OUT OF WORK: With the number of active rigs in Louisiana at a record low, liftboats sit in storage at the Port of Iberia in New Iberia. (Photo by Tim Mueller)
Quay McKnight’s father survived the oil bust of the 1980s. He came away with an important lesson that he hammered into his son: Do not get into debt.
“We choose to grow organically,” says McKnight, chairman of M&M International in Broussard, which sells well-control valves for oil and gas drilling. “And in times like this, it’s a godsend.”
Even in the midst of the worst oil industry slump in 30 years, the company remains reasonably profitable, he says, but only through painful cost-cutting. They’ve had two rounds of layoffs since rig counts started falling at the end of 2014, reducing their workforce from 100 to about 70.
McKnight says he thought his company was lean enough to hold steady for a while. But after watching oil prices dip below $30 a barrel in mid-January, he’s not so sure.
“I don’t know what’s going to happen next week,” he says. “We depend heavily on drilling, and what those guys do is what we have to respond to. I’m not sure, if prices continue to fall, what that looks like.”
Less than two years ago, oil prices touched $100 a barrel. Since then, the price has fallen to its lowest point in more than a decade, even lower than during the worst days of the global recession. Healthy oil and gas-related companies are staying alive by slashing payroll and expenses, but there’s only so much they can cut while still remaining viable.
McKnight considers himself a pretty positive guy, and he believes the future will be bright. The oil industry is cyclical, and it always makes a comeback.
Lower prices lead to less production, but the demand for oil doesn’t go away. So eventually the market tends to rebalance. This time probably will be no different.
But for now there’s not much optimism in the oil business. The strong likely will survive, but the rest may fall away, and it might get worse before it gets any better.
This downturn reminds Louisiana Oil and Gas Association President Don Briggs of the mid-1980s, and not just for the obvious reasons.
President Ronald Reagan’s administration secretly urged Saudi Arabia to ramp up oil production, cratering the market for the Soviet Union’s only reliable source of hard currency. While the tactic may have helped win the Cold War, Louisiana’s oil industry was devastated.
Once again, the domestic oil business is caught in geopolitical crossfire, and again the Saudis are at least partly to blame.
“Cartels do one of two things,” Briggs says. “One, they can stabilize prices and make things competitive. Or they take out their competition.”
OPEC, of which Saudi Arabia is the most important member, has chosen the latter, Briggs says.
“This is a direct frontal attack on our industry,” he adds.
Of course American companies, particularly the shale drillers, also are flooding the market. In 2008, the U.S. was producing five million barrels of crude per day, Briggs says. By 2015, that total had almost doubled.
Briggs says the world’s daily supply is 96 million barrels a day, which exceeds demand by two million barrels, while more than a billion barrels of oil are sitting in pipelines, ships and storage tanks.
As it emerges from international sanctions, Iran is preparing to add even more supply to the market. And economic growth in the developing world no longer can be depended upon to boost demand.
“We are drowning in oil,” Briggs says. “There have been a lot of bankruptcies, and there are going to be more. Everybody’s gotten as lean as they can get.”
He says the number of active rigs in Louisiana is at a “record low,” even compared to the nadir of the 1980s. Only one rig is running in the state’s inland waters, Briggs says, while only eight are running on land in south Louisiana and only a couple dozen in the deepwater of the Gulf of Mexico. That leaves way too many service companies trying to feed off of too few rigs.
According to the most recent Louisiana Workforce Commission report, 42,500 people were working in mining and logging, the category that includes oil and gas, last December. That’s a 21% decrease from two years prior, and it’s safe to assume the numbers are still falling. Moncla Companies, a Lafayette rig and oil services company, told KATC it had gone from 633 employees in 2014 to 305 in December 2015. Oil-and-gas equipment supplier National Oilwell Varco on Jan. 7 closed a Houma facility that employed 80 people, according to the most recent mass layoff announcement by the LWC.
When Jason El Koubi became CEO of One Acadiana, the greater Lafayette business chamber, in 2013, people were excited about the economic climate. Oil and gas was doing well, radiating positive ripple effects throughout the region.
Today, there’s far more anxiety and uncertainty, he says. While many companies are paring back their expenses, El Koubi hasn’t seen a wave of closures.
“They’re preserving their capital and their core players, and waiting for an opportunity to invest when the market conditions are better,” he says.
Fortunately, Louisiana’s economy is more diversified than it used to be. The 1980s oil bust led to double-digit unemployment in the state; today it’s about 6.3%. In the Lafayette area, a little more than 10% of the jobs are in oil and gas, compared to almost 20% before the 1980s slump, El Koubi says.
