Sign Up for FREE Daily Energy News
 
BREAKING NEWS:
Precision Well Servicing
Hazloc Heaters
Copper Tip Energy Services
Hazloc Heaters
Precision Well Servicing
Copper Tip Energy

Canadian OFS Companies Finding Opportunities in the Permian – Case Studies and Advice on How to Move South Smartly – MNP LLP


MNP-OFS-Header

MNP LLP

The whooshing sound you hear is drilling rigs, coiled tubing units, specialty fracking chemicals providers and others flocking to the Permian Basin, the shale oil and gas play that is now responsible for about 35 per cent of the total North American rig count.

Canadian oilfield services (OFS) companies are among those hunting for and exploiting new business opportunities in the Permian. The play, which is centred in one of the oldest oil and gas producing areas in the U.S., has come to life again, thanks to high-tech, multi-stage completion technology and horizontal drilling.

The April Drilling Productivity Report (DPR), published by the Energy Information Administration (EIA), estimated crude oil production in the Permian at 2.3 million barrels per day (b/d) as of April 2017, or almost 300,000 b/d higher than the same month in 2016. The DPR also indicated a total of 310 oil-directed rigs active in the Permian, 158 more than at the same time last year (see graph below).

mnp-permian-crude

The EIA estimates the Permian, which straddles the Texas–New Mexico border, holds 200 billion barrels of oil in place, along with trillions of cubic feet of natural gas. The EIA recently pegged Permian gross gas output, much of it associated with oil drilling, at eight billion cubic feet a day, up about 14 per cent from a year ago.

Oil production in the basin is now at about 2.2 million b/d, about a quarter of U.S. output of 8.9 million b/d. But Permian-focused executive Mark Papa, CEO of Centennial Resource Development Inc. and the former head of Permian pioneer EOG Resources Inc., recently projected U.S. production will reach 11.3 million b/d by 2020, with almost all of that growth coming from the basin.

Case study I: Canadian Energy Services

“Activity will continue to grow in the Permian,” says Craig Nieboer, chief financial officer of Calgary-based Canadian Energy Services Ltd., which provides drilling fluids, frac additives and chemicals and now has about two-thirds of its business volume in the U.S., most of that in the Permian.

Last August, through its U.S. subsidiary, the company completed the acquisition of the speciality chemical business assets of privately-owned Catalyst Oilfield Services, headquartered in the Permian heartland of Midland, Texas.                   

Nieboer says there’s no question the Permian is where much of his company’s future lies. “The Permian is set up for our business model,” he explains, adding the geology and production techniques are similar to Western Canada. “Two-thirds of our business is now in the U.S.”

He says half of that U.S. share is in the Permian, where it has about 16 per cent of the drilling fluids market and about 20 per cent of the specialty chemicals market. Permian-focused EOG is its largest customer in the U.S.

The company, which has 1,500 employees, will continue to grow its presence in the U.S., he says.
Its business model — and one of the reasons he says it has been successful south of the border — is based on providing engineering and design solutions from its Calgary office, while relying on “local, entrepreneurial leadership.” It employs 110 people in Calgary.

After purchasing Catalyst it strove to maintain the local, Texas-based staff, which he says has been a key to building market share there. “We run a decentralized model,” he says. “Our U.S. business is run by U.S. managers.”

Case Study II: Trinidad Drilling

Calgary-based Trinidad Drilling Ltd., which in early May announced it was upping its capital budget by $80 million to $175 million, is also shifting many of its assets to the Permian, according to Lisa Ottmann vice-president of investor relations.

“About 75 per cent of that capital is expected to go to the U.S.,” she says. “We are seeing more demand in Canada, but it’s much stronger in the U.S.”

She says the company’s sophisticated rigs, which drill long laterals, are in great demand in the Permian. The company, which has an office in Houston and a field office in Midland, has 32 rigs operating in the U.S. now, with 26 of those in the Permian. She says Trinidad expects to have 45 rigs operating in the basin by the end of the third quarter.

She notes the seasonal nature of the Canadian industry helps Trinidad in accessing key, experienced Canadian managers and rig hands. “But most of our employees in the U.S. are U.S. citizens,” she says.

About half of Trinidad’s annual revenue comes from the U.S., but that percentage is expected to increase going forward.

