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Want to Take Advantage of an Oil Sector Turnaround? Try Precision Drilling Corp. (TSX:PD)

I tend to have a more contrarian lean in my investing. Often, this means finding companies and sectors that have been the recipients of significant pessimism — companies that are cheap and opportunities for a potential turnaround.

With oil rebounding, investors who want to take advantage of any turnaround need to look into areas that may have significant upside. One area that has been hit significantly is the drillers. Their share prices have been significantly beaten up to the point that they are looking quite attractive. As such, the general negativity towards these companies may reverse significantly if oil sentiment changes.

Now, these companies are not for the faint of heart. Over the past few years, people who have owned these shares have experienced nothing but pain. But if oil starts to be worth pumping again, people will more than likely begin to pile in to these companies when they start making money once again. If you want to get in ahead of the curve, this might be the time to invest. Precision Drilling Corp. (TSX:PD)(NYSE:PDS) might be a leveraged way to benefit from a sector turnaround.

Precision Drilling Corp. (TSX:PD)(NYSE:PDS)

With more than 65 years of drilling experience, Precision has seen many oil market cycles. The company operates primarily in Canada and the United States, but it also has operations around the world, as far away as the Middle East. In addition to its drilling operations, the company also has well servicing, catering, and equipment rental businesses.

Its revenues, after falling significantly following the oil price collapse, have since recovered and appear to be moving higher once again, up 9% year over year. The company has now engaged in reactivating over 100 drills it had shut down during the oil collapse. In the United States, its drill utilization is up 38%. Earnings, while still negative, were closer to positive territory, up 25% year over year. Funds flows from operations were up 21% in Q1.

The biggest concern facing the company is reducing its long-term debt. To achieve this, Precision has been focused on dedicating a large amount of its free positive free cash flow to paying down debt. It also eliminated its dividend a few years ago to focus on strengthening its balance sheet. With its first debt maturities not occurring until December 2021, Precision has ample time to continue to address its debt issue.

Drilling it home

The drillers have been hammered over the last couple of years and seem to be lagging the producers and the price of oil. It may be the case that these companies won’t move much until the rest of the oil patch has moved. When they move, though, they might move big, as they have to catch up to the sector. Adding Precision Drilling could position investors for a rebound in oil prices.

Always keep in mind, though, that commodity companies are extremely volatile, and it might take some patience and a contrarian attitude to wait for the stock to move. The lack of dividend may also deter investors from holding the stock. But if it does move, there may be potential for decent capital gains.

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Fool contributor Kris Knutson has no position in any of the stocks mentioned.

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