ATB Capital Markets’ Waqar Syed lowered his forecast for Precision Drilling Corp. on Monday, seeing its Canadian rig mix shift to lower margin heavy oil rigs with a resulting impact on quarterly margins.
Also seeing its overall rig count falling below his prior forecast, the analyst lowered his third-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) estimate by 10 per cent to $130.4-million from $144.4-million. That led to a 4-per-cent drop in his full-year 2024 projection and a 7-per-cent slid in his 2025 expectation.
“The key reasons for the earnings downgrade are as follows: (1) PD’s U.S. and Canadian rig count has been running 3 per cent to 5 per cent below the previous rig count forecast. Still, we expect PD’s Canadian rig count to increase a solid 25 per cent year-over-year, showing market share gains. (2) However, the Canadian rig count increase is coming at the cost of margins, as most of the increase is associated with heavy oil rigs, where super-single rigs and tele-double rigs operate, which carry lower drilling margins than the super-triple rigs,” he said.
“As a result, we lower our Canadian drilling margin forecast from $13,824/rig-day previously to $12,724/rig-day, while also trimming our U.S. drilling margin forecast slightly from US$10,500/rig-day to US$10,300/rig-day. These cuts have a follow-on impact on 2025/2026 EBITDA estimates also. We have also trimmed our two-year outlook for PD’s U.S. rig activity. Despite the cuts, our FCF forecast remains solid, and we project $265-million in FCF in 2024 and $240-million in 2025, equaling 21 per cent and 19 per cent of the current market capitalization. We expect PD to return 25-35 per cent of its pre-debt repayment FCF to shareholders through share buybacks.”
Maintaining an “outperform” rating for Precision Drilling, Mr. Syed lowered his target for its shares to $113 from $123. The average is currently $133.48.
“PD stock has outperformed its peers year-to-date and we maintain our positive outlook, despite the price target reduction,” he said. “PD has a robust FCF, high levels of debt paydown, and rising cash return to shareholders. We estimate FCF yield on market capitalization of 21 per cent for 2024 and 19 per cent for 2025. The Company has plans to reduce debt by $150-million to $200-million in 2024 and to allocate 25 per cent to 35 per cent of FCF before debt repayments to share repurchases. We expect the Company to further raise its shareholder capital allocation, likely reaching 50 per cent of FCF target in 2025. PD is likely to initiate a dividend in 2025 as well. We expect PD to achieve under-1.0 times net debt/EBITDA ratio by mid-year 2025, and at that stage the Company may increase it shareholder capital allocation further.