Canadian oilfield services stocks swooned over fears Alberta government’s new royalty regime would erode margins for one from the worst hit segments of the oilpatch.
The structure, announced on Friday, is “one more aspect to worry about for oilfield services,” according Mark Westby, analyst at Calgary-based AltaCorp Capital Inc.
“In accessory for significantly decreased oil prices resulting in lower activity and pricing pressure around the oilfield services space, the royalty framework can create one more 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 emphasis on reducing drilling and completion costs for conventional wells could add more pressure on service companies that cut their rates up to 40 per cent this past year to accommodate gas and oil producers’ demands.
CIBC World Markets analyst Jon Morrison, however, believes concerns over the new royalty regime’s impact on oilfield services are misplaced.
“If you look specifically at some of the pressure pumpers, there’s some broad speculation that the royalty review is going to be negative from service providers’ perspective,” Morrison said, noting he believes ongoing market dynamics and oilfield equipment demand and supply will dictate oilfield services pricing.
Vital for hydraulic fracturing, pressure pumpers such as Calfrac Well Services Ltd. (down 13.1 per cent), Trican Well Services Ltd. (10 per cent decline) and Canyon Services Group Inc. (down 11.9 percent), suffered heavy losses Monday as concerns over the new structure were compounded by oil prices crashing seven per cent.
Contract drillers Trinidad Drilling Ltd. and Precision Drilling Corp. also fell in tandem, with both down a lot more than nine per cent. The brand new royalty regime is going to be implemented in 2017.
With oil prices falling 72 per cent in the last 1 . 5 years, the Canadian oilfield services happen to be hardest hit within the oilpatch, resulting in direct and indirect job losses in excess of 28,000 related to the segment this past year, according to the Canadian Association of Oilwell Drilling Contractors.
The industry body said it will closely monitor the mechanics of the new drilling and completion cost-allowance structure, as it is “not clear how good costs is decided given the dramatic collapse in drilling and service rig rates.”
“The government would be unwise to calibrate well costs in today’s pricing environment. These costs are uneconomical for that service industry and should not be used to establish a benchmark,” Mark Scholz, president of CAODC, said in a statement Friday.
CIBC’s Morrison believes that oilfield providers could cast their net wider in search of better margins in competing energy jurisdictions such as Saskatchewan, B.C. and also the United States, as oil prices recover.
“The market would find that oilfield services capacity would shift to people regions to maximize economic returns for shareholders,” Morrison said.
yhussain@nationalpost.com
@YAD_FPEnergy
