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Tough times in oil & gas service sector Peters & Co. slashes 2009 Western Canada, U.S. 2009 activity forecast; Precision Drilling CEO believes drilling has bottomed out Gary Park For Petroleum News
Soft natural gas prices, capital spending cutbacks and relentless demands for reduced labor and materials costs from oil sands operators spell tough times for Canada’s supply and service sector.
Calgary investment dealer Peters & Co. has slashed its 2009 activity forecast for Western Canada to 8,500 wells from its previous target of 10,000 and has taken the axe to its 2009 forecast for Western Canada and the United States, targeting 12,500 wells and 1,200 active rigs, down from an earlier 16,000 wells and 1,450 rigs.
The next 18 months will be “extremely” difficult for service companies, with bright spots confined to directional drilling, pressure pumping and logistics providers, Peters said.
In addition, drilling contractors with fleets suited to drilling deeper wells and strong balance sheets should benefit from spending in resource plays, it said.
The firm does not expect operators’ 2010 budgets will increase substantially, although lower service costs, improving field efficiencies and a 37 percent increase in strip natural gas prices over spot prices should increase year-over-year Western Canada activity levels, Peters said.
But first-quarter results for 49 Canadian service and supply companies, combined with tight debt and equity markets, heighten expectations of increased consolidation and acquisition over the near-term.
Jan Cerny, an analyst with Tristone Capital, said the balance of 2009 will see shrinking cash flows and, unless there is a sharp rebound in the first quarter of 2010 (traditionally the peak drilling season), then the problems won’t ease.
Despite cost-cutting measures by many companies, a prolonged downturn might see consolidation as the only choice, Cerny said.
Roger Soucy, president of the Petroleum Services Association of Canada, said sluggish merger and acquisition activity in the first half of 2009 could speed up through the second half.
But he said it is hard to imagine why any companies would want to buy idled equipment, when their own assets are not working.
Peters anticipates a re-activation of “quality” oil sands projects, with some benefit to specialized service companies.
Faint glimmers of hope However, there are some faint glimmers through the gloom as the industry delivers second-quarter earnings reports.
BJ Services Chief Executive Officer Bill Stewart, declaring “the worst is behind us,” is counting on “improvement from here forward.”
He said markets in the United States and Canada are “close to bottoming” after posting a net loss of US$32.3 million, with Canadian revenues slumping 53 percent to US$23 million.
Wachovia analyst Tom Curran took a measured view of Stewart’s optimism, predicting that a return to profitability would “largely be contingent on continued cost saving and efficiency realizations.”
In reporting a C$57 million profit, Kevin Neveu, chief executive officer of Precision Drilling Trust, Canada’s largest drilling contractor, said the trust is “extremely well-positioned in Alberta heavy oil and northeastern British Columbia shale gas plays.
“These areas operate to a large degree through the spring thaw and, as such, our year-over-year activity held up better than (the overall) industry, falling only 26 percent.”
Neveu believes activity in the U.S. has bottomed out, “but it will be a rocky bottom. We will see rig counts oscillate as the trough continues in the third quarter.”
“There is no question that North America has too much gas supply and too little demand,” he said.
Neveu said early indications for the current quarter “suggest Canadian activity will remain depressed within a diminishing likelihood of a meaningful recovery this year.”
Nabors Chief Executive Officer Eugene Isenberg believes the down cycle will hit bottom in the current quarter, but cautioned he is not expecting a “V-shaped rebound.”
Weatherford still cutting Bernard Duroc-Danner, chairman, president and chief executive officer of Weatherford International, described Canada’s second quarter as “brutal,” with the average rig count dropping to 89, 12 rigs below the historic low in 1999.
“Canada will have its day and in the meantime one has to live with one’s legacy,” he said.
“Not that long ago Canada represented 25 percent of Weatherford’s top line. Our legacy is one which is still, to a degree, quite dependent when it comes to North America on the ups and downs of Canada … more so than our peers,” Duroc-Danner said. “At times it helps us; at times it hurts us.”
But Weatherford is not gambling on an early recovery, cutting its North American workforce by 3,000, closing 20 facilities and warning it is not yet finished.
Canada’s second-quarter activity levels were 30 percent worse than expected, the rig count fell 79 percent from the first quarter and 46 percent from the same quarter of 2008.
“At these levels it is nonsensical to think about covering one’s fixed-cost structure no matter how lean the operation may be,” said Chief Financial Officer Andrew Becnel.
Duroc-Danner would not offer a prediction on a recovery for North America, saying, “It seems that in North America there was nowhere to hide.”
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