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US oil, gas sector shows signs of severe contraction in Q2: Dallas Fed

Highlights

Oil production index sinks to lowest in four-year survey

Oilfield services activity sees sharpest drop from Q1

Washington — The US oil and gas sector showed evidence of "significant contraction" in the second quarter, with activity deteriorating most severely for oilfield services, the Federal Reserve Bank of Dallas said June 24 in its quarterly survey of 168 energy firms.

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Executives expect WTI oil prices to reach an average of $42.11/b by the end of 2020, up from the Q2 average of $37.75/b, and Henry Hub natural gas prices to be $2.15/MMBtu by year's end, up from $1.61/MMBtu in Q2.

The survey results reflected extensive cuts to production, capital spending and jobs in Q2 as the industry grapples with the coronavirus pandemic's massive hit to oil demand and global prices.

In the Dallas Fed's 11th District, which includes Texas and much of New Mexico and Louisiana, a broad measure of business activity by oil and gas firms fell 15 points from Q1 to minus 66.1 in Q2, the lowest in the survey's four-year history.

The Dallas Fed's Q2 oil production index sank 36 points from Q1 to minus 62.6, also a new low, and its natural gas production index dropped 27 points to minus 47.8.

Of the 108 E&P companies surveyed, 82% reported shutting in wells or curtailing output in Q2, with 94% of those drillers reporting low wellhead prices as the main reason, with the remaining pointing to pipelines or refineries refusing to take the oil or storage not being available.

Of the drillers that cut output, 71% said they still have some production shut in or curtailed.

Restarting wells

When asked what month they expect to restart most of their shut-in production, about 36% said June, 20% by July, 18% by August and 14% by December.

About 30% of executives surveyed said they expect the majority of US producers to restart horizontal shut-in wells when prices reach $36-$40/b, with 27% expecting that to happen at oil prices of $41-$45/b.

NYMEX front-month crude settled at $38.01/b June 24, down $2.36 on the day.

Executives said in comments that a lack of liquidity and no access to new capital made the outlook for returning any drilling or well completions uncertain.

"Is oil and gas private equity over?" one executive said.

Another warned of darker days ahead for the industry: "Banks are completely unprepared for what is heading their way. They will need to figure out how to own energy assets this fall."

An oilfield services executive said: "This has been the fastest decline in my oil and gas career, and I expect the turnaround to be painfully slow."