Xtreme Drilling & Coil: Free Cash Flow Finally At Hand

Xtreme Drilling & Coil XDC.TO 5.04 [-0.06] announced solid Q4 results last week beating consensus and analyst estimates. After a long and painful 2012, the ship is finally turning around with 2013 setting up for a solid operational year with plenty of free cash flow.

Xtreme is a drilling & coil services company with one of the youngest fleets in the industry. It markets high-spec drilling rigs that perfectly fit today’s deep & complex wells. The company is mainly active in the hottest liquids plays in the US right now with a small footprint in Canada and Saudi Arabia.

I originally featured this company last February as an undervalued drilling company on the cusp of strong growth. However, the stock just got more undervalued, they had to raise money and the cusp of strong growth turned out to be a few months too early.

But the last quarterly results finally confirmed XDC has turned the corner.

To begin with, XDC’s $220+million expansion capital program from 2011-2012 is finally OVER. The company added 8 new XDR 500 drilling rigs, converted 3 older one to XDR 500 and built 5 XSR coil tubing units. For 2013, the company will be spending $15M in maintenance capex.

There’s a huge difference between a capex of $15M and $112M in 2012 and $115M in 2011.

XDC exited 2012 with $142M of debt on its $150M bank lines with a 3.6 debt to cash flow ratio, substantially lower than the peak of 5.7 registered in Q2-12. The company is targeting 2013 year end debt at $100M. This means debt to cash flow should drop below 3.0x, still high but at least stabilizing and heading in the right direction.

Operationally, 20 of its 21 XDR drilling rigs are currently at work including 3 of them in Canada.  The remaining rigs are contracted to operators in the Bakken/Three Forks play in North Dakota and the DJ Basin/Niobrara play in Colorado. Xtreme has no drilling contracts up for renewal in 2013 – cash flow visibility is excellent for the year.

On the XSR front, this segment swung into a $2.6M profit from a loss of $0.7M.  Out of 7 units, 4 were working at the end of the year – 2 in the Eagle Ford shale play and 2 in Saudi Arabia. XDC expects 2 more XSR rigs to start working in Q2 and Q3 later this year. The high margin Saudi Arabian rigs are up for renewal later this year. The company submitted a renewal bid with higher pricing and will try to add a third rig to the program.

XDC XSR500

XSR500 Service rig, service the debt plz!

The free cash flow visibility is great but it does not mean there isn’t more to do. XDC will be focused on squeezing more profits from its operations; taking profit margins above 30% would be great – Q4 was %29.2, Q2 was 18.5%.  The best part about this is that the company believes it can do much better:

“The company anticipates that continued efforts to improve operations can result in margins that are consistently near the upper end of the industry range.” so says the latest XSR News Release.

Besides that, it all comes down to flawless execution. Bar a collapse in the price of oil, I believe the stock should strengthen in the second half of 2013 as the market starts looking toward 2014.

The stock right now is trading at 0.4x book value compared to the drillers group at 0.9x. The upside is obviously clear given Xtreme’s book value is estimated at $3.91 by Altacorp. Should the market price XDC using the same metric, the stock would be trading at ~$3.50. Call it blue sky potential as I just don’t expect to see $3 any-time soon. The lower the debt goes, the more value oriented investors move in attracted by lower perceived risk. This takes time which is why closing in on book value is beyond 2013 in my opinion.

Finally, I like the fact that XDC operates mainly in the US, there’s a lot of drilling going on in the Niobrara, Eagle Ford and Bakken unconventional shale plays in the US. The company has a substantial amount of 2013 cash flow contractually locked with major operators. The price of oil remains strong and there’s no spring break up or oil price differentials to worry about – just the price of WTI oil which may see its differentials shrink substantially once the southern leg of  Keystone XL enters operations prior to the end of the year.

What do you think of Xtreme? 

9 comments to Xtreme Drilling & Coil: Free Cash Flow Finally At Hand

  • The Engineer

    Considering that 1) the company has only made money for its shareholders on 3 out of the last 7 years and 2) when it has made money the return on equity has not exceeded 3.5% furthermore 3)shares on issue have increased year by year from 26 million in 2005 to currently 80.8 million its not surprising that investors have deserted the company for better investment prospects. Another case of EXTREME..ly poor management

    • Mich

      It’s one way of looking at it but this does not represent the big picture. Can’t blame management for the loss of the Mexican contract a few years ago, can you? Management are technically strong and this shows in the excellent machinery they operate. On the other hand they are weak business wise and that has been reflected in the execution of their build program.

      Xtreme is at an inflection point and there’s good upside potential from here in my opinion. That’s what the post is about.

  • SouthernX

    First, congrats on making this list:

    http://thecollegeinvestor.com/6339/best-investment-blogs/

    From its nature you’re truly out there.

    Second, for years there’s been a chicken v egg debate with services v explorecos as to which moves first. With that in mind and using the messiness of the Canadian markets as a backdrop which will move up first.

    SouthernX

    PS Do you ever investigate Aussie o&g NA plays, eg. Molopo, MPO:ASX?

    • Mich

      Thanks SX,

      This messiness in the Canadian markets results in only a handful of producers/services getting any respect…

      On the AU front, I follow Aurora – a pure play on the Eagle Ford play. They’re listed on both the TSX and ASX.

      I know Molopo, trading at cash value right now but they’re not listed on the TSX :( just in AU. They would make a nice play on the Wolfcamp in the US.

  • pete

    Mich, nice update. Guess this is now watching the paint dry? Curious what your take was on the Woods/CEO announcement appointment. Wasn’t he “relieved” of his post, and then re-appointed to the same post? How to explain? I do wonder, as the debt is reduced, what these guys are doing for their next act, and if they are aiming to keep their technology fresh and innovative in their product/services line. They have difficulty mumbling thru their CC’s so I guess any intelligent conversation from them about a strategy for the future (beyond 2013) would be asking too much..

    • Mich

      To be honest with you Pete, I don’t remember what the CEO story was all about. I view these guys as nerds with exciting toys, their build program failed miserably when it came to expenditures taking the stock to $1. I am glad this is finally behind us and sure hope they won’t be repeating this anytime soon! Let them generate plenty of CF so the stock can close in on the NAV, that’s all I want to see.

      Another thing I noticed is that they are not the best when it comes to talking with investors. Their CFO does not answer emails or return calls.

  • pete

    Motley believes limited pps upside, that 80% utilization is about the top, too much competition depresses margin expansion. They don’t touch intl. aspect.

    http://beta.fool.com/traderinvestor70/2013/05/23/is-the-performance-of-xtreme-drilling-extreme-or-a/34634/?source=eogyholnk0000001

    • Mich

      I actually agree with this post in the sense I never expected the PPS to go over $3 any-time soon. XDC has so far delivered a stellar performance since it was under $2 not that long ago when I posted this.

      Further gains will depend on a stronger balance sheet, an extra rig in SA would also help. It’ll take a few quarters…

  • pete

    Mich, been a year, nice incremental move up. LimeRock LLC I guess is the babysitter for these guys. Explains why they’re continuing to make inroads in middle east. They must have picked up their shares at the gift price of $1+.
    How much additional upside do you see here? Is the ultimate event a buyout in the near future? Can we get $10 for XDC? I am tempted to hold on and wait for the ultimate prize/sale.

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