So, it’s Groundhog Day and I wasted all my intellectual ammo last year doing a whole metaphorical dissertation about one of my favourite movies – Groundhog Day (work with me here) with the oil-patch as Phil Connors.

Not to be outdone for weirdness, apparently this year the gopher refused to come out of his hole because he was too scared – must have been worried about what Donald Trump was going to tweet about him being afraid of his shadow – “Big Chicken Gopher RAT sees shadow & runs away – officially ON NOTICE! VERY BAD!”. I’m not really sure what this means – either four more years of Trump or nuclear winter.

At any rate, amongst all the tragedy of the past week here in Canada and the comedy playing out south of the border, I thought, once again, it would be good to turn our attention back to the oil patch.

Besides, where last year at this time, the price of oil was struggling to get off the floor at $26 a barrel, now we are twice that price, I think it is fair to say that there is no groundhog day movie scenario playing out here.

Anyway, I digress. Off the soapbox to turn attention back to some of positive things going on in Western Canada, where recovery in the energy sector is starting to take hold while at the same time revealing the depth of the downturn.

According to the CAODC, the rig count in Western Canada is at 314 out of 641 for a utilization maddeningly just under 50%, the last time it was this high was in early 2015. This is all positive news, the November through April period is when the majority of the work happens in Western Canada because the ground is frozen and equipment won’t sink into the muskeg, so high rates of utilization restore a sense of normalcy to markets.

In our projected temporal and geographical barbell recovery (busy beavers until breakup, siesta over the summer and back to business in Q4 2017 with the primary areas of activity in North Alberta/BC and Saskatchewan), this suddenly higher field utilization has exposed the first and likely biggest challenge facing the service sector, namely human resources. This is a major dilemna in the field where the workforce is by and large transient and where the job losses have been as high or higher than in downtown Calgary, just less reported.

One of the most striking features of two years of minimal activity in the field is the hollowing out that has occurred in the industry. People have left permanently and that experience isn’t easily replaced. But the producers need the services so companies are scrambling to staff up and hire, but it is a massive challenge. Experienced people want more money and inexperienced guys cost a lot to train. How bad is the problem? In the US, a survey found that 65% of laid off field workers had found jobs outside of the oil and gas sector and further that 55% we planning to seek employment out of the oilpatch in the next 12 months. Canada is likely no different. Ouch. Nothing like recovering into a labour shortage.

As it regards the situation here in Western Canada, the anecdotal evidence is piling up in support of this – while there are a lot of people going back to work, there is also a large cohort of people who don’t want to go back or are seeking guarantees (what are those again?) and other perks from prospective employers.

Consider the case of a hypothetically laid off labourer, who is finally collecting his pogey (Employment Insurance payments for American readers). He gets a call from his former employer telling him that there’s a rig firing up and asking him to come back to work, but work is only there until breakup. So our guy is faced with a dilemma. While he’s working, he’s making good money but he loses his EI payments because he has gone back to work. To requalify for EI, he needs to work probably 90 days, or maybe he qualifies but has to reapply and perhaps at a clawed back rate. In all reality, unless there is guaranteed work through to the end of the year, he’s not likely to give up his cozy seat on his parents’ sofa to go out into the field.

An Alternative scenario is someone who has found alternative employment, maybe at lower pay, but with benefits and closer to home. While the oil patch pays great wages, it’s been two years for a lot of these guys and trying to entice them away from a cozy job driving a forklift at Home Depot in Okotoks to go work in the bush for a measly two or three months isn’t going to move the needle for a lot of these guys or their families, no matter what you pay them. This has led to situations where potential employees are asking for guarantees around work, but the service companies are having a tough time offering this, because their producer clients can’t.

There is no magic bullet to fix this, it is the typical ebb and flow of the work cycle in the patch, but it is exacerbated by how long it took to suddenly find ourselves busy as heck combined with the uncertainty around the pattern of this recovery and, in a uniquely Canadian problem, weather driven work patterns.

While too late for this year, it would seem that this may require Federal intervention through some adjustments to the EI act, such lowering of the minimum time worked, much like for the seasonal fishery in the Maritimes. This would help the service companies.

Federal employment policy aside, in the immediate term, what is actually happening is that service companies are having to offer more money to their prospective employees, or, in a perverse outcome for an economic recovery, are actually turning down work because they can’t staff up.

Critical to this is a lack of pricing flexibility. Service companies need to be able to raise rates to get people back to work and to fund the working capital to mobilize both labour and equipment into the field. And as anyone in the field knows, people get paid weekly or bi-weekly, suppliers to the field service companies get paid either in cash or within 30 days and the produced clients, who demand all these services yesterday godammit? Well they pay when they feel like it – generally 90 days or more by the time an invoice gets written up, approved and cycled through the byzantine approval process at an understaffed head office in Calgary.

So, if you are an oil field service company owner, you have to float your business and its increasing labour costs through the busiest season in the last 2 years, your rates have been hammered so low over that period that every hour you have equipment and people in the field you are probably losing money, you have limited ability to raise rates in the short term and your clients either don’t want to or are structurally precluded from paying you in a timely fashion. Remind me again why these companies do this? Look – it’s a bit of an exaggeration, because when times are good, the money is great and the anecdotes are piling up on the other side where service companies are refusing to send out crews for free anymore and demanding rate increases, and the producers? Increasingly they are caving – because they have to – drilling season is short.

