PRECISION DRILLING TRUST $6.70 (Toronto symbol PD.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 275.6 million; Market cap: $1.8 billion; Price-to-sales ratio: 1.3; SI Rating: Extra Risk) provides contract-drilling services to oil and gas producers. Its clients are located in western Canada, the U.S. and Mexico. The trust owns a fleet of 388 drilling rigs.
Precision has been able to avoid cutting its rates to attract new business. That’s because rising oil prices have spurred demand for its drilling rigs. As well, many of Precision’s customers are locking in new contracts now because drilling services may become more expensive in the next year or two.
The trust is also building new rigs for specific purposes and types of terrain. Demand for these models is growing strongly, so Precision can charge more for them than for its general-purpose rigs.
Moreover, Precision is benefiting from a stronger balance sheet. Last year, its long-term debt jumped to $1.4 billion after it paid $2 billion for U.S.-based contract driller Grey Wolf Inc. In April, Precision issued new units to help pay down the additional debt. Its $868.9-million long-term debt is now a manageable 47% of its market cap.
The trust will probably keep using its excess cash flow to pay down debt instead of resuming distributions. Precision should convert to a regular corporation once Ottawa starts taxing income trusts in 2011.
Thanks to its improving outlook, Precision’s units have shot up by 166.9% since they fell to an all-time low of $2.51 last February.
Precision Drilling is a buy.
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