Rig Upgrades In North America Will Boost Automated Drilling Efficiency

Key Takeaways

• Investments in automation, digitalization, and emissions reduction position the company for margin growth and competitive differentiation amid rising high-spec rig demand.
  
• Strengthened presence in key gas basins and ongoing deleveraging support stable future earnings and increase flexibility for shareholder returns.
  
• Ongoing pricing pressure, high capital needs, and limited international diversification heighten earnings volatility and risk amid exposure to North American market cycles and elevated debt costs.

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.

• Recent and anticipated increases in customer demand for rig upgrades-driven by the longer-term need for high-spec and automated drilling to efficiently access unconventional resources-signal sustainable growth in both average day rates and rig utilization, supporting revenue growth and potential margin expansion.
  
• Precision Drilling's growing presence in key North American natural gas basins (Montney, Haynesville, Marcellus) and the positive outlook from LNG Canada Phase 1 start-up and data center-fueled gas demand reinforce a resilient foundation for long-term drilling activity, enhancing visibility into future earnings.
  
• Expansion of the upgrade program, including investments in digitalization, automation (Alpha rigs), and emissions-reducing EverGreen solutions-enabled by direct customer funding and premium pricing-should continue to drive higher margins and create near-term differentiation, also positioning the company to capitalize on the trend towards lower-emission drilling.
  
• Ongoing deleveraging, with debt reduction ahead of schedule and a normalized leverage target under 1x by 2027, strengthens net income and increases flexibility for future capital returns to shareholders via buybacks or dividends.
  
• Accelerating industry shift toward scale, well-matched operator-service provider partnerships, and technology-driven operational efficiency are expected to drive pricing power and stability for sector leaders like Precision Drilling, supporting longer-term revenue consistency and margin resilience.

Precision Drilling Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Precision Drilling's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 6.7% in 3 years time.
• Analysts expect earnings to reach CA$127.6 million (and earnings per share of CA$10.78) by about August 2028, up from CA$104.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$171 million in earnings, and the most bearish expecting CA$62 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, which is the same as it is today today. This future PE is lower than the current PE for the CA Energy Services industry at 9.8x.
• 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 7.86%, as per the Simply Wall St company report.

Precision Drilling Future Earnings Per Share Growth

Risks

• Persistent oversupply and undisciplined pricing in the Canadian telescoping double rig segment-where Precision is unable to influence industry consolidation-continues to drive pricing competition and cyclically low day rates, risking revenue and margin compression for a significant portion of the Canadian fleet.
  
• Capital expenditure requirements are rising, with the 2025 plan revised up to $240 million to fund rig upgrades and expansion projects; if customer-funded upgrades and contract coverage decline or new investments fail to deliver sufficient returns, net margins and free cash flow could be pressured long term.
  
• Despite recent improved demand, the company's growth in the U.S. hinges largely on activity from private operators and the natural gas market, which remains highly cyclical and exposed to swings in gas and oil prices-introducing revenue and earnings volatility if commodity prices decline or customer drilling appetites shift.
  
• International growth remains limited: rig activity outside North America continues to operate at modest levels (just seven rigs this quarter), so the company's heavy reliance on Canadian and U.S. markets exposes it to regional cyclicality and potential market shrinkage, affecting revenue consistency.
  
• Rising interest expense due to a still-elevated debt position ($644 million, 6.9% average cost), combined with ongoing refinancing needs, increases sensitivity to financial market conditions and potential downturns-posing risk to earnings and constraining capital returns to shareholders if not addressed further.

Valuation

• The analysts have a consensus price target of CA$96.75 for Precision Drilling based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.9 billion, earnings will come to CA$127.6 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of CA$74.92, the analyst price target of CA$96.75 is 22.6% higher.
  
• 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.