State of the Canadian Oilfield Services Industry and 2015 Outlook Webinar
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This presentation was part of an online webinar targeted toward Oilfield Services (OFS) businesses. It gives a clear picture of the current state of the OFS industry as well as a forecast for the future, including strategies for taking advantage of forthcoming opportunities and potential challenges OFS operators may face. It also provides an overview of MNP LLP's Oilfield Services team and the assistance we can provide.
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State of the Canadian Oilfield Services Industry and 2015 Outlook Webinar
- 1. Presented by: Date: David Yager, National Leader Oilfield Services February 2015 Strategies Produced for Today and Tomorrow State of the Canadian Oilfield Services Industry and 2015 Outlook Rig photos courtesy of Beaver Drilling Ltd.
- 2. Page 2 QUESTIONS Email all questions to vic.kroeger@mnp.ca
- 3. Page 3 Program 1. About MNP. 2. What is Oilfield Services? 3. Where have we been? 4. Where are we going? 5. How should a client manage its company in a challenging market environment.
- 4. Page 4 OUR PEOPLE The MNP Advantage: • Fifth largest tax, accounting and business advisory services firm in Canada. • Offices in strategic locations throughout all the major producing areas of the Western Canadian Sedimentary Basin. • Experience with over 5,500 oilfield services clients. • Over 150 dedicated OFS professionals. • Member of the major OFS industry associations. • Only professional services firm with an on-hands industry specialist. • Corporate restructuring specialists in all major Canadian centres. • Alberta based corporate recovery specialists experienced in the major Alberta industries.
- 5. Page 5 OUR PEOPLE “Think Global, Act Local” • Over 75 offices from Montreal to Vancouver Island. • Member of Praxity Global Alliance of Independent Firms giving us worldwide presence. • We have specialists located in the areas necessary to meet the local needs of our OFS clients.
- 6. Page 6 Where We Operate Western Canadian Sedimentary Basin We work where you work
- 7. Page 7 1 - What is Oilfield Service? E&P company seeks to develop an oil or gas reservoir Delivery of oil or gas to refinery terminal or pipeline access facility 1. Exploration 2. Engineering & Consulting 3. Construction 4. Transportation 5. Drilling & Service Rigs 6. Wellhead Services 7. Downhole Tools 8. Equipment Rentals 9. Equipment Supply 10.Logistics 11.Fabrication & Manufacturing 12.Production All the products and services an oil company does not supply itself
- 8. Page 8 1 Exploration 2 Engineering 3 Construction 4 Transportation 5 Drilling & Service Rigs 6 Wellhead Services7 Downhole Tools 8 Equipment Rentals 9 Equipment Supply 10 Logistics 11 Fabrication, Manufacturing 12 Production OILFIELD SERVICES Major subsectors in the Exploration & Production process from early stage investment to commercial development MNP Oilfield Services Subsectors Through Oil and Gas Development Investment Cycle
- 9. Page 9 Sources of Revenue for OFS WHERE DO PRODUCERS GET THEIR MONEY • Cashflow from oil and gas production sales (net of operating expenses) • E&P capital inflows (debt, equity) WHERE DO OFS COMPANIES GETS THEIR MONEY • E&P Capital Expenditures (CAPEX) • E&P operating costs • Service sector CAPEX
- 10. Page 10 Funds Available to OFS - 2014 Source Value, Billions E&P Capex $65 E&P Operating Costs (1/3) $15 OFS CAPEX $10 Less – land sales, licenses, permits ($5) Total $85 OFS CAPEX Includes: third party operated pipelines, processing plants & production storage facilities: drilling rigs, well servicing equipment, rental equipment
- 11. Page 11 2 – Where Have We Been? • Summary of upstream oil industry macro-economic drivers –Production –Revenue and cashflow –Capital expenditures – conventional and oilsands –The gas boom –The oilsands boom –Upstream operating expenditures – conventional and oilsands
