Oil Bust Forces West Texas to Adjust

As oil and gas producers slash production around Texas, small-business owners like Clint Fletcher are suffering the consequences.

Mr. Fletcher, who owns stakes in nearly two-dozen businesses in the Midland area, has shut down 85% of his oil and gas wells and has had to mothball his oil-field equipment rental business, retaining two employees to repair and test the idle equipment.

His business transporting water from oil field production, however, is holding its own. That is better than a number of competitors who have shut their doors in the last 45 days. “In 2015, people could still live and operate because you were living off 2014 receivables,” he said. “In 2016, you just can’t make it.”

 

Falling energy prices are deepening the pain felt in Midland and nearby Odessa, the two biggest cities in the oil-rich Permian Basin region of West Texas. There is downward pressure on wages as job applicants swell, while prices of everything from hotel rooms to tacos fall and late payments on small business loans increase.

After a 50% drop in oil prices in the second half of 2014, Wesley Webb ’s catering business dried up. From serving three meals a day to crews on as many as 50 drilling rigs and fracking sites in 2014, he suddenly had only two or three catering jobs a week in early 2015. “It was like someone had turned the lights out,” Mr. Webb said.

Mac’s Bar-B-Que & Catering Managing Partner Wesley Webb and Manager Derek Webb have revamped their business as fewer energy companies cater meals for employees. PHOTO: JENNIFER BOOMER FOR THE WALL STREET JOURNAL

At least 65% of economic activity in Midland, a city of about 140,000, is directly tied to the energy industry, according to Karr Ingham, the consulting petroleum economist for trade group Texas Alliance of Energy Producers.

Retail sales in Midland and Odessa dropped 19% in the fourth quarter compared with a year earlier, he estimates, while hotel receipts fell 27% in the same time period. Unemployment rates in the Midland-Odessa area have been creeping up, according to his data, reaching 4.1% on average in the fourth quarter, up from 2.6% a year earlier.

Midland “just lives and dies by crude oil prices,” Mr. Ingram said, noting that growth was “stratospheric” during the recent energy boom.

Even as delinquencies remain flat nationally, they are starting to rise among the city’s small businesses and those in the surrounding Permian Basin. According to small business loan tracker PayNet Inc., about 2.2% of small business loans in the area are between 31 and 180 days past due compared with 1.2% in July 2014, near the oil market’s peak. Nationally, the level is about 1.5%.

Delinquency rates on construction loans in Midland and the surrounding area have climbed to 4.3% from 2.6%. Real-estate agents, auto repair shops, restaurants and other businesses are also having more trouble paying their bills, PayNet says.

“It’s like a spreading contagion,” said PayNet President William Phelan. “It is infecting the general Texas economy.”

Midland Mayor Jerry Morales is trying to remain optimistic, hoping efforts to lure aerospace companies and more retail, dining and entertainment to this city will help buffer the slowdown in energy wealth.

Mr. Morales, who owns three restaurants in town, including one that opened last month, is feeling the effects. He says customers are less free-spending than they were when oil prices were high. So he has reintroduced daily specials, such as a $6.99 taco plate, normally $10.

Mulberry Cafe, owned by Midland Mayor Jerry Morales, is running more specials and staying open longer.PHOTO: JENNIFER BOOMER FOR THE WALL STREET JOURNAL

He is being inundated with job seekers, now receiving 30 applications a month compared with about 25 in all of 2014. He has dropped starting pay to $11 an hour, from $15 two years ago and is staying open longer, after cutting back during the oil boom to hold down overtime costs.

“We have been through this before and have always come out of it,” said Mr. Morales.

Hotel owners also have cut prices, which during weekdays had climbed in some cases to $300 or more a night. At the DoubleTree by Hilton Midland Plaza, revenue is down 35% from last year, said Keith Dial, operating partner of the 262-room hotel. Mr. Dial recently offered to lower negotiated rates by between $20 and $40 a night for his best corporate customers.

Stephen Jumper, chief executive of Dawson Geophysical Co. , a publicly traded oil-field services company, negotiated an $85 a night weekend rate for guests at one Midland hotel for his son’s January wedding, below the $150 rate guests paid when another son married two years ago.

We’ve seen it go from really good to really bad to pretty good.

—Wesley Webb, catering company owner

Businesses in Midland and neighboring towns are used to the price swings of oil and it can present opportunities for those that survive.

RK Pump and Supply, which sets up storefronts near active oil fields that sell piping, valves and other supplies, has stepped up marketing in an effort to boost market share, according to co-owner Lance Daniels. It is negotiating to buy several smaller competitors.

RK Pump and Supplywhich, which sets up storefronts near active oil fields that sell piping, valves and other supplies, has stepped up marketing in an effort to boost market share. 

“Our company is staying aggressive,” said Mr. Daniels. “We are trying to build these relationships as a lot of our big competitors get lax.”

Meanwhile, Mr. Webb had to figure out a way to keep his catering business afloat after business came to a halt. More than a year ago, he took a stockpile of eggs, bacon and sausage nearing expiration and launched a special on breakfast burritos. He now serves as many as 2,000 breakfast burritos a week to supplement the catering business. Mr. Webb also turned his commercial kitchen into a barbecue restaurant.

“We have seen it go from really good to really bad to pretty good,” Mr. Webb said.