Oilpatch spending slump could be longest since 1950s, investment bank predicts

The current Canadian drilling slump could last longer and see steeper spending cuts than any since the 1950s, according to a new report from Peters & Co., arriving as besieged oilfield services companies begin releasing thirdquarter results this week.

The Calgary investment bank said in a third- quarter preview report on Monday that it forecasts operator spending in the Canadian oilpatch will fall by 39 per cent this year and 14 per cent next year, resulting in a cumulative decline of 48 per cent over the two- year period compared to 2014. It expects producers to limit spending to less than cash flow as cash flow declines by 10 per cent in 2016.

“Since the infancy of the modern industry in Canada during the 1950s, producer capital spending has declined for two consecutive years only twice, in 1986- 87 and 1998- 99 ...” it said in the report. “In 1986- 87 and 1998- 99, capital spending declined by a cumulative 43 per cent and 16 per cent, respectively, positioning the current downturn among the most severe in industry history.

“We expect Canadian drilling activity to decline on a year- overyear basis for seven consecutive quarters with a cyclical recovery beginning in Q4, 2016.”

Mullen Group Ltd., which has been reducing investment in its oilfield services arm to focus on transportation, is expected to start the reporting season Wednesday after markets close. Precision Drilling Corp., Canada’s largest drilling company, reports Thursday morning.

A preview note to investors from RBC Dominion Securities also predicts that financial results for services companies for the three months ended Sept. 30 will be lower than previously expected.

“Winter is coming, but visibility minimal at best,” wrote analyst Dan MacDonald.

“Typically, commentary around third- quarter results would bring at least some initial thoughts on the winter drilling season, typically the year’s strongest quarter.

“However, we expect visibility to be very low, with many exploration and production budgets not likely to be finalized until later in 2015 early 2016, leaving service companies in the dark on near- term demand.”

Both reports anticipate more bad news for investors.

Peters said low activity is translating into balance sheet deterioration as debt- to- cash- flow ratios move higher. It predicted bank covenant relief will likely be needed by several companies, including leading pressure pumpers Trican Well Service Ltd. and Calfrac Well Services Ltd., adding several companies will likely also review their dividend payouts.

RBC also predicted more cost cutting, covenant reviews and dividend cuts, while suggesting consolidation is coming, with small private operations the most likely candidates for takeout.

Drilling activity in the Western Canadian Sedimentary Basin fell by more than 50 per cent in the third quarter compared with the same period of 2014.

Peters predicts only an average of 172 rigs will be running in the fourth quarter versus 184 in the third quarter ( and 272 rigs in the fourth quarter of 2009, during the last significant downturn). It said it expects stable activity in October and November, followed by a “meaningful decline” in December as customers exhaust their 2015 capital programs.

Also Monday, Halliburton Co., the world’s second- largest oilfield services provider, reported a bigger- than- expected 36 per cent drop in quarterly revenue, hurt by weak drilling and pricing in North America. It said fourth- quarter revenue and margins were likely to be flat to modestly low compared with the prior quarter.

Industry leader Schlumberger, which posted a 33 per cent drop in quarterly revenue last week, said it did not expect a recovery in demand before 2017.