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In the oil and gas industry, producers and service companies suffer and strive together

May 17, 20167:30 AM James Rose0 Comments

In April, the Canadian Association of Petroleum Producers published a stark reminder of how much the business activity in the oil patch has slowed down. “Capital spending in the Canadian oilpatch sector is set to drop by US$50 billion since 2014 — the largest two-year-decline since at least 1947 — thanks to the protracted plunge in oil prices,” reads the report from CAPP.

What’s more, CAPP believes investments are expected to decline 62 per cent to $31 billion in 2016, from a record $81 billion in 2014, and $48 billion in 2015. “The oilsands may see investments drop to around $17 billion this year, half of the figure spent in 2014.”

These dour numbers come at a time when Canada’s entire oil and gas sector is experiencing a prolonged downturn. The low price environment not only affects the producers but also the oilfield service companies. Therefore, it should come as no surprise that many companies on the service side are now cutting rates to less than cost in hopes of maintaining their market share.

In a note to investors, MNP expressed their concern over where low prices leave service companies. “There is no question OFS operators are operating below cost on virtually every job, when the full cost of capital is taken into consideration. Whether it is drilling rigs, frack spreads or coiled tubing units, the current market rates aren’t high enough to justify the original investment. They may not be below cash operating cost but they are certainly below total full-cycle return on invested capital cost.”

Dan Halyk, CEO of the publicly listed Total Energy Services however disagrees with the price discounting he see’s in the market. “Price competition has been fierce, with some competitors literally offering certain of their equipment and services for free … we cannot and will not compete with free,” he said on a conference call to discuss fourth-quarter results earlier in March.

But while some on the service side are avoiding the ‘competing with free’ model, others in industry see it differently. “There is no question that in a time like this, the producers and the service companies will suffer together,” says OSY Rentals General Manager Dallas Cairns. OSY is an oilfield rental and sales company specializing in vapour tight tank packages, flares, knockouts and separators. “Our customers are losing money and its bad for all of us. But what is true is that when prices recover, producers and service companies will collectively do better. Right now it is about creating cash flow to stay afloat until times are better.”

For some producers, the low service costs have helped their capital budgets. Peyto Exploration & Development Corp., recently reported that they hope to drill the same number of wells for 2016 but spend roughly $100 million less in the process.

Darren Gee, Peyto’s President and CEO, said about 80% of the savings will come from lower drilling and completion expenses, and the remainder from lower services prices. “We could run into the problem where margins the service companies are getting are so thin they throw in the towel. That would actually result in our costs going up. The hope is that we’re not the only guy that will be busy this year.”

Yet despite the market turmoil, there are signs of life. Oil this week rebounded after slumping to the lowest level since 2003 earlier this year on signs the global oversupply is easing as U.S. output declines. Yet still, while a deteriorating security situation has curbed Nigerian supply, gains from Iran and Iraq have helped to boost OPEC production to more than 33 million barrels a day.

However, the IEA estimates “global supply will exceed demand by an average of 1.3 million barrels a day in the first six months of the year — down from the 1.5 million it projected a month ago — following surprisingly strong consumption in the first quarter,” the agency said.

Peyto Exploration

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