Service And Supply Companies Boosted 2013 Capex Budgets In Q2

July 31, 2013

The recent second quarter saw a trend towards oilfield service and supply companies boosting their 2013 capital expenditure budgets, in some cases in response to demands from producers looking to increase natural gas drilling in advance of LNG development on the West Coast.

Dana Benner, managing director of oilfield services institutional research at AltaCorp Capital Inc., told the Bulletin there are a variety of current drivers for such 2013 capital spending increases, most notably due to an accelerated push for rig upgrades.

“Companies are clearly feeling the need to continue to keep their rigs as modern as possible, and are thus spending money on rigs that are often reasonably new but need equipment such as bigger mud pumps, top drives, walking systems to make them pad capable, and just a variety of automatic pipe-handling equipment and things that just generally make a rig more efficient or more powerful for the increasing number of horizontal wells and increasing lateral length, in particular.”

Benner noted five service and supply companies boosting 2013 capital spending towards rig upgrades in Q2.

New-build rigs are another reason for capital expenditure increases for 2013 budgets, Benner said, including new builds for what he calls a “new category” of projects required in response to increasing demands for liquefied natural gas (LNG)-related rigs.

“These are ultra-deep, ultra high-horsepower rigs — let us call them $40 million-plus rigs — that would be among the largest in Canada, if not North America,” he said, adding a couple companies announced such rig projects during the last quarter and he expects more companies to make LNG rig announcements in the near-term as well.

“None of [these further projects] have a final investment decision by the group of producers to actually move forward, but of course all signs are looking good.”

Scott Treadwell, vice-president of oilfield services equity research at TD Securities Inc., said he believes the reason for recent capital expenditure increases is in a large part a response to the typical cyclical nature of the oil and gas industry.

“When capex was set last year, the industry was about as negative as it had been since 2010. So based on that outlook, capex was set at a certain level,” he said, adding there is also currently “better visibility” in regards to LNG, and producers are constantly looking for better assets to use in operations.

In some cases, he said, companies will spend on new builds, while other spending will go towards increasing capacity and logistical efficiency.

Kevin Lo, managing director of institutional research at FirstEnergy Capital Corp., said most contractors are building new equipment only on customer commitments and not based on anticipated demand. Many of these companies are currently doing LNG work, so Lo said one way to think about 2013 capital spending increases is that producers are anticipating LNG exports.

Trinidad Drilling Ltd. is expanding its 2013 capital expenditures program to approximately $140 million, which the company expects to fund from its cash flow from operations (DOB, July 30, 2013). The company originally planned to spend $75 million in 2013.

The company is expanding its capital program for the year in response to numerous customer requests for upgraded equipment, as well as to fulfil a contract the company signed to build one of Canada’s largest and most technically-advanced land rigs that will drill for natural gas in the Liard Basin, which is an area under development to supply gas for future LNG plants proposed for the West Coast of B.C.

AKITA Drilling Ltd. announced it had signed a multi-year contract with an as-yet unnamed senior oil and gas producer to build a new, ultra-deep capacity pad rig to drill in Western Canada, which is scheduled to become available for use by the second half of 2014. The top-drive, diesel-electric rig would be larger than anything in AKITA’s current fleet, of which the deepest-capacity rig is currently rated at 6,700 metres (DOB, July 31, 2013).

While service and supply companies could announce more capital spending increases later on in 2013, Lo does not expect LNG to play as big a role in such increases. With current oil prices, he said, demand for drilling in liquids-rich plays should continue to be strong. Therefore, Lo does not anticipate announcements for new LNG-related rigs to occur in next few months.

Treadwell expects any new build equipment for Canada would be focused on northeastern B.C., including in the Montney, Liard and Horn River.

“I don’t know if there will be [more] increases to 2013 spend levels, because unless you announce plans very soon, it is hard to spend much in the current year,” he said. “But I would not be surprised to see new builds announced later in the year with some growth into 2014 spend levels.”

