Canadian Oilfield Services Industry Report Q1 2018

Canadian Oilfield Services Industry Report Q1 2018

Canadian Oilfield Services Industry Q1 2018 Industry Performance and Trends

Whitehorn Merchant Capital Inc.’s Oilfield Services report includes performance trends and transactional activity observed in this sector, as well as our outlook for 2018. Our oilfield services sector includes drilling, completion, production, field services, infrastructure, fabrication, and geophysical companies.

Sector Performance Updates and Outlooks

Average EBITDA Margin 25%

23% 22% 20%

20%

17%

16%

17%

10%

5%

15%

14%

14%

15%

13% 9%

8%

7% Contract Drilling & Well Completions

14%

12.3%

Production & Field Services

Infrastructure & Fabrication

0% '14

'15

'16

'17

'18 F

'14

'15

'16

'17

'18F

'14

'15

'16

'17

'18 F Source: Capital IQ

Overview – Key Takeaways EBITDA margins continued to increase across all sectors since 2016, with 2018 EBITDA margins estimated to improve from 2017. The increase in the number of wells drilled and the improved prices compared to the past two years are signs of optimism for the Canadian oilfield services industry, although there are still concerns over pipeline constraints and the impact of the increase in WTIWCS pricing differential. All sectors are forecasted to experience positive revenue growth in 2018, with growth levels decreasing compared to the rebound year of 2017. The Contract Drilling and Well Completions sector is expected to experience the highest revenue growth in 2018 within the industry.

Average Revenue Growth 80%

69%

60% 40%

43% 24%

22%

29%

19% 14%

20%

17%

11%

0% -20% -29%

-40% -60% '14

-44%

-41%

'15

'16

'17

Contract Drilling & Well Completions

'18 F

'14

'15

-19%

'16

-27%

'17


'18F

'14

'15

-18%

'16

'17

'18F

Infrastructure & Fabrication Source: Capital IQ

270, 333 - 24th Ave SW | Calgary | Alberta | T2S 3E6 | 403.718.9860 www.whitehorncapital.com

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Q1 2018 Highlights There was an increase in M&A activities involving E&P companies in North America. The common theme across transactions that Whitehorn tracked was bigger and financially stronger companies acquiring competitors and assets to diversify geographical presence and to expand market share in the prime shale basins, in particularly the Permian and Eagle Ford Basins. The US Energy Information Administration (EIA) announced in February 2018 that US crude oil production in November 2017 surpassed 10 million bbls/d for the first time since 1970, nearing the US all time output record. The gain was driven by increasing production from the shale basins in North Dakota, Texas, and the Gulf of Mexico.

Ottawa Overhauls the NEB The government of Canada has introduced legislation that may change the way decisions about resource development and energy regulation are made:

Current System

Proposed New System

No early planning and engagement phase.

A new mandatory early planning and engagement phase. This means early dialogue with Indigenous peoples, provinces, the public and stakeholders to identify and discuss issues, leading to better project design.

Three responsible authorities conduct environmental assessments.

A single government agency to lead assessments and coordinate Crown constitutions with the Indigenous peoples.

Availability, accessibility and integration of science and knowledge varies. Indigenous traditional knowledge is not consistently considered.

Decisions on projects are guided by science, evidence and Indigenous traditional knowledge. An open science and data platform, and plain-language summaries of the facts that support assessments. Mandatory consideration and protection of Indigenous traditional knowledge alongside other sources of evidence in impact assessments. Federal and independent reviews of science.

Legislated timelines.

Legislated but exitable timelines will be maintained for impact assessments and extended to the planning phase.

Environmental assessments focus only on minimizing adverse environmental effects.

A move from environmental assessment to impact assessment based on the principles of sustainability. Broaden the scope of assessments to include positive and negative environment, economic, social and health impacts, as well as to require gender-based analysis in order to support holistic and integrated decision-making. An assessment of the impacts of a project on Indigenous peoples and their rights is also required.

Indigenous participation in reviews driven by Duty to Consult.

Early and inclusive engagement and participation at every stage, with the aim of securing consent through processes based on recognition of Indigenous rights and interests from the start. Indigenous governments will have greater opportunities to exercise powers and duties under the Act.


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Current Energy Regulator

Proposed Modern Energy Regulator

Potential conflict related to those setting strategic and those responsible for adjudicating regulatory matters.

A Chief Executive Officer would be established that is separate from the Chair. A Board of Directors would be established to provide strategic direction, and a separate group of Commissioners (i.e., adjudicators) would be created. Remove the requirement for adjudicators to reside in Calgary.

Perception that the Board is closely linked to industry.

At least one member of the Board of Directors and one Commissioner would need to be First Nations.

The timeline for non-designated projects is 450 days.

