Precision Drilling Corporation just released its Q1 2024 earnings transcript, and while the initial focus may be on the muted demand in the US Lower 48, there's a much bigger story unfolding north of the border. It's a story of a quietly brewing oil boom, one that could propel Precision Drilling's future growth in a way few analysts are currently predicting.

The catalyst? The imminent completion of the Trans Mountain pipeline expansion (TMX). This project, set to begin full operation later this year, promises to alleviate the long-standing takeaway constraints that have plagued the Canadian oil market. For years, Western Canadian Select oil has traded at a significant discount to West Texas Intermediate, often in the range of CAD 25 to CAD 40 below WTI. This discount, coupled with takeaway capacity limitations, has acted as a handbrake on Canadian oil production.

But TMX is poised to change all that. With the increased capacity and the expectation of a moderated WCS discount (predicted to shrink to the high single digits), Canadian oil producers are finally seeing the light at the end of the tunnel. The confidence is palpable, and it's translating into a surge in drilling activity that's catching even Precision Drilling, a veteran of the Canadian market, by surprise.

"Precision's CEO, Kevin Neveu, highlighted this unexpected surge in demand during the Q1 2024 earnings call. He noted that the company is currently operating 48 rigs in Canada, up from 38 this time last year, with 9 out of the 10 rig increase being Super Singles targeting heavy oil. And the momentum is just gathering steam. Neveu expects rig counts to reach the mid-60s by the end of June and potentially into the 70s by mid-summer. This is remarkable considering that summer rig counts in Canada typically fall well short of winter levels due to seasonal factors."

This surge in demand is primarily driven by the heavy oil sector, which is characterized by low geological risk, predictable drilling programs, and highly efficient rigs. The confidence provided by TMX, coupled with the existing favorable oil price differentials and a supportive exchange rate, makes it an easy decision for Canadian producers to ramp up their heavy oil drilling programs.

But here's the real kicker: Precision is seeing not just an increase in activity, but also a fundamental shift in the Canadian market dynamic towards long-term take-or-pay contracts. Neveu emphasized this, stating that Precision has more contracts on Super Singles today than ever before in its history.

This shift towards long-term contracts is a game-changer for Precision. It provides much greater revenue visibility, improves operational stability, and reduces the cyclicality that has historically been a hallmark of the Canadian drilling market.

The Hypothesis: A Contrarian View

Most analysts are focusing on the immediate weakness in the US market. However, I believe that the unfolding Canadian oil boom, coupled with the shift towards long-term contracts, could drive Precision's future growth significantly beyond current expectations.

Here's why:

Conservative Guidance: Precision's current guidance for Canadian rig activity appears conservative. With the momentum building and TMX nearing completion, it's highly likely that actual rig counts will exceed the guided ranges. Margin Expansion: The current tightness in the market for Super Triples and pad-equipped Super Singles suggests strong pricing power for Precision. Even with potential rate pressure on the gas rigs due to weak AECO prices, the overall margin profile in Canada is likely to remain robust and potentially even expand. Increased Shareholder Returns: The combination of higher activity, strong margins, and long-term contracts sets the stage for robust free cash flow generation in Canada. As Precision approaches its debt reduction targets, this free cash flow can be increasingly directed towards shareholder returns, either through share buybacks or potential dividend initiation.

Projected Canadian Rig Count Growth

Based on Precision Drilling CEO's statements, here's a chart projecting Canadian rig count growth throughout 2024:

The Numbers:

While it's difficult to quantify the exact impact of the Canadian oil boom on Precision's financials at this stage, some rough estimations can be made: Potential Revenue Upside: Assuming an average of 10 additional Super Singles working in Canada for the remainder of the year at a day rate of CAD 30,000 (conservative estimate), the potential revenue upside could be in the range of CAD 90 million (10 rigs x 9 months x CAD 30,000). Margin Expansion: If the margin on Super Singles remains in the range of CAD 15,000 per day, this additional activity could contribute roughly CAD 40 million to EBITDA (CAD 90 million revenue x 45% margin).

While these are just rough estimates, they illustrate the potential magnitude of the impact the Canadian oil boom could have on Precision's financial performance.

Conclusion:

While the current focus may be on the subdued US market, investors should not overlook the quietly unfolding oil boom in Canada. Precision Drilling, with its strategic positioning, operational expertise, and commitment to technology, is perfectly poised to capitalize on this emerging opportunity. As TMX comes online and the Canadian oil market enters a new era of unconstrained growth, Precision's future may be much brighter than many currently anticipate.

"Fun Fact: Precision Drilling, founded in 1951, is the largest land drilling contractor in Canada and has been a pioneer in introducing innovative technologies to the oil and gas industry. Their commitment to technology and operational excellence is evident in their development of the Super Triple rig, the AlphaAutomation system, and the EverGreen emissions reduction solution."