CRE Market Conditions - Central Wyoming Q4 2020

2020 RECAP - CURRENT MARKET CONDITIONS - Natrona & Converse Counties

Current market conditions have changed dramatically as a result of the recent pandemic and collapse in energy prices. There is considerable uncertainty regarding the future of the energy sector which comprises a substantial portion of the Natrona County and Converse County employment base and consumer spending capacity.  On June 26, Wyoming’s oil and gas rig count sank to zero for the first time in over 136 years.  In addition, industry layoffs began in October 2019 when several companies slashed their labor pools. Moreover, Schlumberger enacted significant labor reductions company-wide with a still-uncertain effect on the 150 employees that remain employed by the company in Wyoming. Chesapeake Energy, a major leasehold owner in the Powder River Basin, and Denbury Resources, a company with enhanced oil recovery technology and production holdings in Wyoming, each filed for Chapter 11 bankruptcy protection in the past months. Noble Energy, a recent rumored bankruptcy candidate, announced a white-knight $5B sale of assets to Chevron Corp in September 2020, a sizeable discount from similar asset valuations, such as the Occidental purchase of Anadarko in early 2019.

Although energy prices have generally recovered since the price collapses in March and April of last year, the industry, in general, is in structural decline.  Only 4 rigs were operating the week ending 12/31, significantly below the 3-year high of 37 in February and July 2019 and 23 in January 2020. Global, economic and political influences, such as a growing public disfavor for fossil fuels like coal, gas and oil and the methods for extracting them (mining and fracking), not to mention global oversupply which has contributed to the most recent decline in pricing and to the re-evaluation of production budgets and capital deployment. Additionally, the industry will be attuned to the policies legislated by the incoming Biden administration, which has announced their intention to prohibit fracking on federal lands.  This uncertainty and the unstable pricing mechanisms are unlikely to be resolved in the short-term.  Economically, regional power plants have shifted their fuel sources from coal to much cheaper natural gas. In the past few years, several utility companies have announced proposed shutdowns of coal-fired power plants nationwide to occur over the next half-dozen years. In addition, many utilities are staking their future production of electrical power on construction of wind turbine farms and solar arrays. These structural shifts are significantly affecting operating revenues for the State of Wyoming. On November 16th, Gov. Mark Gordon announced $500 million in additional cuts to the state’s general fund budget, leaving the Wyoming Legislature with a shortfall of more than a quarter of a billion dollars when it meets this winter. Factoring in the cuts, Gordon’s current budget proposal amounts to roughly $2.4 billion, or roughly $1 billion less than his first budget two years ago. If unheeded by Wyoming’s legislature, Gordon said, the state’s $300 million shortfall could potentially balloon to $600 million within the next two years. The Casper Star-Tribune confirmed in a recent article the current $1.5B rainy day fund will dwindle to $75M by the end of the current biennium without a swift energy recovery. Thus far, the very conservative Wyoming legislature has refused to take up any meaningful proposals to address Wyoming’s long-term shift away from the mineral revenues the state has come to depend on, nor to seriously consider new funding mechanisms to make up the difference, apparently relying upon smaller and smaller government. While many, in principle, would agree with that approach, Wyoming’s citizens now depend on the products and services offered by a well-funded state government, such as top-notch schools and public transportation infrastructure.  

Not all news coming forth from the energy sector is negative, thankfully. The Bureau of Land Management has approved the final draft environmental impact statement on a proposed 4,250-well project on 327,645 acres of public, state and private lands near Lysite. The development, which would greatly expand long-standing oil and gas operations in the area between Shoshoni and Casper, is projected to produce about 18.16 trillion cubic feet of natural gas and 254 million barrels of oil over 65 years. The BLM estimates the development could bring $71 million a year in federal royalties, $57.6 million a year in Wyoming severance taxes, and $70 million a year in county ad valorem taxes. The project proponents, Aethon Energy Management and Burlington Resources Oil and Gas Company LP, plan to drill up to 4,250 new vertical, directional and horizontal wells from single and multi-well pads over a 15-year development period.

Directly affecting the subject property and the Town of Glenrock is the December 2020 announcement and approval of a massive 5,000-well oil and natural gas project. Occidental Petroleum, Chesapeake Energy, Devon Energy, EOG Resources and Northwoods Energy collectively submitted a proposal to develop oil and gas wells on about 1.5 million acres in Converse County located over the Powder River Basin. This project was first announced in 2014. The final environmental impact statement and resource management plan amendment will allow the 5 oil and gas companies to drill 5,000 wells over the next decade, with about 500 total wells drilled each year.   What remains uncertain is whether the incoming Biden administration will adversely influence this project, since some of the lands proposed for the project are administered by the federal government.

Due to the confluence of the virus, weakened demand, tens of millions of barrels of oversupply, lack of storage and the OPEC cartel failing to reach consensus on how deep to cut production and which countries would share in that burden, the price collapsed on April 21, 2020; the benchmark price for crude oil in the United States fell to negative $37.63 for contracts requiring delivery in May. Since then, OPEC reached agreement to cut production by 9.7 million barrels per day in May tapering to 7.7 million bpd from July through the end of 2020, and 5.8 million bpd from January 2021 through April 2022.

