Pacific Drilling S.A. (NYSE:PACD) is a small off shore driller, which currently operates five rigs globally and has three additional drill ships under construction. With the addition of Pacific Kharmsin to the fleet on December 17, 2013 its total contract value has grown by 35 percent per day. In second quarter of 2014 Pacific Sharav will join the fleet increasing contract revenue by an additional 26 percent. When combining the contribution of these 2 rigs total contract value per day is expected to grow by 61 percent. The average EPS estimate for 2013 is currently an EPS of 39 cents. In the second quarter of 2013 Pacific Drilling refinanced their long-term debt and incurred substantial cost. In order to accurately reflect their strong operational performance the company reported both GAAP and Non-GAAP earnings per share figures. To account for the fact that net loss reported thus far cannot be attributed to the company's performance, analysts chose to exclude the net loss from their estimates; to include it would be misleading. Pacific Drilling has entered a short, much anticipated, period of explosive revenue growth which equates to "implied volatility". According to average forward EPS calculations Pacific Drilling has completed a strong 4th quarter and should be rated "buy" ahead of the annual report for the twelve months ended December 31, 2013.
Average Foreword Earnings Per Share
Average forward earnings per share (AFEPS) are a financial metric I created and use to analyze offshore drillers. In my article, "Seadrill Offers Dividend and Growth" average forward EPS are explained in detail and are used to analyze Seadrill Ltd. (NYSE:SDRL). AFEPS brought me to the conclusion that Seadrill would rally based off of stronger-than-expected performance before the market was able to draw the same conclusion. When analyzing Pacific Drilling utilizing AFEPS I made two important discoveries. The first discovery I made was more of an important confirmation; the company completed a strong quarter. The second was that it was impossible for Pacific Drilling to earn the average analyst estimate of 39 cents per share as long as the analysts were estimating GAAP earnings. As of the nine months ended September 30, 2013 Pacific Drilling has reported a net loss of $188,000.00. Further research indicated this loss is attributed to costs associated with refinancing of long term debt in the second quarter. Because of these refinancing costs the company reported a loss of 21 cents for the second quarter and a loss of 14 cents for the six months ended June 30, which resulted in the 188 thousand dollar loss for the 9 months ended September 30. The net loss reported thus far into 2013 does not accurately reflect the company's performance, which explains why analysts chose to exclude it from their estimates and most analytic journalists have all but failed to mention it. Since costs associated with refinancing are irrelevant to the company's performance, combined with the fact that the market didn't seem to care, I will also exclude the net loss from my average forward EPS estimate.
Source: Page 5 Pacific Drilling Q313 Form 6K
Depicted in the chart below is a numerical breakdown of analyst's Non-GAAP expectations for 2013.
Fleet Day Rate
Multiplied by days in a year
Total contract value
Plus new contract revenue from Pacific Khamsin in Dec.
Total contract value inclusive of new contract revenue
Average estimated revenue efficiency
Average contract revenue estimate
Multiplied by Average Estimated Profit Margin
Estimated Net Income
Divided by shares outstanding
Average Estimated EPS
Below Average Forward Earnings Per Share are Calculated for the Period Ended December 31, 2013.
Contract Drilling Revenue as of 9/30/13
4th Quarter Contract Revenue Adjusted For Fleet Downtime
Annual Contract Revenue Before New Contract From Pacific Khamsin
Plus 14 Days of Revenue From Pacific Khamsin
Multiplied by Average Estimated Operating Efficiency
Multiplied By Average Estimated Profit Margin
Equals Forward Average Net Income Estimate
Divided By Shares Outstanding
Equals Average Forward EPS
New Revenue For 2014
|7,211,400||Total Increase in Pacific Scirocco contract|
|240,900,000||Total Value of Pacific Khamsin Contract|
|102,120,000||Total Estimated Contribution from Pacific Sharav|
|350,231,400||Total Possible New Revenue For 2014|
-On January 8th the Pacific Scirocco dayrate will increase by 20,200 per day, totaling 7,211,400 per year
- On December 17th 2013 Pacific Khamsin began earning 660,000 per day, with a total contract value of 240,900,000 per year
-The company expects the Pacific Sharav contract to begin early 3rd Quarter. Should it begin July 1st the contract has a total contract value of 102,120,000 for the remainder of 2014.
-Based off of the figures in the table above total contract revenue should increase by 48.5%
After calculating average forward earnings per share and comparing them with the current average EPS estimate they don't provide shocking news of a substantial increase in EPS, as in the case of my Seadrill Ltd. analysis, but instead offer confirmation of a strong 4th Quarter. With blatantly obvious revenue growth on the horizon it is logical to conclude that Pacific Drilling will begin its rally on the news of a solid fourth quarter. Since the new contract revenue from Pacific Khamsin has already begun to impact the income statement in the beginning of 1st Quarter 2014 and two additional rigs are expected to leave the ship yard over the next 7 months investors should take their positions in Pacific Drilling prior to the official news of a strong 4th quarter 2013. Many cautious investors, such as myself, have likely held out to see how the market would react to such dismal GAAP EPS figures. Since the market, analysts included, isn't concerned with dismal GAAP earnings and prefers to focus on the strong performance in 2013 and the substantial revenue growth expected in 2014, expect cautious investors to come off of the sidelines with interest in Pacific Drilling, resulting in an excellent shorting opportunity.