Precision Drilling Corp.
(PD-T, PDS-N) C$93.93 | US$68.63
Updating Estimates Following CWC Transaction Announcement
Event
We are updating our estimates following a discussion with management.
Impact: POSITIVE
Transaction Details: Precision announced that it will acquire CWC Energy Services (CWC-T, not covered) for a 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 seven AC Triples. The strategic rationale for the transaction revolves around further consolidation around the Canadian service-rig industry and seven AC Triples that are currently operating and can be upgraded to Precision's higher spec over time. We discuss the transaction rationale and valuation metrics in more detail on page 2. 81% of CWC shareholders have agreed to vote in favour of the transaction, which is expected to close in Q4/23.
2023 Leverage Target: Precision remains committed to its 2023 total debt-reduction target of $150.0 million. However, a $53 million cash outflow associated with this transaction and one-time transaction costs make this target more challenging, and will likely require some working-capital management, or indicate that our forecast is more conservative than management's internal expectations.
Estimate Changes: Our 2024 EBITDAS estimate increases by 8% (or $50.3 million) that contemplates CWC's TTM EBITDAS of $42.4 million, as well as partial synergy capture (guidance: $20.0 million). We will contemplate proceeds from redundant real estate when announced (guidance: $20.0 million). Our 2023 estimates do not change materially, as we have been conservative in terms of the timing of transaction close.
TD Investment Conclusion
This transaction checks all the boxes for us (strategic/accretive) and despite volatile commodity prices and the recent reduction in the U.S. rig count, contract drillers remain disciplined in terms of how they price their services, with a focus on generating stronger returns and not only on competing for utilization. With continued strength in pricing and U.S. demand for high-specification drilling rigs expected to return in the near term, we highlighted Precision as a top pick earlier this week (full report), which we reiterate today. In this context, we are maintaining our BUY rating, while increasing our target price to $130.00 (from $125.00 previously).