- 12. Page 12 Production Volumes 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Oil/Liquids Bitumen Gas Total SOURCE: ARC Financial Millions of Barrels of Oil or Natural Gas Liquids Millions of Barrels of Oil Equivalent of Gas (@ 6:1) Per Day
- 13. Page 13 Revenue/Cashflow 1998 - 2015 $0.0 $20.0 $40.0 $60.0 $80.0 $100.0 $120.0 $140.0 $160.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Billions of $ Cdn – (Estimates 2014 & 2015) SOURCE: ARC Financial Jan 27/15 Record Year
- 14. Page 14 CAPEX Conventional/Oilsands 1998 - 2015 $0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 $40.0 $45.0 $50.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Billions of $Cdn – (Estimate 2014, 2015) SOURCE: ARC Financial Jan 27/15 10 Yr. Av Conv. CAPEX
- 15. Page 15 $0 $10 $20 $30 $40 $50 $60 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Production Value SOURCE: CAPP, ARC YAHOO! The Gas Boom – 2000 to 2008 Billions of dollars of revenue Billions of cubic feet per day
- 16. Page 16 The Oilsands Boom – 1998 to 2014 $0 $10 $20 $30 $40 $50 $60 $70 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Value of Oilsands Production, $Billions Per Year 20X increase in 17 years! SOURCE: CAPP Actual to 2013, ARC Financial Estimate 2014
- 17. Page 17 Production Operating Costs 0 5,000 10,000 15,000 20,000 25,000 30,000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Conventional Oilsands Billions of Dollars Oilsands exceeded conventional for the first time in 2011 SOURCE: CAPP 1998 - $8.3 billion 2013 - $44.6 billion
- 18. Page 18 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Equity/Debt Inflows Oil Price Collapses Royalty Trust Era Oil hits $147/bbl Reinvestment Ratio: CAPEX/After-Tax Cashflow (Estimates 2014, 2015) SOURCE: ARC Financial Jan 20/15
- 19. Page 19 3 - Where Are We Going? • Oil prices – recent versus current • Gas prices – recent versus current • Current oil and gas pricing environment • PSAC drilling forecast – wells • PSAC drilling forecast – meters drilled • PSAC drilling forecast – rig operating days • CAPEX – CAPP • CAPEX – Peters & Company & Woods Mackenzie • Outlook by sector – MNP classification system • Winners and losers by service line • Three major positive outlook drivers • How it looks today – major revenue contraction
- 20. Page 20 Oil Price (WTI) 24 Months to December 2014 - $US $0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Latest 20142013 Monthly Average WTI Price Energy Information Agency, Latest Bloomberg 23 Month Average Price To Nov/14 US$97.16
- 21. Page 21 Natural Gas Price (Henry Hub) 24 Months to November 2014 - $US $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Latest 2013 2014 23 Month Average Price To Nov 30.14 US$4.08 Monthly Average WTI Price Energy Information Agency, Latest Bloomberg
- 22. Page 22 Selected Prices Feb 13, 2015 Feb 13, 2014 Trend 2014 Average CRUDE OIL West Texas Intermediate US$ $52.78 $100.35 $93.82 Brent US$ $61.52 $108.52 $99.54 Western Canada Select Cdn$ $49.34 $83.29 $73.60 Synthetic Crude (upgraded) Cdn$ $61.47 $107.77 $100.00 NATURAL GAS AECO Cdn$ $2.77 $5.35 $4.40 Henry Hub US$ $2.73 $5.32 $4.20 Source: First Energy Capital
- 23. Page 23 Capital Expenditures – CAPP Jan 21 2014 Billions of Cdn$ 2013 2014 F 2015 F Change Oilsands $31.0 $33.0 $25.0 -24% Western Canada Conventional $39.0 $36.0 $21.0 -42% Billions of Cdn$ 2012 2013 2014 F 2105 F Change Total CAPEX $67 $74 $69 $46 -33% CAPEX – 4 Year Summary Year 2012 2013 2014 2015 F Change Wells 11,067 11,065 11,255 7,350 -35% 2015 Drilling Forecast
- 24. Page 24 CAODC Drilling Forecast – Jan 22 2015 2012 2013 2014 F 2015 F Change Wells Drilled 11,651 10,847 11,534 6,612 -43% Average Rigs Drilling 355 339 370 203 -45% Fleet Utilization 44% 41% 46% 26% -39% Rig Operating Days 116,031 102,863 131,021 76,696 -41% •On a wells completed basis •Average drilling days per well 11.6 •Price Assumptions: WTI US$55.00 AECO Cdn$3.0
