Our view: PD’s stock dropped 14% seemingly on sticker shock from its stock-based comp expense and concern about soft US natural gas prices driving down industry rig activity. We acknowledge the potential for rig churn through 2023 but believe the concerns are currently overblown. US rig data shows that gas-directed super-spec rig activity has increased since October and PD recently re-contracted about half of its gas-directed rigs. We adjust our EBITDA estimates by -6%/+1% in 2023/24 and maintain our Outperform rating and $145 price target.
Key points:
Reiterating constructive view on PD shares. We remain constructive on PD shares due to: 1) strong EBITDAS margin expansion of about 425bps y/y in 2023 through re-pricing of its rig fleet at improving day rates; 2) leading Canadian market share of 31%, where industry rig counts continue to run at multi-year highs; 3) pathway to organic de-leveraging through $213MM of FCF in 2023, leading to a 1.3x net debt/EBITDA at YE23.
Recently re-contracted several US gas rigs. PD has 61 rigs running in the US with 33% drilling for gas and 88% are AC super-spec. There is concern about gas rig industry slowdown, but the data tells a different story, as high- quality rigs remain in demand: Since October 1, the gas industry rig count has increased by 15 rigs. Higher-spec AC rigs have increased by 26 while lower-spec (SCR/Mechanical) rigs have decreased by 8 rigs. Importantly, the company re-contracted 15 rigs in Q1 on 6- to 24-month terms. PD expects cash margins to approach US$14k/day in 1Q23.
Canadian rig market showing signs of life. PD currently has 78 active rigs in Canada and remains sold out of its 28 super triple rigs. On the call, PD announced a $17MM upgrade of a 1,500 horsepower rig on a 3-year contract. At a base rate of $45k/day plus add-ons, we believe a 60%+ gross margin and 15% IRR are achievable.
Debt repayment on track. PD increased its long-term debt-reduction target to $500MM (from $400MM) by 2025. In 2023, PD expects to make $150MM debt repayments and return 10–20% of its FCF to shareholders as buybacks. The plan jibes with our model, as we forecast PD to generate $213MM in FCF.
Estimate revisions. We adjust our 2023/24 EBITDA estimates by -6%/+1% to $660MM/750MM (Street $669MM/724MM). We raise our revenue per day assumptions in NAm, lower our International rig counts, and increase our corporate taxes assumption. We assume $40MM in SBC in FY23.
Maintaining Outperform rating and $145 price target. Our price target is based on 4.0x (previously 4.5x) our revised 2024E EBITDA. We lower our target multiple to reflect modestly lower FCF margins due to slightly higher capex spend and working capital build.