US Tenth District energy activity declined amid negative expectations

Jan. 11, 2019
The Federal Reserve Bank of Kansas City’s fourth-quarter Energy Survey revealed that Tenth District energy activity declined moderately, and expectations for future activity also turned negative.

The Federal Reserve Bank of Kansas City’s fourth-quarter Energy Survey revealed that Tenth District energy activity declined moderately, and expectations for future activity also turned negative.

“The recent drop in oil prices led to some pullback in activity in fourth quarter, and a number of firms also reduced their 2019 capital spending plans,” said Chad Wilkerson, Oklahoma City Branch executive and economist. “Firms report needing $63/bbl on average for oil in order to ‘substantially’ increase drilling, and anticipate oil rising to only the mid-to high-$50s this year.”

The survey monitors oil and natural gas-related firms located 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 results are diffusion indexes—the percentage of firms indicating increases minus the percentage of firms indicating decreases.

Tenth District energy activity declined in fourth-quarter 2018, as indicated by firms contacted between Dec. 17 and Jan. 4. The drilling and business activity index fell from 45 to -13, the first quarterly decline in nearly 3 years. Indexes for total revenues, profits, and access to credit decreased considerably. Meanwhile, most employment-related indexes declined but remained above zero, indicating expansion, though at a slower pace than in 2018.

Year-over-year indexes also moved lower but remained positive. The year-over-year drilling and business activity index decreased from 57 to 17—the lowest level in 2 years. The capital expenditures index also dropped. Year-over-year total revenues, profits, supplier delivery time, employment, wages and benefits, and access to credit indexes saw modest declines. The year-over-year employment index was unchanged at 27.

Expectation indexes turned negative. The future drilling and business activity index dropped from 57 to -19, the first negative posting since early 2016. 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 declined, but remained positive overall. Conversely, the future supplier delivery time index bounced back into positive territory, and the future wages and benefits index expanded modestly.

The oil price expectations index declined moderately, from 48 to 29, and the gas price expectations index also fell, turning negative for the first time since 2015.

Special questions

This quarter firms were asked what oil and gas prices were needed for an increase in drilling to occur (in alternate quarters they are asked what price they need to be profitable). The average oil price needed was $63/bbl, with a range of $50-80/bbl. This average was down from $69/bbl in second-quarter 2018, but similar to the $62/bbl average reported in fourth-quarter 2017. The average gas price needed was $3.48/MMbtu, with responses ranging $1.25-5/MMbtu.

Firms were again asked what they expected oil and gas prices to be in 6 months, 1 year, 2 years, and 5 years. Expected oil prices declined since the last quarter but were higher than recent spot prices. The average expected West Texas Intermediate prices were $54/bbl, $59/bbl, $61/bbl, and $66/bbl, respectively. However, gas price expectations increased. The average expected Henry Hub gas prices were $3.06/MMbtu, $3.12/MMbtu, $3.23/MMbtu, and $3.54/MMbtu, respectively.

Firms also were asked about their capital spending plans. Nearly 36% of energy contacts indicated they expect capital spending in 2019 to increase either slightly or markedly over the next year, while more than 40% of firms expect capital expenditures to decrease from their 2018 levels. Several firms reported the recent drop in oil prices resulted in them reducing their capital spending plans for 2019.

Finally, firms were asked if they were experiencing any labor shortages. While 21% of respondents reported they were having difficulties finding workers, this was down from second-quarter 2018 when 31% of firms were reporting labor shortages. Most firms experiencing labor shortages reported trouble finding field level personnel or certified truck drivers.