Summary of Quarterly Indicators

Tenth District energy activity stabilized somewhat in the third quarter of 2020 after sharply declining earlier in the year, as indicated by firms contacted between September 15th and September 30th, 2020 (Tables 1 & 2). The drilling and business activity index rebounded significantly, from -61 to 4 (Chart 1). However, all the other quarterly indexes continued to decrease, though at slower paces than in Q2 2020.

Chart 1.

Drilling/Business Activity Index vs. a Quarter Ago

Skip to data visualization table
Date Drilling/Business Activity
2017Q1 55
2017Q2 43
2017Q3 7
2017Q4 13
2018Q1 37
2018Q2 26
2018Q3 45
2018Q4 -13
2019Q1 0
2019Q2 7
2019Q3 -23
2019Q4 -48
2020Q1 -81
2020Q2 -61
2020Q3 4

Year-over-year indexes remained significantly negative in Q3 2020. The year-over-year drilling and business activity index, at -71, was slightly lower than -70 in Q2. Indexes for total revenues, employee hours, and wages and benefits declined at a faster rate in Q3. However, the indexes for capital expenditures, delivery time, profits, employment, and access to credit were less negative than last quarter.

Expectations indexes improved somewhat overall, but future energy activity was expected to remain largely unchanged. The future drilling and business activity index was 0 again in Q3 2020, indicating as many firms expected increases as expected decreases in activity. The future employment and wages and benefits indexes decreased further in Q3 2020. The future revenues, capital expenditures, profits employee hours, and access to credit indexes also remained negative but declined less sharply compared to the previous quarter. On the other hand, the future supplier delivery time index expanded. Price expectations for oil, natural gas, and natural gas liquids were positive, but not up as much as in Q2 2020.

Summary of Special Questions

This quarter firms were asked what oil and natural gas prices were needed to be profitable on average across the fields in which they are active (in alternate quarters they are asked what prices are needed for a substantial increase in drilling to occur). The average oil price needed was $49 per barrel, with a range of $35 to $65 (Chart 2). This average was below the profitable prices reported in 2019, but higher than $47 per barrel reported in Q1 2020. The average natural gas price needed was $3.12 per million Btu, with responses ranging from $1.75 to $4.00.

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 for the near term were higher than price expectations from Q2 2020, but longer-term projections were steady. The average expected WTI prices were $43, $47, $53, and $60 per barrel, respectively. Expectations for natural gas prices rose moderately from last quarter. The average expected Henry Hub natural gas prices were $2.62, $2.71, $2.84, and $3.28 per million Btu, respectively.

Firms were also asked about expectations for future global oil demand (Chart 3). Around 27% of firms expected global oil demand to return to pre-COVID levels by Q2 2021. However, nearly 60% of contacts didn’t expect global oil demand to return to pre-COVID levels until 2022 or 2023. Over 55% of firms anticipated a large increase in both mergers and acquisitions as well as defaults and bankruptcies for the energy sector through 2021. Another third of firms expected more defaults and bankruptcies with little change in mergers and acquisitions through 2021.

Additionally, firms were again asked about their primary goals over the next six months (Chart 4). For 24% of firms, maintaining production is the highest priority, and 21% of firms are focused on reducing debt. Only 14% said acquiring assets is their primary goal.

Chart 3.

Special Question - When does your firm expect global oil demand to return to pre-COVID levels?

Skip to data visualization table
Date Percent
Q4 2020 0
Q1 2021 3.448275862
Q2 2021 24.13793103
Q3 2021 3.448275862
Q4 2021 10.34482759
2022 37.93103448
2023 20.68965517
Never 0

Chart 4.

Special Question - Which of the following is your firm primary goal over the next six months?

Skip to data visualization table
Goal Percent
Maintain production 24.13793
Reduce debt 20.68966
Acquire assets 13.7931
Reduce costs 10.34483
Find additional sources of capital 6.896552
Divest assets 3.448276
Grow production 3.448276
Other 6.896552
No opinion or dont know 10.34483

Selected Comments

“Without a doubt this is the most difficult cycle I've experienced in my 30-year career.”

“M&A is difficult due to number of companies with high leverage on buyers’ side.”

“Bankrupt companies are just restructuring and there is very little new capital available.”

“Large debt load and expiring hedge positions over the next 12 months.”

“The longer it takes for economy to recover, people to get out and start spending, the more difficult it will be for companies to survive.”

“[COVID] will keep demand down for the next year, return to normal demand in year 2 and constrained drilling should drive prices higher. Capital is scarce in the shale plays as the return is marginal and the capital need is so high to maintain production levels.

“Near term: time to work through higher inventories due to lower demand growth limits price upside. Long term: flat production while demand is increasing should have prices start to firm up 2021+.”

“Demand weak through Q1 next year. Not enough drilling going on and we will need investment. Public companies have to pay dividends.”

“LNG picking up. We need more rigs drilling for natural gas. Associated gas won't grow and if anything will shrink.”

“Severe lack of capital being deployed in energy sector. Positive macro factors: significant decline rates, reduced supplies from Canada, improved LNG market.”

“Reduced DUCs, production declines everywhere will be 15-20%.”

“Current and projected cash flow does not provide a good opportunity to grow production… we either tread water/grow slowly or identify new sources of capital.”

Additional Resources

PDFCurrent Release

Excel SpreadsheetHistorical Monthly Data

About the Energy Survey

Author

Chad Wilkerson

Vice President, Economist and Oklahoma City Branch Executive

Chad Wilkerson is Branch Executive of the Kansas City Fed’s Oklahoma City Branch office. In this role, he serves as the Bank’s lead officer and regional economist in Oklahoma. He…