Dallas Fed: Oil & gas activity rises on higher prices

By Bryan Livingston
Managing Partner and CEO

Energy sector activity grew modestly in the first quarter 2019, with oilfield services driving much of the increase, according to the Federal Reserve Bank of Dallas Energy Survey.

The business activity index—the survey’s broadest measure of conditions among 11th Federal Reserve District energy firms—was 10.8 in the first quarter, up from 2.3 in the fourth quarter, but well below the average level seen over the past few years.

The Fed’s 11th District includes the nation’s largest oil-producing field: the Permian Basin. The survey samples oil & gas companies based in the district, which covers Texas, southern New Mexico and northern Louisiana. Many have national and global operations.

Oil and gas production increased for the 10th consecutive quarter, according to exploration and production (E&P) firm executives. However, the oil production index fell from 29.1 in the fourth quarter to 21.1 in the first quarter, indicating a slower rate of growth.

Energy firms began the year with heightened uncertainty and a bit of pessimism, due to the plunge in prices during the fourth quarter.  The renewed positive outlook is consistent with our sense that commodity prices and industry conditions would improve through the year. The company outlook index rebounded into positive territory this quarter, jumping 34 points to 23.3 while the uncertainty index fell 24 points to 18.6.

“We are seeing an overall increase in activity from customers. It’s not tremendous, but certainly noticeable. To me, this demonstrates an increased confidence in the economy,” said a survey respondent in the oil & gas services sector. Another in the services sector said skilled labor is getting harder to find.

Oilfield services firms saw equipment usage rise and operating margins narrow. The index for utilization of equipment jumped sharply to 16.4 in the first quarter, another positive sign. Input costs continued to increase but at a slower pace, with the index declining from 36.7 to 25. The index for operating margins ticked down to ‑6.6.

Technology and other efficiencies continue to help the industry find a lower break-even price.

“For the fourth consecutive year, E&P companies were asked what WTI price they need to profitably drill a new well,” said Dallas Fed Senior Economist Michael D. Plante. “The average breakeven price across E&P respondents was $50, down slightly from last year. The lowest average breakeven prices were once again found in parts of the Permian Basin, which, despite some recent cutbacks, continues to attract the lion’s share of activity in the United States.”

Average prices necessary to cover operating expenses across regions ranged from $27 to $37 per barrel—also slightly lower than in last year’s survey—with the average across the entire sample at approximately $33 per barrel, versus $35 per barrel last year.

“It should be an interesting year on the mergers-and-acquisitions front in the exploration and production (E&P) space,” said one survey respondent.

At Capital Alliance Corp., we still believe global supply-demand fundamentals are healthy, and energy companies interested in M&A deals this year should have some good opportunities.

Capital Alliance Corporation is a Dallas-based investment banking firm with a four-decade history and deep operational and M&A experience across many sectors, including energy infrastructure. Capital Alliance is affiliated with Oaklins International, the world’s most experienced mid-market M&A advisor, with 800 professionals globally and dedicated industry teams in 40 countries worldwide. We have closed over 1,500 transactions in the past five years.

Industry: Energy