Demand for rigs in North America is still growing, but that growth rate has slowed down significantly since the first half of the year. That means rig companies like Precision Drilling (NYSE: PDS) have to fight tooth and nail for additional work and contracts. Based on the company's most recent results, which were better than expected, it looks like it is making progress. Here's a look at Precision Drilling's third quarter.
Continue Reading Below
By the numbers
|Metric||Q3 2017||Q2 2017||Q3 2016|
|Revenue||CA$314.5 million||CA$275.5 million||CA$213.7 million|
|Operating income||(CA$17.31 million)||(CA$39.28 million)||(CA$55.59 million)|
|Net income||(CA$26.29 million)||(CA$36.13 million)||(CA$47.34 million|
|Diluted earnings per share||(CA$0.09)||(CA$0.12)||(CA$0.16)|
Thanks to higher drilling activity in the U.S. and Canada, Precision Drilling posted a smaller-than-expected loss for the third quarter. The company ended the quarter with a total active-rig count of 118 compared to 67 this time last year. That still puts Precision's utilization rate at 46%. That isn't great, but it is a heck of a lot better than the prior year's numbers.
The reason that a near-doubling in active rigs didn't translate into a similar increase in revenue is the rate for most of those rigs declined significantly. This time last year, a much more significant portion of its deployed fleet was under longer-term contracts that had more favorable revenue rates. As those rigs have rolled off contract, more producers are taking new rigs on a spot-pricing basis that typically leads to lower prices. This time last year, the average rig revenue in Canada and the U.S. was CA$21,046 and CA$24,343 per day, respectively. Today, those same rigs earn CA$19,980 and CA$19,026 per day, respectively.
One thing that is unique about the Canadian oil and gas industry is that it is highly seasonal, with most activity occurring in the winter months. Management anticipates that as companies mobilize rigs before the winter months, Precision will see an uptick in activity there.
Continue Reading Below
With more rigs in the field, Precision's fixed costs per rig have declined, which has increased its operating margin for the quarter. That led to the company generating $CA56.7 million in cash from operations, which was more than enough to cover capital spending and allowed the company to build up some cash on the balance sheet. Over the past year, management has used available cash to pay down debt.
What management had to say
As part of his press statement, CEO Kevin Neveu discussed why Precision is well-positioned in the current oil-price market:
Despite commodity price volatility and lower than anticipated WTI [West Texas Intermediate crude oil] and Canadian AECO [natural gas benchmark] prices during the third quarter, demand and pricing for Precision's Super Series rigs remained firm through the quarter. We anticipate demand to further strengthen as our customers initiate their 2018 drilling programs.
As our customers across the U.S. and Canada have learned to operate in a "lower for longer" commodity price environment, they have focused on drilling and completion efficiency utilizing long or extended-reach horizontal wells and adopted large-scale industrialization techniques, such as multi-well pads and high efficiency rig systems. Precision's Super Triple rigs are configured to optimize long reach drilling performance combined with pad walking capability, and are active in virtually every resource play in North America.
What a Fool believes
Even though the company is still posting losses, there are some signs that Precision's business is improving. The company's utilization rate is growing, and the company is taking market share in an environment of flat rig counts. Also, those losses are mostly non-cash expenses, and Precision is still generating free cash flow to improve its balance sheet. It may not be out of the woods yet, but at least the company is headed in the right direction.
10 stocks we like better than Precision Drilling Trust
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Precision Drilling Trust wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of October 9, 2017