Our view: PD's strong 2Q23 results were underpinned by strong results in its Canadian division and higher average revenue from contract rollover in the USA. While 3Q22 will see a step-down in PD's US rig count, we believe the narrative has shifted toward US market stability, complemented by upward results in International and Canadian divisions. We adjust our EBITDAS estimates by 6/3% in 2023/24 and maintain our Outperform rating with a $118 price target (from $100).
Key points:
Reiterating constructive view on PD shares. We remain constructive on PD shares due to: 1) Leading Canadian market share, where stronger rig demand has led to utilization and pricing improvements; 2) 27% y/y International revenue growth in 2H23, underpinned by 8 rigs on long-term contracts; 3) Pathway to organic de-leveraging through $223MM of FCF in 2023E, leading to a 1.5x net debt/EBITDA at YE23E.
US market finding support. The US land rig count has decreased by 113 (15%) since YE22. PD has experienced a decline in activity with 43 rigs currently running (plus 2 on idle-but-contracted), down from 60 at 4Q22. We see PD generating $362MM GM in FY23 with 50 active rigs, versus $267MM in FY22 with 56 active rigs. The y/y growth is a testament to increased rig market discipline, which we believe was underappreciated in early 2023, as the rig market was facing the prospect of a 100+ reduction in rig counts.
Canadian rig market exposure is a differentiator. PD remains sold out of its super-triple rigs and pad super-single rigs in Canada, with 58 rigs currently running. We expect PD to generate $281MM of gross margin in Canada versus $206MM in FY22. As noted in our recent Canadian Trend Tracker, LNG Canada partners (Petronas, Shell) are currently operating 5 rigs, all PD.
Debt repayment on track. In 2023, PD expects to make $150MM debt repayments and return 10–20% of its FCF to shareholders as buybacks. The company has repaid $100MM and used $13MM on its NCIB YTD. The plan jibes with our model, as we forecast PD to generate $223MM in FCF. PD's next major debt maturity is its US$361MM senior notes due 2026.
Estimate revisions. We adjust our 2023/24 EBITDAS estimates by 6/3% to $644/638MM (Street $636/645MM). We raise our Canadian rig margins and near-term US revenue. Our numbers are based on a 1.32 CAD/USD. Our FY25 Revenue/EBITDAS are $2,037/690MM. See Exhibit 1 for details.
Maintaining Outperform rating with a $118 price target ($100 prior). Our price target is based on a rounded 4.5x (prev. 4x) our revised 2024E EBITDA. We see room for modest multiple expansion from current levels as PD's balance sheet improves and its Internationally diversified business provides growth optionality.