A petroleum drilling rig capable of drilling thousands of feet (Photo credit: Wikipedia)

TDG : TSX : C$7.06
TDG.DB : TSX
BUY 
Target: C$8.50

COMPANY DESCRIPTION:
Trinidad Drilling Ltd. is a Canadian based drilling contractor with operations in western Canada, southern US and Mexico. Trinidad’s rig portfolio is largely comprised of deeper rigs. The company also operates coring rigs, surface hole rigs and barge rigs.
All amounts in C$ unless otherwise noted.

Investment recommendation
EPS (ex-FX gain) of 29c came in ahead of consensus of 26c. EBITDA of $85 million beat consensus of $80 million but was just shy of our $88 million forecast. The consensus beat is attributed to better than expected results from the company’s Canadian drilling division. TDG’s Canadian fleet realized 73% utilization vs the industry average of 58%, due to both high demand for the company’s relatively high performance fleet and management’s ability to crew virtually all of its rigs in a seasonally busy period. The division’s result drove overall company outperformance, as TDG’s -3% y-y decline in total company revenues and -8% y-y decline in total company EBITDA represented outperformance vs peers (other drillers active in both Canada and the US reported flat to -21% y-y declines in revenues and -10% to -27% y-y declines in EBITDA over the quarter).

However, we note that in order to satisfy high customer demand, TDG pushed the repairs and maintenance costs it typically incurs in the first quarter into the remainder of the year. Considering this near-term cost reallocation, but also our belief that TDG has a higher performance rig fleet that should continue to outperform longer term, we have revised our 2013/14E EPS from 60c/75c to 57c/80c. Rolling forward the estimates used to derive our target price from 2013 to 2014, our target price increases from C$8.10 to C$8.50. We note our revised target price reflects 4.5x 2014E EV/EBITDA and 10.6x 2014E P/E target multiples.
Divergence between higher vs lower performance fleets continues to surface:

On TDG’s 1Q13 results call, management noted that “older style equipment is being particularly impacted” during softer pockets of demand. We note not only are higher-performance rigs competing for the same work as lower-performance ones, but also that the ownership of NAM oil and gas assets is generally shifting towards larger-cap E&Ps, NOCs and supermajors who place higher value on top-tier equipment vs their small-mid cap E&P peers.