Gregg Gothreaux, CEO of the Lafayette Economic Development Authority, says he’s only heard about “a couple” of oil and gas companies going out of business so far. He hasn’t yet seen many mergers and acquisitions, though he’s been told to expect more in the near future.
He hopes many laid off locals will continue living in Lafayette but find jobs they can commute to in the Lake Charles-area construction boom. While cheap natural gas isn’t good for the oil and gas industry, it’s great for chemical producers along south Louisiana’s 10/12 corridor.
And some oil patch veterans will find temporary jobs or work in unrelated fields to stay afloat. A recent job fair for the Ambassador Town Center retail center drew about 2,800 people, Gothreaux says.
After 15 years of recruiting people into the oil and gas industry, LEDA suddenly finds itself with an energy labor surplus.
“Our mission now is to find jobs for people that were working in the energy sector,” he says.
WAITING FOR THE TURNAROUND
Charles Goodson is CEO of Lafayette-based PetroQuest Energy, which evolved from a company he co-founded in 1985. Not exactly an ideal time to start an oil and gas exploration and production company.
“I went through pretty much all of my savings in the first year,” he recalls. “The more of these cycles you go through, the more you realize they’re longer than you anticipate.”
PetroQuest stock was worth $8 a share in 2014. Lately, it’s trading for less than 40 cents, putting the company’s common stock at risk of being delisted by the New York Stock Exchange. PetroQuest officials have sold their largest asset in Oklahoma’s Woodford Shale for $280 million. They’ve also made a complex exchange offer to their bondholders in hopes of extending the maturity date of many of those bonds from 2017 to 2021.
“We have a reason to survive,” Goodson says. “We have some great assets in the Gulf Coast, the Gulf of Mexico and east Texas. It’s a function of waiting for the commodity prices to come back up.”
Production and service companies can be “frenemies,” as oil and gas attorney Bob Duplantis puts it, even during good times. There’s a tendency to become less friendly when the money isn’t flowing.
“The longer these prices stay down, and the more stress on the cash flows, the more pressure there is to get into a very adversarial sort of relationship,” says Gary Luquette, CEO of Frank’s International. Luquette hopes companies, rather than just slashing costs and hunkering down, use their downtime to prepare for the marketplace of the future. [See “Strategies for tough times.”]
Goodson says PetroQuest gets along well with its service companies. But when commodity prices reach a certain point, such as when natural gas falls below $2.75, it’s impossible to negotiate a rate where it makes sense to keep going.
“They can only go so low,” Goodson says. “At a certain point, they say we’d rather idle our equipment, lay off our employees, keep some hands, and wait for this price to rebound. And that’s kind of what’s going on right now.”
Goodson says now is a good time to do some “housecleaning.” Companies are whittling down to their best people, their best assets and their best partners.
Danos, privately held and headquartered in Gray, has worked for oil and gas operators for almost 70 years. Executive Vice President Paul Danos says the company’s overall workforce including contractors is down from about 2,000 to 1,750 or so. But the company kept all of its core staff and had its busiest year ever in 2015.
There was still work to be had, Danos says, but the margins were much tighter, and customers could be picky about which companies they hired. Now, there’s not enough work for even the best performers.
“This year, even the good suppliers are going to suffer, and some of the good people are going to lose their jobs,” Danos says.
Danos says his company has a broad customer base and not much debt, and should be able to “scrap by with a little bit more than our fair share by really executing well.”
“We’re hopeful that we can continue to do what we did last year,” he says, “which is keep our heads above water, maintain our position, and stay in the game in a strong way for when it all turns around.”
Luquette says industry can still partner with university leadership even when the demand for graduates goes down by giving of time, advocating for technical jobs in the energy business, and explaining the cyclical nature of the industry. But Fathi Boukadi, head of the petroleum engineering department at UL-Lafayette, says he can barely hire teaching assistants because donations have dried up, and companies have stopped recruiting.
Boukadi says companies are laying off a lot of people who are near retirement age and aren’t coming back, meaning they could be caught shorthanded when the market rebounds. He urges companies to still consider hiring college graduates, at a low salary or even part-time if necessary.
Boukadi says the price of oil could rebound as early as this summer, perhaps even reaching $60 by 2017. Some may see that as a wildly optimistic prediction, but who knows?
At this time last year, plenty of so-called experts thought prices would have rebounded to $70 or $80 by now, Briggs says. Maybe they’re wrong again.
“Right now, everyone’s saying we’re going to go to $20 oil,” Briggs says with a chuckle. “So maybe we’re going to be at $70 or $80 oil this time next year.”
Originally published in the first quarter 2016 edition of 10/12 Industry Report. Read more from this issue at 1012industryreport.com.