Why This Well-Timed Acquisition Will Send This Energy Stock Soaring

Precision Drilling Corp. (TSX:PD) (NYSE:PDS) acquires Trinidad Drilling Ltd. (TSX:TDG) in an acquisition that is expected to create a bigger and stronger company, providing significant cash flow accretion and market presence.

| More on:
Hands shaking over a business deal

Image source: Getty Images.

Consolidation in the energy services industry has been kicked up with Precision Drilling Corp.’s (TSX:PD)(NYSE:PDS) $1 billion acquisition (including $477 million of net debt) of Trinidad Drilling Ltd. (TSX:TDG) in an all-share transaction

I must say that a company that is buying at this time of low valuations is a company I like.

Energy services stocks are trading below book value and at tiny multiples compared to their peak earnings capability.

And with oil prices trading at over $73 at the time of writing, natural gas pricing strong in the US, and now strengthening in Canada as well, we have reason to believe that peak earnings will happen sooner rather than later.

Market conditions in Canada and the U.S. are improving, meaning higher day rates, higher margins, and higher activity levels and translating to higher earnings, higher cash flows, and ultimately higher stock prices.

Back to the acquisition of Trinidad Drilling.

The combined company will create a leading North American energy services company aimed at leveraging the transition to high performance drilling, with 152 Canadian rigs, 170 U.S. rigs, as well as 26 international rigs.

It will remain the largest Canadian land driller, and it will become the third largest U.S. land driller (previously the fourth), with high-quality rigs and a well-diversified customer mix.

While Precision’s latest earnings releases have come in below expectations, free cash flow generation remains strong and the company remains well positioned to benefit from the recovery in drilling that is underway.

During the downturn, Precision invested heavily in its fleet, meaning that it now has a high-grade rig fleet that should enable it to capture market share as the industry recovers.

It’s similar to Trinidad’s strategy.

So now we are left with the combined company that will bring many benefits.

According to Precision management, the acquisition will bring immediate cost synergies, operating efficiencies due to scale, and it will be significantly accretive to cash flow starting in 2019.

While Precision has taken on even more debt with this acquisition, management’s plan to drastically reduce debt will play out over the next few years, which will serve as a catalyst for the stock price along with strengthening fundamentals and the benefits of the acquisition.

Pricing continues to firm, activity continues to increase, and the second half of 2018 should see a continued ramp in cash flow and energy stock prices.

Getting into these highly cyclical stocks energy stocks at cyclical lows is a good strategy to set your portfolio up for massive returns as the cycle bottoms and makes its way to the highs.

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 Karen Thomas owns shares of PRECISION DRILLING CORPORATION.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »