Why Was Precision Drilling Corporation Stock up 50% Last Week?

Shares of Precision Drilling Corporation (TSX:PD)(NYSE:PDS) are rocketing higher. Is the rebound for real?

| More on:
The Motley Fool

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?

111
Image source: YCharts

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.

Image Source: Precision Drilling Corporate Presentation
Image source: Precision Drilling corporate presentation

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Energy Stocks

engineer at wind farm
Energy Stocks

1 Canadian Utility Stock to Buy for Big Total Returns

Let's dive into why Fortis (TSX:FTS) remains a top utility stock long-term investors may want to consider right now.

Read more »

Canadian dollars in a magnifying glass
Energy Stocks

The Smartest Energy Stocks to Buy With $200 Right Now

The market is full of great growth and income stocks. Here's a look at two of the smartest energy stocks…

Read more »

Top TSX Stocks

A 6 Percent Dividend Yield Today! But Here’s Why I’m Buying This TSX Stock for the Long Term

Want a great stock to buy? You will regret not buying this TSX stock and its decades of growth and…

Read more »

ways to boost income
Energy Stocks

Act Fast: These 2 Canadian Energy Stocks Are Must-Buys Before Year-End

Here are two high-potential Canadian energy stocks with stable dividends you can consider adding to your portfolio before the year…

Read more »

canadian energy oil
Energy Stocks

2 No-Brainer Energy Stocks to Buy With $1,000 Right Now

If you have $1,000 to invest right now, CES Energy Solutions (TSX:CEU) and Enerflex (TSX:EFX) are no-brainer options.

Read more »

The letters AI glowing on a circuit board processor.
Energy Stocks

Maximizing Returns: How Canadian Investors Can Profit From AI’s Growing Energy Needs

Renewable energy stocks like Brookfield Renewable Partners (TSX:RNW) profit from AI's extreme energy usage.

Read more »

oil pump jack under night sky
Energy Stocks

3 No-Brainer Oil Stocks to Buy With $1,000 Right Now

The current geopolitical situation may not be conducive to oil price gains, but there are also positive catalysts.

Read more »

oil and natural gas
Energy Stocks

Best Stock to Buy Now: Suncor vs Cenovus?

Comparing Canada's energy giants: While Suncor stock dominated 2024, Cenovus could be a more compelling choice for 2025 with stronger…

Read more »