Oilfield Services & Equipment: Oilfield Services Price: C$2.00 (11/13/2015) Price Target: C$3.25 MARKET PERFORM (2) Marc Bianchi, CFA 646.562.1393 marc.bianchi@cowen.com Jonathan Hunter 646.562.1407 jonathan.hunter@cowen.com Key Data Symbol TSX: TDG.TO 52-Week Range: C$6.85-1.96 Market Cap (MM): Net Debt (MM): Cash/Share: C$444.2 C$456.8 C$0.53 Dil. Shares Out (MM): 222.1 Enterprise Value (MM): C$1,099.6 ROIC: 7.6% ROE (LTM): 8.6% BV/Share: Dividend: C$6.47 C$0.04 Yield: 2.00% FY (Dec) 2015E 2016E 2017E Earnings Per Share Q1 C$0.13A C$(0.02) C$(0.03) Q2 C$(0.01)A C$(0.07) C$(0.08) Q3 C$0.01A C$(0.02) C$(0.03) Q4 C$0.00 C$(0.02) C$(0.02) Year C$0.13 C$(0.13) C$(0.15) P/E 15.4x NM NM EBITDA Year C$213.1 C$149.1 C$144.3 EV/EBITDA 5.2x 7.4x 7.6x Estimate Changes International Optionality - 3Q Earnings Recap The Cowen Insight Trinidad's international exposure and JV with HAL provide interesting growth opportunities, however an uninspiring rig market in North America and relatively high levels of financial leverage keep us rated Market Perform. Thoughts on the Stock With the domestic market providing very few opportunities for new work, Trinidad remains opportunistic in its approach toward international expansion. International operations continue to perform well both through legacy Trinidad and through the JV with Halliburton. With an extended holiday/winter drilling slowdown, Trinidad is evaluating the potential to relocate idle assets to international markets. We view international reach as a competitive advantage in a downturn as the longer duration of such contracts provides some cash flow stability. Trinidad currently has roughly 35% of its fleet on long term contract with an average remaining duration of 1.5 years. Also helping results should be diversity offered through CanElson operations; full integration is expected to be complete by year-end. Maintaining financial flexibility remains a focus and we believe TDG took a step in the right direction by reducing its quarterly dividend to 1c/sh from 5c/sh resulting in annualized cash savings of $35.5MM. Additional savings have been achieved through corporate restructuring leading to operational efficiencies and a ~$3MM sequential reduction in SG&A. The benefits of cost cutting actions should continue to flow through 2016. We maintain our Market Perform rating and C$3.25 price target. Outlook and Estimates While NAM activity to date has remained in line with the 3Q exit, it appears an early year-end slowdown will limit work opportunities even further. Compounded with continued pricing pressure, this should lead to a lower 4Q; a message well telegraphed by other service companies. To-date activity levels in Canada since the end of 3Q have improved with utilization of 38% versus the industry at 24% however the rate of improvement has since stalled; we model utilization slightly lower than current levels in 4Q. Dayrates in Canada have declined ~5% in recent months, however rig mix and contract coverage should help counteract pricing pressure. Analogous to the Canadian market, US market pricing is down 5% over the past few months with no improvement expected in the near-term barring a recovering in commodity price. We model deterioration in blended U.S. dayrates in 4Q and through 2016 as rigs roll to lower spot market pricing. Utilization of the fleet was 43% as of 11/4 including 27 rigs working and 4 rigs idle but contracted. We forecast ~40% utilization in 4Q in anticipation of a protracted year-end slowdown. Internationally, we assume the contribution from the JV with Halliburton continues to grow as operating revenues increase and fixed costs are spread over larger overall operations. Opportunities are currently being evaluated in the Middle East and Latin America. Our updated estimates are as follows (New/Old/Cons) 4Q: $0.00/$0.00/$0.00, 2016: $(0.13)/($0.12)/$0.00 2017: ($0.15)/($0.16)/$0.00. Please see addendum of this report for important disclosures.
