Oil Bust Veterans Brace While Shale-Boom Newbies Swagger

Updated on
Endeavor Energy Resources Founder Autry Stephens
Endeavor Energy Resources LP Founder Autry Stephens understands how easy it is to get carried away by oil boom exuberance. Photographer: Brittany Sowacke/Bloomberg

Autry Stephens knows the look and feel of an oil boom going bust, and he’s starting to get ready.

The West Texas wildcatter, 76, has weathered four such cycles in his 52 years draining crude from the Permian basin, still the most prolific U.S. oilfield. Though the collapse in prices since June doesn’t yet have him in a panic, Stephens recognizes the signs of another downturn on the horizon.

And like many bust-hardened veterans in this region -- which has made and broken the fortunes of thousands -- he’s talking about it like a gathering storm. The ups and downs of oil are a way of life in Midland and Odessa, Texas, dating all the way back to the Great Depression. It’s as much a part of the culture as Gulf Coast hurricanes, and residents often prepare accordingly.

“We’re going to hunker down and go into survival mode,” Stephens, founder of Endeavor Energy Resources LP, said in an interview from his Midland office, where visitors are first greeted by a statuette of a Texas Longhorn steer. “Stay alive is our mantra, until the price recovers.”

Go about 1,300 miles (2,100 kilometers) due north and you get a very different take from the rookie oil barons in North Dakota, where crude output from the Bakken formation went from 200,000 barrels a day in 2008 to about 1.2 million today. They’re not seeing any need to take shelter, and it shows in their swagger.

Welcome Relief

Rich Vestal, who’s seen his trucking business double, double again and then double one more time in the past five years, is sipping root beer out of a Styrofoam cup at the Courthouse Cafe in Williston, North Dakota. “I would welcome a slowdown,” he says, while believing one’s not really in the works.

Of all the booming U.S. oil regions set soaring by a drilling renaissance in shale rock, the Permian and Bakken basins are among the most vulnerable to oil prices that fell to $56.74 a barrel at 11:19 a.m. in New York. With enough crude to exceed the reserves of Saudi Arabia, according to some producers, they’re also the most critical to the future of the U.S. shale boom.

For the Texas veteran, the forecast is telling him to batten down the hatches. Up in North Dakota, oil’s new kids on the block figure there’s just a few clouds floating by.

Early signs are pointing in favor of the worriers. Major producers that have well-honed strategies for dealing with falling prices are cutting billions from spending plans, hinting at layoffs and reduced rig counts in both regions. Some already are beginning to cut back drilling, shifting their spending to cheaper fields where they can get more oil per dollar or bargaining with suppliers over costs.

Reviewing Options

Permits to drill new oil and natural gas wells using newly developed techniques such as fracking and horizontal drilling fell by more than 1,000 in November from October, a decline of 36 percent that was most pronounced in West Texas and North Dakota, according to DrillingInfo, an industry researcher. Schlumberger Ltd. and Halliburton Co., which provide services for oil producers, have both announced planned job cuts.

ConocoPhillips identified the Permian as one region where it will defer spending next year. The Permian is likely to be one of the main areas from which producers with better options flee, according to a Sanford C. Bernstein & Co. note to investors Dec. 8.

The average price at which a producer in North Dakota can earn a 10 percent return is $65 a barrel, according to an analysis of 10,000 wells by a team of analysts led by Manuj Nikhanj at ITG Investment Research Inc. U.S. oil fell below $60 last week for the first time since 2009.

Boom Times

If fear feels like a stretch, it’s because both areas bear the markers of a boom. The unemployment rate in Midland is less than 3 percent. A Midland Sam’s Club pays workers $20 an hour, major highways are lined with brand new hotel developments that are full at rates above $300 a night and a one bedroom apartment in a new complex now rents for $1,800 a month.

On a recent morning in frozen Williston, job seekers were fixed in front of a few dozen computers in the office of a state-run employment service. People are journeying thousands of miles cross-country to seek an oilfield job in a migration that echoes the California Gold Rush, back in the 19th century. The county’s unemployment rate is 0.8 percent. Over the last few years, the joke around the employment office was that job interviews consisted of: Do you have a pulse?

