houston chapter wednesday, february 4, 2015 10:30 am – 1:30 pm 2015 economic outlook for better...

HOUSTON CHAPTER

Wednesday, February 4, 201510:30 am – 1:30 pm

2015 Economic Outlook

For Better and for Worse: Oil Drives Houston’s Economic Outlook

Presented by Dr. Robert W. Gilmer, Director, University of

Houston’s Bauer Institute for Regional Forecasting

2015 WORKING SCHEDULE OF EVENTS

Event Location* Date*2015 Economic Outlook La Colombe d’Or February 4

Lunch & Learn hosted by Hoover Slovacek LLP To be announced March

Lunch & Learn – host pending New Orleans April 14

New Member “Meet & Greet” To be announced April

Lunch & Learn hosted by Winsted PC To be announced May

Luncheon Panel – topic to be announced Brennan’s Downtown June

Lunch & Learn hosted by Porter Hedges LLP To be announced September

Annual State of the Private Equity MarketsVic & Anthony’s Steakhouse

September

CFA/TMA Networking Reception & MixerMo’s…A Place for Steaks

October

Lunch & Learn hosted by Weinstein Spira & Co. To be announcedOctober/

November

Sponsor Appreciation Dinner Carrabba’s November

* Dates & locations subject to change

EVENTS & ATTENDANCE – 2014 RECAP

EVENT LOCATION DATEATTENDANC

E2014 Economic Forecast: World, US & Houston

La Colombe d’Or Feb 12 104

Lunch & Learn hosted by Hoover Slovacek LLP Hoover Slovacek LLP offices March 26 40

New Member “Meet & Greet” TopGolf April 22 28

Lunch & Learn hosted by Winstead PC Winstead PC offices May 28 39

FRAUD! – Prevention and Mitigation of Damage Brennan’s Downtown June 25 59

Lunch & Learn hosted by Porter Hedges LLP Porter Hedges LLP offices Sept 8 46

Annual State of the Private Equity Markets Vic & Anthony’s Steakhouse Sept 23 128

CFA/TMA Networking Reception & Mixer Mo’s…A Place for Steaks Oct 16 70

Lunch & Learn hosted by Weinstein Spira & Company

Greenway Plaza Conference Center

Nov 19 45

Average Open Event Attendance 72

Average Closed Event Attendance62

CHAPTER MEMBERSHIP PROFILE

Membership Profile 2014 Members

Banks and other regulated lending institutions 60

Independent non-bank financial institutions 37

CPA firms, audit, tax, consulting, advisory 34

Turnaround/restructuring/consulting, advisory 20

Attorneys 19

Business executives, other 13

Investment banks, intermediaries and other advisory services 8

Private equity groups 5

Insurance 4

Due diligence, investigations, appraisal & field exam services 2

Real Estate Lending/Advisory 2

Total 204

2015 HOUSTON CHAPTER OFFICERS

PRESIDENTSeth Block – Thermo Credit – [email protected]

FIRST VICE PRESIDENTErik Konicki – Briggs & Veselka Co. – [email protected]

VICE PRESIDENT – SPONSOR COMMITTEE CHAIRK.C. Carmody – Willis Group – [email protected]

VICE PRESIDENT – PROGRAM COMMITTEE CHAIRMargaret Ceconi – [email protected]

VICE PRESIDENT – MEMBERSHIP COMMITTEE CHAIRAdam Cox – Pendleton Capital Group – [email protected]

BOARD OF DIRECTORS Larry Ellis – KeyBanc Capital Markets – [email protected] Michael Monk – Amerisource Funding – [email protected] Carl Smith – Wells Fargo Capital Finance – [email protected]

CORNERSTONE SPONSORSHIP LEVELS & BENEFITS – COMPARISON

Level CostSignage,

Recognition, Exposure

Free Events Exclusive Events

# Member-ships Include

d

Hard $ Value

to Spons

or

Other Benefits

DIAMOND $6,000

All events, all emails, member directory, printed materials, website

Preferred, reserved table of 10 at all luncheon events

Invitations to the sponsor appreciation event and new member welcome event

5$5,100

+

See details on next pages.

