Energy sector activity across Texas, parts of New Mexico and Louisiana grew modestly in the first three months of the year, but activity still was under the average level for the past few years, according to the quarterly Federal Reserve Bank of Dallas Energy Survey.
The regional Federal Reserve Board (Dallas Fed) survey measures conditions facing Eleventh District energy firms in Texas, southern New Mexico and northern Louisiana. Data were collected from March 13–21, with 166 energy firms responding, including 104 exploration and production (E&P) companies and 62 oilfield services (OFS) firms.
“Activity modestly increased in the first quarter as higher oil prices provided support for the oil and gas sector’s outlook,” said Dallas Fed senior economist Michael D. Plante. “Notably, though, the increase in oil prices only partially offset the large decline that occurred in late 2018, and this likely restrained growth in activity levels in the first quarter.”
The business activity index, the survey’s broadest measure of conditions of the energy firms, climbed to 10.8 in 1Q2019, versus 2.3 in 4Q2018. However, the gains still fell below the average levels in the past few years, researchers said.
The OFS sector drove much of the quarterly increase in activity, researchers noted. Positive readings generally indicate expansion, while readings below zero generally indicate contraction.
“Most growth is in the Permian Basin and will continue to be for the near future,” an OFS respondent said. “However, the northeast Eagle Ford Shale remains steady.”
Oil and gas production increased for the 10th consecutive quarter, said E&P executives responding to the survey. However, the oil production index fell from 29.1 in 4Q2018 to 21.1, indicating a slower rate of growth. The natural gas production index also slipped, from 24.8 to 16.7.
Asked what Henry Hub gas price they expected by the end of 2019, most E&P respondents predicted it would average $2.80-3.19/MMBtu. For reference, prices were averaging $2.89 during the survey period.
One E&P respondent was circumspect about expanding gas development.
“We have given up on drilling new conventional wells purely for natural gas, owing to prolonged low prices,” the respondent said. “We will drill ‘gas’ wells if there is an expectation of significant liquids along with the gas.”
Natural gas spot prices in West Texas reached a new nadir last Monday, as prices averaged into negatives region-wide.
“I am hearing that natural gas gathering and pipeline companies are, and will continue, to aggressively move their costs into a gathering/processing fee basis,” another respondent said. “We have already seen this happening with our midstream provider, whereby their fees are now more than 40% of our gross revenues, and more fees are said to be coming, thus depressing our net economics further.
“Posted Henry Hub and West Texas Intermediate (WTI) prices fail to tell the whole story.”
In a series of special questions, respondents also were asked about WTI breakeven prices by basin.
“For the fourth consecutive year, E&P companies were asked what WTI price they need to profitably drill a new well,” senior economist Michael D. Plante said. “The average breakeven price across E&P respondents was $50, down slightly from last year.
“The lowest average breakeven prices were once again found in parts of the Permian Basin, which, despite some recent cutbacks, continues to attract the lion’s share of activity in the United States.”
Average prices necessary to cover operating expenses across regions ranged from $27/bbl to $37/bbl, which was slightly lower than in the year-ago survey. The average across the entire sample was $33/bbl, versus $35 last year.
Meanwhile, OFS firms in the latest survey reported an increase in equipment usage while operating margins narrowed. The index for equipment utilization jumped to 16.4 in 1Q2019. Input costs continued to increase but at a slower pace, with the index declining to 25.0 from 36.7. The index for operating margins ticked down to minus 6.6.
Outlooks have improved overall across the district.
“The company outlook index rebounded into positive territory this quarter, jumping 34 points to 23.3. The uncertainty index fell 24 points to 18.6,” researchers said.
Employment also improved, but at a slower pace. The aggregate employment index dropped to 6.0 from 13.8, while the aggregate employee hours worked index also edged down to 9.7 from 12.1. The index for aggregate wages and benefits came in at 23.5, down from 4Q2018 but still indicative of strong growth in wages and benefits.
More OFS support firms expect to increase employment in 2019 versus E&P firms. Fifty-two percent of OFS firms plan to increase the number of employees, while only 29% of the E&Ps responding plan to higher more people.
Overall, executives said they expect to see few changes in the months ahead, either employment-wise or for WTI prices.
“Forty-nine percent of executives expect the number of employees to remain close to 2018 levels,” the survey noted. “Thirty-nine percent of executives expect the number of employees to increase from 2018 levels, and only 13% expect the number of employees to decrease in 2019.”
WTI price expectations for year-end 2019 were roughly in line with current prices. Respondents on average projected $60.19/bbl, compared to the $59.10 average during the latest survey collection period. Responses were from $43-76/bbl.