This edition’s focus on recapitalization was inspired by conversations with two people: Jerry Mainil Ltd. general manager Dennis Mainil, and MNP partner David Hammermeister.
In our June edition, Mainil noted, “We’ve got a large surplus of trucks, so no sense running the new ones. You might as well mile it out. We’re running them longer, too – there again – economics. In the past, 160,000 to 180,000 kilometres. Now we’re over 250,000 kilometres, 270,000 kilometres.”
He noted that 300,000 kilometres can just be a number on the dash.
That really got the hamster running on its wheel upstairs. Hammermeister probably has his finger on the pulse more than anyone in southeast Saskatchewan, as the accountant for many oilfield services companies. He can’t talk about specifics, but in general, he’s been concerned about the need for oilfield services companies to recapitalize. They’re just not making enough to do so.
Over the past three years, since the end of 2014, Pipeline News has not observed one new drilling rig or service rig in the southeast Saskatchewan oilpatch. This past spring we did a story pointing out that R French Trucking bought four new semis. That’s about the total extent of new trucks we’ve come across.
That’s not saying no one is buying new trucks, but whatever purchases there are, it pales in comparison to when trucking companies told us they had been buying a unit per week in 2008. Related trailer sales are down, too.
We’ve seen no new “yellow iron,” either. No new dozers, excavators and the like.
While startup Canadian Plains Energy Services has a new fleet of crew trucks, that would be about the sum and total of what we’ve seen in that regard.
Very few new pickups have been observed, either; although perhaps because its recent redesign makes it stand out, we have noted a profusion of new Ford Super Duty pickups in the last two months.
In the meantime, while staffing at most oilfield services companies have dropped by half, on average, compared to 2014 (and this year slowly started to pick up a bit), that still means the remaining half has been working. And while oil production has dropped from a peak of 536,000 bpd around December, 2014, it hasn’t dropped that much. So there’s still work to be done. They’re still putting miles on trucks and hours on engines.
In other words, the replacement cycle for almost everything that moves in the oilpatch has ground to a halt for three years.
Fundamentally, the problem lies with the fact oilfield services are not making much money these days. They might still have the lights on, their (remaining) staff are being paid, but everything has been cut to the bone. If they’re in the black, they’re barely in the black. As demonstrated in late July, with the insolvency of Vortex Drilling, some simply can’t hold on much longer.
They can’t charge more because the oil companies have demanded huge rate cuts. In some sectors, like drilling and trucking, we’ve heard of four or five rounds of cuts. Very little of those rate reductions have come back.
And that’s because oil companies, who are now seeing, finally, US$50 for the WTI benchmark, haven’t been opening up their purse strings any more than absolutely necessary. They’re not doing so great either, as they are still getting half of what they got for their product four years ago. On top of that, the appreciating Canadian dollar has had an impact on their revenue, too.
So what it really comes down to is no one out there really is making enough money to recapitalize their business, both in a cash sense and in a capital equipment sense. The chickens are soon going to come home to roost on that.
Rouse Industries, which specialized in engine and clutch packages, has engines in their shop that will likely never be rebuilt, because the numbers are simply not there. Some drillers are cannibalizing their fleets to keep working, but to what end? We saw the same thing with trucking. If a unit had a serious mechanical issue, it got parked along the fence, and they turned to something else that was working. This can only last so long.
There’s little interest in the banking community in lending to the oilpatch these days. Investment capital is sparse, if available at all.
Is there a pending recapitalization crisis? If oil doesn’t come up some more, soon, it seems likely.
