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Trinidad Drilling has the tools to outperform peers

Based in Calgary, Trinidad Drilling Ltd. is a relatively new company, dating back only to 1996.

Starting out as a small Saskatchewan-based contract driller with only four rigs, over the years it has expanded into a major player through a combination of acquisitions and organic growth.

The company now has a total of 164 rigs operating in Canada, the U.S., and Mexico. Slightly more than half the rigs are located in the latter two countries, which means Trinidad's capacity is less subject to the seasonal factors that affect work in Canada.

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These are state-of-the-art deep-drilling rigs with an average range of 3,700 meters (2.3 miles). The fleet is relatively new, with an average age of five to seven years. So, Trinidad is a major player in unconventional and shale plays in Canada and the U.S., which is where the demand is highest right now.

Business Beats Industry Average

Trinidad's business isn't booming yet, but the upward trend is clear. The company reported that the average Canadian drill-utilization rate was 55 per cent in 2010, up from 35 per cent in the previous year, due to improving industry conditions. The utilization rate was well above the 40 per cent average for the Canadian industry as a whole.

Significantly, Trinidad's fourth-quarter average Canadian utilization rate was 65 per cent (industry average 49 per cent). That was up from 44 per cent in the fourth quarter of 2009.

We saw the same pattern in the U.S. and international drilling operations, where 2010 utilization levels averaged 68 per cent, compared to 63 per cent in 2009. Similar to Canada, utilization levels improved in the fourth quarter, averaging 73 per cent compared to 63 per cent in the same period of 2009.

The company expects improvement to continue this year, because of stronger oil prices and an improvement in market and credit conditions. Of special importance to investors is the fact that Trinidad has approximately half of its fleet under long-term "take-or-pay" contracts, with an average term remaining of 1.7 years.

"This strategic positioning allows the company to have improved certainty and visibility for a significant portion of its revenue stream, while also maintaining exposure to increasing day rates on the remainder of its equipment," management said in a press release.

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A Crafty Fix to a Tricky Problem

The news on the financial side is not as encouraging, however. Although revenue increased by 11 per cent in 2010, to $646.7-million (Canadian), the company reported adjusted net earnings of only $12.2-million (10 cents per share), down from $29.8-million (28 cents a share) in fiscal 2009. Higher depreciation and amortization expenses, as well as additional interest costs associated with the refinancing of the company's debt facility, were blamed for the decline.

However, Trinidad improved its financial flexibility by raising $450-million (U.S.) in an issue of senior unsecured notes due in 2019, using the proceeds to redeem convertible debentures that matured next year.

"These changes simplify the company's capital structure, allow for penalty-free debt repayment, extend the debt maturities, and better allocate the company's indebtedness between U.S. and Canadian dollars," management said.

The stock, which was trading in the $5 range as recently as last fall, has been on a sharp upward trend, and is now at its highest level since 2008, trading around $11.

However, there is plenty of upside potential remaining; the shares have traded above $18 in the past.

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Trinidad pays a 5-cent quarterly dividend to yield 1.8 per cent at the current price.

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About the Author

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. More

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