Canadian water treatment companies cash in on U.S. shale development
Water treatment from hydraulic fracturing is big business
Secure Energy Services Inc. became a publicly traded company in April 2010. After the Calgary-based company’s initial public offering, its bankers held what is commonly known in the financial world as a “closing dinner,” a formal celebration for a new member on an exchange. Secure’s chief executive Rene Amirault and a group of Secure’s employees attended the festivities at a downtown Calgary eatery. When introductions began and a speaker uttered the words, “Welcome to the closing dinner,” one Secure employee, who spent his time working in the field rather than behind a desk, was confused. “Closing?” he asked, “but we just got going.”
He was half right. Secure, a rapidly growing, full-service waste and fluid treatment provider for oil and gas producers, had indeed “got going.” Since 2007, when it incorporated with 16 employees and a single facility in Grande Prairie, Secure has made a rapid ascent within the high-growth environmental services industry.
Secure now has 26 facilities in both Western Canada and North Dakota, and Amirault says that another seven will be built this year. Business is growing. By the spring of 2014, four years after that memorable closing dinner, Secure’s stock price had climbed from its original debut at $3 a share to roughly $20. The company’s fast-paced ascent cannot be attributed to its ambitiousness alone, as the growth occurred during a time of massive development of shale plays in North America, which has created a huge market for companies looking to treat wastewater. Dirty water is big business, and Canadian firms like Secure are capitalizing on the opportunity domestically and south of the border.
Wastewater recycling and disposal has grown into a multibillion-dollar industry within the oil and gas sector. According to a Bloomberg News article from November 2013, there are about 21 million barrels of wastewater produced annually from U.S. oilfields. The same report cites a study from PacWest Consulting Partners LLC that says $31 billion is spent on water management each year in Canadian and U.S. oilfields. The opportunity is enormous for companies like Secure, which are fighting for market share with Canadian competitors Tervita Corp., Gibson Energy Inc. and Newalta Corp. as well as firms like Schlumberger Ltd. in the U.S.
Jeanie Oudin, a Houston-based analyst with Wood Mackenzie, a consultancy to the energy, metals and mining industries, estimates that approximately 100 companies spread throughout North America are engaged in the water treatment and disposal business in the oil and gas sector. “It’s competitive,” Oudin says. A BMO Capital Markets report from May 2012 shows that the Canadian environmental services sector is dominated by producers – at 52 per cent – who process and dispose of their wastewater in-house. The remaining, and smaller, half of the market is split between Tervita (21 per cent), Newalta (13 per cent), Secure (10 per cent, though Amirault says it’s now 13 per cent) and others (four per cent). In the U.S., the situation is even more fragmented – meaning there are opportunities for relatively large Canadian players to move in. “There are fewer guys [in the U.S.] with the scope and scalability to be bigger players,” Oudin says.
Much of the U.S. activity is centered in the country’s established and growing shale formations: the Marcellus, the Bakken, the Eagle Ford and the Utica shale formations. In each of these formations, and in Canadian plays like the Montney, large volumes of water are used in drilling fluids and then even more water is used to frack the wells after they’re drilled. In Canada, the environmental services subsector is focused in both shale plays and in the oil sands, where large volumes of water are needed to either hydro-transport oil sands ore at mining operations, or to steam-heat bitumen at in situ facilities.
On both sides of the border, the challenge for companies like Secure, Tervita and Newalta is to convince oil and gas producers to outsource their wastewater management. Part of the sales pitch to producers is in convincing them that wastewater processing and disposal is a utilities business. “It’s all about capital efficiency,” Amirault says. He adds that investors reward oil and gas producers for adding new production and reserves, not for spending their capital on processing and recycling their wastewater. So the return on capital invested in a wastewater treatment facility isn’t attractive for an oil and gas production company – but it is for an environmental services provider.
The other part of the sales pitch lies in convincing oil and gas producers that environmental service providers can process, recycle and dispose of wastewater and byproducts at a lower cost. Citing the Marcellus formation as an example, Oudin says that it costs approximately $2 to $5 to dispose of a barrel of wastewater, with an additional $7 to $10 per barrel to truck it out. “If they can shave off $2 to $3 [per barrel] to recycle, that’s a huge savings,” she says. “It’s a large upfront cost so it’s worth finding these smaller water-handling companies that might come in and do it. The large operators are shifting their focus and, in the long run, they can save considerably.”
In fact, over the 2013 fiscal year, Gibson Energy Inc., Tervita, Secure and, Newalta all managed to increase their annual revenues and aside from Tervita (a privately held company whose earnings figures are not released), have all posted strong net earnings. The same can’t be said for their American counterparts. According to Bloomberg News, Nuverra Environmental Solutions Inc., GreenHunter Resources Inc. and Aqua-Pure Ventures Inc. “have reported a succession of losses since 2011” despite a growing need for wastewater management services.
Perhaps as a result, the four largest Canadian players are moving into shale plays south of the border. Tervita Corp. is currently active in the Marcellus and the Bakken. Similarly, Newalta has operations in oil and gas fields in Pennsylvania, North Dakota, Colorado and Texas. In 2012, Gibsons acquired Lafayette, Louisiana-based Omni Energy Services for US$445 million in order to gain assets and customers in the American wastewater processing market. In its most recent annual report, Gibsons attributed a large part of its 41 per cent revenue growth over the 2013 fiscal year to that acquisition.
Amirault says that acquisitions have made up about 20 per cent of Secure’s growth, while the remaining 80 per cent has been organic. “We’ve tried to expand the network with more locations and add more services,” Amirault says. “Acquisitions have been everything from drilling fluid companies to water solution companies to remediation companies. You can add these new services organically, or by acquisition to speed up the process.” Secure and its competitors have been doing both – growing organically and through acquisition – but there is still no dominant player in either the U.S. or Canada.