“Here in Houston a number of projects have been canceled. Engineers are put on ‘hold.’ There have been some contract engineers laid off, and hiring has been suspended. Everyone is waiting for the other shoe to drop.” That’s how an engineer in the energy sector saw it. And it captured the mood.
So the sky isn’t quite falling on the Houston property market. Not yet. With 18.4 million sq. ft. of office space under construction, the epicenter of the US energy industry is far ahead of number two, New York City with 7.6 million sq. ft. under construction. Dallas is number four with 7.5 million sq. ft. Much of the growth in Texas over the last few years has been spawned by the “shale revolution.”
But the layoff announcements in the oil-and-gas sector are hailing down on the industry.
Weatherford International – headquartered in Houston – announced last week, after reporting a quarterly loss of $475 million, that it was axing 5,000 employees, or 8.9% of its global workforce, to save $350 million per year. Yesterday, Halliburton announced 6,400 job cuts, on top of the 1,000 announced in December. Baker Hughes, which is being acquired by Halliburton, announced 7,000 job cuts. In January, Schlumberger announced 9,000 layoffs. This brings the layoff announcements of the four largest oil-field services companies to 28,400. It’s all about cash flow, now that pricing chaos has swept over the once flush industry.
Oil majors and smaller companies have chimed in with their own layoffs. Privately held companies might quietly proceed with cuts. And many of these folks would have needed some office space.
So the once booming market for office space in Houston has taken a hit. Companies from BP on down have dumped 5.2 million square feet of vacant space on the market for subleasing, up from 1 million a year ago, the Wall Street Journal reported.
But the current building boom is Houston’s biggest since the 1980s, when an oil bust, coupled with a rash of empty skyscrapers, made Houston a national symbol of overbuilding. Then, armed with debt from a banking sector eager to lend, developers brought a tidal wave of building to Houston, in some years increasing the office stock by well over 10%. Vacancy rates shot up past 30% from single digits, property values plummeted, and landlords defaulted on mortgages.
That contributed to a wave of failures for banks stuffed with commercial-property loans. More than 425 Texas institutions between 1980 and 1989 failed, including nine of the state’s 10 largest banks.
So everyone is hoping for the price of oil to jump back to a survivable level. And everyone figures that it’s not going to be as bad as last time. Houston has diversified. Healthcare, as everywhere, is taking over a big part of the economy. This is going to work out somehow, the thinking is.
“Everybody here in Houston is waiting to exhale,” Michael Scheurich, CEO of general contractor Arch-Con Corp., told the Wall Street Journal. Over the last four years, his company grew from fewer than 25 employees to 80 by building office towers. He is hoping for “a soft landing.”
Some of these buildings, much like during the run-up to the oil bust in the mid-1980s, are built “on spec” without tenant commitments, including a 48-story tower downtown.
It “is going to be a soft year – it’s hard not to see that,” admitted Mike Mair, executive VP at Skanska, a multinational project development and construction company based in Sweden. He’s in charge of its developments in the Houston area. They’re finishing a 12-story building that is 62% leased; but the sister-building still under construction next to it has no tenant commitments. Yet he remains optimistic. “I’m not afraid of ’16 and ’17,” he said.
But it might not get any better in his time frame. Dallas Fed President Richard Fisher told Fox Business TV today that low oil prices would probably stick around “for a year or two” as Saudi Arabia has kicked off the process of “price discovery” in a world where the US shale revolution has changed the equation. Creative destruction is what he has in mind: stockholders and junior debt holders of companies that can’t survive the low price of oil are likely to get cleaned out. But the assets will be picked up by larger players, and the industry will go on [read… Oil-Price Debacle Is Far From Over].
“So far,” the oil bust hasn’t impacted car sales. That’s what two dealers with new-car franchises in the oil patch told me. And the engineer in the energy sector told me, “I had dinner with a couple of my friends who work at KBR” – a global engineering and construction company focused on energy and petrochemicals – “and they didn’t look frightened … yet.”
For most folks, the oil bust hasn’t hit yet – except at the gas pump.
The drilling boom leading up to the bust of the mid-1980s had largely been funded by local and regional banks in the oil patch, 700 of which toppled during the subsequent bust. This time, the drilling boom was funded by private equity firms, Wall Street banks, junk bonds, leveraged loans many of which have been cobbled into CLOs, and IPOs. So the financial shrapnel will hit different and distant players.
But local and regional lenders are still on the hook; they extended loans to companies that offered supporting services, such as motels and other housing options for oil workers, and they supply the industry and its workers with a myriad products.
“Obviously, it’s not a bed of roses, but it’s not as bad as people think,” Randy Gartz, an energy banker at the Mutual of Omaha Bank in Houston, told the Wall Street Journal.
Banks are warning these customers that their credit lines will likely be trimmed in the near future. Bank regulators are waking up to the problem too. The Office of the Comptroller of the Currency, which supervises all national banks and federal savings associations, has undertaken two reviews of the banks in its bailiwick, and according to the Wall Street Journal, “has zeroed in on about 10 that have significant exposure to the oil and gas sector.”
Charles Cooper, Commissioner of the Texas Department of Banking, which regulates among other entities state-chartered banks, explained that his agency is keeping an eye on 15 banks with less than $1 billion in assets that are heavily tangled up in the energy sector. It has so far singled out three of them for closer inspection. And he summarized the meme on the street: his office is “not pushing the panic button by any means.”
That comes later.
Wall Street sees a further and potentially brutal drop in the price of oil this year and a miraculous, vertigo-inducing V-shaped recovery late this year or early 2016, a recovery they must have because at these prices, many players in the oil patch will run out of liquidity in 2016. Read… Wall Street Has a Dream About the Price of Oil