“Huge Pain” Expected For Canada’s Petroleum Service Sector

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Canadian petroleum services sector experiencing “immense pain” at least in the next year thanks to weak oil and gas exploration activity in North America amid a glut of cheap crude oil, says CIBC report .

Drilling and well completion companies are expected to suffer the most, as producers will be hesitant to reverse the spending and production cuts linked to the COVID-19 pandemic and its effects on fuel demand, analysts warn.

“There is no way to coat it with sugar. The oilfield services sector is in immense pain during the rest of 2020 and into 2021, “said the report.

“This will be felt across the sector and, although some sub-segments are more affected than others (ie drilling / completion service lines), no one will be shelter, in particular with the general closings of existing production. “

Respond to lower demand

Calgary-based STEP Energy Services Ltd. was the last oil service provider on Thursday to report a series of measures to deal with sharply declining demand that began in mid-March.

The measures include layoffs, lower wages, stationary equipment and reduced capital spending in its hydraulic fracturing and coiled wells operations in Canada and the United States.

It is also seeking relief from its lenders, as it could potentially breach its adjusted profit covenants over the next two quarters, triggering a possible request for immediate repayment of all amounts due.

“The volatile market conditions created uncertainty for our customers and they responded by announcing significant reductions in capital spending and canceled work programs,” said STEP in a statement.

“Natural gas prices have firmed recently, which could support further work later in the year; however, this should not compensate for the drop in demand for petroleum-related services. “

In a note, Stifle FirstEnergy analyst Ian Gillies said that STEP’s results were in line with expectations, but the bank covenant’s warning is worrisome to investors.

“The prospects for hydraulic fracturing in North America remain extremely difficult due to the material uncertainty surrounding the global economy and crude prices,” he said.

“A prolonged trough” in activity

The authors of the CIBC report said that the downturn in the service sector is exacerbated by forecasts of an “extended trough” of activity, as demand for new oil and gas production is delayed by the need to reduce crude oil storage and reactivation of unused wells.

He said the shares in the service companies he covered have been down 15-70% since early March, some of which are justified by the cost of the challenges ahead, but some due to “blind sales” by frightened investors.

Continued equipment withdrawals are expected to allow the North American service sector to match capacity with demand, he added.

At STEP, adjusted earnings before interest, taxes, depreciation and amortization decreased 12% to $ 22.8 million in the quarter ended March 31, despite a 10% increase in consolidated revenues to 194 million dollars.

He attributed the decrease to a provision of $ 2.5 million for bad debts and $ 1.9 million in severance for unspecified staff reductions in Canada and the United States.

Despite a recent increase in benchmark oil prices in the United States to more than US $ 30 per barrel, STEP said it has further reduced its 2020 investment program to $ 15.5 million, compared to $ 24 million previously and its plan. initial $ 47 million.

It reported a net loss of $ 52.2 million in the first quarter, compared to a net loss of $ 600,000 for the same period in 2019, mainly due to $ 58.8 million of non-cash impairment charges against its Canadian well fracturing assets.

Earlier this month, Energy Safety Canada’s PetroLMI division reported that more than 7,700 jobs in the oil and gas sector were lost in April compared to March, with 6,500 jobs lost in the petroleum services sector. .

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