Energy executives working in the most prolific natural gas and oil region of the United States are forecasting Henry Hub prices will average $3.01/MMBtu at year’s end, according to the Federal Reserve Bank of Dallas.
The Dallas Fed, as it is known, each quarter queries oilfield services (OFS) and exploration and production (E&P) executives who work in the Eleventh District. The District includes northern Louisiana, southern New Mexico and all of Texas, which covers activity in the Eagle Ford and Haynesville shales and the Permian Basin.
The second quarter report is a compilation of data collected between June 12 and June 20, with 138 firms responding. Of the respondents, 90 were E&Ps and 48 were OFS firms.
Oh, Henry!
When asked about longer term Henry Hub prices, respondents on average forecast they would average $3.58 in two years and $4.28 in five years, Dallas Fed economists noted. For reference, Henry Hub spot prices during the collection period averaged $2.61.
Executives from 28 E&Ps also were queried about how low Waha hub natural gas prices in the Permian could impact drilling and completion plans this year.
“Of the executives surveyed, 43% said low Waha hub natural gas prices won’t likely affect their firm’s drilling and completion plans in the Permian for the rest of 2024,” the Dallas Fed economists said.
Meanwhile, an equal number (43%) of executives expect to see a “slightly negative impact” from low Waha prices. Another 14% said the low Waha prices would have a “significantly negative impact…for the rest of this year in the Permian.
“Small E&P firms were more likely to expect negative impacts.”
A maintenance-induced supply glut in the Permian flipped prices negative in the region on Monday and they remained under pressure Tuesday. However, prices in West Texas regained some momentum. Permian benchmark Waha advanced 44.0 cents on Tuesday but still averaged negative 60.0 cents.
Is Activity Rising?
Meanwhile, activity across the nation’s major producing regions was “essentially unchanged” between April and June from the first quarter.
“Activity in the upstream oil and gas sector grew in the second quarter, although overall production and employment were essentially unchanged,” Dallas Fed senior business economist Kunal Patel said. “Respondents were mildly optimistic about the energy sector’s near-term prospects, though uncertainty appeared to temper responses.”
Industry consolidation was cited as a worry by some OFS operators. Another concern was the Biden administration’s decision in January to temporarily pause permitting for new LNG export projects.
Deferring liquefied natural gas approvals “is a cause for concern,” an E&P executive said. Another executive cited “permitting and bureaucratic or political roadblocks” as “the greatest impairments to our business currently.”
An OFS executive also noted that a lack of natural gas pipeline infrastructure is curtailing Permian projects.
E&P customers “continue to defer or cancel planned drilling programs due to ongoing impacts of the stranded associated natural gas production in West Texas,” the executive said.
Consolidation Concerns
The wave of merger activity across the U.S. energy complex has led to some near-term issues too.
“Consolidation by E&P firms has curtailed investment in exploration,” one OFS executive said. “Our hope is that it’s a temporary situation that will work itself out as the integration is completed.”
Many OFS operators “are extremely consolidated in their work profile and customer base,” another executive said. “We are experiencing very little flexibility in pricing to drive margin growth.”
The Dallas Fed’s business activity index, the survey’s broadest measure of the conditions that Eleventh District companies face, increased from 2.0 in the first quarter to 12.5 in the second quarter.
However, gas and oil production “was little changed in the second quarter,” the E&P executives reported. “The oil production index advanced from minus 4.1 in the first quarter to 1.1 in the second quarter. The near-zero reading suggests production was essentially unchanged,” the Dallas Fed economists noted.
“Meanwhile, the natural gas production index also turned positive, but barely so, increasing from minus 17.0 to 2.3.”
Costs rose at a “slightly faster pace” for the OFS sector and at a slower pace for E&Ps. In addition, the aggregate employment index was “little changed,” suggesting “slow net hiring.”
The Dallas Fed also queried executives about artificial intelligence (AI).
“About half of executives at large exploration and production companies reported using some form of artificial intelligence,” Patel said. “The share was smaller among support services firms and significantly smaller among small E&P companies.
“Among the executives indicating use or planned use of AI in the next 12 months, E&P firms were more likely than services firms to note expected benefits from AI.”
Said one OFS executive, “We are just beginning to explore the full capabilities of artificial intelligence within our business. Within 12-18 months, we will utilize advanced analytics to create predictive models, automate decision making and automate field operations as much as possible.
“Firms currently not exploring the capabilities of AI will soon struggle to compete on any metric other than price.”
