Drillers Debate Clients’ Will To Pay For Technology

Western Canada’s contract-drillers continue to invest in new and better technology, but there’s still debate about whether producers are willing to pay for the improvements, an industry panel heard this week.

In a discussion on drilling and manufacturing that was part of TD Securities’s Calgary Energy Conference, executives representing Precision Drilling Corporation, Ensign Energy Services Inc. and Trinidad Drilling Ltd. outlined the steps each is taking to upgrade drilling rigs to ensure customers benefit from the latest technology.

Yet, a former Calgary investment executive bluntly asked whether producers want to pay for the cutting-edge technology Canadian contractors typically provide. Past chair of Peters & Co. Limited, Michael Tims noted the share prices of several of Western Canada’s publicly-held drillers are trading at prices 70 to 90 per cent below their peak values over the past 10 years.

“Notwithstanding all of the technological things you’re [doing] for customers, the new improvements you’ve built and what you’ve done to provide a better-quality service, shareholders don’t see that, because the returns don’t [always] come through,” Tims told the panel. “How much should we think about [your] customers actually paying for what you’re providing?”

The panel was quick to respond. “As an industry, we’ve done a very good job of using capital to create efficiencies,” said Brent Conway, Trinidad president and chief executive.

“At the top of the market, when we were all getting higher day rates, we were being paid for it. [But] in the last three years, that hasn’t been the case,” he said. “Generally, we’re being more creative [now] as to how we build our contracts with performance-[terms].”

As for getting better day rates, contractors need to “get out there and push,… to get better returns, because where we have been in the last two or three years is not sustainable for us, nor for our shareholders,” Conway said. “All of us here are talking about [technology platforms], but there’s not one guy here that doesn’t expect to get paid for that. I think that’s the starting point.”

At the same time, he said there comes a time for sharing benefits with clients. “If we take your wells from 20 or 25 days’ [drilling] down to 15 days, we expect a piece of that,” he said. “How we share that is becoming much more important, because we’re being gassed again for millions of dollars in capital, and we’ve got to make sure we get a return for our shareholders.”

The head of Precision Drilling took a more nuanced view, looking back on the highs and lows North America’s contract-drillers have seen in recent years. When demand for drilling rigs collapsed in 2016, it fell below supply for every type of drilling rig on the market, Kevin Neveu told the audience. “As we’ve come off that bottom, we’ve gotten back to full utilization of high-performance, high-spec rigs.”

In the United States in particular, he said the current supply of high-spec rigs is fully utilized, and day rates have consequently risen to the low $20,000s from the mid-teens, earlier. “I don’t think I’ve ever seen day rates move up several thousand dollars a day in a six- or eight-month period ever before,” Neveu said. In many cases, rig upgrades are being funded by customers, he added.

“I think the main aspect of the [high-spec] U.S. rig fleet right now is that it’s fully utilized. Day rates are pretty good …[and] are in a range which we consider higher than our cost of capital and sustainable. I think it’s hard to see [that], because there’s so much noise.”

Neveu estimated that 2,000 and 3,000 rigs are currently in the U.S. market, but said that not all of these are high-spec rigs, and not all are in the running for the day rates he cited above.

As North American contractors have focused on technology and improving drilling efficiency, the technology that was once hard to find is now more common. “Today, any drilling contractor can buy an AC rig,” he said. “The technology has become easy to acquire. It’s just a matter of capital spending.”

Yet, he believes the industry’s first movers — those investing in new technology — benefit from a “scale effect.”  “We’re capitalizing on that, and ….by being a first mover, we expect to have a five or 10-year head start on the smaller [industry] players. We think it increases our competitive advantage [and] creates additional revenue streams,” he added.

For his part, Bob Geddes, Ensign’s chief operating officer, talked about the evolution of contract terms in recent months, and the fact that many rig contracts are coming up for renewal, although contractors and customers often have different ideas on terms. In particular, he discussed rates in the U.S. Permian Basin.

“We always believe the operator feels a push coming when he wants to sign us up for longer periods of time. We’ve quite resisted that for a while. But today, I’d take an 18-month contract for $22,000 a day any day, but [rates] have been moving up in the last few months.”

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