Like all oil-services companies these days, Precision Drilling Corporation (TSX:PD)(NYSE:PDS) is currently in survival mode. Results and stock prices in this sector are extremely volatile, and we have seen the downside in this last year, which has been quite brutal. So it is clear that this sector is not for the weak of heart.

But for those of us who are looking for some extra torque in our portfolio, these more risky stocks can do extremely well when the cycle turns can provide just that. They can make a great part of a diversified portfolio, offering the potential for big upside. Let’s look at Precision Drilling, who I believe is positioned quite well in this space.

It’s bad

The weak fourth-quarter results come as no surprise and are reflective of the extremely challenging environment that all oil-services companies are faced with these days. Revenue declined 44.2%, adjusted EBITDA declined 52.5%, and drilling utilization fell 51% and 55% in Canada and the U.S., respectively.

But here are the things that the company is doing in order to come out of this downturn as best as it can.

Focus on the balance sheet

As of December 31, 2015 Precision Drilling’s liquidity position is quite good. The company has $445 million in cash on its balance sheet and $550 million available on its revolving credit line. The first debt maturity is in 2019. The focus this year will be on deleveraging.

Cutting spending

Precision Drilling’s capital expenditure budget for 2016 is currently set at $202 million, down from $459 million in 2015. The company also cut its dividend, which will free up $84 million annually.

A restructuring plan was put into place in order to reduce general, administrative, and operating costs, and now that it is complete, the company expects $100 million in annual savings.


The outlook for 2016 is not good as activity is still declining and it is expected that things will get worse before they get better. So, as we have seen, Precision Drilling is making the cuts necessary and putting the focus on the balance sheet and maintaining liquidity.

When the cycle turns and the market rebounds, Precision Drilling is in a good position. Its young, high-performance fleet is made up of mostly Tier 1 rigs. These are technologically advanced rigs that can drill the same well in half the time, drill to greater depths, and bore longer horizontals.

The company has been speeding up its transformation to Tier 1 rigs and currently has 236 Tier 1 rigs and 16 Tier 2 rigs, which can be upgraded quite easily when the time is right. These rigs would presumably be the rigs of choice for E&P companies and represent a competitive advantage for Precision Drilling.

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Fool contributor Karen Thomas owns shares of Precision Drilling.