GOLD $3,500


Preferred, reserved table of 10 at any 2 luncheon events


3$3,300

+


SILVER $1,500


Admission for 2 at all luncheon events


2$1,500

+


BRONZE $750


Admission for 1 at all luncheon events

Invitation to the sponsor appreciation event and new member welcome event

1 $750See details

on next pages.

Lunch & Learn Host

No Cost to Host

Opportunity to host one or more educational events at your company’s office!•Sponsor hosts have input on programming, subject matter, and speakers •Must be able to accommodate at least 20-30 attendees •Simply provide lunch for attendees •Attendance at the luncheons is FREE to all Houston CFA members

CORNERSTONE LEVELS & BENEFITS

DIAMOND

• Annual membership for five• Recognition as a Diamond Sponsor in EVERYTHING:

• email invitations• event handout materials• event signage• e-newsletter• member directory• website

• Complimentary preferred, reserved table for ten at all Houston luncheon events (3-4 annually)• Invitation to the exclusive sponsor appreciation dinner• Invitations for five to the new member event


GOLD

• Annual membership for three• Recognition as a Gold Sponsor in EVERYTHING:


• Complimentary preferred, reserved table for ten at any 2 Houston luncheon events (3-4 annually) • Invitation to the exclusive sponsor appreciation dinner• Invitations for three to the new member event


SILVER

• Annual membership for two• Recognition as a Silver Sponsor in EVERYTHING:


• Complimentary admission for two at all Houston luncheon events (3-4 annually)• Invitation to the exclusive sponsor appreciation dinner• Invitations for two to the new member event


BRONZE

• Annual membership for one• Recognition as a Bronze Sponsor in EVERYTHING:


• Complimentary admission for one at all Houston luncheon events (3-4 annually)• Invitation to the exclusive sponsor appreciation dinner• Invitation for one to the new member event

LUNCH & LEARN HOST

• Hosts have input on programming, subject matter, and speakers• Recognition as a Lunch Sponsor Host in:

• email invitations• event handout materials• e-newsletter• website

• Must be able to accommodate at least 20 – 30 attendees.• Simply provide lunch for attendees.• Attendance at the luncheons is FREE to all Houston CFA members.• Availability is limited. See Program Committee Chair or Chapter Administrator for more information.

HOUSTON CHAPTERHOUSTON CHAPTER

2015 Cornerstone Sponsors

DIAMONDDIAMOND

Founded in 1984 and headquartered in Houston, Texas, Amerisource is one of the largest and fastest-growing independent commercial finance companies in the country. Amerisource provides working capital financing and outsourced receivables management to small and middle market companies with financing needs from $50,000 to $15,000,000.

Core products include asset-based lending revolvers, accounts receivable factoring, seasonal bank "over-lines", outsourced A/R, credit and collections management, debtor-in-possession ("DIP") financing, trade finance for importers, and export factoring.

Amerisource also provides portfolio management and servicing for banks through its private label program America's Back-Office for Lenders™, portfolio acquisitions and liquidations.

Capital One is a diversified bank that offers a broad array of financial products and services to consumers, small businesses and commercial clients. A Fortune 500 company, Capital One has one of the most widely recognized brands in America. As one of the nation’s top 10 largest banks based on deposits, Capital One serves banking customers through branch locations primarily in New York, New Jersey, Texas, Louisiana, Maryland, Virginia, and the District of Columbia. • Capital One offers a unique combination of financial strength, personal attention, and flexible products

• A hallmark of our strategy has been a relationship-based commercial banking approach• We continue to grow our capabilities in key areas of focus for our clients including Capital Markets and Treasury Management

• The market continues to identify Capital One as a winner coming out of the Great Recession:

• Well Capitalized• Solid Liquidity• Strong Capital Ratios• Stability and Strength



GOLDGOLD

Texas Capital Bank is a commercial bank that delivers highly personalized financial services to businesses and private clients. The Bank has full-service locations in Austin, Dallas, Fort Worth, Houston and San Antonio. It is the primary subsidiary of Texas Capital Bancshares, Inc. (NASDAQ: TCBI), which is included in the Russell 2000® Index and the S&P SmallCap 600. For more information, visit www.texascapitalbank.com



SilverSilver

Advantage Business Capital is a wholly owned subsidiary of Central Bank, which is a locally owned bank in Houston founded in 1956. Our management team has over 80 years of combined experience in factoring and providing working capital to businesses nationally. With the many financing products and bank services available, we can offer some of the most innovative and flexible accounts receivable factoring programs in today’s market. We provide traditional factoring, asset-based borrowing base, inventory and equipment financing solutions to meet the demands of growing companies with opportunities exceeding their current working capital capacity. When qualified, the financing provided by Advantage can seamlessly transition to traditional bank financing to provide a lower cost of capital.

