Rising oil price will spur drilling by small, intermediate producers, analysts predict

Rising oil prices that encouraged more spending by small and intermediate oil and gas companies in Western Canada in the first six months of 2018 are expected to lead drilling budgets to grow even further this fall.

Producers say last week's steady march by U.S. benchmark West Texas Intermediate oil prices to higher than US$70 per barrel, a level last seen in early July, will encourage some to open their wallets.

"A lot of us spent a fair bit of our capex for the year in the first quarter, and before spring break in the second quarter, during that four-month period," said George Fink, CEO of Bonterra Energy Corp., in an interview.

"With the second half now, it's a situation where, if we can stay between US$68 and $70, I think there will be companies that will potentially increase their capital in the fourth quarter and spend a little more because the cash flow will be better than most of us anticipated."

Bonterra spent $55 million in the first half of 2018, almost 75 per cent of its $75-million exploration and development budget for the year, in part because it was able to lock in good prices for drilling and well completion services, Fink said, adding it is considering but hasn't yet committed to spend more in the second half.

Small and intermediate oil and gas companies reported spending an average of about 50 per cent of their planned 2018 exploration and development budgets in the first six months of the year, according to a report this week from analysts at CIBC World Markets.

That's up from about 47 per cent in the first half of 2017 and just 38 per cent in early 2016, when confidence faltered as WTI prices plunged below US$30 per barrel, the depths of the price crisis that began in late 2014, the bank added.

Drilling activity strong

Drilling activity was strong in the three months ended June 30 thanks to warm weather that shortened spring break, the annual slowdown when the thawing landscape in Western Canada prevents companies from moving heavy equipment on provincial roads.

Several producers have signalled increases in their 2018 capital budgets to match expected increases in cash flow in the second half, but the market has tended to punish them with lower valuations, CIBC says.

"Realistically, we expect more producers to follow suit with additional budget increases by year-end even if share buybacks and debt reduction remain the preferred outlets for free cash flow as far as most investors are concerned," it said.

Light oil producer Whitecap Resources Inc. raised its dividend early this year and has bought back about $20 million worth of its shares, CEO Grant Fagerheim said in an interview, adding it plans to spend more next year.

"This year we're spending, in development capital, about $450 million. We'll be 25, maybe 30, per cent higher in 2019," he said. "Our cash flows are going to be up markedly."

The company is benefiting from higher oil prices and the magnifying effect of the low Canadian dollar, as its products are sold in U.S. dollars but its expenses are paid in Canadian loonies, Fagerheim said.

Extra development spending this year will come mainly from companies that produce oil or natural gas liquids, CIBC said, while producers of dry natural gas will remain in survival mode, hoping for positive investment decisions on liquefied natural gas export terminals to create demand that may bolster low gas prices.

Low natural gas prices were cited by the Petroleum Services Association of Canada in recently cutting its 2018 Canadian drilling forecast to 6,900 oil and gas wells, 200 fewer than were drilled in 2017.

WTI oil prices averaged US$67.91 per barrel in the second quarter ended June 30, up from US$48.33 in the same period of 2017, but Alberta natural gas prices fell to C$1.20 per million British thermal units from C$2.69.

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