Western Energy Services Corp. sees takeaway capacity, continued customer spending constraints relative to historical levels, and staffing of field crew as the largest challenges currently facing Canadian oilfield services. But commodity prices increasingly bode well for the sector.

“Even within this context, generally we believe today’s commodity-price environment will support higher oilfield-service activity, as many Canadian producers continue to generate strong returns from drilling programs across the basin,” Jeffrey Bowers, senior vice-president and chief financial officer, told Thursday’s Q1 conference call. “While we expect activity will be largely flat, compared to 2017, we remain positioned to respond to an uptick in demand.”

Over the last year, Western has worked diligently to differentiate what it offers in terms of equipment and service quality, suggested Alex MacAusland, president and chief executive officer. In Q1 the company achieved higher rates in each of its Cardium, Montney rig classes.

“This underlines strong performance of Western’s rigs, and is indicative of an increasingly tight market for higher specification rigs.”

He added: “Looking ahead, all of our Montney- and- Duvernay-class rigs have work ahead of them for the second half of the year. In the U.S., we have two rigs working steady under long-term contracts, and a third that is scheduled to begin work under contract in the near-term, following upgrades. We continue to aggressively market our other rigs.”

Pipeline construction in Alberta and British Columbia, environmental regulations such as carbon taxation, as well as levels of investment in Canada will all impact oilfield service activity going into the future, though, according to the company’s first quarter financial and operational results.

“Activity in our well-servicing business was impacted in the first quarter by wide differentials,” MacAusland said, adding Western now has “line-of-sight” for post-breakup work equalling peak-Q1 2018 activity. “Similarly, we expect the demand for our rental equipment in the second half of the year to meet or exceed Q1.”

Currently, Western has nine drilling rigs operating, with five of 56 drilling rigs still under long-term take-or-pay contracts and one expected to expire this year, two next year, and two in 2020. These contracts typically generate 250 to 350 billable days per year, each.

In the first quarter of 2018, the average active contract drilling rig count for Western’s Canadian operations was 29.1, which is down five per cent from Q1 2017. Operating revenue per operating day totalled $21,171 (up 12 per cent from Q1 2017), and the number of operating days was 2,351 (down five per cent from Q1 2017).

Canadian operating days (drilling utilization rates) averaged 52 per cent in Q1 2018, compared to a 54-per-cent average in Q1 2017, which reflects a 200 basis points decrease, due to activity slowing in the latter part of the quarter as some Western customers ended their winter drilling programs early, due to economic factors.

For U.S. contract drilling operations, Western’s average active rig count was 3.3 in the first quarter of this year, which is up 43 per cent from the first quarter of last year. Operating revenue per operating day was US$21,838 (down nine per cent from Q1 2017), and the number of operating days was 274 (up 56 per cent from Q1 2017).

Although day rates have generally improved, operating revenue per billable day in the U.S. was consistent in the first quarter of 2018, as compared to the first quarter of 2017, mainly due to changes in the average rig mix, as rigs running on lower day rates worked more during the first three months of this year.

With regards to production services, Western’s average active rig count in Q1 2018 was 20.6, which is 18 per cent less than during the same period last year. Service rig operating revenue per service hour was $703 (up two per cent from Q1 2017), and the number of service hours was 18,476 (down 18 per cent from Q1 2017).

Regarding its pricing for the second half of the year, MacAusland said that Western will definitely take a balanced approach, “moving it along as you can where it makes sense” with the company’s client base. “As the customers pick rigs, they pick rigs that are more capable, and they are willing to pay a little bit more for them. And so it is constructive. That is the way we would look at it.”

For the three months ended March 31, 2018, Western’s revenue totalled $81.26 million, which is four per cent less than in Q1 2017. The company’s net loss was $5.95 million for the quarter, compared to $4.37 million during the same period one year prior. Management largely attributes the deepened net loss to a $3.5 million drop in earnings before interest, taxes, depreciation and amortization.

In Q1 2018, EBITDA was $15.11 million due to lower shortfall commitment revenue and decreased well serving activity, partially offset by improved pricing and higher activity in the United States. However, says management, after normalizing for the $6.4 million in shortfall commitment revenue recognized in Q1 2017, adjusted EBITDA improved by 24 per cent during the first quarter of this year.

Capital expenditures totalled $4.66 million in the first quarter of this year, which represents an increase of 91 per cent from the same 2017 timeframe. Expansion capital spending mainly related to drilling rig upgrades in Q1 2018, as well as necessary maintenance capital.

The 2018 capital budget remains unchanged at an estimated $20 million, with $8 million allocated for expansion capital and $12 million for maintenance capital. Western management believes this year’s capital budget provides a prudent use of cash resources and allows the company to maintain its rig fleets, while remaining responsive to customer requirements. Western will manage its operations and make required spending adjustments as required.

During Q1, Western completed refinancing transactions, drawing on its $215 million, 7.25 per cent second lien senior secured term loan facility with Alberta Investment Management Corporation, used to fund redemption of $265 million, seven-and-seven-eighths senior unsecured notes due in January of next year (DOB, Feb. 2, 2018).