If history is any guide, that’s about to end, according to Stephens and a number of other producers in West Texas’s Permian Basin. From roughnecks in the oil field to the suit-wearers who eat lunch at the Petroleum Club of Midland, fear is lurking beneath the veneer of economic frenzy.

Workout Specialist

If low prices persist, they all know what to expect: New drilling permits will fall, rigs will be idled, work crews will see their hours cut, then the layoffs start. Eventually, your friendly banker won’t return calls. Instead, the bank sends over an auditor nicknamed a “workout specialist” for his austere focus on cost-cutting.

The region saw its first bust in 1930 after the stock market crashed and competing crude wells across the state flooded the market. Prices went so far down that renowned oilman Sid Richardson had to pay his roustabouts with groceries to keep them working. Richardson was evicted from one hotel after another when he ran out of money, but persevered to become one of the wealthiest men in the world the next time oil boomed later that decade, according to “The Big Rich,” a 2009 book by Bryan Burrough.

It’s all become a familiar routine to Stephens, and he doesn’t mind sharing a few war stories. His first dance with a bust came in the mid-1980s, when prices collapsed within a month of him completing a major acquisition. In the next round, in the late 1990s, he couldn’t make an interest payment and lost his loan, forcing him to pay more to borrow money from another bank.

Different Pains

During the 2008 financial crisis, a group of banks reacted swiftly to liquidity concerns in the market and demanded a $100 million payment within six months, forcing Stephens to shut down all but a few of his rigs, he said.

“Each time was very costly in a lot of very different ways,” he said.

Across North Dakota’s booming shale towns, the good times have been so good it’s gotten hard to picture anything different. Even as tumbling prices threaten to put the brakes on the roaring energy sector, there’s a widely held belief that everyone’s done so well it won’t be much of a problem.

‘All Good’

Along the windswept northwest corner of the state, where country roads choked by semi-trailer trucks stretch deep into the horizon, the only thing separating towns scattered along the borders of Montana and Canada is miles of open plains pockmarked with oil rigs and wells flaring natural gas. The feeling of threat posed by a glut in crude and weakening global demand seems especially remote.

“Can we double again next year or are we only going to grow 60 percent?” asks a nonchalant John Ollech, president and chief executive officer of B&G Oilfield Services, which monitors and maintains oil wells and pipelines.

Housed in a warehouse-type building about the size of an airplane hangar, B&G has roughly doubled in size each of the last two years since being acquired in 2012 by private equity firm One Eighty Capital LLC.

“It’s still all good. We’re not contemplating any doom and gloom,” says Ollech, whose biggest worry is finding enough skilled and reliable workers. None of his employees have asked him about the effects of oil’s fall, but he brought it up anyway at a recent safety meeting. He told his staff that they can’t control crude prices and that they only need to worry about doing their jobs well.

Mailbox Bonanza

McKenzie County, south of Williston, had 67 active rigs on Dec. 8, the most of any in North Dakota. Here in Watford City, the boom has sprouted all sorts of odd businesses. Jim Bacon quit his job as a sales manager at a Dodge dealership near his home of Spearfish, South Dakota, to peddle oilfield fire-retardant overalls and other gear.

After initially selling out a trailer-load in less than a week, he and a partner opened a store here on Main Street. Three years later, the apparel store has another trade: 750 private mailboxes because the nearby post office can’t cater to all the newcomers.

“We charge $150 per box for six months,” he said. Such fees have become old hat to the likes of Randi Tarter, a 26-year-old server and bartender at Outlaw’s Bar and Grill in Watford City who moved here in January from Coeur d’Alene, Idaho.

Price Proof

“We make a lot of money in this town, so we just don’t care about oil prices,” she said.

For Vestal, the owner of Red River Supply Inc., a logistics and warehousing company, it’s not so much that he doesn’t care. He lost his shirt when oil prices collapsed in the 1980s, so he knows what a bust feels like. Now there’s just too much oil and too much work to spend time worrying. He likened the massive Bakken crude resources to “money in the bank.”

Stephens understands how easy it is to get carried away by oil boom exuberance. He’s been there. “I would just remind them that it can go downhill just as quickly as it went up,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE