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.
Barring a sea change, such as a major disruption in the supply of Middle East oil, Engles anticipates that the small business sector of the energy exploration and services industry "is really going to take the fall." In this cash-intensive business, he explains, those who rely heavily on borrowed money and are highly leveraged are much more vulnerable in a falling market -- and these companies are disproportionately likely to be little guys.
Clearly, when the giants of a city's economy are hurt, other segments of the economy are even more deeply affected. And many of the small Houston businesses that are seeing profits slide are in fields not related to energy.
Take Ninfa's, for example, a phenomenally successful, local Mexican restaurant chain. A family operation, Ninfa's blossomed in eight years from a tiny, 10-table, East Side taqueria to a bustling chain with 13 cavernous restaurants in Texas, 8 of them in Houston. From an investment of $18,000 in 1973, Ninfa's registered sales of $20 million in 1981. It prospered by pioneering a regional cuisine more like that served in central Mexico than like the typical Tex-Mex fare most Houstonians considered Mexican food.
The first Ninfa's opened on the site of the Rio Grande Food Products Co., a tortilla and pizza dough manufacturing and wholesaling operation that reflected the ethnicities of its founders, Ninfa Rodriguez Laurenzo and her Italian-Jewish husband, Dominic. Rio Grande had provided a comfortable enough living for more than two decades for the couple and the five children they raised in their two-story clapboard house next door But after her husband died in 1969 keeping the company going proved a struggle for Ninfa Laurenzo. Problems, including new federal regulations that would have required retooling the facilities, prompted her to close the company, mortgage her home for $13,000, borrow $5,000 from a friend, and launch a small restaurant.
With only her children -- several of them college graduates -- as staff and with $16 in the cash register, Ninfa opened the restaurant in July 1973. At first, it was patronized mainly by locals in the drab industrial-residential barrio. But soon a trend-setting clique from corporate Houston sniffed the place out. Before long, a more affluent clientele began to drift in. Although Ninfa's doubled its seating capacity after a year, the restaurant was still overcrowded. In April 1976, Ninfa's eldest son, Roland Laurenzo, obtained a $190,000 Small Business Administration loan guaranteed by his landlord and launched a second Ninfa's -- in busy, affluent southwest Houston. As president of Ninfa's, Laurenzo opened 13 outlets from 1977 through 1981, including an ambitious plunge into San Antonio, the state's Mexican food and culture capital. Accompanying the expansion was clever marketing, including such internal promotions as "Off-the-menu Menu" dishes formerly available only to the cognoscenti.
Ninfa's had planned to expand even more in 1982, with locations outside Texas for the first time. But the worsening economy caused an across-the-board 8% to 12% drop in receipts, says 34-year-old Laurenzo, and put the kibosh on expansion. "We had to pull in our horns," he explains. "It's amazing how quickly economic trends affect you in this business." Laurenzo says that fellow Houston restauranteurs have told him they have experienced similar slackening.
Now, Laurenzo detects "a little bit of resurgence... in the number of people coming into the restaurants and a little bit of resurgence in the amount they spend." The company is once again evaluating expansion opportunities, but any expansion that does occur, he stresses, will be very controlled and measured.
Ninfa's slowdown is mild indeed compared with the experience of some companies that service the distressed petrochemical industry. Demand for products made from petrochemicals -- from clothes to records -- is down sharply because of the national recession.
One ailing service company is All Seals -- Texas Inc., which makes mechanical seals for centrifugal devices such as pumps and compressors and sells 75% of its product to petrochemical, chemical, and refining companies. Morris Womack, All Seals's president, says his company is suffering along with the bulk of the petrochemical satellite industries. "Not a single one of us is making any money," he says, "and a lot of smaller companies are going under."
All Seals hasn't gone under so far, but it is struggling to stay afloat: 1981 sales were $2 million, down from $4.5 million in 1978. Sales appeared to hit bottom in October when they were off 70% from the previous year, and 67 of 89 employees have been laid off.
