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O&G Services: Robust Economics in SAGD Oil Sands Projects Drives Demand for Remote Accommodations
Two (2) weeks ago, shares in Black Diamond (BDI-TSX), Horizon North (HNL-TSX), and Oil States (OIS-NYSE) were down 18%,
20%, and 26% from their respective mid-September highs. At the same time, the TSX Comp and S&P 500 indices were down 6%
and 8%. Over the last week, shares in the accommodation companies have recouped about 1/3 of their losses while the broader
indices have recovered half of theirs.
Through their actions and words, investors were telling us that they were seeing elevated risk in the remote accommodations
business in Canada’s energy sector. If asked to pinpoint a single event as the catalyst for this perspective, we’d highlight
Suncor’s (SU-TSX) Nov-01-12 decision to defer construction of its Fort Hills oil sands mine and its Voyager upgrader. Prior
thereto, Industry Canada’s Oct-20-12 decision to block Petronas’ takeover of Progress Energy compounded investors’ concerns.
This undercurrent of sentiment has motivated us back to the drawing board to (a) reassess the economic viability of major
energy projects, particularly in the oil sands, and (b) to reconstruct project lists with timelines and implied labour demand over
the foreseeable planning horizon.
Conclusion 1: We expect 25% – 30% net growth in remote accommodations rental demand in Western Canada in 2013E.
Most of the growth we envision over the next year comes from oil sands developments – SAGD in particular. But this also
includes some west central and northwest Alberta demand, infrastructure, and is net of a decline in northeast B.C. natural gas.
Conclusion 2: We expect the demand for ‘beds’ to service SAGD oil sands projects will grow by at least 80% in 2013E.
We base this assertion on several factors, including our oil sands research team’s assessment of economic thresholds for each
project and the funding risk for these projects. We further expect demand in 2015E will be at least 150% higher than in 2012E.
Conclusion 3: Our outlook for demand growth to service oil sands mining and integrated mining projects is approx. zero.
The timing of projects and the transition of phases within projects is such that we expect the existing stock of ‘beds’ is roughly
sufficient to service the oil sands mining sub-sector for the foreseeable future.
Conclusion 4: At this point we think it’s safe to assume the demand for remote accommodations will decline in northeast B.C.
Until at least one (1) of the four (4) major LNG projects gains all of the necessary approvals and commercial elements to proceed
with a final investment decision, we believe the trajectory for demand in northeast B.C. will be downward.
Bottom Line: The Group-wide selloff was unwarranted – we rate the accommodations rental companies ‘Strong Buy’
The rental businesses of Black Diamond (BDI-TSX) and Horizon North (HNL-TSX) are highly leveraged to this growth; Oil States
derives about 30% of its cash flow from the Canadian energy sector. Both Horizon North and WesternOne (WEQ-TSX) construct
remote accommodations – we expect these businesses will operate at high demand through at least 2013E. We see Black Diamond as advantageously positioned with a concentration of core SAGD customers but we also see Horizon’s lower SAGDweighting offset by a correspondingly lower weighting in B.C. gas projects. We reiterate our Strong Buy rating on Black Diamondand are upgrading Horizon North to Strong Buy as well.