Precision Drilling

[SharperDingaan]

We'd be interested in hearing the boards comments on PDS, particulary over the next 12 months.

Q3 earnings were released this AM  ;)

 

We hold a long position with a very low cost base.

 

SD

 

[Guest kawikaho]

How low is low?  :)

 

I've been looking at PDS for the past 3 years.  I think they overpaid for Grey Wolf, and they have alot of debt because of it.  I wonder how long the Canadian gov't will allow these energy trusts to continue with their current tax structures.  But...

 

I like the dividend distribution, they have retired ALOT of LT debt since a year ago, they have massive drilling capacity, I doubt NG is going to stay this low for the next 5 years (but who knows), and oil is heading up! 

 

I'm looknig to move 20% of my portfolio in energy trusts: BBEP, PDS, PWE.

[biaggio]

I bought it high. Have held on through massive dilution as a result of the Grey acquisition which could not have had worse timing. I bought PDS before reading the fine information/wisdom from this board.

 

I am impressed that they are able to turn a profit with drilling being down so much. There drilling rig use was down almost 44%. They earned $0.25 with drilling utilization down as a result of natural gas spot prices being real low during the quarter. Could they earn $1 per share? How much can they earn if + when the economy turns?

 

By the way, PDS not paying a dividend as they are using cash to pay down debt.

 

Trust structure in Canada to end I believe in 2011.

 

I would feel better if management had more skin in the game. I think they own <1% of stock.

 

 

[SharperDingaan]

 

Our cost base is the mid 4's. We started to roll in during the early stages of the GW acquisition, hedged as financing issues began to dominate, then covered & added at around the time of the Treasury Board acquisition. As our portfolio has grown, the PD weighting has fallen, & we need to re-assess.

 

We believe the risk is substantially lower than it was;

1) Debt is down drastically; lowering both the break-even & go-forward earnings volatilty 

2) Business is improving; oil/gas prices are rising, client CF increasing, & decline rates increasing

3) Mgmt is delivering; overall business, & general execution

 

Are we missing something?

 

SD

 

[Guest Dazel]

 

I do not not invest in this area...too capital intensive and I am not smart enough to figure it out...spent a ton of time trying to figure it out years back..thank god it was too hard for me!

That being said.. Sprott are experts and one of Eric's biggest admitted mistakes was selling PD too early. I would take a look at what they are saying..there is no one better in this field..pardon the pun!

 

Dazel.

[Uccmal]

Non-Reit trusts in general.  The drop dead date for the tax benefits they enjoy is 1.3 years away.  That being said, many of these businesses have tax pools to carry forward that will last them for years.  Along the way they tend to accumulate more.  I expect more will follow the route of Mullen Group and convert back to a corporation eventually. 

 

The O&G trusts are hard to get a handle on.  I hold Arc Energy in RRSPs which is among the best managed.  No others need apply. 

 

I like PD.Un as a proxy to the O&G business.  They are not depended on specific oil fields or a specific commodity O vs. G.  When the prices rise drilling will recommence and PD.UN will once again become a huge cash machine.  When the commodities peak you sell all your shares.  This is a deep cyclical on a tight cycle.  This business is not for the buy and hold mentality because in two years the cycle will turn down again.  Agreed with SD... they are getting the debt under control and should be an easy triple once the commodity drilling gets going.

 

The other one I have held for years is Mullen Group.  These guys provide the majority of the trucking and logistics to the O&G business in Canada. 

 

Another is Russell Metals which services both the US and Canada.

 

So I invest in the O&G business via a service supplier (MTL), a pipe and metal suppler (RUS), and a specialty driller (PD.UN).  Each of these businesses is simple to understand and all I need to know is that there is plenty of O&G in North America into the distant future.  I dont need to know about reserve lives, dry holes, exceptional cap-ex, or other things that can be fabricated by the companies and their suppliers. 

[SharperDingaan]

 

Thanks for your comments

 

We’re pretty much on the same page, but we see the primary risk as being distortion ‘from the times’ - versus the actual business risk itself.

 

We can fully understand no more than 2-3 equities … so as the portfolio grows, (1) either the $/investment increase, (2) the equity weighting declines, or (3) cash/margin changes. Given the times … (2) should be increasing (3) should be modestly negative – & (1) starts looking like an institution. Hence the ‘distortion’

 

O/G is largely within our ‘circle’, we have experience with the industry, & we have the expertise to hedge the risks appropriately. We also know our competitive advantage, & have the discipline to stay within it.

 

We’re living in truly extraordinary times

 

SD

 

[Uccmal]

Sharper, I need your clarity on a balance sheet item.  In the liabilities column Precision has listed 700 M in Future Income Tax Expense.  This make about a $3 difference to book value whether I include it or not. 

 

What exactly is this expense and will they ever be required to pay it?  I looked at the AR and it just confused me more.

 

 

[SharperDingaan]

 

The 700,016 per the 09/30 BS is deferred taxes. See Note 4

4. Income Taxes. Currently, the Trust incurs taxes to the extent that there are certain provincial capital taxes or state franchise taxes, as well as taxes on any taxable income, of its underlying subsidiaries. Future income taxes arise from the differences between the accounting and tax basis of the Trust's and its subsidiaries' assets and liabilities.

 

Deferred taxes are effectively an interest free loan from the taxman, that is never repayable as long as the company maintains its asset base (rigs, equipment, etc). The actual amount depends on the asset mix as different assets depreciate (for tax purposes) at different rates; when PD comes out of its trust structure, there shouldn't be any impact.

 

Then keep in mind that the existing trust structure also requires that they essentially pay out their earnings (why we get a distribution); which they haven't been doing. Expect some big (& very favourable) write-downs in Q4  ;)  that bring them back on-side.

 

SD

 

 

 

[Uccmal]

SD, Thankyou.

[SharperDingaan]

This is why you hedge a position ... http://www.calgaryherald.com/business/Precision+Drilling+shares+plummet+Alberta+fund+manager+sells/9251848/story.html

 

We bought in our stake at around the same time as AIM Co, & hedged it at well above the $10 mark.

Entirely house funded today, positive carry, & it looks like we might well get our grubstake back a 2nd time over the next few months.

 

Not the easiest thing to manage, but quite the technique if you can master it  ;)

 

SD