Morningstar | Precision Posts Solid 1Q Driven by Drilling Pricing Improvement
Precision Drilling posted solid first-quarter results, with a 2% revenue increase driven chiefly by seasonal improvement in the completion and production segment. The company's adjusted operating margin increased to 6.4% from 5.0%. In the company's large segment, drilling, revenue slipped 3% sequentially but adjusted operating margin rallied to 11% from 7%.The strong bottom-line improvement in drilling was a result of stronger pricing. In U.S. drilling, Precision's rig count fell 1% but gross margin per rig day increased to $8,800 from $8,300, owing to stronger pricing. Canada drilling posted a similar improvement, although we note that Precision's Canada drilling revenue was down 31% year over year. This is due to a weakening in the industrywide rig count, which is a response to widening oil and gas price differentials in Canada caused by pipeline bottlenecks.
Precision's solid U.S. drilling results were matched by peers. U.S. land drillers had a great first quarter overall. Although the U.S. horizontal rig count fell 2% sequentially, Tier 1 rig utilization remained fairly strong (at about 80%-85%), with "super spec" rig utilization well above 90%. Tight utilization allowed for land drillers to continue to push pricing increases, and as a result, gross margins per day for the drillers increased 11% on average (to $10,400 per day from $9,400).
However, we forecast that the U.S. horizontal rig count will fall from almost 900 today to about 700 by 2023 as U.S. shale drilling moderates and drilling efficiencies continue to improve. This means that utilization and hence pricing will fall in coming years (even for super spec rigs), pushing down drillers' financial results. This doesn't appear to be fully grasped by the market currently, and Precision is trading about 30% above our fair value estimate.
Precision Drilling is engaged in the provision of contract drilling and completion and production services primarily to oil and natural gas exploration and production companies in Canada and the United States. Co. operates two segments: Contract Drilling Services and Completion and Production Services. The Contract Drilling Services segment includes drilling rigs, directional drilling, procurement and distribution of oilfield supplies, and manufacture, sale and repair of drilling equipment. The Completion and Production Services segment includes service rigs, snubbing units, oilfield equipment rental, camp and catering services, and wastewater treatment units.
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