Most galling to Womack is the tendency of his giant corporate customers in Houston and environs to withhold payment for their purchases for 30, 60, and even 90 days beyond the terms of their contracts. "It's called cash management in those companies," Womack says, "but with us it's just called paying slow." A significant difference, he points out angrily, is that "they don't lose their credit rating, while we do." Jack P. Cunningham Sr., chairman and owner of Cunningham Bearing Co., which had 1981 sales of $20 million, agrees that the practice of "corporate controllers trying to optimize the use of their money" is perhaps the biggest point of friction between big and small business in Houston. "It is becoming more pronounced as capital unavailability increases and interest rates soar," he adds.
Just as the frantic drilling activity of 1981 combined with recession and conservation to create a glut, so Houston's record-setting construction activity -- fueled by the boom mentality -- has spawned an oversupply of office space.
And the space glut is having about the same effect on leases as the oil glut has had on the price of gasoline. Significant concessions to attract tenants are now the norm. "In one case some crazy builder offered 18 months' to two years' free rent to a prospective tenant," says Charles H. McArthur, corporate vice-president of Julien J. Studley Inc., a New York-based real estate firm active in the Houston market.
Like the oil glut, the office glut and high interest rates are driving smaller operators out of Houston's construction and development market. Although national retailers continue to announce plans for new, large malls in Houston, "new small strip centers and neighborhood malls are becoming more scarce, as neither the developer nor the potential tenants can find money at reasonable terms," says A. L. Jensen, president of H.A. Lott Inc., a Houston construction contractor.
Smaller contractors working in Houston's public sector are also finding the market increasingly competitive. Today 15 to 25 bidders are vying for the kind of small jobs that five to seven contractors would bid on a year or two ago -- such as contracts of $1.5 million and less to lay water lines or sewer lines, says Gilbert Gaedcke, president of the Gaedcke Equipment Co., which sells, rents, and services equipment to builders and construction contractors. Many of the newcomers joining the bidding come from the Midwest, he adds. "There's more of a shakeout going on here than people realize," Gaedcke says. "I'm seeing more of it every day."
Despite difficult times, a large number of Houston's small businesses continue to prosper. The city's economy is still far healthier than that of most of the nation's big cities. And many observers expect the oil glut to recede and prices to stabilize as the OPEC cartel reduces its production.
Some analysts expect a shift in Houston's overall growth pattern. "Houston has risen at such a rapid pace, it's now due for a period of digestion rather than experiencing continued skyward growth," says Bernard L. Gross, a former University of Houston professor of management who is president of Houston Research Institute International, a local think tank on corporate strategy and planning. Similarly, Franckle, of First City Bancorp., calls the current slump "a sort of cooling-off period" in which the city can catch up with its furious growth. "It's hard to say how temporary a phenomenon this is," he admits. But he remains guardedly optimistic: "Houston may not have the superboom that it's experienced for the past few years," he says, "but we're still going to have strong growth."
And other knowledgeable observers argue that the inevitable contraction of the oil and gas sector will be replaced by other activities that will maintain Houston as an energy capital. For example, Randall Meyer, president of Exxon Co. U.S.A., the Houston division of Exxon Corp., told a Houston Chamber of Commerce meeting recently that he is confident that in the long run Houston will be "heavily involved" in the nation's transition from dependence on oil and gas to use of a diversity of energy resources, some of them nondepleting. Says Charles Magrino, vice-president and economist for Texas Commerce Bancshares: "Houston will continue to grow, but with less emphasis on energy than it has had in the past."
If it does attempt to change, Houston may find that it is a prisoner of its past successes. When a city is heavily dominated by one industry, explains Fantus's Harding, some companies are reluctant to locate there if they're not part of it. "It's sort of like being in Washington when you're not involved in politics," he says.
Some of Houston's options are limited by outside factors, adds Bernard Gross. "Unless the Administration changes its policy on free trade, for example, there's no real opportunity here for additional heavy industry," he says.
Perhaps Houston's most promising alternative for growth, Gross suggests, is as a center of high-technology industries. "There's great opportunity in that area for small business," he points out. "And there are a great number of topquality people who have been recruited and brought to Houston by the oil companies. Many of those people have very easily transferable talents. They could well be the core group to expand that sector."
High tech isn't recession-proof, of course. Texas Instruments Inc. has laid off hundreds of workers in Houston alone in recent months. But, Gross says, high technology is "still the most active basic industry that we have in the United States, despite some minor dislocations."
