Coming Up with Dry Holes

By John Greenwald

Energy belt boomtowns sag as cheaper oil jolts the petroleum industry

Rising oil prices meant high times for Blocker Energy Corp., a leading contract drilling firm. The Houston-based company assembled a worldwide fleet of rigs and kept them perpetually and profitably busy in the hunt for oil. But falling prices have choked that search and nearly throttled Blocker, which lost $71.7 million in 1982. "Our immediate priority," says Chairman J.R. Blocker, "is to survive."

Such woes are the bust side of the boom that fueled the energy industry at the end of the 1970s. Oilmen, expecting the Organization of Petroleum Exporting Countries to push prices to $50 or even $75 per bbl., spent billions to find and develop wells and then were startled when consumption dropped and prices fell. OPEC, which had been trying to resist the slide, acknowledged the new era last month by cutting its official price 15%, from $34 to $29 per bbl. Observes T. Boone Pickens Jr., chairman of Mesa Petroleum and a 32-year veteran of the industry: "I've never seen a collapse as dramatic as this has been. It's an unbelievable situation."

The signs of the bust are widespread and unmistakable. Hundreds of small and medium-size U.S. energy firms have filed for protection from creditors during the past year, and scores more may follow. Companies have budgeted $35.7 billion for drilling and exploration this year, 14% less than in 1982. In the field, only 1,882 rigs were drilling in the U.S. in the first week of April (see chart). That count was the lowest in six years and nearly 60% below the December 1981 peak of more than 4,500.

More signs of distress surfaced last week. MGF Oil of Midland, Texas, said it lost $80.3 million in 1982. The troubled exploration and drilling company, which is trying to restructure its bank debt, already has slashed its work force by two-thirds, from a high of 1,400, and is operating only seven of its 46 rigs. Says Executive Vice President Phillip Marcum: "You should be prepared for a minimum of two years of this. Three to five years would be better."

The MGF deficit was topped by the $90.8 million 1982 loss reported last week by Saxon Oil of Dallas, which owns large reserves of natural gas. The problems of that industry were further spotlighted by Columbia Gas System, a major pipeline operator, which said it would buy only about half of the gas that it had contracted for. Other big pipelines indicated that they also were cutting back. Falling oil prices have made industrial boiler fuel frequently cheaper than gas, which is propped up by regulations and long-term contracts.

While smaller firms have been the main victims of the oil collapse, the major companies have been feeling the pain as well. In their case, however, it has taken the form of lower profits rather than bankruptcies and losses. Earnings for the two dozen largest oil producers fell to an estimated $20.3 billion last year, down nearly one-third from their 1980 peak. Exxon, the world's largest industrial company, cut its work force by 7,000, closed some 3,000 service stations and sold off 17 tankers, but reported that profits still dropped 13%, to $4.2 billion. Texaco earned $1.3 billion, down about 45%.

In some respects, those two giants should actually be helped by $29 oil. Reason: both are U.S. partners--along with Mobil and Standard Oil of California--in Aramco, which produces most of Saudi Arabia's oil. All four had been paying the official $34 OPEC price for the Saudi crude, even though cheaper supplies were available elsewhere. Now the March price cut has freed them of that burden. So far, however, analysts have seen few immediate signs of improvement in the overall industry outlook. Says William Randol of First Boston, an investment banking firm: "This year's first-quarter earnings will be a disaster."

Exxon, Texaco and other big oil firms face another threat to the bottom line. Last week the Supreme Court refused to hear a Texaco appeal of a lower-court ruling that the company overcharged customers by some $750 million during the 1970s. That decision came shortly after a federal judge had ordered Exxon to refund about $1.5 billion in overcharges and interest in another Government case. Both companies insist that they will continue to fight the complaints.

Nowhere have falling prices struck harder than in the oil-rich region around Houston. The city's February unemployment rate reached 10.5%, a shade above the national average for the month and up from only 4.8% just a year ago. Houston office vacancies stand at 20.3%. In Port Arthur, a Gulf coast community that bristles with refineries, February joblessness hit 21.3%.

Many laid-off workers are thinking about getting out of the oil business for good. Daryl Helms, 31, of Andrews, Texas, had been a driller like his father until last Christmas night, when he lost his second job in little more than a month. Now Helms, who had earned $39,000 two years ago, gets $168 a week in unemployment benefits and has sold his car and used up his savings to help support his two children and his wife, who is working part-time. Says he: "I'm fixing to get out of the oilfields. I wish I'd been a jack-of-all-trades."

Hard times have cut a painful swath across much of the rest of the U.S. energy belt. In Oklahoma, more than 100 oil and gas companies went into bankruptcy during the past year, while employment among extraction workers tumbled 26%. "The decline is continuing, and we may not even be able to measure its full impact," says Will Bowman, research director of the Oklahoma employment security commission. In Elk City, which sits over the energy-laden Anadarko Basin, joblessness jumped from 2.4% in February 1982 to 11.8% this February. Laments Mayor Harold Wehrenberg: "Everything kind of cut off all at once. No one really expected anything like this."

Some Colorado residents have similar tales to tell. Developers flocked to build skyscrapers in Denver as the U.S. turned to the resource-rich Rocky Mountain region for relief from OPEC price gouging. Now much of that steel-and-glass space stands empty. The downtown vacancy rate, less than 1% when the energy boom peaked in 1981, has risen to 13%; the city wide rate is 20%. One landlord had offered real estate agents free trips to Paris and even luxury BMW autos as bonuses for helping to fill a new building. Other developers are giving up. Canterra Energy of Canada, an oil and gas exploration company, has dropped plans for a 30- to 35-story office tower and put the site, now a parking lot, up for sale.

