Precision Drilling (
PDS)
has been on a tear recently. Unfortunately, it's downward sloping going
from a multiple billion dollar company to one with a market cap of
barely $350 million. This once highly esteemed stock has been
plummeting to earth ever since the pop of the energy bubble. Sporting a
52 week high stock price of $28.89 and a five-year high of over $50,
one has to squint when it looks at it's historical performance,
including where it once was. Now at $2 and change, is Precision a
bargain? Looking at once high-flying stocks that have fallen to
seemingly obscene lows is a common practice among value oriented
investors. Now that we've spotted a stock that's worth looking into,
lets dig a little deeper into what Precision Drilling actually does.
Officially, Precision states that they “Provide contract drilling, and
completion and production services to oil and natural gas exploration
and production companies in Canada and the United States. It operates
in two segments, Contract Drilling Services, and Completion and
Production Services.” So what does that even mean? Basically Precision
does two things: Helps energy companies get their oil and natural gas
out of the ground through drill rigs and also aids the energy companies
in maintaining, refurbishing, and leaving their drilling sites.
They offer services in basically anything an onshore driller would
need. As of December 31, 2007, Precision Drilling operated a fleet of
232 land drilling rigs, 223 well completion and workover service rigs,
27 snubbing units, 63 wastewater treatment units, and approximately
13,000 rental items in Canada; and 12 land drilling rigs in the United
States. After reading that sentence you might say “Hey that's from
2007.” Not to fear, after pouring through their financial documents and
reports, an investor could find several things, some of them
bothersome.
Since the end of 2007, Precision has been slowly retiring many rigs,
dropping their rigs in service by a few dozen every couple months. This
would seem irking because of the question behind why they are doing
this. Are they not selling these rigs? Is demand so low they actually
have to destroy rigs because maintenance is so high? Yes and no. It is
true that the market is terrible is you are an onshore driller. With
many energy companies not being able to produce oil and natural gas at
a profit because of the collapse in energy prices, Precision is facing
a dramatic slowdown in rig contracts.
There is good news to this however. After a brief conversation with
their financial department, I uncovered that over 50% of their rigs
were contracted through 2011. These aren't flimsy may-go-bankrupt
clients either. They carry the stalwart names such as Transocean and
Schlumberger, where chances are, they aren't going to back out of their
contracts. Even if they wanted to, most of their existing long-term
contracts are binding, meaning only unless the company went bankrupt,
they couldn't pull out.
Another good piece of news...the energy sector will come
back...someday. It could be a year, could be several, but rest assured,
drillers will have their day in the sun yet again. So sporting a
current p/e of 1.18x, a forward p/e of around 4x, a conservative PEG of
.5, this stock seems like a screaming buy right? With a healthy
dividend surely to be reinstated once the energy market is revived, a
management team that is experienced multiple downturns in the economy,
and $50 million in the bank, seems even better right? Check the recent
mutual fund buying activity too: Almost all the fund buying over the
past couple of months has been from 4 and 5 star Morningstar rated
funds. Obviously with every stock thats been beaten down as far as
Precision has some glaring problems. More on that in Part II soon.
Good luck!
Ryan Vanzo
