A Painful Placement at Precision Drilling

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Well, do you want the good news or the bad news about the second-biggest land driller in North America?

On a day like today, with companies including Rowan Companies (NYSE: RDC), Helix Energy Solutions (NYSE: HLX), and Complete Production Services (NYSE: CPX) all down double digits, maybe we should start with the good news.

Here it is: Precision Drilling Trust (NYSE: PDS) is finally on firm financial footing.

But not everything is rosy. After landing its prey (U.S.-based driller Grey Wolf) -- and ratcheting up its debt level in the process -- Precision pretty much immediately began to suffer along with an imploding market for drilling activity. 

In its takeover, the firm employed a bridge loan priced at a punitive 17% interest rate, and has had difficulty replacing the unsecured facility with more attractive financing. The debt offering proposed in tandem with February's dashed dividend and share issuance was later scrapped.

Precision has secured 10% debt financing with an eight-year maturity from an institutional investor called AIMCo. That will go part of the way toward paying off the $235 million in bridge loans. The painful part comes with the equity component of this deal.

AIMCo is getting 35 million units (Precision is an income trust, hence units instead of shares), priced at $3 Canadian each. That was the going market price about a month ago when this deal was being hammered out, but it's now a near-40% discount to Friday's close. So much for catching a break from the recent equity rally. AIMCo is also picking up cheap five-year warrants, which will require Precision to further dilute the share count somewhere down the road.

So that's the bad news. When this deal closes, you'll own less of Precision than you did the day before. That's the trade-off with this sort of deal: You get a better-financed firm with a diluted equity stake. Investors in the real estate investment trust space have been cheering such moves by Simon Property Group (NYSE: SPG) and Kimco (NYSE: KIM). It's hard to separate Precision's share price response from the broader sector sell-off, but it is rebounding pretty soundly off its early morning lows. I probably have to agree that the bad news isn't so bad after all.