Effects of Falling Oil Prices Ripple Across States and Industries

By: Greg Price and Joe Kulek

T hose days – when oil cost more than $100/barrel – may seem like a distant memory. While the drop in oil prices generally puts more money into the

hands of consumers and increases discretionary spending, the specific impact on each industry varies, depending on where you are.

What’s at the root of the drop in oil prices? It’s two parts supply and demand, and one part politics. Technology has enabled the industry to accelerate its production time and process, generating cheap supplies that exceed demand. OPEC, which produces 40 percent of the world’s

crude, hasn’t yet decreased its exports (and re-duced supplies) as a way to pump up the price per barrel. Barring Middle East disruption, most analysts predict that prices will stay around $40-$50/barrel – at least until year-end.

The impact of the greatly reduced prices is ob-vious in some sectors: Decreases in exploration and drilling, onshore shale extraction and off-shore drilling. Already, several companies laid off thousands of workers, and others will likely follow suit. Analysts expect to see a decreasing number of oil and gas projects and capital ex-penditures throughout 2015.

Remember when it cost $70 to fill up an SUV at the pump?

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But the effects ripple well beyond oil and gas. Here are a few areas to watch:

Consumers Have More Cash for Cars, but Not Houses

Low oil prices are temporary, and most consumers realize they may have some extra money in their pockets now. They also understand this may not be the case next year. Thus, we think car sales should remain strong in the short term, espe-cially as SUVs and large vehicles are now even less expensive to fuel.

While consumers have more money in their pockets, it won’t be enough to send them house hunting. Demand for apart-ments and condos should fuel multi-fam-ily construction in non-oil producing states, but the market for single-family housing will remain largely unchanged.

Roofing, on the other hand – with its dependence on petroleum for membranes and adhesives –shoud benefit greatly. For Olsson Roofing Co., Inc., a commercial roofing contractor that serves clients in Wisconsin, Indiana and Illinois and Iowa, a very large percentage of the products the firm uses is a derivative of oil petro-leum products – specifically roofing mem-branes, adhesive and asphalt.

“With oil prices down, it has caused a static price situation over the last six months or so,” said Bill Lynch, the CEO and President of Olsson Roofing, based in Aurora, Illinois. “Even during the reces-sion, we were seeing price increases on pe-troleum derivatives every six months. We haven’t seen any of that since the second half of 2014.” In addition, the oil prices have positively greatly reduced Olsson’s transportation costs since the company has a fleet of close to 100 vehicles that constantly drive to and from job sites.

The stable product prices take the uncer-tainty out of the marketplace and allow Olsson to more accurately estimate proj-

ects that will take place a few months away. Lynch said roofing contractors are pres-

suring materials manufacturers to lower their prices. “Though our suppliers like Firestone, Carlisle, GAF and Johns Man-ville have taken advantage of lower oil prices, they still haven’t offered product price rollbacks. Instead, they simply can-cel the fuel surcharge they put in place – similar to many other companies – when oil prices were high.”

O&G Service Providers Turn Low Oil Prices into Opportunity

Low oil prices could impact recent strong growth trends for RigNet, a global provider of remote communications to the oil and gas industry.

“Our U.S. land drilling business will be affected first as a result of those con-tracts typically being on a well to well basis, which range from 30-60 days,” said

Marty Jimmerson, the CFO and Senior Vice President of RigNet. “Unlike the down cycle in 2009, our land business currently only represents 5 percent of our top line revenue today, compared to more than 20 percent of our revenue in 2009.”

“We expect our flagship offshore busi-ness to hold up reasonably well despite some drillers cold stacking or scrapping rigs. Rigs that continue to work will need to operate more efficiently, which we believe our services facilitate,” said Jimmerson. “As companies continue to announce capital spending reductions, we’ll continue to monitor the market conditions – but we believe the long-term industry fundamentals will improve.”

