A link to the previously written section (03/03/2009) can be found here.
As I stated earlier, Precision Drilling has been on a tear recently, nearly all in the negative direction. Sitting at about $2.00 a share, is it a good value? A quick look at its fundamentals, I would say yes. But is it a good investment. That is the real question. Here in Part II we will analyze the not so great part of Precisions business, the part that has driven its stock price down nearly 90%.
In late 2008, Precision completed the highly competitive and controversial takeover of Grey Wolf. Grey Wolf had originally agreed to a merger with Basic Energy Services (BAS). Grey Wolf rejected the Canadian driller's advances via a public statement two days after the Precision bid was publicly disclosed. Precision then had to follow up with a second, more expensive offer. The offer price was only hiked a bit more than 3%, but they had much more favorable terms pertaining to the cash and share swap ratio.
Precision then took it one more level with its third and supposedly final offer of $10/share. Precisions bid at that time for GW alone was valued at about $1.97 billion. Value of the combined companies as of March 2009: $370 million. That obviously means that Precision has been left with a life threatening debt load. For 2008, PDS generated an average operating cash flow of $270 million dollars. Not bad. Throw in the debt load however and that turns into a leveraged cash flow of $-88 million. A bit scary considering their return on assets, operating margins, gross profits, and overall revenues will drop precipitously in 2009, and possible well into 2010. The point of this buy-out was to gain more exposure and market share in the United States drilling arena, expanding out from Canada. Seems like they may have extended too far on the way up, and are now possibly overleveraged on the way down.
If you are worried about Precisions chance of survival with those stats…it gets worse. To make the acquisition of Grey Wolf, Precision inherited a bridge loan to pay for the buy-out. These loans are normally short-term as they charge a very high interest rate. Basically, they are used to get financing quick, then they are repaid for refinancing through the issuance of shares or a debt offering. Tough luck for PDS. With a balance sheet choking for air and a credit market just as squeezed, Precision was forced to postpone their offering of $172.5 senior notes, the ones that were supposed to refinance the bridge loan. If they can’t peak up enough interest in this offering when they try again, they are stuck with a gigantic 17% loan. Having $48.5 million in cash seems petty when they have a staggering $1.12 billion in debt. That’s with a $370 million market cap, pegging them at an enterprise value of about $1.5 billion.
Conclusion: There is no doubt in my mind this industry will have its day in the sun yet again. The question is however: will they make it? After reviewing PDS, I believe this company is more of a bet than an investment. You are betting on multiple things; Can they restructure their debt, can they keep their contracts, how long will the downturn in energy last? It comes down to one question. Can they survive? If you bet correctly, it’s a multi-bagger. If not, you lose everything. Unless you feel lucky or know something that others don’t about this stock, I’d stay away. Some other stock that are worth looking into include ATW, RIG, and HERO. HERO has many of the same characteristics but I believe ATW and RIG will be able to weather the downturn, but have much less upside that smaller, more troubled stocks like PDS.
May all your investments flourish,
Ryan Vanzo
As I stated earlier, Precision Drilling has been on a tear recently, nearly all in the negative direction. Sitting at about $2.00 a share, is it a good value? A quick look at its fundamentals, I would say yes. But is it a good investment. That is the real question. Here in Part II we will analyze the not so great part of Precisions business, the part that has driven its stock price down nearly 90%.
In late 2008, Precision completed the highly competitive and controversial takeover of Grey Wolf. Grey Wolf had originally agreed to a merger with Basic Energy Services (BAS). Grey Wolf rejected the Canadian driller's advances via a public statement two days after the Precision bid was publicly disclosed. Precision then had to follow up with a second, more expensive offer. The offer price was only hiked a bit more than 3%, but they had much more favorable terms pertaining to the cash and share swap ratio.
Precision then took it one more level with its third and supposedly final offer of $10/share. Precisions bid at that time for GW alone was valued at about $1.97 billion. Value of the combined companies as of March 2009: $370 million. That obviously means that Precision has been left with a life threatening debt load. For 2008, PDS generated an average operating cash flow of $270 million dollars. Not bad. Throw in the debt load however and that turns into a leveraged cash flow of $-88 million. A bit scary considering their return on assets, operating margins, gross profits, and overall revenues will drop precipitously in 2009, and possible well into 2010. The point of this buy-out was to gain more exposure and market share in the United States drilling arena, expanding out from Canada. Seems like they may have extended too far on the way up, and are now possibly overleveraged on the way down.
If you are worried about Precisions chance of survival with those stats…it gets worse. To make the acquisition of Grey Wolf, Precision inherited a bridge loan to pay for the buy-out. These loans are normally short-term as they charge a very high interest rate. Basically, they are used to get financing quick, then they are repaid for refinancing through the issuance of shares or a debt offering. Tough luck for PDS. With a balance sheet choking for air and a credit market just as squeezed, Precision was forced to postpone their offering of $172.5 senior notes, the ones that were supposed to refinance the bridge loan. If they can’t peak up enough interest in this offering when they try again, they are stuck with a gigantic 17% loan. Having $48.5 million in cash seems petty when they have a staggering $1.12 billion in debt. That’s with a $370 million market cap, pegging them at an enterprise value of about $1.5 billion.
Conclusion: There is no doubt in my mind this industry will have its day in the sun yet again. The question is however: will they make it? After reviewing PDS, I believe this company is more of a bet than an investment. You are betting on multiple things; Can they restructure their debt, can they keep their contracts, how long will the downturn in energy last? It comes down to one question. Can they survive? If you bet correctly, it’s a multi-bagger. If not, you lose everything. Unless you feel lucky or know something that others don’t about this stock, I’d stay away. Some other stock that are worth looking into include ATW, RIG, and HERO. HERO has many of the same characteristics but I believe ATW and RIG will be able to weather the downturn, but have much less upside that smaller, more troubled stocks like PDS.
May all your investments flourish,
Ryan Vanzo
