Businesses across Louisiana tied to the oil and gas industry might bear the brunt of another downturn in the price of crude oil, which tumbled as much as 34% Monday before settling just above $31 per barrel.
If sustained, “this might be a death knell for so many companies,” said Peter Ricchiuti, a finance professor at Tulane University who tracks regional companies and stocks across the South through the university's Burkenroad Reports. “There are all these ancillary service industries, such as those who do catering offshore, transporting people by boats or helicopters."
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"It’s been really rough,” Ricchiuti said of the industry's struggles. A 2014-2016 tumble sent prices from more than $100 per barrel to the $30 range before a recovery above $60 coming into this year.
Oil prices fell Monday by the most in one day since the 1991 Gulf War and are the lowest since early 2016.
Monday's oil price plunge followed Russia's refusal last week to join the 14-country OPEC oil cartel in proposed production cuts aimed at supporting oil prices amid declining fuel demand. Thwarted in its search for cuts, Saudi Arabia, the leading OPEC member, sharply changed course over the weekend by cutting prices and signaling it will ramp up production.
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Fuel demand had been softening because of a weak global economy, now further threatened by the coronavirus outbreak that has reduced travel and transport.
"This is going to undermine global investment sentiment over the next couple of months; the best-case scenario would be a flat line for GDP growth in the U.S.," said David Dismukes, head of LSU's Center for Energy Studies.
It’s difficult for oil production businesses to turn a profit when the price sinks below $40 per barrel, which means they might pull back on expenses to preserve cash flow to survive, experts say. Excess spending and efficiencies in the oil and gas sector already have been tackled, so there's not much left to cut from budgets.
Consulting giant Wood Mackenzie noted that the low crude oil prices could spur industry-wide restructuring as many businesses only break even when prices are closer to $53 per barrel. If oil prices are closer to $35 per barrel for the remainder of 2020, Wood Mackenzie estimated that $380 billion in cash flow “would vanish from forecasts” as companies look to cut costs.
"It's going to have collateral impact on the natural gas markets and that's going to have big implications for us in Louisiana with the Haynesville shale," Dismukes said. "I don't know that they are going to survive below $2," he said about the price of natural gas hovering around $1.72 on Monday. "We're also looking at a relatively mild spring so there's no where to sell that excess gas."
About 48,000 individuals worked in the oil and gas sector across Louisiana in December, down from 56,000 in December 2018, according to not seasonally adjusted Federal Reserve Bank of St. Louis data. Oil and gas industry employments' most recent peak in Louisiana was in December 2012, when there were more than 93,000 workers across the state predating the 2014 downturn.
Canadian oil business Enbridge, which employs about 147 workers in the state, with one of its executives sitting on the board of the Louisiana Mid-Continent Oil and Gas Association, doesn't expect any major impacts to its market position.
"Our low-risk business model has proven its strength during financial crises and through various commodity cycles. Much of Enbridge’s business is underpinned by long-term contracts and cost of service agreements, which helps to insulate us from market ups and downs," according to a statement from the company.
Still, its stock tracked a market slump and the big hit taken by the energy sector Monday. Enbridge shares were down nearly 18%.
Covington-based Hornbeck Offshore was already slated to have its stock delisted and it was trading around 13 cents per share on Monday, down from $1.25 per share in July 2019.
Unlike other downturns in the energy industry, there is a growing market for alternative energy sources such as wind and solar, Ricchiuti suggested.
“That makes it really difficult to invest billions of dollars in the deep Gulf of Mexico,” he said. “I think the coronavirus was having some impact on demand but this is going to clobber the bottom line of a lot of companies in Louisiana.”
Taxes and royalties collected by the state are also expected to take a hit. For every $1 decline in the price of oil, it shaves off about $13 million from the state’s budget, he said. The economist responsible for the state's revenue projections suggested that's closer to $11 million or $12 million.
It's unclear whether the price of crude oil may impact the emerging liquefied natural gas export industry in Louisiana. Exports could be crippled if the spread between the cost of natural gas overseas and in the U.S. grow closer together.
Businesses that aren’t carrying heavy debt loads are most likely to survive, but that doesn’t mean others would shut down, but rather seek bankruptcy protection to restructure debt and continue operating.
That would be akin to what Lafayette-based PHI Inc. and others did last year.
“The last thing banks want is 200 helicopters,” Ricchiuti said of PHI's transport fleet.
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Formerly publicly traded, PHI emerged from Chapter 11 bankruptcy protection in September and was taken private by its creditors. The company reduced its debt by $500 million during the bankruptcy process and obtained a new $225 million five-year loan. It regularly shuttled individuals and equipment to and from offshore drilling platforms across the Gulf of Mexico, which can be more than 100 miles.
PHI already laid off 78 employees in February, with cuts described as an attempt to align staffing levels with customer demand.
While the petrochemical industry has been outpacing the oil and gas sector in Louisiana, long-term low oil prices coupled with a stifled China economy could make it difficult for plastic chemical makers in the state.
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The rock bottom price of natural gas has made ethane crackers, in particular, an attractive investment across the state, said Eric Smith, associate director of Tulane University's Energy Institute.
He noted natural gas is often a byproduct of oil production. Cutbacks in drilling, especially in the oil-rich Permian Basin in Texas and New Mexico, would impact natural gas as well. Natural gas is often a raw material for products and an energy source for petrochemical plants.
"The plastics world has been facing very low prices. We are in the middle of a build-out to produce more bulk plastics, but if we don't produce the shale wet gas … it might delay construction," Smith said.
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