PRECISION DRILLING TRUST $11 (Toronto symbol PD.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 125.8 million; Market cap: $1.4 billion; SI Rating: Extra risk) is Canada’s largest provider of contract drilling and related services to the oil and natural gas exploration industry.
Precision currently operates 249 drilling rigs, mainly in Canada. However, many of its Canadian customers suspend exploration during the winter.
Precision now aims to expand its operations in the United States with its upcoming purchase of Grey Wolf Inc., which operates 122 drilling rigs in the U.S. Gulf Coast and Midwest regions. The purchase will make Precision one of the largest providers of drilling services in North America.
Based on current prices, Precision will pay roughly $1.2 billion U.S. in cash and units for Grey Wolf. It will also limit the cash portion to $1.12 billion U.S. Grey Wolf investors will own 25% of Precision after the acquisition.
This is a big purchase for Precision, which earned $0.65 a unit (total $82.3 million) in the three months ended September 30, 2008, up 18.2% from $0.55 a unit ($69.7 million) a year earlier. Cash flow per share rose 36.5%, to $0.93 from $0.68. Revenue grew 25.3%, to $285.6 million from $227.9 million. High energy prices spurred strong demand for drilling services.
Precision has secured loans of $1.6 billion U.S. to pay for Grey Wolf. That will increase its long-term debt from $231.8 million to roughly $2.3 billion. However, the extra cash flow from these new operations should help Precision pay down the extra debt, and let it keep paying monthly distributions of $0.13 a unit (14.2% yield).
Precision’s units have moved down recently, along with oil prices. They now trade at just 4.6 times its forecast earnings for 2008 of $2.40 a unit.
Precision Drilling is a buy.
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