Precision Drilling Corp.
Wednesday’s TSX close: 6.97, down 5 cents, or 0.7 per cent
52-trading range: $5.76 - $12.72 a share
Annual dividend: none
Analysts’ ratings: There were 16 buys, 4 holds and 2 sells, according to Bloomberg data. Target prices range from $8.00 to $12.50 a share
Recent history: Shares of Canada’s largest oil and gas driller have lost 34 per cent of their value this year amid falling drilling activity and weaker commodities prices. Precision Drilling missed analysts’ expectations last month when it reported a 53-per-cent drop in third-quarter profit, but the fourth quarter is a seasonally stronger period. The company, which converted to a corporation from an income trust in 2010, has seen its stock plunge from a high of $40 in 2005. The Calgary-based driller suspended its distribution in 2009, and has not instituted a dividend since.
Outlook: Precision Drilling’s battered stock, which has risen slightly from its 52-week low in June, has been attracting investors looking for bargains. “The stock is very cheap,” said Michael Simpson, a portfolio manager at Sentry Investments and who has owned its shares for a couple of months. “There could be tax-loss selling [that could affect it price], but over the short term it is forming a bottom.”
The driller is compelling because the value of its equipment on the balance sheet is more than $12 a share, and yet its stock trades at under $7, he said. “Its shares are also trading at about 3.5 times forward cash flow. Over the next 18 months, I think its stock can go to $10 or $10.50 a share...You don’t need much of a recovery of natural gas or drilling prices [to get the stock to move], and the company continues to pay down debt.”
At a time when the oil services sector is out of favour, the company has been quietly telling analysts that it is considering a dividend or a share buyback, Mr. Simpson said. He is betting on a dividend within the next 12 to 18 months as part of his rationale for buying the driller’s shares.
“They could pay a small dividend of 15 to 20 cents a year,” he said. “The company has a history of paying a dividend as an income trust, and it generates a lot of free cash flow so there is not reason why it can’t. It has been reinvesting in new equipment.”
Precision Drilling’s management, which has been marketing the company to institutional investors, is scheduled to make a presentation at the Dahlman Rose & Co. Ultimate Oil Services and E&P Conference next Tuesday in New York. The broker has a “buy” rating on the stock. “If there is positive news out of a conference, that should do well for the stock,” Mr. Simpson said. “But a lot depends on the sentiment of investors.”