ATF FINANCE is dedicated to assisting small to medium-sized businesses with needed working capital in a timely, efficient, and competitive manner. Our driving principal is that client’s successes lead to our success. As a commercial factor, we help our clients reach their full potential by providing needed cash for their operations through the purchase of their commercial accounts receivable. ATF FINANCE was started to service the financing needs of small truckers who worked with our sister company, SBL Logistics. From this foundation, we have grown to provide multiple funding options to a variety of industries including: • Transportation• Temporary Help• Manufacturing• Wholesale & Distribution Through a related entity, PAYMAX CARRIER SERVICES (www.paymaxcash.com), we provide an internet-based option for trucking companies to obtain immediate cash. ATF also offers financing options on a case–by-case basis for: • Purchase order financing• Inventory financing• Credit card advances



SilverSilver

Briggs & Veselka, the eighth largest Houston-area public accounting firm, has provided reliable business and financial services to individuals and emerging middle-market businesses in the greater Houston area since 1973.

Their 180 employees, including 19 shareholders, believe in providing quality services on time and at reasonable fees.

Briggs & Veselka believes you’ll find their staff to be among the most experienced when compared to firms of similar size. You can trust that when they promise to provide your services, they’ve got the experience and credentials to follow through.

GBH CPAs, PC is a certified public accounting firm based in Houston, Texas. Their focus is delivering audit, tax compliance, business valuation and advisory services to small and medium publicly-traded and private companies and high net worth individuals. GBH demonstrates professional excellence through the high quality of services performed for clients. Their audit focus delivers a cost-effective audit through professionals trained to meet specific reporting requirements.

GBH CPAs can assist in a broad range of services through their professional alliance referral network. Their management team began their careers with the Big 4 accounting firms and maintain the same level of professional standards, service and relationships in their firm.



SilverSilver

J D Factors helps companies meet their ever-increasing cash flow demands, enabling them to run their businesses successfully. Factoring, or the sale of accounts receivable, gives your company immediate access to working capital for things such as payroll, marketing, paying vendors, and purchasing equipment and inventory, without incurring debt.

Thermo Credit is a privately held funding company that provides asset based loans and factoring services exclusively to the communications industry. With over 100 years of combined experience in communications and financial services, Thermo Credit targets established companies in every segment of the communications market including Long Distance, VoIP, Triple Play, Wholesale, Wireless, ISPs, CLECs and Content Providers.



SilverSilver

Wells Fargo & Company is a diversified financial services company providing banking, insurance, investments, mortgage, and consumer and commercial finance across North America and internationally. Wells Fargo has $1.3 trillion in assets and more than 270,000 team members across our 80+ businesses. These include Wells Fargo Capital Finance (WFCF), and Global Banking. WFCF provides traditional asset-based and non-traditional senior secured financing solutions purchase order finance and distribution finance products throughout the United States and Canada from $2 million to more than $1 billion, while Global Banking provides Cross Border financing, trade finance and treasury management solutions across the globe.



BronzeBronze

Hoover Slovacek LLP is a dynamic, results-driven law firm comprised of more than 35 accomplished attorneys who each excel in specific areas of law. By uniting in one firm, we are able to direct substantial and diverse legal projects throughout Texas related to: real estate, commercial litigation, community association representation, corporate and business practice, estate planning and probate, construction law, mediation, bankruptcy/financial restructuring, tax law, and employment law.

For more than 40 years, individuals, investors, businesses, community groups, management companies and financial institutions have trusted Hoover Slovacek LLP for practical, cost-effective representation. Hoover Slovacek attorneys and staff value client relationships. Communication is open and honest. Above all, integrity and professionalism are never compromised.

