What was the state of the energy market prior to 2020?
We weren’t set for a strong year to begin with. So the market was challenged. Oil prices, we were worried about the demand side. It was looking a little bit weak, and we had issues with firms having access to capital. The investment community was closed. You look at the bond market, flat rates were elevated for energy high-yield versus all other forms of corporate high-yield. You could see cash flow was really not improved basically to neutral. Free cash flow generation indexed by a large number of publicly traded firms in Q4 managed to generate neutral cash flow, but they didn’t really generate strong positive cash flow. And investors were tired of losing money. ... And so access to capital was constrained coming into the year. And we were expecting a modest decline year over year in capital expenditures as it was in North America. ... Adding on top of that the events of the past two months where you’ve got this negative demand shock associated with the coronavirus and a positive supply shock coming from the breakup of OPEC-Plus and the ensuing drive to increase production and lower prices, those two factors really pushed prices lower and added a lot of distress to the industry. So everything that you had before, just worse.
How could the coronavirus and oil price war affect energy companies’ corporate workforce?
I would expect that if low prices [continue] at this level for a sustained period of time, we’re going to have a negative on oil field operations, and we should expect to see that come through even in office jobs here in Houston. Quite frankly, there’s not that much left to cut in terms of oilfield work heading into the year. ... We were already expecting this year to be a down year for oil and gas extraction jobs, [exploration and production] employment in the metro area. And you’ll remember that E&P companies really didn’t recover ... much employment from the bottom of the oil bust. Almost all of the recovery in energy jobs were associated with the two sectors that we call oil support activities for mining and oil field services and field operations. And fabricated metals manufacturing was the other big chunk of that. ... So those two aspects of the energy industry is where the bulk of recovery was, not in white-collar extraction, E&P guys.
In general, the expectation was already that [capital expenditure] and employment, even in office jobs, were going to take a bit of a hit this year because of the industry’s pre-existing condition before we got the virus and before the OPEC crisis.
What is the outlook for the energy industry this year?
Think back to 2015, 2016, the last time oil prices fell into the [$20 per barrel range] was just briefly in February, that was the bottom of that market. ... This is all contingent on ‘what do prices do?’ And ‘what do prices do?’ is going to be contingent on the path that the virus takes. What is the stimulus response, how effective is that? And do we get a resurgence or not? There’s a lot of questions about what the path of the virus is going to be. And the willingness of Saudi Arabia ... and other OPEC countries to suffer prices this low. So you have a lot of moving pieces here that add a lot of uncertainty to the outlook. Suffice to say that if prices do stay where they are, then we’re looking at another major downturn in the industry. It’s not clear what the magnitude of that will be though, because we are in a very different world today.
In the general economy, back in 2015-16 ... the metropolitan area and the whole state economy, really, did relatively well. We suffered major declines in '15 and '16 in oil- and gas-related jobs, but the services sectors were there to backstop. So even looking at the Houston metropolitan area, we had net zero job growth. We shut a lot of jobs in mining and manufacturing and ancillary related industries, but we added a lot of jobs in the service sector particularly health services and leisure and hospitality. The economy of Houston sells into the broader economy of the United States, and so we have that backdrop of diversification to help weather the storm of the 2015-2016 oil bust. Because of uncertainties with the coronavirus, it’s not clear to what extent the broader economy of the United States is going to provide any sort of stabilization against the forces of this recent collapse in oil prices.
How might the federal Coronavirus Aid, Relief, and Economic Security Act affect the energy market?
Roughly speaking, any stimulus package is going to prop up the demand side of the equation within the United States. So that would help on the demand side. But what is going on in the oil price war between Saudi and Russia, and what is going on there with these extremely low price dynamics; we are very oversupplied, inventories of crude oil are rising around the world. And so even if this price war were to abate in the very near future, you would still see an overhang of inventories weighing on oil prices. So even if we were to get a major stimulus package ... we would still be in a challenging price environment for the industry.
Could the economic effects of the coronavirus outbreak compare to those of recent events such as the 2015 oil downturn or Hurricane Harvey?
There’s a lot that’s unique about the situation. You can think about it in terms of a general economic downturn that happens to be very sharp and severe. I personally liken it to Harvey. Do you think of this as a structural business cycle type of thing that happens to be very accelerated because of what’s happening with the virus, or do you think of this as a global natural disaster? When we have a natural disaster, like we had in Hurricane Harvey, the whole city shut down for over a week ... and then we came back very quickly. We see a big bounce-back in activity after natural disasters. And so it’s entirely plausible, or entirely possible, to think that a major downturn like the downturn we’re in here may be more like a natural disaster than a typical oscillation of the business cycle. But there’s a lot of differing opinions on that. ... This looks like a very sharp and significant downturn, and there’s a lot of uncertainty about how this unfolds in the coming weeks and months.
How could a decline in the oil market affect the economy outside of the industry?
If you have an interior decorator in Houston, they’re in the oil business because their customers are disproportionately driven by, or [disproportionately] work in, energy-related spaces because it’s a big part of our industry and a big part of our high-earning base. ... They’re indirectly in the oil business, because the impact on local spending can be significant.
When the oil industry is not doing great, fewer people show up for conferences. ... Leisure and hospitality, restaurants, bars, hotels, will be adversely affected because you have less conference activity. CERAWeek was a big loss ... all of the business, all of the consumption that would have gone on in the region around CERAWeek, that didn’t happen. The same thing with the [Houston Livestock Show and] Rodeo. ... You lose that ancillary spending. Businesses and individuals who are uncertain about their economic future tend to be more restrained in their spending, and that propagates through the regional economy.
We’re having the double whammy of having both a natural disaster in the form of coronavirus shutting down the national economy and oil market being severely depressed as a result of the ongoing ... price war between Saudi [and] Russia. And as a result of that double whammy, depending on how this all unfolds in the next coming weeks and months, there’s a wide range of potential effects it could have on the region. There’s a lot of uncertainty.
The Federal Reserve Bank of Dallas released its quarterly energy survey March 25, featuring responses from more than 160 energy firms about oil prices, their workforces and their business operations. The full report may be viewed here.
