Bust is taking hold in the oil patch

BATESVILLE, Texas (AP) — It was a slow day selling oil field pipe — nothing new there — when Richard Collier had handed his son a select list of customers. Call them, he said.

But there were no buyers.

“That list of people I gave him is the ones that don’t pay their bills,” Collier told the San Antonio Express-News (http://bit.ly/1Q3mcVf). “And they won’t even buy anything.”

To Collier, who owns a small pipe business based out of Concan and a ranch in Zavala County, it’s starting to look a lot like 1984, when the last great Texas oil boom shuddered to an end.

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“Anybody who played in this game and didn’t take care of their finances really well? They’re gone,” Collier said. “You’re looking at living out of your back pocket for three years. I do believe there are people out there who are broke and just don’t know it yet.”

The drumbeat of low crude oil prices has taken hold in the oil and gas industry, from Collier’s South Texas business to Wall Street.

Companies are slashing capital budgets by the billions. Investment research firm Morningstar expects the downturn to last all of 2016, and said last week that near-term prices could be “ugly.”

“It’s just the cycle of things,” said oil and gas attorney David Roth of Elder Bray. “It was bound to arrive.”

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The army of roughnecks, RVs and heavy trucks that washed across South Texas a few years ago is in retreat, battered by crude oil prices that have tumbled from above $100 to below $40.

Alongside oil, other things are crashing — the number of working drilling rigs, the “hiring” signs tacked up on the bulletin boards at South Texas restaurants, the number of people calling Collier, who has been in the pipe business for 40 years.

There were 840 active rigs in Texas last January, a number cut to 321 now. In the Eagle Ford Shale, the field that arcs across South Texas in a half smile, the number of active rigs has tumbled from 200 to 76.

Idle rigs are stacked, folded up like umbrellas, in a field east of San Antonio.

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“Something was going to cause the Eagle Ford to go bust,” Roth said. “One thing could have been a better shale formation somewhere with better economics. Someone could have discovered a shale in Michigan with better returns.”

Instead, it was a combination of timing and prices. By late 2014, the Eagle Ford was already maturing as a field, with companies zeroing in on the best spots and moving away from the edges of the field. Then oil prices crashed.

“When everyone had cheap money and lots of it, they could drill sub-optimal wells,” Roth said. “Some of that acreage isn’t that fantastic. If the Eagle Ford was discovered today, how much would actually be leased? At $40, what would have happened? A lot less would have happened.”

Roth was struck by the view when he flew over the field a few weeks ago. “There’s plenty of activity, but nothing like the last five to six years,” he said.

Accountant Raul Rios with Padgett Stratemann said many operators hedged oil at around $85 per barrel last year.

“They were paid that whether the price is $100 or $50. To some degree that kept these guys in business,” Rios said.

But starting this month, those hedges expire. “If they don’t roll off then, they will roll off by June 30,” Rios said. “I think that’s when you’re going to see the effects of low oil prices. The first two quarters of 2016 will be very telling.”

Rios expects more layoffs, layered on top of the layoffs that have already happened.

The view from Collier’s ranch is a quiet one, of thorn scrub and white-tailed deer and the blue winter sky.

In November, a drilling rig had added a dash of excitement and hope to deer season. The well was for shallow oil instead of deeper shale — the kind of project Roth said he has seen picking up in the region because of its lower costs. But the well turned out to be dry.

It seemed like the way things had gone for everyone on site in 2015. Collier, who would at least get a new water well, and the crews who were rigging down, looked for bright spots.

“America is getting low gas prices,” said Kelly Leininger of Nacogdoches, a third-generation mud-logger, as she packed away hoses, wrapped a microscope in bubble wrap and rinsed out the trays that organized samples of rock.

Chuck Shepherd of Galveston, the night mud-logger at the site, doesn’t think the Texas economy will fare well. “We’re not going out to the mall and out to the movies,” he said. “We’re not buying all of those big trucks. It ripples on and on.”

Shepherd is a retired Navy submariner and a geologist, who used to work offshore. In the fall of 2014, at precisely the wrong time, he took a corporate office job in Houston just as oil prices tanked. Four months later, in February, he was laid off from his job geosteering, controlling the drill bit as it moves through rock to hit specific geologic targets.

“I hit the upper echelon office obviously at exactly the wrong time,” he said.

