Dallas Fed: Oil and gas activities deteriorated further in second quarter

Oil and gas sector activity deteriorated further in-second quarter 2020, according to oil and gas executives responding to the Dallas Fed Energy Survey.

The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—fell to -66.1 in the second quarter from -50.9 in the first quarter. It was the lowest reading in the survey’s 4-year history and indicative of significant contraction in activity.

The business activity index for oilfield services firms plunged to -73.5 from -46.3, while the business activity index for exploration and production (E&P) firms fell to -62.6 from -53.3.

Production indexes suggest oil and gas production sank relative to the previous quarter. According to E&P executives, the oil production index declined sharply, falling to -62.6 from 36. The natural gas production index also fell significantly, to -47.8 from -21.2. The oil production index is at its lowest point in the survey’s 4-year history.

The index for capital expenditures for E&P firms declined to -66.1 in the second quarter from -49.0 in the first quarter, indicating a further reduction in capital spending. Additionally, the index for capital expenditures for oilfield services firms declined to -73.5 from -50.0.

Most indexes point to worsening conditions among oilfield services firms. The equipment utilization index fell to a survey low of -69.2 in the second quarter from -47.2 in the first quarter.

The operating margins index dropped to -68.6 from -50.0. While firms found relief as input costs collapsed—that index fell to -50.0 from -11.3—the index of prices received for services also slid further into negative territory, to -64.7 from -37.7.

The aggregate employment index posted a fifth consecutive negative reading, declining to -46.1 from -24.0, which suggests an acceleration in job cuts. Additionally, the aggregate employee hours worked index dropped to -47.0 from -32.1. The index for aggregate wages and benefits fell further into negative territory, to -41.7 from -8.2.

The company outlook index reading improved but remained deeply negative at -51.0 in the second quarter, indicating outlooks deteriorated. While uncertainty remained elevated, slightly fewer firms noted rising uncertainty this quarter than last, and the aggregate index fell 28 points to 35.7.

On average, respondents expect a West Texas Intermediate (WTI) oil price of $42.11/bbl by year-end 2020, with responses in the range of $22-65/bbl. Survey participants expect Henry Hub natural gas prices to be $2.15/MMbtu by year-end. For reference, WTI spot prices averaged $37.75/bbl during the survey collection period, and Henry Hub spot prices averaged $1.61/MMbtu.