Pipeline News October 2017

PIPELINE NEWS

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How will the oilpatch

RECAPITALIZE? Brad Wall retrospective on energy A3 MNP says few companies have been buying iron A4 Rouse Industries on challenges facing drillers A11 After a long drought, tank trailers are starting to sell again, according to Suzanna Nostadt, Vice-president of operations for Tremcar West Inc., in Weyburn. This edition takes a detailed look at the pressing issue of recapitalization, after three years of almost no one buying new equipment throughout the oilpatch. See related story on Tremcar on Page A9 Photo by Brian Zinchuk

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TOP NEWS "Surprises are for birthday parties, not royalty structures" BRAD WALL’S 10 YEARS AND THE ENERGY SECTOR

By Brian Zinchuk Regina – With Premier Brad Wall taking his leave in January, Pipeline News spoke to him by phone on Sept. 8 about what it was like to lead the province through the boom and bust in the energy sector over the last 10 years.

Pipeline News: Saskatchewan’s oilpatch grew tremendously during much of your tenure, at least until the downturn hit in late 2014.

What was it like to see that, from the office of the premier?

Brad Wall: Well, it was very good to see, from my vantage point. I expect it was even better to see from the vantage point of people working in the industry and benefitting from the activity.

Even here, lately, we’ve seen at US$50 or less West Texas, we’ve seen a lot more drilling activity and rigs. That’s always gratifying, seeing that happening. Jobs are being created or sustained. Small businesses are being engaged as contractors, and royalties are going to get paid. That, of

course, funds quality of life.

We’ve been fortunate over this last while, and we’ve tried to stay out of the way of industry. We’ve tried to practice “do no harm,” has sort of been the motto. We don’t want to get in the way of the industry when they’re creating jobs. Obviously we have environmental concerns and regulations that we’re very serious about.

But in terms of the business climate, we want to make sure, I wanted to make sure this was an inviting place to invest and that we were competitive.

If you check out the stats, the last Fraser Institute report, we were the best environment, investment climate in the energy sector of all Canadian provinces and we’re still in the very top tier of all subnationals – states and provinces, just behind a few U.S. states. I think that’s been intentional on our part.

P.N.: Bill Boyd repeatedly gave the same speech, saying the premier instructed him to thank the oilpatch for the jobs and investment, and that the provincial govern-

ment would not be changing royalties. You also gave similar speeches. Can you explain your thoughts behind that?

Wall: I did. I remember the very first speech I gave to the Petroleum Club in Calgary. I went and announced we would not be messing with royalties, basically. I got a huge ovation. It’s not very often the government says they’re not going to do anything at all and people clap. (laughs) I think it was indicative both of what was elemental to our growth plan and also the commitment we had made.

We’ve actually done a few things. I think industry’s recognized we sought to improve the permitting times, the turnarounds, the consistency of the government interface with the industry. We can always get better. I’ve heard back many times, where the industry said, “That’s working.”

This is a better place to do business than say, well, I’ll say Alberta, because we’ve worked on the regulatory side. That’s the feedback we’ve had. And it was from enough that it was

Premier Brad Wall, right, shared a good laugh with Del Mondor as they walked the Saskatchewan Oil and Gas Show in 2015. File photo

more than anecdotal.

But that is the speech.

That’s the message. You can expect consistency and stability. Surprises are for birthday parties, not royalty structures.

And for those who have massive investments on the line, we’ve tried to practice what we preach.

Politicians don’t simply say

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thank you enough, to industry, when they risk. We’ve used the word industry, but you and I know it’s a lot of small businesses that work here, in the province, in this sector.

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PIPELINE NEWS October 2017

2008 land sales numbers were hard to believe ▲

Page A3 every day, to create a wage for himself, and also for others. That’s the foundation of the economy, it really is. It pays for everything else, and we should thank them.

P.N.: In 2008, early in your mandate, Saskatchewan had its biggest Crown land sales, ever.

What was your reaction when you were told just how big it was?

Wall: It was hard to believe. The amount was hard to believe, much larger than we had budgeted.

We’ve experienced the other side of that coin as well. What we budgeted is not at all what we hit for land sales. But for that year, it allowed us to do two things – long-term investments. We reduced operating debt and reduced taxes structurally.

That’s the long-term, and we did some short-term things, some important capital projects that are one-term investments but have a long-term benefit.

Whether it was record Highways budgets or very specific things like your long-term care facilities, schools, hospitals.

When I saw that, when we looked at those numbers coming in, we

immediately understood we can’t hardwire this into future budgets, but we can make some long term investments with this, be it lower taxes, lower operating debt or major infrastructure.

P.N.: The downturn in recent years has been tough, not only on the oilpatch, but on the province’s finances and, in the last budget, much of the province as a whole. Can you explain what that has been like, from your perspective?

Wall: Well, it’s been a big challenge. We have, for the last couple of budget cycles, we went with the private sector forecasts on commodity prices whereby many were predicting the end to this trough some time ago.

They’ve been predicting the end to this trough.

We’re into, I think, year four of it.

I just believe, and our team just believed, we can’t procrastinate or kick this can down the road.

We have to begin to move off the dependence of resource revenue. We need to do this now, especially if prices are not coming back.

The good news in the sector is people are getting back to work, because the

industry has figured out US$50 a barrel. So that’s the most important part.

I’m gratified, I’m happy about that. I have neighbours that were out of work for 18 months. Their trucks are plated again.

They’re working. Everyone’s making a little less, but people are working.

What has not changed, though, is the revenue picture for government. Our revenues are still off, because, obviously, they’re based on price. If the new normal for some period of time is people back to work at US$50, that’s great, but we better react as a province, because I am not prepared to do what other jurisdictions have done.

I’m saying I’m not, our government’s not prepared to kind of procrastinate on this, and, “Well, we’ll wait, prices will come back.”

Even if they do come back, we need to move off of the dependence on resource revenue. So we took some tough expenditure decisions, made some cuts, stopped some services like STC, and moved taxes away from income and towards consumption. I think that’s caused concerns as well, and I understand it completely. But I really

believe this is an important measure. This is a bit like the Buckley’s Mixture.

It tastes awful, but in the long term, we know these kinds of changes can work, and we will not have procrastinated on the fact the prices for oil are going to remain low for some time.

P.N.: Is there anything you would have done differently, with regards to the oilpatch?

Looking back, do you think maybe we should have implemented a sovereign wealth fund?

Wall: I think we still should. I think, that’s part of, when you move away from resource revenue, and you don’t need those dollars for the operating of the government, then you can put them away for the long term.

You know, I’m not sure of a model like Norway’s, where there’s great benefit, but if you put them too far away from the people who own them in the first place, then there needs to be some flexibility there. I do think, as a whole, since oil was discovered in Canada, provinces with oil, including us, should have been looking at this model a long time ago.

It’s part of our plan.

We have our report from (Peter) McKinnon.

