Growth growing on higher oil prices

The Federal Reserve Bank of Dallas released its quarterly Energy Survey today, giving the results of the bank’s survey of energy executives.

Overall activity in the oil and gas sector is growing rapidly, according to executives. The Fed’s business activity index, which represents changes in overall conditions and activity, was 38.1 in Q4 2017. This is positive, meaning activity grew in Q4, and was higher than the 27.3 reported in Q3, meaning activity growth accelerated. This is the seventh quarter in a row that has seen a positive business activity index, indicating the industry has been recovering since Q2 2016.

E&P and oilfield service firms are taking advantage of the recent increase in oil prices, but service companies are growing operations more rapidly. The Fed’s E&P-specific activity index is 36.4 this quarter, compared to 40.3 for service companies. Things are certainly looking up for companies, as only about 5% of executives reported a worsened company outlook over this quarter.

All of the Fed’s more precise indices were positive also, as activity is increasing throughout. Current and expected CapEx increased sharply, with more than half of E&P executives reporting increases in the quarter.

Dallas Fed Survey Finds Optimistic Energy Executives

Oil price forecasts near current levels

The Fed also surveys executives on expected oil and gas prices, looking at year-end 2018. Most executives predict oil will remain around current levels in 2018, with the average responded predicting just under $59/bbl. Executives reported a wide range of possible prices, from a low of $45/bbl to a high of $95/bbl.

Dallas Fed Survey Finds Optimistic Energy Executives

Expected natural gas prices at year-end 2018 are almost the same as expectations for year-end 2017. Respondents predict a Henry Hub price of $3.05/MMBTU, virtually the same as last quarter’s prediction of $3.02 at year-end 2017. Predicted prices range from $1.95/MMBTU to $4.50/MMBTU.

Dallas Fed Survey Finds Optimistic Energy Executives

Rig count expected to rise

In addition to its standard questions on activity and prices, the Fed asked several questions regarding rig counts. The first of these addressed short-term activity, asking “Do you expect the number of U.S. rigs drilling for oil six months from now to be higher, lower or near current levels?”

Over half of executives predict the number of oil rigs will increase, and almost all the rest predict activity will be at or near current levels. Only 3% predict drilling activity will be lower in six months. Baker Hughes reports there are currently 747 rigs drilling for oil in the U.S.

Most executives expect oil prices above $61/bbl will be needed to generate a substantial increase in the U.S. rig count, and over half expect prices above $66/bbl will be necessary. Oil prices are currently hovering just below $60/bbl WTI, meaning further increases may lead to large growth in drilling activity.

The majority of executives predict their firm’s capital spending will increase in 2018, with 51% expecting slight increases and 19% expecting a significant increase. Only 7% expect to lower spending in 2018.

Dallas Fed Survey Finds Optimistic Energy Executives

The Fed also asked executives “What do you expect the West Texas Intermediate crude oil price to be in the longer term (three to five years from now)?” Respondents do predict some price growth, but mostly only minor changes. The average response was $66.16 per barrel, with a median of $65. Only 11% of respondents predicted prices would decrease from current levels. Some do predict larger increases, and about 40% predict prices will be $70/bbl or higher. Overall, responses ranged from $40/bbl to $100/bbl.

Dallas Fed Survey Finds Optimistic Energy Executives

Comments show positive overall outlook

Executives were also able to make comments on the state of the industry, which were more positive than comments seen in previous surveys.

  • The oil industry in the lower 48 states appears to be in the “Goldilocks stage”—not too strong, not too soft, just right—which incents everyone to be efficient.
  • We believe that the worldwide natural field decline of 5 to 6 percent per year will not be offset by new discoveries or U.S. shale production in the three- to five-year time frame. This belief is driving our expectation of higher oil prices in the early 2020s.
  • The ethereal nature of demand is the most important issue we’re currently facing. If perceived demand continues to increase, then prices could move higher. Worldwide economic improvement creates a reason for optimism in higher crude prices. Natural gas, on the other hand, is stuck in a rut for a very long time.
  • Finding the new “norm,” be it $55 or $65 per barrel, is necessary for our customers to sustain both drilling rigs and necessary maintenance to production facilities.
  • We still believe that $60 per barrel is the tipping point for substantial increases in domestic drilling activity. If backwardation continues and spot prices exceed $60 per barrel, then, in our opinion, prices will drop substantially and return to “lower for longer.”
  • Our outlook for commodity prices is more positive than last quarter, but we are seeing rising costs and, in particular, lengthening lead times from suppliers. It looks like inability to get equipment to drill sites in a timely manner is going to be a bit of a problem for us in 2018.
  • Commodity price stability in a decent price range is facilitating our ability to finance capital programs and hedge prudently, which in turn has made it easier to support longer-term capital programs and hiring for growth.
  • The administration is making a big difference with its pro-business rather than pro-regulation attitude. It is also selling America to the global community like no previous administration. The administration is also creating a tax code that is supportive of work and against government. Our system has changed from government for the people to people for the government.
  • The real economics of a lot of the Wolfcamp/Wolfberry Midland Basin are beginning to show through. Investors are now asking, “Where is the beef?” Returns are not coming in as forecasted, and reserves will prove to have been overestimated. Declines will make it virtually impossible to establish significant free cash flows because maintaining a consistent level of production requires new drilling to make up for declines. The resources are there to be exploited, but I feel that if some type of pressure maintenance or pressure enhancement projects are not implemented soon, millions of barrels of oil will be left in the ground and a lot of people will lose a lot of money.
  • It is certainly looking better as West Texas operations are at full tilt. East Texas is starting to wake up.

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