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Gas industry’s pain ripples across Western Pennsylvania

Lunch crowds in the Hardwood Cafe used to be packed with dozens of workers from the natural gas industry.

A lot of them were regulars. Lately, some familiar faces have disappeared.

“I would say it was right after the holidays that a lot of them were not coming back,” said Justin Trainor, who owns the restaurant in Penn. “The servers would say, ‘Oh, I haven’t seen so and so,’ and (the gas workers) would say, ‘Oh, they didn’t bring them back.’ ”

The falloff in customers has put a dent in Trainor’s business, which has benefited from the gas industry boom in Western Pennsylvania. But low gas prices have forced companies such as Rex Energy and XTO to pull back on new drilling, and the effects are beginning to ripple throughout the region’s economy.

Banks, hotels, restaurants and other businesses that have benefited from the boom times stand to share in the pain from a long-term drop in oil and gas prices.

Natural gas prices fell by a third between October and January, prompting some drillers and related-companies to cut capital budgets and lay off workers. The impact has been barely noticeable in many communities. Loan volumes and hotel bookings have not taken a big hit. But the situation has led to some anxiety about when the effects will be felt.

“It takes a while to trickle through,” said Pat McCune, president and CEO of Carmichaels-based Community Bank. “To date it hasn’t been so bad. But all of us constantly ask ourselves what low prices mean for this area.”

Regulators have taken notice. The Office of the Comptroller of the Currency, which oversees large banks and about 1,400 smaller financial institutions, began reaching out to bank managers in oil- and gas-producing regions last year to evaluate their credit quality and risk from falling prices.

Most large lenders have said their exposure to the industry is limited. At PNC Financial Services Group, only 2 percent, or $2.9 billion, of its commercial lending portfolio is to oil and gas companies, CEO Bill Demchak told analysts in January.

“It’s smaller. It’s new for us. It’s secured and hedged,” Demchak said, according to a transcript of the Jan. 16 earnings call. “So we’re not sweating that yet.”

Small banks generally have not made loans to drillers. But they have financed the trucking companies, welders and other businesses that serve the industry, as well as restaurants and hotels that have benefited from gas workers flooding into the region.

That is where lenders could get into trouble, said Jen Thompson, a banking analyst and managing director at Portales Partners.

“I think if you have exposure to the suppliers, you’re more at risk, definitely,” she said. “It’s not just the upstream and downstream; it’s also the services you have to be concerned about.”

Last year, Community Bank merged with First Federal Savings Bank in Monessen, largely to take advantage of the lending opportunities related to Marcellus shale drilling activity.

Community has made loans to hotels, though it has been careful to keep its exposure within reason, McCune said.

In related news, Shale drilling boom a bust for some Western Pennsylvania towns.

“We haven’t over-concentrated in lending,” said McCune, who did not give specific figures. “All of our hotels are doing very well.”

The bank is monitoring the potential impact on customers from falling gas prices, McCune said, but was not tightening credit to those businesses.

Hotel occupancy rates in Washington County are still above historical averages but have started to slip in the past month, according to STR Global, which tracks the hotel industry. Occupancy rates fell from 70.3 percent in December to 66.9 percent in January.

In Canonsburg, gas workers have filled hotels, spent money on dining in restaurants and on entertainment, and injected some life into the local service economy, said Mayor David Rhome. Any pullback in that spending certainly would be felt around town.

“It’s been nice to have them in our communities,” he said. “You always have to be concerned: How long is this going to last?”

Gas workers in the region are spending less in local restaurants. Redd Dawgs All Star Clubhouse used to have up to 50 workers there daily, but since January that has slowed to a dozen, said Fallyn Skibicki, who tends bar in the Belle Vernon restaurant. Some workers were laid off, she said, but many others stopped coming there because their employers eliminated per diem allowances for food.

“Now that the (oil and gas) prices are low and they’re not drilling, they basically put a freeze on that,” Skibicki said.

Two months ago, Butler-based NexTier Bank began reaching out to its customers that supplied the gas industry to make sure their balance sheets were healthy and to understand how the hit to energy prices has affected their business.

“It’s logical to think that there would be a deterioration there in the credit quality,” said Rich Krauland, president & CEO of NexTier. “We’re making sure we have a (bank relationship manager) contact each one of these folks. We’ve probably contacted about two-thirds of them, just to talk to them about the impact on their business.”

Everybody appears to be in good shape, Krauland said. That will change if prices stay low through this year.

If that happens, Trainor said, the Hardwood Cafe will survive. The natural gas business has been like a bonus, he said, only one that got smaller around the holidays.

“Of course, I would love for them all to be back,” he said.

 

This article was written by Chris Fleisher from The Pittsburgh Tribune-Review and was legally licensed through the NewsCred publisher network.

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