South Louisiana’s energy service companies are bracing for a dismal 2016.
Some likely will file for bankruptcy protection or simply shut the doors, industry experts say. At the least, they’ll continue to lay off employees as the industry wrestles with $35 oil and $1.73 natural gas.
“2016 is starting to feel like 1986 all over again. I hate to say that, but it is,” said C.R. “Rusty” Cloutier, CEO of Lafayette-based MidSouth Bank, the largest money lender to Louisiana’s energy service sector. According to federal financial filings, over 22 percent of MidSouth Bank’s loans are in the energy service sector.
“I don’t know if we’ll see a lot of bankruptcies,” Cloutier said. “I do think we’ll see a lot of companies trying to sell. You’ll see some mergers.”
The price of oil started falling from it $100-plus perch in mid-2014, and predictions that it would rebound in 2015 proved wrong. Last week, U.S. crude fell to below $35 a barrel. And natural gas, which has been inexpensive for a number of years, is downright cheap now. In the last month, it fell from $2.37 per million British thermal unit to $1.74, a 19 percent drop in just 22 days.
So far, a few service companies have filed for bankruptcy, the most notable being Hercules Offshore’s filing for Chapter 11 protection. Others include Tomahawk Resources in Harrisonburg and DivCon in Morgan City, both of which are in Chapter 7 liquidation. And ABL Industries in Cankton in May filed for Chapter 11, according to U.S. Bankruptcy Court records.
Economic pain has been felt in other areas. The governments in energy-reliant parishes such as Terrebonne, Lafayette and St. Mary have witnessed precipitous drops in sales tax revenue, a measure of economic activity. And employment in the Lafayette area and the Houma-Thibidaux area ranked No. 1 and No. 3 respectively in job losses nationally from October 2014 to October 2015, according to the Louisiana Workforce Commission.
Cloutier said next year companies and workers not directly tied to oil and gas — doctors, dentists, insurance agents, bar tenders, cafeteria workers — could start to feel the pinch. “I think every person in Louisiana, not just in Lafayette and Houma, will feel it soon,” he said.
Chasing other work
At the ports of Iberia and Terrebonne, whose tenants are predominantly service companies that work for Gulf of Mexico oil and gas producers, some are pursuing projects not directly related to the oil field.
“They’re trying to pick up work anywhere they can. … I’m sure they’re trying to get work all over the world,” said David Rabalais, executive director at the Port of Terrebonne in Houma. He said companies at the port, which include ship builders, are “holding their own” and trying to survive.
At the Port of Iberia, Executive Director Craig Romero said there have been just two of the port’s 100 tenants that have announced they’re leaving. One of them is Central Gulf Shipyard LLC, a subsidiary of a large Channelview Texas-based shipbuilder that began operations at the port seven years ago to build inland tug boats. Romero said the company’s customers recently canceled seven contracts to build boats.
This past Thursday, Central Gulf Shipyard laid off its 100 workers, Romero said.
Some at the Port of Iberia also are chasing work not directly associated with offshore oil and gas. Dynamic Industries has announced it won a job fabricating piping for the $8 billion Sasol ethane cracker project in Westlake. RamFab, owned by parent company Primoris Services Corporation, is rehabilitating a facility at the port to also work on the Sasol project. And Chart Industries, which builds cryogenic boxes to hold liquefied natural gas, has contracts worth billions of dollars to build the boxes for Louisiana’s LNG industry.
Romero said the offshore oil and gas sector remains the main focus for the port’s service companies. He said deepwater Gulf of Mexico projects like the Appomattox development for Shell — which has inked deals with Dynamic and the Bayou Companies — also are keeping some of companies at the port busy.
‘Hang it up’
Unless something drastic happens — such as the collapse of an oil producing country like Venezuela — the price of oil should stay low through 2016, then start to rise again after that, said Eric Smith, associate director of the Tulane Energy Institute within the university’s Freeman School of Business.
“But that’s just saying that it stabilizes (by December 2016) and inches back up,” Smith said. “It doesn’t mean we’ll be at $100 oil anytime soon.”
Smith said the Louisiana energy sector’s most vulnerable companies — both producers and the service companies that work for them — are those operating in the shallow waters Gulf of Mexico, called “the shelf.”
Those companies include Hercules Offshore, which drills for oil and gas in shallow waters, and CalDive International, which has pipeline construction vessels designed for work on the shelf. Both companies, which had extensive operations in south Louisiana, are in Chapter 11 bankruptcy.
“I suspect you’ll see more (bankruptcies) in 2016,” Smith said, for companies that work exclusively on the shelf.
Cloutier, the CEO for MidSouth Bank, said the bankruptcies filed next year probably should not rival the number of those filed in the mid-1980s. He said business owners in the latest boom cycle did not load up on debt the way they did three decades ago, and are not facing crippling loan payments in this bust cycle.
But there have been some businesses this year that have closed the doors, and more may follow suit in 2016, Cloutier said.
“The owners are paying the bills off and saying, ‘I’m done. I ain’t losing any more money. I’ve got a nice little next egg that I’ve put aside since 1980, and I ain’t putting every nickel I have back into it,’ ” Cloutier said. “… They’re much more willing to hang it up.”