RBC Notes June 8, 2022
Canadian Oilfield Services Trend Tracker
WCSB rig count up 18 week-over-week to 147
Our view: This publication serves as an update to the sector themes we track, including commodity prices, 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 and 17 highlight our valuation comparables, ratings, and price targets for the companies under coverage.
Canadian OFS stocks up 5% w/w, while oil moves 6% higher
Canadian stocks under coverage increased 5% w/w, broadly in line with the 2022 WTI strip. The 2022 Henry Hub natural gas strip decreased 6% and remains 194% above last year. The top three performers were STEP (+15.8%), PD (+8.6%), and CEU (+8.3%). The bottom three performers were SES (-0.4%), ESI (-0.4%), and SCL (-2.3%). Our Canadian Oilfield Services coverage group is up 83.9% YTD vs the S&P/ TSX Capped Energy index up 71.0% YTD. For additional details on North American rig activity, please see here for the latest edition of our US rig tracker.
Rig count above historical levels; QTD avg of 110 vs. RBC estimate of 130
The WCSB rig count increased 18 w/w to 147 and current rig counts sit 35 above 2021 levels and 46 above the 5-year average. Activity in SE SK, Heavy Oil and Other regions drove the majority of the w/ w increase, as noted in Exhibit 10. PrivateCo rig counts increased 6 w/w, Junior E&Ps (<25 mboe/d) increased 5 rigs w/w, Intermediate E&Ps (25-75 mboe/d) increased 2 rigs w/w, and Large E&Ps (>75 mboe/d) increased 6 rigs w/w, as noted in Exhibit 13.
Activity trends
Montney ↓ 1 rig, week-over-week, to 38. The most active Montney operators include ARC (9 rigs), CNRL (4 rigs), and NuVista (3 rigs). The most active drillers in the Montney include Precision (15 rigs, 39% of total), Ensign (12 rigs, 32% of total), and Fox (3 rigs, 8% of total).
SE SK ↑ 6 rigs week-over-week, to 12. The most active SE SK operators include Tundra (3 rigs), Aldon (1 rig), and BCEI (1 rig). The most active drillers in SE SK include Ensign (4 rigs, 33% of total), Stampede (4 rigs, 33% of total), and Betts (3 rigs, 25% of total).
Heavy Oil ↑ 5 rigs week-over-week, to 30. The most active Heavy Oil operators include CNRL (6 rigs), Tamarack (4 rigs), and West Lake (3 rigs). The most active drillers in Heavy Oil regions include Precision (9 rigs, 30% of total), Ensign (7 rigs, 23% of total), and Akita (4 rigs, 13% of total).
E&Ps continue to generate excess FCF
Our Canadian E&P analysts project stocks under coverage to generate $13.8 billion of post-dividend FCF in 2022 at the futures strip. Our E&P analysts' estimates imply that operators will reinvest 33% of cash flow in 2022E at futures pricing (40% at RBC’s price deck), well below the 5-year trailing average of 95%. Current estimates imply ~99% y/y cash flow growth with capital spending increasing 32% as shown in Exhibit 15.
Weekly updates
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Oil Strategy: Physical Inflection Point – Hypothesis on Chinese Buying? The RBC Global Commodity Strategy Research team hypothesize whether a broad tightening even of such price magnitude could be explained by the long-awaited return of Chinese buying, or a roll over in Russia output. While the latter is doubtful at the current time, they work through the inputs of the black box know as China (Pg. 1) Full details here.
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Natural Gas Strategy: What’s the Premium? The RBC Global Commodity Strategy Research team have reiterated they think US natural gas prices are overdone, but by how much and why? Likewise, they have observed a higher price sensitivity to storage recently, but how has that impacted prices? In this note, they use the latter to define the former (see results Figure 1, Pg.1). Based on their analysis, they estimate that a $2.17/MMBtu premium is at play in US natural gas, of which $0.89 is very overdone and $1.28 they think of as just partially justified. Full details here.
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Commodity Comment: And Yet, We Contend... The RBC Global Commodity Strategy and MENA Research team highlight, as they expected, OPEC+ moved to accelerate the return of the remaining 1.3 mb/d of production from the 5.8 mb/d cut, by bringing forward the September volumes and adding them to the planned July and August increases (Pg.1) Full details here.