While some of his peers are shuttering their business or moving their rigs out of Canada to friendlier jurisdictions, Rene Amirault is staying put.
“There’s a lot to be done in Western Canada and North Dakota, and that’s where we are going to spend most of our capital and focus” in 2016, says the chief executive of Secure Energy Services Inc., which provides drilling, onsite services and water disposal facilities to oil and gas producers.
The word challenge doesn’t begin to describe the issues facing Calgary-based Secure and the wider oilfield services industry.
As prices started receding in November 2014, oil service companies were the first to feel the chill, rolling back salaries and reducing headcount as they responded to producers’ demands to slash costs.
Secure laid off around 300 people, cutting salaries by as much as 10 per cent and exiting its U.S. drilling fluids and drilling equipment rental business, as it hunkered down for the lower-for-longer oil price environment. Its stock price has fallen by nearly half this year, as a net profit of $44.3 million in the first nine months in 2014, reversed to a $73 million loss during the same period this year.
It’s one thing to get through one winter drilling season with lower activity, it is certainly another to go through two
As a whole, the industry is expected to lose nearly 28,500 jobs by next year, with drilling activity set to fall by 58 per cent, compared with 2014, according to Mark Scholz, president of The Canadian Association of Oilwell Drilling Contractors.
The association has not recorded such grim numbers since it began recording data in 1977, as the industry braces for yet another agonizingly slow winter drilling season.
“It’s one thing to get through one winter drilling season with lower activity, it is certainly another to go through two,” Scholz said.
Energy financial advisor Peters & Co. Ltd expects oilfield services’ revenues to shrink by 35 per cent this year, with another 10 per cent decline expected in 2016. Many smaller players have filed for bankruptcies, while others such as Trinidad Drilling Ltd. and CanElson Drilling Inc. merged to strengthen their balance sheets against lower oil prices.
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An inability to raise capital in these tumultuous times may spell the end of many aspiring, smaller enterprises. “Many entrepreneurs won’t be able to raise capital,” Scholz said. “It would be a great loss to what I consider to be the Silicon Valley of Alberta’s services sector.”
Still others, such as privately-owned Predator Drilling Inc. are living up to their name. As one of its rivals went into receivership, Predator acquired 12 of its modern rigs through the courts at 25 per cent of the replacement value. “We have really doubled the size of our organization in this downturn,” Shane Walper, the company’s CEO, said.
Dave Brunner for National Postresident and CEO of Predator Drilling, Shane Walper, at a drilling rig in Red Deer, Alberta.
Predator is also exploring opportunities in the African continent to deploy its new rigs outside of Canada, Walper said. “Two weeks ago, we had six rigs working but not one of them was working in Alberta — that’s pretty indicative.”
Scholz said he has also noticed a shift in oil drillers’ focus amid “bad public policy” in Alberta in the form of tax hikes and new policies related to climate change. “We are seeing both small private and large public companies starting to divest out of Canada,” Scholz said. “From a business perspective there are many things that are not boding well for the Canadian market.”
But the services sector’s relentless focus on cost-cutting means that the industry has managed to cut costs by around 39 per cent, Peters & Co. estimates show. That positions the much-leaner sector for a rebound if oil prices recover.
“We do believe the majority of pricing pressures have been seen, although some spot market weakness will remain until commodity prices recover,” said Dan MacDonald, equity analyst at RBC Capital Markets in a report.
The challenge for the industry in the New Year will be to innovate and get its head around developing a “manufacturing widget mindset,” Amirault said.
“We are not exploring for oil and gas anymore, we are exploiting oil and gas,” he said. “We have to have the lowest cost structure and we have to get the highest value out of those hydrocarbons coming out of the reservoir.”
Amirault, who has been running Secure since 2007, says some oil and gas producers have started to realize they can’t squeeze more cost-savings out of oilfield service providers.
Further efforts to cut costs could have health and safety implications and a general deterioration of quality of personnel operating the machinery.
Daniel Acker/BloombergSome oil and gas producers have started to realize they can’t squeeze more cost-savings out of oilfield service providers.
“We have quite a few contractors keeping their equipment in the yard,” Scholz said. “It makes no sense in some cases to put your rigs to work when you are not even covering the depreciation value, and if there is a major repair that needed to happen, you are not making any money.”
Despite the depressed environment, there are some upside catalysts that may lift spirits.
The Alberta government’s decision to retire coal-powered plants by 2030 may give natural gas production some momentum. Decisions on two liquefied natural gas export projects on the West Coast next year may also revive fortunes.
Malaysia’s Petronas Bhd. and its partners may take a decision on the Pacific Northwest LNG project in 2016, while a consortium led by Royal Dutch Shell Plc may also decide to proceed with its LNG Canada project in Kitimat.
“My glass is always half full, not half empty,” Amirault said. “The whole aspect of using innovation and technology to extract these hydrocarbons cost-effectively is what gets me up in the morning and gets me excited.”
yhussain@postmedia.com
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