Canadian oilfield services stocks swooned over fears Alberta government’s new royalty regime would erode margins for starters within the worst hit segments of the oilpatch.
The structure, announced on Friday, is “one more aspect to be concerned about for oilfield services,” according Mark Westby, analyst at Calgary-based AltaCorp Capital Inc.
“In accessory significantly decreased oil prices resulting in lower activity and pricing pressure around the oilfield services space, the royalty framework can make another incentive to push down drilling and completion costs,” Westby said.
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The industry has widely lauded the NDP government’s decision to preserve the royalty structure for oilsands, but the new regime’s concentrate on reducing drilling and completion costs for conventional wells could boost the pressure on service firms that cut their rates around 40 percent a year ago to aid oil and gas producers’ demands.
CIBC World Markets analyst Jon Morrison, however, believes concerns inside the new royalty regime’s effect on oilfield services are misplaced.
“If you peer specifically at a few of the pressure pumpers, there’s some broad speculation the royalty review is going to be negative from service providers’ perspective,” Morrison said, noting he believes ongoing market dynamics and oilfield equipment supply and demand will dictate oilfield services pricing.
Vital for hydraulic fracturing, pressure pumpers for instance Calfrac Well Services Ltd. (down 13.1 per cent), Trican Well Services Ltd. (Ten percent decline) and Canyon Services Group Inc. (down 11.9 percent), suffered heavy losses Monday as concerns inside the new structure were compounded by oil prices crashing seven percent.
Contract drillers Trinidad Drilling Ltd. and Precision Drilling Corp. also fell together, with both down a lot more than nine percent. The newest royalty regime is going to be implemented in 2017.
With oil prices falling 72 per cent within the last 1 . 5 years, the Canadian oilfield services are actually hardest hit inside the oilpatch, resulting in direct and indirect job losses a lot more than 28,000 from the segment a year ago, in line with the Canadian Association of Oilwell Drilling Contractors.
The industry body said hello will closely monitor the mechanics within the new drilling and completion cost-allowance structure, because it is “not clear how good costs is set due to the dramatic collapse in drilling and repair rig rates.”
“The government might be unwise to calibrate well costs in the current pricing environment. These cost is uneconomical for the service industry and cannot be familiar with set up a benchmark,” Mark Scholz, president of CAODC, said in the statement Friday.
CIBC’s Morrison believes that oilfield providers could cast their net wider searching for better margins in competing energy jurisdictions for example Saskatchewan, B.C. as well as the Usa, as oil prices recover.
“The market would discover that oilfield services capacity would shift to individuals regions to increase economic returns for shareholders,” Morrison said.
yhussain@nationalpost.com
@YAD_FPEnergy
