(Reuters) - U.S. oil and gas activity in some of the largest producing regions is declining, led by a weakening oilfield services sector as producers cut spending, according to an energy survey released on Wednesday by the Federal Reserve Bank of Dallas.

Oil pump jacks work at sunset near Midland, Texas, U.S., August 21, 2019. Picture taken August 21, 2019. REUTERS/Jessica Lutz

The Fed’s energy business activity index fell to negative 7.4 in the third quarter, the worst reading since early 2016. Activity in the services sector slumped by more than 28 points to negative 21.8.

Although oil production rose, service firms reported declines in activity, a sign that companies continue to do more with less. The equipment utilization index fell by 27 points to negative 24 for the quarter, the lowest reading since 2016, according to the report, which surveyed 163 energy firms this month in Texas, southern New Mexico and northern Louisiana.

Overall, the outlook from 55 oilfield services executives surveyed was negative. More than 42% of participants reported a decrease in operating margins compared with the prior year, with the index for operating margins falling to negative 23 during the period.

“E&P (exploration and production) companies have pulled back spending and continue to pressure service company prices. I expect there will be a number of insolvent companies looking for help in the next six months,” one oilfield services executive commented.

Another pointed to an oversupply of hydraulic fracturing equipment and service pricing that is “unsustainable over the medium to long term.”

Consultancy Primary Vision this week said hydraulic fracturing fleets across the U.S. declined for the 12th consecutive week, with companies idling about 100 spreads since spring. The largest drop has been in the Permian Basin shale field, where 30 fleets have been sidelined, the firm estimates, followed by declines in Eagle Ford and Williston, which includes the Bakken shale field.

Employment and wage growth across the sector also weakened. Quarter over quarter, employment dipped from 1.7 to negative 12.7. Compared with last year, the oilfield services employment index fell by roughly 30 points, from 21.1 to negative 9.4.

With U.S. crude prices hovering in the mid- to low $50-a barrel range, major service firms like Halliburton and National Oilwell Varco have cut staff in recent months.

While the outlook for exploration and production firms surveyed was less bleak, they pointed to capital constraints as weighing on activity and cited concerns that tariffs were driving up costs.

“The capital markets remain problematic. Access to capital will crimp the industry,” one said.