Our view: PD announced the $141MM cash and stock acquisition of CWC Energy Services while reiterating its plan to reduce debt by $500MM between 2022-2025; thus, we view the transaction as a step toward achieving its current strategy as opposed to a pivot. The deal is accretive to our 2024 CFPS and EPS estimates and we reiterate our Outperform rating with a $125 price target ($118 prior).
Key points:
Acquisition of CWC. PD will pay $14MM cash plus 0.948MM shares, plus the assumption of CWC's debt of ~$40MM, for a total consideration of approximately $141MM, or a blended implied offer price of $0.197 per CWC share. PD expects the deal to close in 4Q23 and sees $20MM of annual synergies post-closing, which we believe are primarily (~75%) G&A-weighted. The 0.948MM shares issued represent about 5-6 days of Precision's daily trading volume and will go to two main holders of CWC.
Adding scale at a reasonable price. Netting off about $57MM for the service rig business, we estimate PD has paid approximately $5MM per working drilling rig. This is well below new build cost plus PD has not added additional market capacity. The acquired rigs are primarily not super spec rigs, which has likely been reflected in the price, but may compete for additional capital in a higher-demand environment. We believe improving OFS valuations should unlock additional consolidation across the sector.
What does PD get? CWC is a contract drilling and well servicing company operating in Canada and the US. The company has 62 marketed service rigs, seven marketed drilling rigs in Canada, along with 11 marketed drilling rigs in the U.S, including seven AC triple rigs. CWC currently has three and seven actively working rigs for customers in Canada and the US, respectively. US rigs are currently working in the Rockies basins for private E&Ps.
PD debt reduction strategy remains intact. Based on our estimates we see the deal adding $42MM of EBITDA post synergies in FY24. We assume a mid 4Q23 closing date. The transaction also aligns with PD's debt reduction target of $500MM by 2025. We estimate that PD's net debt will be reduced by $149/324MM in 2023/24, with the transaction 7% accretive on CFPS in FY24.
Maintaining Outperform rating with a $125 price target ($118 prior). Our price target is based on a rounded 4.5x our revised 2024E EBITDA. We see room for modest multiple expansion from current levels as PD's balance sheet improves and its Internationally diversified business provides growth optionality.