Precision Drilling (PD.TO)

A merger between Precision Drilling (PD-T) and Trinidad (TDG-T)? Thinks you can make the thesis to own either one with a preference to pressure pumping, without necessarily making the bet that you are going to see M&A. The biggest argument is personalities.

Very leveraged to what is going on in oil and gas and is hit by lower commodity prices. BV ex-goodwill is $5.90. The problem is, they have debt of about $1.9 billion as of March 31. The equity component is $1.9 billion. This is very close to being a Buy now, but it is vulnerable. The last $15 off on the price of oil can have a significant erosion in high beta energy stocks.

Like many service stocks, this has gone down materially. The pro is that the multiple is looking very attractive relative to what he thinks it could do in 2018. The con is that within services there is always a lot of subsectors, and the one with the least pricing power is, he thinks, drilling. Unlike pressure pumping, where equipment is in shortage, he doesn’t see a lot more upside in the day rates for drilling equipment.

(A Top Pick July 5/16. Up 39.79%.) *Short* (Pairs trade with a Long on Secure Energy Services (SES-T).This is a contract driller, and the issue with contract driller’s is that crews are becoming more and more efficient. Effectively they can drill and then move on to the next one.

Has a lose mean estimate of $.42 this year. It doesn’t pay out anything. They are not going to make any money at all in 2018.

A very solid, well-run company. Trading at a bit of a premium relative to its Canadian peers. They are starting to get a technical edge on their upgrades to their rigs.

Just announced earnings, which were a little light, but nothing to be concerned about. Canadian exploration companies are just starting to ramp up exploration budgets, and this company will benefit. On a valuation basis, it is a little ahead of some of its smaller competitors. A lot of the service companies should do well as companies start to ramp up their budgets, and this company is a natural beneficiary. Good assets.

He likes services, but not drillers. Pricing power is a little more. It trades at a premium because of good trading liquidity. He likes pressure pumpers.

Has gone through a very difficult environment, but he likes what management has done in that environment. This is Canada’s largest tier #1 contract driven company, with growing operations in the Middle East. They’ve spent a fortune in technology in upgrading equipment, and now we are beginning to hear that contracts are being renewed for longer periods and day rates are firming up a little. It has a lot of leverage to an improving environment. (Analysts’ price target is $9.)

Historically this has very strong seasonality from around the end of January through to the beginning of May. This year it is not there. There is still time for this seasonal trade, so far there is no indication that the stock has even tried to bottom. It is still in a downward trend. Be patient. There still could be time to do a seasonal trade, but you are starting to run out of time.

(A Top Pick July 5/16. Up 12%.) *Short* (Pairs trade with a Long on Secure Energy Services (SES-T)). Took the trade off, but would still not want to own the company.

This and the other service names within the oil/gas sector have been quite volatile. It is really hard to dissect, in terms of earnings and giving them a multiple. He would be looking to buy this if it got down to around $6.40. He is bullish on the energy sector overall and thinks that in the next couple of quarters, the companies will come out with much better results versus last year.

(Market Call Minute) It is too cyclical. If the oil price goes up, everybody drills, and if it goes down the drills are retired.

Trades at a premium multiple because it is one of the few actual liquid service names in Canada. We have a big service sector, but so many of them are small companies. He is more bullish on the pumpers than he is on the drillers. On the drillers, there is a lot of excess capacity in equipment.

Historically, oil service stocks as well as Canadian energy stocks, reach a very important low early next week. And then they have a very good seasonal trend right through until at least the middle of April. Next week we start the period of seasonal strength just as the stock is establishing an intermediate upward trend. Continue holding the security, and on a break out, buy some more.