Oil and natural gas executives told the Federal Reserve Bank (Fed) of Dallas that business activity increased during the third quarter, but there remains "persistent weakness" in employment and production, the latest energy survey indicated.

The Dallas Fed, representing the Eleventh District that consists of Texas, northern Louisiana and southern New Mexico, conducted the quarterly survey Sept. 14-22. Of the 154 energy firms that responded, 70 were exploration and production companies while 84 were oil and gas support services firms.

The business activity index, the survey's broadest measure of conditions facing Eleventh District energy firms, strengthened to 26.7 from the 13.8 reading in 2Q2016.

"Several indicators remained in contractionary territory, though," said Dallas Fed officials. "Overall, activity levels and outlooks improved, but the survey continues to reflect persistent weakness in oil and gas (O&G) employment and production.

Oil and natural gas production fell for the third consecutive quarter, according to E&P firms, but at a slower rate than in previous quarters. Compared to the second quarter, the oil production index was minus 10.2 versus minus 19.7, and the gas production index was minus 20.6 from minus 24.7.

Among O&G support services firms, the equipment utilization index surged sequentially by 25 points, coming in at 24.1. Prices received for services dropped again, however, with the index coming in at minus 23.4.

Labor market indicators contracted on net during 3Q2016, although most firms surveyed reported no changes in jobs, hours or wages.

"The employment index remained negative, but advanced to minus 6.5, with 13% of firms noting net hiring and 20% noting net layoffs," the Dallas Fed noted. "The employee hours index and the wages and benefits index also rose but remained negative at minus 1.9 and minus 9.7, respectively."

Capital expenditures also were reported to expand in the latest quarter, with the corresponding index coming in at 11.4, a reversal from a reading of minus 9.3 in 2Q2016. The index of expected E&P capital spending in 2017 remained positive at 21.8.

Six-month outlooks improved, with the index at 19.6, similar to 19.0 in 2Q2016. The outlook index for E&Ps came in at 29.5, compared to 11.2 for support service firms.

"Respondents continue to be bullish about oil and natural gas prices one-year ahead," according to the survey. "Almost 62% believe oil prices will be higher than they currently are and 48% believe natural gas prices will increase. Comments from respondents suggest some increased uncertainty, though, with several raising concerns about continued oversupply and recent oil price weakness."

Many E&Ps and service operators commented about activity trends, which will impact pricing going forward. Many specifically commented about natural gas price trends.

"Pricing is still being driven by oversupply," said one E&P. "The only bright spot may be increased exports of liquefied natural gas, but the continuing glut of hydrocarbons worldwide will keep a lid on gas prices."

Another pointed to Apache Corp.'s discovery in the Permian Basin, dubbed Alpine High, which "could bring about a significant increase in production over the next two to four years as the field is developed" (see Shale DailySept. 7).

A Texas-based E&P is encouraged by "increasing pipeline capacity to Mexico for natural gas," while another expects gas production to be lower in 2017. However, one E&P surveyed said the "expectation of a rising natural gas price is encouraging us to do more natural gas projects. We are not seeing a rise in service company costs to date."

As to where the money is being made, one E&P told the Dallas Fed that "not every shale play is the same in cost versus profit. One cannot be general in what price drives drilling and production. It also matters who owns sweet spots. Price sensitivity is different in both regions and shale itself."

Less certain about the future are some of the O&G service firms.

"Banks are putting pressure on us and business partners, and rates on lines of credit are up," according to one firm. "Regulatory issues continue to increase especially in light of earthquakes in Oklahoma. Demand for consulting services is collapsing. Solvency of oil and gas operator partners is now a stressor. Bank lines that used to be available are being withdrawn. Access to capital is horrible. Banks are raising fees on everything. We will probably have to start bringing our own pens to the bank. The price of Oklahoma Sweet Crude collapsed in August checks to $15.25/bbl."

Another service company lamented that while overall activity is up, "our pricing power remains at zero. Other headwinds exist as well, such as a shortage of knowledgeable, experienced employees. In addition, the uptick in activity is too slow to save most companies with leverage from having to restructure to heal their balance sheets."

The Dallas Fed's next report is scheduled to be published on Dec. 29.