Released April 11, 2023 | SUGAR LAND
en
Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Oil and gas companies operating in Texas and Louisiana have a bleak outlook, clouded by inflation, labor issues, softer commodity prices, bank failures, the federal government and environmental social and governance (ESG) advocates. The Dallas Federal Reserve Energy Survey's quarterly study of 147 oil and gas producers and service firms in the 11th Federal District, conducted March 15-23 and released March 29, showed a "stall" in growth compared to the fourth quarter of 2022, and diminished expectations for their companies this year.
The 11th Federal District includes companies active in four unconventional formations in Texas and Louisiana: the Permian Basin, the Barnett Shale, the Eagle Ford Shale and the Haynesville Shale.
The top-line takeaway from the survey was that the business activity index--the survey's broadest measure of conditions facing 11th District energy firms--was 2.1 in the first quarter, down sharply from 30.3 in fourth quarter 2022. "The near-zero reading indicates activity was largely unchanged from the prior quarter, a break from the more than two-year stretch of rising activity," the study found.
The oil production index remained positive but declined to 10.5 in the first quarter from 25.8 in the prior quarter. Similarly, the natural gas production index fell to 7.4 from 29.4. Data for both questions came from 95 executives at exploration and production (E&P) firms.
Aggregated responses from 52 oilfield service firms showed a 29-point fall in the equipment utilization index, to 3.9 in the first quarter from 32.9 in the fourth quarter. The operating margin index declined to 1.9 from 25.9. The index of prices received for services remained positive but declined to 25.0 from 43.6 on a quarter-over-quarter basis.
The company outlook index turned negative in the first quarter, falling 27 points to -14.1, the survey said. The overall outlook uncertainty index increased 23 points to 62.6, pointing to firms' continued heightened uncertainty regarding their outlooks. Sixty-eight percent of firms reported greater uncertainty, according to the Dallas Fed report.
Survey respondents said they expected West Texas Intermediate (WTI), the U.S. benchmark crude oil, to sell for an average of $80 per barrel by year-end 2023, with responses ranging from $50 to $160 per barrel. Survey participants predicted natural gas prices would be $3.43 per million British thermal units (MMBtu) at Henry Hub, Louisiana, at year-end.
For reference, WTI spot prices averaged $68.51 per barrel during the survey collection period, and Henry Hub spot prices averaged $2.23 per MMBtu, the report said. Right now, WTI sells for about $81 per barrel while natural gas at Henry Hub fetches about $2.15 per million MMBtu, down sharply from late-November, when gas prices peaked at about $7.70 per MMBtu.
Click on the images at right to see survey respondents' expectations for WTI crude oil prices and natural gas prices at Henry Hub, Louisiana, at yearend 2023.
Executives from 80 E&P firms said they needed WTI to average $62 per barrel to profitably drill a new well in the top two areas where they operated in the 11th Federal District. The range was $56 per barrel in the Eagle Ford to $58 in the Midland Basin of the Permian and $61 in the Delaware Basin of the Permian.
Click on the image at right to see the average price of WTI to profitably drill a new well in the 11th Federal District.
Executives from 136 companies said the two most impactful factors affecting their profitability were inflation and the health of the overall economy. Other issues affecting profitability were access to and cost of capital, government regulation and supply-chain issues.
Click on the image at right to see responses from oil producers and oilfield service firms as to the factors affecting their profitability.
As is often the case, the verbatim responses from respondents provided additional details beyond the anonymized, aggregated responses for companies operating in Texas and Louisiana.
Anonymous comments from E&P firms included:
There does seem to be a bit of good news in the survey: The supplier delivery time index for all firms moved into negative territory, declining to -14.0 in the first quarter from 14.4 in the fourth. This is the first negative reading since fourth quarter 2020 and signals that it takes less time to receive materials and equipment relative to the prior quarter. Among oilfield services firms, the measure of lag time in delivery of services declined to zero from 20.0, suggesting delivery times for these firms are no longer increasing.
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).
The 11th Federal District includes companies active in four unconventional formations in Texas and Louisiana: the Permian Basin, the Barnett Shale, the Eagle Ford Shale and the Haynesville Shale.
The top-line takeaway from the survey was that the business activity index--the survey's broadest measure of conditions facing 11th District energy firms--was 2.1 in the first quarter, down sharply from 30.3 in fourth quarter 2022. "The near-zero reading indicates activity was largely unchanged from the prior quarter, a break from the more than two-year stretch of rising activity," the study found.
The oil production index remained positive but declined to 10.5 in the first quarter from 25.8 in the prior quarter. Similarly, the natural gas production index fell to 7.4 from 29.4. Data for both questions came from 95 executives at exploration and production (E&P) firms.