When oil, when resource revenues hit a certain portion of budget again, they will automatically move towards a fund. That number can move up and down.

I think the steps we’re taking now to move off of resource revenue will allow the government, some future government, my successor or someone after that, can lead an approach where we begin it much sooner, where we put away money much sooner, if we do not need – if oil prices come back and we’ve sort of weaned ourselves off of the great dependence off it, financially.

This has been a factor, by the way, for governments of every stripe, where you have hardwired your resource revenue to commodity prices that are budgeted. It’s hard to be critical, because the needs are there, and if there’s revenue coming in, and you know, there’s a need, generally speaking, you want to respond to it, whether it’s an economic or social need.

P.N.: Is there anything you would like to add?

Wall: This particular sector, I’ve been so pleased

and honoured to be able to work with them.

You know, it’s very frustrating, the degree to which our own energy sector is vilified by fellow Canadians, and sometimes people in our own province who might – I’ll be a bit partisan – folks across the way in the NDP, in our Saskatchewan NDP – there’s a few of them that believe in the Leap Manifesto. The Leap Manifesto is all about really hating, not just having concerns about the energy sector, but not liking. Wishing it would go away. Taking steps to make it go away.

I’m from Swift Current. I’m grateful for the sector. I know what it does for a community, and I know what it does for quality of life. I have friends who work in it. I hope that, as a government over the last 10 years, we’ve been able to send a signal to them that if they don’t feel valued elsewhere, they are valued by our government. We’ll stand up for their interests. As long as we have the honour to form the government, I hope that’s the message we gave them and continued to give to them. I’m grateful for the chance to work with them over the years.

Almost no one is spending money on new equipment: MNP NOT MUCH GOOD USED IRON LEFT, AND NO MONEY TO BUY NEW

By Brian Zinchuk Estevan – Simply put, oilfield companies aren’t making enough money to replace their equipment when the times comes, according to an accountant whose specialty is the oilfield.

David Hammermeister, a chartered professional accountant and chartered accountant with MNP LLP, has been working in oilfield accounting for the better part of 25 years. Working with oilfield services companies, some privately owned oil production companies, and some royalty companies, he has a broad understanding of the numbers that under-

lie the oilfield business in southeast Saskatchewan.

He can’t talk about specifics of clients, or specific clients, but in general he’s seen very little in the way of recapitalization. Hammermeister spoke to Pipeline News on Sept. 14.

Observing the trends in southeast Saskatchewan, Hammermeister said, “Obviously, with the decline in oil price, drilling activity is down, which leads to lower revenues for a lot of operators in the industry, oilfield service companies. You see it on the production side, too, with oil at a third of what it was at its peak. That’s a

third of the revenue they used to be generating.

“Declining activity, declining revenues, declining levels of employment, declining levels of income. More often than not, we’re not talking income; it’s how big the loss is, and what can you do to make the loss smaller?”

He agreed with Pipeline News’ observations that most oilfield services companies’ employment levels dropped by half compared to 2014, and that on average, most of those still with jobs took a 20 per cent cut in pay.

“Or more,” Hammermeister said.

“It’s not uncom-

mon that there’s probably been a 20 per cent reduction in their hourly rate, but the other impact is the number of hours they’re getting are way down. Whether it’s a year-end bonus or Christmas bonus, I shouldn’t say they’re non-existent, but they’re pretty rare and far more modest compared than what they used to be.”

From the business perspective, he said there’s a lot less discretionary spending.

Monetary support for community organizations and events is down. “The days of spending $7,000 for a hockey jersey to support the (Estevan)

Bruins, that hasn’t happened for a few years,” he noted.

The days of handing out tens of thousands of dollars of shirts, hats and coats are largely reduced if not stopped completely. There’s less money being spent wining and dining customers as well. There’s a lot less in the way of taking people to NHL games, for instance.

On capital expenditures, he said, “It’s not even the expansion capital, like who’s expanding and getting bigger, or picking up real estate; it’s pretty rare. It’s a good time to be buying real estate, because there’s

lots of it available and I think the price is pretty negotiable. But even the maintenance capital, for guys to be spending enough money, reinvesting in their equipment, to maintain their same level of capability, it’s not happening.”

On a broad basis, he hasn’t seen much in the way of new iron. He has noted some “resurrected” businesses, with people getting back into the business at the conclusion of a non-compete agreement, are getting going with newer equipment. He’s seen very little new heavy equipment or new semis. ► Page A5

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companies are not maintaining their capacity ◄ Page A4 “Some consultants who live in their trucks are replacing them every few years. I mean, the guys who are still working, are replacing, but that’s not a particularly discretionary. The truck has to work.”

Until recently, privately owned oil companies haven’t seen much drilling activity, either, but some have started drilling again.

The companies he’s familiar with are not spending anything significant on capital purchases. “They are not maintaining their capacity from three years ago, that’s for sure.”

Clients will generally consider buying new equipment if they are getting more work, or a different kind of work, or their current equipment isn’t capable of doing a new job. That’s pretty rare, these days, Hammermeister finds, saying, “The decline is dramatic.

It stopped. Anybody with a 2016/2017 year end, there’s no more than the absolute minimum

requirement by way of capital expenditures.”

Where you going to get it?

He went on, “That leads into a few other issues that go along with it. Now, it’s going to be availability. When you do need to replace it, where are you going to get it? Most of the premium used iron has been gobbled up already. The Ritchie Brothers auctions with the big equipment that was selling for maybe 50 cents on the dollar, but had only 10 per cent of its life used up – that stuff isn’t available anymore. So there’s guys starting to anticipate the day they’re going to have to start spending more money.

But a lot aren’t generating enough cashflow to save up money to replace their equipment anyhow.

“In anticipation of some improvement in activity levels and pricing so they can build some cash up, they’re worried where they’re going to get the equipment from,” he said.

For instance, a new

tri-drive semi now may have a waiting time of eight months to a year.

One small benefit is that the U.S. to Canada dollar exchange rate has improved, so they now get a some more bang for their buck for buying equipment, most of which comes from the U.S. But when the exchange rate was much more favourable to Americans, it was an opportunity for them to snatch up equipment at Canadian auctions and send it south. Thus, there’s not a lot of good, used equipment available.

The financing end of it has become a recurring topic among MNP’s oilfield specialists when they confer amongst themselves.

“The banks aren’t nearly as co-operative as they had been, particularly in regards to used equipment,” Hammermeister said. “You can kind of understand their position, that they’ve probably been burned and don’t understand the value of some of the used stuff.”

This especially the case of anyone exposed to drilling. He noted a company found some premium used equipment for a significant discount to the new price, but the bank wouldn’t lend to support a purchase. It would, however, finance a new buy.

