Precision Drilling Corp.
(PD-T, PDS-N) C$91.75 | US$67.31
PD a Top Pick on Relative Value, Inflection in U.S. Activity
Event
We are highlighting Precision's relative valuation.
Impact: NEUTRAL
Relative Valuation Compelling: Energy Services sector stocks have performed very well throughout the summer alongside recovering crude-oil and natural-gas prices. Although Precision's share price has also featured strong performance recently, we highlight that Precision currently stands out on relative valuation. As shown in Exhibit 1, we highlight that its 2023E and 2024E free-cash-flow yields of 26% and 38% are the highest in our Energy Services coverage by far and significantly exceed the coverage universe averages of 16% and 20%, respectively. We also note that Precision's 2023E and 2024E EV/EBITDAS ratios of 3.0x and 2.4x are meaningfully below its U.S. Contract Driller peer consensus averages of 4.5x and 4.7x, respectively.
Potential Reasons for the Relative Discount: We believe that Precision's high stock-based compensation announced with Q4/22 results, its relatively higher U.S. natural-gas exposure, a declining U.S. rig count, and follow-on concerns around increased price competition may have contributed to its relative discount. In our view, these concerns are not likely to reoccur (stock-based compensation) or are risks that are becoming less likely with time (negative activity/price outcomes).
Potential Inflection in U.S. Drilling Activity Beginning in Q4/23: We continue to have a high degree of confidence in our outlook and estimates for Precision. Additionally, we note that in an investor presentation filed yesterday, Patterson-UTI (PTEN-US, not covered) highlighted the potential for 4-8 of its rigs to be reactivated in Q4/23, additional rig reactivations in 2024, and with rates in the low-to-mid $30,000/ day range, directionally consistent with commentary from Precision management on its Q2/23 conference call (full report).
TD View: Based on Precision's relative valuation when compared with our Energy Services coverage universe and its U.S.-listed contract drilling peers, as well as what we expect will be continued strength in Canada, an inflection in U.S. drilling activity beginning in Q4/23, and continued strength in pricing across North America, we are highlighting Precision as a top pick for Energy Services exposure, heading into a number of North American Energy sector conferences in September.