AKITA DRILLING LTD.
Wednesday’s close: $11.90 a share
52-week trading range: $9.66 to $12 a share
Annual dividend: 32 cents for a yield of 2.7 per cent
Analysts’ ratings: There is one buy and one hold rating, according to Bloomberg data. Target prices ranged from $13 a share by BMO Nesbitt Burns analyst Michael Mazar to $16 by AltaCorp Capital analyst Dana Benner.
Recent history: The A shares of the oil and gas drilling contractor have gained nearly 24 per cent (including dividends) over the past year as earnings have continued to beat analysts’ expectations. On Tuesday, the stock hit a 52-week intraday high of $12 a share. Akita, which was spun out from Atco Ltd. in 1993, is controlled by Calgary’s Southern family, which owns most voting B shares and 30 per cent of the non-voting A shares. The company, whose activities are focused on Western and Northern Canada, owns 39 rigs. That number includes 16 pad rigs, which are more mobile and can drill multiple wells that are close to each other. When Akita reported first-quarter results recently, it said it was bidding on the construction of several new custom rigs, and raised its quarterly dividend by 14.3 per cent to 8 cents a share.
Manager insight: Akita shares could get a nice bump if it wins some long-term pad-drilling contracts tied to British Columbia’s proposed liquefied natural gas (LNG) projects, says Don Walker, a portfolio manager with Hesperian Capital Management Ltd.
To get these rigs built or retrofitted for drilling early next year, the contracts would likely have to come within the next couple of months, said Mr. Walker, whose firm bought Akita shares about a year ago. The company, he noted, has indicated only that it is bidding on between three and eight pad-drilling contracts.
Most of the contracts will focus on drilling “basically along the corridor of northeast British Columbia and northwest Alberta – either in the Horn River, Liard Basin or Duvernay plays,” he said.
Pad rigs are typically used in more unconventional deep gas plays, and fetch contracts lasting three or more years. Contracts for conventional drilling rigs are typically for shorter terms.
The most talked-about contracts for pad drilling are those for Apache Corp., a partner of Chevron Corp. on its proposed Kitimat LNG project, he said. “I believe it is about three rigs they are now looking for. They are $35- to $45-million new-build rigs, and come with a four- to five-year contract. When Kitimat gets built, Apache could be running more than 10 rigs to supply the needs of the Kitimat facility.”
Other work could come from Malaysian state-owned energy firm Petronas, which completed a $6-billion takeover last year of Progress Energy Resources Corp. Petronas plans to build an LNG export terminal near Prince Rupert, B.C.
Akita is well-positioned to win some contracts because of its safety record and experience in pad drilling, Mr. Walker said. “They have 41 per cent of their rig fleet that is directed towards pad drilling, whereas the industry probably has about 5 per cent devoted to this niche.”
Some energy service companies often take on a lot of debt in the boom times and “built like crazy,” but Akita has always been run conservatively with a long-term outlook, he said. “They basically have had no debt since 2005 [that is, with cash greater than the debt], and no net debt since 2001.... They have also had a dividend since 1996, and have never decreased it.”
Any news of contract wins should move Akita’s stock higher, and allow the company to issue equity to help fund the building of these custom pad rigs, he said. “They are pretty debt averse.”
Akita now trades inexpensively at about 7.6 times forecast 2014 earnings versus 9.6 times for Precision Drilling Corp. and 11.9 times for Ensign Energy Services Inc., he said. “If this is the early days of an LNG build-out, I think Akita will benefit from this.”
While there is always the risk that Akita might not get the LNG-related contracts, earnings are still expected to rise to $1.56 a share in 2014, versus $1.36 a share this year just from more drilling activity by Petronas and other players in Western Canada, Mr. Walker said.