Precision Drilling Corp T.PD

RBC

[retiredcf]

February 6, 2024

Precision Drilling Corporation
4Q23 - Strong results; sees continued margin expansion

TSX: PD | CAD 79.87 | Outperform | Price Target CAD 122.00

Sentiment: Positive

Our view: We have a positive view of PD’s 4Q23 results. Adj. EBITDA (before SBC) came in 6/10% ahead of RBC/Street expectations and the company sees increased Y/Y debt repayment of $150-200MM while allocating a larger portion of its FCF to share buybacks (25-35%). PD has also set a marker for its longer-term shareholder return aspirations, expecting to return 50% of FCF. PD is the second highest performing stock in our coverage YTD (+11%); however, its undemanding FY24e EV/EBITDA valuation (3.3x vs. peers at 4.5x) and continued strong FCF generation, should lead the stock to outperform land drilling peers in today’s trading in our view.

• Adj. EBITDAS 6%/10% above Street/RBC estimates. Adj. EBITDAS of $164MM (inc. $6MM transaction costs, RBC $4MM) was 6%/10% ($9MM/$of 32.3% versus Street/RBC 31.6%/30.7%. PD expects to spend capex of $195MM in FY24 (RBC: $225MM).

Increased long-term debt reduction and capital return priorities. In 2024, PD expects to reduce debt by $150-200MM and  allocate 25-35% of FCF to share repurchases. The company has increased its long-term debt reduction target to $600MM ($500MM prior) from 2022-2026. The company targets a long-term net debt/EBITDA target of 1.0x and moving toward returning  50% of FCF to shareholders.

Canada and International strength offsetting US softness. PD expects demand for its services to remain strong throughout FY24, despite recent softness in US activity where the company expects activity to pick up in 2Q24 and beyond if commodity prices remain stable. Its super-triple fleet remains highly utilized in Canada, with the company recently adding another super-triple rig in Canada under a three-year contract bringing its total super-triple Canadian fleet to 30. The company expects to continue to improve its adjusted EBITDA margins supported by strong demand for its super-triple Canadian fleet that is expected to drive higher day rates and daily operating margins for the fleet. It's international active rig count should also increase to 8 (+40% y/ y) as the company activated its eighth rig in November 2023.