US Gas Basins And LNG Canada Will Drive High-Efficiency Drilling

Key Takeaways

• Precision is poised for above-peer growth and utilization due to strong customer demand, technological upgrades, and superior operator relationships in both the U.S. and Canada.
  
• Demand for high-spec, lower-emission rigs and global supply constraints position Precision for premium pricing, robust margins, and enduring long-term earnings strength.
  
• Long-term growth and profitability are challenged by declining oil demand, rising costs, customer concentration, and structural overcapacity in the drilling industry.

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.

• Analysts broadly agree that U.S. activity should climb in gas basins, but Precision is positioned to outpace consensus rig additions, as accelerated customer demand, upgrades, and enhanced operator relationships suggest the company could quickly reach its upper target of 45 active rigs, driving a step-change in both revenue and operating leverage.
  
• The analyst consensus sees growth in Canada's Montney and with LNG Canada, but Precision is primed for year-round, near-100% Super Triple fleet utilization and the potential import of rigs from the U.S., indicating possible sustained revenue and margin outperformance far above current forecasts as Canadian operators ramp for long-duration LNG supply contracts.
  
• Surging operator preference for high-specification, emissions-reducing rigs and digital automation aligns with rising environmental standards globally, enabling Precision to command premium day rates, sustain utilization above peers, and structurally increase net margins as customers pay up for lower-carbon, higher-efficiency drilling solutions.
  
• Precision's rapid deployment of capital into rig upgrades, backed by customer prefunding and short payback periods, creates a self-reinforcing cycle of superior returns and fleet competitiveness, immediately boosting EBITDA and driving faster revenue growth than the industry average.
  
• Global underinvestment in new oil and gas supply is tightening commodity markets, and with Precision's unique scale, geographic diversity (including Middle East operations), and strong contract renewals, the company is positioned to seize structurally higher long-term demand, supporting robust earnings compounding through multiple industry cycles.

Precision Drilling Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Precision Drilling compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Precision Drilling's revenue will grow by 1.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.7% today to 9.1% in 3 years time.
• The bullish analysts expect earnings to reach CA$177.8 million (and earnings per share of CA$14.55) by about August 2028, up 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 bullish analyst cohort, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 9.5x today. This future PE is lower than the current PE for the CA Energy Services industry at 9.7x.
• 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

• Precision Drilling faces long-term structural headwinds from the global energy transition as increasing deployment of renewables and decarbonization strategies diminish oil and gas demand, which over time is likely to shrink the company's core drilling services market and pressure future revenue growth.
  
• Ongoing and potentially tightening regulatory and climate policy risks, such as carbon pricing, emission limits, and environmental scrutiny, may drive up compliance and operating costs, negatively impacting future net margins and overall profitability for the company.
  
• High capital expenditure requirements for rig upgrades, maintenance, and expansion-compounded by risks of underutilized assets if market conditions deteriorate-could increase depreciation and result in lower net margins and return on capital in the long run.
  
• Customer concentration remains a risk, as Precision Drilling depends heavily on a limited number of large E&P clients; loss or renegotiation of major contracts could lead to abrupt declines in revenues and less predictable earnings.
  
• Efficiency gains in drilling technology, industry-wide rig oversupply in specific segments, and increased in-house drilling by major oil companies threaten to structurally reduce the number of active rigs required, further weakening long-term utilization rates and depressing revenue and earnings potential.

Valuation

• The assumed bullish price target for Precision Drilling is CA$119.48, which represents two standard deviations above the consensus price target of CA$96.75. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be CA$2.0 billion, earnings will come to CA$177.8 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 7.9%.
• Given the current share price of CA$74.92, the bullish analyst price target of CA$119.48 is 37.3% 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.