Growth Slows for Oil and Gas Sector

Oil and gas activity slows sharply in the fourth quarter due to the decline in prices.

Growth in the oil and gas sector slowed significantly in the fourth quarter due to the sharp decline in oil prices, the Dallas Federal Reserve Bank said in its periodic Energy Survey.

The business activity index — the survey’s broadest measure of conditions facing Fed Eleventh District energy companies — “remained positive, but barely so, plunging from 43.3 in the third quarter to 2.3 in the fourth,” the survey findings said. Readings near zero indicate activity was largely unchanged from the prior quarter. Readings above zero indicate expansion; below zero, contraction. It was a break from the 10-quarter-long trend of rising activity, according to the survey. “The decrease in the fourth-quarter index was driven by both exploration and production and oilfield services firms,” the survey said.

Oil and gas production increased for the ninth consecutive quarter, executives at exploration and production firms reported in the survey. The oil production index moved down to 29.1 in the fourth quarter from 34.8 in the third. Additionally, the natural gas production index fell to 24.8 from 35.5.

The index for equipment used by oilfield services firms “dropped sharply in the fourth quarter,” the survey said. That index was at 1.6, down 43 points from the third quarter. “This suggests utilization rates remained relatively unchanged from the third quarter,” the survey said.

“Input costs on the services side increased, but at a slower pace as the index declined from 46.6 to 36.7. Meanwhile, the index of prices received for oilfield services fell sharply from 23.2 to zero, suggesting prices were unchanged on a quarter-over-quarter basis. Looking at the special question responses, operating margins declined for oilfield services firms in the fourth quarter relative to the third.”

Labor market indexes “pointed to moderation in both employment and work hours growth in the fourth quarter, particularly for oilfield services, while wage growth accelerated,” the survey said. The employment index for services fell sharply, to 17.5 from 31.7. The hours worked index for services also dropped, to 19.4 from 41. “The declines were smaller for E&P firms as the employment index moved down from 17.4 to 11.5, and the hours worked index fell from 12.8 to 7.7. The aggregate wages and benefits index advanced from 23.5 to 32.9.”

The company outlook index put up its first negative reading since the first quarter of 2016, plunging 57 points to -10.2 in the fourth quarter, the survey said. “This drop was particularly prominent among oilfield services firms, where the company outlook slumped 64 points to -17.2. The uncertainty index jumped 34 points to 42.4, pointing to heightened uncertainty regarding firms’ outlooks. Almost 58 percent of firms reported greater uncertainty.”

When asked for their expectations of where West Texas Intermediate oil prices would be by the end of 2019, the average response was $59.97 per barrel. That’s close to $11 higher than the average spot price during the survey period, $49.22 per barrel. Responses ranged from $45 to $80.

On average, respondents expect Henry Hub natural gas prices to be $3.34 per million British thermal units at the end of 2019. Responses ranged from $2 to $5.50. For reference, Henry Hub spot prices averaged $3.97 per MMBtu during the survey collection period.
Data were collected Dec. 12–20, and 167 energy firms responded to the survey. Of the respondents, 104 were exploration and production firms, and 63 were oilfield services firms.