(By Balaseshan) RBC Capital Markets analyst Kurt Hallead downgraded his rating on shares of Precision Drilling Corp. (NYSE:PDS) to "Sector Perform" from "Outperform" and lowered his price target to $8 from $10.
The brokerage reduced its 2012 EPS estimate for the provider of contract drilling to $0.98 from $1.13 and its 2013 estimate to $0.92 from $1.33.
While positive longer-term, Hallead is stepping to the sidelines near-term in the face of developing industry headwinds.
The analyst's field-level channel checks indicate that the rapid decline in NGL and WTI prices has begun to impact the land drilling market, a point emphasized in Monday's reduced guidance from Helmerich & Payne Inc. (NYSE:HP) and PDS.
In a softening NAM market, Hallead expects reduced demand from E&P companies for rigs, which should pressure both volume and pricing / margins for the NAM land drilling industry.
The U.S. industry rig count forecast is now about 9% down year-over-year in 2013. The analyst's revised industry outlook now calls for a drop in liquids-directed drilling activity into mid-2013, driven by rapid declines in oil and NGL pricing.
Hallead modestly reduces his forecast for natural gas directed rigs although he continues to believe that he is near a bottom in the natural gas rig count.
The PDS rig count is expected to be flattening rig activity in the U.S. The analyst's revised forecast calls for PDS to maintain a relatively constant market share within a declining rig count environment in the U.S.
The analyst said contracts mitigate 2012 risk, although 2013 in question. Average of about 97 active rigs on term contract in the second half of 2012 mitigates the near-term headwinds from commodity price declines.
Given current oil / NGL prices, Hallead sees potential for an increasingly competitive environment among drillers as rigs roll from contract into the spot market.
PDS is trading down 3.31% at $5.85 on Tuesday.