Widespread misery was evident in the Dallas Fed’s latest survey, which included responses from 161 energy firms and took place from March 11-19. The quarterly survey offers a window into not just the economic health of the industry, but also a look into the psyche of many oil executives in Texas. The numbers were stunning. The broad business activity index, which measures activity in the energy industry, plunged in the first quarter, dropping to a -50.9 reading, down from -4.9 in the fourth quarter. More specific indices reveal similar numbers. For instance, the Dallas Fed’s index on capex fell off a cliff, declining from 9.1 in the fourth quarter to -49.0 in the first three months of the year, a reflection of the severe cuts to spending budgets.
In a rather revealing slide from the Dallas Fed survey, the average price that a driller needs to simply cover operating expenses (let alone earn a return) ranged from $23 in the Eagle Ford to $36 in “other” shale basins. In other words, with WTI currently trading below $25 per barrel, the “average” shale driller is not even covering the cost of keeping shale wells online.
Those are just the costs for operating. Breakevens to drill new wells are roughly double those levels, with average breakevens for Permian wells at $46. But even that figure only includes the cost of drilling a new well, and excludes other costs, such as debt servicing, overhead, and other corporate costs. “At $40 per barrel, you’re in the hole; at $30, it is hard to even keep producing existing wells. Nothing can be drilled at $30 per barrel,” one oil executive said in the Dallas Fed survey.
That does not mean that there will be an immediate wave of shut-ins. Companies keep operations going for a variety of reasons – there are costs to starting up and shutting down, the reservoir can be damaged in the process, and certain terms of land leases or debt obligations incentivize drilling even when it may not make sense.
But the figures do reveal that the industry is in a state of profound crisis and a lot of wells will shut down if current prices persist.
More than half of oil executives said that their headcount could drop this year, with nearly a quarter saying payrolls would “decrease significantly.”
When asked how long companies expected to remain solvent if WTI remained stuck below $40 per barrel, about 15 percent of respondents said they would be insolvent in less than 12 months, and another 25 percent said between one and two years.
In the special comment section, which allows oil executives to respond anonymously, the tone was dire. Here are a few select comments:
- “My outlook on the domestic oil and gas industry has never been bleaker.”
- “This will weed out the Ponzi guys in the shale plays. There’s lots of capital destruction occurring…The service industry for fracking will implode.”
- “Banks are squeezing the E&P sector, including our company, and demanding we quit drilling to pay down our debt, even though we are in compliance with the terms of our credit agreement. We will likely shut down drilling next month, pay an early termination penalty to our rig contractor, and liquidate excess hedges to pay down debt. We are in survival mode now.”
- “We were planning for a soft 2020. Soft would be great now. We are now expecting an almost total stop in business in the coming weeks and months.”
- “I am scared! In my opinion, the Texas Railroad Commission (TRRC) should institute proration as we had in the 1950s and early 1960s.”
- “It is looking to be a bloodbath for most firms.”
- “I am shutting in everything I can and cutting general and administrative expenses to minimal levels to try and ride out the storm. Those who are in debt will not survive.”
- “I do not believe the energy industry, except with respect to the largest producers, has the capital liquidity and reserves to survive a price collapse of the depth and time extent that will be experienced.”
- “If Russia and Saudi Arabia hold the line for nine months to a year, they can reassess and then sell oil for $80 per barrel with no competition from the United States shale.”
In fact, the topic of Russia and Saudi Arabia came up repeatedly as a source of trouble. Surprisingly, many executives downplayed the impact of the coronavirus, although perhaps that is because the survey was conducted before many of the more stringent stay-at-home orders went into effect.
There is a small strain of optimism from industry executives. Only about 15 percent of respondents see WTI staying below $35 per barrel by the end of 2020. Almost two-thirds of them see prices between $35 and $50. To be sure, even WTI in that range puts U.S. shale drillers in a financial bind, but the crisis would be not as severe as today.