RBC Notes October 19, 2022
Canadian Oilfield Services Trend Tracker
WCSB rig count down 4 week-over-week to 212
Our view: This publication serves as an update to the sector themes we track, including commodity prices, Western Canadian Sedimentary Basin (WCSB) activity trends, and E&P free cash flow magnitude and prioritization, all of which are inputs to our relative positioning and outlook for sector returns. Exhibits 16-17 highlight our valuation comparables, ratings, and price targets for the companies under coverage.
Canadian OFS stocks down 5%, while WTI edges 4% lower w/w
Canadian stocks under coverage decreased 5.2%, while the 2023 WTI strip decreased 4% w/w. The 2023 Henry Hub strip decreased 5% w/w and remains 20% above last year. The top three performers were SES (+11.3%), ESI (+8.3%), and PD (+7.6%). The bottom three performers were CFW (+3.1%), PSI (+2.2%), and EFX (+0.3%). Our Canadian Oilfield Services coverage group is up 55.9% YTD vs the S&P/TSX Capped Energy index up 48.7% YTD. For additional details on North American rig activity, please see here for the latest edition of our US rig tracker.
Rig count remains above historical levels; 4Q22 average 217 vs. RBC estimate of 210
The rig count decreased 4 w/w, sitting 43 above 2021 levels and 46 above the 5-year average. Viking and Cardium regions drove the w/w decrease, as noted in Exhibit 10. PrivateCo rig counts decreased 1 w/w, Junior E&Ps (<25 mboe/d) decreased 3 rigs w/w, Intermediate E&Ps (25-75 mboe/d) remained flat w/w, and Large E&Ps (>75 mboe/d) decreased 1 rig w/w, as noted in Exhibit 13.
Activity trends
• Montney flat week-over-week, at 42. The most active Montney operators include ARC (10 rigs), Tourmaline (4 rigs), and Ovintiv (3 rigs). The most active drillers in the Montney include Precision (21 rigs, 50% of total), Ensign (9 rigs, 21% of total), and Fox (3 rigs, 7% of total).
• SE SK ↓ 1 rig, week-over-week, to 19. The most active SE SK operators include Crescent Point (3 rigs), Surge (3 rigs), and Tundra (3 rigs). The most active drillers in SE SK include Ensign (6 rigs, 32% of total), Stampede (6 rigs, 32% of total), and Betts (3 rigs, 16% of total).
• Heavy Oil ↑ 4 rigs week-over-week, to 54. The most active Heavy Oil operators include Tamarack (8 rigs), Baytex (6 rigs), and Cenovus (6 rigs). The most active drillers in Heavy Oil include Precision (25 rigs, 46% of total), Savanna (8 rigs, 15% of total), and Ensign (6 rigs, 11% of total).
• Deep Basin ↓ 1 rig, week-over-week, to 18. The most active Deep Basin operators include Tourmaline (6 rigs), Peyto (5 rigs), and Cenovus (2 rigs). The most active drillers in the Deep Basin include Ensign (10 rigs, 56% of total), Savanna (4 rigs, 22% of total), and CWC (2 rigs, 11% of total).
E&Ps continue to generate excess FCF
Our Canadian E&P analysts project stocks under coverage to generate $11.4/11.0Bn of post-dividend FCF in 2022/23 at the futures strip. Our E&P analysts' estimates imply that operators will reinvest 40/42% of cash flow in 2022/23 at futures pricing (40/35% at RBC’s price deck), well below the 5-year trailing average of 95%. Current estimates imply ~105% y/y cash flow growth with capital spending increasing 62%, as shown in Exhibit 15.