Precision builds new rigs with drilling on rebound

After chopping millions from its capital budget last year in the face of slowing North American exploration activity, Canada’s largest drilling contractor is building rigs again.

Precision Drilling Corp. of Calgary said Thursday it will increase its 2013 capital budget by $121 million to $654 million to add five new-build Super Series rigs to previous plans to build just one.

It’s the latest sign of growing confidence in a Canadian oilfield rebound driven by emerging resource plays in northern Alberta and British Columbia and a potentially enormous new consumer in proposed West Coast liquefied natural gas export terminals.

Kevin Neveu, president and chief executive of Precision, said on a conference call to discuss second-quarter results that three of the new rigs are going to the United States and the other two are contracted for northwestern Alberta natural gas drilling.

He said activity in Canada is looking up after a decline last year blamed on uncertain oil prices, poor natural gas prices and a lack of access to capital for Canadian junior producers.

“It’s clear we are seeing initial third-quarter demand ahead of last year’s and we expect this trend to continue for most Canadian areas as the ground dries,” Neveu said.

“It’s a little early to say — indications look good — but we expect to see this modestly improved customer demand continue through the third and fourth quarters and the unusual tail-off we saw in the fourth quarter of last year may prove to be a once-off anomaly.”

The new rigs will take Pre- cision’s Tier 1 North American fleet to 196 from 109 three years ago.

Dan MacDonald, an analyst for RBC Capital Markets, speculated in a morning note the Canadian rigs could be used to probe the emerging Alberta Duvernay formation.

Neveu said later that Montney gas and Duvernay liquids drilling is expected to increase this year.

Precision shares rose five per cent or 47 cents to close at $10.39 on the Toronto Stock Exchange, the highest in more than a year.

Also Thursday, the Petroleum Services Association of Canada said in a forecast revision it expects to see a three per cent increase this year over 2012 drilling levels to 11,415 wells.

That’s 15 more than it predicted in November 2012.

PSAC expects lower activity than previously forecast in Alberta, Manitoba and Saskatchewan but says an increase of 11 per cent in drilling in B.C. to 506 wells will more than make up for it.

In a research note Wednesday, Calgary investment bank Peters & Co. said it believes increased drilling in Duvernay, Horn River, Montney and Wilrich resource plays in northern B.C. and Alberta will support growth from about 95 rigs in 2012 to 125 this year and about 160 rigs in 2014.

“Longer-term, annualized rig demand for these plays has the potential to increase to upwards of 300 rigs, with this predicated on the Montney and Horn River being principal supply sources for Canadian LNG export and the Duvernay and Wilrich developing into Montney-scale resource plays (about 500 wells per year),” it stated.

It estimated 100 new drilling rigs may be needed at a cost of over $2 billion.

Neveu said on the call Precision, too, expects to see increased demand starting this summer for delineation drilling in northeastern British Columbia as producers prove up gas plays to supply LNG demand.

About 10 companies are contemplating LNG projects. The larger projects for which plans are known would each export more than the entire current B.C. gas production of about three billion cubic feet per day.

Precision also reported secondquarter financial results Thursday that were largely in line with RBC and consensus analyst expectations.

It blamed lower North American oilfield activity, offset by higher average day rates and more international and directional drilling, for revenue that came in at $379 million, about one per cent lower than the same period of 2012.

Earnings before income taxes, finance charges, foreign exchange, depreciation and amortization (EBITDA) were $88 million compared with $97 million in the three months ended June 30, 2012.

Net earnings fell to $473,000 from $18 million in the year-earlier period, mainly due to a $73-million depreciation and amortization charge.

Drilling rig utilization days decreased 10 per cent in Canada and 17 per cent in the U.S. in the second quarter compared to the same three months of 2012, Precision noted, citing wet weather in Canada, continuing low natural gas prices and lower customer budgets.

The company said about 90 per cent of its North American rigs are drilling horizontal wells.

Precision said its international fleet will grow to 13 rigs, versus five rigs a year ago, through the redeployment of idle American equipment.

It said it has dispatched two drilling rigs to Northern Iraq in the Kurdistan region, one of which has been drilling for several weeks and the other expected to go to work before the end of July.

It has also signed a deal for an upgraded 3,000 horsepower drilling rig to work in Mexico under long-term contract, bringing the Mexican fleet to eight.

It has three in Saudi Arabia and has plans to deploy two rigs to Kuwait in 2014.