Precision Drilling Corp.
(PD-T, PDS-N) C$91.37 | US$67.05
Precision Announces Acquisition of CWC Event
Precision announced that it will acquire CWC Energy Services (CWC-T, not covered) for total consideration of $141.0 million including $88.0 million (or 947,909) in Precision shares, $14.0 million in cash, and the assumption of $39 million in debt. The transaction will add 62 service rigs, and 18 drilling rigs, including 7 AC Triples. 81% of CWC shareholders have agreed to vote in favor of the transaction which is expected to close in Q4/23.
Impact: POSITIVE
Transaction Rationale: In our view, the strategic rationale for the transaction revolves around the continued consolidation of the Canadian service rig industry. Preicision's service rig count increases to 181 (119 previously), with market share moving to 25% from 16%. The Canadian service rig business is highly fragmented with low barriers to entry. However, Precision has leveraged its scale advantage to generate strong free-cash-flow in this business, including the successful acquisition of High Arctic's service rig assets in 2022 (research: HWO Acquisition, Q3/22 First Look). The other major strategic focus of the transaction is the seven AC triples, all of which appear to be working currently and were acquired by CWC in 2021 in what appears to be a distressed transaction during the depths fo the COVID-19 pandemic (press release). At least five of the seven AC Triples appear to have decent components (1200-1500 hp with 7500 psi circulating systems), but it is unclear if (or at what cost) Precision can add its control system (NOV Amphion/NOVOS) to these assets, or what other upgrades may be necessary.
Valuation Metrics: The transaction implies a 3.3x EV/EBITDAS multiple on a trailing 12-month basis (CWC does not have analyst estimates), that decreases to 1.9x if you assume that Precision can execute on its guidance to extract $20.0 million of synergies and monetize $20.0 million in redundant real estate. Precision trades at 2023E/2024E EV/EBITDAS ratios 3.0x/2.4x, respectively, and we expect that the transaction will be accretive.
TD View: This transaction checks all the boxes for us (strategic/accretive) and note that we highlighted Precision as a top pick earlier this week (full report), which we reiterate today.