Canadian Driller Has the Tools

04/26/2011 2:21 pm EST

Focus: GLOBAL

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Trinidad’s state-of-the-art deep drilling rigs are in demand as energy producers flock to shale, writes Gordon Pape in the Internet Wealth Builder.

Based in Calgary, Trinidad Drilling (Toronto: TDG, OTC: TDGCF) 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 US, 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.

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 US, 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% in 2010, up from 35% in the previous year, due to improving industry conditions. The utilization rate was well above the 40% average for the Canadian industry as a whole.

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

We saw the same pattern in the US and international drilling operations, where 2010 utilization levels averaged 68%, compared to 63% in 2009. Similar to Canada, utilization levels improved in the fourth quarter, averaging 73% compared to 63% 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.

NEXT: A Crafty Fix to a Tricky Problem

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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% in 2010, to $646.7 million, 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. (All figures in Canadian currency, unless otherwise specified.)

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 US$450 million 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 US 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 in Toronto on Tuesday.

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

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

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