Plunging Oil Price Fear
I would like to hear from other investors in the Houston area about strategies and outlook for 2015 in this climate of of dropping oil prices. I am fearful unfortunately and I am trying to fight it.
My elders are full of doom and gloom, citing the 80's disaster. I believe prices will rebound next year once reduced investment in development in estabilished fields and increased demand hits the market but that is just my guess.
What are y'all doing to protect yourself while still staying active?
What if you are a landlord and there are no tenants? Job growth will be affected in the medium term right?
The U.S. and ultimately oil centric places like Houston will have the last laugh at OPEC (Saudia Arabia) and other oil producing countries around the whole. China has access to very cheap oil which they are hoarding. That should spur some growth over in China and the U.S. -China economic machines will drive the world economy.
#1 Huge drop in oil prices put pressure on shale producers to stop digging up more oil. That means more reserve for the future. While OPEC is pumping away and their reserve will be tapped out way before the U.S.
#2 Recession and downturn makes companies lean and cut out unnecessary fat (namely labor fat) and when oil prices increase, the profit margins will jump while operating expenses will be lower. It may hurt jobs for a brief time in places like Houston but it should bounce back nicely. More foreclosures can lead to good deals too.
I still like Houston as a real estate market as an investor, but my acquisitions will slow. Sometimes its good to hoard some capital for the next opportune time.
Interesting reading and some interesting comments. I work for one of the big O&G companies downtown as a upstream systems engineer contractor and I doubt if I will have a job in 6 months time...I personally think this has nothing to do with Russia or any Middle Eastern oil rich countries. I think it's much more obvious. As some people say: "Sometimes you don't see what's right there in your face....."
We were having the same discussion not too long ago in the office and everyone was trying to make sense of it, just as in this forum ....Now I don't know if it's because I'm not American or if I was just thinking outside of the box but the conversation died as soon as I mentioned that the Saudi's might be targeting the US and not Russia or Iran etc etc....and here's why:
The US was still relying on international i.e OPEC oil not too long ago...my comment was based on what someone else mentioned earlier, because of new drilling technologies, oil production here in the US has increased...A LOT. What are they (OPEC) left to do when one of their main stakeholders starts doing their "own thing"? Destroy them because they can. Now that someone previously in the thread put some numbers to it it's even more obvious: 33% in 2 years....as RE investors how happy will ya'll be if one of your main investors starts relying on someone/something else to the tune of 33%? I guess not too happy...
The Saudi's don't care about oil rich countries such as Russia et al. Those countries supply outweighs the demand and will "bounce back". I don't think it has anything to do with Putin behaving like a muppit or Iran playing nuclear chess...Demand still outweighs supply last I checked in the US. Saudi's know that, and why get 67% when you are in the habit of getting 90%+ or whatever it was before all the fracking and shale oil production in the US? Unless fracking and shale oil becomes much cheaper to produce overnight or something, we have a problem....In short they are forcing the oil price down so that it becomes nice and cheap to rather import more crude and cut that 33% local output by as bigger margin as possible....and then the price will systematically rise once the US is "on board" again and they will adjust output to the market value they like...I guess we will still be out of jobs however...
BTW none of my South African friends that work in the O&G market in Saudi are being laid off...makes you think, huh?
Come to south louisiana work in one of the many refineries that pay 100k + a year only working 6 months out the year.
I am watching Houston I'm talking to some friends (Wall street trading types), and may out there think $20-$30 is bottom. Based on this, while I do not necessarily anticipate disaster, there likely will be some serious softening in the marketplace...some buy opportunity potentially. But, not yet...
I think the Houston apartment market is one of the most difficult environments to work in.
It seems like development of new product is easy, cheap, and constant. This keeps vacancy from ever getting very low. Taxes and insurance are incredibly high compared to most other parts of the country.
The bad areas are "bad" and vacancies stay high. The prices in the good locations stay high even through the slow times.
