Jennings Capital-TID TUSCANY INTERNATIONAL DRILLING INC. Previous 12-Month Target: C$1.40
(TSX-TID C
.36) Risk Rating: ABOVE AVERAGE
Q2/12 RESULTS - MISS ON LOWER UTILIZATION AND MARGINS; TRIMMING FORECASTS AND PRICE TARGET
Q2/12 RESULTS SUMMARY:
? EBITDA of US$17.0 million was below JCI estimate of US$20.6 million (and Bloomberg consensus of US$19.6 million), attributable to lower margins and utilization when compared to our estimates.
? EBITDA margin of 20% vs. JCI estimate of 22%.
? G&A (excluding stock-based compensation) was 11% of revenue, in line with our estimate.
? Revenue per day was US$32,618 vs. JCI estimate of US$32,656.
Utilization: During Q2/12, utilization was 79% for the 37 rigs available versus JCI estimate of 84%.
? HRT provided Tuscany with a notice of termination for Rigs 115 and 116. This is a significant loss for Tuscany as the rigs commanded premium day rates (exceeded $40k/day). Tuscany has entered into negotiations with HRT for settlement; however, the rigs have already ceased drilling operations and are actively being marketed.
? Signed an LOI to operate one rig in Uganda.
? Two Trinidad rigs discontinued operations (as previously disclosed by Parex Resources); one has an LOI to operate in Brazil; the other rig is being marketed.
? The Company indicated that utilization in Colombia was weak in Q2/12; however, tenders have been increasing and utilization is expected to increase through the back half of Q3 and Q4/12.
Changes to our estimates: We have decreased our forecasts to reflect weaker market conditions and removed the two Brazil HRT rigs from our 2012 forecasts (Exhibit 2).
Conclusion: In the short-term, we continue to expect volatility and overhanging weakness in the stock, given overall macro concerns in addition to the termination of the HRT rig contracts. Although, longer-term, the shares at current levels remain compelling as a value play, given that they are currently trading at 0.4x their NTBV and 4.0x and 2.6x their 2012 and 2013 EV/EBITDA, respectively. The group is trading at 4.0x and 3.4x its 2012 and 2013 EV/EBITDA, respectively. The next two quarters will be important to watch, specifically regarding Tuscany’s ability to secure new rig contracts as well as an update for Rigs 115 and 116.
We rate Tuscany a BUY with a revised 12-month target of C$1.00/share based on a 5.0x EV/EBITDA (13) multiple.
Rig Activity
? Tuscany signed an LOI with a large oil company to operate one rig in Uganda.
? Two rigs in Trinidad discontinued operations (Previously disclosed by Parex Resources). One of the rigs has entered into an LOI to operate in Brazil, and the other rig is being actively marketed.
? On June 23, 2012, HRT provided Tuscany with a notice of termination for Rigs 115 and 116 on the original 4-year contracts (entered into service contract October 2010 and rental agreement May 2011) citing unsatisfactory safety and performance rates. Tuscany denies these claims.
o Tuscany is entering into good faith negotiations with HRT, with the first meeting to commence on August 14, 2012.
o If no settlement is reached, Tuscany may seek to enforce its remedies related to early termination which are:
? $10 million fee per rental contract if new rental contracts are not secured within 60 days.
? Demobilization fees of $650,000 per rig.
? Demobilization, transportation and mobilization rates applicable during the required 60-day prior notice period.
o The rigs have been demobilized and are actively being marketed.
Key Highlights
? Q2/12 EBITDA was US$17.0 million versus our estimate of US$20.6 million.
o The primary reason for the EBITDA miss was lower than expected utilization and margins.
? At June 30, 2012, Tuscany had cash and cash equivalents of US$15.6 million, long-term debt of US$161.9 million (net of financing fees), and working capital of US$16.8 million.
Changes to our Estimates
? We have decreased our utilization and margin forecasts due to increased uncertainty present in the current commodity markets and the recent pullback of capital budgets for E&P companies operating in Tuscany’s areas of operation.
? In addition, we have removed the contracts for Rig 115 and 116 for the remainder of 2012 and have not assumed collection of the break fee. We will monitor the situation and look to adjust our estimates once further clarity is provided.
GLTA-PT2