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Pacific Drilling: A Pure-Play UDW With Growth

August 18, 2014 | About:
Faisal Humayun

Faisal Humayun

4 followers

Pacific Drilling (PACD) reported strong results for the second quarter of 2014. This article discusses the results and the factors in the future that will translate into strong growth for the company.

Strong 2Q14 results

For 2Q14, revenue increased by a robust 48% to $261 million as compared to $177 million in 2Q13. This revenue growth was triggered by an increase in average revenue efficiency to 97.1%, the company’s highest average quarterly revenue efficiency coupled with $28 million in deferred revenue amortization.

The company’s EBITDA for 2Q14 also increased by a robust 61% to $138 million as compared to $85 million in 2Q13. During the same period, the EBITDA margin also expanded by 450bps to 52.9% in 2Q14 as compared to 48.3% in 2Q13.

Another big positive in the 2Q14 results was the operating cash flow. The company’s OCF for the six months ended June 2014 increased by 110% as compared to prior year to $223.4 million. Pacific Drilling is therefore expected to clock a robust operating cash flow for 2014.

Pacific Drilling had a capital expenditure of $634 million for the six months ended June 2014, which makes the free cash flow significantly negative. This is not a matter of concern as the new rigs will provide higher cash flows in the future.

Overall, the quarter was the best in the history of the company and for reasons discussed in the article, I believe that strong quarters will continue to come.

What makes Pacific Drilling unique?

High growth is one factor to like Pacific Drilling as an investment in the medium term. Another factor that sets Pacific Drilling apart from its peers is that the company is a pure play in the ultra deep-water segment.

As of 2Q14, 100% of the company’s fleet was ultra deep-water as compared to 82% for Ocean Rig (ORIG), 42% for Seadrill (SDRL) and 33% for Atwood Oceanic (ATW).

A clear focus on ultra deep water, where the day rates are high and the demand is expected to be robust, is one of the key differentiating factors for Pacific Drilling. Currently, the company’s fleet is the most modern in terms of rig specification and this factor ensures that the company’s fleet continue to command strong day rates.

Strong growth will continue

The strong revenue and EBITDA growth witnessed in 2Q14 is likely to continue for Pacific Drilling over the next 2-3 years. One new rig was delivered in May 2014 and another new rig is expected for delivery in the third quarter of 2014. Further, one more rig is expected for delivery in the first quarter of 2015.

The delivery of three new rigs will ensure that revenue and EBITDA growth is strong for 2014 and 2015. As of 2Q14, Pacific Drilling had a total contract backlog of $3.3 billion with 99% contractual coverage for 2014 and 68% contractual coverage for 2015. Therefore, the revenue visibility and cash flow visibility will remain strong in 2014 and 2015.

High operating cash flows

I had discussed the company’s operating cash flow in the 2Q14 result analysis. For 2014, the company expects operating cash flow to be $350 million, which is significantly higher than the cash flow of $230 million for 2013.

Further, for 2015, the company expects operating cash flow to be $600 million. Pacific Drilling does not pay dividends now, but with the kind of expected cash flow in 2015, the company is likely to start paying dividends in 2015.

Strong operating cash flow will also sustain beyond 2015 as the company’s order backlog of $3.3 billion gradually translates into cash inflow. The deployment of new rigs will further boost the company’s order backlog.

Conclusion

Pacific Drilling, a pure play in the ultra deep-water segment, has a strong growth potential in the next few years. As three new rigs become operational between now and 1Q15, the company’s high growth will sustain.

Pacific Drilling is also likely to become a dividend paying company in 2015 and this is an additional incentive to invest in this high-growth company.

The company is trading at a current EV/EBITDA valuation of 11 and this is cheap when compared to Seadrill, which is trading at an EV/EBITDA of 11.95. Considering the expected growth in 2014 and 2015, Pacific Drilling’s valuations are attractive.

For Pacific Drilling, analyst estimates point to robust earnings growth of 76% for 2014 and 48% for 2015. With this growth on the horizon, Pacific Drilling is a good stock to hold.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

Rating: 0.0/5 (0 votes)

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