It was supposed to be an American success story. In 2013, Jared Scheeler returned to his hometown of Dickinson, N.D., to open The Hub, a new convenience-store concept that would feature fresh food, a quality car wash and a selection of fuels.
It would be the first new c-store to open in town in more than 15 years, and fracking provided the opportunity. All of the major drilling companies had established offices in western North Dakota’s Williston Basin, where Dickinson sits, along with hundreds of oil-field services companies, bringing in a flood of new residents.
In just a few years, Dickinson’s population more than doubled to an estimated 35,000, and that was just within city limits.
“Imagine any city doubling in size. It’s a lot to absorb, especially from an infrastructure standpoint: roads, water, sewer,” says Scheeler, managing director. “We dealt directly with some of that when building The Hub.”
Hotels rose by the dozens, while the number of coffee shops jumped from four to 10. Then in late 2014, the price of crude oil plummeted 60% on swelling supply and tepid demand. It marked the beginning of a multiyear slump and triggered a slowdown in operating rigs at the major plays. In North Dakota’s Bakken formation, where the Williston Basin lies, rigs plunged 82% from October 2014 to February 2016, according to oil-field services company Baker Hughes.
This slump has pressured oil companies to suspend billions of dollars in domestic and global upstream projects, and ruptured communities such as Dickinson that were riding the upswing.
Many oil-field workers living in Dickinson, N.D., went home during their Christmas break and never returned.
As motorists relish cheap gas and most retailers bask in impressive fuel profits, there is a parallel story of domestic uncertainty, community disappointment and lost investment. In rural bastions across the Midwest and through the Southwest, rigs are closing, jobs are disappearing and businesses face grave uncertainty.
Feeling Lost
A study by the Federal Reserve Bank of Kansas City estimates shutting down one active rig eliminates 28 jobs in the first month of nonoperation, 82 jobs after six months and 171 jobs in the long term. The drop in rigs from September 2014 to April 2015 slashed employment by as much as 4% in some energy-producing states.
For Dickinson, this has meant a return to “normal.” The unemployment rate inched up from a low of 1.2% in September 2014 to just below the national average of 4.8% today. While the town finally has had some time to patch up its infrastructure, businesses that arose or expanded to meet the population boom have suddenly found themselves struggling to keep busy.
The Hub’s transaction level has fallen 20% since its opening. It’s safe to say those 10 coffee shops will consolidate. Then there are all of the new hotels, which for a few years were at 100% occupancy.
“I now drive by and they are literally empty—there is not one car there,” says Scheeler. “There’s a glut of hotel rooms, not enough people, not enough demand to use them. It’s a waiting game for everybody in the area—not to see if oil comes back, but when.”
This same story is unfolding in the other major shale oil plays across the United States. In the Eagle Ford Shale in Texas, the second-largest oil-producing area of the country, the rig count fell 80%. Scott Fisher, vice president of policy and public affairs for the Austin-based Texas Food & Fuel Association, tells of one member—a wholesaler supplying drilling operations—whose volumes dropped from 115 million gallons in 2014 to 95 million gallons in 2015.
“Twenty million gallons in a year lost in volume—that’s huge,” Fisher says.
Others in the area have suffered even greater year-to-year volume hits. E-Z Mart Stores in Texarkana, Texas, is one of them. Two of its more than 280 stores are in Andrews, Texas, just northeast of the Eagle Ford Shale. CEO Sonja Hubbard says sales have “normalized” since the boom.
“Compared to prior years, store sales are down close to 15% and gas gallons about 25%, so certainly there is a noticeable impact to store activity and profits,” she says. Category drivers such as beer, cigarettes, bottled water and milk slumped. And the pumps paid the price, with no more workers filling up for those long trips from their housing to the rigs.
Those sale losses contrast with overall c-store industry sales gains of nearly 6% in 2015, with gallons about flat because of record-low gas prices, according to preliminary 2015 NACS State of the Industry figures. For most of the country, lower gas prices are an economic driver. But for regions that thrive on higher fuel prices, their effect is uneven at best.
“Things could actually get worse before they get better,” says Hubbard, “but all of that is dependent on the price of oil.”
Oil production in the United States has fallen from 9.5 million barrels per day (bpd) to 8.9 million bpd over the past year. While this marks a more than 6% decline, it really could be worse.
“Production has declined but not at nearly the pace people would have thought a year ago, when prices really began to tank,” says Taylor Cavey, an energy analyst for London-based Platts Analytics.
