The entire oil and gas sector, particularly in Canada, has been decimated of late. Mixed in with producers, third-party servicing companies in the drilling, exploration, etc., businesses have been hit as hard or worse. Investors broadly appear to be viewing the entire sector as toxic now.
In this article, I am going to discuss why Precision Drilling (TSX:PD) represents a high-risk, high-reward value play, accordingly.
Precision Drilling, like its drilling and well services counterparts, has seen significant revenue and cash flow declines in recent years. Drilling activity has continued to slow alongside a strong bear market in commodities prices.
Demand for new wells has cratered as prices continue to remain below the break-even level for most producers. Ongoing drilling to support production increases has tapered off, unsurprisingly, for exactly the same reason.
With some analysts predicting WTI potentially remain depressed at levels below U.S.$30 per barrel level, and potentially remain depressed at levels below U.S.$40 WTI for a longer period of time, third part companies like Precision Drilling are often the first to get the investor boot.
This is largely unfair, in my view. I do recognize there is a minimal level of drilling required to simply maintain production levels at current state. Right now, we are very close to such levels, meaning most, if not all, of the downside in Precision Drilling stock has been priced in.
For those bullish on a commodities rebound, Precision Drilling is a high-beta way to trade the price of oil.
Invest wisely, my friends.
