Pioneer Drilling: An ace in the hole

Paul Rolfes | May 02, 2008 6:20am EDT | Comment

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When the going gets tough, the tough drill deeper. And when crude oil demand shoots through the roof, along with prices, exploration companies dig deep to expand their operations.

With oil futures prices running about double what they were a year ago, the oil and gas rigs of Pioneer Drilling Co. (AMEX:PDC) are staying busy, at roughly 85% of capacity going forward in 2008. Still the San Antonio, Texas-based company is expanding the scope of its capabilities beyond the contract drilling business that has long been its mainstay.

According to nine analysts surveyed by Thomson Financial, four rate Pioneer Drilling a “hold,” two call the company a “buy,” and three rank shares a “strong buy.” The median price target from Thomson is $18 a share for Pioneer, which closed Thursday at $16.50.

In mid-April, shares were trading consistently above $17, after hitting a 52-week high of $17.80 on April 16 — nearly double the 52-week low of $8.95 hit on Jan. 22. Historically, Pioneer Drilling traded as high as $23 in early 2006, but more recently, shares suffered a 4% retrenchment April 24 in a commodities sell-off that included the oil sector.

This year, Pioneer Drilling is branching out as the company celebrates its 40th anniversary. Its 66 land-based North American rigs are mostly in Texas and Oklahoma, with a smattering in Utah, Montana and the Dakotas. Last year, Pioneer Drilling put three rigs in Colombia, its first international expansion, with two awaiting deployment when customers there beckon.

Pioneer Drilling’s equipment burrows down 6,000 to 18,000 feet. The company says it has one of the youngest fleets of drilling equipment, with more than 80% either new or refurbished in the past six years. Since 2000, Pioneer has built 26 rigs at an average cost of $8.2 million, but it’s also acquired 42 at an average of just $2.9 million.

The industry took notice March 4 when Pioneer Drilling announced that it had completed its acquisition of Wedge Well Services LLC and said it was purchasing Prairie Investors, which has operated as Competition Wireline, in Billings, Mont., for a package worth $340 million. CEO Stacy Locke has explained it’s a chance to move beyond just drilling a hole and moving on; now Pioneer can provide continuing services at the well site.

Pioneer restructured operations into two divisions — Pioneer Drilling Services and a new Pioneer Production Services. The company, which has altered its financial reporting to follow the calendar year instead of ending its fiscal year in March, also secured a new five-year, $400-million credit line.

Still, Pioneer Drilling didn’t report a slam-dunk quarter for the final three months of 2007. Higher costs and a drop in utilization rates from increased competition produced results not hitting gusher proportions.

Pioneer Drilling reported net income for the three months ended Dec. 31 of $14.8 million, or $0.29 per share, compared with $24 million, or $0.48 a share, in the final three months of 2006 — which still beat consensus estimates of around $0.21 EPS. Revenue declined to $104.6 million from $112.4 million in the year-ago period.

For a comparable nine months, net income was $39.6 million, or $0.79 a share, compared with $67 million, or $1.34 a share, the year before. Revenue increased to $313.9 million, from $312.8 million, for the similar 2006 period.

A fuller impact of diversification is likely to be seen when Pioneer reports first-quarter results on May 8. Thomson’s consensus analyst estimates call for an 8% increase in revenue to $111 million, but a 30% shrinkage in earnings, to $0.24 per share.

Putting the Wedge Well deal in perspective and noting the accretive benefits, Deutsche Bank analyst Mike Urban’s boost of Pioneer Drilling to “buy” from “hold” and a raise of the price target to $18 from $15, helped trigger a one-day 7% jump in the stock on March 4.

Following completion of the Wedge Well acquisition, analyst J. Marshall Adkins of Raymond James wrote to clients March 12 that “the market has loved this transaction and shares have rallied more than 35% since the deal was announced.” Expecting the purchase to be “hugely accretive,” Raymond James kept Pioneer Drilling at “market perform” but raised the 2008 earnings estimate to $1.10 per share from his previous $0.75.

Similarly, Joe Agular of Johnson Rice increased his 2008 EPS estimates to $1.25 from $0.74, to account for the acquisitions, while reiterating an “overweight” view. “From an earnings standpoint, the acquisitions should add roughly $0.48 to annual EPS,” Agular wrote to investors, indicating that he’s looking for $1.75 earnings per share in 2009.

Also after the Wedge Well completion, Jeffries analyst Judson Bailey raised his target price on Pioneer Drilling to $20 from $17, saying that shares are undervalued, while maintaining a “buy” call made in early February.

Yet on April 18, BMO Capital Markets pulled its “outperform” rating from Pioneer, dropping it to “market perform,” but raised its price target to $19 from $15.

Drilling down for a stock that’s an oilfield play, investors might find Pioneer Drilling one worthy of continued exploration.