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Precision Drilling: Follow The Rig Count, Follow The Money

Cornerstone Investments profile picture
Cornerstone Investments


  • 2016 was tough for Precision and other contract drillers as rig count hit a decade-long low.
  • 2017 saw strong rebound in rig counts in the U.S. and Canada which have lifted sales and profitability at Precision.
  • 2018 is shaping up to be the start of a rebound for contract drillers and valuation remains attractive at Precision.

(All amounts in C$ dollars)

We have been following the onshore drilling market ever since the oil downturn. Precision Drilling (NYSE:PDS) has caught our eye as it traded 50% lower since the beginning of 2017 while oil price rebounded to above $60 WTI and has stayed at that level for a few weeks before starting to recover recently. As one of the most efficient and low-cost operators in the land drilling industry, Precision is poised to gain in 2018 as rig count catches up to the $60+ oil and operating leverage translates into higher profitability.

North American Rig Count

We publish a Weekly Rig Count Report, in which we track rig counts based on Baker Hughes data every week. We are seeing a big increase in U.S. rig count starting in mid-2017. Permian has been driving most of the gains and remained to see strong activities.

Initially, as oil price started its ascend and hovered above $60 per barrel, the oil rig count has not followed the upswing in oil price and has stayed relatively flat. There have been speculations on the potential explanations including more completion stages and pumping intensity resulting in more production per well and a large number of drilled but not completed (DUCs) wells. The share price of contract land drillers including Precision lost more than 50% of its value during 2017 as rig counts continued to hold steady. We believe the rig count has lagged the recent oil rally due to reasons including:

  • Large number of DUCs creating a backlog of uncompleted wells
  • Hedging limit upside from rising oil prices in the near-term
  • Budget for 2018 was set in late 2017 with development program finalized

Consequentially, going into 2018 we believe the drilling demand and rig counts will improve materially due to several reasons:

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Analyst’s Disclosure: I am/we are long PDS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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