The long-term economic effect of the coronavirus on the Greater Houston area energy industry is unclear, but as of March 11 stock market losses and announcements of dividend cuts were already signaling industry difficulties, area experts said.
“We have likely just received one of those events that serves as a major shock to the economic system,” said Bill Gilmer, director of the University of Houston’s Bauer Institute for Regional Forecasting, in a March 11 email. “COVID-19 has the potential to be the trigger for an economic downturn in the U.S., although it is far from certain right now.”
Gilmer said a 2006 study by the Congressional Budget Office outlined several potential economic scenarios that could result from the outbreak, ranging from a slowdown to a recession, but that at this stage it is too early to predict an outcome as the situation could continue for several months.
“Then there is the bad news on oil,” Gilmer said, citing difficulties U.S. oil producers such as Occidental Petroleum Corp. already face with issues like credit. "U.S. credit and equity markets have turned their back on the industry, and the number of working rigs in the U.S. fell 25% in the second half of last year. With no access to credit. the industry is strictly dependent on the price of oil for cash flows. Things looked like they were stabilizing for oil until last week.”
According to NASDAQ, crude oil closed at $46.78 per barrel on March 4, but a week later closed at $34.36 on March 10 after hitting as low as $31.13 on March 9. As of March 11, the price of crude oil was $33.22 per barrel at the start of the day, according to NASDAQ.
Gilmer said if oil prices stay at $30 to $40 per barrel, as many as 20,000 oil-related jobs could be lost in the Greater Houston area, mainly in the areas of oil producers, oil services, machinery and fabricated metal.
“Put these together—COVID-19 and oil—and it is not a good situation for Houston for the broad Houston economy,” Gilmer said. “Even a meaningful U.S. slowdown would wipe out most of the 49,000 jobs that I was forecasting for this year. ... This is one of those time you have to hope for the best, plan for the worst. “
Energy company losses on the stock market in the Greater Houston area include Occidental decreasing from $26.85 per share on March 6 to $14.84 on the morning of March 9. As of early afternoon March 11 it had begun to climb from drop below $12 earlier in the day, according to information on the New York Stock Exchange. Occidental acquired Anadarko Petroleum Corp. in The Woodlands in late 2019.
Occidental Petroleum Corp. also announced March 10 that its board of directors approved reducing dividends from $0.79 per share to $0.11 per share as of July 2020. It also announced a reduction in capital spending this year by almost $2 billion. Capital spending had been projected at $5.2 billion to $5.4 billion, but is now expected to be $3.5 billion to $3.7 billion, according to a company news release. It will also look for additional operating and corporate cost reductions, according to the statement.
"Due to the sharp decline in global commodity prices, we are taking actions that will strengthen our balance sheet and continue to reduce debt," Occidental President and CEO Vicki Hollub said in a statement. "These actions lower our cash flow breakeven level to the low $30s [per barrel of crude oil], ... positioning us to succeed in a low commodity price environment.”
The breakeven point is the price needed for a firm to profitably drill a new well, according to information from the Federal Reserve Bank of Dallas.
ExxonMobil, which has a campus in Spring, saw a drop of $47.70 per share at the end of the day March 6 to $41.71 on the morning of March 9, and the price fluctuated between $42 and $43 per share mid-day on March 11.
ExxonMobil did not immediately respond to a request for comment, and the company had not posted a release on its website as of mid-day March 11 addressing stock market changes.
The company’s most recent release, from March 5, outlined its growth strategy this year.
According to the release, ExxonMobil Chairman and CEO Darren Woods told investors the company was planning capital expenditures of between $30 billion to $35 billion annually through 2025.
Alisa Lukash, a senior analyst for Rystad Energy, which has offices in Houston, said oil prices of $30 to $40 per barrel are not considered as damaging for companies with a low breakeven price such as Occidental and ExxonMobil.
“Oxy and ExxonMobil have low breakeven prices,” Lukash said. “Exxon also owns mineral rights so that pushes the breakeven price even lower. ... I think their breakeven price for some of the best acreages might be closer to $30.”
However, the move to cut dividends is one that can help companies when revenues drop, she said.
“When they have overestimated spending and revenues dropped ... That’s when you would see companies cutting dividends or trying to refinance debt,” Lukash said.
Steve Spillette, the president of Community Development Strategies, a Houston-based consulting firm that provides economic analysis services, said declines in the oil and gas industry have a wide-reaching effect in the area, including in real estate.
"Before the coronavirus and new oil price war started we were already looking at a so-so year for the Houston region because we knew the oil and gas industry was not very healthy," Spillette said.
Spillette said in a March 11 phone interview that because the oil and gas industry may see stagnation, the demand for housing and office space may also take a hit.
"I think there will be very little wind in the sails of the Houston economy for a while, and ... Houston may take the biggest hit of any major city," he said.
Spillette said additional diversification beyond energy and health care jobs will likely be needed for the Greater Houston area in the long term.
"I wish I could be more optimistic," he said. "Unless oil prices turn around ... we’re in a tough spot, and it's disappointing. We need to be creating our own industries or getting them to local from elsewhere."
Analysts: Houston energy market will see challenges amid coronavirus-fueled stock declines
Occidental Petroleum Corp., which has offices in The Woodlands and recently acquired Anadarko Petroleum Corp. there, announced it cut dividends this week. (Andrew Christman/Community Impact Newspaper)