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Pacific Drilling: Strong Growth to Spur Stock Upside
Posted by: Value Investor (IP Logged)
Date: March 21, 2014 04:40PM

Pacific Drilling S.A. (PACD). is an offshore drilling company that provides ultra-deepwater drilling services to oil and natural gas companies through the use of high specification drillships. The company has constantly upgraded itself in terms of development of newbuilds, which will result in growth and is now into an agreement with Samsung Heavy Industries for three drillships. Paific Sharav and Pacific Meltem are under construction and will be delivered in 2014; Pacific Zonda will be delivered in the first quarter of 2015.

Strong Contract Backlog

Historical analysis shows that the contract backlog for Pacific Drilling has increased from $1.5 billion in first quarter 2011 to $3.1 billion in first quarter 2014. This is primarily because the company has also increased the number of rigs from 2 to 6 in the same time span. In addition to an increasing contract backlog, contract with big players like Chevron (CVX), Total SA (TOT) and Petrobras Argentina SA (PZE) also play an important role. This would reduce the downside risk for Pacific Drilling as the counterparties are strong.

Source: Company Presentation

Revenue Forecast and Impact on EBITDA

The analysis would have two scenarios:

a) Base case analysis.

b) Bear case analysis.

Basic assumption for base case analysis is; 1) the contract for Pacific Bora would be renewed in August 2014 with a day rate of $615,000 and 2) the effective utilization of drillships would be 90%, considering some days lost in maintenance. Let us see what would be the expected revenue for Pacific Drilling in fiscal 2014. The calculation below is based on the company fixed day rates contract. On a conservative approach, I have not considered Pacific Melten as the expected time for the delivery is yet not finalized.

Fleet Day rate Utilization Revenue ($ millions)
Pacific Khamsin 660000 90% 217
Pacific Bora 474700 90% 104
Pacific Bora 615000 90% 68
Pcific Scirocco 494950 90% 163
Pacific Mitral 458000 90% 150
Pacific Santa Ana 489530 90% 161
Pacific Sharav 555000 90% 91
       
Revenue     954

Considering these assumptions, there would be a 28% increase in revenue in 2014 to $954 million. This increase is primarily due to the addition of two drillships in fiscal 2014.

A bear case analysis would have two assumptions; 1) the contract for Pacific Bora does not get renewed in August 2014 and 2) the second Pacific Sharav is not delivered in 2014, thus affecting the revenue.

The calculation below shows that even after considering the downside risk for Pacific the expected revenue generation would be $840 million in 2014 from $745 million in 2013. A look at the revenue forecast supports the EBIDTA CAGR of 52% over the next two years.

Fleet Day rate Utilization Revenue ($ million)
Pacific Khamsin 660000 90% 217
Pacific Bora 474700 90% 104
Pcific Scirocco 494950 90% 163
Pacific Mitral 458000 90% 150
Pacific Santa Ana 489530 90% 161
Pacific Sharav 555000 90% 45
       
Revenue    

840

Young and Modern Fleet

Another very important point to discuss would be the age of the fleet. A new rig would have a higher day rates as compared to an old one. Comparison with its close peers Diamond Offshore, Transocean and Seadrill shows that the rigs of Pacific drilling are relatively young. As there is a direct relation between the age of a rig and the day rate, the company is also in a position to command a higher day rate.

Source: Company Presentation

Conclusion

An increasing demand for Ultra deepwater rigs definitely puts Pacific Drilling in a strong position. Strong growth in 2014 and more rigs to be delivered in 2015 would definitely trigger the stock price momentum on the upside. The company is also expected to start with distribution of an aggregate of $152 million in 2015 to its investors. I therefore rate the stock as a BUY.



Stocks Discussed: PACD, PZE, TOT, CVX,
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