Accelerated Decarbonization And Oversupplied Rigs Will Undermine Valuation

Key Takeaways

• Accelerating energy transition and regulatory pressures are shrinking Precision Drilling's market and compressing its profitability through higher costs and reduced demand.
  
• Structural industry changes and shifting investor priorities are increasing capital costs, limiting fleet upgrades, and driving long-term valuation risks for the company.
  
• Strong rig utilization, disciplined capital management, and technological innovation are driving margin expansion, earnings stability, and diversified, resilient revenue streams for Precision Drilling.

Catalysts

A drilling company, provides onshore drilling, completion, and production services to exploration and production companies in the oil and natural gas and geothermal industries in the United States, Canada, and internationally.

• Precision Drilling's long-term revenue growth is threatened by the accelerating global transition towards renewables and persistent decarbonization policy momentum, which will shrink the addressable market for oil and gas drilling services and cause diminishing rig utilization and weaker pricing power across all operating regions.
  
• The company is increasingly exposed to rising regulatory costs and carbon price mechanisms, which are likely to add ongoing upward pressure to operating expenses and capital requirements, severely compressing net margins and reducing future cash flow available for debt paydown and shareholder returns.
  
• Precision faces a structurally declining investment environment due to the shift in investor preference towards environmentally responsible assets, raising the company's long-term cost of capital and limiting access to capital for fleet renewal or further technology upgrades, ultimately resulting in lower valuation multiples for its equity.
  
• An aging and underutilized rig fleet, combined with ongoing industry oversupply in key rig segments such as telescoping doubles, will increase upgrade and maintenance capex for Precision while eroding dayrates and margins, putting sustained downward pressure on future EBITDA and earnings per share.
  
• Persistent cyclicality and heightened price competition among oilfield service providers, along with greater capital discipline and project deferrals by exploration and production customers, will constrain Precision's revenue visibility and drive greater volatility in cash flow, endangering the company's ability to maintain recently achieved levels of leverage and capital return targets over the long term.

Precision Drilling Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Precision Drilling compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Precision Drilling's revenue will decrease by 0.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 5.7% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach CA$64.5 million (and earnings per share of CA$5.39) by about August 2028, down from CA$104.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, up from 9.6x today. This future PE is greater than the current PE for the CA Energy Services industry at 9.4x.
• Analysts expect the number of shares outstanding to decline by 6.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

Precision Drilling Future Earnings Per Share Growth

Risks

• Global energy demand growth, especially from emerging markets, remains robust, and increasing LNG export capacity and data center power demand are driving natural gas demand, which supports utilization and pricing power for Precision Drilling's rigs in key basins; this is likely to provide resilience to revenues and support top-line growth.
  
• Precision Drilling is achieving high utilization of its Super Triple and Super Single rigs in premium plays like the Montney and Canadian heavy oil, with upgrades funded by customer contracts and prepayments, which are resulting in premium day rates and significant margin expansion, thereby supporting higher net margins and earnings stability.
  
• Ongoing capital allocation discipline, with aggressive debt reduction ($525 million since 2022 and on track for $700 million by 2027) and sizable share repurchases, is improving Precision Drilling's balance sheet strength and enhancing per-share earnings, positioning the company for higher return on equity and shareholder value appreciation.
  
• Investments in automation, digitization, and proprietary Alpha™ platforms are delivering operational efficiencies and differentiated services, contributing to lower costs, improved customer retention, and sustained net margin improvement, especially as environmental regulations require advanced, lower-emission rigs.
  
• Expansion and steady contract coverage in international markets (such as long-term contracts in Kuwait and Saudi Arabia) serve to diversify revenue streams and reduce geographic and customer concentration risk, supporting consistent cash flow and earnings even during North American market downturns.

Valuation

• The assumed bearish price target for Precision Drilling is CA$77.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Precision Drilling's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$120.0, and the most bearish reporting a price target of just CA$77.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CA$1.8 billion, earnings will come to CA$64.5 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 7.8%.
• Given the current share price of CA$75.45, the bearish analyst price target of CA$77.0 is 2.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.