At A Glance Our Investment Thesis With the domestic market providing very few opportunities for new work, Trinidad remains opportunistic in its approach toward international expansion. International operations continue to perform well both through legacy Trinidad and through the JV with Halliburton. With an extended holiday/winter drilling slowdown, Trinidad is evaluating the potential to relocate idle assets to international markets. We view international reach as a competitive advantage in a downturn as the longer duration of such projects provides some cash flow stability. Maintain Market Perform. Base Case Assumptions Continued dayrate weakness in 4Q U.S. re-rates lower as rigs roll off contract Price Performance C$7 6 5 4 3 2 1 Feb-15 May-15 Aug-15 Nov-15 Upside Scenario Recovery in commodity prices Faster than anticipated recovery in the rig count Company Description Forthcoming Catalysts Newbuild rig awards secured by longterm contracts Land rig data points e.g. the Baker Hughes rig count Downside Scenario Commodity prices move a step lower Prolonged period of lower oil prices and depressed rig count Trinidad is a corporation focused on sustainable growth that trades on the Toronto Stock Exchange under the symbol TDG. Trinidad's divisions operate in the drilling and barge-drilling sectors of the North American oil and natural gas industry with operations in Canada and the United States. In addition, through a joint venture with Halliburton, Trinidad operates drilling rigs in Saudi Arabia and Mexico. Analyst Top Picks Ticker Price (11/13/2015) Price Target Rating U.S. Silica Holdings SLCA $18.32 $27.00 Outperform RPC RES $11.99 $14.00 Outperform Source: Bloomberg 2
Cash Flow, Financing, Balance Sheet Trinidad expects to spend $185MM in 2015 including the original $175MM budget and $10MM related to the CanElson acquisition; this implies $30MM spent in 4Q. This program includes three U.S. newbuilds and two Mexican newbuilds for the JV. We model maintenance spending of $28MM in 2016 and 2017. On our updated estimates, TDG will generate $35MM of cash in 2016 and consume $6MM in 2017. The company recently lowered its quarterly dividend to 1c/sh from 5c/sh in an effort to conserve cash. Annualized savings from the dividend cut are $35.5MM. At the end of 3Q, Trinidad had cash and cash equivalents of $25MM down from $116MM at the end of 2Q and $680MM in total debt. As of 9/30, total debt to Bank EBITDA was 2.65x up slightly from 2.36x at 6/30 and compared to the maximum allowable 4.5x. The calculation of Bank EBITDA includes CanElson pro-forma contribution. Consolidated Senior Debt to Consolidated Bank EBITDA stood at 0.29x versus the 3.5x threshold, and Consolidated Bank EBITDA to Consolidated Cash Interest Expense was at 4.8x compared to the 2.75x minimum. We note TDG has the option to pull JV EBITDA into the combined entity at its discretion which could be used to plug any EBITDA shortfall should ratios run up on covenants; there is currently ~$21MM sitting in the JV. Total liquidity at the end of 3Q was roughly C$400MM. 3
Figure 1 : Debt/Covenant Summary T rinidad Drilling 1Q15 2Q15 3Q15 4Q15E 2013 2014 2015E 2016E 2017E R evenue 194 95 124 136 846 941 549 457 456 seq. growth -30% -51% 31% 9% -1% 11% -42% -17% 0% Adj. E BITDA 78 43 45 47 270 252 213 149 144 Margin 40% 45% 36% 34% 32% 27% 39% 33% 32% Adj. E PS 0.13 (0.01) 0.01 (0.00) 0.70 0.44 0.13 (0.13) (0.15) Capex (50) (42) (22) (31) (90) (277) (145) (28) (28) FCF (49) 72 (27) 5 209 (127) 1 35 (6) Dividends (7) (7) (7) (2) (24) (28) (22) (9) (9) Net Debt 557 508 655 652 201 463 652 626 641 P/E 3.2 5.1 17.3 n/a n/a E V/E BITDA 1.8 3.0 4.5 6.2 6.5 Debt Summary Carrying Value Maturity Source: Company filings, Cowen and Company Last Price Spread Rev olv er Senior Notes 553.5 Jan-19 96.6 716.1 Capacity 462 Revolver (1) 84.9 Dec-18 less drawn 85 Commerical paper - less LOC 0 Other - Undrawn 377 plus cash 25 Available liquidity 402 Cov enant T racking 3Q15 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E Cons debt to bank EBITDA 3.0 3.6 4.7 5.2 5.3 5.5 5.6 5.9 5.9 5.9 Sr debt to bank EBITDA 2.6 3.1 3.8 4.5 4.6 4.8 4.8 5.1 5.1 5.1 Interest coverage ratio 4.3 3.3 2.5 2.1 2.2 2.1 2.1 2.1 2.0 2.0 (1) Cons debt to bank EBITDA 4.0x goes to 4.5x 4Q15 and 1Q16 due to CDI acq; Sr debt to cons bank EBITDA 3.5x; Bank EBITDA to cash int exp 2.75x 4
