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Cattle graze near a True Company oil drilling rig outside Watford.

JIM URQUHART/REUTERS

Xtreme Drilling & Coil Services Corp.

Thursday's close: $2.22, up 10 cents a share

52-week trading range: 96 cents to $3.29 a share

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Annual dividend: none

Analysts' targets: There were three buys, two holds and no sells, according to Bloomberg data. Target prices ranged from $1.90 a share as estimated by Canaccord Genuity analyst John Tasdemir to $3 share by Cormark Securities analyst Todd Garman.

Recent history: Shares of the Calgary-based contract driller for oil and gas companies have shed 31 per cent over the past year. Formerly known as Xtreme Coil Drilling Corp., the company operates a fleet of 22 drilling rigs and seven coiled tubing service units. It is mainly focused on U.S. resource plays like Eagle Ford Shale in Texas and Niobrara in Colorado, but also does business in Canada and Saudi Arabia. Xtreme Drilling's stock has struggled because the firm racked up a pile of debt after embarking on an ambitious capital expansion program, and rigs were not efficiently utilized. Its EBITDA [earnings before interest taxes depreciation and amortization] margin hit a low point of 18.5 per cent in second quarter of 2012 before rebounding to nearly 30 per cent by the end of the year. Thomas Wood, who founded the company in 2005, took over as interim chief executive officer in late 2011 following the resignation of former CEO Rod Uchytil. Because of a dramatic turnaround in financial performance since Mr. Wood took over the helm, he was appointed permanent CEO last month. In the fourth quarter of 2012, the company posted record EBITDA of $14.8-million, or a 140 per cent increase from a year earlier, on record revenue of $50.4-million. The driller will report first-quarter results on May 7.

Manager insight: Xtreme Drilling, whose shares have bounced back from just below $1 a share last fall, is a turnaround story that still has legs, says Stephen Andersons, a portfolio manager at Toronto-based Venator Capital Management Ltd.

The name came on his radar screen because he was looking for stocks trading at a deep discount to asset value. "It was trading at about 25 per cent to tangible book value [estimated at $4 a share] last fall," said Mr. Andersons, who began buying its shares last October.

"Drilling is a cyclical business," he said. "At peak cycle, they trade at 1 to 1.5 times book value. We were were buying it at 25 per cent of book value, and now it is at 50 per cent. ... This stock is worth at least $4 a share and possibly more."

The contract driller has increased operating margins through cost controls and other improvements, and "hopefully it can get to the 35 per cent range," he said. While the company reported revenue of about $85-million in 2010 and $104-million in 2011, "we expect this year it will be over $210-million," he noted.

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"You are looking at these guys who were burning cash before and increasing debt," he said. "Now they are paying down debt, increasing revenue and increasing margins. So it is a pretty good argument that there is a changing course in the company. We expect it will be reflected in the valuation over time."

Analysts are warming up to the story, Mr. Andersons said. "They [Xtreme Drilling] have two proven quarters of increasing margins and cash flow, and we expect that trend to continue. It is a turnaround story that is going to get better in our mind. ... The risk is if oil prices drop substantially, and then companies shut in production and don't drill as much."

Stock to Watch is a regular series on our Inside the Market blog that profiles companies that could make for profitable investing plays.

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