Source: Institute for Energy Economics and Financial Analysis
The recent downturn in oil prices forced a slowdown in the U.S. shale industry, and top executives appear to be gloomier than ever.
According to a survey by the Dallas Federal Reserve, the business activity index in Texas fell to minus 0.6 in the second quarter, down from a positive reading of 10.8 in the first quarter. A negative reading means that business activity actually contracted from the prior quarter, offering evidence that the slide in oil prices led to a pullback in spending and drilling. While oil and gas production continued to rise in the second quarter, it did so at a slower pace than in months past. The Dallas Fed said that its spending index actually fell into negative territory, again, an indication of contraction.
A slowdown in drilling is felt most acutely by oilfield services companies, who make their money from drilling volume and activity, rather than from oil sales. Not only did activity dip, but the prices that oilfield services charge for their services fell sharply, and margins were “notably lower” in the second quarter, the Dallas Fed said. Employment and wages also contracted. The Dallas Fed offers indices on “company outlook,” indices that further highlight the rising pessimism among most firms. The “aggregate uncertainty index” showed a surge of uncertainty from the sector, and it posted the highest reading since 2017.
In short, conditions appeared to have deteriorated in the second quarter, even as the industry posted a “gusher of red ink” in the first.
While the indices offer some quantitative data to back up the souring outlook for U.S. shale, the metrics are also a bit high-level and abstract. The real color comes in the comments section of the Dallas Fed survey, where comments are anonymously submitted by oil and gas executives. These statements offer better clues into what’s really going on at the ground level.
For instance, one executive said that the oil price downturn in the second quarter has had a dramatic effect on industry conditions. The “biggest impact has been the rapid and accelerating lack of investor interest in both conventional and unconventional oil and gas. The securities of oil and gas companies now sell at a fraction of what they once commanded. Huge losses in these shares hamper new exploration. It looks like another round of bankruptcies and mergers,” the executive said.