Keynote: Short-term and Long-term Outlook for the Region

Presented by

Patrick Jankowski

Senior Vice President, Research

Greater Houston Partnership

Regional Outlook

https://www.houston.org/economy

Follow me on Twitter @pnjankowski

Read my blog: www.houston.org/economy/blog

Before I get started . . .

417.3375.4

402.4

447.9489.2

517.4

'08 '09 '10 '11 '12 '13

Source: U.S. Bureau of Economic Analysis

Metro Houston GDP – $ Billions

Economic Growth

Metro GDP Growth in Perspective

$100.1 Billion $103.9 Billion

Houston GDP Growth, '08 - '13 Austin GDP ('13)

Source: U.S. Bureau of Economic Analysis

Houston Growth vs. Austin Total

179153

265298

248

307

392

'08 '09 '10 '11 '12 '13 '14

Source: Greater Houston Partnership New Business Announcements database

New Business Announcements50+ jobs or 20,000+ Sq Ft or $1+ million Investment

Relocations & Expansions

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Emp

loym

ent

(M

illio

ns)

Source: Texas Workforce Commission

Total Nonfarm Payroll, Houston Metro Area, '04 - '15

Employment Growth

Now the medicine

$107.95

$55.96

Source: U.S. Energy Information Administration

Spot Price, West Texas Intermediate

June 20, 2014 February 13, 2015

Falling Oil Prices

$284,528

$156,206

June '14* February '15

Source: Houston Association of Realtors and Partnership calculations

Comparable Drop in Home Prices

If housing suffered the same fate

* Reflects average price of single-family home sold through HAR in June ‘14.

$33,600

$15,540

June '14 February '15

Comparable Drop in MSRP

If vehicle prices fell at the same rate

Source: Edmunds.com and author’s calculations

Q2/14* Q1/15

Source: C2ER Cost of Living Index and Partnership calculations

$8.75

$3.76

If beverages suffered the same fate

Comparable Drop in Price for Heineken Six Pack

Impact of the drop in crude prices

Impact of Crude Price Drop on Cash Flows

Texas Average Daily Onshore Crude Production 2.4 million barrels

Decline, WTI Crude, June - January $52/barrel

WTI = West Texas Intermediate, the U.S. benchmark for light sweet crude

Source: Partnership calculations based on data from the Texas Railroad Commission and U.S. Energy Information Administration

Cash flow has been devastated

Impact of Crude Price Drop on Cash Flows

Texas Average Daily Onshore Crude Production 2.4 million barrels

Decline, WTI Crude, June - January $52/barrel

Lost Potential Revenue – Daily $124.8 million

Lost Potential Revenue – Monthly $3.9 billion

Lost Potential Revenue – Annualized $45.5 billion

WTI = West Texas Intermediate, the U.S. benchmark for light sweet crude

Source: Partnership calculations based on data from the Texas Railroad Commission and U.S. Energy Information Administration

Cash flow has been devastated

July 1, 2014 January 30, 2015 % Change

Anadarko Resources $109.33 $81.75 -25.2%

BP 53.00 38.83 -26.7

Apache 100.51 62.57 -37.7

Baker Hughes 74.53 57.99 -22.2

Chevron 130.54 102.53 -21.5

Conoco Phillips 86.11 62.98 -26.9

EOG Resources 116.55 89.03 -23.6

ExxonMobil 101.36 87.42 -13.8

Hess 99.61 67.49 -32.2

Occidental Petroleum 102.80 80.00 -22.2

Schlumberger 117.85 82.39 -30.1Source: Yahoo Finance

It’s no wonder share prices have fallen

How did we get into this

predicament?

Horizontal drilling and

fracking

8.69.0

7.4

6.6

5.8

5.2 5.1 5.1 5.05.4 5.5 5.6

6.5

7.5

9.29.5.

