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Pioneer Energy Services: Power Horse in Well Servicing

November 16, 2012 | About:
Pioneer Energy Services (PES) provides contract land drilling services to independent and major oil and gas operators in Texas, Louisiana, the mid-continent, Rocky Mountain and Appalachian regions and internationally in Colombia through its drilling services segment. Pioneer also provides well, wireline, coiled tubing and fishing and rental services to producers in the U.S. Gulf Coast, offshore Gulf of Mexico, mid-continent and Rocky Mountain regions through its production services segment.

Valuation

PES trades at 0.82x P/NTA and 11.36x trailing 12 months P/E. It achieved a trailing 12 months ROE of 6.37%.

Financial And Business Risks

PES is highly geared with a gross debt-to-equity ratio of 92%. This is not helped by an interest coverage ratio of 1.38 and current ratio of 1.40. Off-balance sheet liabilities include purchase commitments and operating leases amounting to $134 million and $17 million respectively.

Purchase commitments primarily relate to ten new-build drilling rigs, equipment upgrades and purchases of other new equipment. The total estimated cost for the ten new-build drilling rigs is approximately $220 million to $240 million, of which $66.5 million has already been incurred.

PES is influenced substantially by both operating and capital expenditures by exploration and production companies. When commodity prices are depressed for long periods of time, capital expenditure projects are routinely deferred until prices return to an acceptable level. However, as existing oil and natural gas wells require ongoing spending to maintain production, expenditures by exploration and production companies for the maintenance of existing wells are relatively stable and predictable. This benefits PES which derives a significant portion of its revenue from activities related to the maintenance of existing wells.

PES maintains long-standing customer relationships with a diverse group of major independent oil and gas exploration and production companies. Ecopetrol, PES' largest customer accounted for approximately 14% of its 2011 consolidated revenues. No other single customer accounted for more than 11% of consolidated revenues during the same period. Furthermore, 74% of PES' working rigs are operated for mid to mega-cap publicly traded companies, partially reducing counterparty risk.

Business Quality and Capital Allocation

PES is a leading player in energy services; it is the seventh largest well servicing provider and ninth largest contract driller with 107 well servicing rigs in 12 locations and 68 drilling rigs in 7 locations, respectively. In the well-servicing segment, PES has the newest well servicing fleet in the industry with an average age of less than four years, and it also achieved the highest average hourly rate of top-tier well servicing providers for the past two years. Approximately 80% of its drilling rig fleet has a horsepower rating of over 1000 horsepower and the majority of its fleet is equipped with top drives, allowing PES to pursue opportunities in shale plays, which typically require higher specification rigs than traditional areas.

PES' organic opportunities in its core businesses remains strong. In 2012, it signed multi-year term contracts for 10 new-build drilling rigs and added a total of 19 well-servicing rigs, 15 wireline units and three coiled tubing units. PES has a strong contract backlog in the land drilling segment, with 79% of working rigs backed by term contracts.

PES has averaged over 80% utilization through cycles since 2001, with current utilization at 85%.

PES has pursued and intends to continue to pursue acquisitions of complementary assets and businesses. In March 2008, PES significantly expanded its service offerings with the acquisition of two production services businesses, which provide well services, wireline services and fishing and rental services. On Dec. 31, 2011, it acquired the coiled tubing services business of Go-Coil to complement its existing production services offerings.

Insider Trades

There has been significant insider activity in recent months. Locke Stacy, CEO of PES, bought 100,000 shares at an average price of about $6.40 in November 2012. This is in addition to the 847,004 shares he bought in June 2012. Thompson C. John, a director of PES, sold at more than 100,000 shares, at prices ranging from $7.50 to $8.05, from June to September this year.

Conclusion

PES' listing history on the NYSE is short, given that it transferred the listing of its common stockfrom the NYSE MKT to the NYSE in June 2012. However, a quality business selling for less than book, coupled with significant buying by the CEO in the past six months, makes it a candidate worthy of consideration.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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