Since its peak on June 8, Precision Drilling Corp (USA) PDS shares have underperformed the OSX by 1,300 bps, its land driller peers by 1,800 bps and the S&P 500 by 2,875 bps.
Jefferies’ Brad Handler upgraded the rating on the company from Underperform to Hold, while raising the price target from $4.00 to $4.50
Positives
“There is lingering risk to shares from estimate downside, in our view, but we see positives in (1) our view that we are past the cyclical trough in NAM onshore, (2) C$456 million cash, which offsets covenant/liquidity access risk, and (3) 16 percent short interest,” Handler mentioned.
The U.S. and Canada onshore rig counts are 5 percent and 15 percent, respectively, ahead of the Q3:16 estimate quarter to date.
Precision Drilling has participated in the recovery, with its U.S. rig count rising by eight rigs and its Canada rig count rising by 23 from the trough seen in May.
Risks
“Although PDS's Super Single rigs are likely to generate little incremental EBITDA (given oversupply in this sub-segment), we believe US and Canadian Super Triple rigs should contribute tangible EBITDA as the cycle progresses,” Handler stated.
However, the analyst also pointed that that there still existed estimate risk in North America, due to day-rate erosion and C&P, which along with the valuation keeps Handler on the sidelines.
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