“By and large, I think the banks have been extraordinarily patient for the last few years. If you were in a bind, as long as you were communicating well with your bank, doing what you said what you were going to do, or trying to do what you said you could do, I think the banks have been very understanding. But with some it, it’s like, ‘No. We’re not going to call your loans, but no new loans. Wherever you’re at, that’s your limit. And after you make your next monthly payment, your limit just went down by whatever the principal was.’

“It’s going to be a real problem when people need to replace equipment in finding it,

MNP David Hammermeister

and being able to pay for it,” Hammermeister said.

He did note a oneoff case where another lender came in when a client’s first bank refused.

“As tough as things have been, most people have continued to make their payments. Their debt has gone down, significantly, but they’ve also had some pretty significant losses. Their equity has also disappeared in their businesses.”

Laying it on the line “If people had surplus savings, or surplus cash, it’s gone. They’ve

injected personal monies as much as they can, or are capable of. I’ll say, that’s one thing, generally speaking – the level of commitment a lot of owners have to their business in this area is extraordinary. You start having conversations with guys to creditorproof or limit their losses in case their business goes down – at least we can do some things to put you second in line to the bank, ahead of your trade payable creditors.

There’s almost no uptake. ► Page A9

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PIPELINE NEWS October 2017

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Recapitalization is the next big issue to face the oilpatch 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. Just a number on the dash...

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 Transport 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.

MS RS

PIPELINE NEWS October 2017

The Magical Mystery Tour of oil over US$50 Are we about to embark on the Magical Mystery Tour?

As a Beatles song, it kinda sucked. But for the oilpatch, crossing the threshold of US$50 for a barrel of West Texas Intermediate (WTI) oil, and staying there, is an important threshold.

In recent months I’ve heard time and again, from drilling contractors to oil company CEOs, that US$50 is something of a magic number. We ‘ve been floating right at that number since midSeptember, and, at the time of writing on Sept.

25, it was still US$51.66, spiking that day due to concerns over Kurdish independence moves in Iraq.

Can it stay there? If it does, will our Magical

Mystery Tour of making a little more money, and activity picking up, begin?

Will we see the drilling rig count in Saskatchewan go up 50 per cent or, hopefully, more?

Will drilling contractors, who have been limping by with one out of three or four rigs working, get to send out another rig? Dare they dream of sending out a third?

That might be tough, as I’ve heard that some companies have had to cannibalize their fleets to keep the active rigs running. It also might be hard to come up with the people to man them.

When drilling activity picked up in the first quarter of this year, it became apparent that the service rigs’ work-

force was poached. Since then, nearly every service rig company office I drive by has a billboard advertising for workers.

As a result of the shortage in drilling hands, their wages went up. But the drilling companies didn’t see a corresponding increase in their day rates, so the drillers basically took that payroll increase on the chin, or so I’ve been told.

For pretty much all of 2017, I’ve been pointing out how the rates at most oilfield services companies are just enough to keep the lights on, but not enough to do much else.

Will we see those rates creep up this fall?

I’m betting no. I don’t think we’ll see increases until the calen-

ultants

ecialists

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OPINION FROM THE TOP OF THE PILE

By Brian Zinchuk

dar says 2018.

So far, oil has only been above US$50 for a few days. Most people have told me those prices have got to be a little higher than that, like closer to US$55, for a few months, to really see an increase in activity. Let’s see here: September, October, November…. Yup! Rates are going to be flat until 2018.

If there is more money in the system, and oilfield service companies are making more, and hiring more, we could see a labour shortage hit in the first quarter of 2018. The winter drilling season is by far the busiest, from about Jan. 4 to March 15. In northern Alberta, they call it the 100 days of hell, but with our

spring breakup being a lot sooner, it’s closer to 70 days.

For most of February 2017, we had over 60 drilling rigs working, or 50 per cent more than today. A brief drop in the rig count to 49 was followed by a spike to 76 on March 1, when oil was around US$54 for WTI. Indeed, that busy winter season in Q1 of 2017 corresponded with oil floating between US$52 and US$54 per barrel. If we get to that level this fall, and stay there through March 15, this could be the busiest drilling period we’ve seen in three years.

There are a lot of people who would love to see that again.

For the last year, I’ve had people tell me they’ve spoken to

people who have left the oilpatch, never intending to return again.

“And they’re not coming back,” is usually how the sentence ended.

So the big question will be this: will they come back?

Will people who have forsaken the oilpatch come back for four or three or two months of work, then expect a layoff in March? Will they leave whatever job they have now, which likely pays a lot less, but probably has a stable paycheque?

The expectation from many of those who may be doing the hiring is, “No.” We shall soon see.

Brian Zinchuk is editor of Pipeline News.

He can be reached at brian.zinchuk@sasktel.net.

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PIPELINE NEWS October 2017

PIPELINE NEWS October 2017

A9

Proposed tax changes could have large impacts their business, or their investment in their business, has increased from five years ago,” he said.

“There’s not very much accounting goodwill out there anymore.

Businesses are often not profitable at all, let alone being significantly profitable to justify goodwill.”

For those who had been considering exiting the business, they’ve kind of missed the boat, and may have to wait for the next cycle. For intergenerational transfers,

By Brian Zinchuk Weyburn – With the downturn in oil prices, few companies have been buying new iron, and getting by with what they have. But the iron they do have that has kept working continues to put miles or hours on.

At some point, a lot of equipment is going to need to be replaced.

That’s top of mind to Suzanna Nostadt, Vice-president of operations for Tremcar West Inc., in Weyburn. They also have branches in Saskatoon and Edmonton.

Tremcar special-

izes in tank trailers, and in this region, in the oilpatch.

“With all the sales that have been going on, with people getting rid of trailers, those sales have slowed down.

And people are actually looking at buying new trailers, which is unbelievable, because we haven’t seen that in three years,” Nostadt said on Sept. 7.

“There hasn’t been hardly any sales of new trailers. It’s been extremely slow. A lot of that was caused by the downturn in the oilpatch, crude prices

▲

Page A7 “If my company goes down, I’m going to go broke, too. I’m going to do everything I can to pay off all my suppliers, with maybe a couple exceptions to that rule.”

Asked if anyone has any reserves left, he responded that it varies from business-to-business, and some people have deeper pockets.

“I’m just trying to think of a single person who had a business operating five years ago that I would say the value of

it’s probably a lot easier from an income tax perspective because values are so much lower now.

On top of all this, the proposed tax changes the federal government has out for discussion right now on corporate taxation are some of the biggest since 1972, when capital gains became taxable, he noted. “What they’re proposing are very significant changes, from a policy perspective and dollar amount, that’s going to affect almost every private company in

Canada,” he said.

MNP is working hard to be an advocate for its clients in this regard, he noted.

It all comes back to the price of oil.

Hammermeister said, “You can’t fault the oil companies for grinding people on margins when they’re facing their own liquidity issues and cash crunch. A lot of them borrowed too much money and are no doubt facing pressure from their bankers as well. It’s only natural for them to

be pushing that down as much as they can.