This adversarial relationship between the field and the producers brings to mind another challenge – where are the banks in all of this? Tightening the screws and riding it out for the most part. The past 24 months have seen banks rein in their lending as cash flows have dried up and like good risk averse Canadians, most will be reluctant to loosen the purse strings on revolving working capital facilities for mid-sized businesses, without owners putting up LC’s, personal guarantees or similar.

So what does it all mean? At the risk of stating the obvious, the upstream oil and gas business is a tough gig and is very volatile, particularly at inflection points. A transient workforce in a labour intensive industry is a recipe for trouble, particularly where the work itself has such a seasonal component and the relationship between the service provider and the customer is in many ways adversarial, with the weak funding the working capital of the strong and pricing being the only lever that can be used to regulate either side.

In an ideal world, producers and service companies would heed the lesson of the past two years and work cooperatively to address the human resources and working capital challenges posed by such a cyclical and seasonal business, either by smoothing out the work flows or being flexible on pricing and payment and working together to understand each other’s business model better…

Ah, who am I kidding – it’s a hair on fire industry and always will be. I’ve been through a number of cycles and it’s always the same – when it’s busy you have no time to think how to improve things and when you are in the down cycle, you scramble to survive, no amount of bumper stickers will change that basic truth, it’s hard to see how it will be any different this time around.

Although, I must admit, it worked out OK in the end for Phil Connors, so there’s always hope…

“Phil: Do you know what today is?

Rita: No, what?

Phil: Today is tomorrow. It happened.”

Last thought – New England v Atlanta. Urg. My brain says New England. My daughter picks Atlanta – you know, red and black, right? Can’t fight the kid. Go Falcons.

Prices as at February 3, 2017 (January 27, 2017)

• The price of oil was choppy during the week ending up as the Trump administration imposed some new sanctions on Iran and OPEC was seen as making good on their cuts.
  • Storage posted a big increase
  • Production was flat
  • The rig count in the US and Canada continues to grow

• Natural gas was volatile during the week as milder weather reduced bullish sentiment and pushed prices down

• WTI Crude: $53.84 ($53.17)
• Nymex Gas: $3.060 ($3.391)
• US/Canadian Dollar: $0.7678 ($ 0.7619)

Highlights

• As at January 27, 2017, US crude oil supplies were at 494.8 million barrels, a increase of 6.5 million barrels from the previous week and 23.5 million barrels ahead of last year.
  • The number of days oil supply in storage was 30.2, behind last year’s 31.5.
  • Production was down for the week by 46,000 barrels a day at 8.915 million barrels per day. Production last year at the same time was 9.214 million barrels per day. The change in production this week came from a small drop in Alaska deliveries and lower 48 production.
  • Imports rose from 7.810 million barrels a day to 8.290, compared to 8.256 million barrels per day last year.
  • Refinery inputs were down during the week at 15.947 million barrels a day
• As at January 27, 2017, US natural gas in storage was 2.711 billion cubic feet (Bcf), which is 2% above the 5-year average and about 9% less than last year’s level, following a lighter than expected implied net withdrawal of 87 Bcf during the report week.
  • Overall U.S. natural gas consumption was up by 13% during the week on colder weather and demand rose across all sectors
  • Production for the week was flat and imports from Canada fell by 1% from the week before
• As of January 30, the Canadian rig count was 314 (49% utilization), 223 Alberta (49%), 31 BC (44%), 53 Saskatchewan (46%), 7 Manitoba (47%)). Utilization for the same period last year was about 26%.
• US Onshore Oil rig count at January 27 was at 583, up 17 from the week prior.
  • Peak rig count was October 10, 2014 at 1,609
• Natural gas rigs drilling in the United States was flat at 145.
  • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 56%/44%
• Offshore rig count was up 1 at 22
  • Offshore rig count at January 1, 2015 was 55

Drillbits

• It’s earning season and many companies are reporting results that are at times terrifying for the year but some do show incremental improvement into Q4, Some notables:
  • EXXON  reported Q4 2016 earnings of $1.68 billion compared to Q4-2015 earnings of $2.78 billion. For the full year, the company posted earnings of $7.84 billion compared to $16.15 billion in 2015. Geez, Rex, talk about leaving on a down note…
  • Imperial Oil reported Q4 2016 earnings of $1.44 billion compared to Q4-2015 earnings of $102 million. For the full year, the company posted earnings of $2.17 billion compared to $1.12 billion in 2015.
  • Royal Dutch Shell reported Q4 2016 earnings of $1.0 billion compared to Q4-2015 earnings of $1.8 billion. For the full year, the company posted earnings of $3.5 billion compared to $3.8 billion in 2015
  • ConocoPhillips announced a Q4-2016 loss of $35 million, compared with a Q4-2015 loss of $3.5 billion. FOr the full year, the company posted a loss of $3.6 billion compared to a comparable loss in 2015 of $4.4 billion
• According to rumour and innuendo, the Dakota Access Pipeline is supposed to soon be receiving approval to go forward by the Army COrps of Engineers and is now projected to be operational by Q3 2017.
• An audit by two American firms has confirmed Saudi Aramco’s crude oil reserves at over 261 billion barrels.
• Recent Executive Order actions by the Trump Administration regarding immigration and refugees and the Mexico wall/NAFTA/Tariffs for Mexico raise some interesting questions about future relations with Iraq, the U.S.’s staunchest ally in the Middle East after Saudi Arabia and the prospect for gas prices if a trade war erupts between the US and Mexico given the volumes of natural gas Mexico receives from the US (4.0 BCF/day last week, projected to double)
• Trump Watch: He is still the President of the United States.