Precision Drilling to ramp up spending, rig construction

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Resurgent conditions in oil and gas across the continent have prompted Canada's largest drilling company to boost spending by a third this year, and executives said they may speed up rig building even more in 2015.

Precision Drilling Corp. said it has more rigs operating now than it did a year ago as winter hung on longer than usual, delaying the normal spring slowdown. It expects second-half drilling activity to be 10 to 15 per cent higher than last year's levels due largely to strong oil and gas prices.

The brightening outlook has led to a 38-per-cent increase in Precision's share price since the start of the year. Its rivals in the drilling sector, such as Ensign Energy Services Inc. and Trinidad Drilling Ltd., have also enjoyed sizable gains as investors pump cash back into the sector.

"Oil remains high – it's over $100 a barrel. The natural gas picture looks really good because of the decreased inventories and there's rotation in equity markets specifically into Canadian energy, just because it's underperformed in the last couple of years," said FirstEnergy Capital Corp. analyst Kevin Lo. "All of that working at once is giving it the turbo boost."

Precision said it now aims to spend $833-million this year, up from its initial budget of $634-million. The increase will accommodate rising demand for the most complex rigs it builds, its Super Series, which are used in horizontal drilling. In total, it will build 16 rigs this year – seven for the U.S., six for Canada and three for international markets.

If demand among oil companies for the equipment clips along at the current pace, Precision will build two rigs per month in 2015.

Unexpectedly high cash flow is giving its customers the confidence to start considering increasing their spending, Precision chief executive Kevin Neveu told analysts. "Notably, the capital markets are also opening for the Canadian junior producers, and we've also seen several corporate transactions involving dry gas assets, both in the U.S. and Canada. We believe that the improved cash flow and the recent inflows of capital supports an optimistic view for the North American energy service fundamentals."

Following weak conditions throughout most of 2013, the industry rebounded through the first quarter. Prices for Canadian heavy crude were 24 per cent higher versus the year before, as the industry found more options to move supplies to market, including by rail.

The biggest surprise was natural gas, as cold weather across the continent led to surging demand for heating, draining inventories. The price of Alberta wholesale gas jumped 72 per cent in the quarter, prompting some forecasters to call for strong markets this summer as the industry races to refill gas in storage.

In Canada, however, four-fifths of the drilling targets oil, and that proportion has increased steadily since 2011, said Mark Scholz, president of the Canadian Association of Drilling Contractors, the industry's lobby group.

In late 2013, the association forecast 10,604 oil and gas wells to be drilling Western Canada this year, down slightly from the year before. First-quarter numbers tracked the projection closely, showing a gas renaissance has yet to arrive, Mr. Scholz said.

"These are short-term supply-capacity issues that I don't think are going to have a major impact on where rigs are going to be allocated between oil and gas. They're 80 per cent focused on oil,' he said. "We've had a number of years of depressed gas prices. The industry knows that there are significant reserves in place, and I just don't see this being a formula for natural gas drilling."

He and Precision executives said the next big round of gas drilling in regions such as the Montney in British Columbia will start when West Coast liquefied natural gas plants begin to move forward, adding new export markets.

In the first quarter, Precision earned $102-million or 35 cents a share, up from year-earlier $93-million or 33 cents. Revenue rose 13 per cent to $672-million.