Please ensure Javascript is enabled for purposes of website accessibility

This Cheap Oil Stock Generated Its First Profit in Years. Time to Buy?

By Tyler Crowe – Updated Apr 26, 2019 at 11:12AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Canadian company Precision Drilling was able to squeeze out a profit this past quarter, and it's looking to build on that success in 2019.

Considering all the bad news during the fourth quarter about U.S. producers exhausting capital spending budgets early and the Alberta government enforcing production reductions to alleviate a glut of supply, the results for rig owner Precision Drilling (PDS 1.34%) were a pleasant surprise. Not only did the company beat earnings expectations, but it also continued to deploy rigs at a time when the oil services industry is suffering. 

Let's look at the Canadian driller's most recent quarterly results to see how it was able to post its first profitable quarter in a long time and whether we can expect more of that.  

Precision Drilling: By the numbers

Metric Q4 2018 Q3 2018 Q4 2017
Revenue CA$427 million CA$382 million CA$347 million
Operating income (loss) CA$35.4 million (CA$9.7 million) (CA$18.6 million)
Net income (CA$198.3 million) (CA$30.6 million) (CA$47.0 million)
EPS (diluted) (CA$0.68) (CA$0.10) (CA$0.16)

Data source: Precision Drilling earnings release. $1 Canadian = $0.75.

Even though it says that the company lost 0.68 Canadian dollars per share this past quarter, that loss was because of a CA$200 million goodwill impairment charge. If we strip out that one-time, noncash event, Precision reported a net profit of CA$1 million. It's less than a penny per share, but it is the first time in almost five years that the company didn't end a quarter in the loss column.

Precision Drilling's operating results have always been respectable thanks to its fleet of high-specification rigs and a standardized design that makes upgrades and maintenance relatively cheap. What has kept the company from any sort of profitability lately has been its large debt load. For the quarter, it was able to reduce its debt by $74 million (that's U.S. dollars) by retiring some debt early. The company's efforts to cut its debt load in 2018 meant it spent CA$22 million less in cash interest expenses. It doesn't sound like much, but it can mean the difference between a profit and a loss right now. 

Well, so much for that

In the prior quarter, Precision Drilling was very much looking forward to closing a deal to acquire fellow Canadian rig owner Trinidad Drilling. The proposed deal was supposed to help bolster the company's rig presence in the U.S. and allow the combined company to shed several legacy rigs and focus on marketing its most technologically advanced rigs. That deal fell through, though, when oil services company Ensign Energy Services made a hostile bid and ended up as the majority shareholder, with 56% of Trinidad's shares outstanding. Precision then walked away from the deal.

a drilling rig in a snowy field.

Image source: Getty Images.

Management claimed that the deal would help Precision to bolster its finances and accelerate its debt reduction. But typically any deal requires a decent amount of cash for integration, so scuttling it may have been a blessing in disguise because management can be singularly focused on debt reduction. 

What management had to say

Even though Precision has roots as a Canadian rig company, it is making a lot of headway into the U.S. over the past few years. In the company's press release, CEO Kevin Neveu gave an update on the U.S. market and what Precision anticipates for 2019: 

In the U.S. we have 81 rigs operating, 16 more than this time last year, representing 25% year-over-year growth. While our U.S. activity is steady, our customers are still cautiously assessing 2019 spending plans. Precision has signed eight term contracts year to date, in addition to 11 in the fourth quarter of 2018, indicative of continued strength in high-spec rig demand. Over the last year we have increased our AC Super Triple 1500 rig fleet in the U.S. by five, including two rigs redeployed from Canada and three new builds largely assembled from spare components and vendor credits. Additionally, we completed 31 rig upgrades, including pad-walking systems, third mud-pump additions, and Process Automation Control upgrades. All cash deployed to mobilize, build new, and upgrade rigs was backed with take-or-pay customer contracts at leading-edge rates, and we managed these U.S. fleet enhancements with relatively modest capital spending.

PDS Chart

PDS data by YCharts.

Still burdened by debt, but getting better by the day

Precision is one of those companies that has a good operating business but is saddled with too much debt for its own good. Management has made it a clear priority to trim its debt load and is targeting paying back CA$400 million to CA$600 million between now and 2021. Doing so would certainly make this stock look attractive, especially when it has a market capitalization of only $740 million.

The challenge is that the North American land-drilling market has been incredibly volatile over the past few years, and there is no telling what can happen between now and 2021. Many things out of the company's control could prevent it from meeting those debt reduction targets and putting together a string of profitable quarters. There are some intriguing things happening at Precision Drilling right now, but it's probably still best to sit on the sidelines and watch.  

Check out the latest earnings call transcripts for companies we cover.

Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Precision Drilling Corporation Stock Quote
Precision Drilling Corporation
$59.09 (1.34%) $0.78

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.