North Vancouver, BC / ACCESSWIRE / October 20, 2014 / Energy service stocks have been crushed in the last six weeks along with the oil price-but drilling activity is actually going up in the US.
In Q3 2014 the average US onshore rig count added 46 rigs (3%) to make for a total of was 1,842 rigs. When matched up with last year's Q3, the total is up 133 rigs or 8%.
And in fact, in the last week, as oil prices have slumped, the count has still increased by another 18 rigs. A $20 drop in the price of oil has not lowered activity at all.
Energy investors are realizing this, as energy services stocks stabilized this week for the first time since Labour Day.
Halliburton (HAL:NYSE) was near $70 at the end of August, and fell 30% before bottoming last week at $50. Last week, Schlumberger (SLB:NYSE) said on their Q3 conference call that they do not expect any decline in services despite this initial downturn in oil prices.
As the overwhelming negative emotion of the oil market fades-and the forced selling by energy funds due to redemptions-the solid fundamentals of the services sector during this time could surprise investors.
One of the sectors that benefits the most from increased rig count is also one of the least well-known: the rig movers.
Right now there are over an estimated 2,100 active rigs operating in North America (1,842 of which are in the US, according to Bakers Hughes). Each of those rigs moves an average of 17 times per year, amounting to an estimated $2 billion industry.
"We're in a niche market," says Dave Werklund, Executive Chairman of Aveda Transportation and Energy Services (AVE: TSX.V), holders of the largest rig moving fleet in North America. Aveda is the largest pure-play on North American rig-movers.
"We're a specialized provider of oil field hauling services. We help to dismantle drilling rigs, relocate them to a new location, and help direct them at the new site."
Based in Canada, Werklund moved most of the business into the US over the last few years for one simple reason: seasonality.
"The road bans make it seasonal, so we can lose as much as 90 days in Alberta each year. It doesn't halt entirely, but it does give a dramatic slow period," says Werklund.
"Our sector is viewed as a seasonal business. But I think we'll see that level out with the majority of our income now coming from the US."
And the larger equipment necessary in Canada was just what the Americans were looking, as pad drilling was taking over the Shale Revolution.
"When Dave made the decision to go into the US we really had no choice but to bring the heavier larger equipment down from Canada and open new terminals," says Kevin Roycraft, President and CEO of Aveda.
"We would sure like to grow in Canada. I think we've looked at many acquisitions up there but the low hanging fruit for us has been in the US," says Roycraft.
Upon reaching their new US-based markets, Aveda's timing couldn't have been better.
When they arrived on the scene, they realized that their fleet of trucks were considerably larger than the others in operation in these regions.
Since the industry is undergoing an evolution that included a much heavier dependence on large pad drilling sites, smaller trucks were no longer cutting it. The mismatch of size requirements resulted in expensive and time-wasting multiple trips for the "mom-and-pop" operators in the sector in the US.
Aveda's appearance on the scene with heavier equipment was seen a godsend for operators whose needs were shifting. Size really mattered.
"We really stuck out because the mom and pop's we were competing against in these areas don't have the same size equipment we have," says Roycraft.
"They can't put as much on their trailers, they can't pull as much weight and so we're able to move a rig in far fewer loads than our competition."
Efficiency is a running theme with Werklund's teams. The Calgary-based billionaire made his first big splash with his previous venture Tervita/CCS after noticing deficiencies in fluid handling while working in the field for Shell, and improving upon the standard procedure of the time.
Werklund's subsequent rise to the top with Tervita is now the stuff of legends. What started in 1984 as a $50,000 investment in a single custom treating facility, later went public with a tiny $8 million market cap, and soared to a $3.5 billion enterprise by 2007.
Now with Aveda, Werklund's attention to efficiency is being implemented in the rig moving industry. He already had built up one of the largest pure play fluid management companies, and now he's built up the largest pure play rig moving company.
Since taking a more hands on approach, Aveda's fortunes have turned around considerably.
The shift in focus to the US was an obvious win, and on paper a no-brainer.
Aveda's US crews can not only work year round, but their wages are actually less than their Canadian counterparts in comparison.
On top of this, the US$ has outperformed the $C by a wider margin as of late.
"One thing we think provides a hedge against the decline in the WTI price as well is as the prices decline the US dollar has strengthened since such a large component of our revenue comes from the US," says Bharat Mahajan, Aveda's Vice President of Finance, and CFO.
"We still record in Canadian dollars and we think that will be a big benefit to us."
Thus, the fact that Aveda has the largest US$ exposure among all of its competitors just adds another bonus to this wise decision.
Another factor driving increased drilling activity in the US is called "down-spacing".
Ten years ago the industry was drilling only four wells per square mile in tight oil or shale plays-now it's 8. The well bores themselves are now spaced much tighter together than ever before.
Eight wells, or even 16 or more in some cases, are drilled from the same "pad". This reduces costs for the operator but increases the size of drill rig they use.
Pad drilling as a whole has taken over the North American landscape, and Aveda is leading the way with larger rig moving capabilities than any competitor in the service sector.
Since shifting the focus, Aveda has grown its exposure in the US from 33% in 2011, to an expected 80% by year end 2014.
They now cover Texas' Eagleford, Barnett and Permian, as well as Oklahoma, Colorado, the Utica in Pennsylvania and West Virginia, the Bakken in North Dakota, and Alberta.
The fleet includes 1,040 pieces of equipment (with 341 power units), making it the largest pure-play mover in the space. They have no plans to stop growing.
It's a sector that is severely fragmented, in a market not used to this kind of organization and growth strategy. Aveda has plenty of acquisition targets that will continue to arise as they takeout new targets and grow internally.
"I set a goal of 5 to 6 years to get to a $300 million top line with a 20% EBITDA margin," says Werklund. "We are still on track to get to that number."
G. Joel Chury
TheHydrocarbon.com
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