Independents : Oil Patch Survivors Dwindling

No one has to tell H. B. (Harvey) Rhoads that failure and heartbreak shadow success and riches in the oil patch. He’s living the lesson.

The 60-year-old industry veteran prowled on his own for 10 years in search of crude before he accumulated the magical $1 million that equates with success in this business. In the last three months, half of it has disappeared.

It wasn’t due to squandering. Rhoads eats peanut butter sandwiches and milk for lunch every day. He doesn’t own an airplane, doesn’t frequent the Petroleum Club, has no debts and lives in a modest four-bedroom house with his wife of 38 years in this West Texas town of 100,000.

Flow of Red Ink

For all his efficiency, keen oil-finding instincts and perseverance, Rhoads can’t stop the flow of red ink touched off by the precipitous drop in oil prices. Since November, the price of a barrel has fallen from $30 to below $15.

“Never in my life have I seen anything like this,” the white-haired veteran of four previous industry slumps says. “If I hadn’t increased my production, we would be in bankruptcy today. And if it keeps up for two years this way, as some are predicting, it will bankrupt me for sure.”

Rhoads is part of a dying breed: the independent oil producer.

While the American consumer cheers the drop in oil prices, the 10,000 or so mostly mom-and-pop producers like Rhoads, who work independently of the major oil companies and yet account for 80% of the nation’s new oil discoveries, are going out of business at an alarming rate. Since the boom days of 1981, about 6,000 have called it quits.

Largest Oil Field

Nowhere is the wreckage worse than in Midland. Here, in the heart of the Permian Basin--the largest oil field in the continental United States, where 23% of America’s oil is produced--dozens of independents have thrown in the towel since the beginning of this year.

Observes Clayton Williams, one of the survivors: “We’re a fairly small fraternity as it is, and it’s getting smaller every day.”

These aren’t newcomers, like the brokers and dentists who got into oil six or seven years ago when business was booming. Most of those have long since disappeared.

Gone, too, are most of the inefficient operators and poor managers who were carried by high prices during the booms and the government dole during the busts. Those whom the drilling bust of 1982 or the bank failures of 1983 didn’t get, the price collapse has.

Teetering on the brink of survival now are the Harvey Rhoadses: efficient operators who do everything a good business is supposed to and still can’t make ends meet. They tend to be survivors of past busts and diehards who have been prowling for oil nearly all their lives.

Rhoads is a textbook example. He lacks the fame of more flamboyant Texas oil men such as the late H. L. Hunt. But with his low-key style and reliance on small oil finds instead of gushers, he is more representative of U.S. independent oil operators.

Most Give Seven Months

He is an anomaly in one sense, however. He figures he can hold on at the current price level for two years. Most give it only seven more months, if the price of oil stays below $18 or $20 a barrel. After that, they will have no more inefficient wells to plug, no more people to let go, no more cash and no more borrowing power.

Rhoads was no stranger to the oil business by the time he became an independent producer at age 49. He had gone to work for the old Atlantic Refining Co., predecessor of Atlantic Richfield, as a $118-a-month exploration geologist’s helper when he was 20.

Almost immediately, he learned something that has held him in good stead ever since: The only number that counts in finding oil is what you can sell it for.

In 1947, the answer was simple: $3 a barrel. Government price controls kept it at that level for 25 years.

Settled Around $15

When controls began to be relaxed in 1973, the price started seeking the “real market” level, finally settling around $15 a barrel.

“Immediately, oil people were the scoundrels of the whole thing,” Rhoads recalls. “But if the government had just allowed the price to increase with inflation, there wouldn’t have been that tremendous burst all at once. It’s the huge, fast increase that hurts. And that’s just what’s hurting us now.”

Today’s bust is the worst Rhoads has seen, but not the first. In the early 1950s and again in the early 1960s, the business went into such severe slumps that geologists were out on the streets.

Dropped Out for 10 Years

With two young sons and a wife to feed, Rhoads dropped out of the oil business for 10 years to pursue a management career with Metropolitan Life Insurance Co. in its Midland office.