The spot market for natural gas has also shown dramatic volatility, however much more constrained and within a narrower pricing variance. The table, below, demonstrates the NYMEX pricing mechanism on 12/04/2020 and since 01/06/20. As the table demonstrates, natural gas declined 34.78% from the beginning of the year to its 2020 low on 06/22/2020 of $1.50. Natural gas prices have since recovered reaching a high of $2.95 per mcf on 10/23/2020. The current close on 1/8/21 was $2.70.

The chart and table, below, demonstrates the pricing volatility of crude oil (West Texas Intermediate, Brent, Wyoming Sweet and Sour) and NYMEX natural gas pricing since the beginning of the year. On 1/8/21, the closing price for WTI crude was $52.24 and Brent closed at $55.99

There remains significant uncertainty regarding extractive mineral development in Wyoming resulting from the expected certification of Joe Biden as the next president. His stated policies, as well as those of his vice president and other purported members of his prospective administration, are not friendly to the industry and may well signal a dark period for Wyoming’s future economic fortunes.

Through November 2020, the Wyoming unemployment rate is 5.10% as shown in the table below compiled by the US Bureau of Labor Statistics.  

Through November, Converse County’s unemployment has been faster to recover from its April report of 7.3% with the BLS reporting a rate of 5.10%. By comparison, Natrona County, which is much more heavily influenced by the extractive minerals industry, reached a high of 12.6% unemployment in April and through November reported a rate of 7.0%.

Graphs from Y Charts

Based on sales and use tax collections, 3rd quarter total taxable sales in the state shrunk 7.3 percent to $5.2 billion in the third quarter of 2020, in a year-over-year comparison. Decreases occurred in most economic sectors. The mining industry (including oil & gas extraction) contracted substantially, at -65.2 percent, due to declining sales of equipment, supplies, and services from energy exploration and production activity, and this was the largest year-over-year drop in Wyoming’s history. The construction, manufacturing, and

transportation industries that act closely in tandem with mineral extraction operations, also declined more than 30.0 percent, each. The retail trade industry, the largest in terms of sales tax contribution, decreased 2.4 percent, the first decline since the first quarter of 2017. However, the wholesale trade industry and other services (mostly repair and maintenance) experienced year-over-year growth of 85.6 and 80.0 percent, respectively, mostly as a result of robust activities in the wind power projects. The automobile sales also showed a strong increase of 11.5 percent over the year. Across the state, 15 out of 23 counties experienced decreases in taxable sales in a year over year comparison, led by Sublette’s -48.2 percent, followed by the -32.5 percent in Campbell. However, Carbon (95.3%), Albany (46.5%), and Laramie (26.1%) counties experienced large growth, reflecting boosts in wind energy activities. Converse County reported the 5th largest decline in 3rd quarter sales tax revenue of -27.1%.  

2020 RECAP - REAL ESTATE ACTIVITY - Casper and Surrounding Area

While many of the Rocky Mountain states and a number of Wyoming communities have seen significant year-over-year increases resulting from several 2020-specific transformations, the effect in Casper and the surrounding area was mixed. The pandemic has been working against urban, dense population areas encouraging a flight from the urban core to the suburbs. Others are fleeing the civil unrest that captured the news cycles during much of the year. Finally, many companies have found that they can reduce expensive commercial office space and replace it with free, or vastly reduced cost, of space in workers homes and apartments by allowing them to work remotely. Many of these workers are finding they can just as easily remote into their Los Angeles or other large cities) office from areas of the country less populated and which offer greater recreational opportunities and safer environments in which to raise families. 

Cheyenne, Sheridan, Buffalo and Jackson have been beneficiaries of this seismic shift. The effects in Casper, for single family, townhouse/condo and twin home sales, has resulted in year-over-year increases, as well, but to a lesser degree. The average sale price of a single-family home grew 5.53% to $256,508 in 2020. Total volume of residential sales increased 7.01%, while the time spent on the market declined by 13%. The average price of a new home increased by 12.70% to $385,800. There were 90 new homes constructed and closed in 2020, 4 less than in 2019. However, the market generated 276 new home sales in 2014. (Source: Wyoming MLS)

The Wyoming MLS reported 10 closed industrial sales through 12/31/20 with volume of $8,379,000 representing a 38% decline from 21 sales and $13,494,000 in 2019. Commercial building sales, comprising office, retail, restaurant, hospitality and specialty properties, declined by 43% - 17 sales totaling $6,457,315 vs. 23 sales and $11,356,155 in volume and 10 closed commercial sales. The retail market, while not suffering through the large closures of the past 2 years, remained stagnant in 2020 with the continued vacancies of Sears and Macy’s stores. The Ridley’s CY and the O’Reilly Auto Parts property both sold in December. The O’Reilly Auto will undergo an exterior upgrade, while the Ridley’s store will be repurposed into smaller retail. The eastside Kmart, sold in early 2019, has also been repurposed into retail and storage for Uhaul. Still, there is more than 148,000 of retail space on the market. In addition, the office market remains stagnant with an estimated 130,000 to 160,00 SF of Class B+ or better space currently available (including the potential vacancy of known properties). 

The uncertainties of the new year that existed on January 1st are likely to become more clearly understood in the early part of 2021 as the policies of the new administration in Washington are unveiled and their potential effects on Wyoming’s economy are revealed. The Wyoming legislature, too, will play a role in the continuing debate over how best to make up revenue lost from the downturn in extractive minerals. As a partner and friend frequently reminded me, “All will soon be revealed!” 

Until next quarter, stay safe and feel free to contact me with any commercial real estate questions or requirements. Randy Hall: 307-259-4785 or [email protected]