News & Our Thinking

(St. Louis Business Journal)

As investors — once rushing to cash in on high prices — flee the energy sector, stock values for U.S. drillers have sunk with prices. “If you asked people when oil was $100 a barrel what they would have thought a bad price environment would be, they would have told you $80, $85,” said Ken Crawford, a senior portfolio manager at the Clayton-based investment firm Argent Capital. “I think if someone had said $50 a barrel, you would want to give them a breathalyzer.”

January 23, 2015 (Ben Unglesbee)

Chris Mitchell, president of Carmi, Ill.-based George N. Mitchell Drilling Company, has been involved in the oil industry since the mid-1970s, so he’s familiar with oil’s boom-bust cycle. Recently, when listening to a peer in the industry complain about what low prices were doing to the business, Mitchell told him: “It’s like winter. Nobody likes it, but sooner or later it’s going to come.”

Price tumbles might be inevitable in the oil industry, but virtually nobody expected the price of oil to fall by so much and as quickly as it has since September. With oil prices at their lowest point since 2009 and still hovering below $50 per barrel as of Wednesday, the related dip in gasoline prices are a boon to consumers at the same time as they’re squeezing the revenue and bottom lines of companies involved in the oil trade, such as Mitchell’s and other drillers in the Illinois Basin and worldwide. Companies in industries that support oil, such as St. Louis-based FutureFuel and Fuel Performance Solutions, are getting burned as are major corporations, including U.S. Steel, Southwest Airlines and Delta Airlines.

Battered biofuels

Because they compete with oil, biofuels face a tougher road in a world that is for now filled with cheap oil. Clayton-based FutureFuel Corp., led by CEO Tony Novelly, saw third-quarter revenue from its biodiesel segment fall by nearly $20 million, or 25 percent, from last year, although the company attributed the loss to changes in federal policy around biofuels. Those results don’t cover the quarter ended Dec. 31, which saw the steepest drop in oil prices.

The company’s stock has fallen from more than $17 a share in July to less than $10 a share at its one-year low in December. The stock closed at $11.50 a share Jan. 20, down 32 percent from a year ago.

St. Louis gasoline and biodiesel additive maker Fuel Performance Solutions, which is based in Clayton and led by CEO Jonathan Burst, also has seen its stock careen downward. The value of its shares have fallen 50 percent since June — from 18 cents a share to 9 cents a share Jan. 20.

Lower spending

As companies in the oil trade are taking a drubbing on revenue, many are reducing their capital expenditures for next year. Mitchell’s company, which is named after his father and has been drilling in the Illinois Basin since the 1940s, saw a 10 percent drop in revenue in 2014 because of price changes. That could become a 25 percent to 30 percent decrease over the next two years if oil prices stay low, Mitchell said.

The company slowed its drilling activity in 2014, from 135 new wells in 2013 to around 120 in last year. Across the Illinois Basin — an oil-rich reservoir stretching about 60,000 square miles across most of Illinois as well as parts of Indiana and Kentucky — Mitchell said new well drilling could drop by 25 percent to 30 percent this year, including at his own company. “We’re expecting to see a pretty severe cut in activity,” Mitchell said. “It gives you less money to play with or to work with,” he said, referring to drops in crude prices. “If you have your paycheck cut in half, can you go out and mortgage your home?”

Mitchell anticipates he’ll have to cut jobs — though he doesn’t know how many yet — and others will as well. The company employs nearly 100 people now.

Brad Richards, executive vice president of the Illinois Oil and Gas Association, offers as a conservative estimate that there are currently 6,000 people employed in production alone in the Illinois Basin. Many of those jobs could be in jeopardy if activity slows. “If the downturn in prices lasts, it’s going to cause problems,” Richards said. “It’s got our attention, I can tell you that.”

According to the state’s Department of Natural Resources, more than 32,000 wells pump oil and gas out of Illinois, along with an additional 10,500 injection wells, which use fluid to break up rock. Among the 1,500 operators controlling those wells is Pennsylvania-based Rex Energy Corp., which has a field office in Bridgeport, Illinois. In December, the company announced that capital expenditures in 2015 for its Illinois Basin operations would be about $20 million, down more than 50 percent from its 2014 budget of $40 million to $45 million for the basin. Rex’s total capital expenditures are down significantly from last year as well, a measure CEO Tom Stabley said would keep the company financially flexible amid low oil prices.

As investors — once rushing to cash in on high prices — flee the energy sector, stock values for U.S. drillers have sunk with prices. “If you asked people when oil was $100 a barrel what they would have thought a bad price environment would be, they would have told you $80, $85,” said Ken Crawford, a senior portfolio manager at the Clayton-based investment firm Argent Capital. “I think if someone had said $50 a barrel, you would want to give them a breathalyzer.”

In Argent’s portfolio is Oklahoma City-based Chesapeake Energy, which, after hitting a high of more than $30 a share in June, fell to a 52-week low of $16.71 a share in December. Argent also holds stocks in oil services firms, including Dublin-based Weatherford International, another company that has also lost nearly 50 percent of its stock value. “When big oil companies spend less, they spend less with the service companies,” Crawford said. He described the sudden plunge in energy stock values as “awesome” in its scale — “Unless you’re holding them for clients,” he said.

