Precision Drilling Corporation

Precision Drilling Corporation (TSX: PD) is a leading North American oil and gas services provider, which also operates in contract drilling activities. The company is a market leader in the contract drilling segment. The group marked its presence in the United States through the acquisition of Grey Wolf.

Q2FY20 Financial Updates: PD announced its second quarter results, wherein the company posted revenue of CAD 189.759 million, reflecting a fall of CAD 47.2% on y-o-y basis. The decline in revenue was primarily attributable to a lower activity across all operating segments. Industry drilling activity recorded a steep decline during the quarter, as most of the customers deferred their drilling programs in order to preserve liquidity during the current challenging environment. Further, the quarter reported an improved revenue from contract cancellation fees, idle but contracted rigs and turnkey drilling from the U.S. segment. Adjusted EBITDA was down to CAD 58.465 million, as compared to CAD 81.037 million in the previous corresponding period (pcp). General and administrative expenses stood at CAD 18 million, depicting a decline of CAD 8 million from the previous corresponding quarter as the company has lowered its overhead costs in order to align with the current business activities. The company’s net loss widened to CAD 48.867 million, against CAD 13.801 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: Continuation of capital investment programs deferral by the oil and natural gas companies would dampen the overall order book of the company.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Due to the current economic jolt, most of the drilling players witnessed an erosion in the order book due to temporary cancellation of orders, and the stock of PD witnessed a sharp correction of ~48% so far this year. The company took prudent measures and implemented structural cost reduction initiatives, which is expected to result in an additional cost savings of CAD 14 million on an annualized basis, this augurs well for the preservation of liquidity and margins. Further, wage subsidies from the Canadian Government would reduce the company’s costs. The second quarter was marked by improved field margins across the U.S. aided by tightly managed expenses and strong contract book performance, amidst a tepid macro environment, which is encouraging. We believe, the trend is likely to accelerate in the coming days as the Oil industry is likely to return to normalcy with the gradual recovery in demand. Through the adaptation of digital solutions, the company seeks exceptional field results, driving strong customer interest and field adoption, which is a key positive. In Canada, Precision achieved 36% market share during the second quarter driven by our Super Triple rig fleet, which is well-positioned for pad style development drilling activity in the Montney and Duvernay. The group expect its six rigs under long-term contract in Kuwait and the Kingdom of Saudi Arabia to remain stable sources of revenue. The stock appreciated 20% in the last three months, as the economy is trending to a gradual recovery. We have valued the stock using Price to CF based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like Ensign Energy Services Inc, Patterson-UTI Energy Inc etc. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating at the closing market price of CAD 0.93 on September 02, 2020.

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

Tidewater Midstream and Infrastructure Ltd.

Tidewater Midstream and Infrastructure Ltd. (TSX: TWM) operates in natural gas processing, NGL extraction, gas storage, crude oil and NGL terminalling infrastructure, refining operations and marketing to end-use markets through transmission pipelines, trucking and rail systems. The operations are in three core areas in the Western Canadian Sedimentary Basin (Deep Basin, Montney and Edmonton) as well as in central British Columbia.

Q2FY20 Financial Highlights: Tidewater declared its quarterly results, wherein the company posted revenue of CAD 178.568 million, as compared to CAD 155.311 million in the previous corresponding period (pcp). The increase was driven by the positive impact of the recent acquisition. Meanwhile, the performance was interrupted by the pandemic, which resulted in lower demand for refined products combined with a sharp decrease in crude oil prices at the start of the quarter. Adjusted EBITDA soared to CAD 41.873 million, against CAD 21.786 million in the previous corresponding quarter, driven by the acquisition of the Prince George Refinery coupled with the commissioning of the Pipestone Gas Plant. The company reported a net loss of CAD 0.311 million, as compared to a net loss of CAD 4.086 million in pcp.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks: The income of the company is directly proportionate to the commodity price of crude oil and natural gas, and a price volatility in the international markets would dampen the company’s income and cashflows.

Valuation Methodology: EV to EBITDA Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of TWM corrected ~31% so far this year, due to a steep correction in the crude oil prices due to oversupply and lower demand constraints. The management expects performance in the second half of FY20 to improve as demand within the facilities, including PGR, has shown sign of improvement. During the month of May 2020, the Company witnessed a surge in the volume and saw stability in commodity prices coupled with improved demand in the refined products.  The management expects its FY20 Adjusted EBITDA, in between CAD 175 million to CAD 185 million, which is impressive. The group debottlenecked various processing units at PGR. As a result, PGR is seeing record throughput at over 12,000 bbls/day and combined gasoline and diesel production of over 10,500 bbls/day. The Pipestone Gas Plant had its strongest run times and cash flow generation to date in the second quarter, and the group expects this to continue throughout the remainder of 2020. The facility remains fully contracted. The Company continued to distribute dividend during the challenging times, which indicates higher financial flexibility. At the last traded price, the stock was offering a dividend yield of ~4.94%, which is lucrative looking at the current interest rate scenario. The stock appreciated ~12% in the last three months, as the commodity prices improved from the recent lows. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like AltaGas Ltd, Secure Energy Services Inc. etc. Hence considering the current price movement, we recommend a ‘Speculative Buy’ rating at the closing market price of CAD 0.81 on September 02, 2020.

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

Disclaimer

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