Southward migration: Precision Drilling places heavy bet on U.S.

Precision Drilling Trust, Canada’s largest oilfield services company, has added its name to the southward migration, by setting a capital budget of C$370 million for 2008 (up 70 percent from 2007) and deciding there is less risk in the United States than Canada.

Having increased its U.S. rig fleet to 12 from one in 2007, the trust expects the pace of growth to accelerate “with a continued mix of rig deployments from Canada and new rig construction,” newly installed Chief Executive Officer Kevin Neveu said.

“Clearly, we’ve had great success in the U.S. this year (and) we expect to see that effort cranked up in 2008,” he said.

Precision has earmarked C$260 million of its cap-ex to building 19 “super” series land rigs set for staged delivery in the next six to 18 months to the U.S., where oil and gas activity has stalled.

The “Super” series rigs are valued by Precision’s customers because they achieve favorable day rates and terms compared with traditional rigs.

Tristone Capital services analyst John Tasdemir said Precision has made it plain that its focus is to grow and again become a “global premier player in the drilling business” after selling off its international drilling operations and technology arm to Houston-based Weatherford International for US$2.28 billion in early 2005 as it shifted its focus to Canada in the run-up to joining the income trust ranks.

Non-compete agreements with Weatherford do not cover countries Precision was not doing business in prior to the deal and, in any event, they expire in August 2008.

Tasdemir said the U.S. shift may be viewed as a gamble because the U.S. market appears to be saturated, with utilization rates in decline.

But he said Precision has an edge because its “Super” series rigs are being rated among the industry’s most efficient, with extra speed translating into lower overall drilling costs.

For that reason, it makes sense to pursue the U. S. market and attempt to displace older rigs, Tasdemir said.

Canadian outlook gloomy

The Petroleum Services Association of Canada is targeting a 17 percent drop to 14,500 wells from an expected 17,650 this year; Lehman Brothers is counting on a 12 percent decline in spending to $20.3 billion, with 17 percent of the cut coming from companies likely to spend more than $1 billion; but a survey by Citi Investment Research points to a decline in E&P spending of only 3.1 percent, with the U.S. being fueled by a 6.5 percent rise, and overall spending in Canada estimated at $27.7 billion.

Citi said the decline in natural gas developing spending will be offset by a spending boost on oil sands development.

Of the Canadian respondents to the survey, 49 percent expect a spending cut and 20 percent anticipate no change. Nine companies expect to hike spending by C$50 million or more and only seven expect to lower spending by that amount or more.

The rig overload in Canada was compounded this year with another 61 units added to the fleet, raising the average size to 863. The sector is exiting 2007 with 879 available rigs compared with 837 at the end of 2006.

The rig utilization rate for the year is projected at 43 percent, the lowest in 15 years, compared with the peak 71 percent in 2005.

Working rigs in Alberta dropped 28 percent in 2007 to 270, while British Columbia was off 26 percent to 52 active rigs.

—Gary Park