RBC Notes January 25, 2023
Canadian Oilfield Services Trend Tracker
WCSB rig count down 1 w/w to 248
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 decreased 2% w/w, while WTI remained flat w/w
Canadian stocks under coverage decreased 1.9%, while Bal23 WTI remained flat w/w. The Bal23 Henry Hub strip decreased 4% w/w and is 12% below last year. Canadian stocks under coverage decreased 2.5% w/w. The top three performers were SES (+3.2%), SCL (+1.0%), and PD (+0.8%). The bottom three performers were CFW (-4.8%), STEP (-5.4%), and PSI (-5.6%). Our Canadian Oilfield Services coverage group is up 5.9% YTD vs the S&P/TSX Capped Energy index up 3.6% 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; 1Q23 average 218 vs. RBC estimate of 218
The WCSB rig count decreased 1 w/w to 248 and sits 24 above 2022 levels and 2 below the 5-year average. Deep Basin, Mannville, Viking and Oil Sands regions decreased, offset by additions in SE SK, Cardium, and Duvernay, as noted in Exhibit 10. PrivateCo rig counts decreased 2 rigs w/w, Junior E&Ps (<25 mboe/d) increased 1 rig w/w, Intermediate E&Ps (25-75 mboe/d) remained flat w/w, Large E&Ps (>75 mboe/d) decreased 1 rig w/w.
Activity trends
• Montney flat week-over-week, at 55. The most active Montney operators include ARC (11 rigs), Ovintiv (5 rigs), and CNRL (4 rigs). The most active drillers in the Montney include Precision (25 rigs, 45% of total), Ensign (14 rigs, 25% of total), and Western (5 rigs, 9% of total). The BC Government and Blueberry River First Nations announced an agreement last week, which should ultimately encourage an increase in Montney activity in Northeast British Columbia. Some activity will likely shift from the Alberta side of the Montney but there should be some level of incremental activity driven by regularity clarity, which may remove barriers to future LNG-focused activity.
• Cardium ↑ 3 rigs week-over-week, to 19. The most active Cardium operators include Bonterra (2 rigs), Obsidian (2 rigs), and Whitecap (2 rigs). The most active drillers in Cardium include Western (4 rigs, 21% of total), Savanna (3 rigs, 16% of total), and CWC (3 rigs, 16% of total).
• SE SK ↑ 2 rigs week-over-week, to 17. The most active SE SK operators include Crescent Point (3 rigs), Whitecap (3 rigs), and Tundra (2 rigs). The most active drillers in SE SK include Stampede (6 rigs, 35% of total), Betts (3 rigs, 18% of total), and Precision (2 rigs, 12% of total).
• Heavy Oil flat week-over-week, at 46. The most active Heavy Oil operators include Baytex (10 rigs), Tamarack (5 rigs), and CNRL (4 rigs). The most active drillers in Heavy Oil include Precision (17 rigs, 37% of total), Savanna (8 rigs, 17% of total), and Ensign (6 rigs, 13% of total).
E&Ps continue to generate excess FCF
Our Canadian E&P analysts project stocks under coverage to generate $4.6/3.7Bn of post-dividend FCF in 2023/24 at the futures strip. Our E&P analysts' estimates imply that operators will reinvest 55% of cash flow in 2023 at futures pricing (44% at RBC’s price deck), below the 5-year trailing average of 85%. Current estimates imply a 15% increase in capital spending y/y, as shown in Exhibit 15.