Canada’s Oilfield Service Sector Battered By Low Prices
In some ways the numbers don’t look that bad. For a group of 25 diversified, publicly traded Canadian oilfield service (OFS) companies, combined revenue of nearly $9 billion in the first six months of 2015 was only 22.1 percent lower than $11.53 billion for the same period in 2014. With oil prices down 50 percent for the first half of 2015, a revenue decline of 22.1 percent looks misleadingly attractive.
The problem is that at the field level, OFS is nowhere near as profitable as producing oil or gas. When producers fetch $100 for a barrel of oil, direct field lifting and operating costs can be as little as $10, particularly if the production is within a royalty holiday period. Most oil wells that produce without steam or EOR (enhanced oil recovery) only cost $20 or $30 a barrel to operate. Even after paying Crown royalties, it is usually $40 or less. Oilsands operations have cash operating costs of $50 or less per barrel.
Field margins for OFS have never been as high as 90 percent or even 50 percent except for a few select companies. If it does happen, margins that high don’t last long, either because of a down cycle or because high profits attract competition. Any loss of field margin clobbers the bottom line. As a group, OFS gross margins shrank significantly in the first half of 2015.
Related: Some Small But Welcome Relief For WTI
And that was back before July, when oil prices were high compared to current levels. WTI (West Texas Intermediate) averaged US$53.19 a barrel in the first six months of 2015. At the time it looked awful. Now with oil trading near US$39 or nearly 30 percent below that average first half number, it is clear for OFS things could get worse before they get better.
The financial performance figures analyzed in the following chart are:
• The ranking order based upon gross margin gain (loss) in 2015 versus 2014 for the six-month period ended June 30, with the order starting at the highest in descending order.
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