Investors Bullish on Petroleum Services Sector

By: Petroleum Services Association of Canada (PSAC)

Much of the petroleum services sector is enjoying economic recovery and robust growth lately, and the audience at the Petroleum Services Association of Canada’s (PSAC’s) 17th annual Investment Symposium heard what’s behind it all.

Buyside analysts, institutional investors, portfolio managers, diversified fund managers, industry sellside analysts, and credentialed retail brokers from all over North America gathered in June at Calgary’s Hyatt Regency to glean information on where the sector is at, and where it’s headed.

“The future’s so bright I gotta wear shades,” said an optimistic and enthusiastic Roger Serin, Managing Director and Head of Energy Research for TD Newcrest, when he gave the industry overview at the Symposium. Serin was referring to TD’s current assessment of the petroleum services sector, and added, “This is the most bullish TD’s been in some time.”

This growth is powered by a number of contributors, said Serin: increased drilling activity of deeper, longer, more complex horizontal wells; foreign investment in the Western Canadian Sedimentary Basin (WCSB); the pursuit of oil due to high oil prices; and innovations in drilling and completion technologies.

Changes in Alberta’s royalty regime are also having an impact on this growth. Most horizontal wells oday are receiving royalties of five per cent – a big driver for an upsurge in activity on the horizontal side and an increase in land sale dollars. There is also a proliferation in total land parcels and in dollars per acre. Land sale prices are trending up and are now at more than $3 billion per year across BC, Alberta and Saskatchewan. Large companies are buying large parcels of land at very high costs, and as Serin noted, this is not a “mom and pop” activity – it’s “for the big boys.”

As well, technology and new play types are impacting the shift in activity. Serin said horizontal and directional wells now account for 75 per cent of all wells being drilled. He explained that this is due to two drivers: one is that a horizontal multi-stage fraced well provides significantly higher productivity, and the second is that the lower royalties coupled with longer drilling mean better royalty breaks in some cases, so there exists a bias to drill longer wells and horizontal wells. Additionally, western Canada offers very good shale plays and even better hybrid plays of low permeability rock that was productive conventionally but is much more productive and economically viable when drilled unconventionally with horizontal wells and multi-stage fracing.

An example is Canadian Energy Services & Technology Corp. (CES), a drilling fluid service provider to oil and natural gas producers. Tom Simons, CES’ President and CEO explained that CES has patented a number of innovative drilling fluid technologies for horizontal drilling designed to be adaptable to a broad range of complex and varied drilling scenarios, thus helping customers eliminate inefficiencies in the drilling process and assist them in meeting operational objectives and enviromental compliance obligations. “Typical savings for an operator when they use our drilling fluid system containing one of our patented products…is 30 per cent to 40 per cent less oil is required,” said Simons.

Another company focused on innovation and customer savings is Pason Systems Inc., an oilfield data solutions provider that has developed and is introducing software that’s woven into its rig system. It decodes mud pulses from measurement while drilling (MWD) tools that previously would have been handled by incongruent directional and MWD tools.

David Holodinsky, Pason’s General Manager for Canada, told the audience of investors, “We think the interest in remote drilling is going to be enhanced by people offsite having the same information as the people onsite helping to make decisions. This may minimize rig costs and possibly personnel costs as well.”

And companies like Canyon Services Group Inc., providing ground-breaking services and prioritizing recruitment and retention of adequate numbers of well trained employees will be in demand as investors look for companies to invest in.

In addition to new technologies and play types impacting the sector, Serin indicated that oil sands work is also a significant part of the business in western Canada, requiring services like drilling, SAGD, core hole services, trucking services, and more. It is expected that oil sands work will generate over $15 billion in the next few years, and will be a driver of activity in Alberta and in Canada overall.

In terms of investment, Serin explained that “as companies have a much higher prospect inventory with the resource play focus, there is increased strategic and economic need for new sources of capital, and capital from outside Canada is filling that need and developing assets.” Last year, $10 billion in new money was injected into the WCSB, translating to significant activity.

Finally, Serin noted that the petroleum services sector is not only driven by what goes on in western Canada – it’s also fuelled by activity outside of Canada. Today 40-50% of the sector’s revenue is from outside of Canada. International operations are very important to this sector and will continue to be in the years to come.

In terms of areas service providers will need to pay attention to, it comes as no secret that the skilled labour shortage is and will continue to be an issue causing concern as the services sector continues to recover and grow. Also, health, safety and the environment are areas in which companies need to increasingly demonstrate strengths, and should be prepared to communicate publicly about.

Safety is considered job one industry-wide, and PSAC prides itself and its members on ensuring safety is a main focus for all areas of the business. And as environmental issues are globally garnering more attention than ever before, companies must put a greater and concerted focus toward their environmental programs. Environmental incidents of any size – large or small – become dominant in the news and have far reaching impacts on a company’s reputation and ability to operate. A single incident can – and often does – lead to the industry as a whole being viewed in a negative light.

Environmental activities are expected to be drivers for the conventional and unconventional business going forward, and  stakeholder buy-in will be a critical part of the process, requiring companies to consistently and readily demonstrate ongoing  improvement in this area.

Ultimately, petroleum se vice sector companies that can offer solutions in each of these areas and have the ability to operate outside of Canada will fare very well in the future as oil and gas activity grows and expands internationally. The presentations at PSAC’s Investment Symposium by companies such as Trican Well Service Ltd., Canadian Energy Services & Technology Corp., Pason Systems Inc., Canyon Services Group Inc., and Flint

Energy Services – to name only a few – provided excellent indications of the leadership the services sector is contributing as the industry ramps up activity. These companies are charting the course to stay ahead of industry’s growth through their new technologies and innovations, their focus on providing strategies that address HS&E concerns for themselves and customers, and their ability to address the labour shortage by prioritizing recruitment, retention and training strategies.