EUR 850.00 For Business Accounts Only

Morningstar | Outlook for U.S.-focused Land Drillers Remains Weak Due to Our Forecasts for Declining Rig Counts

Precision is among the top-tier U.S. drillers and leads the Canadian drilling market with close to one third share of drilling in 2017. However, the company's profitability has been curbed in recent years by a downturn in drilling activity, resulting in lower utilization and day rates than in past years.Despite the recovery in U.S. shale activity, the U.S. land rig market today is still marked by overcapacity and low day rates and margins. We expect utilization for even Tier 1 rigs (high-quality AC rigs with 1.5k-plus horsepower and multiwell pad drilling capabilities) to remain below 80% at midcycle. While our view is that incremental global oil supply needs will largely be met by U.S. tight oil in 2017-18, fewer rigs will be needed to meet this requirement than in the past, owing to increased efficiencies. This limits the scope for improved pricing and utilization for all U.S. land drillers moving forward, even as overall industry fundamentals recover. Additionally, our view on Canadian drilling is bearish, owing to development opportunities there being skewed toward low-price gas, as well as very uneconomical oil sands.Precision’s Tier 1 rigs have performed well in U.S. markets, and these rigs have recovered substantially in utilization from low trough levels. Unfortunately, Precision also has a very large fleet of non-Tier 1 rigs. These will struggle to reach reasonable levels of utilization even through 2022. This trend predates the late 2014 downturn, as Precision began losing market share in 2012 as operators’ preferences shifted toward deeper wells and longer laterals, which disqualified many of Precision’s non-Tier 1 rigs, their high efficiency and mobility notwithstanding. Thus, even a full recovery in oil drilling activity would not be enough to restore Precision to prior levels of profitability, in our view. In any case, we see such a recovery as unlikely in the medium term. Thus, the likelihood that Precision is appropriately valued at its current share price is negligible.