Precision Drilling Corporation

Precision Drilling Corporation (TSX: PD) is a leader in North American oil and gas services which operates in contract drilling activities. The company has also expanded into the United States with the purchase of Grey Wolf.

Key Highlights:

• Preservation of liquidity: The company implemented prudent capital and expense management, in order to retain the liquidity levels, which is a key positive considering the ongoing economic cycle. The company is targeting a CAD 150 million of cash savings in 2020 through lower annualized fixed costs and reduction in capital spending. Moreover, the operations are supported by strong collections and improved cash flows.

Source: Company Presentation

• Premium Customer-base: The company caters to the premium customers that include both public and large private oil companies, which indicates predictable cash flows and stable income generation. We believe, as the overall economy normalizes, the energy players would continue to increase their drilling activities, which is a key positive as the company has a track record of strong operational excellence in all aspects of its businesses.

Source: Company Presentation 

• Reduction of Debt-component: The company has consistently lowered its debt components since FY15, which is a key positive, as it would lead to a lower interest expense and subsequently support the company’s profitability.

Source: Company Presentation

Q3FY20 Financial Highlights:

• PD announced its quarterly results, wherein the company posted revenue of CAD 164.822 million, reflecting a decline of 56.1% on y-o-y basis. The decline was due to a lower income from Contract Drilling Services (CAD 150.773 million versus CAD 346.443 million in Q3FY19).
• The company posted adjusted EBITDA of CAD 47.771 million, decline from CAD 97.895 million in the previous corresponding period.
• PD reported an operating loss of CAD 26.785 million, as compared to an operating income of CAD 19.235 million in pcp. The decline was due to lower revenue, while a lower operating and general & administrative expense supported the performance.
• The company’s net loss widened to CAD 28.476 million, from a net loss of CAD 3.534 million in pcp.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company’s operations are dependent on the drilling activities conducted by energy-producing companies. Due to the continuation of the low commodity prices on account of COVID-19 pandemic, most of the energy producers postponed their capital investment, which subsequently impacted the order book of the company. Continuation of the above trend would dampen the company’s future performance.

Valuation Methodology (Illustrative): Price to Cash flow based

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The price of international crude oil has appreciated from its recent lows, supported by higher demand from the manufacturing and industrial activities due to the lifting of restrictions. Continuation of the above trend would lead to higher drilling activities by most of energy producers, which is a key positive for the group. The company expects its capital spending for FY20 to be ~CAD 48 million, which constitutes CAD 30 million for sustaining, infrastructure and intangibles and CAD 18 million for upgrade and expansion. The company would leverage its Alpha technology platform, which is a competitive differentiator and source of financial returns for the company. We have valued the stock using P/CF-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry (energy) median on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 24.67 on December 16, 2020.

PD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Maverix Metals Inc.

Maverix Metals Inc. (TSX: MMX), is a Canada-based company, which focuses on providing upfront payments to mine operators in need of capital in return for a percentage of the future revenue generated from the mine (a royalty), or the right to either purchase all, or a fixed percentage of, future precious metal production for a pre-determined price (a stream).

Key highlights 

• Acquired Newmont’s Royalty Portfolio: In October 2020, the Company acquired High-Quality Gold Royalties portfolio of 11 gold royalties from Newmont Corporation for an upfront consideration of USD 75.0 million and contingent payments of up to USD 15.0 million. This Royalty Portfolio consists of gold assets located in Mexico, USA, Canada and Guatemala, ranging from in construction to exploration stage.

• Increase in cash flow from operations: In Q3 2020, the company clocked the cash flows from operations at USD 13.8 million compared to USD 6.0 million in the previous corresponding period. The increase in cash flows was mainly due to a gain on the amendment of its Beta Hunt royalty interest, ramping up the production at the Moss mine, along with a 30% increase in the average realized gold price per total attributable gold equivalent ounce sold.

• Dividend: On November 12, 2020, the Company declared a quarterly dividend of USD0.01 per common share payable on December 15, 2020 to shareholders with a record date of November 30, 2020.

• Strong Liquidity:On the back of robust operations, the Company is maintaining healthy liquidity. The Company had cash and cash equivalents of USD 28.4 million and working capital of USD 41.9 million. Along with this, the company also holds USD 85.0 million under its credit facility. 

Financial overview of Q3 2020 (in thousands of United States dollars)

Source: Company 

• The company reported record revenue of USD 14.8 million, increased by 41% in Q3 2020, as against USD 10.5 million in the previous corresponding period.

Source: Company

• In Q3 2020, the company posted a Net Income of USD 14.4 million as against USD 1.8 million in the previous corresponding period. The increase in Net Income was primarily due to a gain on the amendment of its Beta Hunt royalty interest, ramping up the production at the Moss mine along with a 30% increase in the average realized gold price per total attributable gold equivalent ounce sold. 

Risk associated with investment

The company is prone to many risks that include risks related to international operations, government and environmental regulations, delays in mine operations, actual results of mining and current exploration activities, labour disputes, and problems inherent to the marketability of gold and other metals, etc. any single or a group of these risks can affect the financials of the company. 

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company presented robust numbers in Q3 2020, where they registered a 41% of growth in its revenue and substantial growth was seen in the bottom-line. Recently the company acquired High-Quality Gold Royalties portfolio from Newmont Corporation, and we expect that this would positively impact the group’s cash flow. Further, we believe that elevated gold prices are likely to support the group’s performance. We have valued the stock using EV/SALES based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a “Speculative Buy” rating at the closing price of CAD 6.36 on December 16, 2020. For the said purpose, we have considered peers like Agnico Eagle Mines Ltd, Ely Gold Royalties Inc, Franco-Nevada Corp, etc.

1-Year Price Chart (as on December 16, 2020) Source: Refinitiv (Thomson Reuters)

Disclaimer

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