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Companies ready to flee Canada Service companies start moving workers, equipment overseas amid doubts that natural gas slump will be short-lived Gary Park For Petroleum News
Faced with a 20 percent bite out of their bottom lines, Canada’s oil and gas service companies could soon face a round of consolidation, or look elsewhere for opportunities, an investment forum in Calgary was told June 21.
Sideswiped by the slump in natural gas drilling activity in Western Canada, the worst in a decade, the sector has already started moving some employees and equipment overseas, fearing the downturn could last years rather than months.
The outlook was further shaken by word from EnCana, one of North America’s leading gas producers, that rather than resuming activities it has further trimmed its gas growth. The big independent said it will increase production by 3 percent this year and is targeting 5 percent annually going forward, far below its earlier projections of 10 percent.
Chief Executive Officer Randy Eresman said EnCana’s portfolio is “capable of a higher growth rate; however, we believe at this more moderate pace we have greater flexibility in our investment choices and we can be more efficient in our capital programs.”
Canadian Natural sees productivity gains One of the few shreds of encouragement came from Canadian Natural Resources, Canada’s No. 2 gas producer, whose President Steve Laut said the decision to rein in production this year has been a successful business move.
“We have slowed down our gas drilling to get better control of costs and it has been very effective so far,” he said. “We expect to see more productivity gains and cost productions as we move forward.”
Laut said Canadian Natural, assuming normalized costs, expects to resume production growth of 3-5 percent from 2008 onward,
But Roger Soucy, president of the Petroleum Services Association of Canada, which sponsored the heavily attended forum, said layoffs among the 70,000 workers employed by PSAC’s member companies have yet to reach levels seen in past downturns.
He said many companies are in better financial health than in previous low points in the cycle, although the squeeze is on shallow gas or coalbed methane operators.
Soucy, too, said a wave of mergers and acquisitions may be around the corner.
However, the consolidation will be “simply … opportunistic. Companies that do have the cash and might have otherwise deployed it in construction of new facilities or equipment might see it better spent by buying someone else,” he said.
The current forecasts call for about 16,300 wells in Western Canada this year, off 27 percent from 2006.
Drilling activity slowest since 1998 TD Newcrest said drilling activity in the current quarter has been slower than for any comparable period since 1998.
TD analyst Roger Serin said overall industry spending will fall 25 percent this year to C$16 billion from C$20 billion in both 2005 and 2006.
He believes the current woes will be the “mother of all speed bumps,” but he is not counting on a recovery until 2008.
“A weaker 2007 is a given,” he said. “We think 2008 will be better, (but) we doubt margins will improve much, only utilization.”
CIBC World Markets senior analyst Jeff Fetterly said only 228 rigs from the available fleet are at work, compared with 453 a year ago, much of the decline due to unseasonably wet weather.
Michael West, chairman and chief executive officer of CE Franklin, whose dominant shareholder is Houston-based service firm Smith International, said companies with the strongest balance sheets are poised to make acquisitions, adding “there are companies out there” his firm has an eye on.
Two years ago, companies wanted “unrealistic multiples”; now they are more reasonable in assessing their worth, he said.
West said it is important for service companies to be profitable through all cycles, which he is confident will rebound.
Until then, CE Franklin is stepping up plans to grow in Libya to ride out the turbulence in Canada, he said.
Trican Well Services has already transferred equipment from Canada to its business arm in Russia, which accounted for about 25 percent of company revenues in 2006 and is expected to reach 45 percent this year and 55 percent in 2008, said chief financial officer Michael Kelley.
He said Trican’s competitors are also chasing international opportunities “in a significant way.”
Drilling downturn has reduced costs On the flipside, Ernie Sapieha, president of Compton Petroleum, told the conference that the gas-driven downturn has “done a wonderful job of bringing costs down” by improving the availability of rigs and technical professionals.
He said that as his own company prepares to increase its drilling activities it is finding that coiled tubing rigs — once unobtainable — are much more available.
Sapieha said the time needed to drill wells in southern Alberta has been slashed dramatically to between 1.5 and two days with coiled tubing from six days with jointed pipe, lowering well costs to C$300,000 from C$500,000.
Compton has even sold oil assets to provide the financial resources and flexibility to redeploy capital in its core natural gas resource plays.
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