'They can't make a nickel': Drillers still struggling despite oil price rebound

Geoffrey Morgan,
Financial Post
November 21, 2017

Canadian drillers are still offering their customers deeply discounted prices even though oil prices have improved and more rigs are active in the field.

The Canadian Association of Oilwell Drilling Contractors released its forecast for 2018 Tuesday, which showed the industry group expects its members will drill 6,138 oil and gas wells next year – a roughly 2 per cent increase from the year before – but still expects drilling companies to struggle with low service prices.
CAODC president Mark Scholz said drilling companies are running rigs for the clients that cost $30 million to build, but earning a day rate that they once would have expected on a $9-million drilling rig.

“They can’t make a nickel,” he said, adding that drilling companies have barely been able to earn enough money to cover their costs and pay for maintenance.

“We underestimate how much cost savings the producer has generated on the back of the drilling contractor and the well-servicing contractor in that they have generated a market that is unsustainable,” Scholz said, adding that some companies have been able to raise their prices, but that has been inconsistent and on a “region by region, customer by customer” basis.

Precision Drilling Corp. president and CEO Kevin Neveu says drilling companies cut their prices to allow oil produces to survive the collapse in crude prices that began in the middle of 2014.

“We’ve saved our customers a lot of money over the last couple of years.”

In addition to cutting prices, Neveu said companies such as Precision have also become more efficient, added new technologies and become safer – effectively providing a better service to its customers at a lower cost.

“We expected day rates would be up slightly into 2018. We’ve worked hard to get day rates up to a healthy range, but it’s really tough. We still have excess capacity,” Neveu said.

U.S. West Texas Intermediate prices hit US$30 in early 2016, but have slowly rebounded. The oil benchmark settled at US$56.83 per barrel on Tuesday.

CAODC expects an average of 200 rigs to be active in Canada next year, up slightly from an expected average of 194 in 2017, out of a total of more than 600 available drilling rigs.

As a result of the excess capacity, the CAODC expects 19 rigs will be retired over the course of the next year, as the overall drilling fleet continues to contract in Canada despite activity levels continuing to rise from a multi-decade low.

Raymond James analyst Andrew Bradford says that the oversupply of well-maintained rigs in the market place makes it difficult for companies to raise their prices meaningfully.

“We have seen them rise somewhat, but they’re definitely way below historical norms and they’re way below mid-cycle points as well,” Bradford said.

“The rates that some of the higher-spec pieces of equipment are garnering today are in the same range that the lower-spec rigs would have attracted before the downturn,” he said.

Within the wider oilfield services sector, hydraulic fracturing companies have had more success raising their prices than drilling companies, according to a report last week from RBC Capital Markets analyst Benjamin Owens.

He said investors have focused on companies that can generate cash in excess of their operating expenses despite the fact that rig counts in Canada and the U.S. are expected to remain flat over the next year. He also expects “minimal pricing improvements” next year for companies that drill or sell drilling products to oil and gas producers.

Story: Financial Post