Precision Drilling (TSX:PD) Stock Falls 25% From the Top: What Should You Do?

Oilfield services stocks have created massive shareholder value since the pandemic.

| More on:
think thought consider

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

The global energy sector has been the only sweet spot among the tumultuous broader markets this year. This massive oil bull run has created an immense shareholder value since the pandemic. However, last week brought in some unpleasant indications for energy investors.

As recession worries hit the market, oil and gas stocks witnessed some of the biggest declines. A recession would dent the energy demand, which has been the primary driver of the oil price rally lately in tightly supplied markets.

PD stock has doubled this year!

Apart from oil and gas production stocks, oilfield services stocks have also been on a surge. One TSX oilfield stock, Precision Drilling (TSX:PD)(NYSE:PDS), has gained a massive 150% in the last 12 months before the weakness started brewing this month. So far in June, PD stock has fallen 25% from its record highs — an outsized impact compared to broader energy names.

Precision provides an extensive fleet of contract drilling rigs, well service, camps, and rental equipment. However, a massive recovery in energy commodity prices changed Precision Drilling’s fortunes. Driven by higher energy prices, producers increased their output and, thus, drilled more wells. This, in turn, drove Precision Drilling’s business prospects.

In fact, it increased its capital expenditure plan to $125 million for this year to cater to the higher demand. This was an increase from $98 million from its previous estimate.

Last year, the company achieved an average market share of 9% in the U.S. and 33% in Canada. In addition, Precision has a presence in every major unconventional oil and gas basin in the United States. In total, it operates a fleet of 104 drilling rigs. Its high-performance fleet, operating scale, and relatively lower growth capital requirements should drive demand and earnings growth.

Financial growth

Note that Precision Drilling is a loss-making company at the moment. For the latest quarter that ended on March 31, it reported a net loss of $44 million compared to $36 million in Q2 2021.

Apart from the topline growth, Precision Drilling stock has rallied like crazy due to its improving leverage. The company has been aggressively repaying its debt, bringing its balance sheet in a much stronger shape. More such strong quarters will likely further bring down its net debt.

Interestingly, Precision Drilling forecasts enough cash flows to drive shareholder dividends, even after repaying debt. So, investors can expect to receive dividends once it reaches a predetermined leverage target.

Bottom line

Precision Drilling will likely see higher demand for its services, as oil prices trade strong. Even though it offers handsome growth prospects, its high correlation with oil prices poses risks to investors. If oil and gas prices slide, which still looks like a remote possibility, PD stock will likely see an oversized blow. So, those who can stomach its large swings can consider entering at these levels. For conservative investors, there are plenty of less-volatile options to play the energy rally.

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.

The Motley Fool has no position in any of the stocks mentioned.  Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Dividend Stocks

analyze data
Dividend Stocks

2 Safe Dividend Stocks That Could Help You Fight Inflation

A dependable stream of passive income is one way to help offset rising inflation rates. Here are two top dividend…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Stay Invested in a Recession: Increase Positions in 2 Value Stocks

The suggestion of market analysts is to increase positions in two value stocks if you want to stay invested amid…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

3 Dividend Stocks to Buy as Inflation Surges in Canada

If you're worried about how surging inflation may impact your portfolio, here are three of the best dividend stocks to…

Read more »

You Should Know This
Dividend Stocks

High Inflation: The Good and the Bad for Canadians

Consider tucking away some of your long-term savings in quality dividend stocks like Brookfield Infrastructure in this correction.

Read more »

STACKED COINS DEPICTING MONEY GROWTH
Dividend Stocks

TFSA Investors: Turn $1,000 Into $10,000 in 10 Years

10-fold growth within a decade is rare but not unheard of. You can capture this growth either by predicting a…

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

1 Oversold REIT Stock to Buy for Safe Dividends

If you're looking for stable dividend income from an oversold stock, this office REIT is a perfect option.

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

3 Cheap Canadian REITs to Buy in 2022

Are you looking for passive income? Start treasure digging in cheap Canadian REITs in this market correction!

Read more »

Dividend Stocks

TFSA Passive Income: 3 Undervalued, High-Yield TSX Dividend Stocks to Buy Now

These top TSX dividend stocks with high yields now look attractive to buy for TFSA passive income.

Read more »