Precision Drilling Seeing Increased Demand for Super Series Rigs

| About: Precision Drilling (PDS)

Precision Drilling (NYSE:PDS) is an onshore drilling and well services company. Precision operates in two segments. The first is contract drilling services and the second is completion and production services. It is a $3.13 billion market cap company.

Precision is benefiting from the new oil drilling environment in the United States and Canada. The reason for this is the application of horizontal drilling for natural gas being used to for oil shale drilling. Locations such as the Bakken/Three Forks, Eagle Ford and Niobrara are all benefiting from this new technology. Now that it has been used for a little while there has been a significant improvement in the collecting of oil, which has further increased interest. Another reason is the increased price of oil. This has also helped to make this drilling possible, as horizontal drilling is time intensive and expensive.

Precision Drilling seems to be in the right place at the right time. Since January of 2006, United States rig counts have grown by over 300%. There are some interesting numbers with respect to drilling for oil and natural gas from January of 2007 to the end of the third quarter last year. Total oil drilling rigs were up 165% through that time frame. There was an increase of 165% for active rigs in the Bakken. Convention gas rigs are down 67%, although shale gas has increased by 104%. Precision states that Tier One rigs have seen dramatic increases in demand over that short time frame. Since 2005 there has been a gradual shift to oil from natural gas rigs.

2005: 22.7% oil
2006: 23.7% oil
2007: 38.6% oil
2008: 42.1% oil
2009: 45.7% oil
2010: 55.6% oil

It is believed oil above $60/barrel will continue to stimulate activity with respect to oil rigs. Precision states they believe gas rigs are rolling over with respect to demand, and they believe this will continue to stimulate demand for oil rigs. Precision is now using unconventional techniques on conventional oil plays to further increase well production and return. This not only increases the amount of oil garnered but also allows Precision to increase charges for further profit. Canadian rig activity had been slow through 2009, but things picked up steadily last year, and Precision is estimating this will be an even better year when compared to last year.

Precision looks good going forward based on its leverage to onshore drilling. As many of the natural gas shale techniques have been utilized by the oil industry, this has created interesting opportunities for oil exploration and production companies now that oil is at $100/barrel. Precision has strong margins and cash flow. They are diversified with a broad geographic customer base. They also have a leading market position in North American oil plays. They are capitalizing from organic United States growth, and with its Precision Series rigs suited for unconventional plays. Fundamentals within this industry are good and there are possible international opportunities.

Precision has a high technological rig force. This group is specifically tethered to growth in shale plays across the United States and Canada. 2011 capital expenditures are $171 million for expansion purposes. Precision invested in producing nine rigs last year and plans to add five this year. This company is also investing $115 million to upgrade existing rigs. Eight to 12 rigs upgraded this year. Another $119 million is being spent on maintenance and infrastructure. Of its 355 rigs, 120 are Super Series, and 125 are Tier 2 (high performance). These rigs are described as:

  • Super Series (Tier 1) - These rigs are high performance and very mobile. These are automated with advanced drilling controls. Horizontal capabilities and capacity mud pumps make these highly suited for deeper shale plays that have complex drilling needs.
  • Tier 2 - These are precision high performance rigs with top drive and high capacity mud pumps. These have horizontal capabilities but are much less mobile then Super Series rigs.
  • Tier 3 - These conventional rigs are used for shallow drilling and lack automation. They have some directional capabilities, but are not suited for high growth shale areas such as the Bakken/Three Forks.

Precision has used its increasing revenue to expand the high technology portion of its fleet. Many of its rigs are designed by Precision. On average, many of these rigs are 1,000 hp and drill for up to 15,000 ft. These rapid deployment rigs are not only safer, but also leave a smaller footprint. These same rigs have drilled as deep as 21,000 ft. in the Bakken Shale. Precision has seen an active increase in rig counts of North America. Since April of 2010, this steady climb has been good for Precision.

Precision is vertically integrated. This unique operating model adds to margins and provides a diverse service offering. It is seeing a new opportunity with respect to waste water treatment. As horizontal plays are becoming more popular with respect to oil, waste water has become an environmental concern. Precision is well placed to help reduce this problem and profit from it.

Precision states that 60% of its rigs are drilling for liquids. Oil and natural gas liquids plays are getting more attention everyday. From the Bakken to Niobrara and Permian to Eagle Ford all of these resource plays have Precision's fleet operating. Precision is a predominant North American driller. They have 130 Super Series and high performance rigs in Canada. In total, 202 rigs are present in Canada from Precision. In addition there are 200 service rigs and 85 drilling rig camps. There are 112 Super Series and high performance rigs operating in the United States. A total of 150 rigs are operating here. Two rigs are now in Mexico with one in Chile. Precision manufactured nine new Super Series rigs last year and has five planned for this year. They are provided with long term contracts.

Precision has 25% of the rig force in Canada. It also has 6% of the rig fleet in the United States. This company is just beginning to increase its presence in Mexico and other Latin American countries. Precision has been operating in the United States and Canada for almost five decades.

Precision offers other services such as waste water handling and treatment. Terra Water Systems has 78 waste water treatment units. These portable waste water units are used then removed from the site. It also has well servicing units for locations that are having difficulty with equipment. Precision also provides rental equipment. More than anything, this provides the customer a complete experience to handle all on site needs.

Current industry trends are bullish for this company. The changes in land drilling in the United States seem to be much like that of deep sea drilling in 2007-2008. Although the entire industry was doing well, the most important aspect of this business was its high specification drill ships. The best way to correlate this is to demonstrate demand for deeper drilling rigs that are able to horizontal drill in areas like the Bakken. Bottlenecks all over shale plays in the United States are occurring because there are not enough Super Series or Tier 1 rigs. These rigs not only garner more revenue but are what the industry needs at this point. As it gets more and more difficult to drill shales, these rigs will continue to be in need. Not only do these types of rigs create better margins for companies like Precision, but they also provide oil exploration companies that ability to access the oil, and do it with better initial flow rates and overall oil recovery.

Looking at the active drilling rigs per region, there are also international opportunities Precision could decide to pursue:
United States and Canada - 2,206 active rigs
Latin America - 463 active rigs
Europe/Africa - 327 active rigs
Middle East - 308 active rigs
Asian Pacific - 214 active rigs
Russia/Asia - 1,169 active rigs
Total Active Land Rigs - 4,687

If Precision decides to do so, they would have access to many high specification areas that have better margins. These plays all over the world will continue to need Precision's services. Also Precision has seen an up tick in demand for its rigs in the short term. Precision believes this will continue into the foreseeable future based on current shale plays like the Bakken and Eagle Ford having a low percentage of drilling locations filled. Precision also has seen an increase in drilling contracts this winter. Half of these contracts are in Canada and the other half the United States.

In summary, I believe all drilling companies focused in the United States and Canada will be very busy, if they have high specification land drilling rigs able to horizontally drill in deep locations. Oil and gas exploration and production companies are talking about current backlogs of work that they are unable to get crews and equipment to complete. It seems with current events and oil shooting higher, these bottlenecks with continue into the foreseeable future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Numbers of active world rigs provided by Schlumberger.