The financial stress sweeping over the U.S. shale sector has led to a sharp contraction in activity.
Oil and gas activity in Texas and parts of New Mexico declined in the third quarter, with the Dallas Fed's business activity index reporting a reading of -7.4, down from -0.6 in the second quarter. A negative reading signals contraction while a positive reading indicates expansion. Falling deeper into negative territory indicates that shale drillers in the Permian further cut drilling activity over the last three months.
A slowdown in drilling is an even larger problem for oilfield services companies, who provide the equipment, manpower and drilling services that oil companies need. A producer may be able to do more with less, but that "less" falls on the service providers, who have been hit hard. The Dallas Fed said that the business activity in the oilfield services sector fell to -21.8 in the third quarter, down from 6.6 in the second.
Another reading demonstrated the pain for oilfield services. The Dallas Fed's "equipment utilization index" plunged to -24 from 3, and the figure for the third quarter was the lowest since the oil market's nadir in 2016.
Problematic for shale drillers is that costs still grew, although at a much slower rate. The "input cost" index stood at 5.6 in the third quarter, an indication of slowing cost increases compared to the 27.1 reading in the second quarter. But the bad news for the industry is that the reading was still in positive territory.
Employment is also weakening. The employment index fell to -8.0 from -2.5, meaning that the Permian likely saw job losses for the second quarter in a row.
When surveyed by the Dallas Fed, 42 percent of the executives from 142 oil and gas firms said that low prices was their most significant constraint on growth. Another 20 percent said the lack of access to capital, followed by 13 percent of which said investor pressure to generate free cash flow. Only a small percentage of respondents said that infrastructure bottlenecks and labor shortages were the top constraint on their growth.
Related: ''Too Much Too Fast'' Gas Glut Crushes Shale Drillers
The more intriguing part of the Dallas Fed survey comes in the comments section, which includes statements submitted anonymously by oil and gas executives. Since they are anonymous, the executives are very candid, offering an unvarnished window into sentiment in the sector.
And the mood is decidedly grim.
The downbeat comments cover a range of topics, including market volatility, reduced access to capital, trade war concerns, operational problems, and complaints about environmentalists. Below is a sampling.
First on lack of capital:
On operational and cost problems:
On the slowdown in drilling and production:
Related: Saudi Aramco Restores Oil Production Capacity To Pre-Attack Levels
And on pressure from environmentalists:
There are few, if any, upbeat comments about the state of play in the shale sector in the survey. To be sure, none of this means that the collapse of the industry is just around the corner. In fact, Rystad Energy put out a commentary downplaying the financial predicament for the industry. "In a nutshell, we do not believe the recent bankruptcies that have beset a number of shale players are indicative of an industry-wide epidemic," Alisa Lukash, a senior analyst on Rystad Energy's North American Shale team, said.
However, it's hard to ignore the deep sense of despair from more than a few shale executives. And as Rystad noted, the top 40 shale companies have $100 billion in debt coming due over the next seven years, which will likely force a reckoning in the sector.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More
Comments
Just a phone call can be started between the presidents!
Both sides should be blamed for this type of policy!