By Irina Slav
Texas’ economy is perhaps the most vulnerable to oil price swings given its leading role in the country’s oil industry. Recently, as prices have remained low, talk has begun about the outlook for the state’s economy.
According to a recent Reuters report, for example, smaller independent oil and gas producers in the Lone Star State are struggling to get loans from banks as the latter become increasingly wary of the ability of the borrowers to return the money when the time comes.
Jobs in the Texas oil and gas industry are falling, too. The Houston Business Journal reported this month that September saw a 1,100 decline in the number of jobs in the mining and logging sector—the category that includes oil and gas jobs. Over the 12 months from September 2018, the state’s oil and gas industry added just 1,700 new jobs, which was the lowest number of new job additions to any Texas industry over the same period, data from the Texas Workforce Commission showed.
Yet not everyone is worried. The University of Houston Energy Fellows, for instance, wrote in an article for Forbes that “the alarm bells are premature.” While the experts that make up the group acknowledge there are plenty of reasons to be worried about the economy of Houston—the article focuses on the city—oil prices are not among them.
The trade war with China and the anticipation of a global economic slowdown caused by it is a top concern for any economy and Houston is no exception. Political economic problems in Europe are also a cause for worry. Yet, according to the University of Houston Energy Fellows, bankruptcies in the Houston oil and gas industry are only slightly higher this year than last, and the credit crunch energy independents are facing now is “far from comparable to 2015-16.”
True as this may be, there is no guarantee things will plateau at this level of problems and not deteriorate further. Reuters reports that banks have marked down the perceived value of U.S. oil and gas not just for next year but for the next five years. This value makes the foundation of reserve-based loans, so the lower it is, the less money the banks would be willing to give businesses.
And then there is the question of exposure.
“Some banks believe they have too much energy exposure and want to reduce some of this risk,” a senior executive from private equity firm Warwick Energy, Ian Rainbolt, told Reuters.
“I expect the biggest issues to be with over-leveraged natural gas producers, especially those without firm transportation in geographically-disadvantaged areas,” said another financial services executive, the managing director of investment bank Carl Marks Advisors. To be fair, this executive said the biggest trouble is for companies in the Appalachia, the Rocky Mountains, and Oklahoma.
Meanwhile Texas has begun exporting pure Permian crude—the light, sweet kind of crude pumped from the most prolific shale play in the U.S. Buyers, especially in Asia, want the so-called ‘neat’ barrels with consistent quality of the Midland grade—the purer, the better. That’s a new market that can grow if producers maintain consistent quality. Any new market would strengthen the resilience of the industry despite problems with banks and benchmark prices.