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Summary

  • Well Positioned to capitalize on LNG growth in Canada.
  • JV with Halliburton.
  • Undervalued with $15.75 target.

For an investor looking for a driller located north of the 49th, Trinidad Drilling (OTCPK:TDGCF) is a drilling company with strong earnings potential looking to capitalize on the growing onshore market.

Trinidad Drilling

Trinidad Drilling LTD provides modern, reliable, expertly designed oil and gas drilling equipment operated by well-trained personnel. The company's drilling fleet is one of the most adaptable, technologically advanced and competitive in the industry.

With recent investments from majors like Shell (NYSE:RDS.A)(NYSE:RDS.B), Exxon (NYSE:XOM), and Chevron there has been an increase in the prospects for LNG exports and therefore higher Canadian E&P spending. In 2014 onshore E&P spending is expected to increase by ~3% compared to 2013.

While the longer-term outlook still remains positive for the development of proposed liquefied natural gas projects in British Columbia, political and environmental issues have delayed these projects. Having stated that, development of the Montney, Horn River and Duvernay basins for LNG export is expected to increase.

In Canada 5 drillers control ~65% of the market. As Trinidad has ~9% of the market share in Canada they are positioned well to capitalize on the growing industry.

With an overall rig fleet that is weighted towards deeper modern equipment and a balance sheet that has seen substantial de-leveraging over the past two years, Trinidad Drilling is positioned to capture a significant portion of the growth in demand for high spec deep drilling assets in Canada.

In the company's pursuit of exploring international markets, on September 3rd, 2013, Management signed a joint venture with Halliburton Inc. (NYSE:HAL). This joint venture is expected to increase revenue from markets outside the U.S. and Canada. Through the joint venture Trinidad Drilling will have access to more than 20 different countries. As Trinidad will be the majority shareholder in the venture with 60% ownership, while Halliburton will own the other 40%, each party will contribute to future capital projects in their respective proportions.

As Trinidad drilling is set to capitalize on the growing onshore drilling market in Canada, the U.S. and overseas the section below will estimate the current value and estimate future price targets.

Valuations

Currently, Essential is trading at very attractive valuations. According to data presented by MSN, Trinidad Drilling is currently trading at a P/S of 1.65 below the industry average of 2.08, P/B of 1.42, slightly above the industry average of 1.26, and a P/FCF of 4.67, which is below the industry average of 7.07.

NAV - Net Asset Value = Shareholders Equity / Number of shares

  • Net Asset Value 2011 = $841 million / 121 million = $6.95
  • Net Asset Value 2012 = $864 million / 121 million = $7.14
  • Net Asset Value 2013 = $1.114 billion / 122 million = $9.13
  • Net Asset Value 2014 E = $1.193 billion /122 million = $9.78
  • Net Asset Value 2015 E = $1.305 billion /122 million = $10.70

Based on 2015 estimates, Trinidad drilling is trading at 2015 book value.

(click to enlarge)

TDG data by YCharts

Dividend

At current levels the company offers a 1.838% yield which equates to an annual payout of $0.20. As the payout ratio is ~34%, this indicates that the company is not overpaying based on their income.

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TDGCF Dividend Yield (TTM) data by YCharts

2014 Target Price

Based on a 2014 estimated EBITDA of $293 million and using industry average of 6.1 EV/EBITDA, I will be able to come up with a target for the company.

Information presented below is needed to calculate this formula.

  1. Estimated Net debt = $350 million
  2. Estimated cash and cash equivalents = $27 million (same)
  3. Estimated future EBITDA (2014) $293 million
  4. EV/EBITDA = 6.1 (industry average)
  5. Shares Outstanding = 122 million
  • 2014 equity value = 6.1 x $293 million = $1464
  • Equity Value - net debt + cash = Enterprise Value (NYSE:EV) = $1464 billion
  • EV / Shares outstanding = $1.464 billion / 121 million
  • Target Price of = $12.00 per share

Based on the EV/EBITDA formula to find a valuation, I have concluded a current value of $12.00 per share.

2015 Target Price

  • Estimated Net debt = $276 million
  • Estimated cash and cash equivalents = $27 million (same)
  • Estimated future EBITDA (2015) $356 million
  • EV/EBITDA = 6.1 (industry average)
  • Shares Outstanding = 122 million
  • 2014 equity value = 6.1 x $356 million = $2171
  • Equity Value - net debt + cash = Enterprise Value = $1922 billion
  • EV / Shares outstanding = $1922 billion / 122 million
  • Target Price of = $15.75 per share

Based on the EV/EBITDA formula to find a valuation, I have concluded a current value of $15.75 per share.

Based on the chart provided by Seeking Alpha, in the United States Trinidad can trade rather "thinly." Today the company moved ~100 shares. If you have access to the TSX, you will find significantly higher liquidity. In Toronto the company trades under the symbol TRN.TO.

Based on a growing onshore drilling market Trinidad looks to capitalize on this. Controlling ~9% of market share north of the border, growth is evident. The current J.V. with Halliburton opens up the door overseas while the company's assets that are weighted towards deep drilling along with debt repayment will create significant shareholder value.

Source: Trinidad: Growth And Value