Oil and gas companies in the Midcontinent and Rockies reported continued activity declines during the fourth quarter, while expectations for future activity continued to fall as well, according to the Federal Reserve Bank of Kansas City’s quarterly energy survey.
The Tenth District survey provides information on current and expected activity in Colorado, Kansas, the western third of Missouri, Nebraska, the northern half of New Mexico, Oklahoma and Wyoming.
“District energy activity continued to decrease through 4Q2019 and most firms do not expect drilling activity to pick up in the near-term,” said Oklahoma City Branch Executive Chad Wilkerson. “However, slightly more firms expect their cash flow to be higher next year than expect it to be lower.”
The survey results are diffusion indexes, meaning the percentage of firms indicating increases minus the percentage of firms indicating decreases.
“The drilling and business activity index fell from minus 23 to minus 48” from the same quarter in 2018, “indicating a continued, significant decrease in activity following a slight expansion earlier in 2019,” Wilkerson said.
The drilling and business activity index showed a similar decline, from minus 21 to minus 50.
“The future capital expenditures, delivery time, profits, employment, employee hours and access to credit indexes decreased again in Q4,” Wilkerson said.
Asked what oil and natural gas prices would be needed for a substantial increase in drilling to occur, firms responded with an average oil price of $65/bbl, and an average natural gas price of $3.66/MMBtu.
“Credit is drying up for large exploration companies,” one respondent said. “Less capital is on hand for exploration.”
Asked what they expected West Texas Intermediate crude prices to be in six months, one year, two years, and five years, firms responded with an average of $60, $62, $65 and $71/bbl, respectively. As for Henry Hub natural gas prices, respondents said $2.38, $2.49, $2.69 and $3.09/MMBtu.
“We have an abundant supply of natural gas,” one respondent said, citing a glut of gas associated with unconventional oil production. In some instances companies have had to pay people to take the gas (negative price). We need more infrastructure (pipelines).”
One respondent said that, “The Midcontinent infrastructure is fading rapidly,” adding, “No people, no services, no investment, no oil.”
Amid volatile commodity prices, Midcontinent operators such as Continental Resources Inc. and Marathon Oil Corp. have increasingly been allocating capital to oil-rich areas of the Bakken Shale in North Dakota and the Anadarko Basin of Oklahoma.
Nearly 37% of surveyed firms said they expect higher cash flow in 2020 than in 2019, 33% said they expect less, and 30% forecasted no material change.
As for when they expect the U.S. rig count to begin rising again, more than 20% said 2Q2020, 25% said 3Q2020, and more than 33% said they do not think rig counts will rise in 2020.
“An uptick in pricing will lead to a small pickup [in rig count],” a respondent said. “There are a few on the sidelines who’ve waited for price stability.”
Another survey taker said that, “Current rig efficiency should keep a large recovery in rig count from increasing anytime soon.”
The Tenth District survey results track closely with the 4Q2019 Dallas Fed Energy Survey, which also showed an activity slowdown during the final three months of 2019.