As this is being drafted the sun is finally coming out and a well-deserved Canadian long weekend is upon us. Typically this is the time where Canadian service companies take some time to catch their breath and recharge after a frantic winter drilling season, I suspect this time it is more likely most will be reflecting on what the next few quarters are going to deliver as the industry tries to find its legs and recover from this latest cyclical downturn.

It was interesting to note in the last week some of the punditry relating to how Saudi Arabia had “won” its market share battle with shale oil in the US and had gotten exactly what it wanted. In contrast to this was the introduction of a bill in the US to allow exports of US oil for the first time in about 40 years. Arguably, if this bill passes, it doesn’t seem that Saudi Arabia has won anything unless winning means getting a new competitor on the global stage as opposed to defending its marginal market share in the North American market. Looking at US energy imports over the past 10 years the big volume losers have included Saudi Arabia and Venezuela and the supply winners have really been Canada and US domestic production. This suggests that the North American energy complex is significant and not going anywhere anytime soon regardless of short term price cycles.

I am intrigued (and encouraged) by recent resurgent chatter about natural gas that is based on increases in domestic demand as opposed to years-off LNG potentials. Whether this has any legs or not is to be determined, however when demand growth is primarily industrial and electrical generation this indicates both a strengthening economy and continued displacement of coal-fired generation which are collectively good for the pocketbook, the climate and, ultimately, the soul I suppose.

Prices as at May 15, 2015 (May 8, 2015)

• WTI Crude: $59.90 ($59.43)
• Nymex Gas: $3.014 ($2.866)
• US/Canadian Dollar: $0.8320 ($ 0.8267)

Highlights

• The price of oil continues to trade in a narrow band of $58 to $62, as traders, speculators and analysts continue to battle over who is right on the next significant directional move in the price of oil.
  • Storage declined more than expected and production increased marginally
  • The rig count continues to fall
  • The US dollar continues to weaken, supporting prices
  • Price headwinds include a decline in refinery runs and general feeling that somehow prices have gotten ahead of themselves
  • The number of shale producers indicating they will increase summer drilling activity on the backs of $60 to $65 oil is increasing and now includes heavyweights such as Continental Resources and EOG.
• Natural gas gained during the week on the basis of increased demand, in particular from electricity generation where natural gas generation is at its closest to market share parity with coal since 2009.
• As of May 8, 2015, US natural gas in storage was 1897 billion cubic feet (Bcf), which is 2.0% below the 5-year average and about 65.7% higher than last year’s level, following an implied net injection of 111 Bcf during the report week.
• As at May 8, 2015, US Crude oil supplies were at 484.8 million barrels, an decrease of 2.2 million barrels from the previous week and 86.3 million barrels ahead of last year.
• The number of days oil supply in storage was 30.1, ahead of last year’s 25.1.
• Production increased slightly to 9.374 million barrels per day from 9.369
• Oil rig count was down to 660 from 668 the week prior, the lowest since August 2010
• Natural gas rigs drilling in the United States increased this past week to 223 from 221.
• As of May 11, the Canadian rig count is 79 (10% utilization) (54 Alberta (10%), 17 BC (20%), 8 Saskatchewan (6%)). Typical utilization for this time of year is about 30%.

Drillbits

• Earnings season bellwethers for the Canadian market this week included natural gas and liquids powerhouse Encana and service company Trican
• Encana reported a loss of US$1.7 billion for Q1 and included $1.2 billion in impairments. Operating earnings were $9 million, which was actually a positive surprise given expectations, although significantly behind last year’s $515 million. The company continues to focus on its Montney, Duvernay, Permian and Eagleford assets and in driving efficiency. While many fund managers in Toronto seem to be talking up Encana as a “short” we are much more interested in what the company is actually doing in its areas of activity and what this indicates about how the local recovery will unfold – with gas and liquids rich gas leading the way.
• Trican felt the brunt of the decline in its first quarter and reported a net loss of $35.7 million on revenues that were down 26% or $167 million from the same quarter last year with most of the decline coming in Canada. The company suspended its dividend and is laying off 2,000 people in an attempt to cut $115 million in fixed costs. With significant debt and a weak few quarters ahead, the company will need all the cash it can generate to keep its lenders at bay.