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.

Outlook: For FY20, the Company is planning to spend CAD 48 million as capital expenditure in FY20, which includes CAD 36 million for sustaining, infrastructure and intangibles and CAD 12 million for upgrade and expansion. The group is likely to invest CAD 43 million in contract drilling services segment while remaining CAD 4 million would be allocated for the Completion and Production Services.

Q1FY20 Financial Highlights: PD declared its quarterly results, wherein the Company reported a 12.6% y-o-y slide in top-line to CAD 379.48 million, due to lower activity within the U.S. drilling and Canadian completion and production services line. Adjusted EBITDA declined 5.6% over Q1FY19 to CAD 101.90 million, as the quarter was negatively impacted by elevated restructuring charges partially offset by share-based compensation recoveries. However, EBITDA margin increased to 27% from 25% in pcp. For the first quarter of FY20, PD reported its operating earnings at CAD 22.59 million, significantly lower than CAD 62.07 million in Q1FY19. Q1FY19 earnings were higher on account of a gain on asset disposals and impairment reversal. Net loss stood at CAD 5.27 million, as compared to a profit of CAD 25.01 million in Q1FY19. During the quarter, the Company reported a capital expenditure of CAD 12 million, which includes upgradation and expansion of assets coupled with maintenance and infrastructure spending.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock corrected ~51% so far this year and currently trading due to lower drilling activity in the North American region coupled with a decline in crude oil prices due to the outbreak of COVID 19 pandemic. The group mentioned that it had not suffered a shutdown, interruption in services, or any capability reduction due to the pandemic. The group is focusing on strong free cash flow generation and targeting to reduce the debt by CAD 100 million to CAD 150 million in 2020. The group reduced its unsecured senior notes balance by CAD 41 million and repurchased and cancelled 3 million common shares for CAD 5 million. The Company has ample liquidity of with CAD 97 million in cash and available borrowing capacity under the secured credit facilities of CAD 701 million, which seems sufficient to surpass the current downturn. The group believe that once rig activity stabilizes, customers’ attention would shift back to capital efficiency and rig performance. We believe drilling activities to increase in the coming days as oil is likely to witness a gradual recovery in demand, and the oil producers would be looking for operational efficiencies. The group is well-positioned to capture those opportunities on account of its modern Super Triple rig fleet and industry-leading technology offerings. The stock is currently trading at a forward P/CF multiple of 2.1x against the industry (Oil and Gas Related Equipment and Services) average of 6.1x. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 0.87 on June 3, 2020.

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

Mullen Group Ltd.

Mullen Group Ltd. (TSX: MTL) is a Canada based Logistics Company that owns a network of independently operated businesses. The company is leading suppliers of trucking and logistics services which includes less-than-truckload, truckload, warehousing, logistics, oversized and specialized hauling transportation. A part of the operation is related to specialized equipment and services provided to the energy and utility industry.

Q1FY20 Financial Highlights: MTL declared its quarterly results, wherein, the company reported revenue of CAD 318.2 million, more or less flat as compared to CAD 319.6 million in pcp. The quarter was marked by improved performance from the company equipment, while a lower performance from the contractor equipment remained a drag. Selling and administrative expenses came in lower at CAD 40.6 million against CAD 42.3 million in pcp, due to positive variance in foreign exchange. Operating Income before depreciation and amortization (OIBDA) stood higher at CAD 45.2 million, as compared to CAD 44 million in the previous corresponding period. The increase was primarily attributable to a higher OIBDA from the Logistics & warehouse segment and improvement from Specialized & Industrial services coupled with a decline in corporate costs which was partly offset by a lower OIBDA from less -than truck segment. Adjusted net income stood marginally lower at CAD 9.5 million, as compared to CAD 10.6 million in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Cash Flow Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of MTL corrected ~33% so far this year. Amidst a tepid industrial scenario, revenue from the specialized & industrial service segment improved during the quarter, driven by strong pipeline construction activity. The group operations are diversified, and the performance of the group does not depend on one industry, and hence reduces the risk. The group’s performance was hindered by the recent downturn in the oil and gas industry along with lockdown restriction imposed by the government. The company is focusing on retaining its short-term liquidity due to lower business activities across its segments and initiated several cost-cutting strategies, and temporarily halted its dividend payment program. As the group operates in the supply chain and logistic industry, we believe the performance of the group is likely to improve as the governments are easing the lockdown restrictions and allowing industrial activities to resume. Also, opening up of economy is likely to stabilize the demand for oil, which is going to impact the group positively. We have valued the stock using Price to Cash flow based relative valuation method and have arrived at a target upside offering lower double-digit (in percentage terms). For the said purposes, we have considered industry (Oil & Gas Related Equipment & Services) average on NTM basis. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 6.15 on June 3, 2020.

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

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