Lessons learned through boom and bust
FARMINGTON — As the price of crude oil hovers around $30 a barrel with only two rigs currently running in the San Juan Basin, many local oil and gas companies have responded by laying off employees and struggling to pay down debt.
But not all of them.
Some of the longer-running oil and gas business owners in town say that while no downturn is pretty, they have all posed similar challenges and familiar demands on anyone running any kind of company.
Three Farmington oil and gas company owners who have survived boom and bust cycles — once or several times — share what they've learned.
McGarrh is the president and owner of Basin Well Logging Wireline Services, Inc., an oilfield service company in Farmington, and has been in the oil and gas industry since he was a kid. He accompanied his father, Dan McGarrh, who came to Farmington in 1956 as a derrick hand for Brown Drilling Co.
In 1979, the elder McGarrh started his own wireline service company called Jetronics. It was then, when he was 16, that Dana McGarrh started working the "whip-end of the wire line" for his dad. He learned how to log wells with a pen recorder. That was a far cry from the remote logging the company does today using computer software that can remotely communicate with workers on laptops at a well site.
McGarrh took over the company from his father, Dan McGarrh, in 1994. He had worked for years as a used-car salesman at Zimes Four Corners dealership.
McGarrh said his dad was so popular — he often took payment in chickens or other non-cash items — his customers called him "Used Car McGarrh," a nickname that would follow him even after he started his oil and gas service company.
The business survives today, McGarrh said, because Basin Well doesn't take on any debt, reinvests profit in new equipment, provides quality service and complies with all safety regulations.
McGarrh said keeping long-term employees who are committed to the company and treating them well is part of the why the company has succeeded. McGarrh said several of his company's workers draw higher salaries than he does.
"You want to be hands-on, driven and caring, for sure ... Be able to do what (your employees) do and treat them like family. You know, that you're not just some suit that runs a wire-line company. You want to be a wireline guy who runs a wireline company. That would go for any business, in my opinion. That way, they are more understanding if pay cuts and layoffs do have to happen. They understand. You're sincere about it. That you really have to do it. You're not (just) looking at nothing but numbers. You sacrifice together while times are bad and then make it up to them when things are good."
All the employees, including McGarrh, took a 15 percent pay cut early last year.
The bulk of his company's workers have been with Basin Well for a long time, McGarrh said. His son, Travis Allen, has been an engineer at the company for 20 years and Pat Baker, operations manager and engineer, has been with McGarrh's company for 16 years.
Basin Well has about 30 workers, but McGarrh did lay off one employee last year, a 66-year-old equipment operator who was unable to physically do the work anymore, McGarrh said.
He said the laid off employee is old enough for Social Security, has VA health care and McGarrh approved his unemployment. The former employee, who worked for Basin Well for about 25 years, also has extra padding, McGarrh said — he has and continues to live rent-free on property McGarrh owns.
"He can live there as long as he needs to," he said.
McGarrh said the downturn in the 1980s nearly cost his dad his business, a lesson he vowed never to repeat.
"In 1986, he had so much debt, that he had one truck tied up on a note, two other trucks tied up on a note, a line of credit that was maxed out and this property was financed," McGarrh said. "The bank wanted him to pool all that together into one note so that that they could foreclose. He was smart enough to (borrow) some money from my step-mom and went to another bank and got enough money to pay off all the notes but that one wireline truck. They couldn't foreclose on those two wireline trucks. The one truck, my brother and I drove it and parked it in front of the bank for him. Debt with no revenue, with no cash flow. That's what that looks like, and I'll never will be in that position."
Oilman Tom Dugan has been in the oil and gas business in the San Juan Basin for 57 years. It is a significant stretch, he said, that his company has achieved with "a lot of hard work."
In 1959, he started his Dugan Production Corp. , ironically, during a downturn caused by a glut of under-priced natural gas and the collapse of local building construction in San Juan County that would persist until the early 1970s.
Dugan has carried his company through about five such cycles of high and low by always looking after his employees and the leases he owns with equal care.
Through the decades, Dugan said he has seen, and survived, both boom and bust periods in the San Juan Basin, but said the current downturn is the worst of them all.
"It's not that wild a ride. It's actually a lot of hard work," he said. "You have ups and downs. I've been through about five (boom-and-bust cycles) since I've been in business and this one is absolutely the worst."
Looming federal regulations like the U.S. Bureau of Land Management's proposed venting and flaring rule are doubling the pain for an aging basin that has a significant number of marginal, or low-producing, wells that would be rendered unprofitable under the rules in their current form, he said.
"A lot of the wells are 50 years old, so they're on the latter part of their life," Dugan said. "As (commodities) prices have gone down, some of them are probably making slim or no profit. You don't want to plug them because they'll never be drilled again. It's almost every branch of the federal government that is trying to make it harder."
Dugan estimates that about a third, or 8,000, of the wells in the basin are aging, low-production, or marginal, wells. They are deemed to be marginal when they produce fewer than 10 barrels of oil or 60,000 cubic feet per day, or 60 Mcf, of natural gas.