Income Statement 1Q15 2Q15 3Q15 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E Revenue 194.4 95.2 124.3 135.5 549.4 127.1 82.3 123.6 123.6 456.6 121.7 82.4 124.8 126.8 455.7 Operating costs and expenses: Operating costs 122.1 53.3 72.3 83.9 331.6 82.7 56.3 79.4 80.8 299.3 80.3 58.2 81.4 84.1 304.0 General and administrative 17.0 15.2 12.5 15.4 60.0 14.4 13.4 13.4 13.4 54.6 13.4 13.4 13.4 13.4 53.6 Depreciation 23.6 19.7 26.6 26.8 96.8 26.7 24.0 28.6 26.0 105.3 26.1 24.7 29.0 26.7 106.6 Total 162.7 88.2 111.4 126.1 488.5 123.9 93.6 121.4 120.2 459.1 119.8 96.3 123.8 124.3 464.2 Other expense: Other expense 5.1 (0.3) 141.5-146.2 - - - - - - - - - - Interest expense, net 11.4 12.9 17.9 13.6 55.9 13.6 13.6 13.6 13.6 54.4 13.6 13.6 13.6 13.6 54.4 Profit before tax 15.2 (5.5) (146.5) (4.2) (141.1) (10.4) (24.9) (11.4) (10.2) (56.9) (11.7) (27.5) (12.6) (11.0) (62.9) Income tax expense 4.4 (3.4) (56.1) (1.1) (56.2) (2.6) (6.2) (2.9) (2.6) (14.2) (2.9) (6.9) (3.2) (2.8) (15.7) Tax rate 28.6% 61.9% 38.3% 25.0% 39.9% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% Minority interest (JV w/ Halliburton) 1.3 0.6 2.8 2.8 7.5 3.2 3.2 3.3 3.3 13.1 3.2 3.2 3.3 3.3 13.1 Net income 12.1 (1.5) (87.6) (0.4) (77.3) (4.6) (15.4) (5.2) (4.3) (29.6) (5.6) (17.4) (6.2) (5.0) (34.1) EPS 0.09 (0.01) (0.48) (0.00) (0.46) (0.02) (0.07) (0.02) (0.02) (0.13) (0.03) (0.08) (0.03) (0.02) (0.15) Adjustments 0.04-0.49-0.53 - - - - - - - - - - Adjusted EPS 0.13 (0.01) 0.01 (0.00) 0.13 (0.02) (0.07) (0.02) (0.02) (0.13) (0.03) (0.08) (0.03) (0.02) (0.15) Diluted shares 133.7 133.4 182.6 222.1 167.9 222.1 222.1 222.1 222.1 222.1 222.1 222.1 222.1 222.1 222.1 Adj. EBITDA (including JV) 78.4 43.1 45.0 46.6 74.4 41.4 24.1 42.5 41.0 149.1 39.3 22.4 41.7 41.0 144.3 Capex 50.1 41.8 21.6 31.0 144.6 7.0 7.0 7.0 7.0 28.0 7.0 7.0 7.0 7.0 28.0 FCF (49.2) 71.8 (27.3) 5.2 0.5 23.4 (0.7) 2.2 10.5 35.3 6.4 (20.5) 2.3 5.6 (6.2) Net Debt 556.5 507.9 655.4 652.5 652.5 631.3 634.2 634.2 626.0 626.0 621.8 644.5 644.4 641.1 641.1 Key Operating Assumptions Contract Drilling CANADA Average rigs available 54 54 68 82 58 82 82 82 82 69 82 82 82 82 79 Working rigs 27 4 23 27 20 26 4 25 25 20 25 5 26 27 20 Utilization 50% 8% 34% 33% 35% 32% 5% 30% 30% 29% 30% 6% 31% 33% 26% Av. Rev/Op Day (CDN) 25,764 31,731 23,695 23,695 26,221 23,695 31,731 23,695 23,695 102,816 24,169 32,366 24,169 24,169 104,872 Costs/Op Day 14,862 23,092 14,037 14,473 14,919 14,862 23,092 14,037 14,473 66,464 14,862 23,092 14,037 14,473 66,464 U.S./INTERNATIONAL Average rigs available 47 48 61 72 57 72 72 73 74 73 74 74 74 74 74 Working rigs 29 24 24 29 27 29 29 29 29 29 30 30 30 30 30 Utilization 61% 50% 40% 40% 47% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% Av. Rev/Op Day (USD) 27,778 26,755 23,582 20,548 24,634 19,015 18,783 18,534 18,272 18,648 18,031 17,805 17,580 17,354 17,690 Costs/Op Day 14,721 12,959 12,348 12,298 13,129 12,248 12,198 12,148 12,098 12,172 12,098 12,098 12,098 12,098 12,098 JV WITH HALLIBURTON Ending rigs 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 Av. Rigs Operating 5 6 7 8 6 8 8 8 8 8 8 8 8 8 8 Av. Rev/Op Day (CDN) 64,277 64,108 61,796 61,000 62,795 61,000 61,000 61,000 61,000 61,000 61,000 61,000 61,000 61,000 61,000 Costs/Op Day 38,195 34,216 33,488 36,500 35,600 36,000 36,000 36,000 36,000 36,000 36,000 36,000 36,000 36,000 36,000 Source: Company filings, Cowen 5
