Outlook uncertain for gas drilling business

Outlook uncertain for gas drilling business

It’s the busiest time of year for the natural gas drilling business, and while the sector is active, weak commodity prices have cast an uncertain outlook over the year ahead.

The season got off to a slow start because warm weather in northern Alberta and British Columbia earlier this winter slowed the ground from freezing, which is necessary to move rigs to remote locations. While the region is now in a deep freeze, eastern North America is still experiencing warmer weather, which has reduced demand for natural gas for heating and therefore kept the commodity price low.

“I would be lying to you to say we’re not concerned about the weather and the commodity prices and what it might do to our customers’ budgets,” said Ken Mullen, chief executive officer of Savanna Energy Services Corp., operator of the country’s third-largest drilling fleet. “But there’s still a reasonable prospect for good activity. Even the most pessimistic people are calling for 20,000 wells [to be drilled in 2007], which would be the third-best year ever.”

The winter months of January, February and March are the busiest time of year for drillers, and Mr. Mullen said this year is no exception, even if the pace of activity is slower than last year.

Last week, there were 616 active rigs, down 15 per cent from 723 rigs a year ago, according to the Canadian Association of Oilwell Drilling Contractors. Last year, when the price of natural gas was about double the current rate, activity was almost unprecedented, with 94 per cent of available rigs working. Last week’s rate was 73 per cent.

The drilling industry has been hit with slowing demand at the same time it is trying to handle increasing supply. Top producers such as EnCana Corp. and Canadian Natural Resources Ltd. are spending several billion dollars less on drilling and there are now 840 total rigs available, up 9 per cent from about 770 a year ago.

For a number of analysts and investors, the situation is appearing dire. A number of shareholders have already dumped much of their holdings in the drilling business.

Shares of Savanna have fallen more than 40 per cent since last May. Ensign Energy Services Inc., the No. 2 driller, is down about a third since June. Since August, the sector leader Precision Drilling Trust has dropped more than a third.

“I haven’t been focusing on energy services lately simply because of the commodity price issues,” said Daniel Bain, president of Toronto-based Thornmark Asset Management Inc., which in 2005 had significant investments in the sector. “On a general basis, I think that drillers and service companies will be challenged by the energy environment, which has been particularly exacerbated by the weather.”

Analyst Andrew Bradford of Canaccord Capital Inc. thinks things could get worse, entitling a recent report: “The holidays are over but the hangover continues.” In a report last week, Mr. Bradford estimated drilling rig utilization could average 45 per cent this year, down from 56 per cent last year. He added warm weather and low natural gas prices might further discourage producers.

“We believe there is more downside potential for producer capital budgets than has been widely discussed,” Mr. Bradford said.

It is the spring and summer months that are a concern to Mr. Mullen, the time of year when the business is slow in general.

“If there is a problem, it’ll be [after the first quarter],” he said.

But Mr. Mullen said he was optimistic in the longer term, noting the supply of natural gas could eventually ebb, pushing prices higher, a scenario that has been outlined by some analysts. He added that the business is still fairly robust compared with past slowdowns.

“I think all of us have seen a lot worse than this.”

© The Globe and Mail

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