In Houston, the second week of March usually marks a highlight on the city’s business calendar, a few days when the city hosts political and business leaders from around the world at what is arguably the most important energy conference of the year.
This year, organizers pulled the plug on CERAWeek — just days before it was set to begin — because of fears of the spread of COVID-19.
It was a sign of things to come.
The last week has been devastating for many oil producers in North America.
An oil price war launched between Saudi Arabia and Russia — combined with growing coronavirus fears — rattled markets to the core and sent energy prices spiralling to their lowest levels in years.
While Canada’s energy sector has struggled in recent years, Texas has been a haven as the home to one of the hottest oil plays in the world, the Permian Basin. Companies from Alberta have shifted resources to the state in a bid to keep going.
But now it seems few can hide from a price collapse that no one seems certain about how long, or deep, it can go — even in the Lone Star state.
Here’s how the last week unfolded as people in the oilfields reacted to one of the worst periods in the industry with oil markets in a free fall.
Sunday, March 8
All 76 seats were full on a regional jet flight from Houston to the airport nestled between the cities of Midland and Odessa in West Texas. There was little conversation on the late Sunday evening journey. Asian markets had already opened for trading and oil prices were tanking, falling by as much as 31 per cent.
This part of Texas is the heart of the Permian Basin, the largest and hottest oil play on the continent. This area isn’t a tourist attraction but rather communities solely focused on the oilpatch. People here either work in the oilfield or cater to the sector by selling trucks to oil companies and teaching oilfield kids.
That’s why everyone on the flight knew the week ahead was going to be grim.
Monday, March 9
Around 9:30 in the morning, half a dozen trucks are waiting their turn to fill up on mud. The substance is used in drilling oil wells throughout the area.
Hour after hour, oil prices keep falling and it is the talk all around the plant. Otherwise, operations are unchanged at the AES Drilling Fluids facility in the town of Kermit as business remains brisk.
The parent company is Calgary-based CES Energy Solutions, which has shifted more of its focus to Texas in recent years as oilpatch activity has flowed to the Permian.
Gary Lankford is busy checking in with clients to gauge their attitudes and get a sense of their potential plans. Lankford is the company’s vice-president of Permian Basin development. He grew up in Texas and this is his 40th year working in the oilfield.
By his guess, he’s experienced seven significant price crashes in the industry, but he admits the wisdom earned does little to anticipate what this depression will be like.
“I think every one is different. This one is going to be a little different because it’s dropping so fast. The fact that you think you’re prepared for it — nah, you never are,” he said.
With every spare minute he has, Lankford calls another client to check in. There is little panic on the other end of the phone, he said. Still, the two big questions are how bad will this be and how long will it last.
“Several years ago my wife and I were in Las Vegas when Frank Sinatra passed away. I said it was kind of like being in the Vatican when the pope passed away. They actually turned the lights off on the strip for two minutes,” Lankford said. “Being here in Midland with what we’re seeing with OPEC, Russia and oil prices, this may be the equivalent of Frank Sinatra dying. I hope not.”
By day’s end, oil prices fall by as much as 30 per cent, while Exxon Mobil and Chevron stock are down more than 12 per cent.
Canadian oilsands companies are blasted, too. Suncor losing more than 17 per cent of its value. Cenovus closing down 51 per cent.
Tuesday, March 10
It’s before 9 a.m. and Dave Hoffman is driving through foggy west Texas oilfield backroads. The Permian Basin extends into New Mexico and that’s where one of its drilling rigs is working around the clock.
Hoffman is from Camrose, Alberta, but spends two-thirds of his time in Texas overseeing operations for Calgary-based Citadel Drilling. Traffic is heavy with workers and heavy trucks navigating the area.
He is convinced the company can withstand a period of depressed oil prices after surviving through several years of tough prices in Western Canada, before all of Citadel Drilling’s rigs were moved to Texas two years ago.
“We’ve overcome a lot. We’ve come here and really done a good job and made a name for ourselves,” said Hoffman.
The 2,000 horsepower drilling rig, named “The Commander,” is hard to miss outside the town of Jal, New Mexico, with little vegetation in the desert to hide the towering red, white and gold machine.
The majority of the workers are Canadian. They fly in from across Canada to work rotations of 20 days on, 10 days off. Depending on what decisions the oil producers make, drilling activity could be impacted. For now, at least, there aren’t any signs of disruption on the rig.
“No, I don’t think we’ve recognized any real change.” said Hoffman. “Everyone is trying to feel out the process and see what’s happening.”
