“Keith, I saw your piece “Another Domino Falls” from last week and I see one significant flaw that I will point out to you and make one comment.
“The flaw is the banks don’t use the year end price deck form the evaluators.
“All the banks use their own price deck which is significantly lower and is currently in the low $5 range, and they only loan on approximately 50-66% of the pdp (proved, developed, producing reserves) which are the most conservative of the bookings, a P90 case.
“They are all slightly different but fall somewhere in these categories so it is not like subprime mortgages and mortgages with no down which I believe you are relating E&P borrowing to. Anyway Canadian banks are still conservative in whatever they do.
“The question is what do they do in the states where access to debt and cash flow is very tough and cash flow will be dropping? The rig count will drop in half from their peaks and at 30% decline on average per year the tread mill will slow down and it will be hard to turn that around.
“The XTO CEO last week (XTO Energy – XTO:NYSE) said they will flatten production out in the states in April/May and will decline 5% by year end (that is close to 3 BCFD). He believes the rig count will drop in half from the highs last fall and remembers the last time they peaked in production in 2001 and the gas rig count dropped in half in 2002 - it took a lot of cash flow and to 2005 to reach those production numbers again. The production in Canada will drop another 1.5 -2.5 bcf/d (billion cubic feet per day) by year end as well.
“Mark my words the rig count in Canada is going to reach 50 or lower in Q2, the lowest since 92-93. It will go under 800 in the states. Last I heard is Nexen was supposed to do 6 horn river wells and it sounds more like 2 now. This gas isn’t as cheap as people think and access to capital was easier prior to this financial crisis and putting gas into this environment is not profitable. The supply side will correct itself.
“I have never been a big fan of NAV (Net Asset Value) anyway because it is an instantaneous # and commodity prices can change significantly every day. No one was screaming that NAV was too low when we used a price of $7/mcf gas in our 2007 yearend report and prices went over $11/mcf. It is a bad number on any instantaneous basis.
“The last thing is when we had the previous few commodity price drops before, the cash flow multiples still tended to trade in the 4X to as high as 7X multiples for good high return growth companies. This time there are so many other things going on in the markets that no one knows what to do. It is a very interesting time.”
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So what are rig counts doing? Just this week the Canadian Association of Drilling Contractors (CAODC) downgraded 2009 expectations by 22%, and said there were only 333 rigs in Canada active out of a fleet of 860, vs. expectations of 493 rigs.
CAODC expects Q2 rig counts in Canada to be 86 – not far off our reader’s call for a bottoming out of 50 rigs! Q2 rig counts are always low because of spring break up. Many rigs must be brought in from the field before the ground thaws, and can’t go back out until the soft goo of spring ground hardens up.
The question is – will they bounce back in Q3?
The other question is – is it too late to short oilfields services stocks? While the charts on many took a beating all the last half of 2008, many have dive-bombed even more just in the last week. It is clear that both the number of rigs active and the rates they can charge will be less than forecast.
This is not an exhaustive list, but Oilfield Services companies include (and their trading symbols)
Calfrac Well Services – CFW
Cathedral Energy Services – CET.UN
Enerflex Systems Income Fund – EFX.UN
Ensign Energy Service – ESI
Horizon North Logistics – HNL
IROC Energy Services – ISC
Mullen Group Income Fund – MTL.UN
Pason Systems – PSI
Phoenix Technology Services – PHX.UN
Nabors Industries NBR
Patterson – UTI Energy PTEN