Predator Drilling taps in situ oil sands business
Ascent of in situ business emerges as a service niche
If company forecasts are to be believed, a sector that’s been built on strip mining is in the middle of a significant shift. In April, production from in situ oil sands projects averaged 750,000 barrels per day, a new high-water mark for the industry. Shane Walper, president and CEO of Red Deer-based Predator Drilling Inc., isn’t oblivious to the shift. His company has changed its focus to the oil sands from servicing shallow gas drillers as companies stung by low prices shut in production. “I think there are definitely opportunities up there,” Walper says.
That reality has caused Predator to shift its business strategy. Predator has been focused on servicing shallow gas wells since it was incorporated in 2008. The company sustained itself over the next few years with about 40 per cent of its business coming from the natural gas market. But chasing business in the natural gas space is no longer benefitting Predator, due to low commodity prices brought on by surging shale gas production in the United States. “This last year we saw the full implication of the gas market; it finally hit us,” Walper says. “We had Encana Corp., who is a big driller in the shallow gas market, that was a big part of our revenue stream and that went away last year.”
In 2011 only about 20 per cent of Predator’s business came from natural gas operations. Walper says the private company still increased revenue by about $3 million to $36 million at the end of its fiscal year in June. But after a 323 per cent jump in revenue between 2010 and 2011, it isn’t the growth he had planned for the company. So rather than try and win more natural gas business, Walper is sharpening his focus on northeastern Alberta.
The drilling that goes on at in situ sites in the oil sands region requires similar construction and infrastructure needed to operate in other formations. A number of companies providing services such as drilling fluid, facility construction, service rigs and site maintenance are eyeing SAGD operations, which gives them steady work and avoids halting operations during the spring break-up that occurs in Western Canada. “The biggest draw to that, whether it’s rigs or maintenance or whatever, is it’s year round,” says Mark Salkeld, president and CEO of the Petroleum Services Association of Canada.
But not all services companies in the oil sands benefit from year-round work and Predator Drilling is one of them. “The bulk of our work happens in the coring market, or delineation, and that’s all reliant on a heavy frost in the ground; so that’s all the first quarter stuff,” Walper says.
The company’s niche drilling market stems from its early days. Walper raised $15 million to launch the firm in 2008 and assembled a fleet of five rigs in five months. At the time, the drilling industry was transitioning from vertical wells to horizontal wells and small single-mast rigs were being replaced by large triple-mast rigs, which could drill deeper into the earth.
Walper took advantage of the shift by purchasing “gently used” drilling rigs at a discount from other companies. “With the downturn, cash is king and companies were looking to unload iron that they were not using,” Walper says. “The market we’re in is somewhat out of favor because everyone is going deeper and horizontal with their double and triple rigs.”
However, one man’s junk is another man’s treasure. The single rigs allowed Predator to work in the shallow gas market and step into the oil sands region performing core hole drilling, as well as drilling observation wells, disposal wells and water source wells. Predator has since added six drilling rigs to its fleet and is working on a deal to bring in another four rigs, which would put the company’s fleet at 15.
Walper is also working to bring in more business by diversifying Predator’s drilling services in the oil sands by drilling the first portion of a SAGD well, so the surface casing can be set before a large drill rig comes in to drill the well to its full depth. “We see the large diameter pre-setting as a huge market for us to increase our utilization year-round,” Walper says. “They save around $30,000 on their overall cost per well by allowing us to do that portion of the service.”
There are some risks for service companies like Predator in going after in situ business. Calgary investment bank Peters & Co. has noted the performance varies at SAGD projects in Alberta. “The results are still weaker than expected for a number of projects that have been on production for an extended length of time,” Peters warned clients in a June research note.
Walper is undaunted. His growth plan for the company includes building some of the larger SAGD drilling rigs. “Those rigs typically work 300 to 340 days per year,” Walper says. “We haven’t got to the stage yet of raising capital for that portion, but I anticipate in the new year we’ll be set up to pursue that.”