That evening, the crowd at the PNG Stadium in Houston is glaringly sparse. The annual rodeo is in full swing, but the majority of people are staying far away as the coronavirus threat increases.
Still, competitors like bareback rider Pascal Isabelle from Okotoks, Alberta, bring some life into the giant 72,000 seat arena.
“That’s a buckin’ son of a gun,” yells the announcer.
Jeremy Thompson watches the rodeo event from one end of the arena and sees parallels to what the oilpatch is going through, especially the bull riding.
“You do a lot of work in the chute to get that bull where you want it to go. and then you come out and it turns the wrong way and you’re in the dirt. You’re picking your hat up, dusting it off and wondering what’s next,” he said.
Thompson regularly travels to different parts of the U.S. to meet with clients and show off the software developed by the company he works for, Calgary-based Spira Data.
With the majority of the American oilpatch focused in Texas, he easily knows his way around Houston and other cities in the state.
For him, this week has been eventful as some customers are too preoccupied with the price meltdown and cancel their meetings with Thompson, while others seem more eager to move ahead with projects as they see technology as a way of being more efficient in their operations.
The following day, the rest of the rodeo is cancelled due to rising coronavirus concerns, marking the first shutdown of the Houston Rodeo in its nearly 90-year history.
Wednesday, March 11
At this point, oil prices are 40 per cent lower than they were a month ago.
It’s the middle of an incredibly tumultuous week and at the Houston office of research and consulting firm Wood Mackenzie, analysts are looking into the financial health of companies to see which are best suited to survive a prolonged downturn, while also revising their forecasts and models for oil production and demand.
After returning from a meeting with Exxon Mobil earlier in the day, analyst Brandon Davis sits down for an interview to explain all the developments he is seeing in the sector.
“We’ve talked to a lot of clients, both from the company side and investor side as well, hedge funds and things like that. I think the only thing everyone can agree upon is they don’t know. It’s an uncertain situation. Who knows what will happen with the Middle East and Russia. Maybe something will emerge.”
In a sustained low-cost scenario, the larger producers are likely better off, while most distressed companies will likely be either junior or mid-sized firms. The oilfield service sector is going to have a rougher ride too.
At this point, the safest thing for the oilpatch is to plan for low prices for the rest of the year, said Davis. Then if prices do recover, companies “have excess inventory you can bring online in that scenario.”
It’s another tough day for stock market investors who are awash in red ink with major stock markets down by between three and five per cent.
Thursday, March 12
As stock markets open, there is red across the board again, this time as investors reel from U.S. President Donald Trump’s announcement the night before to restrict travel from Europe.
It’s another blow to the oilpatch as it “just adds to the negative demand impetus,” said Ken Medlock, from inside his office at the Center for Energy Studies at Rice University in Houston.
Medlock already knows of several people who have cancelled flights and plan to drive to their spring break ski trips. Still, he anticipates even vehicle traffic will decline in the near future as anxiety grows about being near crowds.
On the production side, OPEC and Russia continue to pump more oil and sink prices further. Medlock says they are hoping to force oilpatch bankruptcies in the U.S. and restore more control over the global sector.
“That’s the classic market share game. That’s what that is,” he said.
Medlock expects consolidation in the Permian and for production to fall to the basin this year.
The depths of the oilpatch’s woes, though, are difficult to predict. Medlock describes it as a perfect storm with countries like Russia and Saudi Arabia pumping oil with all their might and the coronavirus sapping away demand more and more every day. The virus, in particular, seems to be the greater unknown for the sector.
“Any time you get into a discussion about fear that just embeds massive uncertainty in terms of how consumers are going to respond and what governments are going to do, etc.,” he said.
Friday, March 13
The headlines spread across the Wall Street Journal, which arrives at corporate head offices and hotel doorsteps, all focus on the coronavirus, including “Virus Batters Economy,” “In U.S., Threat Upends Daily Life,” and “U.S. Hospitals Face Major Challenges.”
The week ultimately ends just like it began — in surprising fashion. Trump declares the coronavirus a national emergency, the Federal Reserve pours $1.5 trillion into the American stock market and the Bank of Canada makes an unexpected interest rate cut.
Stocks jumped across the continent with the Dow up nine per cent and the Toronto Stock Exchange up 10 per cent. Still, the upward swing wasn’t enough to salvage one of the worst weeks in the North American stock market’s history.
Oil edges up slightly to $33.38 US a barrel. It still represents about a 25 per cent drop in one week and there are few clues about what the next week, month or year have in store for the Permian or oilfields across the continent.