Dallas Fed Energy Survey

Second Quarter | June 27, 2018

Price Forecasts

West Texas Intermediate Crude

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Henry Hub Natural Gas

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Second Quarter | June 27, 2018

Special Questions

Data were collected June 13–21, and 135 oil and gas firms responded to the special questions survey.

Which of the following, if any, do you expect to limit near-term growth in activity in the Permian? Please check all that apply.

Executives were first asked to identify the top area in which their firm is active. Of the 60 executives who noted that their firm is primarily active in the Permian Basin, the most prevalent response was lack of crude oil pipeline capacity (55 percent of respondents), followed by problems finding workers (52 percent of respondents).

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Which of the following, if any, do you expect to limit near-term growth in activity outside the Permian? Please check all that apply.

Of the 69 executives who noted that their firm is primarily active in a region outside the Permian, the most frequently identified constraint was cost inflation (38 percent of respondents), followed by problems finding workers (33 percent of respondents).

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Is your firm having problems hiring?

This question was posed to all executives, regardless of the region in which their firm is active. Thirty-one percent of executives noted that their firm was having problems hiring, while 69 percent of executives noted that their firm was not having problems hiring. Forty-seven percent of support services firms responded that they were having problems hiring, while only 18 percent of exploration and production firms noted problems hiring. (See table for more detail.)

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If you are having problems finding workers, in which categories are you experiencing difficulty? Please check all that apply.*

Of the 41 executives who noted that their firm was having problems hiring, 59 percent checked low-skill positions, 63 percent checked mid-skill positions and 29 percent checked high-skill positions as the categories in which they were experiencing difficulty hiring. The percentages were similar across E&P and support services firms for low- and mid-skill jobs, but there was slightly higher demand (43 percent) for high-skill jobs from E&P firms.

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*This question was posed only to executives who noted that their firm was having problems hiring.

If you are having problems finding workers, what are the main reasons why? Please check all that apply.*

Of the 41 executives who responded that their firm was having problems hiring, 83 percent noted a lack of available applicants as a problem, followed by 49 percent who noted lack of experience.

Chart data

*This question was posed only to executives who noted that their firm was having problems hiring.

What, if anything, are you doing to recruit and retain employees? Please check all that apply.

This question was posed to all executives, regardless of whether they noted their firm was having problems hiring. The method to recruit and retain employees most frequently selected by energy executives was increasing wages and/or benefits (45 percent of respondents), followed by increasing variable pay, including bonuses (30 percent of respondents). See the chart file below for a further breakout of results between firms reporting problems hiring and firms reporting no problems hiring.

Chart data

Special Questions Comments

Exploration and Production Firms

• Ongoing Section 232 tariff developments continue to keep us on our toes. The uncertain steel environment could delay pipeline construction necessary to move oil to markets.
• Hiring from personal references and contacts has been possible because we maintain a respectful work environment with a long-term, growth-oriented opportunity for employees.

Oil and Gas Support Services Firms

• We are not having a problem staying busy.
• The labor shortage is getting critical. Overall unemployment is at record lows in most of the basins we work, especially the Permian.
• I would welcome the need to hire additional people. Our seismic business continues to be challenged. Although we are very thinly staffed (and getting older) and would need to increase head count with almost any improvement in business, we will wait for that to be a necessity before we grow.
• The business outlook for high-specification drilling rigs continues to improve. The second quarter gave us an opportunity to catch our breath before ramping up reactivation-related activity in third quarter 2018 and hopefully beyond.

Second Quarter | June 27, 2018

Historical data are available from first quarter 2016 to the most current release quarter.

Business Indicators: Quarter/Quarter

Business Indicators: Year/Year

Second Quarter | June 27, 2018

Activity Chart

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Second Quarter | June 27, 2018

Comments from Survey Respondents

These comments are from respondents’ completed surveys and have been edited for publication. Comments from the Special Questions survey can be found below the special questions.

