The commercial start up of Western Canada’s first natural gas export project, LNG Canada, is going to lead to an uptick in Montney Shale drilling in 2025, according to Calgary-based Precision Drilling Corp.
Exploration and production (E&P) customers are discussing plans to activate natural gas-directed rigs in the Montney by mid 2025, CEO Kevin Neveu told investors during the second quarter conference call.
There has been “surging customer demand” from heavy oil operators since the Trans Mountain Expansion (TMX) crude oil system was commissioned in May.
“It seems we may experience a similar Montney surge,” when the Shell plc-backed liquefied natural gas project in British Columbia (BC) is “fully commissioned and shipping LNG by capacity this time next year,” the CEO said.
Precision has a fleet of 30 rigs in the Montney that are “virtually fully committed, with just a few windows available in activity this quarter, which we expect to fill the short-term customer programs…
“An awful lot of drilling has gone on over the past three years in the Montney,” Neveu said. Most is funded by the condensate volumes, which are sold into the heavy oil market. “The gas has actually kind of oversupplied the system.”
However, Montney-focused E&Ps “built up an inventory of gas supply now for the opening of LNG Canada,” he said. “No question about that…We're sensing that once that plant gets running and sustains operations, they'll need to continue drilling and probably increase drilling.
“That's why we're sensing that there's probably going to be a further step up in rig demand once that plant's running, which should be about mid next year when it's at full capacity.
“When we combine that with the behavior of our customers around trying to contract rigs, lock them in” and “getting the rigs going again on Jan. 1, it really seems like there's behavior pushing toward increased activity in 2025.”
Neveu said “we've got a couple of operators who are slowing down drilling programs this year, but asking us to have that rig for them for Jan. 1.”
Rig Shortage Coming?
It's conceivable, he said, that with the forecast uptick in Western Canada drilling, the market may be several rigs short” in 2025. “Recent customer contracting activity, and particularly the contract duration customers, seem to support the notion of a prospective rig shortage.”
If that were to occur, Precision could move over some “idle, fully winterized, Super Triple 1200s” awaiting work in the Denver-Julesburg Basin of Colorado.
“We expect to have better visibility on this opportunity later this year into 2025.”
One hurdle is securing contracts, Neveu explained. The Canadian natural gas and oil industry “has been really cautious over the past decade. They've been through heck and back with commodity prices and pipeline constraints, and they finally get a bit of room to run right now.”
[Forward Look: Quickly understand where the price of natural gas is headed with these graphic day-on-day comparisons of NGI's forward curves at 70 locations. View Now.]
Natural gas traded at Westcoast Station 2 in BC averaged C76.8 cents/GJ during 2Q2024, down 60% from the year-ago period, NGI’s Daily Historical Data show. Prices at Westcoast Station 2 have remained suppressed through the summer, averaging C55.0 cents on Tuesday (Aug. 6).
“But as a result, Canadian customers have been reluctant to sign too many long-term contracts because of the long-term uncertainty they faced the past 10 years. That is changing now.
“We see, certainly for development drilling in Montney, more of a trend for long-term contracts. So they're more willing to sign the contracts than might have been a few years ago.”
Precision is “not anxious to tie up the entire fleet with long-term contracts, but a blend of half the rigs contracted, half the rigs exposed, maybe a little more contracted. It's kind of how we look at things.”
The overall U.S. drilling rig count “has declined 15% over the past year, and while this data point is typically used as a proxy for broader oilfield service activity and financial performance, this is not the case for Precision,” CFO Carey Ford noted.
Precision activity, outside the Lower 48, was up year/year because of Canada drilling and a double-digit gain in international operations.
Precision’s total contract drilling fleet fell overall by 5% from 2Q2023 to 214.
The data points clearly point to the downturn in the Lower 48, though, with drilling rig utilization days slumping by 30% to 3,236. Meanwhile, Canada recorded a nearly 18% increase from a year ago to 4,464 days. International days jumped 61% to 728 days.
Between April and May, Precision was running on average 36 rigs across the Lower 48, down by two from the first quarter. The Canadian rig count averaged 49, 18% higher, or seven more rigs than a year ago. International activity averaged eight rigs, a 61% increase.
Is Haynesville Uptick Coming?
“While our U.S. segment is stable, activity is a little slower than we would like,” Neveu said. “In the Lower 48, customer demand appears to have troughed. The combined drag effects of capital discipline, low natural gas prices, operator consolidation and delayed drilling plans seems to have bottomed out.”
An “encouraging” touchpoint for Precision are the discussions underway with several Haynesville Shale E&P customers. E&Ps are in the “early stages of planning and anticipating increasing LNG export demand,” Neveu said. LNG capacity on the Gulf Coast is set to expand in the coming months as newbuilds and expansions come online.
“The Haynesville is a region that has traditionally been a stronghold” for Precision rigs, he said. “We currently have six available rigs in the region. And as soon as possible, we will have some additional reactivations before year end.”
Consolidation by E&P customers appears to have slowed, according to Neveu. The rebuilt E&Ps are being integrated, which has a big impact on the oilfield services companies that serve them.
The “drilling contractor mix” is likely to “shrink to fewer and larger, more capable drillers rather than the fractured vendor base used by many of those acquisition targets,” Neveu said. “Some of this contractor rationalization is already underway, and we are encouraged by the sophisticated customer interest in automation, safety performance and overall rig performance.”
Precision reports in Canadian dollars (C$1.00/US 72 cents).
Second quarter net profits were $21 million ($1.44/share), compared with $27 million ($1.97) in the year-ago period. Revenue dipped to $429 million from $426 million.