After an offer to run his own insurance company fizzled, however, he found himself in an uncomfortable position: Out of work, a son in college and $40 in his pocket.

A retired geologist friend from his Atlantic Refining days had an idea. Why not borrow some money, buy a lease on some land the geologist had worked up and found promising, and go into business as an oil man?

Without an office, he persuaded a bank to lend him $14,500, the price of the lease, and investors to ante up the $100,000 to drill a well. It produced only a few barrels a day, but it kept it up for 18 months.

Repaid in Two Weeks

Two weeks after he borrowed the money, Rhoads repaid the loan.

“All it takes,” he says, chuckling now at the memory, “is a little bit of guts.”

“I got on a bus in Washington not long ago and some guy said , ‘Well, I think we should just shut in all those wells in the U.S. and ship the awl in.’ I said, ‘Well, that sounds like a good idea to me. And while we’re at it, why don’t we just let the Japanese make all the cars and Taiwan and Korea all the clothes?’ That’s the trouble with these damned Yankees. They think awl’s down there in the ground just waitin’ to be turned on.”--Paige Eisland, a stripper well owner, cotton farmer, insurance and real estate salesman in Stanton, Tex., the home, as the sign just west of town proclaims, of “3,000 friendly people and a few old soreheads.”

As so often happens in the oil patch, the road to disaster was built during a time of great prosperity. When the Iraqis and Iranians went to war in 1979, worldwide concern over oil supplies sent prices skyrocketing. In the course of one year, the price oil men in Midland were receiving for a barrel of oil shot up from $15 a barrel to $40. And crackerjack bankers, economists and brokers, seeing nothing on the horizon to stop the run-up, began predicting $70-, $80-, even $100-a-barrel oil.

Like No Tomorrow

The oil patch came alive. Even those who knew better succumbed to the lofty forecasts, erecting multimillion-dollar offices as monuments to their good fortune; buying equipment and airplanes like there was no tomorrow; hiring any geologist or petroleum engineer they bumped into on the street for double the pre-boom salary and a car besides; blowing millions on investments in real estate, cattle, aviation and fruit trees, and borrowing hundreds of millions of dollars to finance it all. By late 1981, orders for drilling and well-servicing rigs were backlogged 18 to 24 months--all on the speculation of $100 oil.

“We didn’t have people working then. We had bodies. Expensive ones. The price of materials was up two to three times too, “ says Bill J. Williams, operations manager for Pogo Producing Co.’s western division. “Half way through, I thought to myself, ‘Can this be? One hundred dollars for oil? Really?’

“I really don’t think it was as much we all made mistakes as (it was) we had to make decisions based on some price for oil and all the smart people were saying it was gonna keep going up.”

Independents Not Alone

The independent producers were not alone in letting the good times go to their heads.

“The banks were shoveling money out,” Rhoads says. “Why, one guy I know needed financing for a $4-million rig built to be delivered to him. He walked into the bank with a complete inventory of components on that rig, to justify the loan, and the banker said, ‘Don’t confuse me with details. Just give me the bottom line. How much do you need?’ He didn’t even go over the list to verify the money. A $4-million deal in 10 minutes. It was repossessed when the bank failed.”

“ We learned a lesson with the crash of 1974. We had spent more money than we ever had before. Then, came the crash. We survived because we were able to cut quickly. So in 1981, when everyone was saying $100 oil, we remembered 1974 and surveyed the situation. Interest rates were 21%, oil was $40 and an mcf (1,000 cubic feet) of gas was $10. Now, $40 was a lot for oil and $10 was too much for an mcf of gas. Then oil fell $1 after it had been rising steadily for two or three years. Careful, careful, we said. By January of ‘82, we had made our sale ($30 million worth of Dutch North Sea properties) and cut our debt to a more comfortable level. The bank (First National of Midland) fell a year later and bankruptcies soared. If this keeps up, we could lose 20,000 people from this area in another 12 months.” -- B.J. (Joe) Pevehouse, founder of Adobe Resources and a second-generation oil man who is regarded as one of the nation’s savviest independents.