Producers have been able to manage the downturn with incredible efficiency gains, he says. However, that can last only so long, especially when oil prices remain stubbornly below $50 a barrel.
“If [oil prices] continue to remain where they are, producers are going to become more strapped for cash than they already are, which could mean further bankruptcies,” says Cavey.
The Shakeout
Drilling rigs not only produce oil and natural gas, but they also produce jobs en masse.
A new operating rig immediately creates about 37 jobs, and 224 jobs over the long term, according to a study from Rice University. During the recent oil boom, the number of rigs operating in the United States peaked at more than 1,600, according to Baker Hughes figures. Do the math—more than 59,000 immediate and more than 358,000 long-term jobs—and you can see why this transformed and often overwhelmed small oil towns.
Take Cotulla, Texas, a town of about 4,000 that sits in the heart of the Eagle Ford Shale. Oil production at the Eagle Ford leaped from virtually nothing in 2010 to upward of 1 million bpd by 2014, thanks to fracking technology. And it took thousands of oil-field workers to keep the oil flowing.
“When Eagle Ford began, those little towns down there, they’d never seen a boom,” says Fisher. “State highways literally turned to dust [because] there’s so many trucks on them.”
For convenience operators, the economic sizzle delivered some growing pains: Retailer Maxey Energy had to bus in 75% of the 30 employees at its Cotulla Max-E-Mart travel center from Laredo, an hour away.
“It is just crazy what that does when you have the combination of an oil field coming in and every hotel and every competitor coming in at once and trying to hire,” says Terry Maxey, president of the 17-store chain, based in Uvalde, Texas. “There is literally nobody to work.”
Maxey’s extra effort was worth it. Store sales surged 70% to 85% per year in 2012, 2013 and 2014.
It’s easy to see how much the oil-worker population inflated sales. For example, Maxey Energy owns a Wendy’s in addition to the c-stores. At a typical Wendy’s, the most popular burger is a single patty. “But what you had was oil field workers—they’re pretty big boys. They’d buy doubles and triples, large-size meals,” says Maxey. “So the check average was really high.”
As business conditions dried up, the Wendy’s customer counts shrank, and so did the check average. Maxey’s check-cashing business, which handled oil-field payrolls, “largely disappeared.”
But for any retailer that benefited from the oil boom and is now suffering through the bust, sales-growth figures are all about perspective. At Maxey Energy’s Cotulla site, business began tapering toward the end of 2014. By 2015, it dried up, with sales off 40% from their boom peak. Compared to earlier, pre-2011 averages, however, sales are down a more modest 10%.
Similarly, the store’s fuel volumes fell 40% to 50% from their 2012 peak. But compared to the pre-boom average, they are about flat.
“That was a temporary number—it’s the only way you can look at that,” Maxey says of the boom years. “If you are crafting your business based on 2012 numbers, it’s very difficult. You’ve got a really hard time dealing with the loss of volume.”
But Maxey’s biggest challenge today is not these artificial sales declines. Rather, it is the new competition in Cotulla. When the local economy took off in 2012, it attracted large chains including Stripes and Flying J.
“While you have initial big sales, the market share started dividing,” says Maxey. “Fast-forward to 2015, and even though you’re back to normal levels, you’ve got more competitors.”
To compete, Maxey Energy opened a new concept, 5 Points Market, in August 2014. It features a big craft-beer selection, an upscale coffee bar and wine. It also made a small acquisition and examined which foodservice items did well that its legacy sites could adopt, such as hand-dipped ice cream, corn dogs and burritos.
The plan for 2016 and 2017 is to continue to invest in and improve the foodservice offer while refreshing all of its sites.
In short: It’s about focusing on what you can control.
“There is a time when you can do no wrong; anything, everything you try will work because of the sheer number of people in the area,” says Maxey. “But today, you’re back into the reality of making good decisions and being a good operator.”
Fisher of the Texas Food & Fuel Association concurs: “Some members who are more familiar with the oil field and how you can really get yourself upside-down fast with accounts receivable took a pretty slow and measured approach to what was happening.” Others, generally those not based in the Eagle Ford or Permian, jumped in with both feet, made large investments and now are having to slow down operations and cut headcounts.
“We’re still in that shakeout period,” Fisher says.
At least a few businesses chose not to renew their association membership after losing 50% of their revenue.
“Everybody has steeled themselves, and are trying to be leaner going forward,” Fisher says, citing the twin drivers of lower volumes and margins. “Between those two factors, that has everybody saying: ‘We’re going to try to hold the line on what we have.’ ”
Continued: Waiting for The Boom to Return
A Waiting Game
Before the oil boom, Dickinson had been a typical North Dakota town. It was surrounded by open space and farms and anchored by a Wal-Mart and a few grocery stores, with its 16,000 residents relying on an Applebee’s restaurant for fine dining.
