Investors are likely becoming a bit impatient with the performance of land rig companies lately. Even though improved drilling activity is doing wonders for North American oil services companies, it doesn't seem to have translated into great results for land rig driller Precision Drilling (NYSE:PDS). Is it something to do with the market, or is there something with the company specifically that has kept it from turning a profit lately?
Let's take a look at Precision's most recent results to see why the company is still posting losses even though North American shale drilling seems to be in full gear.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||CA$401 million||CA$347.2 million||CA$368.7 million|
|Operating income||CA$10.2 million||(CA$18.6 million)||(CA$12.9 million)|
|Net income||(CA$18.1 million)||(CA$47 million)||(CA$22.6 million)|
While most oil services companies will benefit from increased drilling activity in the U.S., Precision also has a sizable presence in Canada. That didn't work out quite as well for the company this past quarter as rig utilization days (a measure of fleet efficiency) in Canada declined 5% while increasing 38% in the U.S. That was to be somewhat expected, though, as the price of Canadian crude oil hasn't been growing as fast as other benchmark oil prices because of limited takeaway capacity from pipelines and rail.
Because of increased demand in the U.S., though, management has elected to increase its capital spending to upgrade and expand its fleet there. Companies that have rigs with the necessary specifications to drlll complex wells are in high demand in the U.S. even though there is a large number of available lower-specification rigs. So any additional capacity Precision can move into the U.S. market right now could potentially be absorbed quickly.
Debt reduction and improving the balance sheet is management's first strategic objective over the next few years. Unfortunately, it didn't make much progress on that front. While it did build its cash position, the company's debt load remains at CA$1.77 billion and its debt-to-EBITDA ratio is still a frightening 6.2. Management has said that it intends to retire about CA$300 million to CA$500 million over the next three to four years, but that will become more challenging if it keeps increasing its capital spending.
What management had to say
Based on the statement CEO Kevin Neveu made as part of the company's earnings press release, it looks like he is optimistic about the rest of the year:
Strengthening commodity prices and a continued focus on drilling efficiency drove strong demand for our services in the first quarter of 2018. This was most apparent in the U.S. where our rig count reached its highest level since early 2015 and where we have demonstrated three sequential quarters of improved average dayrates. As a result, our first-quarter financial performance exceeded our expectations and we continue to gain visibility on additional rig activations, rig re-deployments, upgrade opportunities and strengthening average dayrates. Our customers are clearly focused on improving their capital efficiency by utilizing the most efficient and productive drilling rig assets to reduce well costs.
Two sides of the coin
Precision Drilling is a somewhat polarizing stock. On the one hand, it does have an attractive fleet of rigs that meet today's drilling needs and a dominant position in Canada, which is a bit overlooked compared to the red-hot shale basins in the U.S. right now. On the other hand, the business is up to its waist in debt, so any profits right now get eaten up by interest payments, unfortunately.
The market for land rigs is still on the upswing, albeit at a much slower pace than what we saw a year ago. So there is some room for Precision to put more rigs in the field and generate some additional cash to accelerate this debt reduction. At the same time, though, the company is still posting losses even at this rate of North American drilling activity. That means there isn't a whole lot of margin for error with this company right now. Until we see some significant debt reduction and an increase in profitability, this may be a stock to stay away from.