On Thursday, ATB Capital Markets showed confidence in Precision Drilling (PD:CN) (NYSE: NYSE:PDS) stock, raising its price target to C$123.00 from C$120.00, while reiterating an Outperform rating. The upgrade follows the company's second-quarter financial results, which were released after the market closed on July 30, 2024.
Precision Drilling's reported EBITDA of $115 million exceeded ATB Capital Markets' estimate of $110.5 million, partly due to a $10 million share-based compensation benefit.
The firm noted that the number of active rigs Precision Drilling operates in the United States and Canada surpassed their initial forecasts. Additionally, management's optimistic outlook on the Canadian market contributed to a 1.7% increase in the firm's 2024 EBITDA estimate for Precision Drilling. This positive assessment led to the revised price target.
Precision Drilling has demonstrated robust free cash flow (FCF), with an FCF yield on market capitalization of 18% for the 2024 estimate and 17% for the 2025 estimate. The company has committed to returning 25%-35% of its 2024 FCF to shareholders.
Moreover, as the net debt/EBITDA ratio is expected to fall below the target of 1.0x by mid-2025, the firm anticipates that Precision Drilling will increase its shareholder capital allocation to approximately 50% of FCF. The company is also likely to initiate a dividend in the following year.
In addition to its strong financial performance, Precision Drilling is making strides in debt reduction, with a goal to lower its debt by $150 million to $200 million in 2024. The company holds a leading position in the high-specification rig market in Canada, with its rigs actively engaged in regions such as Montney, Duvernay, and the Deep Basin.
The demand for both high-spec rigs and super-single rigs, preferred in heavy oil plays, is high, with expectations of being undersupplied for 2025 and 2026.
ATB Capital Markets views the Canadian super-spec rigs as some of the most advantageous assets in the North American energy service sector, with Precision Drilling's dominance in this area being a significant competitive advantage.
In other recent news, Precision Drilling has seen an upward revision in stock targets from two prominent firms. ATB Capital Markets raised its price target to C$123.00 from C$120.00, following Precision Drilling's second-quarter financial results that exceeded expectations.
The company's EBITDA of $115 million was partly attributed to a $10 million share-based compensation benefit. In addition, the firm noted a rise in the number of active rigs in the United States and Canada, surpassing initial forecasts.
On a similar note, Piper Sandler also increased its price target for Precision Drilling to $101.00, up from $81.00. The revised target is based on the anticipated EBITDA of C$574 million, net debt of C$907 million as of the first quarter of 2024, and a count of 14 million fully diluted shares. This adjustment in the valuation multiple aligns Precision Drilling's target valuations more closely with those of its peers.
These recent developments indicate confidence in Precision Drilling's performance by both ATB Capital Markets and Piper Sandler. However, Piper Sandler acknowledges potential risks, including a challenging North American energy macro environment, upcoming contract expirations, and the company's high debt levels.
Despite these considerations, both firms maintain a positive outlook, with ATB Capital Markets reiterating an Outperform rating and Piper Sandler maintaining its Overweight rating on the stock.
InvestingPro Insights
Precision Drilling (NYSE: PDS) has been garnering positive attention with its strong financial performance and strategic moves in the high-specification rig market. As per InvestingPro data, Precision Drilling boasts a compelling market capitalization of $1.1 billion, underlining its significant presence in the industry. The company's P/E ratio stands at an attractive 6.28, indicating that it may be trading at a low price relative to its near-term earnings growth—a point also highlighted by one of the InvestingPro Tips.
Investors might also find interest in the company's liquid assets, which exceed short-term obligations, providing financial stability and the potential to manage short-term market fluctuations effectively. Moreover, Precision Drilling is trading near its 52-week high, reflecting strong market confidence in its performance and future prospects.
The InvestingPro platform offers additional insights, with tips that can further guide investors in their decision-making process. For example, analysts predict that Precision Drilling will be profitable this year, a sentiment backed by the company's profitability over the last twelve months. To explore more such insights, investors can find additional InvestingPro Tips on the platform, which currently lists 9 more tips for a comprehensive understanding of Precision Drilling's financial health and market position.
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