Precision Sees Room for Rig Rebound as Producers Weather Slump

Even with the oil market in a funk again, producers are adjusting and Precision Drilling Corp. sees the potential for more spending by customers in the second half.

Canada’s largest drilling services company sees some room for the North American rig count to rebound as customers restart wells and upgrade equipment after cutting costs, Chief Executive Officer Kevin Neveu said in an interview. The current price slump poses no threat to Precision’s dividend, he said.

“I think the rig count actually might have dropped a little lower than necessary,” Neveu said by phone from Calgary. “I think our customers have saved more money than they intended to save.”

The oil and gas industry has cut spending by tens of billions of dollars and eliminated more than 100,000 jobs to weather the crude slump. Prices that had rebounded somewhat recently have tumbled 12 percent this month on concern the Greek crisis will hurt the global economy, while an end to Iran sanctions could boost supplies.

Still, the number of active oil rigs in the U.S. increased to 640 in the week ended July 3 from 628 in late June, paring a 60 percent decline from October levels, according to Baker Hughes Inc., the Houston-based oil-services company that has kept rig counts since 1944.

A strong rig-count recovery, though, would require U.S. oil prices at $60 to $70 a barrel, Neveu said. The West Texas Intermediate benchmark fell 0.4 percent to $52.33 a barrel at the close in New York on Tuesday, after slumping 7.7 percent on Monday.

Precision Drilling is the ninth-best performer on the Standard & Poor’s/TSX Energy Index this year, up 6.9 percent, compared with a 7.8 decline in the 63-member indicator. It has a market value of C$2.2 billion ($1.7 billion).

Dividend Yield

The company pays a dividend of 7 Canadian cents per share, with a 12-month yield of 3.6 percent. Neveu said he sees no reason why the current payout would have to change in a prolonged price slump.

Precision currently has about half the number of field employees that it did before the downturn, and about 40 of Precision’s advanced rigs are inactive. But Neveu expects producers will start to upgrade existing rigs to safer, more efficient infrastructure.

“What we’re doing is staying very ready and working with our customers closely to make sure high-grade rigs are ready to respond,” he said.

Demand for those high-quality rigs could come later this year from natural gas projects such as Petroliam Nasional Bhd.’s $36 billion Pacific NorthWest export terminal in British Columbia and developments in the Permian Basin.

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