil related), etc. These industries will keep Houston afloat.

That reminds me--I think we'll see the MOST buildings cancelled in the Energy Corridor with that being one of the "more affected" districts. In fact, I think we may be seeing that already. They recently and demolished Blackhaw Street and Red Haw, the two roads of an extant 1950s subdivision presumably to connect Park Row to North Dairy Ashford. A development was supposed to go there as part of the buyout but cancelled. Didn't save the homes, of course, and that road's still going to go there (in fact, I wouldn't be surprised if they already are prepping the ground).

[toxtethogrady]

CBRE forecasts 62,900 new jobs next year and a slowdown in leasing. However vacancies are less than 12% at the moment:

 

http://www.houstonchronicle.com/business/real-estate/article/Low-oil-prices-could-slow-robust-office-market-5961374.php?t=27d063b77e&cmpid=twitter-premium

[samagon]

In other news, assuming my theory has any merit...

 

http://mobile.nytimes.com/2014/12/17/business/russia-ruble-interest-rates.html?referrer&_r=1

 

Basically, Russian economy is in collapse, so if this was the goal of Saudi Arabia, it appears they're succeeding thoroughly.

[toxtethogrady]

Some good news, for a change, as 215,000 sf of office space gets leased...

 

http://www.bizjournals.com/houston/news/2014/12/17/energy-services-companies-sign-big-office-leases.html

[toxtethogrady]

Basically, Russian economy is in collapse, so if this was the goal of Saudi Arabia, it appears they're succeeding thoroughly.

 

The Saudis appear to be going for the whole nut, as they are undercutting the Russians, the Venezuelans, the Nigerians and a few of their OPEC colleagues, embracing free market principles, for a change, and telling the frackers that they are willing to let the price float to a level that reflects a balance between supply and demand. Because of that, several competitors may get knocked out of the market, but on the other hand, the Saudis will not be able to gain pricing power and return prices to $100 a barrel because the frackers will simply be able to drill all they want and undercut OPEC again.

 

That said, some of the local oil barons must be kicking themselves and saying, "We only needed to cut production 3% to balance supply with demand. Now, prices have dropped 40%, so whatever share we would have gained has caused us to lose 35% in revenues. What were we thinking?"

 

But the airlines should benefit.

[UtterlyUrban]

That said, some of the local oil barons must be kicking themselves and saying, "We only needed to cut production 3% to balance supply with demand. Now, prices have dropped 40%, so whatever share we would have gained has caused us to lose 35% in revenues. What were we thinking?"

But the airlines should benefit.

If supply was only out of demand balance by 3%, why would the price fall by 40%?

The issue here seems to be Nigerian oil and Asia markets. A very insightful article appeared in the WSJ last Saturday. There was a big surplus in oil (low demand globally). It also spoke of Nigerian oil and how it's "natural market" in the US was closed due to fracking and US domestic production --- no need for us to buy it. So, Nigeria went to Asia and the Saudis freaked out. They did not wish to lose market share in Asia. Then, add the fact that the U.S. producers received permission to export crude from the administration (something prohibited since the 1970's apparently) and the Saudis would take no more.....

Good article.

[kdog08]

At the risk of sounding dumb, the oil will still be shipped in overseas, the Panama Canal is still getting expanded, and the predicted boom in freight (and trains) will still happen, right?

The oil companies know the worst-case scenarios, the economy will still keep going (barring some other nationwide/worldwide catastrophe), some projects get cancelled, and the world keeps turning. Again, who agrees/disagrees with my "not doom" prediction (edited for some more info)?

 

And to add, our oil and ant gas aren't going anywhere, the world will boom again, and we will drill it again. It is OPEC and the Saudis who find themselves in a worse long term position. 

Edited December 18, 2014 by kdog08

[august948]

In other news, assuming my theory has any merit...

 

http://mobile.nytimes.com/2014/12/17/business/russia-ruble-interest-rates.html?referrer&_r=1

 

Basically, Russian economy is in collapse, so if this was the goal of Saudi Arabia, it appears they're succeeding thoroughly.

 

Of course the downside to economic chaos in a major power like Russia is that Putin may try to wag the dog by stepping up aggression against the Ukraine and others.

 

[arche_757]

Of course the downside to economic chaos in a major power like Russia is that Putin may try to wag the dog by stepping up aggression against the Ukraine and others.

 

 

Global uncertainty because a major power starts rattling sabers would cause the price of Oil to jump north.  All the Russians would need to do is sink a tanker or attack a refining operation in the Middle East to really cause some panic.  And they could do so without formally doing so as "Russia" they've got proxy organizations I'm sure they support and could even play up to an ISIS or Al Qaeda to cause some additional turmoil.  Now, I don't believe the Russian's would resort to something like that - but who knows what they'll do if the Ruble falls too low?

[toxtethogrady]

The party may be continuing. Houston added 16,000 jobs in November and 125,000 since November of last year. Of course all numbers are subject to revision in March of next year, but so far it's been a good year in 2014.

[UtterlyUrban]

The party may be continuing. Houston added 16,000 jobs in November and 125,000 since November of last year. Of course all numbers are subject to revision in March of next year, but so far it's been a good year in 2014.

Yes, it has been a good year.

Fortunately, oils only started its fall in the last few months.

It's too early for the slide to really impact jobs. It could take a year or more before that happens. If oil falls further and stays there for a protracted time, that is when there will be big problems locally.

[lockmat]

Really good 15 min video from a Midway rep on the status of the economy.

WARNING: includes realistic statements

[Montrose1100]

Pretty on par with what a lot of people are saying. Not shocking to see that Office will probably slow down significantly with long term low oil. Residential still has some catching up to do.

I know I'm a little optimistic but he did mention groundbreaking on Green Street Hotel, and a couple project announcements in the next few months (one guess would be a recent purchase on Washington Avenue).

And he's absolutely correct if we don't figure out transportation we will be in trouble. I'm not saying let us start laying down rail or widening/double decking freeways but we need to catch this important part of the city up while we have a breather.

[Triton]

 

 

Barton Smith, professor emeritus of economics at the University of Houston and a longtime observer of the local economy, said oil prices would have to remain low for about six months before the energy industry takes a hit. He said it would be even longer before sectors such as construction, which is still trying to catch up with the surge in Houston's population, feel the pinch.

http://www.houstonchronicle.com/business/economy/article/Houston-job-growth-is-strong-now-but-slowdown-5968461.php

[toxtethogrady]

The lag implies that the drop in real estate activity will be delayed 6-12 months, and when it happens, the next uptick will be delayed by 6-12 months.

 

A possible cushion is Houston's buoyant housing market, which has fewer "underwater" mortgages than all but San Francisco and San Jose (and we have the merit that our football team may yet make the playoffs).

 

http://www.bizjournals.com/houston/news/2014/12/19/fewer-homes-underwater-but-foreclosures-rising-in.html

[toxtethogrady]

Fitch worries, but cites factors that are 1) not unique to Houston, and 2) more likely to have prevented a bubble from forming.

 

http://swamplot.com/tanking-oil-prices-place-houston-second-on-fitchs-overvalued-housing-market-list/2014-12-23/

Edited December 24, 2014 by toxtethogrady