Many of the larger properties there that were built during the boom of the 80's have master boilers for hot water. These are expensive to work on and requires the landlord to pay for the heating of the water.
A lot of the soil there is unstable and you see foundation problems at many apartment buildings. Things set in the ground tend to move.
The last big hurricane had a large affect on me. I had a 106 unit property that was purchased on a bridge loan that was good for 2 years. I was making progress toward obtaining permanent financing. Ike came through and ripped off about half of the roofs and proceeded to fill the apartments with water. Power was off for about 2 weeks and the mobile water evacuators were not available.
Of course insurance paid but my loan came due before I was able to get the work done. By that time financing was tough to come by. Nobody was making temporary or permanent loans. Even though I had never been late on a payment, they foreclosed on the property.
I would invest there again if I lived there but not from a distance. Too many issues come up that need to be addressed.
@Brandon Cravens I agree with @Shane Jeanfreau Citgo, Phillips 66, Sasol, Westlake Petrochemical, W.R. Grace. Take your pick. They're all hosting job fairs a few times a year. There aren't enough qualified/skilled workers available in Southwest Louisiana. I've heard that the low prices may put a hold on the GTL Expansion at Sasol, but nothing has slowed down for our line of work.
Halliburton laid off some people this week but didn't announce how many and are apparently not going to announce it. Don't know what the rules are on hat but i assume that means the number is relatively "small". I have polled a few Halliburton employees and they are all saying around 1000 people across the entire company, not just Houston.
DR Horton has said it is slowing down its land acquisitions in Houston.
Houston is still expected to NET 60kish jobs in 2015.
What will be the first market segment to turn? Will the class A apartment building boom be the first to soften? Most the projects started early last year are almost done, The big players in our market had announced that they were going to stop building apartments in 2015 as they anticipate supply to meet demand, that was BEFORE oil started to fall.
What about all the class A office space that is still 6mo to a year from completion?
Where do you think the opportunity is going to be first?
While that 80's article is interesting, it's not the same Houston any more - the economy is much more diversified than just oil (medical complex, one of the largest ports in the country, finance and technology). Yes, 50% of Houston's economy today is due to the energy sector (as opposed to 87% in the 80's), but last I checked, it is something we will always need (just like housing), and I'm sure this down cycle will give prices a chance to normalize, hopefully opening up some opportunities for investors like myself :)
The key point to me is now is the time not to be buying in oil dependent areas. There will be a time to buy again but there is likely some pain coming first.
Originally posted by @Cal C.:
The key point to me is now is the time not to be buying in oil dependent areas. There will be a time to buy again but there is likely some pain coming first.
I agree. There does not even need to be a large change in economics to affect real estate performance, just a change in perception...
Here is some more news:
Schlumburger cuts 9000 jobs
That's for the whole company, not just Houston.
The merger between Halliburton and Baker was expected to cause 20k job cuts across the global companies caused from redundancies, but the timing is pretty bad now that oil prices are falling.
From the horse's mouth, if you can believe it. Saudi Oil
"Q: What is moving prices? Is this a supply or a demand story? Some say there's too much oil in the world, and that is pressuring prices. But others say the global economy is slow, so it's weak demand.
A: It is both. We have an oversupply. Iraq right now is producing very much. Even in Libya, where they have civil war, they are still producing. The U.S. is now producing shale oil and gas. So, there's oversupply in the market. But also demand is weak. We all know Japan is hovering around 0% growth. China said that they'll grow 6% or 7%. India's growth has been cut in half. Germany acknowledged just two months ago they will cut the growth potential from 2% to 1%. There's less demand, and there's oversupply. And both are recipes for a crash in oil. And that's what happened. It's a no-brainer."
"But I'm sure we're never going to see $100 anymore. I said a year ago, the price of oil above $100 is artificial. It's not correct." - Prince Alwaleed bin Talal
"But I'm sure we're never going to see $100 anymore. I said a year ago, the price of oil above $100 is artificial. It's not correct." - Prince Alwaleed bin Talal
It has been said that the Prince (and Saudi's) are trying to talk down our oil market. Much like when Mario Draghi say he will do what it takes to save the Euro.