“That would be the quick, easy global fix, is for the price of oil to come up. Hoping for the price of oil to come up is not a very good business plan. So what do you need to do instead of that? If you think lower for longer is the way it’s going to be … They need to be doing some of the things they’ve already been doing. For a lot of the oilfield services guys, one of the biggest line items is wages and

benefits. So what are you doing? Your guys aren’t getting paid as much as they used to, they’re not getting the hours they used to,” Hammermeister said.

That also means cutting discretionary spending, like community support and advertising. Not replacing equipment, which is likely not getting as much use anyhow, is another. Knowing your margins and focusing on relationships are also tactics to use.

After a long drought, tanker trailers are starting to sell again for Tremcar West in Weyburn dropping. It was all types of units, basically.”

While she’s seen some customers keep well-maintained trailers for 32 years or more, that’s not typical. “Most of the time, when they buy a new trailer, they usually keep it for as long as they have work.

And when they don’t use it, they usually wind up selling it. It’s usually a turnover of 10 to 15 years, when they trade up, or there’s newer or better trailers, similar to a vehicle.” she said.

Major overhauls, like replacing the sump and fittings, is dependent on

what they haul, and their maintenance. “If they’re hauling very caustic stuff, and they don’t rinse them out, or how they store it, will affect the longevity of their trailer.

Also, preventative maintenance helps.”

Visual and leakage tests are required by Transport Canada yearly.

Every five years, an

internal test and pressure test are required.

“There’s still people working. They complain lots about the rates, but they’re still working.

They’re still wearing their trailers out. Even if they’re sitting, they’re still wearing their trailers out to a certain extent, because seals are drying up and stuff isn’t mov-

ing,” she said.

Nostadt thinks there is a pent up demand for new trailers.

There seems to be a real push to go to stainless steel tanks, for instance.

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Page A9

payload. However, you have a lining to contend with.

Asked if there’s a magic number for oil prices to see activity pick up, she responded, “I think our customers eventually cannot afford to sit there and let their units sit. They get them ready in anticipation they’re going to need those units.

That kind of activity is based on optimism in the oilpatch and the whole economy. I think it sometimes becomes a self-fulfilling prophesy, because they’re going to create business. They’re going to fix up their units and start using them and actively going out to get

work so they can go out and use their trailer. A lot of them will do their yearly maintenance on them so that in the event they need them, they’re ready to go. They don’t have to wait to get them in a shop to get the work done.”

“It can’t continue this way for another three years, because that would be devastating.

“In the last three months, we’ve seen a real influx of activity and repairs being done; purchasing of new units. We haven’t seen that,” she said, noting customers are now fixing units they wouldn’t have thought of three months prior.

“There must be some-

thing happening.”

“Sales of new iron is picking up. Customers are more confident of purchasing new trailers now, fixing trailers. They’re willing to spend money now.”

It’s not just the big companies, but rather across the board, she noted, saying, “There seems to be a lot more optimism than there was before. I’m hoping we’re at a turning point, here.”

“They’re starting to open the purse up and spend money,” Nostadt said.

“I really think the market is turning. I really think we’re turning in the right direction. Let’s hope, anyway,” she concluded.

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Not a lot of tank trailers have moved in recent years, but they are starting to sell again at Tremcar West Inc., in Weyburn. Photo by Brian Zinchuk

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Drilling rig engines are still putting on the hours, and they add up

By Brian Zinchuk Weyburn – Rouse Industries has supplied engine packages and clutches of their own manufacture for many of the drilling rigs in southeast Saskatchewan over the years, as well as other areas of the country. But when the downturn hit over three years ago, nearly all drilling companies stopped buying new rigs, and Estevan-based rig manufacturer Do-All Industries was an early victim. Its bankruptcy affected many vendors in the region, and Rouse was no exception.

While drilling activity over the last three years has been down roughly half to three quarters compared to the boom years, equipment is still being used and engines are gaining hours. They all have a finite lifespan before rebuilding or replacement is required. But with drilling contractors struggling with day rates at a fraction of what they got when these rigs were built, there will eventually be a day of reckoning.

Dustin Rouse, general manager of Rouse Industries of Weyburn, has done extensive work over the last year, looking into what is going to need to be done to make sure the drilling fleet’s engines keep turning.

Rouse Industries is the sister company to Southern Industrial & Truck.

Rouse said, “In the drilling market, what we’re seeing is we have engines, transmission systems and components that have been in service for varying time frames, from the 20102014 arena, the last time anything was purchased or upgraded, in Saskatchewan specifically. There’s a lot of equipment that’s been run out there that’s put together with tape and bubblegum, trying to keep getting the hours out of it without going into full-on overhauls or replacements.”

The life expectancy of engines is more based on the amount of fuel that goes through it than the number of hours, he explained. Brands are

now looking at intermittent duty cycles, which means there are restricted ratings for the platform.

“Most engine companies will have life cycles based on gallons of fuel consumed,” he explained.

Using two examples, a 1,350-horsepower system like what is now common on mud pumps, and a 1,000-horsepower system, and their ratings, he determined the life expectancy runs from 40,000 hours to as low as 20,000 hours depending on load factor. It varies engine by engine.

“In Saskatchewan, in reasonable years, you can expect 300 drilling days.

I think that’s a conservative number. When you start looking at what the load factors have been and then take the hours of utilization per day and convert that into days and years, what we are seeing is a projected life to overhaul of roughly around five-to-six years.”

Rouse said.

In a normal year, “Three hundred days might be a little disappointing. Today, 200

Dustin Rouse of Rouse Industries has been putting a lot of work into the recapitalization issue facing the drilling industry. Photo by Brian Zinchuk

might be more realistic,” he said.

“I spent most of the early part of 2017, January, February, March, going around to a bunch of rigs doing load profiling. I was hooking up to engines on location. I was trying to find what their load percentage was over their life, the duty cycle over their life, idle time they were seeing, to see not only where we’re at with the life cycle of this product, but also what to

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expect for life cycles going into Tier IV engines.”

Bigger engines and pumps He focused mostly on pumping, as the size of pumps has gone up considerably in recent years, whereas drawworks engines for hoisting have gone up marginally, for 650 to 800-horsepower.

Generator sets went from 350 to 450 kilowatts per gen set.

Rouse said, “In pumping, we went from

having 600-horsepower engines, and now the newest engines we’re selling are 1,500-horsepower. Anyone that’s buying today are 1,350 to 1,500.

The orders I’m delivering over the next several months are all 1,500 and greater.

“It’s a lot more pumping. But if you look at what’s changed in drilling over the last 10 years, the number of days it takes to drill the same ► Page A12

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PIPELINE NEWS October 2017

Rebuilds may not be economical for drilling rig engines ▲

Page A11 well today, as opposed to say 2008, is half.