Aggregated responses from 52 oilfield service firms showed a 29-point fall in the equipment utilization index, to 3.9 in the first quarter from 32.9 in the fourth quarter. The operating margin index declined to 1.9 from 25.9. The index of prices received for services remained positive but declined to 25.0 from 43.6 on a quarter-over-quarter basis.
The company outlook index turned negative in the first quarter, falling 27 points to -14.1, the survey said. The overall outlook uncertainty index increased 23 points to 62.6, pointing to firms' continued heightened uncertainty regarding their outlooks. Sixty-eight percent of firms reported greater uncertainty, according to the Dallas Fed report.
Survey respondents said they expected West Texas Intermediate (WTI), the U.S. benchmark crude oil, to sell for an average of $80 per barrel by year-end 2023, with responses ranging from $50 to $160 per barrel. Survey participants predicted natural gas prices would be $3.43 per million British thermal units (MMBtu) at Henry Hub, Louisiana, at year-end.
For reference, WTI spot prices averaged $68.51 per barrel during the survey collection period, and Henry Hub spot prices averaged $2.23 per MMBtu, the report said. Right now, WTI sells for about $81 per barrel while natural gas at Henry Hub fetches about $2.15 per million MMBtu, down sharply from late-November, when gas prices peaked at about $7.70 per MMBtu.
Executives from 80 E&P firms said they needed WTI to average $62 per barrel to profitably drill a new well in the top two areas where they operated in the 11th Federal District. The range was $56 per barrel in the Eagle Ford to $58 in the Midland Basin of the Permian and $61 in the Delaware Basin of the Permian.
Click on the image at right to see the average price of WTI to profitably drill a new well in the 11th Federal District.Executives from 136 companies said the two most impactful factors affecting their profitability were inflation and the health of the overall economy. Other issues affecting profitability were access to and cost of capital, government regulation and supply-chain issues.
Click on the image at right to see responses from oil producers and oilfield service firms as to the factors affecting their profitability.As is often the case, the verbatim responses from respondents provided additional details beyond the anonymized, aggregated responses for companies operating in Texas and Louisiana.
Anonymous comments from E&P firms included:
- "The dramatic increase in 2022 inflation has severely negatively impacted project economics."
- "Uncertainty of the depth and duration of a bank crisis is causing us to be nervous about capital spending plans in 2023."
- "Chickens seem to be coming home to roost: it turns out loaning out trillions of dollars with zero interest rates (or in the case of Europe, paying folks to borrow money) was not our finest hour."
- "A growing concern in West Texas is that the reliable generated supply of electricity is not growing, while consumption of power has grown roughly 50 percent over the past 24 months. This could lead to a future moderation of basin-wide activity if power supply cannot meet future demand."
- "We expect oil and gas production to decline in 2023 due to higher drilling and completion costs. The significant factor is the lack of qualified employees. The second [factor] is the negative impact of environmental, social and governance initiatives."
- "Government roadblocks are our biggest and most insidious obstacles to overcome. Both the current administration and the governor of California are dreaming up new ways to add costs, delay permits and prevent drilling and leasing."
- "The persistent labor shortage in the Permian Basin shows no signs of easing. It is very difficult to fill mechanical and electrical positions with local residents. Our company is relying on shift workers from out of state to fill these spots due to the shortage of local qualified workers."
- "We're at a crossroads as activity levels are not matching service pricing. There seems to be a disparity at the operator level where their reluctance to allow pricing increases doesn't match with their own internal financial success. What has long been a healthy operator-to-service-provider relationship is beginning to show signs of deterioration."
- "Government at all levels is out of control. Regulation is killing the nation. Environmental issues are overblown to the point of the absurd."
- "Bank failures in March 2023 and concerns over the overall financial system have added to concerns over possible recession timing and severity and the possible short-term impact on WTI. Gas-directed activity, especially in the Haynesville, is being negatively impacted by takeaway limitations and significant declines in Henry Hub natural gas prices since third quarter 2022. Credit was already tight for oilfield services companies; I expect availability of credit will tighten even more, making business conditions tougher for companies without the necessary operating scale."
There does seem to be a bit of good news in the survey: The supplier delivery time index for all firms moved into negative territory, declining to -14.0 in the first quarter from 14.4 in the fourth. This is the first negative reading since fourth quarter 2020 and signals that it takes less time to receive materials and equipment relative to the prior quarter. Among oilfield services firms, the measure of lag time in delivery of services declined to zero from 20.0, suggesting delivery times for these firms are no longer increasing.
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).
