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Upstream Operations Contract, Second-Half Recovery Uncertain

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The coronavirus pandemic has dented global energy demand, hurting business activities of oil and gas players. In fact, companies with headquarters in the Eleventh Federal Reserve District witnessed a significant contraction in activities associated to exploration & production (E&P) and oilfield services in the second quarter of 2020, according to the Dallas Fed Energy Survey.

Oil & Gas Activity Slumps in Q2

The business activity index associated to upstream operations declined to (66.1) in the second quarter from the first quarter’s (50.9), according to the survey. The reading has been the lowest in the four-year history of the survey, suggesting a considerable contraction in upstream operations.

To be more specific, the business activity index for oil and gas E&P companies declined to (62.6) in the June quarter from (53.3) in the March quarter. Moreover, activity associated to oilfield services plummeted to (73.5) from (46.3). Importantly, in the four-year history of the survey, oil production index has been the lowest in the second quarter of 2020. 

The contraction in upstream operations was because of curtailment in capital spending during the quarter. Notably, the index for capital expenditure related to E&P operations slipped to (66.1) in the June quarter from the March quarter’s (49.0).

Investors should know that for the quarterly survey, Dallas Fed has queried 200 oil and gas companies with headquarters in Texas, southern New Mexico and northern Louisiana. The regions are home to prolific oil plays like Permian basin, Eagle Ford, Haynesville and Barnett.

Hence, it could be said that the contraction in oil and gas operations has possibly hurt businesses of upstream firms in the Permian – the most prolific basin in the domestic market. Two such companies are Pioneer Natural Resources Company (PXD - Free Report) and Diamondback Energy, Inc. (FANG - Free Report) . Both the stocks carry a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Two oilfield service biggies, with headquarters in Texas, and are likely to have seen a contraction in business in the June quarter are Schlumberger Limited (SLB - Free Report) and Halliburton Company (HAL - Free Report) .

Uncertainty Awaits in Second Half

With investors concerned about the new wave of coronavirus infections, there are uncertainties on the extent to which the economy can recover in the second half of 2020. Overall, it depends on how successfully the government can contain the spread of the virus with social-distancing measures. If the virus can be contained, people will possibly travel more, thereby boosting demand for gasoline and jet fuels. This will also help in the recovery of oil price.

Hence, with the widespread uncertainty, significant recovery in oil and gas activities over the last six months of this year doesn’t seem like a possibility. However, as most experts are hopeful of a coronavirus vaccine by 2020-end or early 2021, the economy is likely to start recovering by 2021. With a vaccine in place, the lifting of strict social-distancing measures will help business activities to revive. This will in turn boost fuel demand and perk up oil and gas businesses.

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