Alberta’s royalty regime ‘one more thing to worry about’: AltaCorp Capital analyst

FORT ST. JOHN, B.C. — The Financial Post has published a story this week suggesting oilfield service companies may have an entirely different take on the Alberta government’s new royalty regime than the Petroleum Services Association of Canada and the Canadian Association of Petroleum Producers.

It quotes an analyst with AltaCorp Capital calling the new structure, announced at the end of last week, “one more thing to worry about for oilfield services.”

Mark Westby was apparently responding to reports that Canadian oilfield services stocks fell sharply over fears the new framework would erode margins by creating an additional incentive to push down drilling and completion costs.

The Post story put market declines for pressure pumpers — vital for hydraulic fracturing — in the double digits and anywhere from 10 to 13 per cent.

In addition, even though the new royalty regime won’t be implemented until next year, the Post sited at least two contract drillers also with stock price drops of close to 10 per cent.

However, on the flip side of the debate, the story said a CIBC World Markets analyst believes concerns over the impact on the oilfield services sector are misplaced.

It said Jon Morrison, the Director of Institutional Equity Research, also believes ongoing market dynamics and oilfield equipment supply and demand will dictate oilfield services pricing, and he suggests service providers should cast their net wider in search of better margins in competing jurisdictions like B.C.

The Canadian oilfield services sector has been hard hit by the 72 per cent drop in crude oil prices in the past 18 months, with the Canadian Association of Oilwell Drilling Contractors putting direct and indirect job losses in excess of 28,000.

President Mark Scholz says, “It’s not clear how well costs will be determined given the dramatic collapse in drilling and service rig rates, but it would be unwise for the government to calibrate them in today’s pricing environment, since these prices aren’t economical for the service industry and shouldn’t be used to establish a benchmark.”