US Eleventh District oil and gas activity down sharply in Q1 2020
Oil and gas sector activity declined significantly in this year’s first quarter, said oil and gas executives in the US Federal Reserve's Dallas-based Eleventh District responding to a quarterly energy survey.
The Dallas Fed conducts the survey quarterly to obtain a timely assessment of energy activity among oil and gas firms located or headquartered in the Eleventh District encompassing Texas, southern New Mexico, and northern Louisiana. Data of the recent report were collected Mar. 11–19, and 161 energy firms responded. Of the respondents, 107 were exploration and production (E&P) firms and 54 were oilfield services firms.
West Texas Intermediate crude oil prices have fallen from $60/bbl during the fourth-quarter survey period to $28/bbl during the first-quarter survey period. The price per bbl further declined to $24/bbl during the week ended Mar. 20.
Survey results
The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—plunged from -4.2 in the fourth quarter to -50.9 in the first, the lowest reading in the survey’s 4-year history and indicative of significant contraction. E&P and oilfield services firms both saw large decreases.
The oil production index plunged 51 points to -26.4, according to E&P executives. It posted its first negative reading since third-quarter 2016. The natural gas production index also turned negative, from 15.6 to -21.2. Both indexes suggest that oil and gas production fell relative to the previous quarter.
The index for capital expenditures dropped from 9.1 in the fourth quarter to -49.0 in the first quarter, indicating a reduction in capital spending among E&P firms. The index for the expected level of capital expenditures next year plummeted from 0.9 in the fourth quarter to -61.9 in the first quarter, indicating E&P firms also slashed expectations for capital spending next year.
All indexes pointed to worsening conditions among oilfield services firms. The equipment utilization index fell from -25.8 in the fourth quarter to -47.2 in the first quarter, suggesting an accelerating contraction in equipment utilization. Firms found some relief as input costs fell in the first quarter from 1.7 to -11.3. However, the index of prices received for services slid further into negative territory, from -24.5 to -37.7. The operating margins index also became more negative, from -39.7 to -50.0.
The aggregate employment index posted a fourth consecutive negative reading, declining from -10.0 to -24.0, a signal that jobs contracted further. Additionally, the aggregate employee hours worked index fell from -7.7 to -32.1. The index for aggregate wages and benefits went negative for the first time since third-quarter 2016 at -8.2, down from 8.2.
The company outlook index plunged 77 points to -75.0 in the first quarter, indicating an extremely pessimistic outlook. The uncertainty index jumped 38 points to 63.8, pointing to heightened uncertainty regarding firms’ outlooks. Seventy-nine percent of firms reported greater uncertainty.
On average, respondents expect a WTI oil price of $40.50/bbl by year-end 2020, with responses ranging from $20/bbl to $65/bbl. Survey participants expect Henry Hub natural gas prices to be $2.03/MMbtu by year-end. For reference, WTI spot prices averaged $28.27/bbl during the survey collection period, and Henry Hub spot prices averaged $1.84/MMbtu.
Special questions
Q: In the top two areas in which your firm is active: What WTI oil price does your firm need to cover operating expenses for existing wells?
A: Average prices necessary to cover operating expenses across regions range from $23/bbl to $36/bbl. Thirty-five percent of responses were at or below the average WTI spot price for the week ending Mar. 20 ($24/bbl), signaling many firms can’t cover operating expenses at current prices. Overall, operating expenses are lower than those observed in last year’s first-quarter survey, with the average across the entire sample approximately $30/bbl, versus $33/bbl last year.
Q: In the top two areas in which your firm is active: What WTI oil price does your firm need to profitably drill a new well?
A: For the entire sample, firms need $49/bbl on average to profitably drill, slightly lower than the $50/bbl price when the same question was asked last year. Across regions, the average breakeven prices to profitably drill a new well range from $46/bbl to $52/bbl. Breakeven prices in the Permian Basin average $49/bbl, $1 lower than last year. For the past four years, Permian (Midland) has been the lowest-cost region. With the recent oil price decline, almost no firms that responded can profitably drill a new well at the average WTI spot price for the week ending Mar. 20 ($24/bbl).
Q: If the WTI price of oil were to fall to $40/bbl and stay there, how long would you expect your firm to remain solvent?
A: Forty-seven percent of executives expect their firm to remain solvent for 4 or more years if oil prices are $40/bbl. Fifteen percent expect less than 1 year and 24% expect 1-2 years. The remaining 13% of executives expect to remain solvent for 2-4 years.