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Is the Performance of This Company Xtreme or Accidental?

Thursday - 5/23/2013, 4:18pm  ET

Looking for turn around stories in North America, an investor can't afford to overlook Xtreme Drilling and Coil Services (TSX: XDC). The stock has yielded more than 150% since last summer when investors deserted the company for better investment prospects. This eye-catching performance might make an investor wonder whether the stock has run its course. Has the rally legs? Let's dig into this company to find it out. 

Xciting improvement 
Xtreme is a company that markets its drilling rigs and coiled tubing well service units in the U.S., Canada, and Saudi Arabia. It spent $220 million in 2011-2012, loading its balance sheet with a lot of debt in order to expand its fleet. However, the CapEx for 2013 is significantly reduced and the company will spend ~$17 million in maintenance CapEx.
Most of the new fleet was deployed in second half of 2012, driving the growth both for the Drilling and Coil Services segments. For 2012, adjusted EBITDA almost doubled to $39.7 million as compared to $21.9 million in 2011. The top line also grew significantly as the company recognized revenue of $174.2 million in 2012, an increase of 67% from 2011. In addition, operating days for 2012 increased to 6,550 as compared to 4,602 in 2011.
In Q1 2013, the company had a utilization rate of 80% for its fleet. Drilling services continued to be the largest revenue segment for the company as the Canadian and U.S. drilling operations represented 82% of revenue for Q1 2013. Although Canada continued to be slow, evidenced by the fact that horizontal well permits and the rig count were down 10% year-over-year, the company's two primary U.S. plays of the Bakken and the Niobrara remained strong. In Q1 2013, revenue increased 4% over the previous quarter, margins improved, and the company recorded an adjusted EBITDA of $18.6 million.
After all, the recent performance of the stock wasn't accidental as there was a fundamental improvement that fueled this rally. 

Is an Xtreme upside left? 
Now that the company has turned the corner and assuming the price of oil remains strong, is Xtreme Drilling currently undervalued in comparison to its peers? To find this, let's visualize the Q1 2013 reports of Xtreme Drilling and its peers: 






Xtreme  Drilling





Trinidad Drilling





Ensign  Energy






Precision  Drilling





CanElson  Drilling





EV: Enterprise Value

LT: Long-Term

Based on the fundamentals and the key metrics of the peer group, Xtreme's stock won't most likely rise as much as it has risen during the last ten months. The company has to improve its balance sheet further by reducing its debt to exhibit a significant upside from the current levels. 

Xtensive concerns 

Additionally, what concerns me with Xtreme is the fact that its core markets are in the U.S. and Canada, where the demand doesn't exceed the supply. This results in competitive pricing, hurting the margins and the growth of companies operating in these regions. For instance, Trinidad Drilling (TSX: TDG) is another significant player in the sector, and notes that there are softening industry conditions across entire North America, although the downward trend slowed in Q1 2013 and activity levels have begun to flatten.

Trinidad Drilling isn't alone in having growth problems in its core areas. Precision Drilling (TSX: PD) was also hurt by lower North American activity, due primarily to depressed natural gas prices that limits gas-directed drilling activity. In Q1 2013, Precision's CEO noted that the subdued North American industry activity levels continue to disappoint many in the industry. The company's drilling rig utilization was down in both Canada and the U.S., partially offset by growth in its international contract drilling business.

CanElson Drilling (NASDAQOTH: CDLRF) is another company which recognizes that both Canada and the U.S. continue to be subdued markets and the industry saw contraction. CanElson Drilling also notes that its customers in Canada and North Dakota are cautious with respect to their capital spending programs, and consequently, the company expects typical seasonal utilization through the remainder of the year including a normal seasonal decrease in revenues for Q2 and Q3 of 2013. CanElson also points out that there might be some seasonal revenue rate pressure, as less efficient competitor drilling contractors try to obtain work with low revenue rates during the spring and summer drilling seasons.

Ensign Energy Services (TSX: ESI) also points out the continued softening of demand for North American oilfield services. In Q1 2013 report, Ensign notes that "reduced activity levels is combined with downward pressure on revenue rates for Canada and United States oilfield services, but increased demand for oilfield services in the company's international operations partially offset some of the weakness experienced in North America."

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