TD THESIS LARGELY UNCHANGED WITH Q1/24 RESULTS
THE TD COWEN INSIGHT
Management remains confident in its guidance for a strong Canadian outlook despite several near-term challenges (drought/fire conditions, natural gas prices). In the U.S., neither Precision nor several of its competitors see a path to a near-term increase in the rig count. This is consistent with our outlook, although near-term Canadian activity and U.S. margins are modestly better than expected.
Event: We are updating our estimates following management's conference call, and we are maintaining both our BUY rating and $115.00/share target price.
Impact: NEUTRAL
Q1/24 Results: Precision reported Q1/24 EBITDAS of $165.8 million, 8.5% and 9.7% above our estimate of $152.5 million and consensus of $151.2 million, respectively. The key driver of the beat was U.S. gross margins of US$11,148/day, down modestly from the prior quarter of ~US$11,800/day, but well above guidance of US$8,000-10,000/day, and our estimate of US$9,550/day. Higher utilization in Canadian drilling and its Completions & Production segment also contributed to the beat. Details on page 4.
Conference Call Takeaways:
Canadian Outlook: Margins of $13,000-$14,000/day in Q2/24 with the rig count to reach 65 by the end of June and 70 by mid summer driven by strong demand for super singles targeting heavy oil as TMX comes on line. Management believes that tailwinds from LNG Canada could result in two to three rigs being mobilized from the U.S. to Canada in 2025. If this occurs, customer's will be required to cover move and recertification costs.
U.S. Outlook: Margins to exceed US$10,000/day in Q2/24 with the rig count to remain in the 40s for the remainder of the year.
International Tenders: Precision remains actively engaged in rig tenders that could be awarded in the near-term and deployed by year-end or early next year. Reactivation costs would be $6.0 million to $12.0 million.
Shareholder Returns: In 2024, Precision will return 25% to 35% of free-cash-flow before debt reduction to shareholders, and expects the ratio to be higher in 2025, topping out at 50% once it reaches a ND/EBITDAS target of 1.0x. Precision defines free-cash-flow as EBITDAS less interest and capital spending.
Estimate Changes: Our updated estimates contemplate Q1/24 actual results, and the margin and activity guidance noted. As a result, our 2024 and 2025 EBITDAS estimates both increase by 3%.