Porter Hedges is a full-service Houston-based law firm founded in 1981. They are one of the ten largest Houston-based firms and among the largest in Texas. Their team includes business and trial lawyers experienced in a wide range of legal services across a broad spectrum of industries. The firm is known for handling sophisticated transactions and complex litigation on behalf of a diverse group of clients in established and growing industries. Porter Hedges represents public and private companies and are recognized for both the depth of our experience and the ability to meet their clients’ business objectives. Their team has particular experience in energy transactions, corporate M&A, commercial litigation, banking and finance, bankruptcy, and construction law.

Porter Hedges' practices and lawyers are consistently ranked among industry leaders. As a firm, Porter Hedges was selected by The National Law Journal as one of only 20 firms from across the U.S. for inclusion in its "Midsize Hot List" in 2010 and 2012. This list recognizes firms with between 50 and 150 attorneys who rank among the best at spotting emerging trends, providing cost efficient service, and establishing long-lasting client relationships.



BronzeBronze

Walther Partners is a firm of senior business and consulting professionals that specializes in improving corporate financial and operational performance, executing corporate turnarounds, providing litigation consulting, forensic accounting and tax services timely and tirelessly. Since 1998 Walther Partners has created valuable results by improving corporate financial and operational performance, executing corporate turnarounds, providing litigation consulting and, through our affiliates, accounting services. Tireless effort and timely results are the cornerstones of our business. We are known as much for our rapid, thorough preparation as for our aggressive implementation and precise completion requirements. Our senior business and consulting professionals are experienced as interim executive’s court appointed “Chief Restructuring Officers” and proficient at Businessman’s Reviews providing relevant accurate information.


Speaker

Dr. Robert W. GilmerDirector, University of Houston’s Bauer Institute for Regional Forecasting

Dr. Robert W. (Bill) Gilmer is Director of the Institute for Regional Forecasting at the University of Houston’s Bauer College of Business. The Institute monitors the Gulf Coast business cycle, including the influence of the national economy, energy and global expansion on Houston area growth. It also conducts other economic studies of policy significance to the Houston area. Before joining the Institute, Gilmer served the Federal Reserve Bank of Dallas for 23 years, retiring from the bank as a Senior Economist and Vice President. He joined the Houston Branch of the Federal Reserve Bank of Dallas as a senior economist in 1989, focusing on energy markets and regional growth. He co-managed the 11th District’s regional economic analysis from 2004-2012, and was editor of two of the bank’s regional publications. Gilmer’s work on the Texas economy has been recognized by publications such as the Wall Street Journal, The Economist, and Forbes. Dr. Gilmer holds an M.A. and a Ph. D. in Economics from the University of Texas at Austin. He was born in Amarillo, Texas, and grew up in El Paso where he earned a B.A. in economics from the University of Texas at El Paso.

20

(713) [email protected]


Growth of Personal Income Among 12 Largest US Metros: 1969-2013


Houston economy’s reaction to past oil shocks has varied widely


Overview

• Just weeks ago, Houston’s 2015 outlook was to be a clash between upstream oil producers and downstream chemical construction over labor and machine shop capacity Producers in 2015 were set to return to fracking at high levels with oil at $100 per barrel A massive construction boom was set up by low natural gas prices Now? With oil at $50 per barrel? Can the construction boom fill in for the likely loss of

producer and oil service employment?

• Under conservative assumptions, blue-collar jobs located on the east side of Houston will fill in for overall job losses Houston still can create 40,000 jobs in 2015 and 2016, even with a significant drilling

downturn With no help from petrochemical construction, we would likely see a mild recession in

Houston in 2015 and 2016 However, the east side of Houston will probably boom, based on thousands of new but

temporary, blue-collar construction workers. Industrial activity remains strong to support the construction

The white-collar west and downtown will bear much of the brunt of a low oil price. Temporary construction work will not create demand for apartments, offices or high-end retail


Oil Prices Fall Steadily Since Summer

* Week of 1/923

Near-term futures contract, last week of each month


How Did We Get Here?

