Drillers expected to rebound
A rebound in the oil and gas industry is poised to boost drilling and fracking companies, which have felt the pressure of the oil price downturn the longest, as analysts expect activity and pricing to rise 10 to 15 per cent over the coming year.
As oilfield services companies begin reporting their first quarter earnings this week, led by Mullen Group Ltd. on Wednesday, investment banks expect the sector to post surprisingly improved financial results.
CIBC World Markets analyst Jon Morrison said in a research note Tuesday that activity levels and operating margins of fracking companies, or pressure pumpers, should beat analyst expectations for all three Canadian providers — Trican Well Service Ltd., Calfrac Well Services Ltd. and Canyon Technical Services Ltd.
Morrison upgraded Trican’s stock to “outperformer” but maintained his target price of $6.75 per share. He also raised his target price on Canyon to $7.40 from $6.90, — the company agreed last month to a merger with Trican.
The analyst also predicted that oilfield service companies’ ability to hire enough people would become “a material challenge” and that “labour pinch points are starting to arrive across the energy value chain and we don’t believe that will alleviate anytime soon.”
Fracking companies, in particular, hit just 40 to 60 per cent of their hiring targets, Morrison said.
“Although the Canadian pressure pumping sector has faced immense duress over the past two years, look for partial reversal of fortunes in (the first quarter),” Morrison said.
Other oilfield services providers, like drilling companies, could expect better pricing for their services over the next 12 to 18 months because the average Canadian oil and gas producer expects its oilfield services costs to rise 10 to 15 per cent in 2017, Morrison said.
“Overall, we believe these figures better align with current market realities and may end up being light as select large ticket service costs are already up high doubledigit percentages from the bottom,” Morrison said.
Similarly, AltaCorp Capital analyst Aaron MacNeil said that “by all measures, activity was really strong in the first quarter, perhaps not from a historical perspective but certainly from a sequential perspective.”
He said that oilfield services providers are usually the last companies in the broader industry to experience a rebound.
“You always see activity first and you see pricing lag,” MacNeil said. He also said that while prices have risen for pressure pumping companies, the inflation has not affected all oilfield services providers equally.
Prices in the Canadian drilling industry, for example, are set in October before the busy winter drilling season begins. This year, however, Organization of Petroleum Exporting Countries (OPEC) agreed to an output cut after those prices were set and so oil prices rose without leading to a price rebound for drillers.
MacNeil said he expected prices drilling companies charge oil and gas explorers and producers would rise in the second half of 2017 as a result.
However, he also said in a research note the West Texas Intermediate benchmark oil price seemed to be rangebound in the low US$50 range and revised his 12-month target price on several oilfield services companies — including top picks like Precision Drilling Corp. — downward as a result.
Precision’s 12-month target price was cut from $10.25 to $9, Ensign Energy Services Inc. was cut from $12.50 to $11.50 and Shawcor Ltd.’s target price was cut from $47.50 to $42.75.
Although the Canadian pressure pumping sector has faced immense duress over the past two years, look for partial reversal of fortunes in (the first quarter).