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Parker Drilling: Good Opportunity to Buy An Undervalued Stock
Posted by: Value Investor (IP Logged)
Date: July 18, 2014 04:50PM
Company Overview and Business
Parker Drilling Co. (PKD) provides contract drilling and drilling related services to the energy industry. The company also supplies rental tools to the energy companies both in the U.S and international markets.
The company operates in four segments: Rental Tools, U.S Barge Drilling, U.S Drilling, International Drilling and Technical Services.
Apart from United States, the company has its presence in U.K/Europe, Latin America, Central Asia, Middle East, North Africa and Asia Pacific region. Parker’s international fleet consists of 25 land rigs and two barge rigs whereas the U.S fleet has 13 barge rigs in the Gulf of Mexico with three additional rigs under commissioning.
If we look at the company’s 2013 revenue mix, international drilling and rental tools segments are the major contributors. However, barge drilling and rental tools segments have contributed higher gross margin by line of business.
Source: Company Presentation
In this article I will focus on the company’s performance in the barge drilling and rental tools segment and the strategic steps taken by the company to meet their business goals.
Barge Drilling Segment Would Grow
Parker Drilling has 13 barge drilling rigs operating in the inland waters of the U.S Gulf of Mexico with a drilling depth capacity of 13000 to 30000 feet. The company has the most diversified and active rigs in the industry.
U.S barge drilling industry has a very limited market and Parker operates more than half (12) of the number of active and marketed rigs as compared to Axxis’ five, Baywater’s four, Coastal’s three and Nabors’ one.
The company also has the highest number of rig counts by varying depth capability. Even the percentage of downtime of fleet has been below the industry standards since 2011 which makes them a more reliable and efficient fleet for the customers.
Source: Company Presentation
Two recent strategic moves of the company suggest that Parker Drilling foresees huge potential in this segment. In March the company has announced the contract of its Barge rig 55B. The rig has been contracted to Chevron for four wells at an average dayrate of $50,300 for 120 days, at a premium of 25% to the company’s trailing average dayrate.
The contract is expected to commence before the end of second quarter 2014.What is interesting to note is the rig is not a newbuild and is rather a refurbishment of a build at half the cost of the newbuild. This would thus have a positive impact on the company’s margins.
The company has also expanded its fleet in Gulf of Mexico. Parker Drilling has acquired a 1500 horsepower barge rig valued at $12.25 million. The rig has drilling depth capacity of 18,000 feet and the addition of Rig55B would further diversify and strengthen the company’s position in Gulf of Mexico to meet the increasing demand.
Rental Tool Segment Also Looks Promising
Parker Drilling’s has its rental tool operations in U.S, Middle East, Asia-Pacific, Latin America, UK and Europe. The company provides drilling equipments to eight shale play locations in Gulf of Mexico and U.S.
What makes the company different from competitors is its strong supplier and customer base. Quail Tools is the leading supplier of rental tools with Weatherford and Thomas Energy being others. Also, a strong customer base of Apache Corp, Chesapeake, Exxon, EOG resources reduces the downside risk of the company, thus ensuring steady cash inflow.
In addition to this, acquisition of International tubular services limited will help the company to expand its services internationally. ITS has a very strong customer base and with the acquisition, Parker Drilling has the opportunity to cater to the needs of international E&P operators and drilling contractors. This acquisition will also help the company to provide attractive financial returns and compelling cost and tax benefits which will improve profitability and create value for shareholders.
Parker Drilling is currently trading at a high PE of 49, but PE cannot be considered a valuation technique for an oil and gas drilling companies. However, based on the current PE of 49 and growth of 69% for fiscal 2015, the company is trading at a PEG of 0.8. In addition to this the company is also trading at an EV/EBITDA of 4.8 far less than Nabors Industries’ (NBR) 7.3. Thus, from the valuation perspective also the company looks attractive and can be considered a good investment.
Parker Drilling, with attractive valuation is well positioned for solid growth. Growth estimate of 69% for fiscal 2015 will result in price appreciation as well. Based on the discussions above I thus believe this stock has considerable upside potential and will give good returns on a medium to long term investment.
Stocks Discussed: PKD, NBR,