PRECISION DRILLING CORP. $10 (Toronto symbol PD; Aggressive Growth Portfolio, Resource sector; Shares outstanding: 276.9 million; Market cap: $2.8 billion; Price-to-sales ratio: 1.4; Dividend yield: 2.0%; TSINetwork Rating: Extra Risk; www.precisiondrilling.com) provides contract-drilling services to land-based oil and gas producers, mainly in North America. As of June 30, 2013, it had 324 rigs in service.
Wet weather in Western Canada and low gas prices have hurt demand for Precision’s rigs. In the second quarter of 2013, its revenue fell 0.8%, to $378.9 million from $382.0 million a year earlier.
However, demand for the company’s Super Series rigs, which can reach deeper pockets of oil and gas, remains strong.
Thanks to these new rigs, Precision’s average daily revenue rose 7.9% in Canada and 3.0% in the U.S. The company also continues to benefit from its international expansion. In the latest quarter, it operated nine rigs in Mexico and northern Iraq. A year ago, it had just four overseas rigs.
Due to the drop in drilling activity, earnings fell 97.4%, to $473,000, or nil per share, from $18.3 million, or $0.06 a share, a year earlier.
Precision recently announced plans to build another five Super Series rigs. As a result, the company now expects to spend $654 million on capital upgrades in 2013, up 22.7% from its earlier estimate. Precision has already signed contracts with drillers to operate these new rigs, which cuts the risk of this investment.
The stock trades at 13.7 times Precision’s likely 2013 earnings of $0.73 a share. The $0.20 dividend yields 2.0%.
Precision’s exposure to volatile oil and gas prices adds risk. However, its high-quality rigs give it an advantage over its competitors. It’s also in a strong position to profit from proposed terminals on B.C.’s coast that would export liquefied natural gas to Asia. If regulators approve, these facilities could start up between 2015 and 2018.
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