"A lot of the companies are in trouble already and if you add all this additional cost it will plug wells and close companies," he said. "We do a good job of measuring the gas but (the BLM) wants to get more technical."
Dugan said regardless of good times or bad, the bottom line is always the same. Slowing spending in downturns, and taking on little or no significant debt is also essential, he said.
He remembers well the bust period in the 1980s, which he said is much like the downturn today.
By the end of 1985, the price of oil was around $30 a barrel and by around 1986 it had sunk to around $10 a barrel, Dugan said.
"Oil prices dropped by $20 in three months, so that was really the start of the really tough times," he said. "Half the houses in Farmington were empty. We didn't have any work around here. By 1987, it was really bad. That's when the banks started foreclosing. You're seeing it now. I heard a third of oil and gas companies will go bankrupt. I just hope it won't be me."
What helped to reinvigorate the basin was coal-bed methane production from Fruitland coal seams. That process was made possible by the technology and engineering that led to the evaporative lagoons that could take in the large amounts of toxic water from the drilling process that helped make those wells profitable, he said.
"(Coal-bed methane) helped the entire basin," he said. "What triggered it was knowing how to handle the water. That created another boom that lasted several years."
Dugan Production Corp. owns about 200,000 acres of leases on the west and southwest portions of the basin. He employs about 165 people, and Dugan said he hasn't cut any jobs, only overtime pay.
In 2002, Dugan and geologist Emery Arnold published an historical overview of the basin in the book, "Gas: The Adventures into the History of one of the World's Largest Gas Fields — The San Juan Basin of New Mexico."
In a section of the book called "The Future According to Dugan," he predicted that "there will be gas production from the San Juan Basin for the next 100 years." In it, Dugan also said discovery of an "elusive 'big oil pool' deeper underground could still be found and triggering a sixth boom period in the area.
Today, Dugan still stands by his San Juan Basin predictions, though he admits "nobody truly knows."
"I still say there will be oil and gas production here for the next 100 years," Dugan said.
Now 90, Dugan said horizontal drilling was the last great innovation of the industry that has made operating in the basin profitable. What the next one will be is unknown, but he said innovation and hard work have led the way for the industry throughout his time in the business.
"Hard work. Keep at it," he said. "Maybe the next big thing will come around sooner. Who knows?"
Since 1992, Clark was owned and operated A-Plus Well Service, Inc.on Bloomfield Highway, a service company that specializes in the plugging and abandonment of depleted oil and gas wells along with well-casing repair, cementing and perforating services.
Clark has worked in the oil and gas industry since 1977 and considers the current downturn "a very challenging time," which, for him, means he has had to lay off employees.
When crude oil prices were around $100 a barrel on the commodities market, Clark said his company rose to a high of 62 employees, but after oil began its precipitous fall in November 2014, he has had to face the books and do something that the large corporations down to the small independents in the San Juan Basin have had to do — cut payroll expenses and let people go.
"We've gone through our second round of layoffs just this month," Clark said. "The hard part is that you lose good people. It's been tough. We're having to say goodbye to good people and loyal employees. It hurts."
Now A-Plus is down to about 40 workers, he said. Twelve of those have worked for Clark for close to 20 years each, he said, and he considers that a testament to the values at A-Plus — offer your customers quality service and treat your employees like family.
"Farmington is a very small town and integrity and honesty is highly regarded," Clark said. "Provide your customer with service at a reasonable price even during the good times and that will help you during the slow times. In the oil patch, everybody knows everybody. Treat people right."
To honor that pledge, Clark, 62, said that he plans to retire in two years. When he goes, he said he plans on leaving his business to his employees as a show of thanks for carrying on the work he started a quarter of a century ago.
To help the transition, Clark hired former School of Energy Dean Randy Pacheco to ultimately fill his shoes and help convert the company using an employee stock ownership plan, or ESOP, which will provide all Clark's employees with a no-cost ownership interest in A-Plus.
"That's what A-Plus is," he said. "It's the employees, and I want to reward them with ownership as I step away. You pass it to them and that will secure the value of integrity to them. I could have sold out to a big company and walked away with a sack of cash and the employees would be just a number. With this, they can feel like they have a destiny."
A self-described fiscal conservative, Clark said he took on some debt, but he sees it as a necessity for his expansion plans and investing in the business.
Like so many in the industry faced with volatile crude oil prices, his company's goals are simple.
"Our goal for 2016 is to make payroll," he said.
Clark said the current downturn reminds him in a lot of ways of the bust around 1997 when oil went down to $10 a barrel.
"We're awash in parked rigs," he said. "There's over 60 rigs sitting in Farmington right now that if the customers could (put into operation), they'd be working. Bottom line — we do too good of a job. We're a victim of our own success."
James Fenton is the business editor of The Daily Times. He can be reached at 505-564-4621.