On Oilfield services co’s & a Texan Goodbye

Last two days have been about chatter on oilfield services and drilling companies at a pan global level based on Houstonian feedback, an interesting editorial and an investment note – all of which suggest that things are stable, growth will occur but that 2012-2013 may not be as good as 2011.

The reason is tied-in to the Oilholic’s last few blog posts that natural gas price is low and crude oil price is relatively high. So gains are to be made on one side of the business and the other side – while not necessarily countering all gains – would still stunt growth to a degree according to those in the know. Furthermore, growing competition within the services and drilling industry also means the biggest companies will still grow over the next 12 months, but not by the 10%-or-higher range that would warrant a continued positive outlook according to Moody’s.

“We foresee lower operating margins and slower EBITDA growth in 2012-2013 for the three companies that offer the best barometer of industry conditions – Schlumberger, Halliburton and Baker Hughes,” says Stuart Miller, Vice President & Senior Analyst at the ratings agency.

“We would move our outlook to positive if we projected that sector’s EBITDA would grow by more than 10% (annualised) over the next 12-18 months, while a drop of more than 10% would translate to a negative outlook,” he concludes.

The US rig count is also expected stabilise in 2012-2013. Oil-directed drilling will continue to outperform, but natural gas drilling will remain depressed into the foreseeable future, leading to a slower upward curve according to the agency.

(Click on graph - above right - to enlarge; for the latest Baker Hughes Rig Count click here). Nonetheless, drilling and associated services in unconventional plays continues as an area of strength for the industry.

The technical difficulty of developing unconventional resources will support a robust demand for sophisticated (also read expensive) horizontal well services. Companies such as Superior Energy Services, Key Energy Services and Basic Energy Services all stand to gain from their increasing exposure to unconventional plays, says Moody’s.

This ties-in nicely to an editorial in the latest (Apr 13, 2012) issue of the Houston Business Journal by Deon Daugherty in which she notes that private equity funding is being pumped in to oilfield services firms as 2012 unfolds alongside the usual investment in other traditional E&P components of the business.

Based on feedback from key local players, Daugherty writes that the technology and technical expertise needed to drill complex horizontal wells, hydraulic fracturing and expensive equipment is partly behind Houston private equity funds pouring investments in to oilfield services companies, alongside a high price of black gold driving investment into traditional E&P activity.

Speaking of editorials, there is another interesting and controversial one in The New Yorker (Apr 9, 2012) which makes a comment on ExxonMobil – the world’s largest “non-state-owned” corporation with annual revenues exceeding the GDP of Norway – and its ties with the US Republican Party.

While Democrats love to loathe the Irving, Texas headquartered IOC, columnist Steve Coll, splendidly notes that ExxonMobil CEO Rex Tillerson and President Obama "appear to share at least one understanding about energy policy and the 2012 (presidential) campaign: they are both aware that the partisan and media-amplified war over where to place the blame for rising (US) gasoline prices is largely a phony one."

The Oilholic couldn’t have put it better himself that being an E&P behemoth and that in itself being the area where its core interests are, "ExxonMobil can neither control prices at the pump nor make high profits there."

On a related R&M note, a Bloomberg report suggests that Delta Airlines is possibly in talks with ConocoPhillips about purchasing the Houston-based oil and gas major’s Trainer Refinery in Pennsylvania. Citing anonymous sources, the newswire says Delta would use the fuel from the Trainer refinery and other refineries in exchange for other products made there that it would not use.

While ConocoPhillips has said it would close the Trainer facility if it could not find a buyer by the end of May, its spokesman Rich Johnson told Bloomberg it is "still in the process of seeking a buyer for the refinery” and that the process was confidential. If it goes through, the move would be a remarkable one for a privately listed international airline.

Lastly on a crude pricing note, local media outlets suggest Enterprise Product Partners and Enbridge plan to reverse the flow of the Seaway oil pipeline two weeks ahead of schedule by mid-May pending US regulatory approval, thereby starting a much-needed reduction of excess crude from the US Midwest down and dispatch it to the Gulf Coast.

