It’s been a wild ride for shareholders of Precision Drilling Corporation (TSX: PD)(NYSE: PDS). When oil last fell to under $40 a barrel in 2009, shares lost nearly 95% of their value. Once commodities recovered, Precision stock rocketed upwards roughly 600%. With oil prices back under $40, the company’s stock had sunk back down towards the $3 range.
Last week, however, likely gave investors hope as shares popped to almost $5. Is a massive turnaround imminent?
Industry headwinds dominate
As an oilfield-services company, Precision provides contract drilling, well servicing, and support services to oil and gas producers. The latest oil collapse has caused turmoil in the industry, sending drilling activity plummeting as producers try to rebalance supply to a world with lower selling prices.
This has caused the rig count to fall precipitously, severely impacting Precision’s revenues. Drilling activity in Canada and the U.S. fell over 50% last quarter. Only higher oil prices can remedy this situation.
What is Precision doing to compete?
As with most competitors, Precision is focusing on liquidity to maintain solvency throughout the downturn. Last quarter it suspended its dividend payments and plans only $202 million in 2016 capital expenditures, down 56% from a year earlier.
CEO Kevin Neveu says the company only has “limited visibility with few positive market signals. In this protracted challenging environment, financial stability is paramount for both survival and sustaining competitive advantage.”
The backdrop remains weak, but the recent stock-price rally is most likely due to the recent rise in oil prices. Brent crude hit annual highs last week, peaking above $40 a barrel after rumours that OPEC is seeking a higher anchor price for oil. A potential stabilization in the market is why RBC Capital Markets called Precision “one of our favourite ways to position for a recovery.” They have a target price of $7.50, representing roughly 50% upside.
Are they correct in believing the recent rally has more room to run?
Positioned well for a rebound
There are three major reasons why Precision can take full advantage of any market turnaround.
First, it has a young, high-quality fleet comprised of 238 Tier 1 Rigs. Second, it still has an impressive backlog of 60 contracts for 2016, and the credit risk for the vast majority of contracts is very low. Third, it has ample liquidity to survive even if a rebound doesn’t materialize this year. As of last quarter, the company had $445 million in cash and $754 million available through a revolving credit facility.
If you’re an oil bull, Precision likely has significant upside. When oil traded over $80 a barrel in the past decade, Precision’s share price was typically at least $10–sometimes much higher. If a rebound doesn’t occur as quickly as you anticipate, it should have ample liquidity and backlog to survive a continued downturn. As long as you’re willing to sit through the volatility, Precision is a solid long-term holding should oil prices normalize over the next year or two.
