US oil, gas faces prolonged downturn: Dallas Fed

US oil and gas activity contracted sharply in the second quarter, and the sector is set to face a prolonged downturn as demand recovery remains slow, a survey by the Federal Reserve Bank of Dallas showed today.

The business activity index — the survey's broadest measure of conditions facing companies based in the Eleventh Federal Reserve district — plummeted to -66.1 from -50.9 in the first quarter and -4.2 in the fourth quarter. Readings below zero generally indicate contraction, and positive readings indicate expansion. The index was last positive in the first quarter of 2019.

The latest reading is the lowest in the survey's four-year history, the bank said. The capital expenditure index, a guide to producers' spending patterns, worsened to -68.5 from -49.4 in the prior three months, while the employment index, reflecting job prospects, fell to -46.1 from -24 over the same period. The oil production index fell to -62.6 from -26.4.

The sharp decline in the production index comes as 82pc of producers that participated in the survey shut in or curtailed output during the second quarter due to plummeting oil and natural gas prices. Many of those respondents were still holding back production at the time of the survey, with the vast majority reporting that their output would be back online by September or sooner.

Of the companies that have shut-in or curtailed production, 94pc cited wellhead prices that were too low, while 4pc said it was because pipeline companies or refineries refused to take the oil. On when the operators plan to restart the bulk of their output, 36pc said in June, 20pc said by July, 18pc said by August and 14pc said by September, while the remaining 13pc expect to put it off to November or later.

Asked if they expect to pay extra costs when bringing production back online, 61pc of respondents said they see minor costs for putting the wells back online, 27pc said there would be no additional expenses and 11pc predicted significant costs.

On the price range at which producers will restart their horizontal wells, 19pc said below $36/bl, 30pc said $36-$40/bl, 27pc said $41-$45/bl, and 24pc said at prices above $46/bl.

The restart plan reflects producers' expectations of a revival in oil and gas consumption.

"Almost 60pc believe consumption will have returned to normal by fourth quarter of 2021," the bank's senior research economist Michael Plante said.

The most participants — at 41pc — expect drilling and completion activity to return to pre-Covid-19 levels sometime in 2021, with 39pc predicting a 2022 or later timeline and 16pc responding that they don't foresee returning to prior levels.

Nearly 50pc of respondents to the survey said they applied to the administration's small business administration (SBA) paycheck protection program. Another 10pc applied for SBA economic injury disaster loans, 1pc applied for SBA express bridge loans and 2pc applied to the Federal Reserve main street lending program. None applied to the SBA debt relief program, and 47pc did not apply for any government assistance program.

Of the companies that applied, 89pc were successful in accessing the programs. A number of them said the government assistance allowed them to avoid layoffs.

The survey responses were collected from 168 companies between 10-18 June in Texas, southern New Mexico and northern Louisiana. Of the total, 115 were exploration and production (E&P) companies and 53 were oilfield services firms.

By Manash Goswami