Precision Drilling Corp T.PD

TD

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Looking for more than a double. GLTA

Precision Drilling Corp.

(PD-T, PDS-N) C$57.16 | US$42.07

Activity Update

Event

Precision provided an activity update.

Impact: NEUTRAL

Recommendation: BUY

Risk: HIGH

12-Month Target Price: C$130.00

12-Month Dividend (Est.): C$0.00

12-Month Total Return: 127.4%

• Canada: Precision expects Q2/23 will average 42 rigs (+13% year-over-year), with 46 rigs currently active, and guidance for 60 rigs exiting the quarter. Our current forecast contemplates 39 active rigs. On the Q1/23 conference call, management suggested that year-to-date activity was trending 15% above the prior year and expected this trend to continue. To date, wildfires have had a modest impact.

• United States: Precision expects Q2/23 will average 50 rigs, with 50 rigs currently active, and an expectation that activity may further soften in the coming weeks. This compares to management's Q1/23 conference call commentary that it would "sustain activity levels in at least the low-50s". Our current forecast contemplates 53 active rigs. In the press release, Precision sets an expectation for a resumption in activity growth in H2/23 alongside recent customer contract wins.

  TD View: With Q2/23 Canadian activity above our expectations and U.S. activity below, we view the differences as offsetting and will refine our estimates at the next available opportunity. Our Q2/23 EBTIDAS estimate of $123.4 million is not materially different from consensus of $122.2 million. Additionally, our estimates already contemplate further U.S. activity level declines in Q3/23, and view the differences in our H2/23 estimates and the updated expectations above as limited. In our view, a critical omission in the press release is leading-edge U.S. pricing, in light of the disclosures that Precision is signing new contracts. Based on conference call commentary from Precision and its peers, we expect that dayrates will remain strong as the top five North American drillers prioritize price over utilization in the near-term. Precision's share price has declined 45% year-to-date and 56% from its 52-week high due to a combination of reduced commodity prices and higher- than-expected stock-based compensation charges disclosed with Q4/22 results. Precision is currently trading at 2023E and 2024E EV/EBITDAS multiples of 2.5x and 2.0x, implying that investors are currently pricing in further deterioration to Precision's outlook. Precision remains a top pick and an ideal candidate, in our view, for investors positioning for a recovery in near-term Energy sector sentiment.