'80 '85 '90 '95 '00 '05 '06 '07 '08 '09 '10 '11 '12 '13 14* 15**

Source: U.S. Energy Information Administration * as of December ** Projected

U.S. Crude Production, Million Barrels Per Day

Strong Production Growth

The energy industry has begun to cut back

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

Sep Oct Nov Dec Jan Feb Mar

Source: Baker Hughes

U.S. Rotary Rig Count, '14 - '15

621 Rigs-31.2.%

That’s like losing 30 percent of theindustry’s production capacity

And some think the rig count may be halved before crude prices recover

• 30 - 40% less spent on exploration

• Price concessions (10 - 50%) from service companies

• Rig count will continue to fall

• One-third fewer wells drilled

• Wells drilled but not completed

• Difficulties servicing debt

• Divestitures and bankruptcies

• Significant layoffs in the oil patch

A nutshell, what the future holds

140

150

160

170

180

190

200

210

220

230

'08 '09 '10 '11' '12 '13 '14 '15

Job

s, 0

00

s

Source: Bureau of Labor Statistics

U.S. Employment, Oil & Gas Extraction

Layoffs haven’t appeared in theemployment data yet

Because there’s a significant lag in the employment data

But we know the layoffs are coming

Layoffs always start in the field

Layoffs always start in the field

Soon move to the factory floor

Layoffs always start in the field

Soon move to the factory floor

Gradually impact workers in the corporate office

Layoffs always start in the field

Soon move to the factory floor

Gradually impact workers in the corporate office

Ultimately affect workers throughout the economy

Demand won’t rebound soon

1.40

1.65

1.90

2.15

2.40

2.65

2.90

3.15

10

30

50

70

90

110

130

150

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

Job

s (0

00

,00

0)

$/B

arre

l

Source: U.S. Bureau of Labor Statistics and U.S. Energy Information Administration

Spot Price WTI $/BBL Nonfarm Payroll Employment

How Houston responded in the past

’80s ’90s ’00s – ’10s

1.40

1.45

1.50

1.55

1.60

1.65

1.70

1.75

10

15

20

25

30

35

40

45

'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90

Job

s (0

00

,00

0)

$/B

arre

l

Source: U.S. Bureau of Labor Statistics and U.S. Energy Information Administration

Spot Price WTI $/BBL Houston MSA Nonfarm Payroll Employment

Houston Employment and Oil Prices: ’80s

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

10

15

20

25

30

35

40

45

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00

Job

s (0

00

,00

0)

$/B

arre

l

Source: U.S. Bureau of Labor Statistics and U.S. Energy Information Administration

Spot Price WTI $/BBL Houston MSA Nonfarm Payroll Employment

Employment and Oil Prices: ’90s

2.20

2.31

2.43

2.54

2.66

2.77

2.89

3.00

10

30

50

70

90

110

130

150

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Job

s (0

00

,00

0)

$/B

arre

l

Source: U.S. Bureau of Labor Statistics and U.S. Energy Information Administration

Spot Price WTI $/BBL Houston MSA Nonfarm Payroll Employment

Employment and Oil Prices: ’00s – ’10s

How will the region respond now?

Like the ’80s

Like the ’90s

Like the ’00s – ’10s

Not the 80s!

71.7

17.5

'82 - '86 10 - '14

Source: Houston Facts, ‘82 – ’87 and JLL Houston

Metro Office Construction – Million Sq. Ft.

Added to Market

16.2

61.1%

A few things different from the ’80s

71.7

17.5

'82 - '86 '10 - '14

Source: Houston Facts, ‘82 – ’87 and JLL Houston

Metro Office Construction – Million Sq. Ft.

Added to Market Under Construction

16.2

33.761.1%

22.2%

A few things different from the ’80s

187,575

-221,000

'82- '86 '10 - '14

Source: Houston Facts ’82 – ’87 and Texas Workforce Commission

Metro Home Construction and Employment

Housing Units Added Net Job Change

A few things different from the ’80s

187,575 189,575

-221,000

485,000

'82- '86 '10 - '14

Source: Houston Facts ’82 – ’87 and Texas Workforce Commission

Metro Home Construction and Employment

Housing Units Added Net Job Change

A few things different from the ’80s

A few things different from the ’80s

Texas Constitution prohibited interstate banking prior to 1987.

• Largest in the ’80s– Texas Commerce Bank

– First City National

– Allied Bank of Texas

– Mbank Houston

– Republic Bank Houston

• Largest Now – JP Morgan Chase

– Wells Fargo

– Bank of America

– Compass Bank

– Amegy

A few things different from the ’80s

A few things different from the ’80s

“If you don’t have an oil well,

get one!”