• Excess supply of crude oil Increased U.S. production from the Gulf of Mexico and from shale Sales by Libya and Iraq for revenue to fight insurgencies The usual OPEC cheating by Venezuela, Iran, Nigeria and other

• Weaker demand for crude Seasonal weakness/refinery turnarounds European and Japanese recession and fear of deflation Emerging market growth disappoints


Shale Reserves Over 40 Years of Declining U.S. Oil Production (million barrels/day)


Global Growth Sluggish in 2014-15(% GDP Growth)

2012 2013 2014 2015 2016

World 3.4 3.3 3.3 3.5 3.7

U.S. 2.3 2.2 2.4 3.6 3.3

Europe -0.7 -0.5 0.8 1.2 1.4

Japan 1.4 1.6 0.1 0.6 0.8

--- --- --- ---

China 7.7 7.8 7.4 6.8 6.3

India 4.7 5.0 5.8 6.3 6.5

Brazil 1.0 2.5 0.1 0.3 1.5Source: IMF World Economic Outlook: Update, January 2015


The Saudi Revenue Dilemma

• Raise price/lose market share or cut price/keep market share

• Early announcement: let price float between $80 and $90 per barrel with time limit of two years Help their friends in the U.S. and – especially -- European economies Punish their adversaries and enemies: Isis, Iran, Iraq, Venezuela, Russia Force U.S. shale into the role of the swing producer

• Now showing real determination to let the price fall sharply and incur the price of doing so for a prolonged period. $65? $55?


Breakeven Oil Price for 2014 OPEC Government Budgets

Deutsche Bank and the Wall Street Journal


E&P Spending Had Already Slowed from the 20 Percent Growth of the Last Decade

Real $ billion capital expenditures Baker Hughes rig count


Oil-Directed Drilling Has Driven the Rig Count Since 2011

Baker Hughes


Crude Prices and Drilling Plans in November

What crude price do you use to set forward drilling plans?

At what price will you cut your drilling plans?

Tudor, Pickering, Holt industry survey


Domestic Rig Count Already Down 20 Percent from September Peak


Fracking Continues, but the Fracking Frenzy is Probably Over

• A healthy dose of caution was much needed. We have now seen oil under $50 per barrel – and understand better that $100 per barrel is a not fixture in oil markets

• In the short-run, producers have to reduce cap ex, cut labor and other expenses, bring costs in line with cash flow, and keep a low profile until this is over

• Over the long term, fracking is probably with us to stay. But Saudi Aramco and a $700 billion sovereign fund can make it a very painful lesson in the short-run

• U.S. shale probably comes out of this as a more cyclical and more slowly-growing industry – cutting back with every oil surplus, expanding only with high crude price


Houston Economy Looks Great in the Rear View Mirror

For Houston, the Energy Boom has Roared on Through 2014

• We may have added over 100,000 jobs in 2014, as the energy sector – and excitement about oil and gas – drove the economy forward

• Where did this excitement come from? Last winter’s polar vortex generated billions in revenues for natural gas producers

With $100 oil, producers put the 2011-2012 collapse in natural gas price behind them. Going into 2015, the fracking fleet was completely sold out

There is a rush to construct billions in petrochemical and LNG projects in Houston and throughout the Texas and Louisiana Gulf Coast


Houston Employment: Off to the Races Again in 2014

Note: December to December changes, except 2014 which is year-to-date, annualized and s.a.


Houston Employment Sees Job Growth Accelerate in 2014(3-month percent change at annual rates)

Bureau of Labor Statistics


Purchasing Managers’ Index US and Houston Compared (s.a.)


Houston unemployment rate falls on strong job growth



Energy Led the Expansion of Houston’s Economic Base (Thousand Jobs, s.a.)


While Overall Base Growth has Slowed, Non-Basic Growth has Picked Up

(6-mo percent change at annual rate)


Number of Non-Basic Jobs Supported by Each Base Job


Rules of Thumb for counting Jobs in Houston

• Over a period of 8-10 quarters, a one percent change in jobs in Houston’s energy cluster means a change of 18,000 total local jobs

• Similarly, a one percent growth in U.S. employment brings 33,000 jobs. At 1.7 percent, add 56,100 jobs

• How jobs add up annually in Houston: Job growth of 1.7% PLUS 3% energy base growth = 110,000 new jobs in Houston

1.7% US job growth MINUS 3% energy base growth = 2,100 jobs in Houston

Minus 6% energy base growth? Recession and the loss of 45,900 jobs


Scenario #1: 20 Percent Cut in Exploration and Production

• E&P expenditures fall 10 percent in 2015Q1, then another 10 percent in Q2. They stay flat until 2015Q4, then recover. By 2016Q2, E&P growth then resumes rapid growth at 8 percent per year

• U.S. growth remains solid, with 1.7 percent job growth throughout the outlook

• As a result, the energy base jobs shrink by 18,700, or 6.2 percent

• OTHER THINGS EQUAL, this is enough to induce a mild recession in Houston with 50,000 jobs lost in 2015-2016, before growth resumes in early 2017


Scenario #2: 33 Percent Cut in Exploration and Production

• Similar to Scenario 1, but with initial 16.5 percent cut, rising to 33 percent. E&P growth resumes at steady 5 percent annually on the same schedule as Scenario #1.

