Canadian oilfield services’ cycle ‘is dead — or it’s at least very very sick’ — analysts

Despite a 25 per cent increase in oil prices this year, stocks of Canadian oil services companies are languishing at rock bottom prices, and second-quarter results, set to kick off this week, are unlikely to lead to a relief rally, analysts say.

“The Canadian oilfield services cycle is dead – or it’s at least very very sick,” wrote Andrew Bradford, a Raymond James analyst and one of the co-authors of the report published by the investment bank Wednesday.

While the broader S&P Capped Energy Index has kept its head above water this year, with 0.23 per cent gains year-to-date, oilfield services players such as Calfrac Well Services Ltd. (down 16.8 per cent for the year), Trican Well Service Ltd. (down 17.7 per cent), Western Energy Services Corp. (55.6 per cent lower), and Mullen Group Ltd. (down 23.5 per cent) are plumbing new lows. Precision Drilling Corp., the country’s largest oilfield services company, is trading 3.4 per cent lower for the year.

Raymond James attributes the declines to production cuts, or curtailments, initiated by the previous Alberta government to boost prices, which has led to depressed activity and mothballing of rigs.

“Canadian oil and gas producers, as a group, have not demonstrated willingness or ability to use free cash flow to advance or accelerate development plans; a simple corollary of which is that higher crude or natural gas prices do not motivate higher investment levels,” Bradford and fellow analysts said in their report.

The situation is exacerbated by the lack of pipeline capacity, as the government-owned Trans Mountain pipeline and TC Energy Corp.’s Keystone XL pipeline will take a while to be built, compelling producers to rein in output.

A glimmer of hope amid the gloom is the 285,000 barrels per day shipped on rail in May, its highest level since January, according to data released by the National Energy Board on Wednesday — but it may not be enough to move the needle for an industry that produced 4.5 million bpd that month.

Raymond James’ findings echo an RBC Capital Markets report released Tuesday, which cuts rig count for the year, and said the second quarter saw a paltry 90 active rigs — down 52 per cent compared to the previous quarter.

“We have decreased our 2019 rig, well, and completion counts between 6-8 per cent,” RBC analyst Keith Mackey said in a note. “Our updated rig and well counts reflect a slow start to third-quarter activity based on weather delays, lower expected commodity prices, and continued Alberta production curtailments. As Alberta is the largest driver of basin activity, we expect overall activity to be impacted while curtailments remain in effect, which we expect will be into 2020.”

A 10 per cent increase in producer cash flows only results in just under a 2 per cent increase in producer spending. For an industry that consumes its capital, a 20 per cent marginal reinvestment rate is “strikingly low,” RBC said.

Precision Drilling reports its earnings on Thursday, with Trican and Calfrac announcing earnings next week.

“We’ll be surprised if any oilfield outlook deviates from the following narrative to any notable degree,” Bradford of Raymond James said. “Visibility will be described as fairly weak; we may hear of expectations to get another rig or two or spread or two working in the next couple of weeks; pricing is holding steady, but there is no latitude for any increases.”

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