The lacklustre outlook for the price of oil is bringing down the companies that get paid to drill for it.
Precision Drilling Corp. shares slumped to their lowest price since the global financial crisis, despite financial results from Canada's largest drilling contractor that showed a marked improvement in finances and operations.
Precision shaved its second-quarter net loss and posted a 68-per-cent jump in revenue. It also reported its Canadian-based rigs were in use more than twice as much on average than in the second quarter of 2016 and U.S. rig use was up 143 per cent.
Meanwhile, the company is advancing a strategy to modernize and automate its fleet of rigs to boost drilling efficiency for its customers.
However, investor fears over the prospects of exploration and production companies reducing drilling budgets in the coming months are pressuring Precision's stock and those of its rivals. An index that tracks Canadian energy services firms has dropped nearly 22 per cent this year, compared to a 13-per-cent loss for the S&P/TSX energy index. Precision shares tumbled nearly 4 per cent Monday on the Toronto Stock Exchange to their lowest since March, 2009, when debt concerns during the credit crunch scared off investors.
Oil prices have lagged most analyst expectations in recent months, hanging below $50 (U.S.) a barrel as the Organization of Petroleum Exporting Countries and its allies have been slow to live up to promised production cuts and U.S. shale oil output has rebounded sharply.
In response, oil companies, including Anadarko Petroleum Corp., ConocoPhillips Co. and Hess Corp., have clawed back capital spending for the rest of the year. The market has rewarded such moves with stock gains, but cuts threaten the activity of drillers, which rely on the spending.
Kevin Neveu, Precision's chief executive officer, said he is among frustrated shareholders, especially as many of his own customers express intentions to stick to capital spending plans if oil stays in the current range. Precision's stock is worth just more than half of what it was at the start of 2017.
"I think it's just a really challenging period for investors – myself included in that. I'm a large investor in Precision and it has been a challenging period to ride this storm out in commodity prices," Mr. Neveu said during a conference call.
"But the fact is we've got commodity prices now hovering close to $50 [West Texas Intermediate]. That will improve customer sentiment in time and the things we're doing with technology is delivering very good results for our customers and activity is relatively strong."
The sector is much busier than it was last year. In June, 23 per cent of rigs industry-wide were operating on average, up from just 9.5 per cent a year earlier, according to the Canadian Association of Oilwell Drilling Contractors.
Precision is watching closely which companies are cutting budgets and where the reductions are being made. The next few quarters present no cause for alarm, unless there is another dramatic retreat in oil prices, he said.
"I think we're feeling much more confident about the business now than we might have been in the more volatile periods," Mr. Neveu said.
Precision is also being pressured by investor apathy surrounding the energy sector in general amid a downturn now entering its fourth year, said Jon Morrison, an analyst at Canadian Imperial Bank of Commerce. Contract drillers, meanwhile, have less appeal in the current environment than providers of shale-focused fracking services such as Trican Well Service Ltd. and Calfrac Well Services Ltd., Mr. Morrison said.
In the second quarter, Precision had a net loss of $36-million (Canadian) or 12 cents a share, compared with a year-earlier loss of $58-million or 20 cents a share. Adjusted pretax earnings rose by 152 per cent to $57-million. Revenue was $276-million, up from $164-million.