Tagline Header Box

Dallas Fed: E&P activity essentially unchanged; optimism wanes as uncertainty jumps

While there was little change in activity from the third quarter of 2023 to the fourth quarter, there are some negative trends developing that have operators concerned. Yet, there is hope that 2024 can be a marginally better year.

MICHAEL PLANTE and KUNAL PATEL, Dallas Federal Reserve Bank

Activity in the upstream oil and gas sector was essentially unchanged during fourth-quarter 2023, according to oil and gas executives responding to the Dallas Fed Energy Survey. The business activity index, the survey’s broadest measure of conditions that energy firms in the Eleventh District face, remained positive but slipped from 10.9 in the third quarter to 3.6 in the fourth quarter, Fig. 1. The business activity index was 7.5 for E&P firms versus -4.2 for service/supply firms, suggesting activity grew slightly for E&P firms, but it declined slightly for service firms.

Plante-Fig-01

OVERVIEW

The Dallas Fed conducts the Dallas Fed Energy Survey quarterly to obtain a timely assessment of energy activity among oil and gas firms located or headquartered in the Eleventh District.

Methodology. Firms are asked whether business activity, employment, capital expenditures and other indicators increased, decreased or remained unchanged, compared with the prior quarter and with the same quarter a year ago. Survey responses are used to calculate an index for each indicator. Each index is calculated by subtracting the percentage of respondents reporting a decrease from the percentage reporting an increase.

When the share of firms reporting an increase exceeds the share reporting a decrease, the index will be greater than zero, suggesting the indicator has increased over the previous quarter. If the share of firms reporting a decrease exceeds the share reporting an increase, the index will be below zero, suggesting the indicator has decreased over the previous quarter.

Data were collected Dec. 6-14, and 144 energy firms responded. Of the respondents, 96 were exploration and production firms, and 48 were oilfield service/supply firms.

Special questions focus on capital spending in 2024; the oil price that firms use for budgeting; expectations regarding large acquisitions for exploration and production (E&P) firms; plans for reducing greenhouse emissions; and E&P firms’ primary goals for the coming year.

OIL AND GAS PRICES/SUPPLY & DEMAND

On average, respondents expect a West Texas Intermediate (WTI) oil price of $78/bbl at year-end 2024; responses ranged from $51/bbl to $110/bbl, Table 1. Survey participants expect a Henry Hub natural gas price of $3.09/MMBtu at year-end, Table 2. For reference, WTI spot prices averaged $69.77/bbl during the survey collection period, and Henry Hub spot prices averaged $2.48/MMBtu.

Plante-Table-01
Plante-Table-02

In one special question, participants were asked, “What West Texas Intermediate crude oil price is your firm using for capital planning in 2024?” The average response was $71/bbl, with the median and the mode at $70/bbl, Fig. 2. The average price used is relatively close to the price used in the budget in 2023 at $73, but higher than prior years (2019, $54; 2020, $54; 2021, $44; 2022, $64).

Plante-Fig-02

STRATEGY/FINANCIAL OUTLOOK

The company outlook index turned negative in the fourth quarter and plunged 48 points to -12.4, suggesting some pessimism among firms. The company outlook for E&P firms changed more drastically, as the company outlook index for these firms fell sharply from 46.8 to -9.0. The overall outlook uncertainty index jumped 39 points to 46.1, suggesting mounting uncertainty.

Capital spending. One of this quarter’s special questions asked respondents, “What are your expectations for your firm’s capital spending in 2024 versus 2023?” Reponses varied widely among executives. The most selected response was “increase slightly,” selected by 33% of executives, Fig. 3. The second most selected response was “remain close to 2023 levels,” selected by 26%, followed by “decrease slightly,” selected by 18%. Another 13% said “decrease significantly,” while 10% selected “increase significantly.”

Plante-Fig-03

Responses differed, depending on the firm’s size and type. A breakdown of the data for large and small E&P companies and oil and gas support services can be found in Table 3. E&P firms were classified as small, if they produced fewer than 10,000 bopd or large if they produced 10,000 bopd or more. The most selected response from executives of both small E&P firms and service firms was “increase slightly” at 32% and 34%, respectively. The most selected response from executives at large E&P firms was “remain close to 2023 levels” at 35%.