The legislated timeline for non-designated projects would be shortened to 300 days.

Authority of inspection officers is limited.

Inspection officers would have the authority to act quickly and order work stopped on a project that is operating unsafely or not meeting conditions.

No legislative authority for regulating offshore renewable energy (ORE) resources in the federal offshore.

The regulator would have legislative authority to regulate ORE projects and ORE power lines in the federal offshore.

A strict test is used to determine who can participate during a project hearing. Current practice involves parties that are directly impacted by the project.

The standing test would be eliminated to ensure that any member of the public can express their views. This opens the floor for countless parties to make comments, which may potentially lengthen the process as well.

Project reviews are used for debate on broad climate and energy policy issues.

Generation Energy, an ongoing dialogue with Canadians on energy issues, will provide a venue for policy debates on climate and energy issues outside of the formal regulatory process.

Concerns have been raised regarding the way in which regulator collects, uses, and protects Indigenous knowledge.

The regulator would be required to consider Indigenous knowledge provided during project reviews, and protections would be set out in legislation and regulations.

Our Take: New rules increase uncertainty and reduce clarity for new projects The changes proposed by the Canadian government were made in order to “restore trust in the regulatory process and ensure good projects are approved and built in a timely manner”. For the most part, Canadians had no issue or lack of trust in the old NEB process (other than a very vocal minority). Bill C-69 appears to be exasperating problems in the system, creating more uncertainty and inevitably making Canada a regulatory nightmare for major infrastructure projects. Money is, and will continue to flow to environments where the Government is supportive of growth – meaning everywhere but Canada. Our own research shows investment in Canadian energy projects continues to drop, while companies continue to flow more capital into the US (and other regions). The energy industry, those responsible for building many of the targeted projects, do not believe in or trust the Canadian system anymore. The rules keep changing. Industry executives have been warning the government that these new rules will “make it virtually impossible to build oil and gas pipelines in Canada.” The legislation is characterized by broad and poorly defined language and requirements that increase uncertainty: “Sustainability test” that now assess environmental issues and broader social concerns (like indigenous reconciliation and gender); Balancing traditional Indigenous knowledge and science, with no clear rules to govern how the two will interact, especially in conflict; and The elimination of the “standing test” to open up public hearings to any member of the public versus just those affected by the project, which will inevitably bog down hearings a la Montreal’s violent Energy East hearings, only on a much larger scale. Few of the proposed changes improve clarity of the rules or improve the process on scientific or national interest grounds. Unfortunately, the Canadian government has taken a process that was largely effective, and created more risk to project owners who see a continuously changing landscape for rules and approval. Industry’s concerns are being deferred or ignored, while the government pushes ahead with an agenda that makes large scale investment highly improbable.


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Kinder Morgan’s Trans Mountain Pipeline: A Review


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2017 OFS Annual Results Whitehorn tracked the 2017 financial performance of Canadian OFS companies. The annual earnings of select OFS companies are as follow: In CAD $ millions

Company Name Badger Daylighting Ltd. Calfrac Well Services Ltd. CES Energy Solutions Corp. Enerflex Ltd. Ensign Energy Services Inc. Gibson Energy Inc. Mullen Group Ltd. PHX Energy Services Corp. Precision Drilling Corp. PHX Energy Services Corp. Secure Energy Services Inc. Shawcor Ltd. Total Energy Services Inc. Trican Well Services Ltd. Trinidad Drilling Ltd. Western Energy Services

Ticker TSX:BAD TSX:CFW TSX:CEU TSX:EFX TSX:ESI TSX:GEI TSX:MTL TSX:PHX TSX:PD TSX:PHX TSX:SES TSX:SCL TSX:TOT TSX:TCW TSX:TDG TSX:WRG

2017 Revenue

2016 Revenue

$499 $1,528 $1,030 $1,553 $1,001 $6,101 $1,138 $246 $1,321 $241 $2,328 $1,567 $605 $930 $502 $238

2017 Adj. EBITDA

$404 $735 $568 $1,131 $860 $4,594 $1,035 $160 $951 $148 $1,410 $1,209 $198 $325 $362 $124

$125 $180 $152 $207 $201 $278 $180 $98 $305 $23 $157 $226 $72 $174 $97 $36

2016 Adj. EBITDA

$105 $(45) $50 $181 $185 $244 $184 $31 $228 $5.1 $94 $56 $14 $(65) $143 $5.4

Overall, Canadian OFS companies performed significantly better in 2017 compared to 2016, largely due to the overall increase in energy prices, increase in activity levels and the continuous focus on cost reduction measures.

