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Energy and Resources ‘Brutal market’ for oil services makes rebound elusive

Workers tap deep into North Dakota’s Bakken formation, on a Precision Drilling rig.

Nathan VanderKlippe/The Globe and Mail

An "industry-wide state of depression" is weighing heavily on Canada's oil-field service sector as Precision Drilling Corp. and Mullen Group Ltd. kicked off earnings season this week.

Companies in the beleaguered sector are looking well into 2016 for even a tepid recovery from low oil prices. Idle rigs and workers is the theme of the winter – which could be the slowest in terms of drilling activity in almost 20 years.

As is the case with the broader energy sector, questions loom about whether liquefied natural gas (LNG) terminals on the West Coast will ever be built, or the new Trudeau government in Ottawa will favour oil pipeline projects to fuel overseas markets.

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"Like many of our peers, we're not having any fun right now," Mullen Group chief executive Murray Mullen said in his company's earnings conference call on Thursday. "This is a really brutal market." But lower third-quarter revenues for the two oil and gas service companies did not seem to rattle markets that were prepared for bad news.

In fact, share prices for both rose.

Oil prices have settled in well below $50 per barrel, and nothing suggests change is coming in the near term, he said.

Mr. Mullen said his company is muddling through the "industry-wide state of depression" better than many competitors because it is diversified into two segments: oil-field services, and trucking and logistics. It helped bolster its trucking segment with its $172-million purchase early this year of Gardewine Group LP, one of the country's largest privately owned trucking companies.

Many competitors are trapped in a single business, he said. "They're pricing to survive."

Even with the boost from its trucking operations, the Mullen Group reported third-quarter revenue that decreased from $357-million in 2014 to $305-million this year, a drop of 15 per cent.

Mr. Mullen he is most concerned about the low price of oil and that pipeline projects and LNG facilities get the green light from the new Liberal government and First Nations.

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"We don't think the oil business can grow unless you get some new pipeline takeaway capacity," he said. "We'll invest capital in the oil-field service space when we get more clarity on those two big-time issues."

Mr. Mullen, whose father started the company, is known for honing in on sector trends – he voiced his worries about an energy sector slowdown in mid-2014. He said in an interview with The Globe and Mail on Thursday that he owns 2 to 3 per cent of the Mullen Group, but has drawn a salary of just $1 a year since the downturn of 2009. He said he recently told his board of directors, "if I get us through this mess without too many issues, I expect my salary doubled."

Precision Drilling, one of Canada's largest oil and gas drilling companies, reported asset write-downs and a smaller capital budget for 2016. Its revenue for the third quarter was $364-million – 38 per cent lower than the third quarter of 2014. The company's rig count is down in both the United States and Canada.

"Barring [an] unforeseen catalyst, we expect the weakest drilling season since the late 1990s," Precision Drilling chief executive Kevin Neveu said during the earnings conference call.

While Precision Drilling's $0.07 per common share dividend will continue for now, the company noted that its debts contain covenants that could limit its ability to pay future dividends.

In a note, TD Securities Inc. analyst Scott Treadwell said the Precision Drilling results were mainly in line with expectations, and news that the company's wholly owned international subsidiary recently contracted two new-build rigs for operations in Kuwait is a positive. However, he added "the announced risk to the dividend is likely to be viewed cautiously by investors."

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