Investing In Canadian Oilfield Services & Drilling Companies

The oilfield services industry provides investors with exposure to the oil and gas commodity sector minus the inherent risks associated with exploration and development drilling. These companies mainly offer contract drilling, directional services, wireline technologies, equipment rentals and frac fluids management. Besides the current strength in oil prices, why would anyone want to invest in this sector? Let’s look at a few reasons.

In the Western Canadian sedimentary basin drilling activity jumps as the winter season settles in. Given the current strength in oil prices, activity will be largely focused on light oil and liquids rich resource plays. Furthermore, 2011 saw a land rush as producers and land brokers paid $4.13 billion in Western Canada to secure land rights, the 3^rd highest in history. This is land that will be drilled sooner or later and as long as oil prices are strong the momentum is going to carry into 2012 and beyond.

These however are not the only determining factors responsible for an expansion in drilling which brings us to a major variable. The shale revolution brought by the advent of horizontal drilling and multi-stage fracturing have not only made it possible to tap new hydrocarbon zones, they have created a need to keep the momentum going due to the high decline rates of unconventional wells. Tight oil plays can see up to 70% in production decline in their first year pushing producers to run the treadmill faster in order to make up for the decline AND grow their production on a yearly basis. This is a gold mine for all the companies involved in drilling services and well completion thanks to the growing demand for horizontal and directional drilling. The wells are reaching deeper, drilled with longer laterals and the fracturing jobs are increasing in size!

Growth in HZ drilling in the US & CA – CET presentation

The following table presents a host of Canadian listed drilling and well completion companies operating in Canada and across the world. Before you start looking at who pays a dividend and who doesn’t keep in mind that if you’re going domestic with your selection, you have to pick the companies that have the most exposure to key and emerging light oil and liquids resource plays such as the Cardium, the Viking and the Bakken. In my opinion, natural gas prices won’t see a sustained recovery before North American export terminals become operational.

Furthermore, while all of the companies listed above are Canadian based, many amongst them will provide you with a varying degree of exposure to international markets. Latin America’s energy services sector for example is in growth mode and companies such as Calmena Energy Services, Estrella International Energy Services and Tuscany International Drilling run their operations largely focused on South America where there’s no ‘spring breakup’, no natural gas glut and where oil fetches prices closer to Brent rather than WTI. But the upside to emerging markets is also balanced by political and economic risks beyond a company’s control.

When you invest in the oilfield services sector you remove a lot of risk but not all the risk as a sharp decline in commodity prices for an extended period of time will impact the capital spending of E&P companies. Moreover, it should not come as surprising for energy services stocks to mirror market volatility when oil and gas commodity prices wildly fluctuate. Finally, every one of these companies reporting in Canadian dollars is exposed to foreign currency risk if they have operations abroad. If the Canadian dollar rises substantially for an extended period of time, revenue and margins will be negatively impacted as these companies are paid for their services and products in a foreign currency.

Who would be your top pick from the table above and why?