The Company earns revenue primarily by providing specialized transportation services to companies engaged in exploration, development and production of petroleum resources. Demand for the Company's transportation services is therefore linked to the economic conditions of the energy industry and the general level of drilling activity in the exploration, development and production of petroleum resources in Western Canada and in the United States. Drilling activity in the WCSB and in the United States has in recent history been affected by amongst other things, low natural gas prices and higher than normal natural gas inventories in storage caused by many factors including reduced demand for commodities as a consequence of a global recession and the temporary oversupply of natural gas caused by the fast development of shale gas resources in the United States.
Countering these factors is a strong price for oil, which has allowed oil-focused regions to experience increasing rig counts. The Pleasanton and Midland branches are benefitting from such increases in Texas, while other US branches are making efforts to minimize revenue and margin reductions stemming from low activity levels in natural gas explorations.
In the WCSB, rig counts in the fourth quarter 2012 failed to ramp up(1) to levels normally expected for that time of the year. This deviation from the typical industry cycle is reported to stem from export capacity bottlenecks coupled with delays in the approval of the Keystone XL and Northern Gateway pipelines. Similarly, while first quarter 2013 showed rig counts akin to first quarter 2011 up to the end of February(2), early March statistics indicate an earlier and steeper decline in rig counts even before the usual start of the "spring break-up" season. This is in line with expectations that 2013 might face limited growth in exploration and production projects reflecting the cited market conditions, as exemplified by the late 2012 announcement of delays in large projects such as the Fort Hill and Joslyn oil sands mines(3). Within WCSB gas plays, various companies have reduced capital expenditure investments due to the low returns experienced from the exploration and production of low-priced natural gas. Instead, these companies have shifted their focus towards cautious investments in liquids-rich plays, divesting from dry gas assets and reducing overall capital expenditure in expectation of market improvements(4).
(1) June Warren Nickels Rig Locator, accessed on March 7, 2013, at http://www.riglocator.ca/(2) CAODC Statistics, accessed on March 7, 2013 at http://www.caodc.ca/(3) http://www.theglobeandmail.com/globe-investor/suncor-joins-spending- retreat/article4813907/(4) http://www.theglobeandmail.com/report-on-business/industry-news/energy- and-resources/encana-puts-brakes-on-liquids-plays/article8656404/
Despite Aveda's rental asset additions in 2012, revenues have not picked up as aggressively as expected in the rentals division. This indicates a need for further analysis and efforts geared specifically at increasing utilization of current excess capacity, including evaluating customer opportunities outside of the immediate geographical range of our Sylvan Lake location.