Since communication plays an es-sential role in oil and gas operations, Jimmerson doesn’t expect customers to terminate his company’s service. In-

stead, “Some are choosing to maintain the same satellite bandwidth, or increase it albeit less frequently than in the past. Other customers, however, are continu-ing to increase their bandwidth as fast or faster than in the past so that they can drill more efficiently and cut costs.”

“If a drilling rig manager can video conference with a supervisor back at the corporate or regional office regarding op-erational or equipment problems, they can potentially collaboratively solve the problem before that equipment breaks. Otherwise, if the drilling rig has to go into downtime, the drilling rig compa-ny incurs downtime-reducing revenue and experiences operating costs that can run hundreds of thousands of dollars per day,” said Jimmerson. “Communication could make the difference and save the company significant amounts of money. That’s how companies can stay profitable in a down market.”

For Rumber Materials CEO Brian Adams, the low prices present more of an opportunity than a threat. Rumber man-ufactures a wide variety of durable, petro-leum-based products from recycled tire rubber and plastics for oilfield, military, marines, trucks and boards/trailer floor-ing applications, among others. The com-pany has clients around the world, with 30-35 percent in the oil and gas industry.

Low oil prices drive demand down in the recycled raw materials commodity business. This increases the supply and decreases the price of the materials. As a result, the value of recycled material plummets since it’s just as easy for peo-ple to buy new materials.

Adams sees this as an opportunity to grow. “Since we make high-quality prod-ucts from entirely recycled materials – that are now cheaper to produce – this enables us to enter new markets and grow the business.”

“With oil prices down, it has caused a static price situation over the last six

months or so. Even during the recession, we were seeing price increases on

petroleum derivatives every six months. We haven’t seen any of that since the

second half of 2014.”Bill Lynch, the CEO and President of Olsson Roofing, based in Aurora, Illinois

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Texas Contractors Turn to Retail from Housing and Office; Houston Takes a ‘Breather’

Torrey Hawkins, the Founder and Pres-ident of Houston-based commercial con-tractor Angler Construction, said that his firm – which serves the light indus-trial/retail markets – has unexpectedly benefited from the low oil prices. Angler landed more work in the past couple of months than it did in all of 2014.

“Probably 60-70 percent of our projects were for energy-related companies or speculative developers, but we’re mov-ing away from that marketplace and fo-cusing on end user-driven construction projects that aren’t affected by the recent downslide in energy prices,” said Hawkins.

Hawkins also said that much of the high-rise speculative office construction planned for the Houston market likely won’t happen anytime soon. “This oil price collapse occurred very quickly, which discouraged a lot of speculative building. Everyone is taking more of a conservative approach. Before, it was a philosophy of, ‘If you build it, you can fill it.’”

Hawkins said people are “anxiously op-timistic” about the future of oil prices, believing that we are at or near the pric-ing bottom. While Houston as been able to diversify its economy, it’s still greatly affected by the energy-related commod-ity pricing, so most people have taken a conservative approach to their discre-tionary spending.

Luckily, Houston experienced significant population growth over the last few years, and multi-family housing construction grew with it. Lower oil prices will damp-en this growth due to the lack of available capital and the reduction in job growth, as oil companies reduce staff and less people move there in search of jobs.

As multi-family housing construction decreases and consumer spending in-creases, retail developers have an oppor-tunity to break into the market.

“There was such a demand for high-density, multi-family type projects for awhile, and retail developers just couldn’t compete,” said Hawkins. “Now

that some of those multi-family deals aren’t going to happen, this opens up an opportunity for retail developers to step in, which benefits commercial contract-ing firms such as Angler. We’ve probably seen an increase of 20 percent in the last six months in new retail projects.”

Adam Wheeless and Derik Lundy serve as partners at Gallant Builders, a commer-cial general contracting firm that primar-ily serves clients in Houston. The firm does half its work in new construction and the other half in corporate interiors.

Wheeless and Lundy said Houston has “been running at such a frantic pace for so long that the slowdown in construc-tion caused by low oil prices is kind of a ‘breather.’ The situation might weed out some people who have moved here tem-porarily and may help balance out the workforce.”

