PRECISION DRILLING CORP. $6.85 (Toronto symbol PD; Aggressive Growth Portfolio, Resource sector; Shares outstanding: 276.3 million; Market cap: $1.9 billion; Price-to-sales ratio: 0.9; No dividends paid since February 2009; TSINetwork Rating: Extra Risk; www.precisiondrilling.com) provides contract-drilling services to land-based oil and gas producers in Canada, the U.S. and Mexico. It had 344 rigs in service as of March 31, 2012.
The stock is down 45.6% from its recent peak of $12.60 in March 2012. That’s due to fears that falling oil and natural gas prices will hurt demand for Precision’s rigs. However, the company operates under long-term contracts that help shield it from volatile oil and gas prices. It has 122 rigs under contract in 2012 and 79 in 2013.
Precision can also conserve cash by putting off building new rigs if demand weakens. That’s why it recently cut its 2012 capital expenditures to $975 million from its earlier forecast of $1.1 billion.
Meanwhile, the company earned $111.1 million, or $0.39 a share, in the first quarter of 2012. That’s up 69.4% from $65.6 million, or $0.23 a share, a year earlier. Revenue rose 21.8%, to $640.1 million from $525.4 million. Cash flow per share rose 28.7%, to $0.86 from $0.67.
Drilling activity picked up in the U.S., and Precision raised its rates. That helped offset lower demand for rigs in Canada, where warmer-thanusual weather delayed the start of the winter drilling season.
The company’s long-term debt of $1.2 billion is a high 63% of its market cap. However, it does not have to pay back these loans until 2019. It also holds cash of $369.6 million, or $1.34 a share.
The stock is riskier than our more conservative resource-sector recommendations, such as Imperial Oil and Suncor Energy. However, Precision is a leader in its field, and it trades at a low 6.2 times the $1.11 a share that it will likely earn in 2012.
Precision Drilling is a buy.
