Market Assessment: Oilfield Distribution (Part 1)

Market Assessment: Oilfield Distribution

Having worked in oilfield distribution over a decade ago, I’ve been looking forward to writing this note and revisiting the materials side of the upstream and midstream sectors. And along with it, getting a sense of share among the publicly traded and private distributors across Canada and the United States. More than that though, it has been an opportunity to reconnect with a number of old friends in the industry and gain insights to how the distributors are positioned within the Canadian and US markets.

The overarching goals of this research note are twofold: firstly, examine how national-level historical operating models correspond to distributor revenue results dating back to 2020, and secondly, assess market share among the distributors to better define product markets, particularly valves, for the upstream sector. I have modeled three distributors as part of the market assessment, Now Inc. (NOW), MRC Global Inc. (MRC) and Russel Metals Inc. (RUS).

Benchmarking national level D&C activity

The premise to the research note is largely based on investigating the correlation between national-level D&C activity in Canada and the US to the quarterly revenue results of each distributor. As part of my efforts to model E&P production, Capex and drilling activity as outlined in prior notes (here) and (here), I have aggregated and extrapolated those results to compile and cross-reference national-level (Canada and US) production, Capex and drilling activity. With those national-level metrics in hand, I then ran a regression to measure the fit of these metrics compared to the quarterly revenue results of NOW, MRC and RUS. The resulting R-squared value of 0.88 for NOW and MRC's US revenues indicates a strong correlation.

So what does that mean? In simpler terms, the R-squared value acts as a measure or report card of how well the historical revenue data fits the regression model. An R-squared value of 0.88 suggests that 88% of the variation in revenue can be explained by the national-level metrics, indicating a high level of accuracy in predicting future revenues for NOW and MRC's US operations.

For Canada, the regression analysis was mixed, though it did reiterate the differing client targets of NOW, MRC and RUS. For NOW, its R-squared was the highest among the three distributors at 0.90 for the period 1Q20 to 2Q23, which corresponds to NOW’s predominantly upstream-focused client base. Conversely, MRC’s Canadian revenues equated to a 0.66 R-squared score, while RUS, with its combination of Canadian and US energy field stores through its Apex Distribution, Comco Pipe & Supply and Elite Supply Partners companies also posted an R-squared score of 0.66. This divergence in correlation can largely be attributed to a greater focus on midstream and downstream clients.

Additional Factors to Consider

While the NOW regression results were the most tightly correlated, the distributor’s 3Q23 and 4Q23 Canadian revenues were materially below where the the regression data points suggested the revenues to be. So what caused the divergence? NOW noted in its annual report that US dollar strength relative to the Canadian dollar negatively affects Canadian revenues, which did occur through the second half of 2024 with the USD : CAD at 1.32 on July 1 and peaking at 1.39 in late October. However, I’m not so sure that currency exchange accounts for all of the $21 million per quarter variance between the actuals and modeled revenue. My belief is that NOW likely lost out on a combination of master supply agreement RFPs and project-related scopes of work. Considering that two of the largest E&Ps, Canadian Natural Resources (CNQ) and Cenovus Energy (CVE), did not award their master supply agreements to NOW I believe these win/loss-type results play a greater factor in explaining NOW’s 2H24 revenue drop in Canada. Moving forward, it will be essential to monitor such win/loss outcomes to better understand revenue fluctuations.

Irrespective of which distributor is awarded an MSA, the pipe/valves/flanges & fittings spend is going to be accounted for. To further illustrate this point, the final regression was run - this time aggregating revenues of NOW, MRC and RUS for Canadian and US operations only against the national-level rig count and national-level Capex for both countries. As illustrated below, the modeled revenue is tightly correlated with the highest R-square score of the lot at 0.94.

Part 2: Estimates, Market Share and Product-Specific Outlooks

In the second part of this research note, I will elaborate on my FY24 Capex and rig count estimates for FY24, the market share results of both the publicly traded and private distributors, and lastly, estimating the annual valve spend across the US and Canadian upstream markets. Stay tuned for further analysis.