Today we look at an energy stock that should be among the first to rebound when oil and gas prices recover. With a well-established client base in North America and other energy-producing nations, Precision Drilling has already seen an increase in activity. This is driven by the company’s greatest asset, its high-quality drill rigs. It will deliver 18 rigs this year and its average drilling revenue per day actually increased in the most recent quarter. And its dividend, which yields 5.25%, appears safe.
PRECISION DRILLING CORP. (Toronto symbol PD; www.precisiondrilling.com) provides contract drilling services to land-based oil and gas producers, mainly in North America, through 329 rigs.
Even though low oil and gas prices have slowed drilling activity, demand for Precision’s Super Series rigs remains strong. That’s because these rigs can reach deeper pockets of oil than regular rigs.
The company recently received an order for a new Super Series rig. As a result, it now plans to spend $546 million on new rigs and other upgrades in 2015, up 7.9% from its previous estimate of $506 million.
Including this order, the company expects to deliver 18 rigs in 2015 (13 for the U.S., four for Canada and one for Kuwait), up from 15 in 2014. Drillers have already signed contracts for the new rigs, which cuts the risk in investing in them.
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Energy stocks: Drilling activity expected to improve in second half of 2015
Still, the drop in drilling activity caused Precision to lose $28.9 million, or $0.10 a share, in the second quarter of 2015. That’s worse than the $7.2 million, or $0.02 a share, it lost a year earlier. Overall revenue declined 29.6%, to $334.5 million from $475.2 million. However, thanks to Precision’s high-quality rigs, its average drilling revenue per day increased 14.0% in the U.S., 4.2% internationally and 3.2% in Canada.
Precision ended the quarter with cash of $433.7 million, or $1.48 a share. Its long-term debt of $2.0 billion is a high 1.3 times its market cap—though that market cap is way down, along with Precision’s share price and those of most other oil and gas-related stocks.
The company expects drilling activity to improve in the second half of 2015. But even so, it will probably lose $0.16 a share for the full year and $0.13 in 2016. The $0.28 dividend still seems safe and yields 5.2%.
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