March 28, 2018 / 4:36 PM / 23 days ago

U.S. oil producer costs climb with more drilling: Fed Survey

HOUSTON (Reuters) - Oil and gas business activity continued to climb last quarter, driven by an improved oilfield services sector, but costs for goods and labor also rose, the Federal Reserve Bank of Dallas said on Wednesday in its quarterly energy survey.

Crude oil is dispensed into a bottle in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration

About 65 percent of the 140 energy firms surveyed in Texas, southern New Mexico and northern Louisiana reported increased activity from a year ago. During that time, U.S. oil prices have climbed more than 30 percent to near $65 a barrel CLc1.

About 77 percent of the respondents reported an improved company outlook, with over 80 percent of oilfield services firms offering a better view for the future.

The uptick in activity is driving up costs, companies said, with the Fed’s index for wages and benefits climbing to 46.5 from 40.6 last year. Its index for service firms’ input costs rose by 14 percent from a year ago and over 50 percent from last quarter.

Despite higher costs, the index for prices received for oilfield services fell to 35.7 from 44 a year ago. Less than half of firms reported receiving higher prices and 10.7 percent reported a decrease.

“E&P companies are still holding service prices down at every turn. On the flip side, our costs of goods, fuel and wages are climbing every day. It is time for rate increases to ensure a profit and sustainability,” said one respondent.

    On average, companies said they needed $52 per barrel oil prices to profitably drill new wells, $2 over the prior year’s breakeven. In the Permian Basin, companies said they needed $50 a barrel oil for new wells, also up $2 from last year.

    The higher breakevens come as companies are paying up for land. On Wednesday, Concho Resources (CXO.N) said it would buy rival RSP Permian in a deal valued at more than $70,000 per acre.

    Around 20 percent of the firms reported increased uncertainty from last quarter, driven partly by the Trump Administration’s decision to tax steel imports.

    “The recent uncertainty regarding steel tariffs has the potential to create a major immediate shortfall in upstream drill pipe and to add significantly to costs, which would negatively impact the internal rate of return on many plays,” said one respondent who works for an oilfield services firm.

    The index for producer capital expenditures fell to 42 from 55.7 the previous year, a signal that oil and gas producers may be heeding calls from investors to boost returns rather than expand drilling at all cost.

    Reporting by Liz Hampton; Editing by David Gregorio

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