“So when you think about what’s changed, you have to drill the same distance of hole, but in half the time. Anybody who has ever drilled anything knows you have to get all those cuttings back up to surface. If you’re drilling faster, you’re pumping more, because you have to get those cuttings up to surface quicker. If you’re trying to drill faster, more accurately, you need more torque down at that bit.

That’s what’s changed, most dramatically, from the engine point of view,” he said.

He noted that the pressures are so high now, drilling is almost waterjetting the rock.

Most of the oncecommonplace 800-horsepower mud pump setups have been replaced.

Whereas before, it was possible to run a pump with a smaller engine, oil companies are now demanding the engines match the pumps, as Rouse said, “They will be

taken to the limit.”

And thereupon lies the issue of how long will these engines will last.

Overhauls costs When you wear out a 15-litre engine in a semi, you can swap out that engine core for a factoryreconditioned engine and get back to work in relatively short order. Not so, with drilling rig engines, because they’re considered “high-horsepower” they fall into a different category of product and their volumes are so low.

“The problem with our engines in highhorsepower, industrial applications, especially with these intermittent duty cycle ratings that are restricted, they don’t use the recon system. There aren’t enough volumes for it and it’s not a standard engine in the way other markets of the world get treated. You have to deal master rebuild centres in most cases. So you’re not getting the same level of pricing a highway guy would get, traded in.”

His calculations set an engine rebuild costing as much as 70 per cent

of the new engine price, but he added he’s seen them go as high as 110 per cent of new. That the begs the question if one should even consider rebuilding, or just going with a new engine?

“So when you’re talking recapitalization of some of this equipment, I think a lot of guys assume you’re going to be able to go out and repair this stuff for cheaper than what you had to buy it for originally, and I actually don’t know if that’s going to be the case, between the change in the dollar (exchange rate) and the fact the recon program doesn’t really work in these high-horsepower applications. It’s more like going to be one-to-one, if not higher,” Rouse said.

Some drillers have engines in the shop now, and they’re not being repaired as a result of this. Instead, they’re cannibalizing their fleet, pulling engines off idle rigs instead. “I have several engines in the shop that are not going to be repaired, because the cost

Some of these engines will likely never be rebuilt, as the cost is simply not economical.

Photo by Brian Zinchuk

is too high. The engine manufacturers don’t have the programs in place to offer, like the on-highway stuff, so they’re still expensive. And to replace with new, it’s hard to do.”

Tier IV is coming And there’s the kicker, because new engines, as of the new year, are going to be a lot more expensive. Drilling rig engines, which had been Tier II emissions controls, now will have to meet the much more

stringent, and expensive, Tier IV level come the new year.

Rouse said one should budget a new Tier IV engine costing 1.6x the cost of an equivalent Tier II engine, and he’s seen it even higher. Tier III didn’t really exist in high horsepower applications due to exemptions that were allowed. Those exemptions end at the end of the year.

Engines can be grandfathered with

equivalent tier engine, but Rouse wonders if it will be cost-effective. It’s also an open question of what the federal government will do with regards to emissions controls Asked what the price of a full package of engines for a Saskatchewan drilling rig, Rouse said a couple years ago the total would have been roughly $1.12 million, based on their average manufacturer’s prices. ► Page A14

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PIPELINE NEWS October 2017

Tier IV engines are going to cost a lot more ▲

Page A12 “The new price today is hard to judge, because there’s not a lot of purchases going on,” he noted.

“One of the things, when you talk about recapitalization that is so concerning is you go add up all these numbers, and then you take a theoretical traditional

loan out … Between the low day rates we are seeing and the high cost of operating, its hard to see how that investment is going to pay you back.”

Even with a currently unrealistic total drilling days of 300 days per year, and an average current day rate, subtract wages and look at what’s left, he said, “You wonder

how on earth this is going to get recapitalized?”

He’s been working for months to find a product they can offer to address these recapitalization issues for drilling customers, but hasn’t announced anything yet.

“It is top of mind,” he said.

Is AC the future?

With some expecta-

tion within industry that Tier IV engines might have teething problems, Rouse said there’s an expectation everyone will go to alternating current (AC) powered drilling rigs. Instead of having separate engines mechanically linked to the various pumps, drawworks and hydraulicallypowered topdrive, an AC

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rig uses a much larger generator plant, transmits power via wires, and they, in turn, power electric motors throughout the rig.

He noted that fully electric has its place, and on the big rigs that operate in different regions they can make a lot of sense, but for the Saskatchewan market specifically, it’s very hard to see that happening.

Rouse said there’s a rude awakening when it comes to efficiency ex-

pectations, and the electrical power generation is not without its difficulties. This includes much, much larger engines, i.e. 50-litre engines over 30-litre engines in pumping applications.

There’s also the addition of variable frequency drives for loads requiring variable speed, which have “real losses” in energy efficiency. The additional components also makes rig moves more difficult, and therefore, more costly.

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By Brian Zinchuk Regina – Few companies in the oilpatch have been buying heavy equipment since the downturn hit in 2014. Eventually, they’re going to have to recapitalize their iron.

How are equipment dealers dealing with this? Jeff Foster, operations manager, Regina, for SMS Equipment Inc., responded to our questions via email on Sept. 22.

Pipeline News: Over the past three years of the downturn, Pipeline News has observed that next to no new equipment has been bought and deployed in the Sas-

katchewan oilfield, from drilling rigs to semis to excavators. At some point, companies are going to have to resume their replacement cycles as things begin to wear out. How is SMS addressing this scenario?

Jeff Foster: There is no secret that the heavy equipment market in Saskatchewan, as well as other parts of Canada, has been experiencing a downturn. SMS Equipment as a company has remained optimistic for 2017 and is now starting to see slight increases within the industry. While other ► Page A15

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A15

All sectors of construction industry picking up ▲

Page A14 companies have downsized to match the demand, SMS Equipment has been focusing on growing its capacity. In Saskatchewan, we have worked to hire on additional parts personnel as well as trained heavy equipment technicians.

This is so we can be ready to serve our customers needs when they begin replacing their heavy equipment fleets.

We are certain that our team of skilled, trained, and knowledgeable people will be available to support their business when the time comes.

One of the key elements for our organizational success is to increase our after-sales support, whether parts or service, in order to ensure our customers’ investment is productive and profitable.

P.N.: Is there a pent up demand for heavy equipment? Is it just waiting for the money to become available?

Foster: Due to the slowed activity being experienced since late 2014, we have noticed that customers were focusing on service and maintenance of their equipment rather than

fleet replacement. We are now just starting to see a point where industry sales are increasing.

I don’t believe it’s about waiting for money to become available, but leaning more towards that customers are facing economic uncertainty in today’s lucrative environment. At SMS Equipment, we understand that a new piece of equipment is a sizable investment and that it requires proper planning in order for companies to forecast their return on investment.

P.N.: Do you expect, when the money is available, that there will be a flurry of orders from the oilpatch at some time? If so, will there be inventory out there to accommodate this, or will there be long waits?