Even if there are no further LNG-related rig announcements in 2013, Benner said recent announcements are only the beginning of many more to come. Another reason for capital expenditure increases during Q2 2013, he believes, would be companies ordering large components in anticipation that there could be a contract to build new rigs soon.

“If you get a contract, you’re already well along the way to building it, but if you don’t you can always use these components to replace aging components on existing rigs, he said, adding acquisitions and new equipment purchases were also reasons for a couple service and supply companies boosting their capital budgets during the last quarter.

“This is all very encouraging,” he said of the recent announcements, which show signs of regeneration for a business suffering with slower activity, particularly in Canada for at least the past year or more.

Mullen Group Ltd. recently increased its 2013 capital budget by $20 million to approximately $100 million, with the majority of the increase allocated towards the purchase of specialized operating equipment for the company’s oilfield services segment, most notably Canadian Dewatering LP, as well as for businesses involved in transporting production-related fluids (DOB, July 26, 2013).

Lo said a company such as Mullen tends to be disciplined, and therefore only spends capital where it sees a real return on that investment.

Precision Drilling Corporation recently announced it would bump up this year’s capital budget 22.7 per cent to $654 million from $533 million announced earlier this year (DOB, July 26, 2013). Its original 2013 budget, announced late last year, was set at $485 million.

The $654-million figure includes $330 million in expansion capital, $139 million for rig upgrades, and $185 million for sustaining and infrastructure spending, the company said. Expansion capital spending includes the cost to finish construction of two drilling rigs from Precision’s 2012 capital program, six new-build rigs for North America and 60 per cent of the cost of two new-build rigs for Kuwait, and other equipment.

Trican Well Services Inc. recently increased its 2013 capital budget by $27 million, to be directed to conversion of frac pumpers to bi-fuel capacity, as well as maintenance and infrastructure initiatives for Canada and U.S. operations (DOB, Aug. 1, 2013).

The company’s originally-approved 2013 capital budget was $32.3 million (with carry-over spending from the 2012 budget of approximately $110 million), and with current 2013 expenditures and remaining expenditures from the 2012 capital budget, Trican management expects to spend between $160 million and $180 million on capital projects in 2013.

Western Energy Services Corp. recently announced it would boost its 2013 capital budget to $94 million from $86 million announced in May. Of the new total, approximately $81 million is directed towards the company’s contract drilling division, with most of the balance going to Western’s production services business (DOB, Aug. 2, 2013). Last December, the company set its initial 2013 budget at $60 million.

CanElson Drilling Inc. increased its 2013 capital budget 25 per cent to $102.8 million from the previous figure of $82.1 million. The $20.7-million budget increase includes $4 million in expansion capital for long-lead items relating to rig assembly, $2.2 million for pump upgrades and a drilling pad moving system, and $15 million for three more drilling rigs from Calmena Energy Services Inc. (DOB, Aug. 2, 2013).

Savanna Energy Services Corp. has increased its 2013 capital budget by $19.4 million to $137.4 million, and of that $14.4 million of the increase goes to order long-lead drilling components to address timing constraints related to North American tenders in which Savanna is currently participating (DOB, Aug. 9, 2013).

Benner noted Savanna also announced a new-build service rig for Australia in Q2, which he said is “another interesting trend” of either the upgrade or building of new rigs by companies for deployment Down Under.

Despite experiencing losses in the second quarter and first half of the year, Canyon Services Group Inc. announced it is adding $2 million to its 2013 capital expenditures budget — for a new total of $17 million — in response to industry conditions and in preparation for a busy 2014 (DOB, Aug. 13, 2013).

Given the increased demand for compression services, Total Energy Services Inc. told a second quarter results conference call that it would increase its 2013 capital expenditures budget by $10 million to a total of $78.6 million, with $20 million budgeted towards expansion of the company’s compression rental fleet (DOB, Aug. 14, 2013).

Overall, for the nearly 25 service companies tracked by the DOB that have announced spending plans for 2013 (excluding infrastructure and midstream companies), capital expenditures are now anticipated to reach $2.52 billion, up from $1.97 billion announced initially.