• U.S. growth remains solid at 1.7 percent

• As a result, the energy base jobs shrink by 23,600 or 7.9 percent. Similar cuts in E&P in 2008-09 resulted in a decline of 30,000 energy jobs

• OTHER THINGS EQUAL, the resulting recession in Houston means 78,000 jobs lost in 2015-2016, before growth resumes in early 2017


Figure 6: Houston Job Growth if E&P Falls Without Chemical Expansion(Quarterly % change, annual rates)


Very Important Caveats

• We have never been through this in the new era of high-cost shale drilling. How will the industry react to lower cash flow? How fast does the industry grow in recovery?

• Will all the jobs cuts upstream materialize? Will the Big Crew Change continue to protect the core engineering and geology skills?

• Much depends on global economic recovery. But also on the will and the pocketbook of the Saudis – this is not entirely a market-based event. Where is their pain threshold? And ours?

• OTHER THINGS ARE NOT EQUAL– let’s look downstream!


A Construction Boom Built on Low Energy Prices


Natural Gas Prices Collapsed in Late 2011 ($/mcf)

DOE/EIA


$100 Billion U.S. Construction Boom is Based on Cheap Energy and Exports

• Ten proposed new ethylene crackers, more ethylene-related expansion in PE, PVC and other derivative plants

• LNG export terminals to sell surplus natural gas into global markets

• Gas processing facilities, natural gas liquid export terminals, pipelines and other basic infrastructure

• The Gulf Coast is the focus of this expansion


Natural Gas Energy Content Equivalent to $20-$40 per Barrel for Oil

DOE/EIA and calculations of the author


December Margins for Ethylene were 39 Cents per Pound in North America, 10 Cents Elsewhere

Muse, Stancil Cash Ethylene Margins, Oil and Gas Journal, 2013


Ethylene Projects Proposed or Under Construction In or Near Houston In or Near HoustonCompany Scale

(thousand m tons/yr)

Location Completion

ChevronPhillips 1,500 Baytown 2017

ExxonMobil 1,500 Baytown 2017

Dow 1,500 Freeport 2017

Sasol 1,500 Lake Charles DELAYED

Occidental 500 Ingleside 2017

Formosa Plastic 1,200 Point Comfort 2017

LyondellBasell 450 La Porte and Channelview

2016

Total S.A. 900 Port Arthur Proposed


LNG Export Terminals Being Approved

• Over 40 applications for permits to DOE and/or FERC to export up to 42 Bcf/day

• Current global market only 11-12 Bcf/day, projected to 16 Bcf/day by 2019. Even

allowing for rigid weeding out of projects, and highly optimistic assumptions of global growth, proposed capacity additions are quite large

• But two projects are under construction in Freeport and Sabine Pass, two others approved in Cove Point, Maryland and Hackberry, Louisiana.

• The projects have a typical construction cost of $10 billion and recent permit applications hope for initial operation in 2018 and 2019


Why Other Things Aren’t Equal in the Earlier Scenarios

• Some decent statistical results – plus back of the envelope calculations – say that a one percent increase in downstream capital expenditure by the oil industry brings 145 construction jobs to Houston

• Jobs adds up quickly given the number and scale of proposed construction projects in 2015-2017

• These are temporary jobs, disappearing as projects end and capital expenditures wind down

• Normally, downstream capital expenditures are small compared to the upstream, move in a narrow range, and create relatively few jobs

• The construction projects just described means the downstream can’t be ignored right now. Can this spending substitute for losses upstream?


