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Bad oil news piles up in the Permian and for companies serving it: Dallas Fed

Recent reports out of the Federal Reserve Bank of Dallas paint a gloomy picture regarding prospects in the U.S. oil industry.

Even as U.S. crude and total petroleum production continue to set records, that is happening while surrounded by cutbacks in operations that are leading to less spending and fewer jobs. That’s obvious in the recently released data and analysis from the Dallas Fed, contained in both the Permian Basin Economic Indicators and the bank’s Energy Indicators.

The most stunning number comes in its figure for October employment. The Fed reported that in October, the employment category of mining, logging and construction in the Permian Basin of west Texas was down 13.9% year-on-year. That sector, despite its name, is overwhelmingly oil & gas-related. For the first 10 months of the year, the Fed reported employment in the Permian Basin was down just 400 jobs, but that is because of growth in other sectors and oil and gas growth earlier in the year. Through the first 10 months of 2018, total employment was up 16,700 jobs. 

“This marks the first time since 2016 that Permian Basin employment has lagged Texas job growth,” the Dallas Fed said in its report.

The two reports – the Permian Indicators and the Energy Indicators – are bearish across the board and show an industry that while not suffering from a sharp downturn in prices, is reflecting a growing drop in activity. 

“Drilling activity…continued to erode, with firms cutting spending and orders for new equipment,” the Dallas Fed said. “Well completion activity has proved more resilient, particularly in the Permian Basin, slipping only slightly from recent highs. The oilfield services market remained depressed, with little optimism about better margins next year.”

For Texas as a whole, oil and gas extraction jobs in the state dropped in September by 740 jobs from a month earlier, but still, the state as a whole has posted an increase in those jobs of 4,290 for the year. It’s the support field that is getting hammered the most. That sector, mostly oilfield service firms, is down more than 10,500  jobs from a recent high level, the Dallas Fed said.

The report also breaks out Permian-specific data. For example, what it defines as the Permian Basin had production of 4.5 million barrels/day (b/d) in September, an all-time high. That means it’s more than one-third of current U.S. production of about 12.8 million b/d. 

But the Dallas Fed data also reported that the rig count in the region – 417 in October, up just slightly from September – was also down 72 in the past year. 

One way that production has been able to be maintained even as drilling activity is down is through the conversion of what are known as DUCs. DUCs are drilled but uncompleted wells, where the exploratory well has been drilled but the work to complete the well has not. Turning them into productive wells does not take more drilling, so they don’t add to the rig count. But they do bring on more production.

According to the Dallas Fed, DUCs in the Permian Basin hit a high of 3,713 in July but were down in October to 3,589. The drop between September to October was 4.3% and the decline means they’re becoming completed, productive wells.

The Dallas Fed has other data on how things are slowing in the Permian. For example, the median home price in the Permian, which stretches into New Mexico, was down 2.6% in October from August. That brought the median down to $301,045 from $309,094. Sales in October were down to 372, a decline of 3.6% from September.

And while it isn’t unique to the Permian, the broader Energy Indicators report of the Dallas Fed had some sobering statistics on the performance of oil and gas equities. Between March and October, the report said, independent exploration & production companies had a compound annualized decline in their stock values of 33%. That figure would not include integrated giants like Chevron. For equipment and service firms, it was worse – 43%. 

The shale boom has been fueled by a great deal of debt and those obligations in many cases are trading at pennies on the dollar. According to the Dallas Fed, on October 25, the spread between non-energy high-yield debt – in other words, junk bonds for something other than energy – were, on average, trading 413 basis points more than energy junk bonds. That’s the highest since April 2016, when the market was just a month or two off its recent low price for oil. 

John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.