RBC Notes October 5, 2022
Canadian Oilfield Services Trend Tracker
WCSB rig count up 3 week-over-week to 222
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 follow WTI up w/w
Canadian stocks under coverage increased 10.5%, while the WTI strip increased 7% w/w for the balance of 2023. Henry Hub decreased 1% w/w for the balance of 2023 and remains 16% above last year. The top three performers were EFX (+15.4%), SCL (+14.3%), and SES (+13.2%). The bottom three performers were PSI (+9.2%), ESI (+7.4%), and CFW (+3.4%). Our Canadian Oilfield Services coverage group is up 50.9% YTD vs the S&P/TSX Capped Energy index up 42.7% 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 222 vs. RBC estimate of 200
The rig count increased 3 w/w, sitting 53 above 2021 levels and 64 above the 5-year average. SE SK, Deep Basin and Heavy Oil regions drove the w/w increase, as noted in Exhibit 10. PrivateCo rig counts remained flat w/w, Junior E&Ps (<25 mboe/d) increased 1 rig w/w, Intermediate E&Ps (25-75 mboe/d) remained flat w/w, and Large E&Ps (>75 mboe/d) increased 1 rig w/w, as noted in Exhibit 13.
Activity trends
• Montney ↓ 2 rigs week-over-week, to 41. The most active Montney operators include ARC (9 rigs), Tourmaline (4 rigs), and Ovintiv (3 rigs). The most active drillers in the Montney include Precision (21 rigs, 51% of total), Ensign (8 rigs, 20% of total), and Fox (3 rigs, 7% of total).
• SE SK ↑ 3 rigs week-over-week, to 18. The most active SE SK operators include Crescent Point (3 rigs), Tundra (3 rigs), and Whitecap (3 rigs). The most active drillers in SE SK include Stampede (6 rigs, 33% of total), Ensign (5 rigs, 28% of total), and Betts (2 rigs, 11% of total).
• Heavy Oil ↑ 4 rigs week-over-week, to 53. The most active Heavy Oil operators include Cenovus (7 rigs), Baytex (6 rigs), and Tamarack (5 rigs). The most active drillers in Heavy Oil regions include Precision (22 rigs, 42% of total), Ensign (7 rigs, 13% of total), and Savanna (7 rigs, 13% of total).
• Deep Basin ↑ 2 rigs week-over-week, to 16. 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, 63% of total), Savanna (3 rigs, 19% of total), and Precision (2 rigs, 13% of total).
E&Ps continue to generate excess FCF
Our Canadian E&P analysts project stocks under coverage to generate $12.7/7.8Bn of post-dividend FCF in 2022/23 at the futures strip. Our E&P analysts' estimates imply that operators will reinvest 39/45% of cash flow in 2022/23 at futures pricing (38/30% at RBC’s price deck), well below the 5-year trailing average of 95%. Current estimates imply ~121% y/y cash flow growth with capital spending increasing 72%, as shown in Exhibit 15.