Two Scenarios Downstream

• Begin with $90 billion in shale-related chemical construction in the U.S., plus 5 new LNG plants

• Chemical construction begins to wind down by 2017, and LNG plants by 2017-18

• Scenario 1 assumes that one-third of this announced construction never materializes. Scenario 2 assumes only one-half are built. The expansion still is massive and completely unprecedented

• Combine these with Scenario 1 and Scenario 2 upstream


East Houston is Looking for A Few Good Workers

Downstream Cap Ex in U.S.

($ mil)

New Houston Construction

Workers Needed

Year Build 1/2 Build 2/3

2014 3613 3613

2015 15,972 20,292

2016 9,760 10,457

2017 -3,465 -3,656

2018 -4,906 -5,279

2019 -14,888 -17,547

Build 1/2 assumes that only one-half of announced construction moves forward;Build 2/3 assumes two-thirds of the projects move forward


Questions and Concerns

• Are the workers and skills available? AGC union negotiations to bring workers to Gulf Coast Companies are scouring the nation More workers available now than we thought a couple of months ago – as drilling winds down

• Do projects move forward? Chemical margins are squeezed with cheaper oil Doubts raised about the availability of some products as drilling falls? Propane, butane, and

ethane for export?

• Plenty of questions about the realism of the scenario – but assumptions are conservative. There is a substantial cushion against upstream problems.


One Construction Worker = One White-Collar Job?

• Does one upstream job equal one downstream? White-collar versus blue-collar, education versus trade skills, high salaries versus high wages?

• Are the multipliers the same? Not likely – replacing long-term employment with temporary construction jobs, and a workforce that will soon shrink Scenarios assume that multipliers for construction are half those of white-collar workers. Construction stimulates industrial base, less effect of retail, apartments, lot development and single-family,

offices, and infrastructure

• Ship channel is an obvious winner, and most of the machine shops and metal fabrication on the north and northwest side should continue to thrive

• What happens now to flow of young professional into central city and west Houston apartments, single-family, and offices?

• Industrial east side booms while the air could be sucked out of the white-collar west side. There is plenty of scope for economic disruption, even if overall job numbers stay healthy


What It Means for Houston

Scenario 1: 20% Drop in E&P and 2/3 of Projects Completed

• Replace upstream jobs with construction workers on a 2-for-1 basis

• Energy employment rises in early 2015, then sees a net drop in energy-related jobs of 6,150 or 2.1 percent

• Payroll job growth continues at 2.0 percent in 2015 and 1.9 percent in 2016, both faster than assumed for the U.S.

• Rapid payroll growth in late 2017-2018 is driven by 8 percent growth in fracking


Scenario 2: 33% Drop in E&P and ½ of Chemical Projects Completed

• Replace upstream jobs with construction workers on a 2-for-1 basis

• Energy jobs initially rise, then see a decline of 11,263 or 3.8 percent

• Payroll job growth in Houston during this period is cut to 1.6 percent in 2015 and 1.3 percent in 2016

• The recovery in 2017-2018 is subdued compared to Scenario 1 because of the slower expansion of fracking, assumed to be only 5 percent


Energy Jobs in Houston if We Include Construction Workers

Chemical and other construction workers replace upstream jobs on 2-for 1 basis


Employment Growth in Two Scenarios, 2015-2018(Quarterly % change, annual rates)


Both Scenarios See Continued Job Growth in Houston

Scenario 1 Scenario 2

Year Jobs (000)

Percent Increase

Year Jobs (000)

Percent Increase

2014 84.4 3.0 2014 84.4 3.0

2015 61.1 2.0 2015 47.6 1.6

2016 58.4 1.9 2016 38.9 1.3

2017 59.1 1.9 2017 41.4 1.3

2018 79.3 2.5 2018 56.9 1.8


Current Events Are More Like a 1/3 Cut in E&P and of 2/3 of Chemical Projects Completed

(thousand jobs in energy base)


Current Mix of Events Pull Payroll Employment Forecast to Low Side (% increase in payroll jobs at annual rate)

Y-o-Y%

Y-o-Y%

Y-o-Y%

Year Scenario 1 Scenario 2 Mix 1/3 2/3

2014 3.0 3.0 3.0

2015 2.0 1.6 1.8

2016 1.9 1.3 1.5

2017 1.9 1.3 1.5

2018 2.5 1.8 2.0


Big Conclusions

• Crude in the $80-$90 per barrel range implies modest industry retrenchment, but upstream growth from shale evaporates and reverses quickly below $75

