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Trinidad reported 2Q16 EBITDAS of $57 mm, above our estimate of $47 mm due to higher-than-expected standby revenue. Internationally, Trinidad has one rig operating in the UAE on a trial basis, but this work could provide the opportunity for a broader scope of activity. In TDI, one rig contract in Saudi Arabia was cancelled during the quarter, but the Company is trying to identify new opportunities for this rig and negotiating termination compensation. Our 2016e EBITDAS is down 1% to $138 mm and 2017e EBITDAS has been lowered by 11% to $120 mm.
Trinidad Drilling
Impact: We expect the stock to trade higher tomorrow due to positive 2Q16 results.
Impact: positive due to reduced covenant risk should a low rig count environment persist, with the operational update being in line with expectations.
FirstEnergy hosted Brent Conway (President) and Lisa Ottmann (VP, Investor Relations) of Trinidad Drilling for an operational update on May 18,2016.
Trinidad is one of our top investment ideas in the FCC Oilfield Services (OFS) coverage universe given it is well situated to benefit from a recovery in the North American rig count, while being able to remain in compliance with its covenants. We have increased 2016e EBITDAS by 13% to $137 mm and 2017e EBITDAS by 7% to $129 mm. Trinidad has reiterated its 2016e capital program of $30 mm. We are forecasting 2016e and 2017e FCF of $56 mm in each year respectively, depicting a FCF yield of 12%.
Positive with results above consensus, net debt coming in better than our expectations and the first JV distribution being completed.
We believe Trinidad’s fleet composition in Canada and the United States will allow it to be a first mover in increasing utilization and EBITDAS as North American rig counts recover. We believe the mid-cycle case for TDG’s EBITDAS from its existing asset base is $202 mm and the high point case is $298 mm, relative to our 2016e of $133 mm (which is aided by $34 mm in early termination revenue). In Canada, Trinidad has the highest average vertical depth per rig at 4,267 metres leaving a significant portion of its fleet well positioned to develop the Montney, Duvernay and Deep Basin. Additionally, the Company has the second highest percentage of rigs that have AC power systems at 29%. In the United States, The Company’s fleet of 49 triples should be well suited for pad development. Of these triples, 34 have AC power systems and 25 are equipped with walking systems. We believe incremental upgrade capital will be deployed in future years to add walking systems on existing rigs which will improve marketability. At 6.0x EV/EBITDAS, we can identify a path to $3.50/share at the mid-point and $6.30 at the high point, compared to the current share price of $1.63.
Trinidad reported 4Q15 EBITDAS of $47 mm, well above our es mate of $37 mm due to cost cutting initiatives and greater than expected early termination payments. The Company also announced early termination revenue of $34.9 mm, of which $34.3 mm will be recognized as EBITDAS in 2Q16e. This posi vely impacts our 2016e EBITDAS but has a negative impact on 2017e. We expect the Company to receive a distribution payment of $21.6 mm from Trinidad Drilling International in 2Q16e. Our current forecasts suggest Trinidad will remain in compliance with its covenants for the duration of our forecasts. We have increased 2016e EBITDAS by 25% to $135 mm but have decreased 2017e EBITDAS to $126 mm from $141 mm. Trinidad has suspended its dividend which should reduce annual cash outflows by ~$9 mm.
Impact: positive.
Impact: Positive. The amended covenant package should provide Trinidad with additional flexibility should the duration of the downturn continue to extend. Furthermore, the 2016e capital program should allow Trinidad to remain FCF positive in 2016e.
FirstEnergy hosted Brent Conway (President) and Lisa Ottmann (VP, Investor Relations) of Trinidad Drilling for a management update on October 5, 2015. Trinidad continues to pragmatically manage the downturn through ongoing reviews of its cost structure while competitively bidding for work where appropriate. Trinidad's contracted status of ~35% in 2015e has helped it mitigate some of the reduction in North American rig count, but the reality is that all companies have been meaningfully impacted. The Company is currently planning its business in a way that suggests 2016e will not be much different than 2015e from a profitability standpoint to help manage costs.
We are discontinuing coverage of CanElson Drilling due to completion of it being acquired by Trinidad Drilling Ltd. (Market Perform, $5.25/ share target price). Our most recent rating for CanElson was Tender and our target price was $5.60/share.
We are continuing to set our target price using a 2016e P/Book multiple of 0.7x which results in an unchanged target price of $5.25/share and Market Perform rating. Our 2015e revenue is unchanged as our expectation for weaker revenue-per-day in Canada has been offset by the potential for an earlier than expected closing of the CanElson transaction. Our EBITDAS forecast has been increased to $190 mm from $178 mm due to 2Q15 results and our EPS forecast has been increased to $0.14 from $0.10.
Trinidad is anticipated to complete the acquisition of CanElson on August 10, 2015. Our 2016 estimates are largely unchanged with our forecast still calling for EBITDAS of $74 mm. However, if oil prices remain at current levels there is significant downside risk to our estimates. Our target price of $5.60/share and Tender rating is unchanged as we have made no changes to our Trinidad Drilling target price (Market Perform, target price: $5.25).
Impact: Slightly Positive.
Trinidad is buying CanElson for an announced $5.02/share when taking into account the TDG-CDI share exchange ratio and cash portion of the purchase. The total transaction value is $505 mm. The per share value would fall to $4.59, or $464 mm, based on today’s closing price. We believe the deal is positive for both CanElson and Trinidad shareholders. For Trinidad shareholders, it means acquiring an asset base that generates strong utilization, good ROCE, and alleviates any immediate concerns about debt levels. It provides CanElson shareholders with exposure to a rig fleet composition that is very different from what the Company has today and is a liquidity event at a fair valuation in a challenging operating environment.
CanElson reported revenue of $66 mm, beating our forecast of $58 mm, due to higher than expected activity and day rates in Canada. EBITDAS of $18 mm was higher than FCC ($14 mm) due to higher revenue. EBITDAS margin of 27% was higher than forecast, a testament to the Company’s realized costs savings. EPS of $0.06 was higher than our forecast of $0.03.
Trinidad reported 1Q15 results well above FirstEnergy expectations due to one-time payments from U.S. contract terminations and tronger- than-expected Canadian operating performance. EBITDAS of $60 mm was above FirstEnergy’s estimate at $45 mm. The Company continues to have 45% of its fleet on long-term take-or-pay contracts which should provide a base level of stability for earnings going forward.
Impact: Neutral.
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