KANSAS CITY, Mo. – The Energy Survey compiled by the Federal Reserve Bank of Kansas City recently revealed that Tenth District energy activity declined sharply again in the second quarter of this year and is expected to remain largely unchanged moving forward.
“District energy activity dropped considerably again during the second quarter of 2020, but many firms expected some stabilization heading forward,” Chad Wilkerson, Oklahoma City Branch executive and economist at the Federal Reserve Bank of Kansas City, said last Friday.
“A majority of firms in our survey applied for and received SBA Paycheck Protection Program loans, but low energy prices have hurt profitability. Most regional firms do not plan to increase production levels until oil prices recover more.”
In a related matter, approximately 22% of firms that received PPP assistance have fired workers or expect to lay off one or more employees once their loan runs out; in comparison, that ratio was 14% just last month, according to a National Federation of Independent Business survey of its members.
The PPP, a key federal stimulus program, was meant to keep workers on payrolls during the COVID-19 pandemic.
“As owners finish using their loan, more are finding that economic conditions are unable to support current staffing levels,” the NFIB said.
The Kansas City Fed’s quarterly Tenth District Energy Survey provides information on current and expected activity among energy firms in the Tenth District. The survey monitors oil and gas-related firms located and/or headquartered in the Tenth District, with results based on total firm activity.
Survey results reveal changes in several indicators of energy activity, including drilling, capital spending, and employment. Firms also indicate projections for oil and gas prices.
The Federal Reserve Bank of Kansas City serves the Tenth Federal Reserve District, encompassing the western third of Missouri; all of Kansas, Colorado, Nebraska, Oklahoma and Wyoming; and the northern half of New Mexico.
As part of the nation’s central bank, the Kansas City Federal Reserve participates in setting national monetary policy, supervising and regulating numerous commercial banks and bank holding companies, and providing financial services to depository institutions.
Summary of Q2 Indicators
Tenth District energy activity declined nearly as much in the second quarter of 2020 as in the first quarter, as indicated by firms contacted between June 15 and June 30. The drilling and business activity index rose somewhat, but indicated continued substantial decreases in activity.
The drop in revenues and profits indexes accelerated, and the employment and wages and benefits indexes fell further. However, the access to credit index declined at a similar pace as Q1 2020, and the supplier delivery time index decreased less sharply in Q2 2020.
Year-over-year indexes also decreased significantly. The year-over-year drilling and business activity index remained highly negative but had increased from a record survey low of -92. Indexes for total revenues, capital expenditures, delivery time, profits, employment, employee hours, wages and benefits, and access to credit continued to decrease.
This quarter, firms were asked what oil and natural gas prices were needed to substantially increase drilling on average across the fields in which they are active. The average oil price needed was $51 per barrel, with a range of $40 to $75. This average was below the prices reported in 2019, and the lowest recorded price to substantially increase drilling. The average natural gas price needed was $2.88 per million Btu, with responses ranging from $2 to $5.25.
Firms were again asked what they expected oil and natural gas prices to be in six months, one year, two years, and five years. Expected oil prices were moderately higher than price expectations from Q1 2020, but lower than a year ago. The average expected West Texas Intermediate prices were $41, $47, $53 and $60 per barrel, respectively. Expectations for natural gas prices grew modestly from last quarter; the average expected Henry Hub natural gas prices were $2.17, $2.41, $2.64 and $3.02 per million Btu, respectively.
Firms also were asked about shut-in wells. More than 62% of firms shut in wells or curtailed production in Q2 2020, primarily because of low wellhead prices. Regarding prices moving forward, 37% of firms indicated they expect the majority of producers in the U.S. to restart horizontal drilling at prices of $41 to $45 per barrel. Another 37% of firms predict oil prices need to be higher than $45 per barrel for drilling to restart.
Additionally, firms were again asked about solvency. A majority of firms in the survey applied for and received SBA PPP loans, but low energy prices have hurt profitability. More than two-thirds of firms reported they could survive more than a year if current revenues were to continue, while around 32% would not survive a year if current revenue levels persist.
Selected Survey Comments
“We have low debt and believe rig counts are beginning to bottom.”
“We’re starting our fourth month without any revenue. Currently we have nothing scheduled to drill.”
“The U.S. orphaned well inventory will explode to new highs if the current price continues. In addition, I don’t see a market for stripper wells in the future, so many small producers will be surrendering their wells...”
“The demand destruction from Covid-19 impact on the economy is the biggest unknown until an effective vaccine is developed. Underinvestment will drive higher prices in future years.”
“This has been a historically challenging down cycle. Many firms will not survive and there will be longer-term damage than in comparable down cycles.”
“The PPP was a life saver. We’re planning to apply for the SBA Economic Disaster.”
“The market is oversupplied and needs to be brought back into balance. Reduced production rates are required.”
“Summer and fall waves of COVID-19 driving down demand.”