• There is currently a big cushion for the Houston economy from downstream construction and a healthier U.S. economy. Our scenarios continue to point to near-term job growth that matches or does not fall far behind the U.S., even with a significant setback to drilling

• The overall job growth hides likely differences between Houston’s east and west sides, between blue-collar versus white-collar jobs, and industrial-versus office-based employment

• Over the long-term, if U.S. shale is the swing producer, it becomes a cyclical industry, ramping down with every oil surplus, growing again only as oil price recovers. This means slower and less consistent growth for the industry and the many cities where it works


Existing home sales in Houston return to 2006 levels(sales/month, s.a.)


Houston Home Prices Stable Through Crisis, But Then Rose Quickly(median price, s.a.)


Price Increases for Houston’s Single-Family Homes(% quarterly change, annual rates)


Houston Single-Family Market Still Below 3-Month Supply

MLS, Texas A&M Real Estate Center, seasonally adjusted


Houston Single-Family Permits Constrained by Lot Shortages(monthly permits, s.a.)

FRED, St. Louis Federal Reserve Bank, s.a.


Change in Home Value, Construction Cost, and Land Prices Since 2011 Q4


Contribution of Land Value to Price of Single-Family Home in Houston(constant $2014)


Local Multi-Family Permits Still Trending Up?(units/mo at annual rate, s.a., 6-mo avg)


Output Growth in This Recovery Has Disappointed Badly (Real gross product %-change, annual rates)


U.S. Payroll Jobs Finally Match Jan 2008 Peak Employment


U.S. Employment Growth In Thousands of New Jobs per Month, 1990 to 2011



Percent Contribution to GDP Growth, 1990 to the Present


Consumer Makes Progress Reducing Debt After the Build-Up Post-2000

Federal Reserve Board, BEA


Consumer Debt Payments As a Percent of Disposable Income


Stock Market Holdings Add to Consumer Net Worth Again (billion $ 2009)


Home Equity Again Over $10 Trillion: Back On a Healthy Trend?

Federal Reserve, U.S. Financial Accounts


University of Michigan: Consumer Sentiment Trends Up


Retail Sales Have Accelerated Over the Last Six Months

Census, Retail, ex auto, Seasonally adjusted data


Auto Sales Back at Pre-Crisis Levels (million units at annual rate)


Housing Recovery Still Sub-Par in Early 2015

• 2014 was tough: Polar vortex, interest rate rose with end to QE3 announced, institutional buyers backed out of the market as prices rose

• Affordability for first time home buyers is stretched by higher rates and credit standards

• Household formation remains low, keeping young buyers out of the market

• Recovery is in place, but will unfold slowly


Home Prices Rise More Slowly in 2014(index: 3-mo percent change at annual rate)

FHFA purchase -only home price index


Recovery of New and Existing Home Sales Slowed After Polar Vortex

St. Louis Federal Reserve Bank


U.S. months of supply of existing homes still below six months


New home starts have stabilized after the winter


Homebuilder Optimism Worked Its Way Out of Polar Vortex Slump(NAHB homebuilder sentiment)


Where We Are Now with Houston’s Economic Outlook

• The upstream fracking boom is over for now, as low oil pushed oil producers into substantial cuts in E&P spending • The chemical construction boom will prevent this from being a significant downturn in Houston in

2015-2016

• This outlook also needs the global economy to avoid recession or crisis in 2015 and 2016, and the U.S. to continue on a strong growth path

• This is probably not the end of the U.S. shale development, but how fast does it grow over the long-term? Does it become the swing producer, and inherently more cyclical?

• Current construction boom is a once in a lifetime event. It won’t provide much shelter in future downturns brought on by exploration and production


Missing sectors add to GDP again(percent contribution to GDP growth)


Developed Land Cost for the Average House by Metro Area


Affordability of Homes in Other Selected Metropolitan Areas

*Percentage of homes sold in the area that are affordable to families that earn themedian income in the metro area and based on a standard 30-year mortgage


How Much Will Drilling Plans Change at $79 Per Barrel?

Tudor, Pickering, Holt survey

houston chapter wednesday, february 4, 2015 10:30 am – 1:30 pm 2015 economic outlook for better...

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