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Rockies, Midcontinent Oil, Gas Activity Climbs During 4Q

Oil and natural gas activity across the Midcontinent and into the Rockies slightly accelerated in the final three months of the year as commodity prices and optimism strengthened, the Federal Reserve Bank of Kansas City said Friday.

The Tenth District’s quarterly energy survey contacted firms between Dec. 15 and Jan. 5 to gauge the outlook for activity. The district encompasses Colorado, Kansas, Nebraska, Oklahoma and Wyoming, as well as the northern half of New Mexico and western third of Missouri.

“Regional energy firms reported somewhat stronger growth last quarter amid stronger oil prices and were optimistic about the future,” said Oklahoma City Branch executive Chad Wilkerson.

Activity in the Bank’s Eleventh District, which encompasses Texas, northern Louisiana and southeastern New Mexico also gained momentum during the fourth quarter.

The average oil price firms considered necessary to “substantially” increase drilling was $62/bbl, with the natural gas price needed estimated at $3.59/MMBtu.

The Kansas City, MO-based banking branch 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 of the results are diffusion indexes, which provide the percentage of firms indicating increases minus the percentage of firms indicating decreases.

Capital expenditures (capex) overall this year is expected to be higher than in 2017, with exploration and development seeing the strongest growth, respondents said.

Most quarterly indexes increased in the fourth quarter.

The drilling and business activity index rising to 13 from 7. The revenues and employee hours indexes also increased considerably, while the wages/benefits and profits indexes grew moderately. The supplier delivery time index rose to minus 4.

The employment index edged higher, but the access to credit index fell to zero.

Most year/year indexes also increased, with the revenues, profits and employment indexes “considerably higher,” said economists. The drilling and business activity posted a moderate increase from 2016, while the supplier delivery time index rose but remained negative.

Meanwhile, the capex index year/year remained flat. On the other hand, the wages and benefits index fell slightly, and the access to credit index slipped from 20 to 7.

“Expectations continued to improve,” respondents said. “The future wages and benefits index was significantly higher, and the profits and employee hours indexes also grew moderately.”
Future capex, access to credit and drilling/business activity indexes rose slightly. The future employment index also inched up, while the revenues and supplier delivery time indexes were unchanged.

“Price expectations for oil and gas remained solid,” said economists. Respondents were asked about oil and gas price expectations for the next six months, one year, two years and five years. Oil prices are expected to continue to increase modestly, while the forecast for natural gas prices was marginally lower.

For oil, respondents expect West Texas Intermediate prices to average $58/bbl in six months, $60 in one year, $62 in two years and $70 within five years.

The average expected Henry Hub gas price expectation was $2.88/MMBtu in six months, $3.10 in one year, $3.30 in two years and $3.65 in five years.

Firms on average see spending higher across all categories, led by capex for exploration/development and followed by research/development.

“Maintenance capital spending was expected to increase modestly, while labor/wages/benefits, administrative, and other categories were expected to grow slightly,” the survey noted. Additionally, firms were asked what risks they face from renewable energy and electric vehicles (EV) within the next 10-20 years.

“Almost half of firms said they faced low risks, while slightly more than a third said medium risks,” said the survey. “Several respondents mentioned that the rate of adoption of EVs is limited by declining tax credits, support infrastructure and battery range. Only a few firms said they faced high risk.”

Asked how lifting the U.S. oil export ban may be impacting their firms, more than half have seen positive effects. And when asked how the newly enacted federal tax legislation was expected to impact them, nearly 75% see a “slightly positive impact. The immediate impact was the lower
corporate tax rate, which some said would help expand drilling.”

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