Rates Our Conclusion
Precision reported a strong quarter with adjusted EBITDA that was ahead of
expectations. Better-than-expected day rates in the U.S. and Canada were
the primary contributors to the beat versus our estimates. Although we would
not be surprised to see natural gas completion activity remain subdued
through Q3/24, we maintain a positive outlook on Canadian activity for the
balance of the year and into 2025. We also expect a gradual ascent in U.S.
drilling activity is likely as we move into 2025, particularly in dry gas basins,
which we believe will benefit Precision. We have increased our day rate
expectations for Canada over the balance of the year and into 2025, which
increases our forward adjusted EBITDA estimates. We increase our price
target to $140/sh from $130/sh prior as a result of the increased EBITDA
expectations and continue to see attractive upside potential in the shares.
The stock currently trades at 2.8x 2025E EV/EBITDA versus U.S. peers at
3.6x and Canadian peers at 2.5x.
Key Points
Q2/24 EBITDA topped expectations. Precision reported Q2/24 adjusted
EBITDA of $125MM (prior to share-based compensation of $10MM) which
was ahead of our estimate of $116MM and Street at $108MM. Capital
spending of $38MM came in below our estimate of $50MM and consensus of
$44MM.
Canadian field margins were ahead of our expectations, and we expect
margins should remain strong in H2/24. In Canada there were 49 active
rigs versus our estimate of 51. Precision reported field margins of
$14,423/day versus our estimate of $13,530/day. Precision is currently
running 74 rigs, and we would note that PD operated 73 rigs in Q1/24. Given
the current activity levels, we would then expect Q3/24 margins are likely to
remain strong.
U.S. field margins were ahead of our expectations, although we expect
Q3/24 margins could be relatively flat. In the U.S., there were 36 active
rigs versus our estimate of 36. Precision reported field margins of
US$10,800/day versus our prior estimate of US$10,400/day. In the U.S.,
Precision is currently running 38 rigs, with management indicating it expects
Q3/24 activity to be stable to Q2 levels. Based on commentary from other
drilling contractors, we believe U.S. margins are likely to remain flat or
potentially decline in H2/24.
Potential for increasing shareholder returns in 2025 appears likely.
Precision generated $73MM of free cash flow during the quarter prior to
working capital release and asset sales ($147MM inclusive), of which
$102MM was directed towards debt reduction. On our revised estimates we
see the company generating $166MM in free cash flow through H2/24, which
would allow Precision to meet the upper end of its debt reduction target and
continue to repurchase shares through its NCIB.