Precision Drilling Trust's (NYSE:PDS) eye-popping payout has passed from this world. After February's distribution, the land driller's dividends are going the way of the dodo. Are shareholders screaming today? Heck, no.
As I recently illustrated in tabular form, business is lousy for Precision Drilling, Patterson-UTI (NASDAQ:PTEN), and their drilling brethren. Business is likely to remain lousy for the foreseeable future. Precision Drilling capitalized on the weak market early with a drawn-out takeover of Grey Wolf, which concluded in December with no shortage of confusion. Now, there's a debt load to deal with.
Rather than end up like DryShips (NASDAQ:DRYS), a bulk shipper contending with a gaping hole in its side, Precision Drilling is taking all the necessary moves to steer clear of financial distress. The February distribution itself was reduced nearly 70% from the prior monthly level. With conditions getting worse, a complete suspension of dividends is a conservative course of action.
Shareholders are taking the move in stride. It may help that all the former Grey Wolf shareholders who are still on board were never in it for the dividends anyway. Most operators in this space, from Nabors Industries (NYSE:NBR) to Helmerich & Payne (NYSE:HP), tend to retain nearly all of their earnings. This brutal leg down in the cycle helps to explain why that is.
Precision Drilling also announced today that it's issuing both more equity (in the form of additional trust units) and new senior debt. These funding sources will combine to pay off the company's takeover-related $400 million bridge loan, so there's no need to worry that it's digging itself deeper here. Quite the opposite.
Finally, if you're wondering why Precision Drilling would shell out $164 million of expansion capital in this kind of environment, I would just point out that every newbuild rig has a long-term contract in hand. Some of these will be shuffled around. EOG Resources (NYSE:EOG), for instance, is laying down half its rigs in the Bakken oil play. Still, Precision Drilling made it a point to assure everyone that these contracts will be honored. With contracts being undone offshore, that's a point worth repeating.
