By Sarfaraz A. Khan. Research Asst: Gohar Yousuf
NEW YORK (TheStreet) -- If there is one company that stands to benefit from the increasing oil and gas drilling activity in North America and Canada's LNG export prospects, then that is Precision Drilling (PDS_), Canada's largest oil and gas drilling contractor.
Precision Drilling gets more than 80% of its revenue by providing contract drilling services and less than 20% by providing completion and production services.
Precision Drilling gets 50% of its revenue from Canada and more than 40% from the U.S. With operations in nearly all major North American oil and gas plays, the company will profit from the increasing activity from this region.
Moreover, analysts have said that Precision Drilling could double the size of its Canadian business in the coming years from the expected growth in liquefied natural gas, or LNG, output. Canada has been developing several LNG export facilities to meet the increasing demand coming from Asia.
Precision Drilling's shares are up more than 40% this year, currently hovering around $13.28, yet they are priced just 2 times the company's trailing sales, considerably lower than the industry's average of 44 times, as per Thomson Reuters.
According to data provided by Baker Hughes, as of May 30, the rig count in the U.S. and Canada was up 5.4% and 37% respectively from the same period last year. This uptake in activity, supported by the year-over-year increase in energy prices, has been driven by increasing production from shale basins. This spurred demand for rigs, mainly the higher-quality, Tier-1 rigs.
Precision Drilling will gain from these positive trends in the industry. The company has significant operations in all the active North American regions such as the Permian Basin, Barnett, Eagle Ford, Bakken, Marcellus and Utica Shales.
Furthermore, Precision Drilling's rig fleet consists primarily of the higher quality rigs. As of June 2, Precision Drilling had 348 rigs, of which 223, or 64%, were Tier-1 rigs.
This was evident in the previous quarter when the company's net profits increased by 8.8% from the same quarter last year from 12.8% increase in revenues, thanks to the strong demand of its rigs.
Analysts are expecting robust activity this year, which should continue to support the company's growth.
In order to meet the rising levels of demand, Precision Drilling increased its 2014 capital expenditure budget by 31% from its previous estimate to $762.26 million. More than 95% of the capital expenditure will go towards contract drilling.
A significant portion of this additional expenditure is for the nine new-build rigs in the U.S., which will be delivered by early 2015. In the current year, Precision Drilling will deploy 16 additional new-build rigs, six at home, seven in the U.S. and three in international markets.
Investors should note that in the second quarter, the company could report a sequential drop in revenue from Canada due to the seasonal drop in activity in the country. This will be, however, a short term hiccup as the company has forecast recovery in the second half.
Canada has enormous energy reserves and is planning to capitalize on the increasing demand coming from Asian economies, such as China.
Canada is witnessing the development of several LNG export projects, the largest of which are Chevron (CVX_) and Apache's (APA_) Kitimat LNG project and Shell's (RDS.A_) (RDS.B_)LNG Canada project, which will come online through 2020.
Canadian Imperial Bank of Commerce (CM_) says Precision Drilling is in an excellent position to capitalize on Canada's LNG export prospects. The company is the biggest player in the onshore Canadian market; it owns nearly a quarter of all the onshore drilling rigs in Canada. In the first three months of this year, more than 3,400 onshore wells were drilled in Canada, of which more than 27% were drilled by Precision Drilling.
According to the Canadian bank, Precision Drilling is also the most active oilfield service provider in the sedimentary basins of Western Canada.
Precision Drilling, due to its fleet of high performance rigs, is one of the most efficient drillers in Canada. For the three months ending March, Precision Drilling took an average 10.6 days to drill a single well, better than the industry's average of 13 days. In a single day, on an average, the company's rig drilled to depths of 597 feet, ahead of the industry's average of 561 feet.
At the time of publication, the author held no positions in any of the stocks mentioned.This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.