oil-pump-sunset

It’s gloomy in Houston – and it’s black up here.

That’s how Allen Brooks describes the current state of Canada’s oil industry. He’s managing director for Houston-based PPHB LP, a boutique investment banking firm.

“We have entered a new environment for the energy business,” said Brooks at the ninth annual Oilfield Services Forecast Breakfast, hosted by CFA Society Calgary last Thursday.

With oil prices down 40% year over year, the industry’s mood is grim. During the 2008 financial crisis, “people cut their activity, but then restarted it pretty quickly,” says Brooks. “This time around, we’re probably not going to see the same kind of response out of the exploration and production [E&P] industry as it relates to service companies.”

He adds, “The whole sector is going to have to reassess how they do their business and how they size their companies. We’re probably not done seeing layoffs in the energy industry.”

Read: How shipping costs affect global oil prices

As for the eventual recovery, it “will not be evenly paced across all sectors,” Brooks says. “The larger service companies are probably going to be the safer place to be, because of the nature of their business models. Because they have a broader portfolio of products and services, and in most cases, more technology, they tend to be higher-margin businesses and will fare better in this period of the down phase — and also in the up phase.”

Another panel member, Jackie Forrest, vice-president of energy research at ARC Financial Corp., foresees a challenging year or two ahead for the oilfield services industry.

But the downturn is also providing companies with opportunities to reduce costs, she says, “which should set the industry up for a more sustainable future.” Success, she adds, “is about looking at how to get more oil and gas for the same amount of money.” For example, companies can attempt to get more production out of each well by optimizing the way wells are fractured.

“The industry that emerges from this challenging environment will come out leaner, stronger and possibly smaller – but will be more ready to take on that next up cycle,” Forrest says. “Western Canada has proven it can innovate to survive. Despite the headwinds facing the industry today, we’re optimistic, and continue to be keen to invest in western Canada and the oil and gas industry.”

Read: There’s more to oilsands development than the price of oil

Panelist Dana Benner, oil services equity research managing director at AltaCorp Capital, also sees positive signs amidst the gloom.

“The speed at which the contraction has happened will allow a quicker turnaround. That’s encouraging, but we still have to get through the valley,” says Benner, adding this summer will be difficult.

Leverage ratios (net debt to forward cash flow) are about twice as high as they were during the financial crisis, which is impacting valuation. Benner sees a rebound coming in 2016, “and share prices will reflect that by the end of this year.” His top picks are Enerflex, Mullen Group and Newalta.

Read: Oil’s plunge stalls energy sector deal activity

Originally published on Advisor.ca

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