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Midcontinent NatGas, Oil Operators Buoyed by (Slightly) More Activity During 3Q, Says Fed Survey

For the first time in two years, oil and natural gas operators reported a "modest increase" during the third quarter, according to a survey by the Federal Reserve Bank of Kansas City, which serves Colorado, Kansas, the western third of Missouri, Nebraska, the northern half of New Mexico, Oklahoma and Wyoming.

The survey, conducted each quarter, provides information on current and expected activity among oil- and natural gas-related firms located and/or headquartered in the Tenth District. Results are based on total firm activity.

"For the first time in two years, firms reported rising business activity and revenues last quarter," said Fed economist Chad Wilkerson, vice president of the Oklahoma City Branch. "On average, though, firms need energy prices to be slightly higher than recent prices in order to be profitable."

Firms surveyed between Sept. 1 and Sept. 30 said on average, Henry Hub prices need to be $3.24/MMBtu for operations to be profitable. Prices ranged from $2.00 to $5.00.

"Firms were also asked what they expected the Henry Hub natural gas price to be by year-end 2016 and 2017 and why. The year-end 2016 expected price was $2.97/MMBtu, up from last survey's average of $2.84/MMBtu.The average year-end 2017 expected price was $3.33/MMBtu, slightly higher than the previous survey average of $3.18/MMBtu. The majority of respondents said lower supply, increasing demand, and winter weather were factors that led to their slightly higher price projections."

"The recent increase in natural gas prices has spurred drilling in southeast Oklahoma," one respondent said.

For crude oil prices (West Texas Intermediate), companies surveyed said they needed to average $53/bbl, slightly higher than the $51/bbl average reported in 1Q2016. Responses ranged from $40/bbl to $75. On average, WTI prices are expected to average $49/bbl at the end of 2016 and $57 by the end of 2017, respondents said. Most firms expected oil inventories to balance during the second and third quarters of 2017.

Many respondents said if prices rise, so will activity.

"We expect a significant increase in 2017 capital spending as long as we have access to debt and equity markets at rates justifying accretive returns," said one respondent. Said another, "We need to replace declining production and also expect some price improvement." Drilling and completion spending is expected to increase "in anticipation of prices rising in late 2017," said one. While another said, “We may increase capital spending to drill if oil prices rise above $55 for a sustained period."

The survey results reveal changes in several indicators of energy activity, including drilling, capital spending and employment. Operators that respond to the survey also indicate projections for oil and gas prices. All results are diffusion indexes, which are the percentage of firms indicating increases minus the percentage of firms indicating decreases.

Price expectations for oil and gas eased somewhat from the previous quarter but remained in positive territory. The expected oil prices index edged lower to 49 from 58, while the expected natural gas prices index fell to 44 from 61. The natural gas liquids price index fell moderately to 31 from 59.

From 2Q2016, the drilling and business activity index increased to 26 from 0, and the total revenues index jumped into positive territory to 5 from minus 31. Employment and employee hours indexes also climbed, but they remain below zero. The total profits, access to credit, and wages and benefits indexes reported a modest increase, but they remained negative.

Meanwhile, the year/year indexes continued to rise, although they still were negative. The drilling and business activity index from a year ago jumped from minus 65 to minus 21, and the revenues, total profits, and capital spending indexes improved slightly. The employment, employee hours and access to credit indexes also saw a slight uptick, while the wages and benefits, as well as supplier delivery time indexes, edged higher.

"The future expectations indexes moderated somewhat but overall, remained positive," the survey reported. The future drilling and business activity index eased to 21 from 39, while the future revenues index declined to 6 from 26. The future total profits index also fell modestly. The future capital spending index inched lower to 9 from 17, while the future employment and employee hours indexes fell back into negative territory. Access to credit declined to minus 6.

In a quarterly survey by the Dallas-based Eleventh District, oil and gas executives also reported improved business activity but "persistent weakness" in employment and production (see Shale Daily, Sept. 28). The Eleventh District consists of Texas, northern Louisiana and southern New Mexico.

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