Energy sector activity across Texas, parts of New Mexico and Louisiana dipped again in the final three months of the year, driven mostly by a downturn in support services, according to a quarterly survey by the Federal Reserve Bank of Dallas.
The Dallas Fed, as it is known, conducts a survey every three months to gauge activity by exploration and production (E&P) and oilfield services (OFS) companies within the Eleventh District, which includes Texas, southern New Mexico and northern Louisiana. Many of the operators have national and global operations.
“Survey responses pointed to a modest decline in overall activity levels in the oil and gas sector,” said the Dallas Fed’s Michael Plante, senior research economist. “This was largely driven by oilfield support service firms, which reported falling equipment utilization, operating margins and employment since the last quarter.”
The broadest measure of conditions facing Eleventh District energy firms, the business activity index, remained in negative territory in 4Q2019. Still, the index eased from minus 7.4 in the third quarter to minus 4.2 in the final three months, suggesting that the pace of contraction overall has declined. Negative survey readings indicate contraction; those above zero suggest expansion.
Activity for OFS firms continued to slump between October and December, with the business activity index at minus 22.1. Meanwhile, the business activity index for E&Ps indicated modest growth, rising to 5.4 from zero.
Executives were queried about capital expenditure (capex) plans for 2020. They also were asked what oil price was needed to cover capex in 2020, as well as questions about natural gas flaring in the Permian Basin.
“Increased flaring of natural gas in the Permian Basin has received growing attention lately, and this quarter’s survey asked firms about what’s behind the increase,” Plante said. “The most frequently chosen response was a lack of pipelines to move growing volumes of natural gas from the area to commercial hubs.”
Regarding the 2020 capex plans, Plante said “few firms expect to significantly increase expenditures, reflecting a mediocre price environment and greater attention to capital discipline.”
When asked about what West Texas Intermediate oil price firms are using for capital planning, $55/bbl was cited most frequently.
E&P executives reported that oil and gas production continues to increase. The oil production index increased to 24.7 from 15.7 in the third quarter. The natural gas production index also advanced, to 15.6 from 6.5, suggesting a slightly faster pace of growth this quarter.
Meanwhile, conditions worsened for OFS firms.
The equipment utilization index for the OFS sector was mostly unchanged from the third quarter at minus 25.8. The index for input costs fell to 1.7 from 5.6, while the index of prices received for services slid to minus 24.5 from minus 18.5. Given flat input prices and lower selling prices, the operating margins index plummeted to minus 39.7 from minus 24.0.
Employment declined further in the final quarter too. The aggregate employment index dipped to minus 10.0 from minus 8.0. In addition, the aggregate employee hours worked index fell to minus 7.7 from minus 2.4, signaling a further drop in employee hours. The index for aggregate wages and benefits edged up to 8.2 from 6.2.
The company outlooks were mixed. The E&P company outlook index increased to 15.4 from 7.6, while the OFS outlook index decreased to minus 22.4 from minus 14.8.
“While uncertainty remains elevated, slightly fewer firms noted rising uncertainty this quarter than last,” researchers said. The aggregate index fell by 12 points to 26.
Data were collected Dec. 11-19, and 170 energy firms responded. Of the respondents, 111 were E&Ps and 59 were OFS firms.