Exploration and Production Firms

• The negative crude price differential in the Permian Basin to West Texas Intermediate in Cushing is completely unexpected. In fact, it’s really a double hit since predictions were for a new pipeline to bring higher prices in the Permian as it would bypass Cushing. Several new pipelines were scheduled to come online, so the expectation was there would be s­­urplus capacity from the Permian for the foreseeable future. In the Delaware Basin, water disposal is creating a new issue. In addition to injection availability, issues are developing in the zones where injection is taking place. Depleted zones drilled in the early 1900s are becoming recharged, and old wellbores generally cannot handle the pressure, primarily due to age.
• The U.S. frac fleet count [equipment used in hydraulic fracturing] is at all-time high, having surpassed the 2014 peak in early June. This is significant because the current rig count is still about half of the peak. Efficiencies in drilling space require more frac fleets to commercially produce a well. If you want to know production levels, just follow the frac fleet. Ongoing Section 232 tariff developments regarding steel and aluminum continue to keep us on our toes.
• The backwardation in the futures curve is holding back activity in the offshore area. Activity will pick up when the five-year strip [annual average of the monthly futures for the first five years] flattens and averages $65 per barrel.
• The outlook has definitely improved. We are positive on our forecast for energy prices going forward, at least in the near term, which is six months to a year out. We are looking to buy production where possible and are still investing in drilling and development deals.
• There appears to be a shift underway as Wall Street realizes that conventional plays can give greater return on revenue than shale plays. In the meantime, big money is still practicing the balance-sheet shuffle and refinancing legacy shale companies in their portfolios. Tobin’s q [the ratio between an asset’s market and replacement value] is less than 1, and the initial public offering market is closed because of it. One private equity titan has completely exited the Permian. Daughter wells there appear to be less productive than anticipated. Hence, drilled-but-uncompleted-wells inventory is still rising.
• The “blend wall” hit two major Oklahoma oil and gas projects, both producing ultra-sweet, light crude oil, but which are NOT shale projects. One-fourth of wells selling oil in June sold at $65 per barrel, but three-fourths of wells sold oil at as low as $31 per barrel. The State of Alaska is hurting small independents by not coming through with their incentive reimbursements for exploration as were specifically promised in legislation passed by the state and signed by the previous governor. Earthquake lawsuits in Oklahoma continue to drain cash flow, forcing the premature sale of producing properties at distressed prices due to the huge geographic impact of forced plugging or drastically curtailed saltwater disposal volumes. Operating expenses have drastically increased due to increased saltwater disposal rates (farther distances), legal costs and supply/demand of services, equipment and experienced field personnel.
• The tax cuts have really helped. The reduction in regulation has also helped.
• Crude prices are more than ever subject to political conflicts both domestically and internationally, particularly with pending tariff impositions. In addition, there has been no reduction in the potential for escalation of military conflict in the Middle East. It is unrealistic to project significant crude price increases short of an event or events, considering the apparent strategic decisions of Russia and Saudi Arabia to increase production when coupled with the escalation of U.S. production. It may be difficult for crude to maintain pricing between $60 and $65 per barrel.
• The administration has stimulated the economy with regulation reductions and tax cuts. This, along with the red-tape cutting that is allowing liquefied natural gas (LNG) programs here to grow in order to help with the trade deficits we have with other countries, is placing more demand on natural gas. East Texas is a natural gas basin. Thank you to the administration for bringing a business model to Washington.
• The widening Midland–Cushing crude oil price differential and the widening Waha–Henry Hub natural gas price differential have reduced our cash-flow outlook and will reduce our cash flow from operations available to reinvest in drilling and completion expenditures.
• My vendor and supplier costs continue to increase. Even in areas outside of the shale plays, drilling, completion and vendor prices are at very high levels. There are no longer any low-cost operations in my area of activity.
• I think we are getting comfortable that the floor for oil prices is moving up. Although it is tough to call where the ceiling is, confidence in a higher floor than anticipated will help assets move and help create slightly more aggressive capital plans. However, this is with the backdrop of a more skeptical equity market and the reasonable expectations that we are running the business inside cash flow.
• Comments and actions by the administration on tariffs and oil supply have increased our uncertainty about the next six months, so we are limiting investment at the moment.
• The uncertainty in the Louisiana tax structure is frustrating.
• We are a conventional driller/explorer who is finding it difficult to attract capital and services because unconventional (shale) drillers are consuming most of the “oxygen.”

Oil and Gas Support Services Firms

• Hangover from the last slump is making it hard to rebound. Field hands’ and drivers’ wages are steadily increasing, while our hourly and daily rates remain flat.
• Hiring and retaining the bottom 20 percent of labor is a significant challenge in busy oil fields like the Permian Basin. Employees will jump to a new job for as little as $1 more per hour. The more-tenured employees—those who have been through multiple down-cycles—understand loyalty and the benefits of working for companies with staying power and a good culture. However, younger workers have shorter memories and get caught up in the euphoria.
• Demand for seismic data continues at the reduced pace seen in recent years. Customers continue to chase the Permian Basin seemingly at any price. Until the appetite for assets reaches outside of the Permian, our space (seismic) will remain challenged.
• We are still busy in the Permian. East Texas has started to back up, and I have moved operations primarily back to East Texas.
• Who knows what the price of oil will do? There are so many variables in play at this time—political, pipeline capacity, drilling and completion obligations, Venezuela, Iran, Russia, Saudi Arabia, the cost of borrowing money. A change in any of them could significantly affect the price of oil.