Haynesville, Marcellus And Montney Will Fuel Future Operations

Key Takeaways

• U.S. activity growth and increased rig utilization should enhance revenue and operating margins through operational restructuring and efficiency improvements.
  
• Canadian division benefits from stable rig demand and cost reductions, while debt reduction efforts aim to improve financial leverage and reduce interest expenses.
  
• Declining revenues, high operational costs, and international activity reductions pose significant challenges to Precision Drilling's future earnings growth and market development.

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 is expecting an increase in activity in the U.S., primarily in gas basins like the Haynesville and Marcellus, which should drive revenue growth as they mobilize additional rigs in 2025.
  
• They are restructuring operations in the U.S. to enhance customer relationships and focus on performance, which should lead to better utilization rates and improved operating margins in the future.
  
• Long-term stability and potential for additional rig demand in Canada’s Montney region, driven by LNG Canada's operations and developments, are expected to support robust revenue streams in the Canadian division.
  
• Planned cost reductions and efficiency improvements, particularly in U.S. operating costs, are likely to enhance net margins as per rig fixed costs decrease with anticipated higher activity levels.
  
• Commitment to reducing net debt by $100 million in 2025 and a significant portion of their revolving credit facility before its 2027 maturity should improve their financial leverage and strengthen earnings by reducing interest expenses.

Precision Drilling Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Precision Drilling's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.8% today to 8.9% in 3 years time.
• Analysts expect earnings to reach CA$169.8 million (and earnings per share of CA$11.95) by about May 2028, up from CA$109.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, up from 7.4x today. This future PE is greater than the current PE for the CA Energy Services industry at 7.8x.
• Analysts expect the number of shares outstanding to decline by 6.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.84%, as per the Simply Wall St company report.

Precision Drilling Future Earnings Per Share Growth

Risks

• Precision Drilling experienced a 6% revenue decrease from Q1 2024, which suggests challenges in maintaining or growing future revenues.
  
• Daily operating margins in the U.S. decreased significantly, with expected normalization at lower levels, potentially impacting net margins negatively if costs remain high.
  
• The U.S. drilling activity decline and high daily operating costs due to rig activations and mobilizations indicate potential erosion in net earnings if not effectively managed in future periods.
  
• International rig activity decreased, with lower average day rates and rig suspensions in Saudi Arabia, which could impact future revenue streams and earnings stability from international operations.
  
• The exit from the North Dakota market due to competition and low returns may limit revenue growth and reflects challenges in market penetration and expansion in certain service lines.

Valuation

• The analysts have a consensus price target of CA$94.875 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$124.0, and the most bearish reporting a price target of just CA$69.0.
  
• 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$169.8 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of CA$60.05, the analyst price target of CA$94.88 is 36.7% 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.