A continued decline in energy was found in a Federal Reserve Bank of Kansas City survey in Oklahoma and other states that make up the Tenth District.
At the same time, Chad Wilkerson, senior vice president at the bank said the same survey indicated a rebound in energy activity is expected in the coming months. The same survey found those in the oil and gas industry believe government regulation is their greatest risk in the coming year.
“District drilling and business activity posted a decline for the sixth consecutive quarter in Q2, but is expected to rebound in coming months along with natural gas prices,” said Wilkerson. “Employment was flat this quarter, and capital expenditures continued to decline from this time last year.”
Firms reported that oil prices needed to be on average $64 per barrel for drilling to be profitable, and $91 per barrel for a substantial increase in drilling to occur. Natural gas prices needed to be $3.47 per million Btu for drilling to be profitable on average, and $4.68 per million Btu for drilling to increase substantially.
The survey showed drilling activity declined at a steady pace from this time last year, something also reflected in the weekly Baker Hughes rig reports. The same survey showed a gain in employment on a year-over-year basis while revenues and profits fell. Capital expenditures continued to fall moderately, but access to credit increased further from this time last year.
Despite the declines, firms expect activity to rebound in the next six months along with natural gas prices, as the drilling activity, revenues, profits, and employment expectations indexes all posted improved readings.
Firms were asked how they would respond if oil prices fell 20% over the next six months and 21% of firms reported they would reduce headcount more than currently anticipated by selectively laying off workers, while 39% each reported they would reduce headcount more than anticipated by not replacing workers who leave or by reducing the number of open positions. Another 8% claimed they would reduce their employees’ hours more than anticipated, 43% said they would maintain headcount, and 4% would increase headcount by at least as much as they currently anticipate.
Contacts were also asked what the two greatest risks for their business over the next year are and 43% of firms ranked increased regulation as their greatest risk, while another 29% ranked slowing economic activity as their greatest risk. Additionally, 25% ranked OPEC production decisions as the top risk and 4% said supply chain issues. 21% of firms said increased regulation is their second-greatest risk, while 47% ranked slowing economic activity second, 11% ranked financial capital availability second, and 7% each ranked OPEC production decisions or labor constraints as second.
Selected Energy Comments
“Projects in these areas are too high priced with any return based on receiving federal credits. More profitable to drill or purchase existing properties.”
“Geothermal drilling is promising; we are doing some now.”
“Producer return of capital to investors will restrain production and global demand will rise.”
“LNG export capacity will increase as new plants are commissioned. This should stabilize the market price swings to a degree.”
“Appalachia and the Permian can fully supply the USA needs for natural gas.”
“We are maintaining cadence and offsetting inflationary pressures with improved efficiency and innovation.”
“Gas prices in the Rockies are so low, we are shutting in production.”
“We are now fully staffed and can get all workover rigs running. This allows us to attack the easier and smaller projects that bear low hanging fruit.”
“The MidCon is less distressed than any time in the past six years. We are seeing more competition move here from the Permian.”
“Natural gas is a small part of our business, but even so we are going to reduce production due to historically low prices. Oil prices seem to have a bottom and reside at a comfortable level.”