WTI-WCS Differential In Q1 2018, the differential increased significantly compared to the previous two years. The increase can be attributed to pipeline congestion coupled with the increase in crude production. The situation is worsened as Canadian rail companies have not expressed additional interest in carrying crude to markets as they are reluctant to be a temporary solution for the energy industry until pipelines are built in the future.

WTI-WCS Diferential (USD $)

WTI-WCS Differential 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 30-Oct-15

29-Feb-16

30-Jun-16

31-Oct-16

28-Feb-17

30-Jun-17


31-Oct-17

28-Feb-18

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Federal Budget Released

More balanced oil market “Prudent” energy outlook Bitumen royalties expected to fall Crude oil royalties expected to rise Pipeline capacity will increase

Canadian Oilfield Services Valuation Whitehorn closely follows the M&A activity in the Oilfield Services space. Sectors in this space include drilling, completion, production, field services, infrastructure, fabrication, and geophysical companies.

Average EV/EBITDA 14.0x

12.9x

12.0x

10.6x 9.3x

9.3x

10.0x

8.5x

8.2x

7.8x

8.0x 6.0x

13.0x

12.6x

11.7x

7.1x

6.6x

8.9x 7.7x

5.3x

4.0x 2.0x 0.0x '14

'15

'16

'17

'18F

Contract Drilling & Well Completions

'14

'15

'16

'17


'18F

'14

'15

'16

'17

'18F

Infrastructure & Fabrication Source: Capital IQ

Q1 2018 Review The EV/EBITDA multiples continue to decline as earnings continue to improve with the increase in rig counts and drilling activity. Infrastructure and Fabrication and Production and Field Services demonstrated the highest decrease in EV/EBITDA multiples, consistent with the significant improvement in EBITDA for companies in both of these sectors in 2017. Tracked M&A activity in North America increased this quarter, from 17 in Q4 2017 to 20 in Q1 2018. Total disclosed transaction value in Q1 2018 was $1.9 billion, compared to $616 million reported in Q4 2017. This was largely made up of Wolf Midstream Inc. acquiring Access Pipeline Inc. for $1.3 billion. Compared to previous first quarters, Whitehorn tracked 20 M&A transactions, which is the highest number for the quarter since 2012 (21). Of the 20 transactions, 18 of these deals were for $100 million or less. This indicates that small and mid-size OFS companies have been actively involved in M&A activities in the quarter.


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Recent Oilfield Services Transactions Q1 2018 The table below summarizes a selection of recently closed and announced transactions in the Oilfield Services sector involving companies in North America that are active in mergers and acquisitions. Transactions this quarter include acquisition of additional assets, as well as expansion into new areas and service line offerings.

Date Mar 2018

Buyer Morgan Stanley Private Equity; North Haven Energy Capital

Target/Seller Specialized Desanders Inc.

Target Location Calgary, AB

Acquisition of high pressure sand recovery services provider formerly known as Specialized Tech Inc. by private equity firms. Mar 2018

Horizon North Logistics Inc. (TSX:HNL)

Shelter Modular Inc.

Aldergrove, BC

Acquisition of modular building manufacturer and builder serving the energy, accommodation and education industries. Mar 2018

Wolf Midstream Inc.

Access Pipeline Inc.

Calgary, AB

Acquisition of remaining 50% stake in pipeline network servicing facilities in northeastern Alberta. Feb 2018

Tervita Corp.

Newalta Corp. (TSX:NAL)

Calgary, AB

Acquisition of engineered environmental solutions provider in a reverse-merger transaction. Feb 2018

Mullen Group Ltd. (TSX:MTL)

DWS Logistics Inc.

Mississauga, ON

Acquisition of warehouse, distribution, order fulfilment and transloading services provider to expand service offerings. Feb 2018

STEP Energy Services Ltd. (TSX:STEP)

Tucker Energy Services Holdings Inc.

Houston, TX

$280 million acquisition of fracturing and coiled tubing solutions and wireline services provider by Calgary based STEP. Jan 2018

Vertex Resource Group Ltd. (TSXV:VTX)

Sonic Oilfield Service Ltd.

Medicine Hat, AB

$4.5 million acquisition of material and fluid transportation and hauling services provider serving the oil and gas industry. Jan 2018

AGAT Laboratories Ltd.

Trican Geological Solutions Ltd.

Calgary, AB

Acquisition of unconventional reservoir evaluation specialists operating in North America and internationally. Jan 2018

Horizon North Logistics In. (TSXHNL)

Moose Haven lodge

Janvier, AB

$14 million acquisition of 288-bed open lodge servicing workforce accommodation provider.

Contact Whitehorn today to discuss your company, your sector and your next transaction strategy. 270, 333 - 24th Ave SW | Calgary | Alberta | T2S 3E6 | 403.718.9860 www.whitehorncapital.com

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