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Originally posted by broken_legs
Wow. that seems kind of counter-intuitive don't you think? If you were a service company in the middle of a huge boom what would you do?
a.) Keep your work force small and charge a higher margin, provide crappy service to a small number clients and thus limit your market share and profits or
b.) Hire as many people as you can and buy as much equipment as you can and try to gain market share and make more money serving more clients albeit it at a lower margin
I agree it's counter-intuitive. That's probably why I remember reading about it so well - it was interesting from a management perspective. I wish I had the articles somewhere...I think they were in the Petroleum News or on the DOB. Anyways, they basically said that in the past whenever there were booms the service companies invested in more service rigs and more crews to grow in size and accommodate the demand (makes sense, right?). I guess the issue they were having was that all of the service companies would do this and supply would increase to meet the demand and prices would fall. So quite quickly, the prices fell back into check and they were operating with more rigs and more crews at the same old rates. Still good for the service companies because they were making profits at their old rates and now they're making profits on even more rigs. Apparently, the problem always was that with every boom comes a bust and when the bust came around, there was all of this idle equipment that still hadn't been paid off. The jist of the article was that the service companies had learned their lessons in the past and although the prices were high, they were resisting the growth that they used to strive for. Interesting business case..
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OK so the Royalty review was announced in Feb 2007. But as I have been saying the slow down started in late 2006 so this point to me at least is moot. I'm trying to show that slowdown was a natural retraction from the high in activity due to the high price of natural gas and rising price of oil and rediculars prices of service companies.
I agree that the slowdown started in 2006. My point is that the Royalty Review has caused for things to slow even more. Things pulling back cannot be attributed to one thing, it's a combination of variables.
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You are absolutely right that budgets have been adjusted to include the new Royalty structure, however agian I'm just trying to show that we had already peaked in activity in 2006 and the Royalty review was the 4th (and last) part of a perfect storm so to speak.
Agreed. I'm not sure if it's the last part of the storm though. If there is a Global Recession then oil prices may also fall. I don't think it's likely in the near term but it's certainly a possibility.
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Most of the rig workers come 'from'* AB period. They drive to where the rig is working or get flown in by their drilling contractor. Currently there are lots of rigs working in BC and Sask, and again most of the people on those rigs are FROM AB. Yes im sure a few more people will end up working in those other provinces, but the infrastructure and operations for all the large service companies are in AB. You still pay taxes in AB. You spend your perdium in a shitty hotel in Sask.
*From: Meaning they live and work and pay taxes in...
For the most part I agree. I'm a rotator out of the Middle East after all. Most people I work with live in Calgary but work over here. My point was more that housing prices in Saskatchewan are projected to increase faster than in Alberta this year due to people moving from AB there for work. People will always chase the 'next' boom and since corporate investment is going there and the cost of living hasn't been inflated like it has in AB, a lot of people who now find themselves out of work will be looking at that next opportunity.
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I think you're right but I see a recovery starting late 2008 and 2009. I see service companies charging MORE money for the same services they were forced to cut prices on before. I also see oil dropping in price save any more geopolitical nonsense and refineries in Texas exploding. This causing some layoffs among operators. I see a slowdown in the GP area as I believe it heavily linked to NG drilling, however, its the natural hub for any new work taking place around Dawson and Peace River will go through the roof soon as well as everything Sure Northern owns between there and Ft Mac.
Tough to predict. You may be right and things could pick up in '08. I think it will take a few more years as too many people have been burned by investing in the small caps that were destroyed by government policy. Similarly, I think the pressure for environmental policy change will cause for continued uncertainty until the government steps up and makes a decision. From my discussions with a couple of the big wigs, they'd prefer the gov't just come out and make a policy (even if it costs companies more) so that they have a framework to make decisions within. Right now, it's tough for them to make major capital investments as they don't know what the worst case scenario is.