Foster: SMS Equipment has worked very hard to forecast and manage the supply chain of equipment. We work with our OEM manufacturers on a daily basis to ensure that we are in a good place to support our customers in all regions. Should there be a sudden increase in oilfield activity, we are confident we

will be able to meet the demand.

P.N.: How have your sales been impacted during this downturn? Have you started to see signs of recovery?

Foster: Overall, heavy equipment sales activity in the province is starting to increase, but far from where it was five years ago. As of current market reports, the total number of machines has substantially declined from a high in 2012, but is lately showing signs that the market is starting to rebound. For the first time since the downturn, we are seeing increased business activity over the previous year, in all sectors of the construction industry.

P.N.: Has your emphasis been on service during this time?

Foster: Service is always a high prior-

Jeff Foster is operations manager for SMS Equipment in Regina. Photo submitted

ity, but when we see a downturn like this, it becomes even more paramount. The limited number of projects being completed in the oilfield, requires our customers to be that much more profitable on every job. They can’t afford any down-time or waiting for technicians and parts to arrive. Our customers need to be able to complete their

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A16

PIPELINE NEWS October 2017

Rent-to-purchase now popular with SMS ▲

Page A15 in some cases. But, what we have seen as a far more popular option, is rental purchase. It allows our customers to take possession of a new machine without having to commit to a longterm agreement. If all goes well and they decide to buy it, we simply roll the rental equity into the price of the machine as a down payment. This option offers great flexibility and saves the need to come up with a large sum for a down payment up front. In addition to our finance programs, we also have a department dedicated to helping our customers with financing solutions.

P.N.: Is there anything you would like to add?

Foster: SMS Equipment was here for the good times and has endured these hard times along with everyone in the oilfield. Our existing, new and prospective customers can be assured that we’re not going anywhere and that we look forward to creating lasting SMS Equipment is confident they will be able to meet the demand for new equipment, such as this dozer seen at the partnerships and taking care of all their NOW WITH TWO LOCATIONS TO SERVE WOheavy LOCATIONS TO SERVE YOU! NOW WITH TWO LOCATIONS TO SERVEYOU! YOU! Saskatchewan Oil and Gas Show several years ago. File photo equipment needs.

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PIPELINE NEWS October 2017

A17

Recapitalization, from an investment firm’s perspective

By Brian Zinchuk Regina – When it comes to recapitalization in the oilpatch, it’s something Jason Moser, partner, investments with PFM Capital Inc. in Regina had been thinking about.

PFM’s portfolio includes investment in two drilling companies, several exploration and production companies, a midstream company and other oilfield services operations.

Moser sits on several of the boards of these companies.

Asked about the need for recapitalization in the oilpatch, both in an equipment sense and financial, given it’s been three years since the downturn hit, and few companies have been replacing their iron, Moser replied, “No surprises, but there’s limited free cash flow, outside capital or senior debt available for most sub-sectors in energy services perhaps outside of a few isolated cases/management teams.

“When or if that money comes available, there still needs to be a suit-

able return on the assets to be generated in order to make those needed investments/replacements you talk about.”

He added that should be required anyways. “One good by-product to come out of the downturn is people actually look at a return on capital/ equity and make investment decisions based on that versus just growth for the sake of growth.”

Moser went on, “In some cases perhaps, with whatever the base level of activity is – obviously a lot of the idle equipment may not be required (or required for oil and gas purposes) so therefore no maintenance or refurbishment needed if it’s obsolete or just redundant. The balance of equipment it will be a struggle, I imagine, to start doing that maintenance that was put off and finding the suitable shops/people to do it.”

Moser pointed out that the number of wells drilled in Saskatchewan now is not remotely close to what it

had been a few years ago, but a lot of the infrastructure is built to handle those earlier numbers.

When it comes to capital for the oilpatch, he noted, “It’s tough. Not too many companies have zero bank debt or cash in the till. In an ideal world, if you had zero debt, you might not elect to work some particular equipment in some cases, right now, because you’re not getting sufficient return on capital for your equipment.

But unfortunately, for many, that’s not an option. There’s other intangibles, like keeping your market share, keeping your presence and keeping your people.”

“In the real world, you may have to adapt to the reality you’re probably going to be working your equipment at economics that don’t support it for a period of time, to keep your people and keep your business viable. In the event that you do have a bit of surplus cashflow, you do have to earmark some of that for recertifications and

maintenance capital. You have to put that away, just as you would pay your people, or pay your overhead, to the extent you can. Inevitably, it’s going to come up,” Moser said.

PFM has done some investments into the oilpatch over the past year, but Moser describes those investments as “pinpoint.”

“We’ve done a few isolated cases.

A few producers, where we’ve seen they’re really good stewards of capital.

Probably what’s required, in this cycle, we think is different than where it was previously growth at any cost. Now it’s a producer or service company getting a good return on capital and someone whose efficient at spending that capital.

He said one good thing is now people are applying the same standards to energy companies that they do to any other company. “Can you actually produce net income and sufficient margins?” he questioned. ► Page A18

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A18

PIPELINE NEWS October 2017

Most companies' business plans have been disrupted ▲

Page A17 He thinks there’s a correlation between net income, retained earnings, and value creation in this cycle. “I think, if you look at it from the public side, it’s all relative, but those that do have net income, I think they’ve fared better. It is reflective that they’re actually creating value even after depreciating the assets or equipment.

It’s also reflecting some underlying characteristics of the assets and management team.

“On the service side, again, it is difficult. We’re looking for someone who can differentiate themselves on something other than price, because that’s a race to the bottom,” Moser said. He added that if a company has a product or service that we see you can differentiate yourself, outside of price, and there’s a possibility you can maintain and grow market share, even in this flat commodity environment, that’s of interest.

That may mean working in multiple geographies

Jason Moser is partner, investments with PFM Capital Inc. in Regina. File photo

and/or adding complimentary business lines.

PFM’s investments are generally “patient capital,” with a usual investment horizon of

five to seven years. Moser said, “People’s business plans have been interrupted by two to three years. That horizon has expanded and it’s a differ-

ent world now. For producers, the critical mass, the size, has increased.

You don’t see the same appetite to buy, finance or bank 500 - 1,000 barrel

a day producers, either.

So if that threshold has increased, probably, by definition, your business plan has as well. It necessitates a longer business

plan, the same on the service side as well and bigger service companies may be required to work for increasingly larger producers.”

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PIPELINE NEWS October 2017

A19

Daily Oil Bulletin launches new Assets for Sale portal On Sept. 19, sister publication Daily Oil Bulletin (DOB) announced the launch today of its new Assets for Sale portal.

The data can be accessed via the DOB home page. DOB is a subscription-based service.

The map displays oil and gas assets (royalty, production, land) available for acquisition or trade. Advisors and sellers are listed with each property.