Broader impact

The slowdown has spread beyond the energy industry. Pittsburgh-based U.S. Steel, which sells tube equipment for pipelines and oil wells, announced in the first week of January that it would idle its Lorain, Ohio, plant and lay off more than 600 workers in the process. “The company has suddenly lost a great deal of business because of the recent downturn in the oil industry,” Tom McDermott, president of United Steelworkers Local 1104 wrote to workers on the union’s website. “What appeared just a few short weeks ago as being a productive year … has most abruptly turned sour.”

Some airlines are feeling the pain of low fuel prices. Several airlines, including Delta and Southwest, are taking big hits as they routinely hedged on oil’s continued high price by buying pricey insurance instruments, which proved expensive when oil prices fell, according to a Reuters report. Delta is losing $1.2 billion on its bad hedging bets, but will have the benefit of a $1.7 billion gain from low fuel costs that will offset its loss. So the result is a $500 million gain, rather than $2.9 billion, according to the report.

Other airlines are cashing in on low fuel prices, including American Airlines, which hasn’t hedged since 2013, according to Reuters. All that said, airline stock has soared with cheap oil. Argent’s Crawford calls the low prices “gravy” for the airlines.

Relief at the pump

In Missouri, the average price of gas in 2014 was between $3.10 and $3.19 a gallon, according to fuel information site GasBuddy.com. By the end of the year, Missouri prices had hit a low point of $1.93 a gallon. Across the U.S., the difference between prices on the first day of 2014 and the last was more than $1 per gallon, according to GasBuddy.

Those buying gasoline can certainly feel the difference. “Obviously from a consumer perspective, it seems great, and clearly people are talking about the prices being a jolt to the economy in a positive sense. And as far as St. Louis as a region, which is transportation heavy, it can’t hurt there,” Brad Gustafson, Washington University associate professor of anthropology, said. “In the short run, it will give us a sense that we don’t need to worry about conserving fuel or consume less fuel.”

When it comes to gas, the bigger the buyer, the bigger the savings. Washington University, for example, spent about $225,000 on gas in fiscal 2014. If prices remain low, the university would realize savings across its 140-vehicle fleet, said Alan Kuebler, assistant vice chancellor and executive director for resource management at Washington University. “If the price remains below $2 per gallon for the foreseeable future, we could save more than $50,000 at the pump.”

Retailers reprice

As for the sellers of gasoline, they might not feel the difference either way. “Revenue doesn’t mean anything in our business,” said Jim Forsyth, president of Moto Inc., which operates Motomart convenience stores and is one of the St. Louis region’s largest private companies. “As a retailer, we buy gas at one price and sell it another price. Your spread doesn’t change much. We prefer lower prices because it’s good for the economy, good for the consumer.”

Forsyth said that down markets, especially quickly moving ones, can hurt gasoline sellers, who often have three or four days of gas in the ground, purchased at earlier prices. If competition drives retail prices down suddenly, gas sellers can take a hit. “When you have good margins, they get whacked down pretty quickly,” he said. “In the St. Louis region, we have one of the most competitive gas markets in the country.”

Economic boost

Many economists expect low gas prices to provide a bump to overall consumer spending. Morgan Stanley senior U.S. economist Ellen Zentner estimates the annualized savings for consumers to be $10.9 billion for every 10-cent decrease in gas prices. Kevin Kliesen, business economist at the Federal Reserve Bank of St. Louis, said lower gas prices are, on the whole, a small net positive for the economy. “Lower oil prices mean lower inflation and increased household purchasing power and consumption, and that feeds into stronger demand,” he said. The expected stimulus from low gas prices hasn’t been seen directly yet. Many economists were spooked to see retail sales fall by 0.9 percent in December, according to U.S. Commerce Department numbers released Jan. 14.

The wild ride that began in fall has left everybody wondering where the bottom is and how long low prices will last. Analysts with Morgan Stanley wrote in early January: “Without intervention, prices will need to move lower … for a brief period to shut in existing production. We expect U.S. supply growth to slow as a response, leading to a potential recovery as early as (the second half of 2015) or 2016.”

For drillers like Mitchell, the fluctuations are part of life. What goes up must come down, and what comes down must go back up at some point. “When you get low, you get a rebound, then you get high prices again,” he said. “When it comes back, it comes back hard.”

Brian Feldt and Jacob Kirn contributed to this story.

Average Missouri gas costs

Prices are per gallon for regular unleaded gasoline

2008 $3.25

2009 $2.35

2010 $2.78

2011 $3.51

2012 $3.60

2013 $3.49

2014 $3.34

Source: Fuelgaugereport.aaa.com

How we got here

Gasoline at $3 or more a gallon and oil at $100 a barrel or above had become the norm since the 2009 recession. But, in a shock to many investors, prices for Brent crude oil fell by $50, from $112 per barrel in June to $62 in December, as “robust global production” exceeded demand, according to the U.S. Energy Information Administration. By the first week of January, prices had dropped below $55 a barrel, and by Jan. 12 prices had fallen below $47 a barrel.

Behind the dizzying drop is a mix of factors.

“Saudi Arabia is partly to thank or blame depending on where you stand, said Brad Gustafson, a Washington University associate professor of sociocultural anthropology. “Shale oil contributed to the supply boom, and Saudi officials are pushing to keep prices down. In this moment, there’s downward pressure on the price of oil in hopes of slowing down U.S. shale production.”

Also helping to bring down the price of oil is a slowdown in global economic growth. On Jan. 19, the International Monetary Fund shaved 0.3 percent from its global growth forecast, citing gloomier-than-expected prospects in China, Russia and Europe. At the same time, the IMF said it expected growth to get a boost from lower oil prices — but not enough to offset slowdowns elsewhere in the economy.