2020 Top Operators Report: A Long, Hard Road For OFS
Canada’s oil and gas industry is at an inflection point. After five years of wild price volatility, market access issues, and other challenges, it now finds itself in the midst of a pandemic that has driven demand to lows not seen in decades.
This year’s Daily Oil Bulletin Top Operator report reflects the great uncertainty facing the oil and gas sector and tries to make sense of what the industry and successful operators in the post-pandemic future will look like.
To do so, we made some changes to the Top Operator format.
Rather than comparing year-over-year data, in some instances our CanOils analysts compared first quarter 2019/2020 data to measure the impact of the early stages of the COVID-19 pandemic.
We also tapped into the experience of professional services firm KPMG to gain insight into what strategies operators and service companies could pursue to survive and thrive through the difficult days ahead.
Further, we leveraged the reporting power of the Daily Oil Bulletin staff and its ongoing coverage of the industry over the last four months to capture the industry’s response to the pandemic and its future outlook.
Canada’s oilfield services sector has struggled the last five years.
Activity levels plummeted as operators adjusted capital expenditures in light of low commodity prices and a lack of access to global markets. An over-supply of services drove down pricing, forcing companies to innovate, change strategies and improve productivity or disappear.
Then came COVID-19. Service companies are again under massive pressures as activity reaches new lows. Those that can again adapt will come out on the other side.
What were the keys to survival the last five years?
“Organizations that survived didn’t make the short- term decision of forgoing pricing for volume,” says Rick Mussenden, a partner at KPMG, who co-leads the energy services practice. “Those that leaned out their business also survived.”
Companies that rewarded team members that effectively met strategic goals remained in the game, along with those that worked with clients to improve safety and other customer-centric priorities, he adds. “Companies that had a relentless focus on liquidity to handle volatility are still here as well as those that actively managed their balance sheets and proactively worked with their lenders.”
These same strategies will get oilfield service companies through the COVID crisis.
“The organizations that will survive have learned the lessons of the last five years and made the tough decisions early by cutting deeper and actively managing their balance sheets,” he explains.
There are plenty of examples of companies doing just that. Precision Drilling Corporation responded quickly to the decline in activity.
“We previously announced a series of steps to substantially reduce our fixed costs and capital spending plans, while continuing to support our high- performance, high-value business model,” says Kevin Neveu, president and chief executive officer. “These expenditure reductions and other cash preservation measures will reduce the firm’s 2020 annualized cash outflow by more than $100 million, generating substantial savings in 2021 and improving the existing liquidity position.”
Precision currently is working with a reduced workforce — down an estimated 2,800 workers in North America when compared to last year. In the U.S. there are 45 fewer rigs running now than at the same time last year, equating to approximately 1,800 fewer people. In Canada, the company is down about 1,000 people across its drilling and well-servicing segments when compared to last year.
“We believe that persistent low oil prices will result in constrained capital spending by our customers and lower demand for our services, further underscoring the importance of financial liquidity in the near-term,” says Neveu. “We also know it’s important to look beyond near-term uncertainties and continue to drive our strategies to strengthen Precision’s competitive position for the long-term.”
CES Energy Solutions Corp. suspended all non-essential capital expenditures and currently expects its 2020 capital expenditures to total up to $30 million, down from a planned $50 million budget. CES will adjust these levels as conditions continue to unfold.
“We’ve made significant cost reductions in the business to the tune of $70-$80 million annualized,” says Tom Simons, president and chief executive officer.
KPMG’s Jason Boland, tax partner and co-leader of the energy services practice, says the current state of the oilfield service sector limits the options available to distressed companies looking to exit the market. While many believe a rush of consolidation is coming, Boland has his doubts.
“Companies are in survival mode,” he explains, adding that given current activity levels, those with capital are unlikely to spend it on M&A activities. “It’s difficult to buy market share right now in Canada so I’m not sure the big players are buying. As for asset sales, very few companies want to risk buying steel right now. No one has a balance sheet to buy and lay down iron.”
That said, smaller companies with the ability could buy out competitors if it makes sense, he notes. “It may happen if they bring complementary services together. The relentless focus on leaning out may begin pushing companies together. Combining companies with complementary geography or customer base may make sense. But there’s not a lot of incremental value to be had.”
With first quarter results only reflecting one month of the pandemic downturn, we haven’t seen the full impact yet, he adds. “The balance of 2020-2021 is going to be challenging. Q1 was OK, but everyone is expecting a year-over-year decline of 30 per cent. Companies may have to continue to make changes. The loss of activity is creating more competition for fewer wells and as a result we will see pricing pressures.”
Boland expects debt covenant violations to increase as 2020 progresses. He advises companies to actively manage their relationships with lenders to keep afloat. He has confidence companies that make the hard choices will survive.
“They will come through this. They always seem to manage to find a way,” he says. “Bigger companies will come through easier but the smaller companies aren’t dead.”
“Six months from now we will hopefully have a different story to tell,” adds Mussenden.
- Oilfield Services