Our view: PD reported a solid quarter, with adj. EBITDA exceeding Street estimates on both revenue and margins. The stock has suffered YTD from weak sentiment with respect to the downward trajectory of US natural gas rig demand. We acknowledge the risk, but remain constructive on PD shares given forecast margin expansion, strong Canadian rig demand, and improving FCF. We adjust our EBITDAS estimates by +1/-3% in 2023/24 and maintain our Outperform rating with a $120 price target (from $130).
Key points:
Reiterating constructive view on PD shares. We remain constructive on PD shares due to: 1) strong EBITDAS margin expansion of about 630bps y/y in 2023 through re-pricing of its rig fleet at prevailing day rates; 2) leading Canadian market share, where industry rig counts continue to run at multi- year highs; 3) pathway to organic de-leveraging through $229MM of FCF in 2023E, leading to a 1.4x net debt/EBITDA at YE23E.
US market seeing some churn. PD has 57 rigs running in the US with about 34% drilling for gas, down from 62 at the start of the year. Consensus industry view sees 30-40 gas rig reductions over the course of 2023. We expect this to put a cap on leading edge rig rates as many of these rigs shift to oil basins. PD expects cash margins to hold at about US$14.2k/day in 2Q23. We expect PD to average 53 active rigs through the rest of the year.
Canadian rig market exposure is a differentiator. First quarter Industry rig counts of 220 ran at 5-year highs and PD remains sold out of its 29 super-triple rigs. We see continued strength in the second half of the year, particularly with the return of activity in Northeast BC. As noted in our recent , the Northeast BC rig count is up 11 rigs (92%) y/y. LNG Canada partners (Petronas, Shell) are currently operating 5 rigs, all PD.
Debt repayment on track. PD maintained its long-term debt-reduction target of $500MM 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 $229MM in FCF. PD's next major debt maturity is its US$361MM senior notes due 2026.
Maintaining Outperform rating with a $120 price target. Our price target is based on 4.0x (unchanged) our revised 2024E EBITDA. We see room for modest multiple expansion as PD's balance sheet improves and its Internationally diversified business provides growth optionality.