PRECISION DRILLING TRUST $28 (Toronto symbol PD.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 125.8 million; Market cap: $3.5 billion; SI Rating: Extra risk) is the largest contract driller in Canada. It operates 231 drilling rigs, 223 well servicing rigs and a rental and production services division. It also operates 14 drilling rigs in the United States, and one rig in Latin America.
In the past year, lower natural gas prices and increasing royalty payments have hurt demand for Precision’s rigs and services in its core markets in Western Canada. In the three months ended March 31, 2008, Canadian drilling rig utilization fell to 50.0% from 53.3% a year earlier, and prices fell 11%. However, that’s partly because Precision continues to avoid low-margin contracts.
Earnings in the first quarter fell 33.3%, to $0.84 a unit from $1.26. Cash flow per unit declined 66.3%, to $0.28 from $0.83, while revenue fell 16.5%, to $342.7 million from $410.5 million.
In light of slow growth in Canada, Precision is now steadily expanding its U.S. and international operations, which account for less than 10% of its revenue.
Precision now plans to move up to eight of its Canadian rigs to the U.S. in the second quarter of 2008. It is also building 19 new high-efficiency rigs. Many American operators use older equipment, so these new rigs should expand Precision’s U.S. revenue and market share.
As well, several new natural gas projects in the U.S. require modern rigs that specialize in horizontal drilling. This is a big growth area. Horizontal drilling involves drilling wells sideways or at an angle to reach isolated pockets of oil and gas, or to follow a reservoir spread out in a narrow layer. Demand for horizontal drilling is growing strongly, since it works well in situations where conventional drilling is either impossible or too costly.
Despite the weaker cash flow, Precision should be able to keep paying its monthly distributions of $0.13 a unit (5.6% yield). The units now trade at 14.0 times Precision’s likely 2008 earnings of $2.00 a unit.
Precision Drilling is a buy.
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