Energy activity across the Midcontinent and the Rockies declined moderately in the final three months of the year and expectations about future activity have turned negative, the Federal Reserve Bank of Kansas City said.
The quarterly energy survey by the Tenth District covers activity trends in Colorado, Kansas, the western third of Missouri, Nebraska, the northern half of New Mexico, Oklahoma and Wyoming.
“The recent drop in oil prices led to some pullback in activity in the fourth quarter, and a number of firms also reduced their 2019 capital spending plans,” the Oklahoma City Branch executive Chad Wilkerson. “Firms report needing $63/bbl on average for oil in order to ‘substantially’ increase drilling,” but they “anticipate oil rising to only the mid-to high-$50s this year.”
The survey, conducted Dec. 17-Jan. 4, revealed changes in drilling, capital spending and employment. All results are diffusion indexes, i.e. the percentage of firms indicating increases minus the percentage of firms indicating decreases.
Comments from some firms surveyed blamed volatile oil prices for uncertainty.
“Commodity prices are driving everything,” said one executive. “With lower oil prices, our cash flow is down significantly. We are hunkering down and weathering the storm.”
Another said, “We’ve hedged the majority of our 2019 production so that keeps us somewhat insulated from price drops.” However, the company has “a number of projects that need to be executed in 2019 or we may lose the right to participate in these projects in future years.”
One firm surveyed said uncertainty is driving 2019 plans, and “the ebb and flow of pricing is a deal killer for many of the operators we work for.”
For at least the next six months, commodity prices “will control spending,” said one respondent. “Continued low prices will dampen new hires and future spending.”
The 4Q2018 drilling and business activity index in the latest survey fell from 45 to minus 13, the first quarterly decline in nearly three years, while indexes for total revenues, profits and access to credit also decreased considerably.
Most employment-related indexes declined but remained above zero, “indicating expansion, though at a slower pace than in 2018.”
Year/year (y/y) indexes also moved lower, but they remained positive.
The drilling and business activity index decreased y/y to 17 from 57, the lowest level in two years. The capital expenditures index also dropped sharply, while total revenues, profits, supplier delivery time, employment, wages/benefits, and access to credit indexes reporting modest declines from 4Q2017.
The employment index from a year ago was unchanged at 27, while expectation indexes turned negative.
“The future drilling and business activity index dropped from 57 to minus 19, the first negative posting since early 2016,” the survey noted. “The future total revenues, capital expenditures and total profits indexes all decreased considerably, moving below zero.”
The future employment, employee hours and access to credit indexes also moved lower, but overall it was positive. “Conversely, the future supplier delivery time index bounced back into positive territory, and the future wages and benefits index expanded modestly.”
In addition, oil price expectations index declined moderately, to 29 from 48, and the natural gas price expectations index also fell, “turning negative for the first time since 2015.”
For the survey firms were asked what commodity prices would be needed to increase drilling substantially. In alternate quarters they are asked what price they need to be profitable.
Firms said they needed an average oil price of $63/bbl, with a range of $50 to $80, down from an average of $69 in 2Q2018, but similar to the $62 average reported in 4Q2017.
“The average natural gas price needed was $3.48/MMBtu, with responses ranging from $1.25 to $5.00,” said researchers.
Firms also were queried about their forecast for oil and gas prices in six months to five years. The average expected West Texas Intermediate price forecast per barrel was $54 in six months, $59 in one year, $61 in two years and $66 in five years.
“However, natural gas price expectations increased,” according to the survey. The average expected Henry Hub price per MMBtu was $30.6 in six months, $3.12 in one year, $3.23 in two years and $3.54 in five years.
Concerning capital spending plans, nearly 36% said they expect to increase outlays this year “either slightly or significantly” from 2018, while more than 40% plan to decrease y/y spend.
“A number of firms reported the recent drop in oil prices resulted in them reducing their capital spending plans for 2019,” said researchers.
Firms also were asked if they were experiencing any labor shortages.
“While 21% of respondents reported they were having difficulties finding workers, this was down from the second quarter of 2018 when 31% of firms were reporting labor shortages. Most firms experiencing labor shortages reported trouble finding field level personnel or certified truck drivers.”