Oil-Price Depression Brings Sleepy Feel Back To South Texas Boomtown

Only a year ago, with oil trading near $100 a barrel, residents of this proud and pretty South Texas boomtown had only one chief complaint: traffic.

Heavy-duty trucks bearing gas and equipment were kicking up dust and leaving rural roads pitted.

Townspeople don’t have that worry anymore, with roads half-empty as the oil and gas game has slowed.

To see what’s at stake for Texas in a shrinking oil economy, one need look no further than Gonzales, 65 miles south of Austin and in the central portion of the Eagle Ford Shale area, which stretches roughly 50 miles wide and 400 miles long in a sweep across what were once some of South Texas’ poorest counties.

In a town that long ago made a name for itself as the birthplace of Texas’ battle of independence, the latest malaise suggests how much of its fate is connected to an industry over which it has virtually no control.

Oil now trades under $50, leaving drilling outfits with virtually no incentive to expand on the sort of exploration that brought itinerant workers to this community for jobs several years ago.

Now, it’s a reverse migration: Less than a month ago, JM Oilfield Services became the latest company to shut down its Gonzales operation, leading to job losses for more than 200 people.

Soon, the laid-off, ready to hit the road, were stopping by National Pawn and Jewelry to get what they could for their flat-screen televisions, their drum kits, their guns.

“They come here with their hope and dreams, and now they’re back on their own,” said Linda Arriola, an assistant manager at the shop. “We’re going to have a good job — but it’s bad for everyone else.”

Ramping down

Across the Eagle Ford region, a similar story is playing out, driven by the depression in oil prices: The Texas Railroad Commission this year is on track to issue less than half the Eagle Ford drilling permits it issued in 2014.

And the number of active rigs in Texas dropped by more than half over the past 12 months — from an average of 904 in September 2014 to just 371 now, according to oilfield services company Baker Hughes.

“When the rig count drops, a lot of these jobs and workers on the rigs, jobs driving trucks to haul sand and water, those jobs drop off pretty quickly,” said Keith Phillips, assistant vice president at the San Antonio branch of the Federal Reserve Bank of Dallas.

“Those people, when they’re in town, are going out to eat, to buy lunch, to shop,” Phillips said, “so those retail establishments will feel it pretty quickly.”

The number of active Texas rigs has dropped precipitously since oil prices plunged late last year. Source: Baker Hughes Inc.

Many of the small and midsize oil and gas producers are heading toward the whipsaw, as previous contracts that paid them higher oil prices expire and banks reassess their credit lines in October.

The impacts have been real for this town, site of the first skirmish of the Texas Revolution and now home to the Come and Wash It Laundromat, a clever take-off on the Come and Take It signs so common here.

As with much of South Texas, the fracking boom had revived Gonzales — “the town was totally dead, a one-horse town,” said Charlotte Guess, who manages commercial property in the town center — with new taxes easily outstripping growing expenses in the county, according to a Duke University research paper published this month by the National Bureau of Economic Research.

The city’s sales tax revenue soared to $1.6 million in 2013, up from just $950,000 four years earlier, and the city added 13 people to its staff of 100, the report noted.

It also enjoyed a jump in additional revenue from hotel taxes.

As energy companies poured resources and people into Gonzales over the last several years to mine gas — trapped in a layer of shale 250 feet thick and 65 million years old — at least five new hotels sprung up. (On a table in the reception area at the 2-year-oldHoliday Inn Express lies a special-edition Bible, titled “God’s Word for the Oil Patch: Fuel for the Soul.”)

Back in 2010, “we couldn’t make up enough rooms,” said Alison Rodriguez, who manages a couple of hotels in town and who sits on a community tourism advisory committee. “There was nothing, then there was everything,” she said.

Now occupancy rates are as low as 20 percent.

Other evidence of the slowdown is not hard to come by.

Diners at La Bella Tavola, the charming, roomy Italian restaurant on the city square used to have to wait before they could get a table; but there are fewer customers now, as workers move out and townspeople have seen their royalties ebb, leaving no wait at all to get the popular fettuccine alfredo, said proprietor Gasper Lekgega.

And Brian Bennett, who works the counter at A-Line Auto Parts, said sales have dropped from roughly $3,500 a day to $1,200.

Less painful bust?

To the extent local and regional bankers suffer from the fallout, it will likely come from problems at hotels, defaults on car loans or mortgages and from other commercial lending, said Chris Williston, head of the Independent Bankers Association of Texas.

Texas bankers and oil producers remember the late 1980s, when the combination of energy and real estate busts sparked bank failures that radiated the pain across the state.

Today, Williston and Phillips said, the Texas economy is far more diverse and bank lending far more balanced. Federal banking regulators have kept a tighter leash on loan portfolios since the recession, keeping lenders from putting too many eggs in any basket, including energy in an oil-boom town.

The drawback still has consequences for city projects. August saw the town’s first double-digit decrease in sales tax revenue, Gonzales City Manager Allen Barnes said, and “sales tax is crucial” to the city’s revenues.

A couple of years ago, at the head of the boom, Gonzales committed to building a $3.3 million, roughly 21,000-square-foot exposition center — half of the money is to come from hotel occupancy fees.

Barnes said the project should still come in underbudget and open in time to host the senior prom.

But a new water tower, to help regulate pressure in town, will now likely be put off, Barnes said.

“A year ago I’d have said three years, but now I’m saying we don’t need it for five years,” he said.

Things are more pressing at the Gonzales school district. Mineral values in the district dropped roughly $1 billion dollars — from $2.5 billion the previous fiscal year — translating into a 66 percent, or $9 million, decline in tax revenues this year, Superintendent Kim Strozier said.

Roughly 10 teaching and teaching aide positions have gone unfilled, and technology improvements have been put on hold.

“It’s an extremely challenging time,” Strozier said.

The last drilling boom-and-bust in these parts ended in the 1980s. People who were in Gonzales back then say things haven’t gotten that bad, and Phillips, at the Dallas Fed, notes that the wealth generated by the Eagle Ford fracking boom won’t just evaporate.

But there’s a feeling that at least higher taxes are around the corner, as counties, school districts and towns have to cover the investments they made over the last few years.

“People always think the latest boom will have more longevity, that it’s a new paradigm,” said David Honeycutt, CEO of Austin-based producer Texas American Resources, who says his firm expects to buy as other, less fortunate drillers look to sell. “I’m always surprised how unprepared people are when these downturns happen. People get a nice royalty income and think it’s going to be like that a long time. They spend money like it is, and suddenly they have a lot less.”

The slowdown has carried at least one silver lining: Anne Gage, co-owner of an ophthalmology office, says that with less activity for welders, she’s seeing fewer injuries involving specks of metal needing to be removed from eyes.

By Asher Price and Dan Zehr

Source: My Statesman