While the crude fetches a premium in the Gulf Coast, high inventory levels at the Cushing, Oklahoma – the delivery point for WTI oil futures contracts – have impacted WTI pricing relative to Brent. Reports suggest a mid-May (May 17) start date for the pipeline flow reversal will initially carry about 150,000 barrels per day of crude from the Midwest to the Gulf Coast. The news had an immediate impact as the arbitrage between transatlantic Brent and Gulf coast crudes on one hand and WTI on the other contracted sharply.

At 18:15 GMT, Light Louisiana Sweet (LLS) traded at US$19.40 a barrel premium over WTI, down US$1.65 from Friday's, Mars Sour (MRS) traded at US$12.25 a barrel over WTI down US$1.75, Poseidon (PSD) traded at US$11.55 over WTI down US$1.55.

Meanwhile, the ICE Brent futures contract for June traded at US$118.60 down US$2.61. Hitherto Brent crude and Gulf Coast crudes were moving up in tandem for the last 18 months, so this is certainly welcome news for those hoping for a return to more traditional levels stateside between WTI and Gulf Coast crudes.

Sadly, it is now time to bid another goodbye to Houston – a city which the Oilholic loves to visit more than any other. Yours truly leaves you with a view of the Minute Maid Park in downtown Houston. It is home to the local baseball team – the Houston Astros.

The stadium has a capacity of 40,963 spectators according to a spokesperson with an electronically retractable roof which was developed by Vahle, courtesy of which it can be fully air-conditioned when required – a wise decision given the city’s often hot and humid weather!

A local enthusiast tells the Oilholic that the field is unofficially and lightheartedly known as "The Field Formerly Known As Enron" by fans, locals, critics and scribes alike, acquiring the title in wake of the Enron scandal, as the failed energy company had bought naming rights to the stadium in 2000 before its spectacular and fraud-ridden collapse in November 2001.

Thankfully, on June 5, 2002, Houston-based Minute Maid, the fruit-juice subsidiary of Coca Cola Company, acquired the naming rights to the stadium for 28 years. Unlike Enron, it’s a healthier brand says the Oilholic. That’s all from Texas folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore/National Geographic. Photo 2: Minute Maid Park - home of the Houston Astros, Texas, USA © Gaurav Sharma 2012. Graph: Land & Offshore rig count and forecast © Baker Hughes/Moody's.

Keystone XL, politics & the King’s Speech

Even before the original Keystone cross-border pipeline project aimed at bringing Canadian crude oil to the doorstep of US refineries had been completed, calls were growing for an extension. The original pipeline which links Hardisty (Alberta, Canada) to Cushing (Oklahoma) and Patoka (Illinois) became operational in June 2010, just as another, albeit atypical US-Canadian tussle was brewing.

The extension project – Keystone XL first proposed in 2008, again starting from Hardisty but with a different route and an extension to Houston and Port Arthur (Texas) is still stuck in the quagmire of US politics, environmental reticence, planning laws and bituminous mix of the Canadian oil sands.

The need for extension is exactly what formed the basis of the original Keystone project – Canada is already the biggest supplier of crude oil to the US; and it is only logical that its share should rise and in all likelihood will rise. Keystone XL according to one of its sponsors – TransCanada – would have the capacity to raise the existing capacity by 591,000 barrels per day though the initial dispatch proposal is more likely to be in the range of 510,000 barrels.

Having visited both the proposed ends of the pipeline in Alberta and Texas, the Oilholic finds the sense of frustration only too palpable more so because infrastructural challenges and the merits (or otherwise) of the extension project are not being talked about. To begin with the project has a loud ‘fan’ club and an equally boisterous ‘ban’ club. Since it is a cross-border project, US secretary of State Hillary Clinton has to play the role of referee.

