Focus Article: Pioneer Drilling Co. (PDC)

Pioneer Drilling Co. (PDC) $7.49

The Company:

Established in 1968 and headquartered in San Antonio, Texas, Pioneer Drilling Company provides land drilling services to oil and gas companies in the Unites States and Columbia. The company’s four primary business lines include drilling services, well services, wireline services and fishing and rental services. The company grew revenue by 47% to $716 million in 2011 and appears to be on track to exceed $1 billion in annual revenue this year.

The Drilling Services segment offers drilling rigs and crews to natural gas and oil companies. Pioneer rigs were primarily used for natural gas production but the company has been shifting assets and 87% of their equipment is  now used in areas that produce crude oil and other liquid hydrocarbons. The company has 62 drilling rigs, which is expected to increase to 69 or 70 by the end of this year.

The production services segment contracts workover rigs and wireline units to help with maintenance and production at existing wells. For example, workover rigs replace well tubing, while wireline units help lower equipment into open wells. Production services generated 47% of total revenue in Q1 2012 and accounted for 52% of gross margin dollars. Pioneer has 98 well service rigs, which is expected to increase to 108 by the year end. The company has 112 wireline units, which is expected to increase to 119 by the year end.

Following the acquisition of Go-Coil for $110 million on January 3 of this year, the company is now offering coiled tubing services to its customers. They have 10 coiled tubing units, which is expected to increase to 13 by the end of this year. A large part of the 27% increase in production services revenue in Q1 2012 was driven by the acquisition of Go-Coil.

In Louisiana, Pioneer Drilling provides both on-shore and off-shore drilling services. 80% of the company’s working rigs operate under term contracts. Average utilization of rigs over multiple cycles since 2001 has been over 80% and current utilization is 90%.

In spite of the chaos caused in the drilling industry due to lower natural gas prices, Pioneer has continued to see good demand for its services. According to the first quarter 2012 results, the company’s revenues were up 14% and EBITDA was up 26% on a sequential quarter basis. The company was also picked as the safest among the 15 largest land contract drillers in the United States for 2011 by the International Association of Drilling Contractors (IADC).

Business Statistics & Financials:

The first thing that struck me about Pioneer Drilling was just how cheap it appeared especially after considering its historic growth and projected growth in 2012 and 2013. The company not only trades below book value but also trades for less than 4 times EBITDA. The cluster of insider purchases from last week, while not large, did not go unnoticed and the stock jumped 6% on Friday.

So why exactly is a profitable company that appears to be on track to double its 2010 revenue in two years, trading at such a large discount to the market? Part of the answer lies in the fact that drilling services providers are usually leveraged and tend to trade at low multiples as a group. Pioneer Drilling is no different with nearly $400 million in net debt on its balance sheet. While the company is generating positive operating cash flow, on account of its rapid growth and high capital expenditures, free cash flow was negative in 2011. The company reported $210 million in CapEx in 2011 and expects CapEx of around $330 million in 2012. Maintenance CapEx was 12.8% of total CapEx of $95 million in Q1 2012. Assuming maintenance CapEx of 15% of total CapEx for 2012, the company will pay just under $50 million for maintenance CapEx for this year.

Pioneer Drilling reported first quarter 2012 revenue of $232 million which was up approximately 14% from the prior quarter and up 51% from a year ago. A little over 10% of that revenue or $24 million came from Pioneer’s drilling activity in Colombia. Net income was $14.2 million or $0.23 per share compared to net earnings in the prior quarter of $6.8 million or $0.11 per diluted share and a net loss of $6 million or $0.11 per share loss in Q1 2011.

Total adjusted EBITDA in Q1 2012 was $70.1 million,  up 26% from the prior quarter and is 121% higher than Q1 2011. The company’s Q1 results were unusually strong on account of good weather and higher than normal turnkey revenue.

Competitors:

Insider Buying:

Three insiders purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Pioneer Drilling here.

Conclusion:

Pioneer Drilling is a high growth stock that trades at a very reasonable valuation and fits our preference for growth at a reasonable price (GARP). However drilling companies, just like hard drive manufacturers, usually tend to sport low multiples just like hard drive manufacturers. While we might not see multiples expand, growth in earnings should eventually help the stock appreciate.

Leverage and high CapEx are concerns but it is reassuring to see maintenance CapEx is well below the reported overall CapEx figure.