Since June, he’s worked on these onshore projects. “It’s a huge step down in pay and stature,” Shepherd said. “But it’s pay for now.”

The oil field is brimming with overqualified people.

Allen Gilmer of Drillinginfo said his research firm had a pool of 2,000 applicants to fill 70 positions last year. “Anyone hiring today has a very deep talent pool to choose from,” Gilmer said.

Charlie Cavazos of Benavides, the driller at Collier’s ranch, said he went about six months without work in 2015. “Paying one month my truck, one month my trailer,” he said, since unemployment was not even half of what he was used to living on.

In the last few months of the year, work had picked up, though Cavazos said there’s a noticeable uptick in the level of expertise and experience on rigs.

“Some sites, the whole crew is drillers,” Cavazos said.

Joe Garcia, 24, has been alternating between the oil field and college, saving up and paying cash as he works on an associates degree in computer science at Coastal Bend College in Kingsville. But the slowdown in the oilfield has meant he’s that not saving as much money to return to school.

He likes the work — being outside, the satisfaction of being tired at the end of the day, knowing that he earned his money. “It’s a good feeling,” he said. The crew listens to country music on the drive to work and laughs all the way home. “Hopefully I get out of here, though,” Garcia said.

Garcia also worries about his hometown, Benavides, and others nearby, Alice, Agua Dulce and Freer.

“If it wasn’t for the oil field, there would be nothing,” Garcia said. “Everyone works in the oil field.”

Thomas Tunstall, economic development research director at the University of Texas at San Antonio, published a paper recently that outlined things South Texas communities were doing to create an identity beyond oil — growing olives around Asherton in Dimmit County, or focusing on history and the “Come and Take It” motto of the Texas Revolution in Gonzales.

“It may be a thing that sort of buffers the community,” Tunstall said. “It’s just a buffer. You’re not going to replace a $90,000 oil field job with a tourism job or something in the service industry, but at least they won’t be losing population.”

Tunstall said there’s a level of anxiety even for workers who are still busy. “They might be the next group of people to get laid off. It’s unfortunately the nature of that industry,” Tunstall said.

His own dad, a petroleum engineer, had to drive a truck for a couple of years. “You’ve got to do what you’ve got to do,” he said.

Attorney Marty Truss of Dykema Cox Smith said bankruptcy filings are on the uptick. “That’s new, and it’s something that’s been anticipated for many months,” Truss said.

Law firm Haynes and Boone LLP on Dec. 4 released its “Oil Patch Bankruptcy Monitor,” which tracked 37 North American oil and gas bankruptcies in 2015, including 17 in Texas.

By mid-December, Irving-based Magnum Hunter, which operates on the far eastern edge of the Eagle Ford, had also filed for bankruptcy protection, saying it had $6.4 million in cash and $1.1 billion in total liabilities at the end of the third quarter.

“It’s a time for condensing, consolidation, and frankly, survival of the fittest,” Truss said. “There are folks who will not make it.”

Legal disputes over royalty payments are on the increase in South Texas, with more mineral owners requesting audits to make sure they’ve been paid correctly. “As the checks get smaller, people look at them a lot closer,” Truss said.

Gilmer said much of the idle equipment now sitting in fields is damaged from a lack of routine maintenance, and may never go back to work. Instead, it it’s likely to be cannibalized for parts.

“This is exactly what happened in the 1980s. The longer equipment doesn’t run, the more likely it will be used as spares or junked,” Gilmer said.

But when oil prices turn around, the surviving service companies with good equipment will have a lock on the market. “This is also what happened in the 1980’s,” Gilmer said. “Fortunes are built in the busts.”

Collier compared the oil business to coyotes, gorging on jackrabbits in the good times.

“When it comes to it, we’ll be in the desert and flipping up a rock to try to eat scorpions,” he said. We’re survivors.”

He got a call recently about three truckloads of pipe for sale in a yard near Dilley. He drove south to look at what should have been 600 to 700 pieces of pipe, each 30-feet in length.

“This yard is like 50 acres and there is pipe everywhere,” Collier said.

He and his son asked about the pipe for sale.

The yard manager held his arms out wide. “This is it,” he told them.

All of it was for sale, but the Colliers didn’t buy anything.


Information from: San Antonio Express-News, http://www.mysanantonio.com