- 25. Page 25 2015 Trends By MNP Sector Exploration Downhole Tools Engineering & Consulting Equipment Rentals Construction Supply Transportation Logistics Drilling & Service Rigs Manufacturing & Fabrication Wellbore Services Production
- 26. Page 26 Rebound By Sector OFS Activity Sector Outlook Production Services – keep the cash flowing Continuing, pricing main challenge Facilities & Pipelines – processing plants and gathering systems Expanding with production volume, pricing pressure main problem Shale Oil Drilling Down for now but first to recover with oil prices Oilsands sustaining CAPEX Ongoing because of harsh operating conditions, pricing main challenge Oilsands growth CAPEX Winding down as construction finishes, no new projects, no recovery imminent
- 27. Page 27 Major Positive Potential Changes • LNG Project Announced – B.C. tax changes in place: will somebody commit? • Keystone XL Approval – will Republicans overpower President Obama? • Supply/Demand Balance Oil Price Recovery in mid-2015 – lower prices drive demand, lower prices reduce North American shale oil output
- 28. Page 28 How It Looks Today • Producer cashflow in 2015 forecast to fall by 50%, all E&P CAPEX budgets reduced • Overall reduction in demand for goods and services with the exception of production infrastructure • Pricing pressure will follow • Capital markets have contracted • Over-leverage (too much debt) will be difficult to manage • The 2011 – 2014 business plan will not work in 2015
- 29. Page 29 2015 Drilling Starts Slowly Date Active Drilling Rigs Change February 10, 2015 359 -43% February 11, 2014 632 -1% February 12, 2013 624 Source: June-Warren Nickles Rig Locator Feb 10, 2015
- 30. Page 30 U.S. Oil Drilling Rig Count Declining 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 Feb14/15 Feb6/15 Jan30/15 Jan23/15 Jan16/15 Jan9/15 Jan2/15 Dec26/14 Dec19/14 Dec12/14 Dec5/14 Nov26/14 Nov21/14 Nov14/14 Nov7/14 Oct31/14 Oct24/14 Oct17/14 Oct10/14 Oct3/14 Sep26/14 Sep19/14 Sep12/14 Sep5/14 Aug29/14 Aug22/14 Aug15/14 Aug8/14 Aug1/14 Jul25/14 Jul18/14 Jul11/14 July3/14 Rigs Drilling For Oil in the United States, Baker Hughes July 3, 2014 - February 13, 2015 Down 35% from October 2014 peak
- 31. Page 31 4 – What Should Clients Do? • Understand where they make their money • Understand operational considerations • Have a cash management system • Have financial flexibility • Have a risk management system
- 32. Page 32 Does Clients Know Where They Make (or Lose) Money? • Pricing, job costs, and field margins • Variable expenses versus fixed expenses – do they know what they are? • Do they have monthly internal financial reports per station, division, product line so they can detect problems? • Are they paying too much tax in Canada or internationally?
- 33. Page 33 Operations Considerations • Do our clients understand the implications of a more challenging business environment? • Is everyone in the company going in the same direction? • Are they using the lowest cost suppliers and vendors (without compromising quality)?
- 34. Page 34 Collections • Do they undertake credit checks on their customers? • Do they get their field tickets signed and processed to the invoice stage in a timely manner? • Does their operations team know a) how important this is and b) the best practices for faster payment • Do they know what late payments cost?
- 35. Page 35 Financial Flexibility • Are they employing the cheapest possible sources of capital? • Do they have the financial reports necessary to secure lower cost capital? • If they wanted to sell, buy or merge with a competitor, do they have the financial information required to actually do a deal?
- 36. Page 36 Risk Management • Are they taking on excessive credit risk in the event of a significant downturn? • Are they experiencing “leakage”? Are tools going out the back door? Is all the fuel going into company vehicles?
