Major Themes in Oil Service Companies’ Third Quarter Results

A tough current environment, but the future appears promising for this high beta way to play energy.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published November 11, 2013 3:52 pm EST

Canadian oilfield services companies recently reported their third quarter results. Let’s take a look at some major themes that have come out of these updates.

Revenues Weak Year over Year

Oil service company revenues experienced a year over year decline in the third quarter. This is due to lower activity levels as well as a market that remains highly competitive. Trican’s (TSX: TCW) revenue declined 8%, with Canadian revenue falling 13% and U.S. revenue falling 8%. Precision Drilling (TSX: PD) managed to eke out a mere 1% increase in revenue as a result of increased international activity as well as higher dayrates in Canadian contract drilling.

The Market is Still Very Competitive

In aggregate, there is currently an oversupply of rigs in the market. Pricing was weak across the board as a result of this. As for Trican, it saw revenue per job in Canada decrease by 9%. Pricing in the U.S. stabilized somewhat, with a decline of 2%, which was an improvement relative to the declines seen last quarter.

If we focus on the more technical rigs that have the capacity to go deeper, there is a healthier demand/supply dynamic.

Liquified Natural Gas (LNG) Related Drilling Becoming More of a Reality

There are a number of current proposals to build LNG plants along the coast of British Columbia with anticipated start-up times from 2015 and beyond. There is a flurry of activity in a number of deep basin plays in northwestern Canada, including the Montney, Duvernay, Horn River and Liard Basin, all of which are well positioned to be a source of supply for the LNG market. This has increased demand for deep, modern drilling equipment in Canada.

Trinidad Drilling (TSX: TDG) announced a new rig build contract for LNG related drilling in Canada. This highly technical rig will be designed specifically to drill natural gas in the Liard Basin, an area that is being developed to supply natural gas for future LNG plants that are being proposed for the west coast of British Columbia. The rig is expected to be in operation in the second half of 2014.

Signs of Increased Focus on Managing Cash Flow

Precision Drilling, for example, is reducing planned expenditures by $45 million in an effort to maintain capital discipline and respond to industry weakness.

Increasing Dividends

Precision Drilling announced a 20% dividend hike, demonstrating its confidence in the longer term outlook for the company. Ensign Energy (TSX: ESI) also announced a dividend hike of 6.8%.

Bottom Line

Oil service companies face a very seasonal and cyclical business model. Right now, the market is challenging. On the flip side though, these companies also face a future that looks promising, as the industry is gearing up for exporting LNG to Asia and other markets. Though not for the faint of heart, an intriguing long-term story is potentially developing in this space.