PRECISION DRILLING CORP. (Toronto symbol PD; 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.
Energy stocks: Precisions stands to profit if LNG terminals approved in British Columbia
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.
Longer term, Precision is 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.
The stock trades at 13.7 times Precision’s likely 2013 earnings of $0.73 a share. The $0.20 dividend yields 2.0%.
In the latest edition of The Successful Investor, we look at the added risk of Precision’s exposure to volatile energy prices and balance that against the competitive advantage it derives from its high-quality rigs. We conclude with our clear buy-sell-hold advice on the stock.
(Note: If you are a current subscriber to The Successful Investor, please click here to view Pat’s recommendation in the latest issue. Be sure to log in first.)
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