Eddie Chiles, founder,

Western Company of North

America

Hubris

A few things different from the ’80s

“Dive 80 and Freeze a

Yankee!”

Bumper sticker frequently

seen in Houston in late 70s

and early 80s

Hubris

A few things different from the ’80s

Work Ethic

A few things different from the ’80s

Humility

A few things different from the ’80s

What will happen to construction?

0

1

2

3

4

5

6

7

8

9

10

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

$ B

illio

ns

Source: City of Houston Planning Department

CITY OF HOUSTON BUILDING PERMIT VALUE12-Month Total

Residential Nonresidential Total

City of Houston Construction

• November ’14

– $2.4 billion

• May ’14

– $1.6 billion

• November ’13

– $600 million

• Total = $4.6 billion

County, City, ISD Construction Bond Elections

• Tim Relyea, Cushman & Wakefield

– three or four big developments

– hundreds of thousands of SF apiece

– definitely happen regardless of how oil behaves

• Why?

– Cost of capital more important than cost of oil

– Big firms realize most Houston product obsolete

– Three years to get a major project built

Local Office Construction

• Tim Relyea, Cushman & Wakefield

– three or four big developments

– hundreds of thousands of SF apiece

– definitely happen regardless of how oil behaves

• Why?

– Cost of capital more important than cost of oil

– Big firms realize most Houston product obsolete

– Three years to get a major project built

Local Office Construction

. . . budget adds more than $4 billion a year to build

more roads in Texas . . .

. . . ends diversions of state highway funds . . .

. . . dedicates half of the existing motor vehicle sales tax

to fund roads.

Governor Gregg Abbott’s Address tothe Greater Houston Partnership

Company Tons/Year Location Completion

ChevronPhillips 1,500 Baytown 2017

ExxonMobil 1,500 Baytown 2017

Dow 1,500 Freeport 2017

Sasol 1,500 Lake Charles 2018

Occidental 500 Ingleside 2017

Formosa Plastic 1,200 Point Comfort 2017

LyodellBasell 450La Porte and

Channel View2016

Major Ethylene Projects Under Constructionon the Gulf Coast

Source: Institute for Regional Forecasting

So where is Houston headed?

2015 Employment Outlook

• ’15 Employment Outlook

– 62,900 jobs

– 2.2 percent increase

– 3.0+ million by Dec

2015 Employment Outlook

• ’15 Employment Outlook

– 62,900 jobs

– 2.2 percent increase

– 3.0+ million by Dec

• Probably on the high side but to soon to revise

– 50,000 Jobs• Jessie Thompson, Federal Reserve Bank of Dallas

– 40,000 – 50,000 jobs• Bill Gilmer, Institute for Regional Forecasting

2015 Employment Outlook

• ’15 Employment Outlook

– 62,900 jobs

– 2.2 percent increase

– 3.0+ million by Dec

• Probably on the high side but to soon to revise

• More current forecasts

– 50,000 Jobs• Jessie Thompson, Federal Reserve Bank of Dallas

– 40,000 – 50,000 jobs• Bill Gilmer, Institute for Regional Forecasting

• Slower Job growth– Construction– Nondurables Manufacturing– Wholesale Trade– Retail Trade– Utilities– Real Estate– Finance– Professional Services– Administrative Services– Educational Services– Health Care– Arts, Entertainment, Recreation– Accommodations and Dining Services– Personal Services– Government

• Job losses– Exploration and Production– Oil Field Services– Durables Manufacturing

2015 Employment Outlook

-10.4

17.7

43.452.9 51.8 52.4

105.290.8

17.4

59.0

3.6

-3.2-11.4

37.5

89.2105.8

88.8

19.5

-107.4

47.4

81.2

105.7

76.2

120.6

62.9

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Long-term average 47.4

Historic Job Creation (000s)

How will Houston respond now?

Like the ’80s

Like the ’90s

Like the ’00s – ’10s

Oil Prices and Employment Growth

0

20

40

60

80

100

120

140

160

1.5

1.8

2.0

2.3

2.5

2.8

3.0

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

WTI($/bbl)

Jobs(millions)

Source: U.S. Energy Information Administration and Texas Workforce Commission data

Oil Prices and Employment Growth

Employment Monthly Oil Prices

Presented by

Patrick Jankowski

Senior Vice President, Research

Greater Houston Partnership

Regional Outlook