Why Low Oil Prices Could Be Bad for Jobs in America

Corbis Oil prices are plunging, and one byproduct almost everyone in the U.S. has noticed is the falling price of gasoline. In some locations gasoline has fallen below $2, and the rest of the country won't be far behind if the price of oil keeps falling. Most of the time, lower gas prices are seen as a good thing. They put more money in consumers' wallets, which right now can be spent on items just in time for the holidays. As a result, retailers and the economy as a whole should get a bit of a boost as long as prices stay low. But a side effect that shouldn't go unnoticed is the potential loss of thousands of jobs in the oil extraction industry. States like North Dakota and Texas have seen a boom in oil-related jobs, and if oil falls much further, drilling could dry up altogether there, pushing thousands back to unemployment lines. It's a repercussion that could have a big impact in parts of the country. Oil and Gas Have Been a Boon for American Jobs Since the shale boom began in earnest a decade ago, the number of people employed extracting oil and gas has risen sharply. As you can see below, the entire mining industry, which includes oil and gas and support services, has added about 360,000 jobs in the past decade, according to the Bureau of Labor Statistics. Oil and gas extraction alone has added nearly 100,000 jobs, and hundreds of thousands more jobs benefit from this economic activity. Source: U.S. Bureau of Labor Statistics This growth -- except for a dip in 2009 when oil prices plunged -- coincided with a rise in oil prices, and for the last few years, prices have been hovering around $100 per barrel. If we're in a "new normal" for oil where prices are below $60, or worse, below $40, the industry could reverse the course of the past decade. Thousands of jobs could be lost if oil prices stay low for long. Where Jobs Would Be Hit Hardest States that drove the oil boom would certainly be affected, but so would large swaths of the country that aren't normally known for oil drilling. Below is a map of the location quotient for natural resource extraction. This measures which states have higher and lower than average exposure to the industry based on the national average. Blue is high exposure, orange is low. As you can see, North Dakota, Oklahoma and Texas are three of the most heavily dependent on energy, particularly oil. Source: U.S. Bureau of Labor Statistics The advantage for states in the South is that they're involved in the collection and processing of oil in the U.S. Even some oil from North Dakota makes its way to states like Oklahoma for refining. They'll be somewhat insulated because of this exposure if oil prices fall. Hardest hit will be northern states like North Dakota, Montana, Wyoming and Alaska, which have expanded oil drilling rapidly in the past five years. The industry could be all but abandoned there if oil prices fall too far and stay down for long. The Other Side of the Story There are a lot of benefits to low oil and gasoline prices, but now that the U.S. imports only about 20 percent of the oil we consume, versus 60 percent in 2005, there's also a downside to lower prices. A lot of people's jobs rely on the growth in domestic energy production, and it's likely job cuts are on the table as drillers consider cutting back production. More from Travis Hoium
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Shorting Mortgage Stock PHH Corporation (PHH): A Sure Thing? RLGY & WAC

Small cap mortgage originator and servicer stock PHH Corporation (NYSE: PHH), which has real estate services stock Realogy Holdings Corp (NYSE: RLGY) as a joint venture partner and small cap Walter Investment Management Corp (NYSE: WAC) as a potential peer, has elevated short interest of 34.37% according to Highshortinterest.com. PHH Corporation did sell its more stable Fleet Management business last summer in order to concentrate on its more volatile residential mortgage business. 

Why is PHH Corporation Being Shorted?

Small cap New Jersey based PHH Corporation is a leading provider of end-to-end mortgage solutions through its subsidiary, PHH Mortgage, which provides mortgage solutions for the real estate market and financial institutions plus offers home financing directly to consumers. The company's outsourcing model has enabled PHH Mortgage to become one of the largest non-bank originators and servicers of residential mortgages in the United States.

At the end of December, Sterne, Agee & Leach issued a research note (reprinted in Barron's) that said:

"The factors that are going to drive PHH's shares above $30 over the next 12 months have little to do with the dynamics of the mortgage market and everything to do with changes we think management can make in both the profitability of its fee for service-origination business and the cost structure of its servicing operation."

And:

"The primary problem with the company's mortgage-origination business is the fees earned on its fee-for-service business, which we estimate to equal about 1.00% of originations and the operating cost of its servicing line of business, which is arguably, as a percentage of average servicing, three-to-five basis points too high… We think initial steps to redo its fee-for-service contracts (likely to be announced in January or February 2015) and right-size its cost structure will support, going into 2016, a business able to earn north of 8% on equity and trade at or above tangible book value."

In early November, PHH Corporation reported third quarter revenues of $152 million verses $211 million along with net income attributable to PHH Corporation of $215 million or $4.00 per basic share and a net loss from continuing operations attributable to PHH Corporation (which excludes a $303 million gain on the sale of the Fleet Management business, net of tax) was $88 million or $1.64 per basic share. The CEO commented:

"We remain focused on our re-engineering efforts, which we expect to deliver up to $225 million in annualized operating benefits driven by expense reduction actions and achieving our Private Label contract renegotiation objectives. We expect to generate an aggregate of $175 million of the annualized operating benefits from expense reduction actions, the majority of which is expected to be realized in the next 12 months. With regard to our Private Label contract renegotiations, we continue to make progress, and our clients remain highly engaged. We, and our clients, are working diligently to attempt to conclude these negotiations by year-end. With more than 75% of our total expected re-engineering benefits driven by optimization of our cost structure, we believe we have significant control over the achievement of our re-engineering goals."

In early July, PHH Corporation completed the sale of its Fleet Management Services business for cash consideration of $1.4 billion ($821 million in net proceeds after the payment of expected taxes and transaction expenses). Moody's Investors Service then downgraded PHH Corporation's corporate family rating and senior unsecured debt rating to Ba3 from Ba2 and affirmed the Not Prime short term rating with a stable outlook, noting:

"The sale of the Fleet Management business weakens the company's franchise strength and results in a more concentrated monoline business solely focused on residential mortgage banking. The mortgage business has significant reliance on the company's Realogy, Merrill Lynch and Morgan Stanley relationships which account for more than 60% of origination volume. In selling the operationally and financially more stable and more profitable fleet business, PHH becomes a cyclical, low margin, lower franchise strength prime mortgage banking business."

And:

"The company's mortgage business profitability has been constrained by a changing business mix in which its private label clients are electing to keep an increasing percentage of their mortgage originations. As a result, PHH is increasingly responsible for administering the mortgage origination and servicing process while its clients retain the more profitable mortgage and mortgage servicing assets. According to the company, approximately 75% of its private label mortgage contracts, or half of its mortgage originations, are currently unprofitable on a fully allocated basis."

What Are the Charts Saying?

The latest technical chart for small cap PHH Corporation is sending mixed messages:

A long term performance chart shows PHH Corporation and Realogy Holdings Corp not generating much excitement for investors or traders while small cap Walter Investment Management Corp is back to where it was five years ago:

A technical chart for Realogy Holdings Corp seems to show shares bouncing back nicely after hitting a bottom in October while Walter Investment Management Corp has been in a downtrend since late summer:

What Should Be Your Next Move?

Moody's made some interesting points about small cap PHH Corporation that should keep investors who don't want to speculate on a turnaround looking for better real estate related investments elsewhere. Likewise, PHH Corporation's technical chart is not looking all that bullish for the shorts.