Bill Price, owner of Bill Price Drilling Co. here, squinted into the sun as he watched workers "stacking pipe" on the Jose Noe Martinez Well No. 1.
George Hawn, of Hawn Brothers, an independent oil operator that hired Price to drill the 240-acre tract, paced the site with a worried look as the pipe was withdrawn and taken apart in 30-foot sections. Martinez No. 1 was a "step-out well"--a well drilled beyond the edge of a known pool of oil. Hawn was gambling that the geological sand that was yielding oil 2,400 feet away would reach the area he had leased.
In this case, Price was an investor as well as driller, not only because he liked the gamble, but also because drilling activity was slow.
"I'm in a position to keep six rigs busy, but I'm only running two," he said, nodding in the direction of Hawn. "Most independent oil investors are holding back on their investments. They see prices going down, but drillers are caught in the middle. We've already invested in the higher-priced equipment."
The brakes are being applied in the oil business, and drillers like Price and operators like Hawn are being brought up short. The recession, combined with plentiful supplies and relatively low prices for oil, are discouraging investment in exploration.
Those factors also are squeezing equipment suppliers, and have reached into the banking system with the failure last week of the Penn Square National Bank of Oklahoma City. Several major banks, including Chase Manhattan, Seattle First National, and Chicago's Continental Illinois National and Northern Trust, were left holding hundreds of millions of dollars of sour oil-drilling loans they had purchased from Penn Square.
A report last week by Hughes Tool Co. showed oil and gas drilling in the United States at a 25-month low, with 2,816 rigs in operation, down from 3,984 a year ago and 38 percent below the record 4,530 active rigs at the end of 1981.
Investors, Price said, change with the economic climate. The first to go, he said, are what he calls the "Hollywood, romantic investors"--those who know nothing about the industry but think it would be "romantic" to be a partner in a well.
"If people make a lot of money on a movie, they'll come out here and invest the dollars in a project that they can write off immediately." He grinned and quipped, "With all this defense spending, the Pentagon's big defense budget, I'm expecting a lot of shipbuilders to start coming down."
The ranks of the romantics thinned first, but Price started worrying when the number of serious investors began to dwindle. "I'm talking about the ones who make their living by leasing property and putting deals together, those are the ones you have to worry about. When they start pulling back you know there's a problem somewhere."
The first signs of real trouble were there for Price late last year. Typically, in November and December drillers are inundated with orders from investors trying to schedule rigs for the first few months of the following year. They reserve a rig and pre-pay the fee, taking a deduction on their tax return for the expiring year. At the end of 1980, Price had $1.5 million in prepayments for rigs reserved until the end of March, 1981. At the end of last year, "with the improved investment climate, Reagan's tax structure, I expected to be swamped with orders, but I had only $100,000 in prepayments by Jan. 1," he said.
Anticipating that the boom that began with deregulation of oil prices would continue, Price had invested heavily in sophisticated and expensive equipment that he planned to finance with drilling revenues.
When Bill Price Drilling was created in 1956, rigs were cheap. Drilling was slow and investment down. He bought his first rig, a 3,000-footer (capable of drilling to that depth), for $14,000. He chuckled as he recalled, "The banker who lent me the money wanted to know how much it weighed. He figured when I went under he would sell it to a junkyard for scrap metal.
"In my first year of business I must have been approached by 100 people who wanted to unload their rigs. You'd see stuff in junkyards that, today, would have a real good market value."
In 1970, Price said, you could still buy a rig for $100,000. Then, with the oil crisis of 1973 and the sudden rise in prices, the south Texas oil industry found itself in the middle of an investment surge.
"Those people already in the business without a big capital outlay had an advantage in the boom years. We were already here, we had the knowledge, the expertise, the experience. Our only problem was that we didn't expand fast enough."
With the sudden increase in investment, drillers found their equipment in short supply and, as a consequence, the prices skyrocketed. The $100,000 rig couldn't be had for less than $800,000. The $100 Hughes drill bit that most companies used commanded close to $900. Costs across the board escalated by four to six times, Price said.
The distortions of those giddy times bothered Price. "When the boom came there was a real shortage of experienced personnel, there was an incredible demand for people who knew what they were doing. The majors large oil companies tried to hire my good men every time I turned around." The oil companies offered generous salaries, which Price tried to match to keep his rig crews.
Price singled out the "tool pusher," or rig foreman, on the Martinez well, Emerico Perez. "He's worked for me for 21 years. One of the best . . . he makes well over $40,000 a year."
Perez is the rig's troubleshooter, capable of repairing all equipment and handling any crisis. He is responsible for directing the activities of the four-man teams of roughnecks, who make $10 to $14 an hour.
Price said he didn't know if or when he would have to lay off some of his 85 employes. "I haven't laid off any hands yet, but even though I added a new rig last fall, I didn't add any new men." Pulling his baseball cap down over his eyes, he added, "How can you readjust someone's salary that shot up to $40,000 during the boom? It's one thing to increase it, but another to adjust it down."
Eventually, Hawn, who had been pacing the tract nervously for an hour, approached Price. "The log is finished," he said. "We can read it."
The two disappeared into a trailer with a geologist to decipher the mechanical squiggles. The log is a graph print-out of electrical impulses fired against the side of a hole. An interpretation of the graph will reveal the presence of oil or gas, and thus is the make or break moment for the investors.
Soon the three men stepped out of the trailer. To the expectant looks of those waiting, the geologist replied, "Right sand. Wrong structure."
In other words, a dry hole.