Free Cash Flow per share:
- PDS’s FCF over the past 4 quarters was $171,670,000
- PDS has shares outstanding of $125,760,000
- Thus the Free Cash Flow Per Share is $1.37
Annual Growth Rate
- PDS’s FCF fell from $324 million to $297 million from 2004 through 2007. Temporarily there was a significant spike in the year 2006 which was certainly due to the continuous rise in oil prices. However, due to this high volatility it is not possible to make any predictions based on the past 4 years.
- Precision drilling certainly thrives in a high oil price environment. The higher the price the more explorations and thus more demand for drilling equipment.
- But the oil price has been falling sharply over the past 5 months. Even though the money supply has begun to grow significantly again, the effects on the oil price will not be visible immediately. It may take another 1-2 years before oil bottoms out.
- In order to make our calculation as conservative as reasonably possible we shall thus assume that the annual cash flow for PDS will continue to fall over the next 5 years, at an annual rate of 10%
- Thereafter we shall assume a perpetual growth rate of 1%
We shall apply an confidence margin of only 30% in order to account for the fact that we did not make very elaborate research on the overall strengths/weaknesses and opportunities/risks that the company faces and hence are not very sure if the expected returns will be achieved. In addition to this, the past data indicates a high level of cash flow volatility.
Risk Free Rate:
- At the time this post was written the rate for 10 Year Treasury notes was 2.58%
Based on the data above, the fair price for PDS is $13.13, about double of the current price which is $6.66. And this is assuming falling oil prices and a continuously falling cash flow over the next 5 years at an extremely conservative confidence margin. If oil prices bottom out or even begin rising again over the next 5 years the stock has the potential to explode.
In any case, based on the above it is reasonable to be very bullish on Precision Drilling at the current price.