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Sahil Vora

PDC AT A GLANCE

P/E ► -2.93   EV/EBITDA ► -9.34   ROA ► -14.1% AVG ROE ► -28.4% AVG Debt to Equity ► 0.979 AVG Current Ratio ► 2.15 AVG Interest Coverage Ratio ► -17.1 LOW

 

 

 

 

 

 

Pioneer Drilling Company (AMEX: PDC) contracts onshore drilling rigs to oil and gas companies. Pioneer rigs can drill and maintain wells for any hydrocarbons, but most of the company’s rigs are contracted to natural gas producers.^[1] The company has a limited geographic scope: about 93% of its drilling rigs operate in the U.S., with 68% contracted in Texas alone.

Technological developments in the gas drilling industry, such as horizontal drilling and hydraulic fracturing, have opened up 842 trillion cubic feet of previously inaccessible shale natural gas in the last two years. ^[2] The sudden availability of enormous, untapped natural gas reserves has driven exploration and production (E&P) companies to ramp up drilling between 2006 and 2008, consequently increasing demand for Pioneer rigs and services. For instance, U.S. gas production grew 8.8% year-over-year between the first five months of 2007 and 2008 – the largest rate of increase since 1959. ^[3] Pioneer’s revenue, which grew 48% year-over-year between Q2 2007 and 2008, reflects this increasing demand. ^[4]

Between July and August 2008, however, the price of natural gas dropped 42%. ^[5] As gas prices fall, drilling activity slows, which ultimately hurts demand for Pioneer rigs. It remains unclear whether gas prices have been falling because of the larger economic crisis or due to fears of a natural gas supply glut.^[6]

Business Overview

Pioneer Drilling Company is an oilfield services business that contracts land drilling rigs, crews, and maintenance equipment to oil and gas exploration and production companies. With the acquisition of WEDGE Companies and Competition Wireline in March 2008, Pioneer Drilling Company began to offer workover rigs and wireline units to accompany its established line-up of drilling rigs.^[7] While drilling rigs create new wells, workover rigs and wireline units help maintain existing ones.

As a general note, starting 2008, Pioneer will close its fiscal year on December 31, rather than March 31. In order to facilitate the transition, Pioneer released financial data in an SEC filing for March to December 2007, in addition to its regular filing for March 31, 2007.

Business and Financial Metrics

Pioneer Drilling Company’s revenue and operating income have increased steadily over the last three years. Revenue grew 125% from FY 2005 to FY 2007,^[8] reflecting a 50% increase in rig count and 171% higher drilling margin per revenue day.^[9] Revenue has been growing more recently as well: Q2 revenue rose 48% year-over-year between 2007 and 2008, from $102.7 million to $152.5 million. ^[10]

Rig count, revenue days, and utilization rates are also valuable indicators of business potential and performance in the drilling industry. Pioneer’s 69-rig fleet is small by industry standards, but the company has opted to keep its rigs up-to-date with the latest technology, rather than rapidly add machines to its fleet.^[11] The company has built or upgraded 80% of its drilling fleet within the last 6 years. ^[12] For the fiscal year ending March 31, 2007, the company spent approximately $15.7 million upgrading 15 rigs over the course of 391 potential revenue days. ^[13] 60% of its rigs have been fitted with iron roughnecks, which help to mechanize and automate the drilling process. ^[14] This level of capital investment lets Pioneer charge its customers $600/hour on average,^[15] compared to the $400/hour charged by larger competitors. Despite its high prices, Pioneer has maintained high rig utilization levels for its premium quality fleet.

Revenue and Operating Income, years ending March 31^[16]

Business Segments

With the acquisition of WEDGE Companies and Competition Wireline in March 2008, Pioneer added a Production Services segment to accompany its traditional Drilling Services business. (As a result, segment revenue data only reflects the first half of 2008, not an entire fiscal year.)

Drilling Services accounted for 79% revenue for the first half of 2008.^[18]

The Drilling Services segment offers 69 drilling rigs and crews to natural gas and oil exploration and production companies.^[19] Pioneer rigs, with a drilling capacity of 6,000 to 18,000 feet, are primarily used for natural gas production.^[20]

Production Services made up 21% of revenue for the first half of 2008.^[21]

This segment contracts 66 workover rigs, 54 wireline units, and $14 million of fishing and rental tools for oil and natural gas production.^[22] Oil and gas E&P companies rent production services equipment to aid with maintenance and production at existing wells. For instance, workover rigs replace well tubing, while wireline units help lower equipment into open wells.

Geographic Distribution

Pioneer generally contracts its rigs to companies throughout Texas and the American Midwest, but the company stepped into international markets in 2008 by deploying 5 rigs to Colombia.

Trends and Forces

Pioneer stands to benefit from the unconventional gas production boom occurring in the Texas Barnett Shale.

Domestic natural gas production has risen dramatically since 2006,^[24] as the new combination of horizontal drilling and hydraulic fracturing lets companies access gas stored in shale beds.^[25] In the first five months of 2008, natural gas production in the U.S. grew 8.8% year-over-year, the biggest rate of increase in the last 50 years.^[26] Pioneer Drilling benefits from unconventional gas production due to its proximity to the Barnett Shale in North Texas, where production has jumped over 3000% since 1998.^[27] In fact, two of Pioneer Drilling Company’s largest customers, EOG (9.7% of 2007 revenue^[28]) and Chesapeake (9.1% of 2007 revenue^[29]), drill extensively in the Barnett Shale.^[30] Pioneer offers the horizontal rigs that E&P companies, like EOG and Chesapeake, need to access shale gas.

