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 (NYSE:PDS) 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)|
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.
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.
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.