Saskatchewan-based oil service company Fast Trucking Service Ltd. has weathered every energy sector storm – an oil glut in the 1980s, the 2008 financial crisis, a 2014 price drop – since it opened shop in 1957.
This time, president Dennis Day has no idea what’s in store. This downturn hit hard and fast. Last week, his company parked its trucks, removed their plates and cancelled the insurance to save some money. On Friday, he laid off 225 of his 350 employees.
With Canadian oil and gas producers dialling back production and cutting capital spending by about $6.6-billion in a bid to protect their balance sheets, energy service companies are facing an unprecedented slowdown that threatens the sector’s viability.
The Canadian Association of Oilwell Drilling Contractors (CAODC) has sent an SOS to Ottawa, pleading for urgent help as the battered energy sector awaits news on a series of supports promised by the federal government. It says there will be a cascade of bankruptcies without immediate action to shore up liquidity in the drilling service sector.
“It’s an existential crisis for the industry as a whole,” CAODC president and chief executive Mark Scholz told The Globe and Mail Thursday.
The energy sector was still recovering from the 2014 hit to oil. Now it’s facing the double whammy of a sharp drop in demand due to the COVID-19 pandemic and a price war between Saudi Arabia and Russia, which has seen the Saudis flood the market with crude.
Companies are dealing with the uncertainty by reining in spending. On Thursday, Calgary-based Cenovus Energy Inc. said it was cutting its capital budget for the second time in less than a month, reducing salaries and suspending its dividend.
Such cuts ripple throughout the service sector – the contractors who do the actual drilling, fracking and other jobs for the oil companies.
Mr. Scholz welcomed the general business supports already announced by the federal government – including a 75-per-cent wage subsidy – but said it’s “nowhere near” enough to keep the service sector afloat.
Furthermore, he worries that a federal bailout package will be a trickle-down approach that focuses on support for the exploration and production (E&P) side of the energy sector, which is already asking his members for price reductions of as much as 30 per cent.
“If the feds decide to just look at liquidity support for E&Ps, it’s going to fail. We’ll have a handful of surviving E&Ps but a completely decimated – if not non-existent – service sector,” he said.
Alberta Premier Jason Kenney told Bloomberg Thursday that the federal government’s backstop of the energy sector would have to be worth about $20-billion.
As Ottawa works out the details, the CAODC has floated two sector-specific moves it says would give drillers the liquidity they need to make it through the next few months.
First, it would like companies to keep the GST, HST and payroll deductions they would usually remit over the next six months, then repay that cash in instalments over the following six months. In 2019, Canadian drilling and service rig companies paid about $263-million in CPP, EI and tax remittances, according to the CAODC.
The second proposal is a program in which the federal government – through the Business Development Bank of Canada or Export Development Canada – would purchase accounts receivable from drilling and service rig companies for a discounted face value of 85 cents on the dollar. Mr. Scholz said that would put cash directly into the hands of drilling companies, and Ottawa could then collect the money from producers when the economy recovers.
“The reality is, we need support and liquidity today if we are going to be part of the conversation about what that future energy system looks like in Canada,” Mr. Scholz said.
“Quite frankly, with the current announcements, we’re not going to be able to survive.”
Mr. Day spent $50,000 on Co-op gift cards for his employees last week, well aware that many of those he laid off have no money for groceries.
He has also been reciting advice from his dad, who started Fast Trucking but died a couple of years ago.
“We’ve faced this kind of thing before. He used to say, ‘We gotta lock the lids down, batten the hatches and hang on,’ and that’s what I told my boys,” Mr. Day said.
“I told them, ‘We’ve got to prepare for the worst.’”
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Emma Graney