Winners and Losers in the Shale-Oil Production Boom

The price of WTI Crude oil at last look was trading around $65. This is good for some and not so good for others. As we know, the price of oil rises and falls, and with each cycle come similar results to similar businesses. If prices stay above $60 a barrel, this would spur a strong rebound in oil and gas drilling in Texas and in the other southern states, as forecast by the Dallas Fed in a survey among oil executives conducted at the end of last year. The growing economy and the latest Permian Basin shale-oil boom have made Midland, Texas and others hot spots of opportunity.  In the country’s busiest oil patch, where the rig count has climbed by nearly one third in the past year, drillers, service providers and trucking companies have been hiring at an unprecedented rate. So, for now, Texas’ oil and gas prospects look very bright. But how long it will shine is anyone’s guess. The near-term seems clear unless OPEC and Russia decide to put an early end to their production cut deal.

So who are the winners and losers in the latest up-cycle of oil? The trucking industry is a winner for one. Schools that teach how to pass the test for a CDL — commercial driver’s license are packed. “A CDL is a golden ticket around here,” said Steve Sauceda, who runs the workforce training program at New Mexico Junior College. “You are employable just about anywhere.” One such student, Jeremiah Fleming, 30, is on track to pull down $140,000 driving flatbed trucks for Aveda Transportation & Energy Services Inc., hauling rigs. With oil prices in the mid $60’s, shale producers can cover new drilling investments and still pay dividends. This would reflect positively with Wall Street investors. “We’re looking to invest in those companies who have been able to improve their production and win the battle as far as cost of extraction,” said Derek Rollingson, portfolio manager of the ICON Energy Fund, which holds shares of more than a dozen U.S. shale producers.

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The Permian Basin shale-oil boom has basically eradicated unemployment in the region. At a rate of just about 2 percent, if you can’t find a job there, then you don’t want to work. This is welcome news to the energy sector, where U.S. shale producers have failed for years to turn a profit with the increased output, frustrating their financial backers. The energy sector has lagged the rally that took the broader stock market to record highs. Investors in these shale oil companies are looking for cash, in the form of dividends, and increased share price, through cost controls and share buybacks. “‘Give me some cash, please. That’s what investors have said,” states Anoop Poddar, a partner at private equity firm Energy Ventures.

The rotation into energy has had a dubious impact on ancillary businesses in the oil region. Businesses are competing for workers as the oil industry has a huge need for workers when production rises. This has a negative trickle-down effect on other sectors. From teachers to the hospitality industry, workers are in very short supply. Oil prices go up, and energy companies dangle such incredible salaries that restaurants, grocery stores, hotels and other businesses can’t compete. Jerry Morales, the mayor of Midland, Texas, and a local restaurateur, puts it this way regarding hiring for his restaurants, “If you’ll stay with me, I can give you three quarters of what the oil will give you but you don’t have to get dirty or worry about getting hurt.  Oil prices are up now. Remember, what goes up, must come down.

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