For investors looking for an aggressive small-cap company that has many attractive catalysts for growth and is creating shareholder value, Trinidad Drilling (TSX: TDG ) is a growth-oriented, dividend-paying oil and gas service company based out of Calgary, Alberta on the verge of taking its business to the next level.
Trinidad Drilling is a provider of reliable, expertly designed oil and gas drilling equipment operated by well-trained personnel. The company's drilling fleet is one of the most adaptable, technologically advanced and competitive in the onshore drilling industry. With 149 rigs in total and 116 of them being 10 years old or less Trinidad Drilling has one of the youngest fleets in the business.
Over the past couple of years, the oil and gas equipment service industry has evolved rapidly. With the introduction of new fracking techniques, horizontal drilling, increased safety regulations, and domestic demand showing no signs of slowing down, energy service companies with the financial leverage to make quick adaptations and possess technologically advanced, cost efficient deep drilling rigs are the companies that will do well in this energy cycle.
A focus on deep drilling
To capitalize on the growing demand for oil and gas services, the Trinidad Drilling management team has streamlined their assets to focus on the deep drilling market. Currently, 87% of Trinidad Drilling's rigs have the ability to drill wells deeper than 6,000 feet or more while 77% of the company's total rigs are considered "high performance." These high performance rigs have increased maneuverability, upgraded safety features and integrated control systems that provide the drillers with real-time graphic information designed to improve efficiency and increase safety.
According to Kootenay Capital fund manager Chris Theal, well licenses are up around 70% year over year for the deeper 5,000 meter wells, making it important to have exposure to the drillers with Tier 1, high-horsepower rigs specializing in deep drilling.
Because of Trinidad's fleet of high-performance rigs, opportunities in Northern B.C. Canada have become available. Apache Energy (NYSE: APA ) and Chevron (NYSE: CVX ) , which are 50/50% owners of the Kitimat LNG plant, the Pacific Trail Pipeline and 644,000 acres of undeveloped land in the Horn River and Liard basins, have recently signed a five-year, take-or-pay contract with Trinidad Drilling. As Chevron Canada (which will operate the LNG plant and the pipeline while Apache Canada will operate the upstream assets) is looking to expand on its long-standing relationships in key Asian markets, the need for some of the most advanced and reliable drilling equipment in the business is there. To meet these needs it contracted Trinidad Drilling to build a new rig designed to drill natural gas in the Laird Basin. Chevron, Apache, and Trinidad anticipate that this rig will be one of Canada's largest, most reliable, and most technologically advanced land rigs. Construction of the rig is expected to be completed in Q3 of 2014.
In coordination with management's plan to focus on the deep drilling market,Trinidad sold its coring and pre-set rigs to Alken Basin Drilling for $12 million. In a recent interview, CEO Lyle Whitmarsh stated, "Our growth over the past few years has largely been through adding deep, technically advanced drilling rigs and we have developed a reputation as an industry leader in this area." He further states, "Our decision to sell our coring and pre-set rigs reflects our strategy to focus on the deep, modern contract drilling market where returns are generally stronger and where we see opportunities for future growth."
As Trinidad has a reputation for selling off its assets that do not fit within the company's current plans, management has used cash gained from these sales to purchase new assets, upgrade their existing assets and pay down company debt. In the recent sale of their coring and pre-set rigs to Alken Basin Drilling, Trinidad announced that it would use this $12 million to purchase assets that fit within the company's plans and to pay off debt to aid in the company's goal of achieving a total debt/adjusted EBITDA ratio to 1.50.
This goal is designed to improve flexibility and increase leverage. The reduction of debt will give management increased leverage, thus allowing the company to capitalize on opportunities as they appear. As you can see by the chart below management has been successful in reducing this ratio. Based on future projections, management expects to reach this goal in 2014.
Joint venture with Halliburton
On September 3, management signed a joint venture with Halliburton (NYSE: HAL ) . This joint venture will increase revenues from markets outside the U.S. and Canada and will enable Trinidad to have access to more than 20 different countries through Halliburton. Trinidad will be the majority shareholder in the venture with 60% ownership, while Halliburton will own the other 40%. Each party will contribute to future capital projects in their respective proportions.
Currently, both respective companies seem satisfied with the venture, but it does have its restrictions. It is set up so that either party may exit after five years, or earlier under certain circumstances. In a recent statement Trinidad's CEO stated, "We see this agreement as a significant milestone for Trinidad in international markets. By aligning ourselves with a major oilfield services company, such as Halliburton, we are able to open the doors to a new level of international growth. Trinidad will benefit from Halliburton's international operating experience and infrastructure and will gain access to the integrated project management market. In return, we can provide Halliburton with high-performance drilling services and strong operating performance that will enhance their ability to win future integrated projects."
As Trinidad's management team has set the company up to increase earnings through new international markets, increase cash flow and leverage through the reduction of debt, and increase the customer base and demand through high-performance, efficient, safety based equipment and personal, 2014 looks to be a breakout year for Trinidad Drilling.
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