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ENERGY Downturn time for drill rig operators

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If import figures are any indication, the oil country tubular goods (OCTG) market in Canada might be slowing.

Imports accounted for about 40 percent of supply in Canada over the past two years but only 20 percent in the first quarter of 2007, an early indication that the market is softening, said Guy Cocquyt, director of investor relations and market research at Flint Energy Services Ltd., Calgary, Alberta.

Drilling activity and OCTG demand are driven primarily by energy prices, which in turn determine energy and production companies' budgets, he said. "These are the two leading indicators we look at for forecasting, usually on a 12-month horizon." Well permits, drill rig activity, rig releases and well depths are near-term indicators of demand and how it affects current OCTG demand.

For two- to three-year planning, Flint, which is involved in the management, storage, transportation, inspection and repair of OCTG and drill pipe, looks at industry spending forecasts and government energy production and demand forecasts.

The past two years appear to have been the peak of the current cycle in Canada, with 24,800 wells drilled in 2005 and 23,500 last year. Industry forecasts for this year point to a 10-percent decrease in upstream capital spending on conventional drilling and a 15-percent drop in well completions to between 19,200 and 20,000, mostly from a drop in natural gas drilling, resulting in less demand for OCTG products. Oil and gas exploration companies have indicated they're in no hurry to increase drilling activities due to lower natural gas prices and significantly higher drilling and well completion costs.

But natural gas prices have shown some recovery recently and drilling costs have come down, suggesting that drilling activity will pick up at the end of the year. At the same time, Cocquyt said, OCTG inventories remain relatively high and Canadian mills have reduced production until they can work through existing supplies.

Natural gas demand is expected to continue to grow, however, and "in the near term we are very optimistic about the OCTG market recovering in late 2007. And the prognosis appears positive for increasing drilling activity in western Canada in the next three to five years," he said.

Precision Drilling Trust, Canada's largest oilfield service provider, had some bad news for its unit holders when it announced it was cutting its May distribution by 31.6 percent to Canadian 13 cents (11 cents) from C19 cents (17 cents) per unit. It had already slashed its monthly payout from C31 cents (28 cents) in January.

It's an indication that all isn't well in OCTG and reflects "low equipment utilization levels, on a seasonally adjusted basis, for Precision's operations in Canada and an increasingly competitive pricing environment," said Doug Strong, the Calgary, Alberta,-based company's chief financial officer. The weakening demand reflects a large decline in the number of government licenses issued for new natural gas wells in western Canada in the past two months, he added.

The January-to-March period produced Precision's lowest first-quarter count of drill rig operating days since 1999. The company, which operates 240 rigs in Canada and five in the United States and expects to add 10 rigs in Canada and five in the U.S. next year, suffered a 29-percent drop in first-quarter net income to C$158 million ($143.8 million).

It cited deteriorating fundamentals during the past 12 months, which weakened industry cash flows. Fiscal 2007 is expected to be a difficult year compared with the growth and performance established during the past three years, the company added. While the down-cycle trend was particularly acute during the recent spring break-up period, however, recent strengthening in spot natural gas prices is encouraging. If the trend continues, Precision expects a rebound in demand, on a seasonally adjusted basis, as early as next winter.

The most recent distribution cut also will enable the company to carry out its capital expenditure plan in new technologies and to diversify its U.S. operations, it added.


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