What happened
The energy sector in general had a market-beating 2021, but oil and gas rig owner Precision Drilling (PDS 1.34%) had an even better year. Its shares were up 113%, according to S&P Global Market Intelligence, while the S&P GSCI Energy Index showed a 60.7% total return for the overall sector.
The journey to that 113% gain was a wild one. At one point during the year, Precision's stock was up 199% before pulling back.
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So what
A rising tide lifts all boats, and any company in the energy industry got a huge lift this past year. Rising oil prices throughout the year motivated many oil and gas producers to increase drilling activity and, in turn, lease rigs from Precision and others.
According to the company's third-quarter earnings report, total rig utilization days were up 15.8% for the first nine months compared to the same time last year. Also, service rig operating hours were up 71% compared to the same time last year. The uptick in utilization has increased revenue and reduced net losses so far, and the expectation is that higher prices will incentivize more companies to drill.
Management also took advantage of the more favorable environment to clean up its balance sheet. In addition to paying down some of its debt, Precision Drilling also was able to refinance some near-term notes for longer-term debt at a more favorable rate. With a rather large debt load, anything that can bring down interest payments and total obligations is a welcome sign.
Image source: Getty Images.
Now what
Investing in Precision Drilling is a bet on the continued growth of the oil and gas industry in 2022 more than anything else. After years of cutting capital spending and development work, there are fewer new sources of oil and gas in the development pipeline. That, plus a return to pre-pandemic demand levels, could lead to higher oil prices and even more incentive for producers to lease rigs and drill.
Precision Drilling will certainly benefit from this situation, and the possibility of generating net income will be a welcome change after posting losses since 2015. But the biggest concerns here are the company's debt load -- still over $1.1 billion Canadian dollars ($865 million) -- and a shaky track record of generating free cash flow. While there are signs pointing in the right direction, it will take a much more favorable environment for the business to flourish.
So anyone considering an investment in Precision Drilling is betting on another year of oil price growth and the lifting tide that tends to come with it.