Asset data for this new initiative is supplied

by CanOils, which is owned by JWN, which also publishes the DOB. JWN, DOB, Rig Locator, Estevan Mercury and Pipeline News are all owned by Glacier Media.

Rather than outlining exact properties on the map, pins are shown at the centre of townships, with a note saying, “The pin represents an average of all locations. Individual loca-

tions are highlighted.”

Pipeline systems are also shown on the map, such as the TEML system that acts as the gathering system for all pipelined oil in southeast Saskatchewan.

The tool provides unique view of energy assets for sale across Canada, presented in a map format similar to Rig Locator. In southeast Saskatchewan, for instance, you can find four cases of land for sale, one instance of royalty assets, and numerous production assets listed.

One example of royalty assets is composed of 17,000 barrels of oil equivalent (boe) 1P reserves in the Bromhead area. That property is for sale from Petro One Energy Corp.

A little to the east, in the Torquay area, you can find a producing asset for sale from 101250512 Saskatchewan Ltd. It includes 31

barrels of oil equivalent per day (boepd) of production.

In the Carnduff area, Canadian Natural Resources Limited has 992 net acres for sale.

Over in the Weyburn field, Crescent Point Energy Corp. has 1,202 boepd production (100 per cent liquids) and 6,027 net acres for sale. It also includes 6 million boe of 1P reserves. In this case, the pin highlighted six townships, but was weighed to near Goodwater.

It’s also possible to come across areas that might otherwise be obscure. For instance, in the Chapleau Lake area, south of Kendall, Manulife Financial has 2,442 boepd (62 per cent gas) and 2.8 million boe 1P reserves (53 per cent gas) listed.

For a property at

This map shows production, land and royalty assets for sale in southeast Saskatchewan as of Sept. 19, the launch date of the new Assets for Sale portal on sister publication Daily Oil Bulletin. Highlighted is a set of production properties for sale at Whitebear. Graphic courtesy Daily Oil Bulletin

Senate, in the extreme southwest corner of the province, the tables show, “Talisman is seeking to sell, swap or farm-out two properties located in Michichi, Alberta and

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A20

PIPELINE NEWS October 2017

That Level IV inspection is coming, and you better be putting away for it

By Brian Zinchuk Carnduff – There hasn’t been a new drilling rig deployed in southeast Saskatchewan since 2014.

One of the last rigs added to the fleet was Betts Drilling Rig 4. Pipeline News spoke to Bob Betts, general manager of Betts Drilling, on July 27 about the pending need for the industry to recapitalize.

The summer drilling season started out alright for them, but when oil dropped below US$50,

he said, “It slowed the projects for the summer right down. We had two rigs going, and one came in, and we have one out now.”

Since then, the pattern has continued throughout the end of summer. In late September, a second rig went out.

Asked when was the last time Betts Drilling bought any new iron, he replied, “I bought a pump this year, only because it

was going to help me get more work, and I did get the job with it. It was a second pump.”

One of their pickups has 300,000 kilometres on it, and his has 205,000. They used to get rid of them at 200,000, because you could still get some trade-in value for them, but now they’re going to drive them as long as they can.

No one really’s been able to make much money in the oilpatch

In late July, the new shop for Betts Drilling was coming together. They hope to be in the new facility in November, a little under a year since a fire destroyed the original.

Photo by Brian Zinchuk

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Drilling, just before this interview took place, was of high interest in the drilling community. Betts said, “I think Vortex has probably started it, and now that it’s done there, I think the house of cards maybe starting fall, a little bit. You’ll find the weak guys starting to drop here. It’s gotta be close.

“We’re good for now.

I’d like to have two rigs running. I don’t know how much longer we can go (with one rig.)

Two years, we probably couldn’t. I think I could do another one year storm, from now, this say this time in summer to next summer. But after that, it gets to the point where, do you stay in the game?”

Most of the independent drillers in Saskatchewan with three or four rigs have only had one rig working at a time throughout the summer, according to Rig Locator.

Some have had two, but some have had none.

With the Vortex rigs on the market at the time of the interview, he said he was thinking about them, but then he’d have more derricks standing in the yard with no work.

One of the Vortex was parked in the yard next door to the Betts shop.

“If times were right, and I had work for them, it would be a no-brainer.

I’d definitely go after them,” he said.

He noted that if the independents like himself, with many years experience drilling in the region, have trouble finding work, he can’t imagine a new guy picking up those rigs and finding work for them. “I don’t think any investors would invest with you,” Betts said.

Indeed, most of this summer, Saskatchewan’s rig count, according to Rig Locator, has seen roughly one third, or less, of the 120 rigs in the province working.

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PIPELINE NEWS October 2017

A21

Day rates in drilling industry aren’t enough to recapitalize ▲

Page A20 end of the year, he said, “The fourth quarter looks really good,” adding companies are looking to spend the rest of their budget.

“From what I’m hearing, everybody wants oil over US$50,” he noted. In mid-September, the benchmark West Texas Intermediate crossed that threshold.

Day rates are a big factor for drillers. The court paperwork from the Vortex insolvency noted day rates for that company had gone from $16,000 a day to under $7,000 a day, a primary reason they went under.

Betts has heard of rates as low as $8,700 per day, as they were asked to match that. “I did the math. There’s now way I could do it. It be committing would be suicide for my company,” he said.

Even at rates a bit above that, it’s still tough.

“You’re not putting away for a Level IV. We’ve got a Level IV coming up that’s roughly $300,000.”

Drilling rigs are required to undergo a comprehensive Level IV inspection every

1,000 operating days. It involves tearing apart much of the rig, inspecting welds and basically bringing it up to likenew status. It often involves sandblasting and painting. Pipeline News has heard various from numerous drillers that the cost can range from as little as $150,000 to as much as $500,000, or more.

“It’s going to catch up sooner or later. It’s going to be a lot of expenses for a lot of companies.

Whether they have to go back out and raise capital to certify their equipment, I don’t know.

It would be really tough to go to a bank with oil under US$50 and get loans to do Level IVs and replace engines on your equipment.

“To do a Level IV, we usually sandblast the substructure, sandblast the derrick. The blocks, crown, are sandblasted and torn apart. Now I’m hearing you can get away without sandblasting.

If they’ll let us do that, you’ll see a lot of guys running it with the same paint for another five years. That would bring

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For much of the summer, three of Betts Drilling’s four rigs were lined up in their yard. However, just before this paper went to press, a second rig went out. Photo by Brian Zinchuk

down the cost of Level IVs tremendously.”

Blowout preventer systems (BOPS) need to be recertified every three calendar years, whether the rig is working or sitting. If you look after it, the average recertification on a BOP is $60,000.

Are the day rates the oil companies are willing to pay enough to put

away for these things?

“Not right now,” Betts said. “Now there’s not enough to put away for a Level IV. There might be, if you’re working the rig steady, every day. I guess there’s a bunch of variables there.

