Energy sector outlook mixed, hopes rise for a few rigs to return to Fayetteville Shale Play

Economists are mixed on the outlook of the energy sector, but they don’t see it getting worse than it was this past year.

Looking back on 2016, “it hasn’t been very highlighty,” said Kathy Deck, director of the Center for Business & Economic Research in the Sam M. Walton College of Business at the University of Arkansas. “It was a tough year.”

The high level of natural gas extraction the state had “enjoyed for about a decade” has ended, she added.

Between October 2016 and October 2015, energy employment fell 16.9% to about 6,500 workers, Deck said. In 2011, the state had nearly 12,000 workers as a result of the boom in the Fayetteville Shale play, but nearly all the jobs that were created because the boom have been eliminated. As of late 2016, one drilling rig was operating in the gas play.

“The downturn and resulting layoffs across the industry threaten to damage the industry’s brand as a career destination,” according to a Deloitte report on the outlook of the oil and gas industry.

“While I called 2016 the ‘year of tough decisions,’ I’d characterize 2017 as ‘the slow road back.’”
The sector may not be out of the woods yet. “We still find ourselves in a pretty low price environment,” Deck said.

However, the addition of one the new operating rig in the Arkansas Shale play may be the first sign of increased capital spending in 2017. In August, Southwestern Energy upped its capital spending nearly 94% from a range $360 million to $400 million to $725 million to $775 million. That second quarter review also revealed a companywide drilling and completion program that will bring five new drilling rigs back into operation for the rest of 2016, including one new rig and a healthy $73 million in capital spend in the Arkansas shale play.

Southwestern’s plans also show the Texas driller plans to increase production to 500 drilling locations if the price of natural gas moves to $3 per MMbtu. If prices move to $4 or higher, then Southwestern said it is prepared to adjust its production level up to as many as 4,300 drilling locations.

Southwestern Energy, BHP, Murphy Oil, ExxonMobil and other U.S. oil and gas producers traditionally unveil yearly capital spending plans in the first quarter. Wall Street analyst expect most U.S. independent and integrated oil giants to dramatically increase capital spending in 2017 after sitting dramatically cutting budgets in 2015 and 2016.

To that point, Jim Huntzinger, chief investment officer for BOK Financial, said 2017 is “shaping up to be a good year.” BOK Financial is the publicly-traded parent company of Bank of Arkansas, with Bentonville and Fayetteville branches.

Nationwide, natural gas production is expected to rise 2.5 billion cubic feet per day to an average of 80 billion cubic feet per day in 2017, up from 77.5 billion cubic feet per day in 2016, according to U.S. Energy Information Administration. Increased demand for natural gas in the United States and Mexico will lead the Henry Hub natural gas spot price to increase to $3.27 per million British thermal units, up from $2.49 per million Btu in 2016.

Huntzinger said the energy sector has “gone through a correction in price,” had to “downsize dramatically” and cut costs, but that’s “behind us now.” Because of the cost cuts, it bodes “very well for profitability” and job growth as energy prices rise.

The price outlook looks positive if the Organization of the Petroleum Exporting Countries (OPEC) follows through on its Nov. 30 announcement to cut oil production by 1.2 million barrels per day, starting Jan. 1. OPEC members always talk a big game but sometimes don’t deliver on their agreements, Huntzinger said. Expect prices to increase if they do, but if not, some energy prices could “pull back.” Whether they do will be something everyone in the sector will be following.

U.S crude oil production is expected to slip to 8.8 million barrels per day in 2017, down from 8.9 million barrels per day in 2016 and 9.4 million barrels per day in 2015, according to the EIA. Brent crude oil prices look to rise to an average of $52 a barrel in 2017, up from an average of $43 per barrel in 2016. The price forecast took into consideration OPEC’s Nov. 30 announcement to slash oil production. Before the announcement, the EIA had projected that Brent crude oil would be $51 per barrel in 2017.

“There is a sense that better times are ahead,” according to the Deloitte report.

But the impact of low oil prices might have a long-term impact on the industry. As a result of the oil price downturn, $620 billion in projects through 2020 were either deferred or canceled.

When asked about how the next president could impact the sector in the state, Deck said President-elect Donald Trump spoke about helping coal workers, but “that’s not what we do here.” Nationwide, Arkansas is the 25th largest producer of coal, producing 91,000 short tons in 2015, the most recent data available, according to the EIA. The top coal producer is Wyoming with 375.773 million short tons, followed by West Virginia with 95.63 million short tons.

However, Huntzinger sees most of Trump’s impact on energy sector as “very positive.” Trump wants a “robust” independent energy policy for the United States, to lower corporate income taxes and rein in “excessive regulations.”

Nationwide, electricity generated at utility-scale plants is projected to rise 0.7% to 11,272.70 gigawatt hours per day in 2017, up from 11,194.34 gigawatt hours per day in 2016. Wind energy capacity is expected to jump 9 gigawatts to 89 gigawatts by the end of 2017. Renewable energy, excluding hydropower, will account for 9% of U.S. generated electricity, up 1% from 2016. Natural gas plants will account for 33%, down 1%, and coal-fired plants will account for 31%, an increase of 1%.

(Talk Business & Politics Senior Analyst Wesley Brown contributed to this report.)