Energy Prospectus

I want to give everyone a heads up on this.

Precision Drilling Trust (NYSE: PDS) is the second of two service companies included in this year’s Sweet-16 portfolio. The Company is well positioned in both the Canadian and U.S. markets.

PDS was a drag on the portfolio for the first three quarters but it made a nice run since late September, now up 27% YTD. PDS is now trading just below my Fair Value estimate of $9.50/share and it will be dropped from the Sweet-16 by year-end as soon as I decide on which company from our Watch List will replace it.

PDS is one of North America’s leading suppliers of oilfield services. They are Canada’s largest driller. Operations are reported in two segments:

• Contract Drilling Services, which generates about 88% of their revenues, includes drilling rigs, camp & catering, oilfield supply and manufacturing divisions
• Completion & Production Services includes service rigs, snubbing, equipment rental, and water treatment divisions

The Company reported net earnings of $61 million or $0.21 per share for the third quarter, which included a foreign exchange gain of $18 million caused by the weakening of the U.S. dollar against the Canadian dollar. Excluding this item, Precision’s EPS came in right at our forecast of $0.15 for the quarter.

There is really nothing wrong with PDS. I just have some stocks from our Watch List that offer the Sweet 16 more upside.

Dan

Would it be worth considering a pressure pumping i.e. fraccing company to replace PDS? ...as I understand it, the pumpers are over-worked. i.e. can raise prices...TCW.TO maybe?

My focus is obviously on E&P companies. The only problem I see with the small-cap service companies is that HAL, SLB, Weatherford, and a few others have a monopoly on the pressure pumping business. If you find some good ones please post them under the Other Tips area here. Take a look at KEG.

I will be up to my gills working on the companies that are on our Watch List. I will be adding PMG.TO that looks very good to me as a stand alone company.

Dan

All I needed to do was say I was dropping PDS from the S-16 and it responds by taking off! I doubt that anything I say can have an impact on a company the size of PDS. I really do like it but I have seen little interest from our members so I decided to drop it to make room for some others I like.

Raymond James just publish their "Energy Stat of the Week" that paints a rather rosey 2011 for the onshore drillers. Here is the summary:

"It will come as no surprise to anyone watching the domestic E&P space that independent natural gas producers are rarely known for their capital discipline. Quite simply, most E&P management teams are hard-wired to do two things: (1) drill as many wells as they can afford; and thereby (2) grow production as much as they can. To recognize this point is to understand why the North American gas glut is so severe and so protracted. The question therefore becomes: What is enabling and at times requiring gas producers to drill past the point of what's economically rational?
In this Stat, we discuss four main reasons why we think 2011 U.S. natural gas drilling activity will likely remain robust in the face of relatively weak natural gas prices.
>First, the producers have financial backing from large strategic partners, mainly joint ventures with integrated majors and international conglomerates (or drilling with other people's money).
>Second, many E&P operators are drilling to hold acreage and/or fulfill minimum volume commitments.
> Third (and most importantly), we expect increased drilling in liquids-rich "gas" plays such as the Eagle Ford, where the lucrative returns from liquids compensate for poor gas returns.
> Finally, we cannot ignore the fact that there are many gas basins (i.e., Marcellus and Pinedale) where economics are still very attractive in a sub-$4 gas world.
In aggregate, these four factors (and a few others) go a long way toward explaining why domestic gas drilling is likely to remain irrationally "sticky" over the next year.

I track the onshore rig count and it continues to move higher. Drilling in the Bakken and Eagle Ford continues to ramp up. More capital is being deployed onshore with the Gulf of Mexico shut down. PTEN, HP, PDS, UNT and NBR should all do well next year if RJ is right. - Dan

PDS will be officially dropped from the Sweet 16 on Friday after the close. We have selected the replacement, which we will announce tomorrow. - Dan

One last reminder. PDS is a good company. It is being dropped due to lack of interest and I needed to make room for CRZO. If you own PDS, you should hang tough. I believe the onshore drillers have some running room.

Dan

hanging tough-up 35%

target is 20ish. may take 12-18 months to get there.

jim

I do think the onshore drillers will do quite well in 2011. The outlook for PTEN, UNT and HP looks solid. Again, there is nothing wrong with PDS. Per my forecast model, their earnings per share will double in 2011 and cash flow per share will be up more than 40%.

Based on the announcement by PetroBakken this week and the emerging Alberta Bakken play, the demand for rigs in Canada should be picking up despite depressed natural gas prices.

PDS does have a lot of their rigs working in the U.S. already.

PTEN should have the largest percentage increase in earnings per share next year.

PDS rated a BUY by Zacks.
http://finance.yahoo.com/news/Precision ... l?x=0&.v=1

The onshore drillers should do well in 2011.