Part of Denver's office glut reflects the collapse of the synfuels industry, which was to have produced high-cost fuels from shale, tar sands and other sources. Dozens of projects have been shelved in the face of falling energy prices. One of the largest was Exxon's multibillion-dollar Colony Shale Oil venture near Parachute, Colo., which was closed a year ago at a cost of 2,100 jobs. Recalls Allen Koeneke, president of the First National Bank in Rifle, Colo. (pop. 3,215), some 17 miles away: "When the news hit, we would have had a lot of people jumping off five-story buildings, if we had any five-story buildings." Exxon has suspended rather than abandoned Colony, but it has no plans to revive it any time soon. "We're putting synfuels to bed as a major priority," says Samuel Vastola, manager of corporate planning for Exxon U.S.A.

The largest remaining synfuels project also looks a bit wobbly. That is the $2.1 billion, 750-employee Great Plains venture to extract synthetic gas from coal near Beulah, N. Dak. Great Plains, owned by five energy and utility firms, had planned to charge up to $10 per 1,000 cu. ft. of gas. But the facility, currently 70% complete, could charge no more than $6.25 per 1,000 cu. ft. because of the fall in fuel-oil prices, to which the gas rates are pegged. At those prices, Great Plains looks like a terrible investment for its owners. They are turning for help to the Energy Department, where the experimental project has strong support.

U.S. banks also have a major stake in the ongoing energy slump. Many loaned heavily to oil and gas firms while prices were rising, and are now awash in bad debts. Nonperforming assets at Dallas-based InterFirst Corp. equaled a full 35% of equity capital--which can be thought of as its cushion against losses--at the end of last year. Oil-and gas-related loans in total came to 252% of equity. The largest bank holding company in Texas, Inter-First, said its earnings fell about one-third during the first quarter. In Houston, Southwest Bancshares expects a 40% first-quarter profit drop. Nevertheless, all the big Texas banks plan to continue their energy lending. Says Larry Helm, Inter-First's executive vice president: "The oil industry will come back. It has always been a cyclical business."

Some firms already foresee a rebound and are starting to buy oilfield equipment on the cheap. "Anyone can steal a rig now," says James Jackson of Jim Davis Auctioneers in Dallas. "All the boys out there are hurting."

Oil-rig costs in some areas are down some 40% from their peak levels of two years ago. The result, for those with the capital or a gambler's nerves, is low-cost ventures that can make even cheap energy pay off. Argues Sanford McCormick, president of Houston-based McCormick Oil & Gas Co.: "At today's costs, there's nothing wrong with the exploration business at $28 a barrel. I'll take that any time."

Wall Street also has been deciding that now is the right time to buy. Energy stocks have been among the best performers since fears of an all-out price war began ebbing last month. Says Merz Peters, an energy analyst for Brown Bros., Harriman: "Everybody's portfolio was underrepresented in oils." And for investors with a taste for a different speculation, futures contracts in crude oil began trading last month on the New York Mercantile Exchange and the Chicago Board of Trade. The two exchanges hope that the new contracts, which cover oil for future delivery, will set the price for the entire industry. New York prices hovered around $29 during the first seven days of trading, while volume averaged a slow 1,500 contracts a day. Says Michel Marks, chairman of the New York Mercantile Exchange: "Such things don't start with a bang."

Car buyers already are showing the influence of cheaper oil. Sales of Chevrolet's full-size Caprice and Impala models rose 12.6% during the first quarter, for ex ample, while its subcompact Chevette showed a 40.2% drop. Ford sold 25.3% more of its big Crown Victorias, and 9.8% fewer of its little Escorts. Ford is extending the life of its Victoria and Grand Marquis models, which were to have been phased out this year, and Chrysler is keeping its big New Yorker and producing large cars 16% faster than it did four months ago. Chairman Lee Iacocca, however, wants the Government to tack an additional 20-c- onto the federal gas tax to encourage conservation, even though there is more profit in bigger cars. Says Harold Sperlich, president of Chrysler's North American car business: "We are giving people the wrong signal, and hastening the day when the next oil crisis will arrive."

The Reagan Administration has called for continuing conservation, but it is reluctant to discourage consumption by tampering with the workings of the market. The White House's proposed budget would place a stand-by tax on oil if the federal deficit grows too large, but that measure is aimed mainly at boosting Government revenues and, in any event, seems to have little chance of passage. Energy Secretary Donald Hodel has meanwhile suggested slowing the rate at which the U.S. Strategic Petroleum Reserve is being filled. That cache, which currently holds 312 million bbl. out of a planned 1 billion bbl., was created in 1975 as a safeguard against future shortages of foreign oil. With imports down, says Hodel. "maybe we don't need such a big insurance policy."

The current oil glut could hold the seeds of a future shortage. The ailing energy industry, however, may have finally and painfully absorbed an even simpler notion: booms have a way of becoming busts.

--By John Greenwald. Reported by Sam Allis/Houston and Steven Holmes/Denver

With reporting by Sam Allis, Steven Holmes This file is automatically generated by a robot program, so viewer discretion is required.