Pacific Drilling (PACD, Financial), which has declined by 36% in 2014, is an attractive stock to buy at current levels. This article discusses five reasons to be bullish on Pacific Drilling.
Initiation of Share Repurchase – Pacific Drilling has recommended the repurchase of 8 million shares and the board will initiate the process to repurchase up to $30 million of the company’s issued and outstanding shares as a first tranche in the program. I believe this is a big positive from the shareholder value creation point of view. This also shows that the company’s shares are trading at attractive levels making repurchase a good option for the management. The repurchase of shares will boost the company’s EPS for 2015 and 2016.
High Specification Fleet – Pacific Drilling has the best fleet among the peer group and this will ensure that the company’s fleet day rates remain high. As of November 2014, 100% of the company’s fleet was high specification fleet as compared to 84% for Ocean Rig (ORIG, Financial), 41% for Seadrill (SDRL, Financial) and 33% for Atwood Oceanics (ATW, Financial).
Strong Cash Visibility – Even in the downturn, Pacific Drilling has strong revenue and cash visibility. Therefore, the stock is likely to move higher after being beaten down by 36% in 2014. As of 3Q14, Pacific Drilling had a contract backlog of $2.7 billion and with 100% contract coverage for 2014 and 73% contract coverage for 2015. Pacific Drilling expects operating cash flows to be robust at $450 million in 2015 and this should take the stock much higher from current levels.
Strong Results in 2014 – For the first nine months of 2014, Pacific Drilling reported revenue increase of 40.6% to $766 million as compared to $545 million in the first nine months of 2013. For the same period, the company reported an increase of 47.5% in EBITDA to $388 million as compared to $263 million. Strong results amidst weak industry outlook have resulted in improvement in the company’s fundamentals even when the stock has moved lower. As oil prices recover and offshore markets also recover, Pacific Drilling is likely to move higher.
More Growth Coming in 2015 – Pacific Drilling will continue to grow at a very strong pace in 2015 and this is another important reason to consider buying the stock. Rig Pacific Meltem is scheduled for delivery in November 2014 and Pacific Zonda is scheduled for delivery in the second quarter of 2015. This will ensure that strong growth momentum will continue for Pacific Drilling into 2015.
In conclusion, Pacific Drilling is a quality offshore driller with strong fundamentals and robust growth prospects at a time when big offshore drillers like Seadrill are struggling. Investors can consider exposure to the stock as current levels as strong growth in 2015 means that the stock will move higher from current depressed levels.
