Despite a gloomy outlook for 2023, a central bank poll found that those in the oil and gas sector are feeling positive.
While surging inflation and supply chain disruptions were cited as headwinds to growth, over six out of 10 oil and gas company executives surveyed by the Federal Reserve Bank of Dallas still intend to increase capital spending in 2023.
An even higher number of executives in the industry anticipate rising input costs this year but are optimistic about prospects, regardless of fears of a looming recession.
This year, a majority of oil and gas companies intend to increase capital expenditures (CapEx). In other words, these energy firms plan to invest in equipment upgrades and acquisition, property and technology expansion, and other enhancements to support business growth.
To conduct the survey, researchers at the Dallas Fed spoke with executives at 95 exploration and production companies. A further 53 oil and gas support services firms were also questioned as part of an appendix to the primary survey.
Although business activity has deteriorated amid a challenging economic environment, Texas’ energy sector optimism remains relatively strong. Between the third and fourth quarters of 2022, the business activity index fell from 46.0 to 30.3. According to the Dallas Fed, the index is “the survey’s broadest measure of conditions facing Eleventh District energy firms.”
Oil and gas production continued to grow, albeit at a slower pace in Q4 versus Q3. The oil production index fell from 31.7 in the third quarter to 25.8 in the fourth quarter. The natural gas production index similarly slipped, dropping from 35.6 to 29.4 during the same period.
While the surveyed firms reported that costs rose for the eighth consecutive quarter, the rate of the increases has slowed. The input cost index during the reporting period fell to 61.8 compared to 83.9 the quarter prior. The finding and development costs index also dropped from 64.7 to 52.5, while the operating expenses index lowered from 68.4 to 48.4.
Notably, one-quarter of all respondents intend on significantly increasing CapEx in 2023. Another 39% plan to raise capital expenditures slightly this year compared to last. Of those surveyed, only 14% revealed intentions to cut back expenses. Service firms expressed higher rates of spending reduction compared to exploration and production (E&P) companies.
One reason for the optimism in the industry is the expectation that energy prices will remain high. Nearly three-quarters of survey respondents said their projections assume West Texas Intermediate prices will range between $70 and $85 per barrel, with the average landing at $73 in 2023 compared to $64 last year.
According to the Dallas Fed, 58% of survey respondents expect a slight increase in the cost of key inputs. A further 10% expect increases to be substantial.
“Inflation affecting operating expenses (wages and salaries) is an issue affecting our business. Also, pending state and federal regulations are impacting operational expenses,” according to comments from one of the participants in the survey.
Optimism persists, but it has softened. The company outlook index was positive for the 10th straight quarter but was down 20 points, dropping below the index’s long-term average.
Uncertainty is also growing. The overall outlook uncertainty index rose from 35.7 to 40.1 during Q4 2022. E&P firms in particular had substantially higher uncertainty than services firms (45.4 versus 30.9).
According to the Texas Comptroller of Public Accounts, the state generated nearly 12% of the United State’s total net energy in 2021, the highest in the country.