US Tenth District 3Q energy activity down ‘moderately’

Oct. 11, 2019
The Federal Reserve Bank of Kansas City’s third-quarter Energy Survey revealed that energy activity in the Tenth District decreased moderately and “expectations for future activity continued to decline.”

The Federal Reserve Bank of Kansas City’s third-quarter Energy Survey revealed that energy activity in the Tenth District decreased moderately and “expectations for future activity continued to decline.”

Firms reported that oil prices needed to be on average $55/bbl for drilling to be profitable, up slightly from 6 months ago. The average natural gas price needed for profitability was $2.91/MMbtu, with responses ranging $1.25-4/MMbtu.

“Firms indicated the level of energy prices was the main constraint on their activity and plans,” said Chad Wilkerson, Oklahoma City branch executive and economist at the Kansas City Fed. “The average profitable price for oil rose slightly in Q3 and was similar to recent and expected oil prices, while natural gas prices remained below profitable levels,” he said.

The Kansas City Fed’s quarterly Tenth District Energy Survey monitors oil and gas-related firms located and headquartered in the Tenth District, with results based on total firm activity. The Tenth District encompasses the western third of Missouri; all of Kansas, Colorado, Nebraska, Oklahoma, and Wyoming; and the northern half of New Mexico.

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.

Indicators

The drilling and business activity index fell from 7 to -23, indicating a marked drop in activity following a slight expansion in the second quarter (OGJ Online, July 21, 2019).

The wages and benefits index remained positive and the employee hours index remained flat, the survey said. “However, the revenues, supplier delivery time, profits, employment, and access to credit indexes all decreased,” it said.

Most year-over-year indexes fell as well. The year-over-year drilling and business activity index dipped further, from -11 to -21, the survey noted. “Indexes for capital expenditures, delivery time, employment, and employee hours dropped into negative territory,” it said, adding, “However, year-over-year indexes for revenues and profits declined at a slower rate, and the access to credit index was flat. While the growth rate of the year-over-year wages and benefits index eased from last quarter, it was still highly positive.”

Expectation indexes, meanwhile, stayed mostly negative. “The future drilling and business activity index was -21, following a reading of -26” in the second quarter, the survey said.

Meanwhile, the price expectations indexes all increased for oil and gas, and the price expectations index for natural gas liquids rose back up into positive territory, the survey said.

Special questions

Firms also were asked what they expected oil and gas prices to be in 6 months, a year, 2 years, and 5 years. The average expected West Texas Intermediate prices were $58/bbl, $60/bbl, $63/bbl, and $69/bbl, respectively.

Expected oil prices were relatively the same as in the second quarter but were still above price expectations from late 2018.

Expectations for gas prices rebounded slightly from last quarter. The average expected Henry Hub gas prices were $2.59/MMbtu, $2.58/MMbtu, $2.81/MMbtu, and $3.20/MMbtu, respectively.

Firms also were asked about constraints limiting near-term growth in activity in the top areas where their firm is active.

About 60% of surveyed firms indicated that current low prices for oil and gas were the main constraints limiting near-term growth. Respondents also reported investor pressures for free cash flow, limited access to capital credit, lack of gas pipeline capacity, and problems finding workers as primary or secondary constraints to near-term growth, the survey said.

Finally, respondents were asked about how trade tensions in the way of tariffs affected their business and expectations for the future. About 70% of firms reported slightly or significantly negative effects from trade tensions on their business in the past year. A similar share of firms anticipated negative effects from trade policy on their business in 2020, the survey said.