Is the Permian Basin Seeing the End of the Oil Boom?

Is the Permian Basin Seeing the End of the Oil Boom?
Oil prices are slipping and that has people worried. Could we be seeing the end of the boom and how are oil producers and local businesses being affected?

"So, we're down, say, 50% of the rigs that we had before. We had 400 rigs running in the Permian. We're down to about 200 rigs,"  said Kirk Edwards.

To say the oil industry is an unpredictable market is somewhat of an understatement. After enjoying high oil prices for the last several months, people all over are feeling the effects of the recent slow down. But possibly none as much as the oil producers.

According to Edwards, President of Latigo Petroleum, in Odessa, "We're as volatile as always. I think everybody was getting comfortable with the $60 price range. The service companies, prices have come down, probably, 40% from where they were a year ago." 

Edwards has been in the oil business for over 30 years. When the boom hit a couple of years ago, he was extremely optimistic. Now that things have slowed a bit, he still is.

"It's a very interesting time, again, as always in this business that we have. I'm still optimistic we will be in 60-70 range, once the Greece and China things work themselves out. We're probably going to go ahead and drill, then hopefully later on in the year, the prices will be back up to where we want them to pay out our wells," Edwards said.

Between 2011 and now, the price of a barrel of oil has been anywhere from the low to mid 90's to over 100, in the 60's, to where it is now, in the 50's.

Edwards says, even in these low prices, there can still be a positive return, "So, if you take 40% lower cost, then you get 40% less for your oil. Really, the oil and gas companies, if you go back to drilling today, we're getting the same economics we got at $100 oil, because the wells will pay out, in the same period of time."

As for the stacked rigs along Highway 80 in Ector County and the layoffs of hundreds of employees,  there's a method to that madness, too.  Each stacked rig is about $10 to $20 million worth of capital investments.  Not to mention the cost of labor to man them.  

"If you don't stack your rig, you're bleeding cash, holding those employees. But yet, they don't have the labor cost, associated with them, going out the door every month either. So, they had to do it as, purely an economic move on their part," Edwards said.

But we did say there was a positive side to this slowdown. Through it all, commercial and retail construction in the Permian Basin is thriving. Recently built hotels and apartment complexes, once filled to capacity are now renting and leasing again. More are being built and the retail business are building, too.

Jerry Morales wears two hats, He's the current Mayor of Midland and he also owns his own restaurant.  He's seen first hand the effects of the boom and the slow down.

"There was a lot of concern, about what it is going to do to our business, the impact?

"When January came around, February, the financial impact wasn't that bad.  We continued to see 30 minutes waits (for a table) at the chain restaurants and good waits at the mom and pop restaurants."  he said.

Things did change in the summer. Students were not taking long vacations. People were starting to cut back on spending and tightening their belts. 

"June was probably the month when I heard from restauranteurs, that they felt the impact, financially," said Morales.

The city, as a whole, is also starting to feel the pinch. This is an especially crucial time, since they city council is getting ready to go into it's budget season. Council members are worried, since the most recent report on sales tax receipts came in 11% less than last year. 

According to the Mayor, "There is much concern that we're probably going to have to tighten our belt, put a hiring freeze out there. I don't think there will be any layoffs, but we will not be hiring, at this time."

Current projects, already approved and funded, like the new municipal courthouse and road projects will go on as planned.

Morales says if tightening the financial belt is what's required,  the Tall City is in good shape.

"We've done a fantastic job of building up our savings account. We're talking upwards of $40 million in our savings account. So, if we were to get very tight, we have a good, six month supply."

If new businesses want to come in, during this time, Mayor Morales won't turn them away, "There is no reason to shut the doors and say we're not doing business. Midland is not closing down, for any reason. We're going to say "come on in!"  

Compared to the boom and bust of the 80's, folks today have learned their lesson. albeit, some harder than others. There will be no closed down businesses and no semblance of a ghost town.   

"I think people in Midland and Odessa and the surrounding counties, too, it doesn't look like a "bust town." The traffic is still bad. The cafeterias and restaurants are still full," said Edwards. 

"People are still spending. They have jobs. They're working. Those that were laid off, in oil and gas, the economy absorbed those individuals. So, they're still receiving a paycheck. A lot of them are still getting benefits," Morales said.

Edwards, like many others, is waiting for oil prices to come up again. Then it's back to drilling.  He stays positive, through it all. Mayor Morales is positive, too.

"The Permian Basin is the lowest cost producer in the country and in the world. We're going to be last to shut down and the first to get back going, again," said Edwards.   

"It's business as usual. But we'll definitely be monitoring, as we always do. We're very conservative, very conscientious about the taxpayers money. But it's exciting times and we're very blessed to be here, in the Permian Basin," Morales said.  

These interviews were conducted last week, days before the nuclear deal was struck with Iran on Tuesday. It will be interesting to see if and how lifting those sanctions will affect our current situation.