For years, it was an agriculture community—wheat and soybeans—despite the fact that Dickinson sat on the Williston Basin, which holds an estimated 3.8 billion barrels of oil and 470 billion cubic feet of natural gas. Traditional and then horizontal drilling freed up some of this in earlier decades. But in 2010, the gates truly opened with fracking, which uses high-pressure injections of water and chemicals to free oil and gas trapped between the basin’s tight layers of shale.
“It was really a technology boom rather than an oil boom, because we knew the oil was there,” says Scheeler of The Hub. “It was just the technology allowed us to get it.”
With the exploding residential population, housing prices ballooned. Rent for a one-bedroom unit in Dickinson more than quintupled from $400 pre-boom to upward of $2,200 at the peak. Lines at the local Wal-Mart were consistently 12 people deep.
Scheeler and his team planned The Hub with the town’s economic expansion and estimates of another 40 to 50 years’ worth of crude still in the ground as the backdrop.
Then came the crash—and the timing could not have been worse.
By the time The Hub broke ground on the edge of town in May 2014, with a planned opening for January 2015, business conditions had started to taper. When oil prices crashed in late 2014, Dickinson’s population ruptured. Oil-field workers left for Christmas break—and never returned.
The effect on The Hub was immediate. The 1-mile radius around store had been home to several oil services companies, which employed 3,000 to 5,000 people at the peak of the boom. Meanwhile, much of the area surrounding The Hub was zoned residential, with housing developments in the works.
“We thought we would have the best of both worlds with commercial and residential, and of course with everything going kaput, the residential was the first thing to go on hold,” says Scheeler.
That means no households within one-third of a mile of the store. And those thousands of oil workers? “It’s pretty safe to say 80% or more of those are gone right now,” he says.
This has left Scheeler to retool his business model and marketing efforts to attract in-town residents. The Hub is focusing heavily on foodservice, from its proprietary HubWiches program to its Schlotzsky’s franchise. Scheeler also is highlighting the site’s automatic car wash and Mobil-branded fuels to separate it from the traditional mom-and-pops in town.
“We do have to give a compelling reason for people to drive to an area where most Dickinson residents would deem out of town, even though we’re within city limits,” he says. That means more promotions than Scheeler would prefer. But he has no choice; he needs more first-time visitors.
“Things could actually get worse before they get better.”
There are signs his efforts are working. Despite the exodus of oil-field workers, The Hub’s sales have grown, although not nearly close to the 30% increase originally projected for its first year in business.
Packaged beverages continue to perform well, possibly because they have always been popular with the locals. Foodservice sales are static. One category hit hard: other tobacco products (OTP). Because oil-field workers could not smoke at the rigs, they used smokeless tobacco instead. With the workers gone, OTP volumes have shrunken “a lot,” says Scheeler, who declined to share an exact figure.
Other plans are on hold. Scheeler originally planned to develop several leadership-level employees; today, his leadership team centers on him and just one other person. He has had to scale back staffing and service expectations.
‘Fun While It Lasted’
Several oil producers have said they would begin completing wells at about $50-per-barrel oil. This price would have to sustain for at least a couple of months, says Cavey of Platts.
“Anything above $50, you could see increased rig activity in some of those rich areas like Permian, Eagle Ford, Andarko and Williston,” he says. Platts Analytics is forecasting a slow recovery of oil prices through 2017 and 2018.
Despite the sales hits, postponed plans and likely a few sleepless nights, the retailers are also patient about the recovery.
“Long term, I’m very optimistic about what the oil industry will bring to this area once again for decades to come,” says Scheeler. “There is a lot of oil in the ground.”
At the peak, there were more than 200 rigs drilling around western North Dakota at any given time. Today, there are fewer than 30. That said, Scheeler tries to avoid dwelling on oil-price and production forecasts. “I have a hard time listening to the so-called experts,” he says. “If they were so smart, why didn’t they see the bust coming?”
“This too shall pass,” says Hubbard of E-Z Mart Stores. “The region suffers from more economic volatility than most parts of the country but overall has learned to take advantage of the booms and gut through the busts. West Texas will survive and again thrive.”
“It was fun while it lasted,” says Maxey. “You think in the back of your mind, when you least expect it, it will go again. Hopefully we’ll be around to experience it when it happens.”
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