Crude oil prices have been highly impacted by recent US economic data, Federal Reserve rate activity, and the decline in geopolitical risk premiums. Rig counts are down, and fears of higher-for-longer interest rates are depressing expectations for near-term growth. Like many in the industry, this has affected the recent results of Canadian drilling company Precision Drilling (NYSE:PDS).
However, shares have crossed the 47% mark year-to-date, and the consensus outlook remains positive. Investors willing to look past the current concerns of the broader oil and natural gas market might find this stock presents an opportunity for long-term growth at a reasonable price (GARP).
Precision Drilling’s Footprint
Precision Drilling provides onshore drilling, completion, and production services to exploration and production businesses in the oil, natural gas, and geothermal sectors across North America and the Middle East.
The company’s operations are divided into two main segments: Contract Drilling Services and Completion and Production Services. The former provides land drilling rigs, turnkey drilling, and distribution of oilfield supplies. The latter operates in natural gas exploration.
Precision Drilling’s Recent Financial Results
The company recently announced financial results for Q1 2024. Revenue of C$528 million declined 5.5% from the previous year’s C$559 million, yet it exceeded expectations of C$526.47 million. The company’s net earnings of $37 million, or $2.53 per share, show a substantial decline from last year’s Q1 $96 million, or $7.02/share.
As of March 31, the company reported long-term debt of approximately $900 million and a total liquidity position of over $600 million, with a net debt to trailing 12-month EBITDA ratio of around 1.5
Looking forward, management has given guidance that it expects to continue decreasing its net debt to adjusted EBITDA throughout the year, setting a debt reduction target of $150 to $200 million for 2024. The company will also support shareholder returns by allocating 25% to 35% to share buybacks, having already repurchased $10 million of common shares in the first quarter.
What is the Price Target for PDS Stock?
Precision Drilling is rated a Strong Buy based on the recommendations and 12-month price targets of nine Wall Street analysts issued over the past three months. The average price target for PDS stock is $91.80, representing a 29.08% upside from current levels.
Analysts following the company have been primarily bullish on the stock. BMO analyst John Gibson recently reiterated a Buy rating on the shares, setting a price target of $95.11, also noting the company’s strong financial health and promising future prospects.
Meanwhile, shares have been trending upward, climbing over 14% in the past 90 days, and continue to demonstrate positive momentum, trading above the 20-day (69.64) and 50-day (66.28) moving averages. The stock appears fairly valued, with a P/E ratio of 6.25x, in line with the Energy sector average of 6.3x and the Oil & Gas Drilling industry average of 5.8x.
PDS Stock in Summary
While the near-term outlook for the oil and gas drilling industry is challenging, Precision Drilling is well-positioned to continue to grow its market share while generating long-term value for shareholders. The stock is reasonably valued, making it a solid GARP opportunity for investors looking for exposure to this industry.
