Welcome to the First Edition of the Schachter Energy Report: April 2017

Ticker Symbol: PD-T

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PRECISION DRILLING

FINANCIAL HIGHLIGHTS

Black Gold: Q3 2021 - Precision Drilling

PD Q3/21 RESULTS & ANALYSIS

  • With a recovering energy sector, public E&P companies are holding spending steady or moderately increasing capex as their cash flows rise with growth coming from private energy companies. PD has focused on lowering its cost structure and providing leading edge technology rigs. Their fleet of AC Super Triple Alpha-Rigs have the latest AI automation apps that give them a premier fleet for customers and $1,500-per-day higher rates as well as application usage revenues. They are now adding new features (Evergreen suite of environmental and emission-reduction focused products and services) for support of customer climate change initiatives.
  • Revenue in Q3/21 rose a healthy 54% as rig utilization days rose in both key operating countries of the US and Canada. Rig days rose 93% in the US and by a more robust 188% in Canada. Overall revenues rose to $253.8M from $164.8M in Q3/20. In their two business lines: Contract Drilling Services rose by 50.5% to $227M while Completion Services saw a 95% increase to $28.1M. Cash on the balance sheet was $57M down from $109M at the beginning of the year as they used cash and cash flow to pay down debt by $60M so far this year (Q3/21 – $8M). They have a target to pay down debt by $100-125M this year, so in Q4/21 they will need to pay down $40M+. As at September 30th they owed $1.16B. PD also extended their Senior Credit Facility to June 18, 2025.
  • Under our quality scoring classification we continue to rate PD a ‘C’, a Problematic entity due to their high debt load. EBITDA in Q3/21 fell 5% to $45.4M versus $47.8M in Q3/20 but was above our forecast of $36M. PD had a net loss of $38.0M in Q3/21 versus a loss of $28.5M in Q3/20. Cash from operations in the quarter fell 48% to $21.9M from $42.0M last year. EBITDA from drilling was up only 7% to $55.4M in Q3/21 from $51.6M in Q3/20. These results were disappointing. The service rig side saw EBITDA at $5.5M up from $3.95M last year. In Q3/21 service rig hours worked rose 107% to 32,244 hours from 15,599 hours in Q3/20. Service rig utilization hours rose to 28% from 14% in the prior year.
  • Precision needs US$400 of EBITDA to be profitable and they are moving rates up to get toward that goal. In Q3/21 they gave up some low margin US business as they focus on margin improvement and having the rigs available when energy companies need equipment which they see as being in short supply in 2022. Rig counts could go up 20-30% next year if operators focus again on production growth versus financial viability.

SER Quality Score

Black Gold: Q3 2021 - Precision Drilling

Balance of Evidence

POSITIVES

  • The number of rigs being used is picking up in both the US and Canada and they see more activity later in the year with rising day rates and expanding margins as renewals occur. Rig activity is now 45 rigs in the US up from 21 in Q3/20 and for Canada are at 61 rigs working up from 21 in Q3/20.
  • More of the rigs (now up to 40 rigs) are using their Alpha automation technologies. They continue to commercialize new apps. Over the long-term they see their whole fleet becoming Alpha rigs. The rigs so configured earn $3,000 per day more than non-Alpha automated rigs.
  • PD has green initiatives to monitor and lower GHG emissions. They are working on hybrid battery energy storage systems, bi-fuel systems and natural gas powered systems. Longer term they see the possibility of zero emission drilling if renewable energy grid power is in the area and they can have grid power drilling rigs.
  • PD is paying down debt and as part of this they paid off their 2023 and 2024 maturities. They added $400M of 5.875% senior notes that mature in 2029 to extend their maturities and pay down their nearer term debt. Their next big maturity is in 2025 for US$178M.
  • On July 23rd PD announced the sale of their directional drilling business to Cathedral Energy Services for $6.35M. The deal was done for 13.4M shares of Cathedral and PD now owns 17.5% of their outstanding shares.

ISSUES OF CONCERN

  • Canadian day rate margins fell in Q3/21 to $6,238/day from $7,124/day in Q2/21 and $8,506/day in Q3/20.
  • US drilling margins in Q3/21 fell to US$5,211/day from US$6,752/day in Q2/21 and from US$12,297/day in Q3/20 Very disappointing!
  • Debt remains too high at 6.2x debt/EBITDA based upon our forecast of $189M in EBITDA this year.
  • Margins are being squeezed by higher steel, wages and other product costs.
  • While they expect to see their rigs in Kuwait get business soon, their rigs in Saudi Arabia may not see work until the Saudis have reversed all of their production cutbacks and all countries re-open their expat working visas.

Precision Drilling Third Quarter Report

Black Gold: Q3 2021 - Precision Drilling
Black Gold: Q3 2021 - Precision Drilling

Source: Precision Drilling Q3/21 Report

September Investor Presentation

Black Gold: Q3 2021 - Precision Drilling

Source: Precision Drilling September 2021 Investor Presentation

2021 Strategic Priorities

Black Gold: Q3 2021 - Precision Drilling

Source: Precision Drilling September 2021 Investor Presentation

Strategic Priority #2 – Free Cash Flow to Reduce Debt

Black Gold: Q3 2021 - Precision Drilling

Source: Precision Drilling September 2021 Investor Presentation

Fully Scaled Geographic Footprint Creates Operating Leverage

Black Gold: Q3 2021 - Precision Drilling

Source: Precision Drilling September 2021 Investor Presentation

Attractive Balance Sheet & Cash Flow Profile

Black Gold: Q3 2021 - Precision Drilling

Source: Precision Drilling September 2021 Investor Presentation

Strategic Priority #3 – Leading ESG Performance

Black Gold: Q3 2021 - Precision Drilling

Source: Precision Drilling September 2021 Investor Presentation

PD Evergreen Solutions Help Customers Reduce Emissions

Black Gold: Q3 2021 - Precision Drilling

Source: Precision Drilling September 2021 Investor Presentation

Precision Drilling – Weekly

Black Gold: Q3 2021 - Precision Drilling

Source: stockcharts.com October 29, 2021

Precision Drilling – Monthly

Black Gold: Q3 2021 - Precision Drilling

Source: stockcharts.com October 29, 2021

Valuation Comparison

Black Gold: Q3 2021 - Precision Drilling

Source: Corporate Reports & SER Forecasts

Conclusion: BUY on weakness – the stock currently is overvalued

  • Precision is trading at 0.58x Q3/21 book value. The stock would be an attractive BUY around 0.32x declining book value (as losses lower this value) or $30.00 per share. On a cash flow basis, a good BUY target would be at 2.9x cash flow or around $28.00 per share. If the stock falls below $35.00 (BUY range $28.00 – $35.00/share) it would again be a very attractive BUY for long-term entrepreneurial investors. We have a one-year target of $50 per share, which was exceeded in June of this year. Remain patient and be ready to BUY when we get our next low risk BUY signal. Any reversal of the drilling recovery in upcoming months as crude prices retreat would accelerate the decline. The PD results of Q3/21 tell the story of how difficult the service industry conditions are.
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