Investor returns in the energy sector have lagged behind the broader market for some time. This has led to restraint in capital spending plans for 2019, which may be contributing to a lower rig count and a tepid outlook for employment growth this year. Oil prices are up on production cuts by OPEC and a few other countries, and U.S. crude differentials have declined with new pipeline capacity. However, West Texas natural gas prices are languishing near record lows even as liquefied natural gas (LNG) exports reach new heights.
S&P 500 and Public Company Energy Returns
Publicly traded energy companies have underperformed the S&P 500 total returns index over the past few years, even when the price of West Texas Intermediate crude was substantially higher than estimates of average industry breakeven prices for new wells (Chart 1). Exploration and production and equipment and services firms have fared the worst over the past 15 months, with the latter yielding a compound annual loss of nearly 25 percent from December 2017 to March 2019. Most public energy companies have announced more conservative capital spending plans in 2019 as they seek to improve investor returns in the year ahead.
Refining and marketing and midstream have fared better. Refining returns did well through most of 2018, but their value was pulled down from October to March by a soft market overall, a falling energy sector and a sharp drop in margins over the winter months. Midstream saw healthy returns over the past year thanks to surging production in the U.S. amid limited transportation capacity, as evidenced by comments in the Dallas Fed Energy Survey.
Brent crude oil prices rose to average $66 a barrel in March, closing as high as $68 toward the end of the month (Chart 2). Crude prices continue to be supported by a variety of factors including production cuts in OPEC—and a few other countries—and U.S. sanctions on Venezuela and Iran.
U.S. data released in March were also supportive of higher crude prices. Domestic crude production fell by 90,000 barrels per day in January, the largest one-month drop since June 2017, and seasonally adjusted U.S. commercial crude stocks fell nearly 12 million barrels in February and another 6.5 million barrels in March. Even as prices have risen, the U.S. oil rig count has continued to slip. It fell 23 rigs from February to March—down 50 rigs from December—as firms have reined in capital spending.
With the conversion of the Seminole natural gas liquids pipeline to carry crude at the end of February, oil prices in West Texas have risen on par with prices in Cushing, Oklahoma. The discount on West Texas Intermediate relative to Brent fell from $9 in February to $8 in March.
Natural Gas Prices
Additional takeaway capacity for crude oil in the Permian is doing nothing to lift local natural gas prices. West Texas Waha gas saw an average weekly price of only 73 cents per million British thermal units in March (Chart 3). The week of March 29, it fell to -48 cents—sellers paying buyers to take the gas. With prices already pressured by limited transportation capacity and a seasonal fall in demand, a temporary shutdown of a gas pipeline in New Mexico in mid-March helped push local prices through the floor. In contrast, Henry Hub natural gas ticked up to its longer-run average of nearly $3.
LNG Export Growth
U.S. LNG exports hit a new record of nearly 0.6 trillion cubic feet in the second half of 2018—an increase of 49.1 percent year over year. Japan and South Korea were the biggest individual importers of U.S. LNG in the last half of the year (Chart 4). A sharp fall in exports to China was likely due to tariffs but was offset by growth in exports to Japan. Most of the volume increase in U.S. LNG exports was driven by smaller shipments to a variety of other countries.
Overall, the U.S. exported nearly 1.1 trillion cubic feet of LNG in 2018—a 53 percent increase from 2017. To put that in context, global LNG trade grew 9.8 percent last year to total 15.2 trillion cubic feet, according to a report compiled by the International Gas Union.
Job Growth Pauses
Texas total mining jobs fell by 2,500 in February (Chart 5). That decline was driven by losses in support activities for mining (-2,400 jobs; mostly oilfield services firms), which tends to be much more sensitive to fluctuations in energy prices and drilling activity. The rest of the decline was in oil and gas extraction (-100). In contrast, mining employment in the rest of the U.S. grew by 2,600 jobs in February, driven mostly by oil and gas extraction (2,000). On net, industry job growth was nearly flat in the U.S.
Firms Project Modest Hiring in 2019
In the March Dallas Fed Energy Survey, expectations for hiring this year were muted. Half of the respondents indicated they expected employment to be steady compared with 2018 (Chart 6). Another 32 percent said they expected to increase employment only slightly. In line with hiring trends over the past two years in Texas, more support services firms expect a slight increase in the number of employees this year (44 percent) than producers (23 percent).
Ongoing efforts to contain costs are likely contributing to the cautious labor outlook, but other factors are at play as well. The labor force in the Permian Basin is thoroughly utilized, and importing skilled labor to West Texas has become increasingly challenging, according to industry contacts.