The Coronavirus and Energy Executives in Texas

Victims of the COVID-19 pandemic abound, and energy executives in Texas are not immune.

The energy industry was dealt a one-two punch: A sudden loss of demand was coupled with an alarming drop in oil prices. While many large national and multi-national energy companies have sufficient financial reserves to weather a storm, not all independent Texas oil and gas producers have such assurance.

Linscomb & Williams is one of the financial planning firms in Houston specializing in advice to energy executives. We understand the unique concerns these professionals have and the challenges the industry is facing. 

First, the Situation

The state’s oil and gas producers and related companies must now face many challenges.

Cancelled contracts: Customers have been cancelling purchase contracts, severely hurting revenues. For example, Texland Petroleum has lost at least four contracts, cutting revenues by 30 percent. Refiners are dealing with reduced demand for aviation fuel due to the severe slowdown of airline passenger traffic. Offshore drillers must contend with cancelled rig contracts.

Job losses: After the economy shut down, job losses skyrocketed. At the end of 2019, Texas had approximately 428,000 jobs directly tied to oil and gas operations, and as of April 2020, at least 20,600 jobs had been lost. Further job losses are expected in coming months. Many of these job losses stem from small oil and gas companies shutting down or seeking bankruptcy protection.

Cash drain: Producers are now paying termination fees to contractors instead of drilling new wells. While this saves money in the long-run, it is an immediate drain on cash. Another unforeseen drain involves the cost of additional storage facilities, including tankers, to store unwanted excess oil. When oil prices were negative, producers were actually paying customers to “buy” their oil. Of course, shutting down wells is an expensive process with underlying costs, such as treating well casings to prevent corrosion.

Price collapse: Oil prices have been extremely volatile since the Coronavirus pandemic hit home. Many companies that could survive when oil prices were $50/barrel are now floundering with prices reaching levels below half that price. Some smaller producers may close down until conditions improve. Inevitably, this adds to job loss and general economic discomfort. 

Lost tax revenues: The ability of the Texas state government to help out its oil and gas industry is severely hampered by the tax collection fall-off due to the virus. Some infrastructure projects may be put on hold as the state deals with budgetary uncertainties.

Auto industry effected: Car sales tumbled starting in February 2020. Demand for cars declined and gasoline consumption is down due to fewer cars on the road as a result of stay-at-home provisions.

Alternative Energy Producers Also Effected

The U.S. solar industry has seen a 38 percent decline in employment since the pandemic began. Texas is the second largest solar producer in the U.S., trailing only California. Now, with cheap oil and gas, Texas has shelved a $109 million utility project that would have pumped millions into the state economy. In fact, solar developers have cancelled 2.5 gigawatts worth of Texas projects since early March. Renewables development will continue to slow through 2021.

 

Linscomb & Williams specializes in helping executives and professionals in the energy industry. Contact us to see how we can help you.

 

Assistance for Energy Executives

Energy executives who haven’t been laid-off yet may be faced with (or have already experienced) significant pay cuts. Thus, many must revise their financial plans and their lifestyles. Financial planning firms in Houston can help.

Here are some tips to help weather the storm:

Unemployment Benefits: To apply for unemployment benefits, contact the Texas Workforce Commission. Naturally, these benefits will not be much when compared to your normal salary, but they will keep some level of cash coming in to help defray your immediate expenses. Money from the Coronavirus Aid, Relief and Economic Security (CARES) Act can also help bridge the financial gap.

Health Insurance: If you’ve lost your employee health insurance, you can apply for COBRA to maintain your policies. Texas law allows an additional six months of coverage once COBRA ends, if you belonged to a fully insured group. If you prefer, you can apply for health insurance at the ACA Marketplace. Because you lost your employee insurance, you can use the Marketplace without waiting for open enrollment.

Retirement Accounts: If you’ve been laid-off or had your work hours reduced because of the virus or have experienced a COVID-19 infection in your family, you qualify for special retirement account rules. Your 401(k) sponsor must adopt these rules for you to qualify:

  • You can withdraw in 2020 an aggregate amount of $100,000 from your 401(k), IRAs and other qualified retirement accounts without triggering the 10 percent early withdrawal penalty. You will have to include the withdrawn amount in your taxable income, but you can take three years to pay the taxes if you wish. (Before making any changes to your retirement funds, discuss your options with a financial advisor, because this isn’t always the best decision.)
  • You can redeposit the withdrawn money into the same or different retirement account within three years and treat the money as a rollover contribution, eliminating the tax liability. If you already paid the taxes, you can file an amended tax return to claim a refund.
  • Until September 23, 2020, you can borrow tax-free up to 100 percent of your 401(k) net account balance (your balance minus any presently outstanding loans) or $100,000, whichever is less. Any repayments due in 2020 can be postponed for one year. You have six years to repay the loan. Any loan you fail to repay by the deadline will be treated as taxable income and be subject to the 10 percent early withdrawal penalty, if it applies.
  • Required Minimum Distributions (RMDs) have been suspended for 2020.

It’s important to be careful when you rearrange your finances during a crisis like the COVID-19 pandemic. That’s a good reason to consult with a financial advisor before making any moves. Your advisor will help you understand all your options and the consequences of your decisions.

For example, if you need to sell investments, your advisor can help you minimize the tax bite. If you own a home, it might be more affordable to take out a home equity line of credit rather than borrow from your retirement account. Each situation is unique, so let a financial advisor offer you unique advice.

If you’re looking for financial planning firms in Houston that specialize in helping energy executives, contact us. Linscomb & Williams is here to help.

 

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B. Craig Ivy, AIF®

B. Craig Ivy, AIF®

B. Craig Ivy is a principal and wealth advisor for Linscomb & Williams.

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