“I don’t think Houston has ever seen a boom this big, and the number of projects with such a thin workforce has been tough,” said Lundy. “This really helps Houston at some level since it puts things back in reality…the whole bubble was getting out of control.”

When trying to keep pace with the re-cent boom, the construction industry found it difficult to identify talent – par-ticularly because the oil and gas indus-try and the construction industry often share a workforce. Adam and Derik said that when the oil industry is doing well

then it pays significantly more than con-struction – so it takes talent away from the construction industry. But when the oil industry slows down, many of its workers return to jobs in construction.

“The thinness in the qualified person-nel that we work with has made projects difficult to execute, and talent affects everything from production to safety to quality,” said Wheeless.

Gallant Builders serves a variety of in-dustries – including oil and gas. As ener-gy companies look to cut costs and un-necessary spending, they restructure and reduce staffs. Lundy said that affects the firm’s corporate interior practice. It does high-end corporate interior work during boom times, and paints walls and installs carpeting during busts.

Even though Gallant Builders hasn’t been hurt by the oil prices, Wheeless and Lundy stress that oil and gas companies will increasingly start to nix more and more projects – leading to less available jobs around the country.

Dakotas and Louisiana Face Tough Road Ahead

Large oil-producing states face the darkest days since their economies de-pend so heavily on the revenues from the oil and gas industry.

While Texas has some diversificiation and doesn’t rely solely on oil and gas rev-enues, the Dakotas will face some tough-er challenges. The cost of drilling there is now higher than the price of oil, so nu-merous drilling rigs will get stacked and returned to their yards.

Due to the climate and terrain in the Dakotas, oil companies often need to drill deeper and have greater distances to cover between drilling sites. The gas also needs more refining to get it ready for commercial use than it does in oth-er states. This all adds additional costs. Across the board, the economy in the Dakotas will experience a decline since people will lose jobs as the oil and gas in-dustry slows down.

Louisiana will feel the effects of the oil prices as well. It had a moratorium on drilling following the BP oil spill off the Gulf of Mexico in 2010. The state just started to recover from the loss in reve-nues, but now it faces a big test as to how well it can weather the current storm.

Louisiana relies heavily on oil and gas revenues to fund a variety of state pro-grams, so the low oil prices have resulted in huge revenue shortfalls and sizeable layoffs. The state faces more than a $100 million midyear shortfall in expected revenue – and it will only grow bigger the longer prices remain low.

As the state is forced to slash budgets and reduce funding for select programs, everyone is worried, especially those at higher education institutations. If the state significantly lowers higher edu-cation funding, schools will have to de-crease the number of classes offered, close certain campuses, lay off faculty and staff, halt infrastructure expansion and/or repair work and cut funding for summer stipends, research grants and apprenticeship opportunities. Ultimate-ly, some schools could potentially risk losing their accreditation.

Overall, the economy in Louisiana will struggle greatly as the state struggles to find a way to keep everything running and everyone employed with a rapidly di-minishing pool of money and a decreas-ing number of jobs.

‘Every Time There’s an Action, There’s a Reaction’

The impact of the drop in oil prices differs widely depending on numerous factors – with location leading the way.

The global oil and gas market hasn’t hit bottom yet, and it will likely get tougher before it gets better. Very few people in the energy business believe we need to have $100/barrel oil in order to make money, but they also think there’s a better balance.

It’s important to consider the ripple effect of the low oil prices on national interests -- high oil prices encourage energy exploration and drilling in addi-tion to investment in alternative energy solutions. Low prices discourage both. Thus, the repercussions of low oil prices in the long term threaten our country’s ability to become independent of for-eign oil.

Perhaps Lynch said it best. “We are tru-ly a global economy, so even if you’re just a roofing contractor here in Chicago, you affect others. Every time there’s an action, there’s a reaction someplace else.”

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