A pattern seems to be emerging. A group of 14 US senators here and 39 there with their counterparts across the border would write to her explaining the merits only for environmental groups, whom I found to be very well funded – rather than the little guys they claim to be – launching a counter representation. That has been the drill since Clinton took office.

One US senator told me, “If we can’t trust the Canadians in this geopolitical climate then who can we trust. Go examine it yourself.” On the other hand, an environmental group which tries to get tourists to boycott Alberta because of its oil sands business tried its best to convince me not to land in Calgary. I did so anyway, not being a tourist in any case.

Since 2008, TransCanada has held nearly 100 open houses and public meetings along the pipeline route; given hundreds of hours of testimony to local, state and federal officials and submitted thousands of pages of information to government agencies in response to questions. The environmentalists did not tell me, but no prizes for guessing who did and with proof. This is the kind of salvo being traded.

Send fools on a fool’s errand!

It is not that TransCanda, its partner ConocoPhillips and their American and Canadian support base know something we do not. It is a fact that for some years yet – and even in light of falling gasoline consumption levels – the US would remain the world’s largest importer of crude oil. China should surpass it, but this will not happen overnight.

The opponents of oil sands have gotten the narrative engrained in a wider debate on the environment and the energy mix. Going forward, they view Keystone XL and other incremental pipeline projects in the US as perpetuating reliance on crude oil and are opposing the project on that basis.

Given the current geopolitical climate, environmental groups in California and British Columbia impressed upon this blogger that stunting Alberta’s oil sands – hitherto the second largest proven oil reserve after Saudi Arabia’s Ghawar extraction zone – would somehow send American oilholics to an early bath and force a green age. This is a load of nonsense.

Au contraire, it will increase US dependency on Middle Eastern oil and spike the price. Agreed the connection is neither simple nor linear – but foreign supply will rise not fall. Keystone XL brings this crude foreign product from a friendly source.

Everyone in Alberta admits work needs to be done by the industry to meet environmental concerns. However, a 'wells to wheels' analysis of CO2 emissions, most notably by IHS CERA and many North American institutions has confirmed that oil sands crude is only 5 to 15 per cent ‘dirtier’ than US sweet crude mix.

The figure compares favourably with Nigerian, Mexican and Venezuelan crude which the US already imports. So branding Canadian crude as dirty and holding up Keystone XL on this basis is a bit rich coming from the US. Keystone XL increases US access to Canadian crude. Who would the Americans rather buy from Canada or Venezuela? Surveys suggest the former.

The pragmatists at CAPP

Over a meeting in Calgary, Dave Collyer, President of Canadian Association of Petroleum Producers (CAPP) told the Oilholic that they have always viewed Keystone XL as an opportunity to link up Western Canada to the US Gulf coast market, to replace production that would otherwise be imported by the US from overseas sources most notably Venezuela and Mexico where production is declining according to available data. There are also noticeable political impediments in case of the former.

“We don’t see this pipeline extension as incremental supply into that orbit, rather a replacement of existing production through a relatively straightforward pipeline project, akin to many other pipeline projects and extensions that have been built into the US,” Collyer said.

Energy infrastructure players, market commentators and CAPP make another valid point – why are we not debating scope of the Keystone XL project and its economic impact and focussing on the crude stuff it would deliver across the border? CAPP for its part takes a very pragmatic line.

“Do we think there is legitimacy in the argument that is being made against Keystone? No (for the most part) but the reality is that there has to be due consideration in the US. I would assume the US State Department is in a position where it has no alternative but to employ an abundance of caution to ensure that all due processes are met. What frustrates Canadians and Americans alike is the length of time that it has taken. However, at the end of the day when we get that approval and it is a robust one which withstands a strict level of scrutiny then it’s a good thing,” Collyer said.

T I M B E R!

Canadians and Americans first started bickering about timber, another Canadian resource needed in the US, about taxation, ethics, alleged subsidies and all the rest of it way back in 1981. Thirty years later, not much has changed as they are still at it. But these days it barely makes the local news in Canada each time the Americans take some reactive action or the other against the timber industry. Reason – since 2003 there has been another buyer in town – China.

