Red ink will rule, but optimism in the oilpatch as earnings released

Earnings season got off on the right foot last week when Precision Drilling said that it had rehired 1,000 workers. Will that set the tone for the coming weeks?

After 2 years, are things turning around in the oilpatch?

At least 1,000 oil workers have been recalled back to work by Precision Drilling, as the sector stabilizes. (Hasan Jamali/Associated Press)

Precision Drilling announced some full-on good news last week with its third-quarter earnings. Although the company lost $47 million in the third quarter and revenue was down by nearly a half, it also said that it had rehired 1,000 workers.

Precision Drilling employed 4,337 people at the end of 2015, as compared with 7,834 a year earlier. So, 1,000 hires is significant.

The ones that survived through the low stuff, they're making money at $50.- Mark Salkeld , Petroleum Services Association of Canada

In a conference call with analysts, Precision's chief executive Kevin Neveu said that sentiment in the industry was the best he had seen in two years.

The consensus is that the sector hit bottom this past winter, but as the oilpatch continues to report earnings this week, beginning with Suncor tomorrow, the question is whether a recovery will include the oilsands, or be focused on conventional oil and gas.

Conventional producers doing fine at $50

The conventional oil and gas sector is getting ready for the winter drilling season. Winter is the busiest time of year for the Canadian oilpatch, as heavy drill rigs are more easily transported over frozen ground. Most counties have bans on transporting that equipment in the spring to preserve rural roads.

That means that producers are planning their drilling season now, with more confidence that $50 US oil is sustainable.

"As they set their budgets for the year, there's been a material improvement in commodity prices, so that could potentially translate into more activity in the winter drilling season, said Martin Pelletier, a  portfolio manager with Trivest Wealth Counsel.

There's quite a few reasons to be moderately bullish.- Robert Mark, Raymond James Financial

"Which is good for the sector, but not as much for the commodity, in the big picture, since you're bringing on more supply."

The cost to drill a conventional well [non-oilsands], has dropped dramatically in the United States.

In Canada, according to Mark Salkeld, president of the Petroleum Services Association of Canada, costs to his members have been squeezed by between 30 and 50 per cent.

"It's an interesting circumstance we're in," said Salkeld. "Oil prices are up, producers are making more money, but they're not letting us raise rates."

Companies that made it through the lean time of $30 oil are in decent shape now.

"The ones that survived through the low stuff, they're making money at $50," said Salkeld.

Oilsands costs higher

That is not necessarily the case in the oilsands.

According to research done by consulting group Wood MacKenzie, new thermal or steam-assisted gravity drainage oilsands projects break even between $55 and $70 US a barrel. Already producing thermal projects break even between $30 and $45 a barrel. Mining projects all have break-evens below $50.  

That means that while oilsands producers can largely scrape by at $50 a barrel, they have to bring costs down further.

"Oilsands are going to have compete against shale plays in the U.S.," said Pelletier.

Earnings outlook mixed

Four major players are set to report earnings in the coming days. Suncor, Cenovus and Husky, all integrated producers with operations in the oilsands, are expected to post losses, while Imperial Oil is expected to report a profit.

However, that is the quarter behind us — the key news will come from their forecasts for the coming months.

"Any kinds of hints on capital budgeting and spending plans, which I expect to be quite positive," said Robert Mark with Raymond James Financial.

Mark expects oilsands spending to be slower.

"They're going to be slower turning the ship around, they need more time to get comfortable that prices aren't going to take another leg down."

"But sitting today in October, with overall fundamentals in the market, and positive news from OPEC, there's quite a few reasons to be moderately bullish."