RBC Notes November 23, 2022
Canadian Oilfield Services Trend Tracker
WCSB rig count down 6 w/w to 208
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 flat, while WTI 4% lower w/w
Canadian stocks under coverage decreased 0.1%, while the 2023 WTI strip decreased 4% w/w. The 2023 Henry Hub strip increased 7% w/w and remains 30% above last year. The top three performers were EFX (+12.4%), SCL (+4.2%), and TCW (+0.8%). The bottom three performers were ESI (-3.3%), CEU (-4.9%), and STEP (-8.7%). Our Canadian Oilfield Services coverage group is up 94.3% YTD vs the S&P/TSX Capped Energy index up 63.0% 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 214 vs. RBC estimate of 210
The rig count decreased 6 w/w, and sits 24 above 2021 levels and 35 above the 5-year average. Montney, Deep Basin and Cardium regions drove the w/w decrease, as noted in Exhibit 10. PrivateCo rig counts increased 5 w/w, Junior E&Ps (<25 mboe/d) decreased 6 rigs w/w, Intermediate E&Ps (25-75 mboe/d) decreased 2 rigs w/w, Large E&Ps (>75 mboe/d) increased 1 rig w/w, and International (Supermajor, NOC, US E&P) decreased 1 rig w/w.
Activity trends
• Montney ↓ 3 rigs week-over-week, to 43. The most active Montney operators include ARC (10 rigs), Ovintiv (4 rigs), and Petronas (3 rigs). The most active drillers in the Montney include Precision (24 rigs, 56% of total), Ensign (10 rigs, 23% of total), and DC (2 rigs, 5% of total).
• SE SK ↑ 1 rig, week-over-week, to 16. The most active SE SK operators include Tundra (3 rigs), Crescent Point (2 rigs), and Aldon (1 rig). The most active drillers in SE SK include Stampede (5 rigs, 31% of total), Ensign (4 rigs, 25% of total), and Betts (3 rigs, 19% of total).
• Deep Basin ↓ 2 rigs week-over-week, to 15. The most active Deep Basin operators include Tourmaline (4 rigs), Cenovus (3 rigs), and CNRL (3 rigs). The most active drillers in the Deep Basin include Ensign (9 rigs, 60% of total), Savanna (3 rigs, 20% of total), and Precision (2 rigs, 13% of total). • Heavy Oil ↓ 1 rig, week-over-week, to 48. The most active Heavy Oil operators include Spur (6 rigs), Cenovus (5 rigs), and CNRL (5 rigs). The most active drillers in Heavy Oil include Precision (25 rigs, 52% of total), Ensign (5 rigs, 10% of total), and Savanna (4 rigs, 8% of total).
E&Ps continue to generate excess FCF
Canadian E&Ps that have released FY23 budgets to-date show 12% y/y increases, as noted in our Oil & Gas Services: 3Q22 Review. Our Canadian E&P analysts project stocks under coverage to generate $10.5/7.6Bn of post-dividend FCF in 2023/24 at the futures strip. Our E&P analysts' estimates imply that operators will reinvest 41% of cash flow in 2023 at futures pricing (48% at RBC’s price deck), well below the 5-year trailing average of 85%. Current estimates imply flat y/y cash flow growth with capital spending increasing 13%, as shown in Exhibit 15.
Weekly updates
• Oil & Gas Services: 3Q22 Review. 3Q22 results highlighted another strong quarter of revenue growth and margin expansion for oilfield services providers. We see continued strength in OFS financial results heading into 2023 including improving y/y free cash flow margins. Given strong outlooks, firms have begun to increase shareholder returns with some implementing defined shareholder return approaches. Our list of preferred stocks remains (NYSE: SLB), (NYSE: LBRT), (NYSE: HP), (TSX: PD, NYSE: PDS), (TSX: PSI), and (TSX: SES). Full details here.
• OPEC+ Quick Take: Way Too Early. The RBC Global Commodity Strategy and MENA Research team note the Wall Street Journal article stating that OPEC+ is considering a 500 kb/d increase at the December 4 OPEC+ ministerial meeting sent oil tumbling, but the team contend that it is way too early to make definitive calls on the outcome and that a variety of factors will influence the final production decision in the days leading up to the meeting. Full details here.
• Oil Market in 60 Seconds: Thoughts on the Recent Price Blitz. The RBC Global Commodity Strategy Research team note WTI prices have fallen by nearly 14% over the past two weeks. They have wrapped up a tour of investor marketing, calls with E&P management teams and meetings with Boards of Directors. The team fielded many inbound calls to close out last week given the two day 6% retracement in benchmark pricing.