Precision Drilling is precisely undervalued
Stock price will rise as debt falls
Precision Drilling (PD.TO) is one of Canada’s largest drilling contractors, operating not only in Canada but also in United States and overseas. The company should generate about CAD$300 million a year in cash flow in 2022 and has maintenance capital outlays of CAD$160 million more or less, leaving about CAD$140 million for debt reduction. Precision planned to retire CAD$75 million in debt in 2022 but recently reported it had repaid over CAD$100 million.
As at September 30, 2022 PD.TO had long term debt of CAD$1.24 billion. Recent new contracts for its high technology rigs suggests the company can generate CAD$400 to CAD$600 million in cash flow (Q3 2022 cash flow was ~CAD$120 million) and accelerate its debt repayment. Precision trades at an enterprise value of CAD$2.6 billion and, with only 15 million shares issued and outstanding, every $100 million of debt repaid adds ~CAD$7 a share to equity.
PD.TO shares are currently trading at around CAD$100 a share. I expect to see the company’s debt fall by CAD$200 million a year in 2023 and perhaps a bit more in 2024, increasing equity by about CAD$50 to CAD$60 a share. TD Waterhouse has a CAD$145 “target” on the shares (whatever “target” means) and BMO has “target” of CAD$175 per share. I value the shares at about CAD$130, a reflection of my concern that the debt level remains a risk should drilling markets shrink during an expected recession.
I would like to see Precision issue about 5 million treasury shares at around $100 a share which would make the debt level inconsequential. If the shares outstanding rose to 20 million and the enterprise value remained at or near it current $2.6 billion, the shares would very likely trade in the $130 range or higher with a lower risk profile and less income squandered on interest payments.
This is the point in time where the directors of Precision should consider such an issue. If they are overly concerned about dilution to existing shareholders, a rights issue on a one for three basis would protect the current shareholders and the company would emerge stronger and well positioned for a necessary recovery in worldwide oil drilling as jurisdictions begin to recognize that the global energy shortage can only be resolved with higher oil output.
I own 1,000 shares. I would support a rights issue and buy more.