Oil never made it to $100 a barrel. It topped out at $40 in the Permian Basin and then fell gradually to $28.75. By the time the oil men realized their mistake, they were already committed to projects and could not back out. On its journey back to reality, the price of oil claimed hundreds of overzealous oil prospectors and bankers.

Slowdown Became a Bust

By 1982, the drilling slowdown had become a bust, but nothing the veteran independents had not seen before. Or so they thought. “Stay alive ‘til ‘85,” was the motto they adopted as they took the usual cost-cutting survival steps.

But then something happened that helped make this bust a collapse of the entire domestic industry instead of just another cyclical slump. All over the oil patch, banks began failing. In Oklahoma City, it was Penn Square. In Midland, it was the First National Bank of Midland.

“Somebody has the story wrong. That just can’t possibly be,” Midland oil man Ron C. Fincher remembers thinking when he heard the news in Denver.

‘Just Couldn’t Fail’

This was Midland’s stalwart lending institution. A bank whose “financial stability has saved its customers from ruin in the face of drought or other disasters over the years,” proclaims the State Historical Survey Committee plaque that still marks the bank’s first site. A bank that, as Rhoads puts it, “just couldn’t fail.”

Three years later, the FDIC is still trying to collect on 7,000 First National Bank of Midland loans, most of which were so flawed that the new owner, Dallas’ big RepublicBank, would not buy them. The bust and the bankruptcies it wrought made the collection task of the FDIC--one of Midland’s five largest employers--difficult enough.

But just as some big creditors began to emerge from bankruptcy proceedings with their pay-out plans, prices collapsed practically overnight. Suddenly, properties securing those loans are worth only half as much, and the veil of bankruptcy cannot be lifted.

“The hardest thing about this is the boredom. The phone never rings. It drives you crazy. I’ve even started playing golf once a week just to get out of here.”--Midland independent Thomas C. Brown.

Rhoads saw “a lot of friends destroyed” by the First Midland failure and lost $150,000 himself--not in loans, but in stock accumulated over the 25 years his wife worked for the bank.

Rhoads’ Business Thrived

But despite that setback, Rhoads’ own business thrived from 1983 to 1985. Drilling and the personnel to do it were cheaper than they had been in the boom. And since he had no debts, and therefore no interest expenses, he had the development money that others did not.

When he sat down in December, 1985, to prepare his plan for the coming year, Rhoads had interests in about 30 wells, had built his net worth to $1.3 million and was clearing $150,000 a year, virtually all of which he plowed back into the company for more planning and development. Prices had held steady at $28.75 for some months, but just to be safe, he planned his 1986 budget on the basis of $26 to $28 oil.

A month later, however, the Saudis turned up the pumps and flooded the world oil market. In January, Rhoads received $4,271 for a load of oil; by March he was getting $1,993.

“First the bank failure and then, whammo, this,” Rhoads says.

Drilled Eight Wells

He plugged two wells that cost more to operate than he could sell the oil for. He got rid of the leases on undrilled property where oil looked promising but was not a sure thing. And instead of saving his cash to ride out the hard times, he spent it--along with some money from a small nucleus of investors he frequently does business with--drilling eight new wells where he knew there was oil.

Wells are plugged with great reluctance because the odds of them ever producing again are so long that most plugged wells are never reopened. Because a typical oil well is 50 parts water to eight parts oil and gas, they tend to fill up with water.

The fact that hundreds of wells have been closed down in West Texas alone over the last four months is indicative of how desperate independents are. It is also indicative of how much of the nation’s oil production is derived not from great gushers that pay for themselves in a matter of days but from small so-called stripper wells that sometimes never pay for themselves. Those are the ones being plugged.