Case Study III: Predator

Shane Walper, president and CEO of Red Deer, Alta.-based Predator Drilling Inc., says his privately-owned company (Trinidad and Canadian Energy Services are both publicly-listed), which formerly concentrated on drilling shallow oilsands wells, has diversified beyond being a drilling contractor, to offering cementing and transportation services. Along with that service diversification has come a move into the Permian.

“I was down there last week,” he said in mid-May. “It’s pretty nice to see rigs operating everywhere you look.” He says Predator has two rigs operating in the basin now.

“In addition, we acquired a local trucking company in Midland in December and last week we closed on the acquisition of another trucking company.” The firm has about 40 “wheeled assets” in the area, which provide heavy haul services.

The company also has 26 rigs. Over the past year it experienced a 246 per cent increase in utilization, he says.

“We’re still challenged on the profit side,” but he says he’s optimistic that will change, particularly with activity levels increasing in Canada and the U.S.

Predator’s oilsands operation remains a major part of its business, but Walper believes the company’s U.S. operations will play a growing role. A key to success in the Permian is to rely on local employees, familiar with the market. He and other company executives will be spending increasing amounts of their time in Texas. “You have to be there,” he says. “The client needs to have a level of confidence in you.”

A key part of that is to maintain a “culture of safety,” with well-maintained equipment.

“Canadian service companies are very welcome there,” he says.

Sidebar: Advice for Canadian OFS companies looking to enter the U.S.

If you happen to run an oilfield service or technology company, what could be so complicated about setting up shop or moving equipment and Canadian-based employees to hot oil and gas plays in the U.S.?

After all, if you’re from Western Canada and you’re thinking of making the shift, they speak the same language there and business practices are very similar.

Except, as with everything when it comes to crossing international borders, it’s just not that simple, according to Jennifer Hanna, a Calgary-based lawyer and partner with the international tax services department of MNP.

“At least once a week we get questions from companies planning to export to the U.S. or bidding on a contract there,” says Hanna, who notes that many oilfield service and technology companies started looking south when the sector entered a downturn after oil and gas prices plunged.

Hanna says it only makes sense for companies considering doing business in Texas, North Dakota or another active play in the U.S. to talk to MNP first. And yet that is often not the case.

“Some have already gone and done business before talking to us,” she notes.

And that can be a very costly mistake.  “The tax rate for a Canadian company doing business in Alberta is 27 per cent,” she says. “But in one case, a Canadian-based company ended up paying a tax rate of 80 per cent.”

If the move to the U.S. is structured well and follows the tax treaty between the U.S. and Canada and, “they [Canadian companies] may end up just paying Canadian taxes,” she says.

Trump’s Impact

At this point, U.S. federal taxes of about 35 per cent for corporations are higher than Canada’s corporate tax rate of about 27 per cent.  That may change if U.S. President Donald Trump has his way. He’s talked about lowering corporate taxes to 15 per cent (although the betting is that Congress will keep it at the 25 per cent area).

If the U.S. does lower corporate taxes, then it might make sense for Canadian companies to establish a separate U.S. company, rather than operating through a partnership or a branch.  “Canadian companies would benefit from the proposed lower corporate tax rate if they set up a separate U.S. company, because Canada doesn’t tax that corporate income again in the Canadian company’s hands,” says Hanna. 

She adds that if Trump also carries through on plans to renegotiate the North American Free Trade Agreement (NAFTA), the tax rules between Canada and the U.S. shouldn’t change. That’s because taxes between the two countries are governed by a separate tax treaty. In fact, Canada has tax treaties with 90 countries overall.

MNP-LLP-David-HammerMNP understands the oilfield services industry – its drivers, challenges and opportunities. We are proud to provide insight into the latest industry news and trends in our newsletter, issued in association with JuneWarren-Nickle’s Energy Group. ​​

For more information on MNP’s OFS services, contact a member of our team:

 ​David Hammermeister, CPA, CA, 306.634.2603 or david.hammermeister@mnp.ca



Share This:



More News Articles


New SHOWCASE Directory Companies

 

Vision Integrity Engineering Ltd.
Stream-Flo
Osprey Informatics
CFR Chemicals
Nationwide Boiler Inc
Ironhub
Silverstream Energy Solutions
Scovan Engineering