“There’s really not enough to cover wear and tear on drill pipe, your Level IV recertifica-

tion, your BOPS recert, wear and tear on the rig and breakdowns, replacing engines at 30,000 hours. A floor motor and a transmission on a teledouble is $250,000.”

Industry-wide, day rates are down roughly 30 per cent compare to where they were before the downturn hit, he said, adding rates would have

to come up 30 per cent from where they are now to be able to put that money away for those big ticket issues.

Betts Drilling saw a fire destroy their shop and several of their loaders early in the year.

Their shop is now nearing completion and they hope to move in in early November.

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A22

PIPELINE NEWS October 2017

Almost no one has spent money on capital equipment: PSAC

By Brian Zinchuk Calgary – Very few oilfield service companies are spending money on new equipment, according to Mark Salkeld, president and CEO of the Petroleum Services Association of Canada (PSAC). He spoke to Pipeline News via phone on Sept. 14.

“It’s a different environment we’re in.

We’re trying to make everything squeeze, as we’re squeezing everything we possibly can out of everything we’ve got, to try get through to a point where we can actually start spending some money again. It’s definitely tough times,” he said.

“We’re still losing equipment,” he said,

noting a recent Ritchie Brothers auction at Fox Creek, Alberta, was full of equipment again.

“Stuff is still leaving. I talked to our members, and they’re getting contracts, for work on fracs and completions and such. Customers are saying they want such and such a spread, and they’re saying, ‘No, if we do, that means bringing equipment off the fence and recertification and hiring people and that costs money.’

“Customers aren’t giving up the rates, so they’re saying, ‘Fine, then that’s not what we can do.’”

Others have bid jobs at cost or below cost, and the equipment broke down on the road,

and the oil company ended up seeking the second bidder because the first couldn’t even make it to the job.

“It that case, they’re paying the rates.

“We’re working, but we’re not making any money, ” he said.

Asked if PSAC members have been spending money on capital equipment over the last three years, Salkeld replied, “Pretty much, almost no one.

The only ones you’re seeing spending anything are your Precision Drilling. They’re investing in software and updating their rigs for other applications. The bigger, established players are spending money, but even at that, you

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see in interviews they’re saying, ‘It’s better than last year, we’re not losing as much money.’”

“Very few people are investing, from the PSAC perspective.

That’s northern B.C., Alberta, Saskatchewan and Manitoba. You’re seeing a little bit of new iron come out here and there, for long-return, as-built-type equipment for large contracts, but those are few and far between,” he said.

Salkeld used to work in procurement in 2007-09. He recalled a big order to build new coil tubing rigs.

Pumps and engines went through the roof in price. “What you’ll see is a replication of that. The prices pick up a little bit, we’ll see demand grow, we’ll see the customers willing to give up some rates, and then you’ll see our members start to invest in equipment.

And then the prices will go up again, the cost of equipment and everything else. The whole supply-demand cycle.”

He added PSAC members may be hurting, but they’re not going to put out equipment on a job unless it’s good to go.

He doesn’t think the industry can go much longer without investing in equipment. Mergers are one of the results.

“We’re getting to the point, I would say,

Mark Salkeld

in a year, where if things don’t turn around … we’ll have fewer service companies, but bigger. They’ll have picked through the remnants of what’s left and rebuild.

“The oilpatch won’t shut down for lack of equipment. It’s going to be the bigger players, who can afford to spend, and get the rates they want,” Salkeld said.

“The way we’re working equipment now, it can’t go much longer without reinvesting, to a certain degree.”

With interest rates going up, lending from banks is in question. But he said there’s money out there, Canadian, U.S. and foreign money watching for places to invest. “That money’s going to go to a very select few, superior management teams,” he said.

“The banks have been burnt. The service companies have been burnt. The only ones making money over the last three years has been Ritchie Brothers.”

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PIPELINE NEWS October 2017

A23

Pickup trucks sales are picking up for senchuk Ford

By Brian Zinchuk Estevan – When the downturn hit hard in late 2014, one of the areas that was hit hard was light truck sales for the oilpatch. Perhaps because it’s a new design, but Pipeline News has observed a substantial number of new Ford Super Duty trucks in the oilpatch in the past two months.

Randy Senchuk, dealer principal with Senchuk Ford Sales Ltd. in Estevan, noted on Sept. 14 that sales have indeed picked up.

“There’s more going out the door, that’s for sure,” he said.

“Over the last few years we noticed a huge drop in the amount of vehicles that have been purchased. A lot of that was fleet. A lot of companies just weren’t buying new stuff. Probably 50, 60 per cent, it was a huge number.

“It’s not that our

share of market was going down, it was the overall numbers were dropping,” Senchuk said.

“I’ve noticed in the last year, it’s not back where it was, but it’s certainly improved a lot. We’ve seen a lot more. We’re seeing a lot more numbers going out. People are getting back to work. I don’t know if they’re making any money, but they’re finding ways. They’ve made their cuts. They’ve made their adjustments and they’re finding ways to get back to work at today’s prices.”

“Vehicles wear out over time, so I think it’s a necessity for them. They have to do it. I don’t know what’s happening in heavier equipment. I know some oil companies used to get rid of their trucks around the 100,000 kilometre mark, and now they’ve pushed them to the 200,000 mark. Now they’re get-

ting up those numbers, and I think it’s a necessity. They have to change them. They don’t have a choice anymore.”

Asked what the life expectancy of an oilfield truck is, Senchuk replied that it depends how it’s treated. He’s seen trucks go up to 300,000 kilometres, but it’s all in how it’s maintained. “You can get a lot of life out of it if it’s looked after well. It’s treated a little rough, it’ll be a shorter lifespan, for sure.”

“A lot of companies like to get rid of their vehicles at 100,000, because there’s still some value in the truck. When you start to get up to 200,000, 300,000, there’s really not much value left in the truck. The sooner you do it, the more it’s worth.”

Senchuk Ford finds their truck sales are roughly half-and-half between F-150s and the heavier Super Duties.

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On fleet sales, he said, “The contract operators, you’re always going to get them, as long as they’re working.

When the oil companies cut their staffs back a few years ago, they had a lot of extra trucks sitting around, too. So that was part of it as well. If you go from 50 people driving trucks to 20, you have 30 trucks left.

They may have shuffled them around and found a home for them.

“They’re starting to hire more people and get people in the field.”

“Hopefully things are going to pick up a little bit and stay there,” Senchuk said. “I don’t know if we need to be as crazy as we were when it was that busy. But I think, as long as the price has stabilized to the point where everyone can do their job and be successful, that’s important.”

Randy Senchuk, dealer principal at Senchuk Ford Sales Ltd. in Estevan, has seen sales pick up this year after a few years of low sales. The new Super Duty models, like the one seen behind him, hit the market at the right time, according to Senchuk. Photo by Brian Zinchuk

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A24

PIPELINE NEWS October 2017

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