@Peter Grosso I'm sure he is. But nevertheless, I imagine the price will eventually find it's way to point at which shale extraction, fracking etc, are just cost prohibitive. It'll hover there and fluctuate as supply and demand dictate; as well as technical advancements that make shale more cost effective.
I think he is right about $100 oil though. The high prices were artificial; there's just too much supply on earth, it just took a few years for the technology to extract it to develop and the supply to catch up.
Meanwhile, I'm filling up my V8s like..
@Ryan R. , The long term trend certainly is more fuel efficiency and accessible oil. What the market will do with that change can be debated. Drillers will only drill at a certain price, so supply in the U.S. might fluctuate for a generation. I know I wouldn't invest in oil drilling again right now, but I wouldn't stop pulling the oil out of the ground that I already drilled (at $20bbl I would).
@Peter Grosso agreed. My guess is as useless as the experts, but I see it stablizing somewhere between $100 and where it is today. I see it as a correction, and it's welcomed.
i actually did skip the whole second page but i saw a few people talking about oil prices stabilizing around 100$ a barrel........
Now that 2015 is more than 25% over and prices are still far from 100$ a barrel and i recently heard something about 100,000 layoffs in the oil industry in texas although i am not sure which part of texas
anyone getting worried????
As I predicted in my own post, here I am freshly laid off...but get this, my lay-off created 2 new jobs in Malaysia....now where did I hear that rhetoric about American jobs for American people again.... :(
So have you guys in Texas felt any pain from this drop in prices? It has been more then six months since this thread has started.
While oil has already affected the personal situations of many employees in the Houston area, I do not worry about it as far as investing and here's why: This explanation will depend on the size of your operations but if you're a wholesaler, you have little money (perhaps options, consideration fees, earnest money) invested at any given time so you are minimizing your risk there as well as the fact that wholesaling takes place in hours/days/weeks... not months. If you are flipping (buy, fix, sell) then your project can take up to 6 months. In that case, I would tell you to focus on projects that have lower turnaround times - comps that justify estimated ARVs, low days on market in neighborhood, target cash buyers if possible, and smaller projects with professional crews that don't dilly-dally. A good general contractor/subs can make or break a deal. It should not take more than a month and a half for a $50k rehab job; it should be perhaps 4 weeks. You have to take on a project having a very clear plan of remodeling/rehab; if you can't do that I would advise you to pass. Time is not your friend especially with additional hard money costs so you need to get in and get out of the project quickly by creating your own systems. Unless something drastic happens to the economy, you're risking that for the next 3 months or so and you will be fine as that should be plenty of time to finish a project and market it. If you are a landlord, you are going after a predefined yield/return to buy and hold that is easily forecasted typically with a 1 year lease. The market can crash and those rent checks will continue to come in and people are moving to Houston for jobs other than oil. That is anticipated to remain constant for the long-term. If you are still worried after analyzing these factors, you need to focus on asset allocation. If you have too much money in real estate keeping you up at night, find yourself a secondary non-related business to diversify into or also consider more liquid assets that can be sold within minutes. Stocks, bonds, and commodities as well as others can offer you this peace of mind of not holding all of your eggs in one basket. This will depend on your own personal risk tolerance. As a landlord myself that works for a wholesaling company, I see clients flip day in and day out and are making money because they have a plan in place, they know what their buying criteria is, and they stick to their success niche. They don't try to figure out shortsales this week, wholesaling next week, and tax liens the next. Pick out a couple of things you like and stick to them and master them. At that point, money and deals will find you because you will be "the man"/"the go-to guy" in that field. I appreciate any comments or questions (negative or positive) that you have on my post. We're all in this together! Thanks!
Since you took the time to write this I suggest you clean it up a little bit and make it into a blog post/or a new thread. I don't believe most people read old threads unless they have already posted in it.