This Canadian stock plans to complete the friendly acquisition of a major rival by the end of 2018.
If shareholders reject a competing hostile bid, the takeover will bring this drilling firm more than 140 new rigs. It will also make it much easier to compete for drilling contracts in the United States. While oil prices continue to slide from their 2018 highs, this stock is usually one of the first to benefit when energy prices recover.
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PRECISION DRILLING CORP. (Toronto symbol PD; www.precisiondrilling.com) provides contract drilling services to land-based oil and gas producers, mainly in North America. It operates 257 rigs in Canada, the U.S. and the Middle East.
On October 4, 2018, Precision agreed to acquire rival firm Trinidad Drilling Inc. (Toronto symbol TDG). That driller has 141 rigs in the U.S., Canada, the Middle East and Mexico.
Trinidad investors will receive 0.445 of a Precision share for each TDG share they hold. That will give them 29% of the combined company. If you include Trinidad’s debt, the deal is worth $1.03 billion. Precision expects to complete the purchase by the end of 2018.
Precision’s offer (currently worth $1.84 per Trinidad share) beat out a hostile all-cash bid of $1.68 a share made in August by Ensign Energy Services Inc. (Toronto symbol ESI).
However, last week Ensign brought forward to November 27 a deadline for Trinidad shareholders to respond to its hostile bid. That new deadline is now ahead of the December 11 date set by Precision for shareholders to vote on its offer. Trinidad’s management confirmed that it continues to support Precision’s friendly bid, announced on October 4.
The shares of all three companies—Trinidad and its two prospective buyers—rose on Monday in the wake of Ensign’s statement. If the deal with Precision Drilling doesn’t go through, Trinidad is required to pay a break-up fee of $20 million.
Energy stocks: Acquisition figures to cut more than $30 million in annual costs
The completion of the Precision-Trinidad merger would give the combined business 170 rigs in the U.S., 152 in Canada, and 26 elsewhere. Precision expects to be able to find at least $30 million in annual cost-savings from the merger.
Big acquisitions like this one add considerable risk. However, merging with Trinidad will let Precision bid on more drilling contracts in the U.S. Eliminating overlapping earnings will also cut $30 million in annual costs, starting in 2019.
Meantime, Precision’s revenue in the third quarter of 2018 rose 21.6%, to $382.5 million from $314.5 million a year earlier. That’s because higher oil prices have spurred demand for its rigs, particularly in the U.S.
However, the company’s losses expanded to $31 million, or $0.10 a share, from $26 million, or $0.09. That’s mainly due to higher employee compensation based on Precision’s share price.
For 2018, Precision is spending $135 million to upgrade its operations. That’s up $19 million from its earlier estimate but includes a new contract to build a rig for use in Kuwait. That new rig costs $60 million U.S. to construct. The company expects cash flow in the second half of the year to cover its capital spending plan. It also expects to pay down more of its long-term debt of $1.7 billion. That’s a high 1.6 times its market cap.
We will have further coverage on the outcome of the proposed merger in a future issue of The Successful Investor.
Recommendation in The Successful Investor: Precision Drilling is a buy.
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