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Message: Trinidad Drilling sees strength in deep drilling

Trinidad Drilling sees strength in deep drilling

By Dina O'Meara, Calgary HeraldMarch 4, 2010

CALGARY - Deep oil and shale gas drilling will drive up day rates on rigs as companies compete to secure units with qualified personnel and the technology to tackle unconventional plays this year, said Trinidad Drilling Ltd.

The drilling and servicing company reported a fourth-quarter profit of $3.9 million Wednesday on poor economic conditions and low industry activity as Canada and the United States struggled out of the recession.

Where activity didn't falter was in shale gas plays on both sides of the border, and in west-central Alberta, where exploration and producing companies flocked to unlock Cardium reserves.

"You're going to continue to see this polarization in the market continue as long as gas pricing is so choppy and stays in the $4 to $6 range," chief financial officer Brent Conway said in a conference call Wednesday.

"Clients are starting to realize that they are going to need to lock some of these rigs up. I don't think 75 per cent utilization for the industry is going to happen, but I definitely think it's going to be higher than forecast."

Drilling activity in Canada dropped in 2009 to decades-low levels as demand for oil fell on the global economic downturn and natural gas -- the bread and butter of Alberta drillers -- saw its market drop on high inventories, poor demand and new royalty structures in the province.

"Overall, 2009 was influenced by weaker market conditions. However, we maintained strong growth margins and continue to outperform industry in terms of rig activity," chief executive Lyle Whitmarsh said.

"Although improvements are positive, we are being cautious about the next six months and do not expect to see a full-blown recovery in Canada or the U.S. We expect that demand in specific areas will continue to grow -- those that require deeper . . . or new technology will continue to be more sought-after as market conditions improve."

Rigs that can drill 3,000 metres and deeper have more commitment for the entire year, relating to Horn River, Montney, even the Bakken plays, Trinidad said.

More uncertainty exists around rigs capable of drilling 1,600 to 2,000 metres and shallower on soft natural gas prices and a wait-and-see attitude around possible royalty changes in Alberta.

"It seems that a lot of the clients are waiting to get clarification from the government," Conway said. "Once that happens, we'll have a better understanding of exactly what the 2010 forecast will look like. We're going to be a little cautious until we get clarity, get some of these rigs tied up and get a better feel."

The upswing also will challenge companies to find qualified crews to staff the rigs, prompting some to secure rigs for later on in the year and supporting day rates for 2010.

Trinidad recorded net fourth-quarter earnings of $3.9 million, up from a net loss of $12.1 million in the third quarter but down from net earnings of $21.8 million a year prior.

The company logged a net annual loss of $22.4 million, or 21 cents per diluted share, a decrease in earnings of 82 per cent and 127 per cent, respectively.

Trinidad's earnings per share came out shy of analysts' expectations at three cents per share compared to consensus of five cents per share.

However, strong cash flow offset some of the dip, coming in at 32 cents per share against expectations of 27 cents per share.

The drilling company's fleet of modern rigs and focus on deep targets placed Trinidad in a good position to take advantage of the run on unconventional natural gas and Cardium oil plays, said Calgary-based analyst Brian Purdy.

"They've had a lot of deeper, more modern rigs under contract that have kept working," said Purdy, with National Bank Financial. "And the ones that have been coming off (during the year) have gone back to work pretty regularly, so their utilization rate has been better than most."

Trinidad had an average utilization rate of 90 per cent in the first quarter of the year, up from an industry average of about 70 per cent, the company said. In the U.S., Trinidad's rate was lower, at around 70 per cent utilization, driven in large part to activity in the Haynesville shale gas region where companies rushed to meet drill-or-drop terms on land leases.

During the quarter Trinidad ran 44 per cent of its Canadian rigs, down from 61 per cent a year prior, on low demand due to soft markets. South of the border the story was similar, with 63 per cent utilization rate, compared to 80 per cent a year ago.

For the full year, Trinidad tallied a 35 per cent rig utilization rate in Canada, higher than the 24 per cent industry average but substantially under the prior year's average of 57 per cent. Across the border and internationally, Trinidad operations utilization levels averaged 63 per cent, from 85 per cent in 2008.

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