The advent of horizontal drilling and hydraulic fracturing brought about a shale revolution that unleashed previously untouchable reserves and boosted U.S. oil and gas production to a record high. This shale rush has transformed the Canadian energy industry, helping Western Energy Services and Trinidad Drilling grow substantially over the last couple of years and become two of the largest oilfield-service companies in Canada.
Western's explosive growth is real
Currently, the largest challenges facing the Canadian oilfield-services industry are producer spending constraints, pricing differentials on Canadian crude oil, historically low natural gas prices, and the challenge to attract and retain skilled labor. To offset these headwinds, Western has pursued an acquisition spree since 2011. Western has acquired a total of six small players, boosting its top and bottom lines.
Thanks to this buying spree, Western has expanded its business lines, which currently include contract drilling, well servicing, and rental services. Meanwhile, it retains a high-quality customer base that eliminates writedowns, providing a predictable revenue stream.
Western's capital spending for 2013 totals $94 million, which can be financed substantially by operating cash flow. With net debt at approximately $220 million and estimated earnings before interest, taxes, depreciation, and amortization for 2013 at $120 million, Western looks comfortable to handle its debt burden too.
Trinidad's long-term contracts and innovation
Trinidad currently has approximately 50% of its fleet under long-term, take-or-pay contracts with an average term remaining of approximately one and a half years. This high percentage of long-term contracts and the technologically advanced rigs have helped Trinidad mitigate the impact of the headwinds in this industry.
Trinidad has also ramped-up its international presence, and recently entered into a joint-venture arrangement with Halliburton to provide and operate drilling rigs for Halliburton's international integrated projects. The JV will concentrate initially in Saudi Arabia and Mexico, with future growth opportunities in other international markets. The partnership will have a right of first look to provide drilling rigs for all of Halliburton's managed onshore projects outside of Canada and the U.S.
This is why Trinidad has expanded its 2013 capital expenditure program to approximately $140 million, which the company expects to fund from cash flow from operations without hurting its credit line. Trinidad fully paid off its revolving credit facility in Q2 2013, and brought its total debt-to-EBITDA ratio down to 1.9 times. This is its lowest level in several years and approaches the company's long-term target of around 1.5 times.
Deep drilling is Western's and Trinidad's expertise
The growth opportunities for Western and Trinidad don't appear as though they will wane anytime soon. Several international majors are deeply embedded in Canada's shale industry through a string of deals, targeting the deep Montney and Duvernay plays. PetroChina formed a JV with EnCana last year and gained a 49.9% interest in Encana's 445,000 acres in the Duvernay play for total consideration of approximately C$2.2 billion. Petronas acquired Progress Energy in late 2012, and is gearing up its drilling program by going from five to 25 rigs in the Montney play this year.
ExxonMobil bought Celtic Exploration for almost $3 billion last year to get access in Celtic's Montney and Duvernay fields. That was the largest purchase by ExxonMobil since June 2010.
Canada is also moving to commercialize its abundant natural gas resources, approving several liquefied natural gas projects that target Asia's growing demand for natural gas. There are several current proposals to build LNG plants along the British Columbia coastline with start-up timelines from 2015 and beyond.
Chevron and Apache, the owners of the Kitimat LNG, are looking for specialized rigs to be built and put into their undeveloped properties up in the Liard and Horn River Basins in British Columbia. Meanwhile, Chevron continues to expand its Duvernay acreage and acquired Alta Energy last month, getting access to 68,000 net acres in west-central Alberta.
Shell Canada, Korea Gas, Mitsubishi, and PetroChina are the owners of LNG Canada, while the Haisla Nation aboriginal community, Golar LNG, and LNG Partners plan to ship as much as 700,000 tons of LNG annually from their Douglas Channel LNG plant.
All of these participants are looking to prove their supply of natural gas, and a very LNG-oriented type of drilling activity is creating strong demand for modern rigs that can drill deep horizontal wells of approximately 5,000 meters. Western and Trinidad are two Tier 1 drillers with high horsepower rigs that specialize in deep drilling.
Most of Western's fleet contains efficient long-reach drilling rigs with depth ratings greater than 3,000 meters. More importantly, one-third of Western's drilling fleet has depth capacities ranging up to 4,500 meters, and obviously Western is well positioned to capitalize on this segment of the drilling market.
Approximately three-quarters of Trinidad's fleet is considered high performance. Trinidad's growth over the past few years has largely been through adding deep, technically advanced drilling rigs that drive better margins and offer opportunities for future growth.
A few weeks ago, the company added one of Canada's largest and most technically advanced land rigs in its fleet. The rig is being constructed to drill natural gas in the Liard Basin and will have a depth capacity of 8,000 meters.
Western and Trinidad have a strategic position in the drilling market, and look poised to exploit the flow of capital coming from the international energy investors in Canada.
Many producers are also focused on booking reserves for LNG-related projects. While this development is in early stages in Canada, the level of activity related to LNG development is expected to ramp up over the next 12 to 18 months, helping both Western and Trinidad capitalize on their reputation as deep, technical drillers whose fleets are largely composed of higher specification rigs.
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