Many of Canada’s largest petroleum producers are pumping out higher second-quarter profits and improved cash flow levels, yet more money isn’t coursing through the veins of the entire oilpatch.
Canada’s oilfield service firms witnessed a significant drop in activity during the first six months of 2019, and are tempering expectations for the back half of a bumpy year.
A lack of pipeline capacity, investor malaise, mandatory oil production limits by the Alberta government and volatile commodity prices have dealt a weak hand to the country’s drillers and service firms.
“For the services industry, it’s abnormal for customers to have increased cash flow and it not being transferred into more drilling completions, which feeds our business,” Trican Well Service CEO Dale Dusterhoft said in an interview.
“It’s quite unusual to see what we are seeing.”
Trican, a Calgary-based fracking firm, released second-quarter results last week showing revenues fell by 36 per cent from the same period a year ago, while the company lost $28.6 million.
In the report, the company noted average cash flow levels for its customers have risen by more than 20 per cent from last year. Yet, producers “continue to exercise discipline with the timing of their capital spending.”
On Tuesday, Canada’s largest driller, Ensign Energy Services, said revenues shot up 44 per cent to $378 million during the quarter on the heels of its recent acquisition of Trinidad Drilling, while it lost $32 million.
In an interview, Ensign president Bob Geddes said stronger cash flow levels for Canadian producers aren’t prompting customers to expand their drilling plans.
“Everyone has the same cold, so to speak, and some are doing better than others with it, but the situation is not changing generally,” Geddes said.
“There’s not going to be too many surprises in the fourth quarter. People will be working (within) their cash flow and sticking to their budgets … not growth for growth’s sake.”
The trepidation over spending comes during a period of mixed news for petroleum producers.
Positive trends include a smaller price discount for Canadian crude this year and incremental progress on the pipeline front, punctuated by the federal government’s re-approval of the stalled Trans Mountain expansion project in June.
However, global oil markets have been on a volatile ride in recent weeks.
Benchmark West Texas Intermediate (WTI) crude plunged more than $2 to close at US$51.09 a barrel on Wednesday amid reports of growing oil inventories in the United States, although prices are still up almost 13 per cent since the end of last year.
Alberta’s production quotas have bolstered Canadian heavy oil prices, but curtailment has removed the immediate incentive for producers to grow output.
With higher oil prices in the first half of the year, earnings have gone up.
For example, Suncor Energy generated $3 billion in funds from operations during the April-to-June period and posted net earnings of $2.7 billion.
Yet, Suncor trimmed the top end of its capital spending guidance by $200 million to $5.4 billion “to reflect the company’s continued focus on capital discipline,” it stated.
This disconnect — stronger results but diminished spending — impacts drillers, fracking companies and other service firms, as well as industry employment.
Last week, the Petroleum Services Association of Canada reduced the number of oil and gas wells it expects to be drilled this year to 5,100, down from an initial forecast of 6,600.
And the Canadian Association of Oilwell Drilling Contractors projected last November that 6,962 wells would be drilled this year, but at the halfway point, only 2,610 were completed.
“Where we are now, 2019 could end up being just as bad as 2016, and that’s really hard to say because we thought we were (turning) a corner after what we experienced in ’16,” said CAODC head Mark Scholz.
A report last month by Raymond James aptly described the industry as being “stuck in first gear,” pointing out that under normal circumstances, the Canadian rig count should have been 20 to 30 per cent higher this year.
AltaCorp Capital analyst Tim Monachello expects there will be select pockets of producers that end up spending more money in 2019, but most firms will be “sitting on their wallets.”
With volatile oil prices and curtailment limits in place, investors are eager to see money returned to their pockets through dividends or spent on share repurchases, not on growing production.
“Guys announce they’re increasing their cap-ex and the stocks go down usually,” he said.
On Wednesday, NuVista Energy reported its production averaged 50,000 barrels of oil equivalent per day in the second quarter, up 40 per cent from the same time last year, and the company reaffirmed its capital spending program for the year remains at $300 million to $325 million.
Yet, the stock fell almost 14 per cent.
“They spent a little bit more than the market was expecting, and in a market where investors are very sensitive to a company’s ability to show free cash flow … that’s just not something that’s been resonating well,” said analyst Cody Kwong of GMP FirstEnergy.
At Trican, Dusterhoft expects his company’s activity levels will be down another 20 to 25 per cent during the third quarter from 2018, while the October-to-December period should see a modest rise from the same time last year.
The company, which has about 1,500 employees, has seen its staffing levels fall by about 160 positions this year due to attrition. It also closed two local bases — in Lloydminster and Drayton Valley — in June.
“There is not a lot of incentive for our clients to bring on production until they can get visibility on getting it out of the basin,” Dusterhoft added.
“It’s definitely something we haven’t seen in our business before where increased cash flow hasn’t resulted in at least some increased spending.”
Chris Varcoe is a Calgary Herald columnist.
This content was originally published here.