In 2010, timber sales from Canada to China (and Japan to a lesser extent) exceed those to the US. Over the last half-decade timber exports from the province of British Columbia alone to China rose 10 times over on an annualised basis. Moral of the story, the US is not the only player in town whatever the natural resource. Canadians feel a sense of frustration with the US, and rightly so according to Scott Rusty Miller, managing partner of Ogilvy Renault (soon to be part of Norton Rose) in Calgary.

“We are close to the US, we are secure and we have scruples. Our industry is more open to outside scrutiny and environmental standards than perhaps many or in fact any other country the US imports crude oil from – yet there are these legal impediments. Scrutiny is fine. It’s imperative in this business, but not to such an extent that it starts frustrating a project,” Miller noted.

Ask anyone at CAPP or any Toronto-based market analyst if Canada could look elsewhere – you would get an answer back with a smile; only the Americans probably would not join them. The Oilholic asked Collyer if Americans should fear such moves.

His reply was, “As our crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Unquestionably there is increasing interest in the Oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us.”

CAPP has noted increasing interest from Chinese, Korean and other Asian players when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Interest alone does not create a market – but backed up by infrastructure at both ends, it strengthens the relationship between markets Canadians have traditionally not looked at. All of this shifts emphasis on Canadian West coast exports.

“Is it going to be straightforward to get a pipeline to the West coast – we’ll all acknowledge that it’s not. For instance, Enbridge has its challenges with the Gateway pipeline. There is an interest in having an alternative market. There are drivers in trying to pursue that and I would say collectively this raises the “fear” you mention and with some factual basis. However, the US has been a great market and should continue to be a great market...while some caution is warranted,” he concluded.

The King’s speech

We’re not talking about Bertie, (King George VI of England) but Barack (The King of gasoline consumers and the US President). On March 30th, the King rose and told his audience at Georgetown University that he would be targeting a one-third reduction in US crude imports by 2025.

“I set this goal knowing that we’re still going to have to import some oil. And when it comes to the oil we import from other nations, obviously we have got to look at neighbours like Canada and Mexico that are stable, steady and reliable sources,” he added. While I am reliably informed that the speech was not picked up by Chinese state television, the Canadian press went into overdrive. The Globe and Mail, the country’s leading newspaper, declared “Obama signals new reliance on oil sands.”

Shares of Canadian oil and service companies rose the next day on the Toronto Exchange, even gas producers benefited and 'pro-Keystone XL' American senators queued up on networks to de facto say “We love you, we told you so.” Beyond the hyped response, there is a solid reason. Keystone XL bridges both markets – a friendly producer to a friendly consumer with wide ranging economic benefits.

According to Miller, “Refining capacity exists down south. Some refineries on the US Gulf coast could be upgraded at a much lower cost compared to building new infrastructure. There are economic opportunities for both sides courtesy this project – we are not just talking jobs, but an improvement of the regional macro scenario. Furthermore, however short or long, it could be a shot in the arm for the much beleaguered and low-margin haunted refining business.”

The pipeline could also help Canadians export surplus crude using US ports in the Gulf and tax benefits could accrue not just at the Texan end but along the route as well. That the oil sands are in Canada is a geological stroke of luck, given the unpredictability of OPEC and Russian supplies. The US State Department says it will conclude its review of Keystone XL later this year. Subjecting this project to scrutiny is imperative, but bludgeoning it with impediments would be ‘crudely’ unwise.

This post contains excerpts from an article written by the Oilholic for UK's Infrastructure Journal. While the author retains serial rights, the copyright is shared with the publication in question.

Gaurav Sharma 2011 © Gaurav Sharma and Infrastructure Journal 2011. Map: All proposals of Canadian & US Crude Oil Pipelines © CAPP (Click map to enlarge)