Energy Ink

Service companies set to prosper in 2012

January 19, 2012

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Today, dear readers, I’m giving you a break from oil sands-related pipeline coverage.

While plenty of newspapers and columnists continue to weigh in on the yesterday’s decision by the U.S. State Department to reject TransCanada’s Corp.’s application to build the Keystone XL pipeline, not all the news is bad. That’s particularly true if you are in the energy services sector.

According to a recent research note issued by FirstEnergy Capital, the next 12 months are shaping up to be very profitable for the sector as US$100 oil compels producers to grow oil sands production and drill for oil and in liquids-rich plays across Western Canada. FirstEnergy expects total cash flow for producers in 2012 to increase 21 per cent from its 2011 estimates. Capital expenditures are also expected to be up 10 per cent.

Of course, when producers have cash to spend, they tend to invest it in building infrastructure and in drilling programs. And when they’re spending money in these areas, the need to employ service companies goes up.

The Calgary-based investment boutique does point out that it expects a larger portion of the producers’ capex pie to be spent on drilling and completions, as opposed to facilities. That makes sense considering sub-US$3 natural gas prices have the industry shunning “dry” gas targets, and oil development tends to require less facilities compared to natural gas development. But that fact is of little consequence to the service sector. FirstEnergy expects pricing for services to rise by seven per cent in 2012 and another 4.7 per cent in 2013.

One factor that clouds the sunny forecast is labor. Growth could be constrained because there aren’t enough people to do the work required. It’s not an new problem, but one the oil patch always struggles to keep on top of. But FirstEnergy sees the energy services sector as well-positioned to weather this storm.

When compared to 2005 to 2007 … a number of service providers now have experience sourcing labor from foreign countries and have become adept at moving people in between regions if an area gets slow.”

Activity in the energy services sector will also be influenced by what goes on in British Columbia and the port of Kitimat. But this has nothing to do with the Northern Gateway pipeline, and has everything to do liquefied natural gas (LNG) and the export terminals being proposed by the likes of Apache Canada Ltd. FirstEnergy notes that the pace of development in northeastern B.C.’s Horn River basinĀ  would increase drastically if Apache and other LNG proponents decide to build these things.

Currently, producers are using fracturing crews to prove out reserves, but see no reason to move into full-scale development due to low natural gas prices. Should producers see a need (e.g. Kitimat coming online) to move into full development, there will be major a increase in the demand for fracturing horsepower in Western Canada.

If you’re playing the stock market, it sounds like it’s time to do some due diligence on Canadian energy services companies.

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