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Contraction in oil and gas industry activity eases in Q4, Dallas Fed data shows

The pace of oil and gas activity contraction lessened in the fourth quarter of 2019 compared to the prior quarter, as a modest increase in exploration and production activity countered a sharp decline in the oilfield services sector, according to the latest Federal Reserve Bank of Dallas Energy Survey.

The business activity index — the survey's broadest measure of conditions facing energy firms in the Eleventh District, which includes Texas, northern Louisiana and southern New Mexico — eased from negative 7.4 in the 2019 third quarter to negative 4.2 in the fourth, "suggesting that the pace of contraction has lessened," the Dallas Fed said on Dec. 27, 2019.

The business activity index for exploration and production companies increased from zero to 5.4. Conversely, activity for oilfield services providers declined to negative 22.1, compared with negative 21.8 the previous quarter. Negative survey readings indicate contraction, and those above zero suggest expansion.

Among oilfield services firms, the equipment utilization index was largely unchanged at negative 25.8 in the fourth quarter of 2019. Upward pressure on input costs decreased, with the index falling from 5.6 to 1.7. Meanwhile, the index of prices received for services slid from negative 18.5 to negative 24.5.

The operating margins index fell from negative 24.0 to negative 39.7, "given flat input prices and lower selling prices," the Dallas Fed said.

Plans for capital spending in 2020 by exploration and production companies paint a bleak picture for oilfield services.

Of the 161 oil and gas companies that responded to a survey question on capital spending plans for 2020, 41% expect to decrease capital spending either significantly or slightly. Only 8% expect to increase capital spending significantly, while 26% plan to increase it slightly.

"Our company outlook is for 2020 to be a continuation of the 2019 slowdown in North American onshore seismic spending; thus, our planning is for decreased investment and opportunity in 2020," an unidentified oil and gas services firm respondent was quoted as saying.

The larger share of the respondents looking to cut spending, 49%, were oil and gas support services companies, compared with 36% of exploration and production companies.

Of the companies looking to increase capital spending, 24% were support services providers, while 40% were exploration and production firms, with only 10% of the exploration and production companies intend to boost spending significantly, the Dallas Fed said.

While the company outlook index for exploration and productions increased from 7.6 to 15.4, the same index for oilfield services firms decreased from negative 14.8 to negative 22.4. "This suggests modest improvement in outlooks for E&P firms and worsening outlooks for oilfield services firms," the Dallas Fed said.