Remain Solid And Tepid U.S. Outlook Remains
Our Conclusion
Excluding stock-based compensation, headline adjusted EBITDA was ahead
of expectations. Overall margins were better than our expectations, including
C&P EBITDA topping our estimates by 17%. Precision’s Canadian market
share remains robust, with 10 more rigs operating currently than a year ago,
however, the company’s U.S. outlook remains tepid. We expect U.S. rig
activity is likely to slowly ascend into 2025 with natural gas directed drilling
activity likely to modestly increase. The stock should continue to benefit from
high rig utilization in Canada, which is supportive for EBITDA generation. We
have fine-tuned our model on the back of this update, which drives a slight
increase to our EBITDA expectations for 2024. The stock trades at 2024E
EV/EBITDA of 3.5x and a free cash flow yield of ~24%. We maintain our
Outperformer rating and $130 price target.
Key Points
Q1/24 EBITDA came in slightly ahead of expectations. Q1/24 EBITDA of
$166MM (pre stock based compensation of $23MM) topped our estimate
$151MM and consensus of $151MM. Capital spending of $56MM was below
our estimate of $80MM and ahead of consensus of $52MM. The company
currently has 48 rigs running in Canada, which is 10 additional rigs compared
to last year due to year-round pad drilling and heavy oil programs.
Canadian field margins were in line with our expectations, and the
segment should remain highly utilized for the balance of the year. In
Canada, there were 73 active rigs versus our estimate of 72. The company
reported field margins of $15,637/day, which was just shy of our expectations
of $15,980/day.
U.S. field margins topped our estimates, with indication that H2/24
demand should increase. In the U.S., there were 38 active rigs versus our
estimate of 38. The company reported field margins of US$11,148/day,
which was ahead of our expectations of US$10,050/day. Precision currently
has 39 rigs operating in the U.S. versus our prior Q2/24 estimate of 41 rigs.
The company cited weak natural gas prices and pending M&A transactions
as short-term headwinds, which it believes could improve later in 2024.
Deleveraging remains the top priority in the short-term, however the
prospect of accelerating return of cash flow to shareholders over the
medium term remains intriguing. Precision generated $10MM in free cash
flow in Q1/24 and repurchased $10MM in shares under its NCIB. On our
revised estimates, we see the company generating ~$300MM in free cash
flow in 2024, with $200MM being used for debt repayment and the remaining
~$100MM being available for share repurchases