Market Size, Growth, and Public Company Exposures.

Tim Monachello, CFA 403-539-8633

Since the Federal Government of Canada announced a $1.72 billion aid package targeted at oilfield abandonment and reclamations (A&Rs) in April 2020, we have been in contact with companies across the spectrum of A&R services to assess the impact to the industry. Within the full report, we present a framework to assess the size, growth, and public company exposures to incremental A&R spending as a result of the federal A&R aid package.

A&R Market Size Could Double by 2022 in Bull Scenario
Our modeling suggests that as a result of Federal aid, the conventional A&R market in the Western Canada Sedimentary Basin (WCSB) could grow from roughly $615 million in 2019e to roughly $775mm-$830 million (+26-35% y/y) in 2020e, to roughly $850mm-$1.1 billion by 2021e and to roughly $820 million-$1.2 billion by 2022e when provincial allocation programs are set to finalize. In our view, the largest factors that could influence the ultimate impact to service companies are 1) the timing of provincial program allocations; and 2) the level to which licensees (E&Ps and other oilfield companies which hold abandonment liabilities) use federal funds to replace their organic A&R budgets rather than using federal funds to abandon and reclaim incremental sites.

Smaller and More Concentrated Service Providers are Most Exposed
Within the full report, we rate 15 public companies based on their potential revenue exposure to federal abandonment aid. Our analysis shows that the most exposed companies are generally those which are smaller and more concentrated toward Canadian A&R related services. Of the 15 companies in our analysis, we believe CWC Energy Services (CWC-T; not rated), High Arctic Energy Services (HWO-T; SP; $0.80 PT), and Vertex (VTX-T; not rated) offer investors the highest proportional exposure to incremental A&R activity in Western Canada as a result of federal aid.

Understanding Average A&R Costs and Addressable Market Size
Oilfield abandonments and reclamations are highly customized and vary significantly in cost and service intensity. With this in mind, we estimate the average cost to abandon and reclaim wells range between $50,000 and $150,000 per well and we estimate the total addressable market size based on currently inactive and orphan sites at roughly $9 billion, with the total liability for WCSB abandonments over the coming decades at roughly $37 billion.

Revenue Attribution Across Service Lines
Through channel checks with multiple industry sources and our internal modeling, we estimate abandonment and reclamation spending across five primary service line categories.

Employment Impact
Our estimates suggest that depending on the level of organic A&R spending replaced by federal aid, incremental jobs created from the federal stimulus program could peak in 2021 between roughly 7,600 and roughly 12,000 new jobs.

No Changes to Estimates, Targets or Ratings
Given considerable unknowns regarding the ultimate timing and uptake of the federal abandonment aid package, and given significant challenges in assessing the impact to companies operating in more opaque markets, we make no changes to our estimates, targets or ratings at this juncture.