Demand for Pioneer drilling rigs fluctuates with natural gas prices.

Natural gas prices, like oil prices, dropped dramatically through August and September 2008, though it is unclear whether this drop reflects an excess of supply due to booming shale oil production or insufficient demand due to the growing U.S. economic crisis.^[31] Natural gas prices slipped to $7.35 per 1000 cubic feet in early September, down from a high of $13 in July.^[32] Falling natural gas prices have been accompanied by a reduced active rig count. During the week of 9/15, drilling activity declined by 13 rigs.^[33] Low gas prices, and accompanying long-term production cutbacks, will drive exploration and production companies away from premium drill rig contractors like Pioneer Drilling Company.

Pioneer production services are moderately counter cyclical.

Production services help insulate the company from the substantial fluctuations of the drilling business. Even when oil and gas companies cut back on production, existing wells require workover and wireline rigs for regular maintenance. As E&P companies drill fewer wells, existing wells need more regular maintenance to keep up production levels.^[34] However, in severe downturns, workover rigs could be laid down as much as conventional rigs.

Competition

Pioneer Drilling Company competes with onshore drilling rig and workover rig contractors, particularly those dealing with natural gas exploration and production companies in Texas.

• Helmerich & Payne (HP) has 157 onshore drilling rigs in the U.S. Helmerich & Payne's FlexRig technology is ideal for unconventional shale drilling.
• Nabors Industries (NBR) has 535 onshore drilling rigs, 564 domestic and 173 internationally deployed onshore well workover and well-servicing rigs, 35 offshore platform rigs, 12 jack-ups, 4 barges, and a host of marine transport units.^[35] The company is the largest land driller in North America, and is rapidly expanding internationally.
• Patterson-UTI Energy (PTEN) markets 350 onshore drilling rigs in the United States, making it the second largest land drill contractor in North America.^[36]
• Unit (UNT) operates 129 land rigs in Wyoming, Utah, Colorado, New Mexico, Texas, Oklahoma, Kansas, and Louisiana. Since the company is also involved in E&P, many of these rigs are used internally.^[37]
• Grey Wolf (GW) focuses on drilling contracts in the US, with a fleet size of 121 drilling rigs.^[38]

This graph shows market share for the United States' onshore contract drilling market in FY 2007. Market share is determined by the number of rigs owned and operated by the respective drilling companies.^{[39][40][41][42][43][44][45][46]}

References

1. ↑ PDC 2007 10-K page 14
2. ↑ Navigant Consulting, "North American Natural Gas Supply Assessment", 7/4/2008, page 19
3. ↑ NYT "Drilling Boom Revives Hope for Natural Gas" 8/24/2008
4. ↑ PDC 10-Q Q2 2008 page 3
5. ↑ NYT "Drilling Boom Revives Hope for Natural Gas" 8/24/2008
6. ↑ Morningstar "Is a Natural Gas Supply Bubble Forming?" 9/12/2008
7. ↑ PDC 10-Q Q2 2008 page 9
8. ↑ PDC 2007 10-K
9. ↑ PDC 2007 10-K, Page 28
10. ↑ PDC 10-Q Q2 2008 page 3
11. ↑ PDC Corporate Presentation slide 8 9/2008
12. ↑ PDC Corporate Presentation slide 8 9/2008
13. ↑ PDC 2007 10-K page 21
14. ↑ PDC Corporate Presentation slide 8 9/2008
15. ↑ Lehman Brothers CEO Energy/Power Conference Call 9/4/2008
16. ↑ PDC 2007 10-K
17. ↑ PDC 2007 10-K, Page 28
18. ↑ PDC 10-Q Q2 2008 page 14
19. ↑ PDC 10-Q Q2 2008 page 14
20. ↑ PDC 2007 10-K page 14
21. ↑ PDC 10-Q Q2 2008
22. ↑ PDC 10-Q Q2 2008 page 14
23. ↑ PDC Corporate Presentation slide 3 9/2008
24. ↑ The Oil Drum 9/4/2008
25. ↑ NYT "Drilling Boom Revives Hope for Natural Gas" 8/24/2008
26. ↑ NYT "Drilling Boom Revives Hope for Natural Gas" 8/24/2008
27. ↑ Navigant Consulting, "North American Natural Gas Supply Assessment", 7/4/2008, page 10
28. ↑ PDC 2007 10-K page 6
29. ↑ PDC 2007 10-K page 6
30. ↑ Navigant Consulting, "North American Natural Gas Supply Assessment", 7/4/2008, page 36
31. ↑ Morningstar "Is a Natural Gas Supply Bubble Forming?" 9/12/2008
32. ↑ The Canadian Press 9/19/2008
33. ↑ Baker Hughes Rig Count
34. ↑ Lehman Brothers CEO Energy/Power Conference Call 9/4/2008
35. ↑ NBR 2007 10-K, Page 3
36. ↑ PTEN 2007 10-K, Page 1
37. ↑ Unit Web Site: Rig Fleet Map
38. ↑ GW 2007 10-K, Page 4
39. ↑ Pioneer Drilling Company Rig Fleet List
40. ↑ Grey Wolf, Inc. Summary
41. ↑ Nabors Industries Ltd Summary
42. ↑ Patterson UTI Summary
43. ↑ Helmerich & Payne Rig Fleet
44. ↑
45. ↑ Rowan Companies Land Rig Fleet
46. ↑ Parker Drilling Fleet