‘Misery’ in Canadian service sector

CAPP forecasts drop of almost 50% in wells drilled; Peters & Co. says drilling slump could be longest, steepest of any since 1950s

GARY PARK

For Petroleum News

Oilfield service companies have become the bellwether sector in Canada’s petroleum industry by pointing to a “brutal” market from which highly trusted investment banker Peters & Co. said recovery will first have to survive the steepest spending cuts in 60 years.

Precision Drilling which operates Canada largest drilling fleet and the all-purpose Mullen Group launched the third-quarter earnings season with an unvarnished grim outlook.

Mullen Chief Executive Officer Murray Mullen said “like many of our peers, we’re not having any fun right now.”

He said his company is struggling through an “industry-wide state of depression” partly because it divided into two sections: oilfield services and trucking and logistics, unlike its rivals who are mostly trapped in a single business and are “pricing to survive.”

Mullen said his company will not invest in capital until there is a clear sign that the LNG industry will proceed and new pipeline takeaway capacity is approved.

Even with a boost from its trucking operations, Mullen reported that its revenue from the quarter dropped to C$305 million from C$357 million in the third quarter of 2014.

Loss at Precision

“The outlook is grim,” said Chief Executive Officer Kevin Neveu, predicting the weakest winter drilling season since the late 1990s as producers reduce their capital budget for 2016 by 30 percent to 50 percent.

The best he could offer was a prediction that the industry’s cyclical nature means a “rebound is inevitable. The downturn will persist in 2016 with visibility on a rebound non-existent at this point and rig activity will lag a price rebound.”

Precision said it retired five drilling rigs and 44 service rigs over the past year, trimming its fleet to 507 - 330 drilling and 177 service - while adding 18 rigs this year.

Neveu said producers have been sympathetic to the challenges facing their suppliers and “are not trying to put anybody out of business.”

He insisted Precision, having seen a brief spring rally in oil prices evaporate, will not “underestimate the depth and voracity of this downturn.”

Wells predicted to be down almost 50%

But Peters & Co. said the drilling slump could be the longest and steepest of any since the 1950s.

It estimates operator spending in Canada will fall by 39 percent this year and 14 percent in 2016, marking only the third time the country has had back-to-back annual declines. The two previous occasions were 1986-87 (when the cumulative decline was 43 percent) and 1998-99 (which tallied a decline of 16 percent).

The firm said it anticipates lower Canadian drilling activity will stretch over seven quarters, with a cyclical recovery possible in the final quarter of 2016.

Peters said the low activity is translating into balance sheet deterioration as debt-to-cash-flow ratios move higher, predicting bank covenant relief will likely be needed by service companies such as Trican Well Service and Calfrac Well Services, while others review their dividend payments.

As these outlooks work their way to the bottom line, the Bank of Canada Gov. Stephen Poloz is warning that the oil price dive could act as a drag on the Canadian economy for another two years.

The bank downgraded its economic forecast for 2016 and 2017, citing a “complex” transition away from the once-thriving resource sector.

It has described the United States as being in “solid expansion” towards 2.5 percent growth this year, compared with Canada’s 1.1 percent.

Poloz said oil prices will continue to sap business investment and put a dent in the value of Canadian exports, wiping out some of the strong gains in the non-energy sector.