A unique cycle in the energy markets rattles through the WNY economy
By Dan Miner
Buffalo Business First
The topsy-turvy energy markets were already rattling through the Western New York economy before March.
A tremendous oversupply of hydro-fracked natural gas was pushing down prices across the world – good news for energy users, but bad for those who produce and sell it.
In January 2010, for instance, commercial customers of natural gas in New York state paid an average of $11.85 per thousand cubic feet. In January 2019, they paid $7.60 for the same amount.
In other words, the supply side was already a major issue for the entire oil and gas supply chain. Then world economies ground to a halt this winter as the Covid-19 pandemic took hold, and the demand side plummeted as well.
National Fuel, a Williamsville-based gas utility that also drills and distributes, took part this summer in a broader industry push to choke off drilling activity, reducing its number of active rigs in Pennsylvania to one.
The firm is Western New York’s third-largest public company by revenue. Its actions, though, highlight the long-term confidence that this is the trough of a constantly cycling industry.
National Fuel closed on a $504 million acquisition in July, giving it a much bigger footprint of drilling assets in Pennsylvania, and continues to expand its network of pipelines to reach new customers. The company expects those investments to push earnings per share from a range of $2.75-2.85 this year to $3.40-3.70 in 2021.
National Fuel isn’t the only actor to see an opportunity in the dynamics of heavy supply and depressed demand. Buffalo Sabres and Bills owner Terry Pegula recently formed an entity, East Resources Acquisition Corp., which intends to raise money on the public markets and acquire a company in the American energy industry.
Pegula, who made his fortune in oil and gas, is partnering with many of the same people who worked with him before.
In a prospectus filed with the U.S. Securities and Exchange Commission, they announced their intention to make investments analogous to lucrative deals they struck in the early 2000s, when prices were also low.
“Commodity prices have declined recently to levels not seen in decades,” the company said in its prospectus. “In addition, both public and private capital available to the (exploration and production) sector have become scarce, limiting the pool of potential asset purchasers, as well as existing companies’ operational flexibility and ability to refinance debt, much of which is maturing in the next few years.”
For a company with 150 trucks on the road, low gas prices certainly have their benefits at Noco Energy Corp., even if it has been a struggle for the core business.
“Lower prices are good for the person who is just buying the energy,” said Dave Wentland, vice president of Noco’s fuels division. “For Noco, for refineries, for the companies that transport gasoline, and the gas stations, their business is going to be down.”
The Tonawanda-based company sold all 37 of its gas stations and convenience stores last year – fortunate timing, in hindsight, given the down business and logistical complexity in managing all those extra workers and workplaces during a pandemic.
Noco is now focusing on its traditional fuel-distribution business, growing its commercial and residential gas divisions, electrical and HVAC services and a recently created sustainability division.
Wentland said that Noco has managed to keep all customers the past five months, and that demand is starting to pick up as the economy revs back to life. The residential business has been strong throughout.
“Certainly, the situation has impacted our volume,” he said. “But the company is still very vibrant, doing quite well and looking at other opportunities in the market.”
At EnergyMark, a Williamsville-based energy supplier, president Gary Marchiori said many customers are taking advantage of cheap power to lock in long-term contracts at those prices. Buoyed by the Paycheck Protection Program, EnergyMark managed to maintain its 18-person workforce as electricity and gas usage dropped significantly, especially by customers in sectors such as restaurants.
Perhaps nowhere are energy prices more impactful than the manufacturing sector, where several companies are anchor employers in their hometowns.
About 1,500 people work at the Siemens Oil & Gas factory in Olean, which makes compressors, turbines and other products for the global energy industry. Siemens representatives declined comment for this story due to the pending spinoff of its power and gas company, which includes the Olean plant.
The leaders of Graham Corp. started to see energy markets change a year ago, as commodity prices began to decline because of a global glut in supply. The Batavia-based manufacturer traditionally designs and manufactures large machines in the oil refining and petrochemical markets – and its large refinery customers pull back on investments when prices decline.
“Our main customers are now focusing on cash in hand, and they are delaying capital investments and reducing operating expenses,” CEO James Lines said. “Our order patterns have diminished measurably compared to the recent past.”
The good news is the company took lessons from the recession of 2008 and 2009, and embarked on a strategy to diversify its customer base. Orders from the U.S. Navy are now more than 50 percent of its backlog.
“If we hadn’t embarked on that strategy a decade ago, what we are going through today would be absolutely devastating,” Lines said.
Instead, the publicly traded business has managed to keep its workforce steady through the pandemic, and is now hiring for a variety of different positions. It has about $70 million in available cash, and it is looking to invest that into further diversification of its business.
“We want to use our balance sheet on stable, more predictable revenue streams, so that we dampen the impact of energy cycles over time,” Lines said.
This article originally appeared in Buffalo Business First.