There are 109 rigs drilling for oil in Canada currently, according to Baker Hughes. If that number sounds small to you, it is. The rig drill count in Canada is down 40.8% year over year. What about Gas?
According to Baker Hughes, the gas directed rig count for the week ending February 19th was down 7 to just 79 rigs or 44.9% lower than last year.
With oil overflowing in most countries and a massive global glut in supply, Canada’s expensive oil and gas is closed for business at the moment. What’s more, we could be set up for the biggest collapse in driling yet.
Consider this: According to Baker Hughes:
“Canadian drilling falls rapidly in the spring to avoid environmental damage moving drilling equipment during the spring thaw and rainy season. With large weather related seasonal swings, even year-over-year comparisons can lead to incorrect conclusions.”
source: http://www.wtrg.com/rotaryrigs.html
There is just one problem. It is still the dead of winter in most of Canada. Now, take a look at the below chart:
When Canada’s rotary rig count dropped below 100 in the spring/summer of 2015, industry experts were floored. If the price of oil does not rebound soon, expect exploration to fall to levels never before seen.
Despite the tough marketplace for the oil and gas sector, top management teams are getting deals done. Seeking out the best management teams as this historic bearish period comes to an end is no small task.How does one go about finding the ‘stout’ management teams?
This was the motivation behind our new Ebook at Pinnacle Digest.
Rig count falls in U.S. not just Canada
The U.S. rotary rig count hasn’t fared much better and was down 27 at 514 for the week of February 19, 2016, according to Baker Hughes. Its year over year decline is even worse, giving up 796 rigs or 60.8% lower.
“Rig count is at the lowest level since the week of May 14, 1999 when there were 507 active rigs.”
source: http://www.wtrg.com/rotaryrigs.html
Special note: In the U.S., rigs drilling for oil represent 80.4 percent of all drilling activity.
The silver lining in all of this is that the worst bear markets set up the biggest bulls. With exploration declining and new discoveries not being made, eventually, and I say eventually for a reason, the global supply glut will turn into a deficit.
Energy loans and bonds go bad
J.P. Morgan has been sounding the alarm on exposure to energy bonds, or loans given out in the past decade that are maturing. The subtitle of an article from yesterday reads: Bank plans to build reserves by another $500 million tied to oil-and-gas exposure.
Bond pain has arrived in Canada as RBC announced this morning that it missed Q4 profit estimates.
Reuters reported Wednesday morning that:
“Gross impaired loans in the oil and gas industry almost doubled to C$310 million ($224.04 million) from the fourth quarter. Those loans were just C$5 million in the year-earlier period.”
source: http://ca.reuters.com/article/businessNews/idCAKCN0VX17G
RBC seems to be scrambling to deal with increased losses as “provisions for credit losses, the amount set aside to cover bad loans, tied to the energy sector reached C$106 million versus none a year earlier.”
source: http://ca.reuters.com/article/businessNews/idCAKCN0VX17G
Barclays analyst John Aiken commented:
“We are starting to see the credit deterioration that the market has been anticipating for some time.”
source: http://ca.reuters.com/article/businessNews/idCAKCN0VX17G
Where are oil prices headed?
With Iran and Russia at Saudi throats over its refusal to cut production it is difficult to say.
“Iranian Oil Minister Bijan Namdar Zanganeh said a Saudi-Russia proposal to freeze output was “ridiculous” since Iran seeks to boost exports after years of sanctions, according to his ministry’s news agency.”
source: http://www.bloomberg.com/news/articles/2016-02-23/oil-extends-decline-as…
Trust has been broken among OPEC and the largest oil producers in the world. Until it is restored, or supply diminishes, prices will remain weak.
After threatening to fall below $30 in early morning trading, oil prices had rebounded to $32.22 per barrel. AsnCanada’s oil rig count continues to decline into spring and summer exploration will be hugely limited. Saudi Arabia has been effective at crushing Canadian and U.S. energy expansion which we highlighted in early 2015, in The Orchestrator of Oil’s Collapse and, more recently in Using Oil as a Weapon.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.
