Hoteliers expect recovery in US oil regions
June 17, 2015
While most of the U.S. hotel industry is booming, lower oil prices are translating into fewer rooms sold and less revenue for hotels doing business in the nation’s oil and gas markets. The slowdown – that comes after a five-year boon in U.S. production – may be a bellwether of what’s ahead in these regions if hydraulic fracturing plateaus and keeps the lid on crude oil prices, warns STR Analytics.
“The decline in oil prices has impacted occupancy rates throughout the oil field markets,” Anand Jobalia, managing partner of Shale Lodging, said. “A lot of these smaller towns especially have gotten more affected [because] crews, they’re just not fracking oil.”
Shale Lodging has hotels in Pleasanton and Three Rivers, Texas, and Hobbs, New Mexico – all centers of oil industry activity. Though business declined in the first quarter and part of the second, Jobalia said occupancy has increased by about 6 percent in the past 45 days as companies return to the oil areas. Companies are organizing crews to go to the fields in the next month, he said.
Pratik Patel, principal at REM Hospitality, also expected to see a return to growth. REM Hospitality has hotels in the same towns of the U.S. as Shale Lodging.
“We have seen a slowdown in business in those areas, but remember those areas were doing especially well prior to gas prices and oil prices dipping. So I think what a lot of people need to realize is that the world’s not coming to an end,” Patel said. “It’s just not at the level that it used to be at when everyone had a RevPAR of $150 to $160. It’s more normalized right now at the little less than $100 range.”
Since 2010, hotel development in oil and gas market tracts have accounted for 25 percent of new supply that has entered the industry. The oil and gas market tracts also have accounted for 47 percent of midscale properties and 44.5 percent of economy hotels developed in the U.S. during that time.
“As most people already know, the growth of the U.S. oil and gas industry over the past few years has been a boon to the hotel industry, particularly in remote locations where the hotel markets were previously small to negligible,” Steve Hennis, director at STR Analytics, said.
Among prominent oil submarkets, the North Dakota area has reported the largest supply increase since 2010, up 73.4 percent. Midland/Odessa, Texas (+44.4 percent) ranks second followed by the Texas South Area (+37.7 percent) and Bismarck, N.D. (+36.9 percent).
“For markets that were completely undersupplied initially, we saw revenues that were just through the roof, and those continued,” Patel said. “But now, what’s going on is you see markets kind of stabilizing to where yes, [oil companies] are not sending as much business, but the markets are still doing well. You’re still making money, and you’re still churning out dollars, but it’s nothing to be too worrisome about in the long run.”
More hotel supply is reported in the pipeline with nearly 11,000 rooms in construction in the top 20 oil and gas tracts as well as another 24,000 rooms in planning stages. Shale Lodging is developing a hotel in Midland/Odessa. In the past six years, Midland, which also offers space tourism, has added more than 1,500 hotels rooms – a 52 percent increase in room supply, said Brenda Kissko, tourism & public relations manager at the Midland Convention & Visitors Bureau. Occupancy and ADR in Midland have decreased slightly, but supply is strong, Kissko said.
“This new development has helped increase overall room quality. It adds competition,” she said. “It’s important that CVBs and hoteliers work together to continually increase direct visitor spending in our community and to continue to diversify our economy.”
Most of Bismarck’s hotel business that comes from the oil industry is due to corporate-level people flying into North Dakota for oil and gas conferences, meetings and site visits, said Sheri Grossman, CEO of the Bismarck-Mandan Convention and Visitors Bureau.
“Our occupancy is down a little bit, but we have a lot more hotel rooms than we used to,” Grossman said.
Bismarck-Mandan has added 1,000 hotel rooms in the past five to six years, she said.
Revenue-per-available-room growth in the oil and gas tracts outpaced RevPAR growth in the U.S. for most of 2011, all of 2012 and roughly half of 2013. Since the middle months of 2013, RevPAR growth in the top 20 oil and gas tracts has lagged the overall growth in the U.S. Thus far in 2015, 12-month running RevPAR growth in the U.S. has remained above 8 percent. During the same four months, that metric in the top 20 oil and gas tracts has remained below 8 percent. Most recently in April, 12-month running RevPAR growth in the top 20 oil and gas tracts fell below 6 percent.
Hennis said occupancy began to slide in the top 20 oil and gas tracts in mid-2013 as supply growth started to outpace demand growth. RevPAR performance also began to lag as a result. In late 2014, crude oil prices decreased from more than $100 to below $60.
“With the price of oil at that level, the profitability of many fracking operations comes into question,” Hennis said. “The $60 mark has been noted by many analysts as the reported break-even point for fracking.”
Patel of REM Hospitality said he expects to see another boom in business once oil prices creep up and crews return to their pipelines. Within six months, he said business will rise to the level of six months ago.
“What this downturn has done is it’s kind of cut off the supply side. Banks aren’t as willing to now finance new deals and new construction products that people are taking to them,” Patel said. “We see a stop in the supply growth because of the short-term downfall, and so what’s going to happen is that when the boom does come again, now you have an undersupply again, so the rates will rocket once more.”
Recently, demand growth has dipped in the top 20 oil-dependent tracts in the U.S. In these submarkets, STR reported demand declines of 0.3 percent and 3.5 percent for March and April, respectively. During those months, U.S. oil production growth has plateaued between 9.3 million and 9.4 million barrels per day.
The North Dakota Area tract experienced the largest hotel demand decline in April, dropping 9 percent. The demand declines come after several years of steady demand increases in major market tracts driven by the oil and gas sector, Hennis said.
“It is too early to tell if this is a shift in the trend, but it may be a possible warning sign of the potential fallout in these regions if oil prices remain low,” Hennis said.
Jobalia said he believes in the long-term stability of the oil and gas industry; companies will return to their investments, and his hotel business will experience a full recovery.
“I think what people have to realize is when you visit these markets and these places, the amount of infrastructure money that’s been invested is in the hundreds of billions of dollars. It’s not something that they sort of just go, set up, find a well, frack it and then pick up and leave. There has been a lot of money invested,” Jobalia said. “We have no doubts that as oil price continues to rise, as America continues to strive toward energy independence, that our investments, our hotels and other hotels on the market too, will once again flourish. This is a dip. Every sort of industry has an economic dip, and this is no different for the oil industry."