It’s taken a while to get here, but Canadian conventional oil and gas producers are spending more money as commodity prices climb.
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Varcoe: Oilpatch spending grows on back of $100 crude, but labour shortages prevent rapid growth Back to video
Some of the increase is due to inflation and costs rising by 10 to 15 per cent. Some is directed towards more drilling activity and modest production increases.
However, challenges stand in the way of more capital expenditures and activity in the field: a lack of equipment — and staff — in the oilfield services industry to make it happen easily.
“The incentive is definitely there to put as much capital to work in the ground as we can,” Peyto Exploration & Development CEO Darren Gee said on a first-quarter earnings call Thursday.
“The challenge, of course, to do that is we are kind of at the limit of the people and the equipment and the amount that we can go and do.
“The industry, though, is kind of tapped out.”
With today’s high prices, Peyto is seeing some new wells payout within three to six months, but prices remain volatile and there are limitations on what additional work can be done due to labour shortages, Gee said in an interview.
With soaring energy prices, much of the oilpatch has released strong first-quarter results in the past few weeks, marked by massive increases in cash flow levels, rising profits and more money returned to shareholders through dividends and share buybacks.
Energy prices have climbed this year following Russia’s invasion of Ukraine. West Texas Intermediate oil closed Friday above US$110 a barrel, while benchmark U.S. natural gas prices sat at US$7.67 per million British thermal units.
Peyto reported net earnings jumped 154 per cent to $98 million during the first three months of the year. Funds from operations broke a company record and reached $203 million; throughout 2020, the company’s annual cash flow level was just $212 million.
Earlier this week, Crescent Point Energy reported net income of almost $1.2 billion during the quarter, up from $22 million a year earlier.
Some companies have increased their capital budgets recently.
On Thursday, Headwater Exploration announced a 59 per cent boost to its capital budget — to $230 million — as it increases production.
The junior petroleum producer has a new region to develop and Headwater president Jason Jaskela said the company has the ability and places to invest more capital. However, he noted supply chain issues, inflation and labour shortages are challenging the entire industry in North America.
“If tomorrow we wanted to go out and add 10 rigs, it’s not happening. For us, we’re looking to add an incremental rig … so it’s quite manageable and allows us to grow,” Jaskela said.
“For the basin to show growth, the North American basin, it is exceptionally challenging.”
Earlier this week, NuVista Energy increased its capital spending guidance for the year by more than 20 per cent to about $365 million.
Earlier this month, Kelt Exploration bumped its capital spending by six per cent. Tourmaline Oil Corp. said previously it would boost spending by about $100 million to $1.23 billion due to inflation and a new pool exploration program.
Analyst Patrick O’Rourke of ATB Capital Markets noted inflation for many producers has been running around 10 to 15 per cent, which has increased spending in the sector.
“Inflation is real, it’s in the system and companies are doing their best to offset it through efficiencies,” he said.
Total capital spending in Canada this year is expected to rise by 20 to 30 per cent over last year’s levels, added oilfield services analyst Tim Monachello of ATB Capital Markets.
The oilfield services sector was decimated by a steep drop in industry spending after the decline in energy prices in 2014 and the subsequent collapse in oil markets at the start of the pandemic.
Activity has been picking up this year. The Canadian Association of Energy Contractors reports 92 rigs were drilling in the country on Friday, compared with 65 during the same period last year.
A new drilling forecast released by the association this week anticipates 6,900 oil and gas wells will be completed this year, a seven per cent increase from its projection in November. The outlook calls for an additional 2,500 jobs to be created.
However, labour shortages will be a drag on activity through the rest of the year and global supply chain challenges will impact the availably of materials, the association cautioned.
To attract more workers into the sector, the group called for its members to increase the recommended minimum wage for various positions on drilling rigs by nine per cent (as of June 1) and 17 per cent for positions on service rigs, effective May 1.
“This is to prepare our workforce and to start recruiting,” said Mark Scholz, president of the energy contractors association.
“We’re trying to signal to prospective workers that we can both provide really competitive wages and … a line of sight into some stability in the level of activity.”
After several tough years, a transition is taking place as many producers have the ability to pay down debt, return more money to shareholders and increase capital budgets as commodity prices remain strong.
But will they be able to access the equipment and personnel to do so?
“I think there’ll be producers in the short term that are going to be disappointed,” said Dan Halyk, CEO of Total Energy Services, which operates drilling and service rigs in Canada and the United States.
“What the workforce needs is some certainty that this is stable and long-lasting and $105 oil certainly helps create that impression.
“Generally, we’re seeing some success bringing people back, but … you can’t just snap your fingers and have magically another 100 rigs show up ready, willing, and able to work.”
Chris Varcoe is a Calgary Herald columnist.
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