Plante-Table-03

M&A activity. In October 2023, acquisitions of two E&P companies valued at $50 billion or more were announced. In another special question, executives were asked, “Do you expect more deals of this size to occur in the next two years?” Among the executives responding, 77% said they expect more acquisitions of $50 billion or more to occur in the next two years, Fig. 4. The remaining 23% don’t anticipate such transactions.

Plante-Fig-04

ESG plans. In another special question, respondents were asked, “Which of the following (ESG-related) plans does your firm have?” E&P firms were first asked to define their size, based on fourth-quarter 2023 crude oil production. They were then asked if they had any of the following plans: reduce carbon emissions; reduce methane emissions; reduce flaring; recycle/reuse water; invest in renewables. Respondents could choose more than one answer for this special question.

In the U.S., small E&P firms are greater in number, but large E&P firms make up the majority of production (more than 80%). For the large firms, 53% of executives said their firms plan to reduce CO2 emissions, 68% indicated plans to reduce methane emissions, 79% expected to reduce flaring, 42% planned to recycle/reuse water, and 11% expected to invest in renewables, Table 4.

Plante-Table-04

For the small firms, 22% of executives said their firms plan to reduce CO2 emissions, 34% anticipate reducing methane emissions, 18% plan to reduce flaring, 27% plan to recycle/reuse water, and 4% will invest in renewables. Among the smaller firms, 51% said they have no mitigation plans, compared with 11% of large E&P firms.

Goals for 2024. In another special question, respondents were asked, “Which of the following is your firm’s primary goal in 2024?” Executives from E&P firms were presented with eight potential goals for 2024 and asked to select their firm’s primary one. The most-selected response among large firms was "acquire assets" (35% of respondents), followed by “reduce debt” (20% of respondents), Fig. 5. At the same time, the most-selected response among small firms was “grow production” (41% of respondents) followed by “maintain production” (25% of respondents.)

Plante-Fig-05

OIL AND GAS PRODUCTION

Oil production increased but at a significantly slower pace, compared with the prior quarter, according to executives at E&P firms. The oil production index remained positive but fell from 26.5 in the third quarter to 5.3 in the fourth. Meanwhile, the natural gas production index edged up from 15.4 to 17.9.

COSTS

Among oilfield services firms, the input cost index remained positive, but slipped from 33.4 to 21.3. Among E&P firms, the finding and development costs index rose from 18.3 to 24.4.

OFS SECTOR

Oilfield service/supply firms reported modest deterioration in nearly all indicators. The equipment utilization index moved down from -4.2 in the third quarter to -8.4 in the fourth quarter. The operating margin index was relatively unchanged at -32.0. The index of prices received for services turned negative and fell from 2.1 to -6.2.

EMPLOYMENT TRENDS

The aggregate employment index was relatively unchanged at 4.2 in the fourth quarter. The aggregate employee hours index remained positive but fell from 9.6 in the third quarter to 2.8 in the fourth quarter. Meanwhile, the aggregate wages and benefits index edged down from 24.5 to 21.2. WO


Text in Box with Lists


First Author Rule Line
Author-pic-Plante

MICHAEL PLANTE joined the Federal Reserve Bank of Dallas in July 2010 and is senior research economist and advisor. Recent research has focused on such topics as the economic impact of the U.S. shale oil boom, structural changes in oil price differentials, and macroeconomic uncertainty. He also has been the project manager of the Dallas Fed Energy Survey since its inception in 2016. Mr. Plante received his PhD in economics from Indiana University in August 2009.

Author-pic-Patel

KUNAL PATEL is a senior business economist at the Federal Reserve Bank of Dallas. He analyzes and investigates developments and topics in the oil and gas sector. Mr. Patel is also heavily involved with production of the Dallas Fed Energy Survey. Before joining the Dallas Fed in 2017, he worked in a variety of energy-related positions at Luminant, McKinsey and Co., and Bank of America Merrill Lynch. Mr. Patel received a BBA degree from the Business Honors Program at the University of Texas at Austin and an MBA degree in finance from the University of Texas at Dallas.