Another upgrade CIBC’s Jamie Kubik initiated coverage of a pair of drilling stocks on Tuesday.
“With the immense earnings volatility of recent years, investing in the energy services sector has not been for the faint of heart, and the economic environment in which we find ourselves is a test of resiliency for these businesses,” he said. “Earnings volatility in the drillers can be likened to the ‘bullwhip’ effect, as the higher one moves up a supply chain, the more volatile the supply/demand swings can become. 2020 was a demonstration of this, as global crude oil and liquids demand dropped by an estimated 9 per cent, leading to a 50-per-cent contraction in annual North American rig counts.
“We expect the contraction in rig activity will continue to gradually reverse itself through 2021 and 2022, translating into increased EBITDA generation for contract drillers. We expect this environment will favor larger contractors that have diversification across key basins and carry technically advanced rig fleets that can help operators optimize capital efficiencies. We believe Ensign Energy Services and Precision Drilling both showcase the right characteristics to maintain or grow market share in North America. Due to a more attractive valuation on our forecasts, we favor Precision over Ensign, but acknowledge both of these stocks carry high earnings and share price torque towards improving fundamentals in the energy space.”
Mr. Kubik started Precision Drilling Corp. (PD-T) an “outperformer” recommendation and $45 target, versus the $30.52 average.
“We see Precision’s high-spec fleet, enhanced technology offering, and variable cost structure pushing for the company to maintain healthy EBITDA margins, and drive greater earnings power in an ascending activity environment,” he said. “Precision’s deleveraging initiatives are well under way ($550-million of $800-million in debt reduction is complete), and we believe a continued improvement in the company’s capital structure will serve to benefit the shares moving forward. We also see Precision as having ample financial flexibility over the near term, with laddered note maturities beginning in 2023.”
He gave Ensign Energy Services Inc. (ESI-T) a “neutral” rating and $1.40 target. The average is $1.12.
“We expect Ensign will look to leverage its technology offering through a shift towards performance-based contracts in key areas, which could see the company receive market share wins in the coming years,” said Mr. Kubik. “Ensign has taken numerous steps to improve its balance sheet over the last year, but our current estimates see net debt/EBITDA ratios at 6.2 times for 2021 and 4.8 times in 2022. We also regard the current valuation as relatively full compared to our forecasts, and we believe a lower expected return profile combined with added leverage warrants a neutral stance at the current time.”