- 37. Page 37 CONTACTS Oilfield Services Leader David Yager Direct: 403 461 8566 David.Yager@mnp.ca Corporate Recovery Calgary Victor Kroeger Verne Wood Direct: 403 298 8479 Direct: 403 537 1621 Vic.Kroeger@mnp.ca Verne.Wood@mnp.ca Edmonton Eric Sirrs Direct: 780 969 1491 Eric.Sirrs@mnp.ca
Editor's Notes
- As David as discussed the economic outlook is somewhat uncertain. To combat this he refers to making money in your operations and focussing on your existing business as a profit driver vs. The development of new work or reliance on new projects. To be able to do this companies need to know their internal financial key performance indicators and other financial specifics of their business. These would include knowing margins, on jobs and field margins. Knowing what the split between the fixed and variable costs. These and other KPI’s would ideally be encompassed in internal monthly financials statements or other financial reports which allow for companies to make proper decisions based upon reliable information. The economic outlook David describes is not as daunting as the 2008 downturn; however one thing learned from that downturn is that the best way to recover from a downturn is to focus internally and make sure internal profits are maximized and that growth decisions are made strategically such that you do not become over leveraged or erode margins. At MNP we have worked with many companies to establish KPI’s, bench marks and develop monthly reporting packages. We have access to industry statistics and other benchmarks which will allow for you to gauge your financial strengths and weaknesses amongst your industry peers. One other significant balance on the income statement that reduces your cash flow and earnings are taxes. So it is important to always ensure you have the most efficient tax strategy to reduce this burden. At MNP we have worked with many companies to restructure things to streamline the structures for efficiency as well as reduce taxes. We have many strategic tax strategies which have been vetted by our tax partners and group.
- The development and utilization of the financial information I just discussed is paramount to manoeuvring in an uncertain economy. However equally as important is the acknowledgment by your employees and team as to why decisions are being made. How many times have you heard that head office or the finance team does not understand things and they keep hammering us on capital or expenditures requirements. This happens routinely and if there is a disconnect between what the budgetary priorities are vs. the operational understanding then this may lead to conflicting actions in the field. Given this it is important that all employees have a base understanding of the Company’s outlook in the industry as well as a high level explanation for the short term or long term vision. There are also ways to incent employees to be part of the solution, by empowering them with budgets, financial rewards for hitting margin or other targets. One other option is to ensure that you have the lowest cost suppliers, which again can be pushed down as an initiative to the field staff such that they are aware that your company would like to challenge suppliers and ensure you have the lowest cost suppliers. This message however needs to also encompass that compromising quality or safety is not an option.
- The previous few items focussed on improving margins and managing costs. One other big issue for most oil field service companies is the collection of cash from its customers. The quicker you get paid the quicker your company goals can be enacted. Also while your customer holds your money you may be utilizing an operating line which means you are paying interest and your customer is costing you money. Looking at your collection practices and seeing where things are redundant, or where things can be automated is critical to cash collections. The staff can also be empowered to be part of the solution and if you are able to do a cultural shift to have your teams believe the job is done when you get paid vs. when they leave the site this can result in a significant improvement to your cash flows.
- In all states of the economy financial flexibility is critical; however this is heightened in soft economies. Banks may tighten up their lending strategies which make capital harder to obtain and other souring options may not be as aggressive in their lending strategies. Regardless of the economic state, companies should always be seeking the lowest costing capital. To do this financial information will be required and in some cases historical information and future forecast information will be needed. If a company is not ready to act on a finance lending solution then the opportunity to reduce capital costs may pass them by. In cases where you may want to sell or merge or buy a company. The question will be – are you ready for this? In all forms of merger and acquisitions financial records, reporting both historical and future will be critical to allow you act on these opportunities as they arise. This concept ties in nicely with the initial discussions on operational financial records. Adequate financial information not only affords better cost management and improved operational decision making but it also allows for better financial flexibility as financing and M&A opportunities arise.
- Generally risk management in the oil fiend services industry is done by knowledge of the people, customers, and experience over the years. But formalizing this and communicating areas of weakness can reduce these risks and prevent situations of loss to your companies. One area is the credit risk of your customers. A lot of companies focus on utilization and revenue and do not necessarily pay to much attention to the financial ability of the company to pay. Eventually if a customer does not pay then they likely will be blacklisted; however how does your company prevent this ahead of time vs. learning the hard way? Another area of risk to most OFS companies is in relation to their tools, field assets or potentially fuel. In situations where cash management and monitoring of margins and costs is critical any leakage can have an impact on the company and if the risk of leakage is significant this could become a much larger issue for the company. In situations where the job went well, the bidding was adequate and you see that margins are not what you expected or costs are out of line. This is critical to understand for future bids, cost management etc; however a situation like this could be an indicator for the risk of leakage.