We are updating our estimates following management's conference call.
Impact: POSITIVE
Q2/23 Results: Precision reported Q2/23 EBITDAS of $144.8 million, 21% above our estimate of $120.0 million. Operationally, we view the quarter as a beat. Details on Page 2.
Conference Call Takeaways:
Q3/23 Margin Guidance and U.S. Activity Outlook: For Q3/23, management is guiding to US$15,000/day gross margins in the U.S. and a $500/day sequential increase (~$12,700/day) in margins in Canada. Currently, PD has 43 active rigs in the U.S., and management believes activity levels could decline further before ramping back up again in Q4/23.
Excess Demand for AC Triples in Canada: Precision estimates that the Canadian market was short five to seven super-triple rigs last winter in light of the BC government/BRFN settlement, TMX, and LNG Canada. Management is asking Canadian E&Ps for contracted day-rates in the upper 30s and to cover mobilization costs in order to move a rig to Canada.
Contracting Activity Details: Management has contracted rigs under take-or-pay with contract terms in the 12-month range on average with leading-edge all-in rig pricing approaching ~$40,000/day.
Estimate Changes: Our updated estimates contemplate Q2/23 actual results and the margin guidance noted above. As a result, our 2023 and 2024 EBITDAS estimates increase by 10% and 11%, respectively. See Page 3 for details.
TD Investment Conclusion
Despite volatile commodity prices and the recent reduction in the U.S. rig count, which we expect will reach trough levels in the coming weeks, contract drillers remain disciplined in terms of how it prices its services with a focus on generating stronger returns and not only competing for utilization. With continued strength in pricing and demand for high-specification drilling rigs expected to return, we believe Precision's H2/23 and 2024 outlook will not be as challenging as previously feared. In this context, we are increasing our target price to $125.00/share ($105.00 previously) and maintaining our BUY rating.