Please ensure Javascript is enabled for purposes of website accessibility

Precision Drilling Overcomes a Challenging Rig Market to Surge 30.8% in March

By Tyler Crowe - Apr 6, 2016 at 8:15AM

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

The decline of active rigs should lead to Precision's shares declining, but they shot up 30% in March instead.

Image source: Precision Drilling investor presentation.

What: Shares of Precision Drilling (PDS 2.35%) saw a robust gain of 30.8% in March, flying in the face of conventional wisdom that said the company should have declined as active rigs in the U.S. and Canada continue to drop and its credit rating was downgraded by Moody's.

So what: You have to imagine that investors are looking for any sign of good news to send energy stocks higher. It looks as though they got it last month with oil and gas prices ticking up. Because, other than a bit of oil price relief, all signs pointed to Precision having a miserable month. For the 16th straight month, total active rigs in the U.S. and Canada have fallen, and the reduced capital budgets of producers don't suggest they are headed out to hire new rigs anytime soon. 

US Rig Count Chart

U.S. Rig Count data by YCharts.

While the credit downgrade could sting the company in the future if there is need for financing, this is less of an issue today. It has more than $445 million of cash on hand, generated about $500 million in operational cash flow in 2015, and only has about $200 million in capital expenditures slated for 2016. As long as it stays the course, this credit downgrade is more of a bad headline rather than a fundamental game changer for the company.

Now what: Precision drilling has some things going for it in comparison to its peers. Canadian drilling activity still remains seasonal because of harsh weather conditions, and the drilling season for Canadian producers is just getting started. At the same time, Precision is also looking to expand its footprint in the Middle East as it is bringing more rigs to Kuwait in 2017. Also, Precision's financial situation is in much better shape than that of some of its peers. 

At the same time, this past month's price spike seems a bit premature. Chances are, there are still several more months of low drilling activity across North America to go, and Wall Street's bullish stance today could go away pretty quick if oil and gas prices were to head down again. There is some value in Precision's shares today as the company is trading for about 80% of tangible book value, but looking longer term, there are companies in the rig space that have posted stronger returns over the long run that are also trading for cheap. 

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
$77.92 (2.35%) $1.79
Moody's Corporation Stock Quote
Moody's Corporation
$299.44 (2.55%) $7.45

*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 service.

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 05/26/2022.

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.