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Energy Watch: CIBC tout’s Precision Drilling’s competitive advantage


ANALYSIS: It might be the same advanced tool used to make holes in the ground, but according to CIBC, there is a fairly good chance it would not be placed as strategically, used as efficiently or marketed as effectively in the hands of a company other than Calgary-based Precision Drilling.

In a 114-page report published Wednesday, the bank's director of oilfield services research reintroduced a deep dive into western Canada's best frackers, pumpers and drillers with support from 11 other analysts based out of CIBC's Calgary office. Their collective advice to investors:

  • Get into the sector now
  • Be prepared to stay for a long time
  • While you're there, be wary of where the companies you invest in plan to go next

“While we expect broad-based ownership of the sector to be rewarded over the next three to five years, strategically, we believe investments should be focused on those companies with exposure to deeper resource plays and leverage to oil-and liquids-rich activity (in both Canada and the U.S.) and that are increasingly well positioned to benefit from early-stage upstream development work to support liquefied natural gas (LNG) export plans,” Jon Morrison wrote on behalf of the report's 12 authors.

“Presently, we have a bias towards owning higher-quality contract drillers on the basis of relative valuation, continued contract awards and a tightening supply/demand dynamic in 2014 and 2015. Our current top picks are Calfrac Well Services (CFW-T), Ensign Energy Services (ESI-T), Precision Drilling (PD-T), Savanna Energy Services (SVY-T), Trinidad Drilling (TDG-T) and Western Energy Services (WRG-T).”

Not surprisingly, all six of the top picks outlined in the report have an Outperform rating at CIBC and have an average rating of Buy or higher among all the other analysts who cover the same stocks. Yet given the CIBC report's unique approach of cross-referencing Canada's top resource plays, there is one company that stands out above the rest.

Canada's Deep Basin is “by far the most important play” in western Canada, CIBC's analysis found, as it represents more than half of all Canadian resource play activity over the past two years. British Columbia's Montney and Alberta's Duvernay resources, despite being touted as the keys to Canada's much ballyhooed LNG export boom, represented 20 percent and 5 percent of total activity by comparison.

Within the Deep Basin, Precision has a dominant 25 percent market share. Even though none of the company's rigs there rank among the top 10 most active, CIBC notes that is simply a function of a “balance of the company's rigs all performing well in the play without a select handful being the most active and pulling up the average.”

In total, CIBC found Precision Drilling was the most active oilfield service provider throughout the entire western Canadian sedimentary basin. From the start of 2012 until the end of 2013, the company drilled a total of 2,850 wells drilled and recorded roughly 30,000 operating days on a spud-to-rig release basis.

Now it is worth keeping in mind when looking at the other companies on that list that those numbers do not tell the entire story. Savanna Energy Services, for example, commands the third-largest drilling fleet in Canada and ranked third as well in terms of total wells drilled, yet the company ranked sixth in terms of total operating days at less than 11,000 largely because 19 Savanna drills remain devoted to certain shallower resources marketers are willing to buy only during certain times of the year.

That can give the impression of underperformance in terms of resource play activity versus total fleet size, but as CIBC explains: “these shallower assets continue to generate solid cash-on-cash returns and provide positive gross margins and earnings each year. As such, we believe that by continuing to operate these shallower assets, Savanna is providing a better absolute economic return for its shareholders, despite these rigs making the average fleet performance look softer.”

Ensign Energy Services is the second most active driller in the Deep Basin and six of the region's ten most active rigs come from that company's fleet. Patterson's feet spent more than four out of every five operating days over the past two years in the Deep Basin and CIBC notes the company is the “contract drilling of choice for Tourmaline Oil” in the region.

CIBC's report comes at a particularly good time for Precision Drilling, being just two days after the company announced several new international contracts that will require a 2014 budget about 23% higher than the one management laid out just last month to $634-million. Most of those contracts (6 out of 7) are in Mexico; a growth market by all accounts as the country continues rapid progress towards opening its state monopoly on energy development to private enterprise for the first time since before the Second World War.

Incidentally, Morrison also increased his price target on Precision Drilling stock by $1 to $14.50 per share in a separate note also published on Wednesday. Clearly the company is aptly named. With timing, opportunity, location and foresight all converging to help Precision Drilling hit the oilfield services bullseye.

Jameson Berkow is BNN's western bureau chief based out of Calgary. Every weekday morning he researches the top stories affecting commodities and the oil patch, and sends his analysis to the BNN newsroom in Toronto. You can follow him on twitter @crudereporter CTV Two CTV News CTV News Channel BNN - Business News Network CP24