The Stock That Burned Me: Precision Drilling

Worldwide Invest Better Day 9/25/2012

In the run-up to the Fool's Worldwide Invest Better Day on Sept. 25, you're going to see a lot of good investment advice from a wide range of experienced investors. But, one thing I've found is that you often learn more lessons from the mistakes you make than you do from the successes you have.

That's why in my effort to try and help you become a better investor, I'm not going to tell you the biggest winner I ever bought, or the investments that I've held over the years that have given me slow but steady gains. Rather, I'm going to share one of my most embarrassing experiences as an investor, in the hope that you can avoid the same fate with your investments.

Looking for a gusher
The story begins in 2006 with a stock called Precision Drilling (NYSE: PDS  ) . At the time, the big boom in oil and gas production that we've seen blossom over the past several years had just started, and investors were still figuring out the lay of the land. With its emphasis on the Western Canada Sedimentary Basin and its rich reserves of conventional oil and gas as well as oil sands and coal bed methane, Precision Drilling looked to be on the cutting edge of a promising trend.

Two other things were attractive about Precision Drilling. First, its share price had dropped considerably from its summer highs, making me think the stock was cheap. At the same time, as a royalty trust, Precision Drilling had a huge dividend yield around 10%, making it a cash cow as well. That was enough to make me buy.

What went wrong
Unfortunately, soon after I bought the stock, Precision Drilling got some bad news. As part of a tax reform package, the Canadian government had decided to eliminate special royalty-trust status. As a result, Precision Drilling, along with Penn West Energy (NYSE: PWE  ) , Enerplus Resources (NYSE: ERF  ) , Pengrowth Energy (NYSE: PGH  ) , and a host of other trusts, would have to give up its favorable tax treatment within five years. In what Fool analyst Christopher Barker would later refer to as the "Halloween Massacre," Precision Drilling's shares plunged along with its peers.

Then, Precision Drilling got more bad news as production levels started to drop. Because royalty trust payouts are based on income, the dividend that Precision Drilling paid got cut by more than half in just six months.

At that point, my original investing thesis was totally shot. Favorable tax status was doomed to extinction, and dividend income was no longer reliable. The appropriate thing to do would have been to sell immediately. Yet, it wasn't until much later that I finally got out, taking a big loss on the stock.

What I learned
As promising as Precision Drilling was, I made several mistakes with it. First, I never wrote out a clear explanation of why I'd bought the stock or what I expected from the company. When bad times came, that lack of preparation left me unprepared to deal with the consequences.

Second, when the price suddenly dropped, I was reluctant to sell. I wanted to earn those losses back and believed that the market would bounce back. Yet even as oil and gas prices continued to rise, Precision Drilling didn't participate in the rally that other stocks saw. That should've been a warning sign in itself, but it only made me more tenacious.

Last, given how key a role dividends had in my purchase decision, the dividend cut should have been an unequivocal sign to get out. Instead, I changed my view, thinking that a lower dividend would help the company. That may have been true, but it was contrary to my original thinking, and all it did was allow me to justify holding on when I shouldn't have.

You won't always avoid stocks burning you. But, by writing out the reasons for buying and not letting emotions guide your subsequent decisions, you'll be able to handle problems a lot more effectively.

Please stay tuned throughout the month for other informative articles covering a wide range of important topics. Let me also encourage you to take a look at the special website we've set up at InvestBetterDay.com. On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Take a look at the site now and get on the path to personal prosperity.

If you like energy stocks, we've got an idea you really should take a look at. Find out why this company is "The Only Energy Stock You'll Ever Need" in the Motley Fool's popular free report. Click here for the inside scoop while it lasts.

Fool contributor Dan Caplinger works harder not to get burned now. You can follow him on Twitter @DanCaplinger. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Precision Drilling. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is like aloe on a sunburn.


Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 13, 2012, at 12:44 PM, hofmanjim wrote:

    Honestly, you guys seem to have some terrible advice. Years ago you touted CYTR and it has gone to the birds and reverse split.

    Pengrowth, is a great stock. You should have dollar cost averaged out your loss. You dont lose if you dont sell. Just find a solid company with solid business. Stop trying to short pos this play. You are an idiot for doing it. WInter is on the way.

  • Report this Comment On September 13, 2012, at 2:08 PM, ngass wrote:

    Dear fool comrade. Why do you tell a 5 year old story now?Is there an ulterior motive?

    After you sold, the share price of PDS went up close to $30 in Sept. 2008 . You could have bought back PDS for close to $2 in Spring 2009 to reover your losses. It seems that had no patience.

    Very strange indeed. On 28 July 2012 you were fond of PDS and 5 weeks later you try to down it.

    http://www.fool.com/investing/general/2012/07/27/orange-port...

  • Report this Comment On September 13, 2012, at 7:19 PM, dieseljack wrote:

    PDS is a "seasonal " stock. You buy it in late summer or fall and sell before the snow melts

  • Report this Comment On September 13, 2012, at 11:20 PM, 2motley4words wrote:

    Well, Dan, it seems that there are also lessons to be derived from the comments to your article---specifically, that your respondents (1) have 20/20 hindsight and (2) have never made an investing mistake.

  • Report this Comment On September 14, 2012, at 10:07 AM, doyle4210 wrote:

    Your article was useful to me. I own PDS and have from time to time been tempted to unload it. We all make mistakes but few like to publically admit it even if it well help others. Bravo to you for your courage.

  • Report this Comment On September 14, 2012, at 2:23 PM, Ideafixxx wrote:

    It looks like the author never understood what Precision Drilling´s business was/is.

    They DRILL, they didn´t and DO NOT have reserves or production levels that could drop or go higher.

    Precision Drilling Corporation provides contract drilling, and completion and production services to oil and natural gas exploration and production companies. Its Contract Drilling Services segment offers land drilling, directional drilling, and turnkey drilling services; trucking services for the movement of precision rigs; and procures and distributes oilfield supplies, as well as manufactures and refurbishes drilling and service rig equipments. As of December 31, 2011, this segment operated 188 land drilling rigs in Canada, 143 land drilling rigs in the United States, 3 land drilling rigs in Saudi Arabia, 2 land drilling rigs in Mexico, and 1 land drilling rig in Colombia. The company’s Completion and Production Services segment offers service rigs for well completion and workover services; snubbing services; camp and catering services; and wastewater treatment services, as well as is involved in the rental of oilfield surface equipment, tubulars, well control equipment, wellsite accommodations, and drilling camps. As of December 31, 2011, this segment operated 189 well completion and workover service rigs and 17 snubbing units in Canada; 1 snubbing unit in the United States; 232 wellsite accommodation units in Canada; 28 wellsite accommodation units in the United States; 86 small-flow wastewater treatment units, 4 large-flow wastewater treatment units, and 3 potable water production units in Canada; 56 drilling camps and 2 base camps in Canada; and 4 drilling camps in the United States, as well as provided approximately 11,100 oilfield rental items, including well control equipment, surface equipment and specialty tubulars in Canada. Precision Drilling Corporation was founded in 1951 and is headquartered in Calgary, Canada.

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