Drillers in oilpatch going full tilt
605 of 660 rigs busy: Analysts say pick-up may not be reflected in share prices
Financial Post, Friday, February 28
By Paul Haavardsrud
Almost the entire fleet of Canadian oil and gas drilling rigs is in use.
CALGARY - A quick shake of the magic eight ball would likely kick back an "All Signs Point To Yes," for drilling companies these days, as sky-high commodity prices continue to send cash pouring into the oil and gas sector.
According to drilling rig counts on both sides of the border, producers' previous hesitancy to pump cash flow back into the ground seems to have disappeared, as commodity prices continue to defy gravity.
In Canada, drilling rig numbers are almost maxed out, while rig counts in the United States, which languished for the last year, have also begun to climb.
Meanwhile, low storage levels for both oil and natural gas suggest drilling activity will stay healthier than usual as producers continue to drill to replenish depleted reserves.
In short, it turns out drillers, after weathering a tough start to winter, look like they're going to make a pile of money this year.
For Canadian oilfield services stocks, the key to understanding whether the good times will keep rolling for the rest of the year will be found in the rig count numbers for the second quarter, said Miles Lich, an analyst at Peters & Co. in Calgary.
Almost the entire fleet of Canadian drilling rigs -- about 605 out of 660 -- is currently in use as producers scramble to take advantage of natural gas prices that are more than double historical averages, by drilling as many easily exploited shallow gas wells as possible.
Indeed, yesterday Dundee Securities analyst Matt Mackenzie moved his western Canadian well completion estimate to 17,100 from 16,010, based on the higher commodity prices.
Last year, well completions were 14,200, while in 2001 -- when gas prices spiked to more than US$10 a gigajoule -- 17,625 wells were completed.
While such a high rig utilization rate is going to translate into boffo profits for oilfield services stocks in the traditionally strong first quarter, as usual the real test will come during break-up season in the second quarter when the weather warms up and rigs get taken down.
"If you look back at 2001 in the second quarter the rig count never dipped below 200, a normal [spring] break-up is 100 maybe 115," Mr. Lich explained. "If the rig count stays above 200, which I think it will ... what that does is keep a core number of rigs running, which also keeps pricing up."
For drillers a low rig utilization rate presents a double whammy, as not only do rigs sit idle, but the ample supply of equipment also sends rates lower.
During the second quarter last year, the rig count dropped to 110.
"When you run 100 rigs what happens is prices just get beat up, they get annihilated," explained Mr. Lich. A higher rig count through spring, however, positions service companies for better rates when drilling picks back up later in the year.
Canadian oilfield services stocks, which have already enjoyed a run-up on these fundamentals, have also been bolstered by a long-awaited uptick in drilling activity in the U.S.
In the past few weeks, rig counts south of the border have trended higher, moving above 900 from the 850 range they had hovered in for most of the year.
Even with the soaring commodity prices, many U.S. producers chose to spend their cash flow paying down debt, after a heavy round of consolidation in 2001, rather than on expanded drilling programs.
With so much noise in the commodity markets, such as the so-called "Iraqi war premium," producers had also been inclined to take a more conservative route to capital spending, rather than commit to big budgets that could be sideswiped by falling commodity prices.
That sentiment, however, appears to be shifting, with the rig count hitting 928, a number that could rise as drilling on the gulf coast picks up.
The increased activity could make for some opportunities among U.S. drillers, which have lagged their Canadian counterparts, Mr. Lich noted.
The analyst did caution, however, that drilling stocks across the board are almost guaranteed to pull back when oil prices return to more normal levels.
"When it's over and done and the oil price settles out you know these stocks are coming in," he said. "Whether they're making money or not it will have nothing to do with that, it's a sentiment driven move versus the fundamentals of the company."
As for what the increased activity will mean for Canadian drilling stocks even if commodity prices remain high, that question, as always, is up in the air.
BMO Nesbitt Burns analyst Randy Ollenberger, who picked up coverage of the sector recently with a "market perform" rating, told clients last week, "We believe 2003 will be much like 2001, when higher industry activity levels did not correspond with an increase in equity values as the equities outperformed the prior year in anticipation of improved industry conditions."
Similarly, Griffiths McBurney analyst Todd Kepler picked up coverage of the sector this month with a "market weight" rating, noting: "While the oilfield services sector is positioned to benefit from increased spending levels by the E&P sector, we do not anticipate growth above what current capacity will allow ... notwithstanding the current robust drilling environment in Canada, capacity levels are currently considered sufficient to handle the expected increase in demand for services this year."
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