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To the best of our assessment, drilling rig utilization averaged about 58% in Canada in 4Q11, which was just a point or so betterthan the 57% average over the third quarter and brings the year in at about 51% overall. This is up 9 percentage points from2010 and is the highest utilization year in Canada since 2006.
Our initial reads suggest that some contractors showed sequential utilization increases, such as Western Energy Services andPrecision Drilling, while utilization dropped sequentially for Savanna Energy Services. However, most should report roughly flatutilization performance from 3Q11 levels.
It’s unusual to see flat utilization levels transitioning from the third to fourth quarter. Utilization ordinarily increases by around5 – 8 percentage points from 3Q to 4Q – flat utilization performance or declines are often indicators that the sector is in theearly stages of downturn. ‘Often’, but not this time, in our view. We believe the numbers are telling us that the surge of activitylate in the summer, following a very uncooperative rainy season in June and July, effectively biased the 3Q numbers higher thanthey would have otherwise been. Fourth quarter utilization merely normalized this activity surge.
That said, we expect the story of the 4Q11 numbers will be margin increases more than utilization stats. Effective October 1,2011, a roughly 9% - 10% wage rate increase was recommended by the Canadian Association of Oilwell Drilling Contractors(CAODC). We’d estimate that the effective cost of this increase amounted to an additional $650 - $750 per day. In response,producers accommodated these wage increases with a corresponding 9% - 10% dayrate increase, or about $1,300 - $2,000 perday, depending on the rig and contract arrangements. As such, we estimate that the average net impact has been about a $650- $1,150 per day increase in ‘day margins’ – the cash flow generation of drilling rigs per day. This is before the surcharges forwinterization equipment, which typically add about another $1,000 per day in rental revenues.
