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Midcontinent Energy Operators Less Optimistic, Cite Need for Higher Oil, Natural Gas Prices

Midcontinent oil and natural gas activity, including in Colorado, Oklahoma and Wyoming, slowed during the second quarter, according to a survey of energy operators by the Federal Reserve Bank of Kansas City.

The Tenth District’s second quarter energy survey was released on Friday. Companies responding said oil prices needed to average $56/bbl and natural gas needed to average $3.65/MMBtu to increase drilling significantly.

“Firms were not quite as optimistic in the second quarter as in the previous two quarters,” said economist Chad Wilkerson, who is based in Oklahoma City. “They on average expect oil and natural gas prices to stay below levels needed for significant expansion for at least the next year, and perhaps longer.”

The survey provides information on current and expected activity among energy firms in the Tenth District, which emcompasses the western third of Missouri, northern half of New Mexico and Kansas, Colorado, Nebraska, Oklahoma and Wyoming.

Companies were asked if they expected the U.S. rig count growth to continue at the current pace, and most of the contacts said they expected a slowdown in growth, citing the recent drop in oil prices as the main factor.

Firms were also asked if financing had become more or less available in recent months. Respondents said financing has tightened at banks and in bond markets, while equity markets were mixed. Private equity was the most readily available source of financing for most contacts.

“The rig count pace of growth is going to slow significantly and probably flatline,” said one respondent. “The industry has a significant number of drilled but uncompleted wells and this inventory is growing every day.”

Said another respondent, “Abundant supply of both oil and gas has the market depressed. We anticipate reduction in activity if the commodity price trend continues in this direction.”

Another believes “the rig count has gone up ahead of the price of oil. I do not believe that the current price and oversupply requires the increase in rig counts that we have seen.”
Still another said, “The current rise in the rig count is a harvesting operation within the shale plays. Very little exploration seems to be occurring at the moment.”

The survey monitors oil and gas-related firms located and/or headquartered in the Tenth District, with results based on total firm activity. Survey results reveal changes in several indicators of energy activity, including drilling, capital spending, and employment. Firms also indicate projections for oil and gas prices.

All results are diffusion indexes, the percentage of firms indicating increases minus the percentage of firms indicating decreases. The survey was taken from June 15-30.

“Most indexes eased but remained above zero,” the survey indicated. “The total revenues and profits indexes were significantly lower, and the drilling and business activity index declined moderately.”
Meanwhile, the employment index was modestly lower, while the access to credit index fell into negative territory for the first time since 3Q2016. In contrast, the indexes for employee hours and for wages and benefits edged higher.

“Most year/year indexes increased further,” said the survey. “The drilling and business activity and capital expenditures indexes increased to their highest readings in the survey’s history. Similarly, the employee hours and wages and benefits indexes jumped to their highest readings since 2014.”
Revenue and employment indexes rose modestly, while the profits index edged higher. Further, the supplier delivery time index turned positive for the first time since early 2015. However, the access to credit index fell back into negative territory.

“Most future expectations indexes dropped but remained in positive territory,” according to the survey. “The future drilling and business activity index fell from 57 to 26, and the future revenues and total profits indexes also declined considerably.”
Also down was the future capital spending index, from 37 to 19. However, the future employment index edged higher and the access to credit index rose from zero to four.

“Price expectations for oil and gas were mixed,” said the survey. “The expected oil prices index inched up to four, meaning most respondents expected oil prices to stay near current levels through the end of 2017.” The natural gas liquids index rose moderately, while the natural gas price index fell to three from six.

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