U.S. drilling activity continued to contract in the fourth quarter, and the sense of gloom among shale drillers in Texas remains palpable.
The latest data from the Dallas Federal Reserve shows that the business activity index - a broad measure that captures conditions in the energy sector in Texas - remained in negative territory, although narrowed slightly from a reading of -7.4 in the third quarter to -4.2 in the fourth. Oil producers are trying to ride out the storm, but that means a steep fall in activity for service firms. The activity reading for the oilfield services segment saw a -22.1 reading. Anything in negative territory signals a contraction.
E&P firms specifically saw modest growth, with the index rising from zero to 5.4 in the fourth quarter. But employment posted a third consecutive negative reading.
The Dallas Fed Energy Survey offers a treasure trove of information. The quarterly release asks a series of questions, to which oil and gas executives respond anonymously, which allows them to speak frankly. The survey reached 170 firms, 111 of which were E&Ps, and other 59 that were oilfield services companies. As such, it produces a kind of unvarnished gauge of sentiment in the Permian, although it should be noted that a handful of oil majors make up an increasingly large portion of activity, something that is not captured in the survey.
For several quarters, the surveys have been downbeat, and the fourth quarter was no different.
The survey found that 41 percent of all firms expect to cut spending in 2020, while 34 percent expect to increase capex. The vast majority of companies are basing their 2020 budgets off of a WTI price between $53 and $56 per barrel. Related: US Urges All Americans To Leave Iraq After Soleimani Assassination
The responses on breakeven prices were also revealing. Only 41 percent of companies said that they could breakeven at $50 per barrel, while another 40 percent said they need prices above $55 per barrel.
In the comments section, there were a handful of themes that respondents kept circling back to: the lack of access to capital markets, financial struggles and consolidation in the services sector.
Below are a selection of comments from various oil executives, which offer a glimpse into the mind of Texas drillers:
Related: These Oil Stocks Are Soaring As Middle East Risk Explodes
One would be hard-pressed to find a positive comment among the dozens submitted. There were a few, but they mostly related to conditions outside of Texas shale. For instance, one executive at an oilfield services firm said "Offshore/International is looking good." There was not much else in there that offered unalloyed optimism.
Flaring was a hot topic in the survey. Some blamed inadequate pipeline infrastructure, but others acknowledged the problem, with more than a few respondents saying that rampant flaring was "wasteful" and that Texas regulators need to step in.
One executive called for the government to ration production in order to balance the market. "The tax base of producing states is declining and being wasted. Venting and flaring of natural gas are ridiculous wastes of resources and a sign of imbalances," the executive said. Yet another worried that the practice of flaring was "energizing environmentalists and encouraging investment funds to go 'green,' which will further constrain oil and gas investments."
The doom and gloom preceded the latest conflagration in the Middle East. As of Friday, WTI was approaching the mid-$60s per barrel, which may lead to an entirely different assessment on market conditions in the next survey.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
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
The fate of the US shale oil industry is virtually sealed. It will be no more in 4-9 years from now.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London