Weekend Edition: Drilling Activity Ramping Up

rig_7_largeWith all the talk of pipeline constraints and heavy oil pricing differentials, things don’t seem so bad in the field. According to statistics from the Canadian Association of Oilwell Drilling Contractors 67% of the drilling rig fleet was working this week. That’s down from 75% in the same week of 2012.

While 542 rigs out of a total of 812 do not seem like a high utilization rate, some companies are enjoying good business. It’s particularly true for deep well drillers like Western Energy Services that has the highest utilization rate of the group with 40 of its 44 rigs working. That’s a 91% utilization rate accord to FirstEnergy Capital.

Apart from a few exceptions in the sector, it remains out of favor and has not seen much of a seasonal rally yet. On the contrary we have seen some destruction for no apparent reason like Surge Energy.

Surge is currently at -31% for the year, the TOP LOSER in all categories of energy stocks above $1. That’s even after 2 news releases where the company reported it was not aware of any material change and the release of the 2013 guidance. I can’t decipher what the market is pricing here. (If it’s because they missed guidance, this is overkill!)

It is important to remember that the price differentials & pipeline constraints will not last forever. WCS discounts are expected to improve in the 2nd half of the year from new refinery demand coming online in the Midwest. The Southern Portion of the KeyStone XL will be operational in Q3. That of course is not the silver bullet that will fix a complicated infrastructure network. On the other hand, I think the market is finding ways to cope with these problems by using rail increasingly.

Finally, there’s still a chance for the price of natural gas to average above $3.00/mcf in 2013. The current storage level is 4% lower than last year’s and 11% higher than the 5 year average. General Winter will have the last word on this one!

We are still early in the year so a mild up-tick might still be possible before we enter the debt drama at the end of February.

What’s your take on the sector?

News Roundup

IEA Sees Tighter Oil Market, Boosts Global Demand F’cast

Goldman Sachs Strategist: Oil Price Could Reach $150/Bbl in Summer

China Crude-Processing Rises to Record High as Economy Recovers

Pipelines to U.S. gulf coast seen as panacea for slumping Alberta oil prices

China offers greatest prize of all for shale gas

Have a Great Weekend!

6 comments to Weekend Edition: Drilling Activity Ramping Up

  • W.C.

    I don’t know Surge at all but from what I have seen they missed their 2012 guidance numbers, have aprox. 1.6-1.7 debt to cash flow and their updated 2013 guidance is almost exactly the same as their 2012?????

    In a word OUCH!!!!

    • Mich

      W.C

      SGY’s debt is higher than 1.6, I think closer to 2.0x which is not very diff from some others (LEG is around 1.8x). They missed their guidance yes but I think the sell-off is exaggerated.I feel for the shareholders as the drop has been brutal!

  • CashIsKing

    The wield thing about Surge is that its SP had significantly dropped before its 2013 capital budget and production update came out this morning. Obviously some players had learnt bad news (for me, not really that bad reflexed by the waterfall decline in its SP) before it was released.
    Similarly, Meadow bay gold (MAY.TO)’s SP had doubled from its 52wk low in around 2 weeks before an assay result was released. Contrary to the normal market reaction to a good news release, its SP stalled afterwards. Again, some people knew something that the market didnot know and took advantage of it.
    I sort of have lost some confidence in the Toronto market integrity.

    • Mich

      Cash,

      I’ve been thinking the same thing, news is getting leaked way before it gets released in some instances.

      PRY exhibited the same symptoms but I’m glad so far it proved the market wrong.

      TSX and integrity, they don’t rhyme :)

  • Jacq

    I like exaggerated sell-off’s on a buy-side opportunity. Problem is trying to pick a bottom though without getting cut by a falling knife. I don’t think I ever realized how impatient people are in general (including me) until I started paying more attention to the markets. It really is as much about psychology as it is about business fundamentals.

    • Mich

      Jacq, asides from timing the bottom, this one might require more patience than usual. After missing guidance, the market might wait a few quarters of meeting guidance before it revalues the stock higher. There’s no dividend here so you’re not getting paid for the wait :)

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