Trinidad Drilling

Suite 1000, 585 -8th Avenue SW Calgary, AB T2P 1G1
Phone 403.265.6525  •  Website: www.trinidaddrilling.com
Content updated periodically  •  Last update August 18, 2017

Ticker Symbol: TDG-T

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FINANCIAL TARGETS

Shares Outstanding

269.5M

Market Capitalization (US$)

$434M

Enterprise Value (Long term debt: $442.5M)

$876M

Intermediate Cap Company

Current Price (08/18/17)

$1.61

Attractive Purchase

Under $1.40

Table-Pounding BUY

Under $1.10

12 Month Target

$3.00/share

Bull Market Peak

$7.00/share

BACKGROUND

Trinidad Drilling was incorporated in 1996 and went public on the TSX in October 2000. The company provides contract drilling to the Canadian, US and international energy markets. In 2015 TDG bought CanElson Drilling for $345M, adding 51 rigs of which 28 were in Canada, 21 in the US and two were in Mexico. Currently they have 138, 100% owned rigs working worldwide with 70 in Canada, 68 in the US.

In addition they had participation in an international joint venture that operated 11 drilling rigs of which three were in Saudi Arabia, two in UAE and six in Mexico. The joint venture is with Haliburton and is owned 60% by Trinidad and 40% by Halliburton.

Trinidad is Active in Key Plays

Trinidad Drilling

Source: Trinidad Drilling Corporate Presentation July 2017

Update from the Field

Trinidad Drilling

Source: Trinidad Drilling Corporate Presentation July 2017

INVESTMENT PARAMETERS: PEOPLE

At March 31, 2017 Trinidad Drilling had 784 Canadian employees, 717 in the US and International operations and 291 in Joint Venture operations for a total of 1,792 personnel. This is up from 1,529 employees at December 31, 2016.  Conner Clark & Lunn Financial Group is a major shareholder, owning 36.14M shares or 13% of the outstanding shares. Overall ownership by insiders is 1% of outstanding shares.

TitleManagementShares Owned
ChairmanMichael Heier725K
President & CEOBrent Conway156K
COOAdrian Lachance314K
TitleManagementShares Owned
CFOLesley Bolster4K
Exec VP, US OperationsRandy Hawkins1.51M

Source: www.sedi.ca August 2017

INVESTMENT PARAMETERS: PROJECTS

For 2017, Trinidad has a capital budget of $175M of which $155M is directed to upgrades and $20M towards maintenance capex. We are using a lower capex number as we expect the company to pare back its spending as crude prices retreat in the coming months and activity levels by TDG’s customers wane. In the first six months of 2017 they spent $58.6M and we forecast that they will spend net capex of $90M this year. We believe that the upgrade spend is too high and will be retrenched as crude prices fall in coming months.  In the tough market of 2016 they spent only $50M down from $183M in 2014.

Canadian Trends by Rig Type

Trinidad Drilling

Source: Trinidad Drilling Investor Presentation June 2017

US Trends by Rig Type

Trinidad Drilling

Source: Trinidad Drilling Investor Presentation June 2017

To keep its fleet modernized, TDG decommissioned 15 rigs at the end of 2015. Of these ten were removed from the Canadian fleet and 5 from the US and International side.

Currently TDG is adding to its fleet that’s working in the active Permian basin. It added two rigs to the area which now has a total of 28 rigs active.

The contract base for TDG is 33 rigs or 22% of the fleet under long term contract with the average term remaining at 1.2 years. In 2017, eight rigs will roll off contract. TDG will need to be busy in 2H/17 keeping its fleet occupied. We have used a slower pace than their forecast in our models.

Upside for Trinidad in the upcoming new Energy Bull Market is significant. It 2014 utilization was 57% in Canada and 87% in the US and International. Day rates rose to $25,638 in Canada in 2014. Operating margins in robust times have been up to 43% in Canada and 51% in the US and International. Cash flow from operations in robust years has reached over $200M. In 2008 it was $210.8M and in 2015, $215.5M. If they reach $200M again in the next 3-4 years, that would work out to $0.74  cash flow per share.

