(CN) – Companies that supply equipment, materials and services to the oil and gas industry in Texas and nearby states had a rough third quarter as drilling activity continued to slow, according to an industry survey from the Federal Reserve Bank of Dallas.
The quarterly survey of energy executives revealed an industry continuing to weather the negative effects of relatively low oil prices, pressure from investors and a lack of access to capital, even as the total amount of hydrocarbons pulled from the ground continued to rise.
“The results from the service firms are particularly bad,” Michael Plante, senior research economist at the Dallas Fed, said in an interview. “They’re the ones that saw a very sharp drop.”
The contraction in the oilfield services sector was tied to a drop in demand from companies on the exploration and production side of the industry, Plante said. This month, the number of active drilling rigs in the U.S. fell to two-year lows.
“The rig count is falling nonstop,” Plante said. “[It’s] not a good environment for these companies to be in.”
Executives also reported falling prices for oilfield services. According to Plante, that suggests there could be just too many service firms active in the Permian Basin of West Texas, the nation’s largest oilfield, forcing those firms to cut prices to stay competitive.
More broadly, the survey showed signs of a modest decline in employment across the oil and gas industry for the second quarter in a row, as wage growth appeared to slow.
Ed Hirs, an energy economist at the University of Houston, said the third quarter downturn was to be expected, as oil and gas companies slashed their capital spending budgets by 20 to 25% in late 2018 and then tried to maintain their activity levels for as long as possible into this year.
“A lot of the firms just said well, we’ll just drop that 25% off at the end of the year,” Hirs said. “Well now we’re here at the end of the year.”
The effects of the U.S.-China trade war have taken a toll as well, Hirs said, thanks to increased costs for steel.
Alongside concerns about low oil and gas prices, executives in the Permian told the Dallas Fed one of their primary constraints in the third quarter was pressure from investors to free up cash flow.
“The investors want a rate of return,” Hirs said. “They’re not getting it.”