The light that some leaders in Canada’s oil and gas sector are seeing at the end of its long, dark economic tunnel may still be further away than they think.
Kevin Neveu, CEO of Calgary-based Precision Drilling (PD.TO), did not sugarcoat the quarterly loss his company reported before markets opened Monday. Despite the loss being narrower than analysts expected, the difference was largely the result of contract cancellations and Neveu cited “unprecedented” declines in industry activity in the release.
However, his commentary very quickly turned to the happier times the oilfield services executive sees ahead for the sector.
“While the timing for a potential rebound remains uncertain, we are turning our minds from cost reduction and downsizing to stabilization and preparation for a rebound, ensuring we are a first choice in the minds of customers,” Neveu said. “Our priority will be to have access to the rig leadership and crews to staff up rigs in a rebound, and sustaining the expense reductions achieved during this downturn.”
Texas-based Halliburton (HAL.N), which delayed its own first-quarter earnings release until early May as it hopes to complete its US$35-billion acquisition of Baker Hughes by the end of this week, shares that optimistic outlook. The company said previously it expects North American rig counts to hit a “landing point” sometime in the second quarter of this year, with profit margins for drillers expanding again in the following quarter.
Yet drillers are unlikely to be first in line for any increased cash flow producers might generate from climbing prices; they will have to line up behind lenders.
“Meaningful” cash will start to flow back into the pockets of oil and gas producers once crude oil prices push back above US$50 per barrel, ARC Financial Chief Energy Economist Peter Tertzakian wrote in an April 12th report, “but that money won’t be going back into the ground.”
“The first dollars will be headed to bank vaults, placating bruised bankers who pushed out too many loans,” Tertzakian wrote. “Next, producing companies will have to take time to restock their wallets and heal their balance sheets. The result: investment, activity and employment momentum will lag oil price recovery by many months, well into 2017.”
Canada’s largest oil and gas producers will be reporting first-quarter results this week, starting with Husky Energy on Monday afternoon and including Suncor (SU.TO), Cenovus (CVE.TO), MEG (MEG.TO) and Imperial Oil (IMO.TO) over the next several days. While most, with the exception of MEG, are expected to report positive cash flow, earnings generally are expected to be horrible and certainly not a harbinger of a drilling rebound.
Cameron Hurst, senior vice-president and chief portfolio manager at Canaccord Genuity Wealth Management, told BNN it is management’s job to “strike a more optimistic tone,” as Precision’s Neveu has done.
“But ultimately as the investor or the researcher you have to figure out is that [rebound] six months away?,” Hurst said, “Or is it more of a 2018 kind of event?”