Catching A Post-boom Chill

When Big Oil sneezes, many of Houston's small companies catch pneumonia.

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Jerry Cross is a plainspoken good old boy, almost a stereotype of the self-made men who populate Houston's oil patch. Now 51 years old, he spent most of his adult life working in jobs that would prepare him to become an independent oil-field drilling contractor, a goal he finally realized in April 1980. In less than two years his company, Arrowhead Drilling Corp., blossomed into a $4.5 million business. But the energy boom that carried Arrowhead and many other small Houston companies along on an expansionary flood tide has ebbed, and Cross has watched with dismay as his business has dried up. "If it stays like this another six or seven months," he says, "I can't survive -- and I know a lot of other people who can't either."

Cross's problems in Houston could befall many small businesspeople who make their living in a town dominated by one industry. But few one-industry towns in recent years seemed as hospitable as Houston to entrepreneurs. In the spring of 1981, The New York Times described the city as the last bastion of laissez-faire economics. For example, Houston levies a sales tax of only 6% in a state with no corporate or personal income taxes, and the city is the biggest in the country that doesn't have zoning regulations.

Houston's boom reached its peak in 1980 and 1981, when Jerry Cross's drilling business was prospering. Houston had overtaken Detroit as the nation's fifth most populous city. New skyscrapers, high-rise luxury towers, low-rise atrium office buildings, and residential developments sprawled across its 556 square miles, the fourth largest municipal land area in the United States. Building permits soared from $2.3 billion in value in 1980 to $3.01 billion in 1981. Municipal-bond ratings are high. And despite recent layoffs, unemployment, compared with the rest of the nation, is low.

Most of Houston's growth was based on oil and gas. "For practical purposes, Houston is as dependent on energy as Detroit is on autos," says Charles F. Harding, a vice-president in Chicago of Fantus Co., which studies cities for clients considering corporate or factory relocations. Of Houston's 20 largest public companies, 16 are energy-based or energy-related. By most estimates, oil- and gas-related activity accounts for one-third to two-fifths of Houston's economy. It is the linchpin of the city's boom.

If Jerry Cross is now the victim of Houston's economic vagaries he also typifies many of the entrepreneurs who benefited from the city's extraordinary opportunities. Cross started in oil fields as a summertime roughneck and roust-about during his college years. With a degree in business administration and engineering, he worked for an oil-field equipment manufacturer, as operations manager for a drilling company, and as vice-president for sales of another drilling company.

Finally, with two other investors, Cross launched Arrowhead Drilling with one used rig. By the end of 1980, the company had another used rig and sales of $1.8 million.

The first four months of 1981 were a classic seller's market. "People were screaming for rigs," says Cross. Arrowhead bought a third rig and ordered two more for delivery in mid-1982.

Then, almost as rapidly as it had started, the boom began to abate. Many observers see two causes: First the 1981 tax law reduced the maximum tax rate for individuals from 70% of net income to 50%; then a conservation- and recession-induced oil glut drove down prices. Both events made oil drilling a less attractive investment than it had been. From his 30 years in the business, Cross knew by mid-December that the oil field's roller coaster was headed down. He hastily canceled the two new rigs that were on order.

By March, Cross was bidding for any job he could get and was in fierce price competition with the 15 or so drilling contractors who operate as he does within 200 miles north and east of Houston. He scaled down to two rigs, and instead of having orders backed up for three or four months, there was work only on a well-to-well basis for the men who operated his rigs in five-man crews, 24 hours a day. By May he laid off many of those employees and was scrambling to keep one rig operating.

Says Cross: "A lot of operators are not paying the contractors, and a lot are 90 days in arrears." Meanwhile he has to deal with his bank. While he won't discuss his own debt service costs, he says that it isn't unusual for independents to pay $50,000 to $60,000, or more, monthly on rig loans -- costs that can't be recouped when rigs are idle. "I don't know the staying power of other people," he says. "I guess it depends on how long the bank will ride with them."

Drilling contractors aren't the only businesspeople being squeezed by the oil glut and softening prices. "Houston has 30 different energy industries, and they all feel it one way or another," says Charles T. Fanckle, vice-president and economist for First City Bancorp. of Texas, one of the city's two biggest bank holding companies and a major lender to energy concerns. For the first quarter of 1982, many of the oil-related big businesses in the city recorded significant earnings declines compared with the year-earlier quarter. But small business-people in energy industries are "unquestionably the hardest hit," says Charles R. Engles, a strategic management specialist with the international consulting firm of Booz-Allen & Hamilton Inc.

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