Cathedral Energy Services Ltd. expects a tight supply and demand balance for drilling equipment and field personnel to support prices in 2022 and 2023.

"Financial markets are currently trying to assess the extent of any US and global recession as well as any resulting impact on oil and natural gas demand," the Canadian directional drilling service provider said.

"Over the summer, there has been ample volatility in various commodity markets, but oil and natural gas prices have proved stubbornly resistant to any material fall-off.

"Years of underinvestment in the global oil business combined with the pull-back in spending on the natural gas side via Covid-19 shut-downs have created a situation of considerable undersupply of both critically important commodities in the global economy.

"The war in Ukraine has added further pressure on supplies especially into Europe. Heading into the fall and winter, the supply situation is growing increasingly troublesome and major economies in Europe may face severe rationing leading to economic contraction.

"Notwithstanding the considerable uncertainties in global oil and gas markets, the E&P spending backdrop in North America remains very constructive.

"A recent industry analysis of E&P cash flow vs capital spending levels revealed a dramatically lower reinvestment rate versus investment levels over the last decade.

"E&P companies have pursued balance sheet repair, share buy-backs and growing dividends vs major levels of field reinvestment, which should add considerable duration to the current upcycle.

"Commentary from many energy service companies is that in this upcycle, the pursuit is higher margins and not equipment capacity. This is an important reason Cathedral remains optimistic that the back half of 2022 and 2023 will be strong for the Company.

"Current Canadian rig count forecasts range from an average of 155-175 rigs working in 2022 (up roughly 30% y/y) moving to an average of 195-210 rigs working in 2023 (up another 10-15%).

"On the U.S. side, analyst estimates are consolidating around an average of 700 rigs working in 2022 (up over 50% y/y) and almost 800 average rigs working in 2023 (up 13% y/y).

"Cathedral estimates that 92-95% of wells are directionally drilled in the current North American drilling marketplace. As such, rig count forecasts correlate very tightly to directional drilling activity levels.

"On the pricing side, management expects continued strengthening through the balance of 2022 and into 2023 as part of a tight supply/demand balance for equipment (and most importantly) field personnel."

"On the corporate side, Cathedral plans to introduce its own rotary steerable offering into the Canadian marketplace as a direct competitor to the incumbent provider. Rotary steerable is an important growth market and Cathedral is optimistic that it will be very competitive going forward.

"Growth in Montney and Deep Basin activity should also begin in the coming quarters and years around a longer-term ramp-up of Canadian natural gas production for LNG Canada (Late 2024/25 first gas export)."

"Based on publicly disclosed Canadian drilling and directional drilling days, Cathedral's market share for 2022 was 18.2% compared to 9.3% in 2021. Day rates increased due to certain ancillary revenues along with overall increases in day rates and changes in client mix."

In the U.S., the company experienced a 15% increase in rigs, but with the nationwide average active land rig count up 62%, Cathedral's market share fell to 0.7% in 2022 from 1% in 2021. Day rates rose 5% from a year ago, primarily due to an increase in the company's client mix, Cathedral said.

Write to Mary de Wet at mary.dewet@dowjones.com

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