Prospects Go Too

Giving up promising leases as Rhoads did, while an attractive way to cut costs quickly, can also be dangerous to an oil man’s future. If he does survive the bust, he has no prospects left when drilling again becomes economical.

Drilling wells just for the sake of increasing production can also be risky with oil prices so depressed. For one thing, drilling is an expensive proposition--$350,000 to drill a well in West Texas at last count--and uses up cash the driller may need to stay in business.

For another, it takes longer to recover one’s expenses when oil is $15 a barrel than when it is $28. Rhoads figures the last two wells he drilled, just to keep the leases from expiring, would have been paid off in 18 months before prices collapsed; now it will take three years.

Drilling Rigs Idled

Little wonder that drilling has ground to a virtual halt. About 3,600 drilling rigs have been idled and there are now fewer rigs working the U.S. oil patch than at any time since World War II--757 at last count, down from 4,530 at the peak of the 1981 boom.

“The guy who’s starting an oil well today, except for drainage reasons or to protect a lease, has got to be out of his cotton-picking mind,” says Richard C. Sparling, director of economics and financial studies for the Independent Petroleum Assn. of America.

“We’re hanging on by our fingernails. And if the price doesn’t bounce back to $20 or $22 by December, most of us won’t make it beyond the first of the year. To make $15 oil economical, you have to find it for $5 because oil comes to you over a long period, so you have to discount it. All of us have been trying to achieve $8 (finding costs). And before January, we were getting toward that. But I don’t see where to get the other $3.” -- Charles Priddy .

In the oil patch, upwards of half the geologists and petroleum engineers are already out of work because of the oil collapse, as are a similar number who service the oil industry--people who construct and service wells and provide the equipment to drill and pump them.

Personnel Loss Feared

“We depend heavily on these people and they’re the ones we’re concerned about,” says Rhoads. “My biggest fear is that we’re going to see a major loss of industrial personnel.” Of special concern to Rhoads are his two sons, one a drilling superintendent for Exxon and the other, an MBA whose clients include many in the oil industry. They will take over the business when Rhoads dies.

“If we lose all of these people it will take two years beyond when the rest of the industry returns to see these people come back. I’ve been told 25,000 people are moving out of town as soon as school’s out and you can be sure they’re the geologists, the engineers and the service people. In the ‘70s (slump), it took almost four years for us to get back in gear and find all the people and equipment it takes to run a good business. This time you have the same thing only worse because the bank failure took so many people out.”

Rhoads and others are worried about the ripple effect too. Gas accounts for about twice as much business as oil in the industry and independents are worried that with oil prices so low, businesses will start converting to cheaper oil en masse or insist that the already low natural gas prices be brought down still more, further cutting their income.

Surviving Banks Reel

The surviving banks are another concern. Already reeling from sour loans, many fear they are in for another round of serious losses when oil men who have been amassing huge debts on their credit cards as a stop-gap measure call it quits.

“Years ago,” Rhoads observes, “there were only three banks in this town. Now there are 13. With things the way they are, we just can’t support that many. The word around town is two or three are going to collapse this summer.”

Rhoads is not sure about the answers to the independents’ plight. “Perseverance and patience takes care of a lot of things and I guess maybe that’s the answer here.”

“Once you get the government in, you’ll never get them out of your hair. Besides that, prices are liable to go up almost as fast as they dropped. Then you’re going to see clamoring from non - oil producing states to penalize us. As sure as you and I are sitting here, that’s going to happen.”--James Henry, founder of Henry Petroleum Co., a Midland independent producer.

Rhoads is a proud man. Proud he’s a Texan. Proud he’s an American. Proud he’s active in his community. And proud he’s never drawn unemployment or missed a meal.

But he does sometimes question why he stays in a business that doles out heartache and failure as surely as it does riches and success.

“Gawd, sometimes I don’t know. There’s a certain excitement to drilling for oil, though. A romance to that that’s in my blood and I can’t get it out. It’s the only thing I know. The thing I really love. And frankly, I don’t have anyplace else to go.”