Tommy Harlan couldn't agree more. Four years ago, Harlan founded Microprocessor Laboratories Inc. (MicroLabs), a Houston computer software company that wrote custom programs for a variety of commercial engineering and industrial clients who used mainframe and minicomputers.
Harlan, now 34, had worked less than a year after college for the Houston office of Arthur Andersen Co., the big accounting firm, doing systems analysis consulting. "I was bored stiff," he admits, "so I started a trucking company with a friend of mine." After 18 months, the company had 18 trucks, and Harlan was earning $60,000 a year. "But I didn't do any real work after the first 6 months," he says.
After his partner balked at an expansion plan, Harlan sold his interest and started a data processing company. It grew swiftly -- too swiftly -- to encompass 200 accounts. "We were out of control," Harlan says, "and sold out to a larger firm." The experience demonstrated a painful lesson: "Having a successful product and successful sales doesn't ensure the success of a company. Growth is not great if it isn't planned for and anticipated."
To ensure orderly growth, MicroLabs designed custom software programs for the first two years. Simultaneously it worked to refine management systems that could deal efficiently with the typically complex, labor-intensive, and lengthy process of software engineering. Then Harlan began to shift the company toward its current focus -- providing software programs and other computer-related products that could be widely used and broadly marketed.
The question the company next had to address was how to raise the cash to develop its software products. Because Harlan hopes to retain control of the company, he decided to develop each product as a joint venture -- MicroLabs would supply the sweat and intelligence; outside investors would come up with the money. The first such deal -- structured as a research and development limited partnership -- was for a word processing program MicroLabs calls The Handle.
The Handle's signal advantage over earlier software is that it melds word-processing and data-based functions, allowing, for example, retailer clients to command the system to send a specific dunning letter to all charge customers more than $150 in arrears. Houston investors anted up $670,000 for the project, a sum that will be almost entirely recouped with an initial order for 500 of the units, which will sell individually for $2,500 to $3,000.
Harlan says the company is close to launching two other systems; it is also seeking funding to develop a heavy equipment, vibration-monitoring system and to refine further an energy management system and a hand-held medical diagnostics and treatment system it calls the MicroMed Advisor.
MicroLabs, which went into the black two years ago and had annual revenues last year of about $879,000, projects revenues this year of $2 million to $3 million. Harlan is confident that he will obtain enough investment to get many products off the ground. "The investor climate is hot in Houston," he says, "and it's hotter than usual for us because all my friends in the oil business and in real estate here are in a depression."
Capitalizing on local investors' familiarity with the oil and gas business, MicroLabs's corporate report compares the company with a "typical successful independent oil and gas exploration company... [that] generally obtains outside investor funding for its exploration efforts, as MicroLabs obtains funding of its product development efforts." The report explains: "The oil and gas exploration investors are charged management fees and overrides to cover monthly expenses, as MicroLabs charges the investors for its development work. The exploration company and its investors profit when oil and gas reserves are found and sold, as MicroLabs, and its investors, profit from software product sales."
Could MicroLabs do as well someplace other than Houston? Perhaps. But Harlan says that in addition to the investment climate, "Our operation as an opportunity company derives a lot of punch from our being in Houston -- a lot of Fortune 1,000 companies are located here that we can sell products to, and there are a lot of technical professionals in Houston that we can hire."
Although it probably won't matter much to MicroLabs, Houston may never again see quite the go-go growth of the 1970s and early 1980s. Drilling contractor Jerry Cross, is confident there will be another drilling boom. There always is for those with staying power. But Cross doubts that it will be as frenzied as the 1980-81 period. "I just don't believe that they'll ever drill that many wells that fast again," he says.
As the boom-and-bust oil economy winds down, most observers predict that Houston will spawn other industries that can take its place and that will promote measured expansion and a more diversified economy. Whether these industries will be high-technology, heavy manufacturing, international trade, or something yet unborn, is anybody's guess.
Despite the current hard times for small business, there is still an abiding optimism in Houston. "This is the hottest market in America for entrepreneurs and new business," asserts Bill Wayne, president of Cooper Resources & Energy Inc., a manufacturer of stainless-steel valves for chemical and general industries, which virtually doubled its sales in fiscal 1982, ended June 30, to $12 million. Adds MicroLabs's vice-president for development, Jeff Sulma: "There's a full-throttle atmosphere here. The attitude is still let 'er roll and don't look back."