Can the Boom Continue?

[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.