A Note on Natural Gas Drilling in Alberta...

By Chip Hanlon | July 25, 2008 | 5:01 PM | 0 Comments

...by way of Precision Drilling Services (NYSE: PDS), the Canadian oil and gas services company. I'm rushing to type this before I head down to Del Mar, so I'll make this quick:

Since PDS was mentioned favorably by GF contributor Steve Saville yesterday in a note to his subscribers and the stock came up in a conference call on which I spoke earlier today, I thought I'd point out something that may be acting as a physochological drag on the stock.

Energy investors are, of course, aware of the big tax bombshell regarding how the Canadian federal government changed the accounting rules for royalty trusts nearly two years ago. They may be unaware, however, of a subsequent tax change--this one coming late last year from the provincial government of Alberta-- has impacted drilling there.

Looking at sky-high energy prices, the province did what government does and decided it wanted a bigger slice of the pie, so it changed the existing tax structure last Fall.  Trust investors scarcely noticed because the changes had essentially no impact on mature energy fields-- from which energy trusts typically produce. Instead the new levies came down most heavily on exploration companies, particularly gas producers who, even at today's elevated nat gas prices, have a hard time making new projects pencil out.

The result? Natural gas drilling in the province has fallen off a cliff, and rigs are pouring across the borders into British Columbia, Saskatchewan and the U.S.

PDS isn't contstrained by borders, of course, and its fiscal house is in better shape than just 12 months ago but I think this reality may be having a psychological drag on the stock--that's just my impression from having spent some time up there last month.

It should stand as a simple-to-understand cautionary tale for the windfall profits tax crowd down here in the U.S., but don't hold your breath on that one.

Off (literally) to the races...have a great weekend!