Proactively Maintain Market Share

Trinidad Drilling

Source: Trinidad Drilling Corporate Presentation July 2017

Canadian Fleet

Trinidad Drilling

Source: Trinidad Drilling Corporate Presentation July 2017

US & International Fleet

Trinidad Drilling

Source: Trinidad Drilling Corporate Presentation July 2017

INVESTMENT PARAMETERS: FINANCIAL CAPACITY

  • In Q2/17, TDG showed cash flow from operations at $60.6M against capex of $35.4M in the quarter. The utilization rate during the quarter was 21% for Canada and a respectable 48% in the US. Prices per operating day were $19,842 in Canada and $24,589 in the US.
  • TDG raised $149.5M in early 2017 via the issue of 47.5M shares at $3.15 per share. The stock has fallen in half due to the sector weakness and still has some downside risk, so patience is in order.
  • The debt load is manageable with TDG raising US$350M in a private placement in January 2017, with a maturity date of 2025. The interest rate on this debt is 6.625%.
  • The balance sheet is in good shape with $1.345B of equity at the end of Q2/17 and debt of $442.5M. Book Value at the end of Q2/17 was $4.99 per share.

Our forecasts for 2017 and 2018 by quarter are as follows:

Trinidad Quarterly Results

Trinidad Drilling

Trinidad Valuation Comparisons

Trinidad Drilling

Source: TDG results and SER forecasts

  • TDG trades very cheaply. It trades below Book Value and below the financing done in early 2017. Our 12 Month Target of $3.00 is based upon an estimate of 3x our Q4/18 annualized cash flow estimate of $1.00 per share. The stock would be a very Attractive Purchase below $1.40 per share, and a Table Pounding BUY under $1.10. If the stock falls to the 0.23X book value that it reached in 2015 then our Table Pounding BUY level would be attainable. Our downside stock price targets should be reached in the coming months if we are right about the upcoming sharp decline in crude prices. If so, an Action Alert adding this name to our TOP PICKS list should occur.
  • Our 3-5 year Bull Market Peak scenario envisions TDG having cash flow per share growing in excess of $1.50 per share, a rising book value in excess of $7.00 and trading at Book Value, resulting in a stock price target in excess of $7.00 per share.
  • Trinidad stock did very well in previous energy cycles, rising from $0.55 in 2002 to $13.07 in 2006. From the low of $1.58 per share in 2009,  it rose to $9.66/share two years later.

Trinidad Annual Financials

Trinidad Drilling

Source: TDG results and SER forecasts

Balance of Evidence

POSITIVES

  • TDG’s balance sheet and capital raising decisions in 2017, have helped the company survive the tough industry conditions. While we commend the balance sheet decisions, we concerned about the aggressive capex plan currently underway.
  • The company has been very good at cutting G&A costs.
  • The company is focused on getting a return on new capex over a 2.5 year window.
  • Trinidad has paid a dividend in profitable years and was paying a $0.05 quarterly dividend as recently as Q3/15. In the next 2-3 years we see them paying a dividend again.
  • TDG is focused on the Permian for their US operations and this is a key focus going forward. Day rates are rising in the US and International areas more so than in Canada. TDG sees 45 rigs working in the US later this year, and is moving more of their $20M triples to the US as they find US customers for these big rigs.
  • Rig activation costs have been high but are non-recurring and new contracts will add revenues and positive margins going forward. Some of the move costs are being paid by the customers.
  • Tender activity is picking up in the International markets.

ISSUES OF CONCERN

  • Outside of two individuals, the management team are not large holders of TDG’s stock. While well rewarded with stock options and restricted shares, as well as generous pay, bonuses and perks, we would like to see management required to own shares at multiples of their salaries as energy companies do.
  • The average age of the Canadian fleet, at nine years, is a bit older than competitors.
  • Activity in Canada on a utilization rate is disappointing while the US rate is commendable. TDG needs to get its Canadian fleet operating at a much higher rate. The current activity is for their smaller shallow rigs which face tougher competition and lower margins.
  • TDG is upgrading rigs on a speculative basis and this may come back to haunt them as crude prices retreat and clients cut back on usage. TDG should only be doing upgrades where client long term contracts recover the investment. Spending >$8M on a rig upgrade is not economic in our forecasted environment in 2H/17. TDG may need to write down some of its older fleet if crude prices retreat below US$40/b.

TRINIDAD DRILLING LTD. (TDG-T)

Trinidad Drilling

Source: stockcharts.com August 18, 2017

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