Valuation Methodology And Risks Valuation Methodology Oilfield Services: We favor EV/EBITDA and/or P/E multiples to value companies within our coverage universe, with companies with greater international exposure, larger backlogs, and more modern assets typically receiving higher multiples. We also use earnings multiples with a premium or discount based on where the oilfield service group is trading relative to the current cycle. Investment Risks Primary Oilfield Services Investment Risks Include: A material change in commodity prices has the potential to change our view on the entire oil service and drilling sector. A deterioration in the economic climate, increasing non-opec oil production or international political and economic risks could impede the price performance of the shares. The strength of the global economy and its impact on the global demand for oil and natural gas. Upstream (E&P) budget fluctuations that directly impact demand for oil services, which may be affected by M&A, commodity prices, or access to capital markets. Capacity expansions within various product lines in the oilfield services industry that may create supply overhangs and influence marginal pricing. Political issues that may lead to higher taxes on the industry or limit access to potential resource developments, due to geopolitical issues or regulatory changes. Technology changes that may negatively impact the lifecycle of various products and services. Risks To The Price Target Trinidad's business is dependent on commodity prices and capital spending by natural gas and oil companies for exploration and production. A sharp decline in commodity prices could lead to a decrease in rig count and subsequently rig utilization levels and ultimately push day rates down. Trinidad generates most of its revenue and earnings from North America and a worse than expected cyclical decline in North America could adversely affect the company s earnings. 6
Addendum Stocks Mentioned In Important Disclosures Ticker RES TDG.TO SLCA Analyst Certification Company Name RPC U.S. Silica Holdings Each author of this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the subject securities or issuers, and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. Important Disclosures Cowen and Company, LLC and or its affiliates make a market in the stock of RPC and U.S. Silica Holdings securities. Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firm's investor clients. 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New York (646) 562-1000 Boston (617) 946-3700 San Francisco (415) 646-7200 Chicago (312) 577-2240 Cleveland (440) 331-3531 Atlanta (866) 544-7009 London (affiliate) 44-207-071-7500 COWEN AND COMPANY RATING DEFINITIONS Cowen and Company Rating System effective May 25, 2013 Outperform (1): The stock is expected to achieve a total positive return of at least 15% over the next 12 months Market Perform (2): The stock is expected to have a total return that falls between the parameters of an Outperform and Underperform over the next 12 months Underperform (3): Stock is expected to achieve a total negative return of at least 10% over the next 12 months Assumption: The expected total return calculation includes anticipated dividend yield Cowen and Company Rating System until May 25, 2013 7
Outperform (1): Stock expected to outperform the S&P 500 Neutral (2): Stock expected to perform in line with the S&P 500 Underperform (3): Stock expected to underperform the S&P 500 Assumptions: Time horizon is 12 months; S&P 500 is flat over forecast period Cowen Securities, formerly known as Dahlman Rose & Company, Rating System until May 25, 2013 Buy The fundamentals/valuations of the subject company are improving and the investment return is expected to be 5 to 15 percentage points higher than the general market return Sell The fundamentals/valuations of the subject company are deteriorating and the investment return is expected to be 5 to 15 percentage points lower than the general market return Hold The fundamentals/valuations of the subject company are neither improving nor deteriorating and the investment return is expected to be in line with the general market return Cowen And Company Rating Definitions Distribution of Ratings/Investment Banking Services (IB) as of 09/30/15 Rating Count Ratings Distribution Count IB Services/Past 12 Months Buy (a) 492 59.49% 118 23.98% Hold (b) 317 38.33% 11 3.47% Sell (c) 18 2.18% 0 0.00% (a) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLC's rating definitions. (b) Corresponds to "Market Perform" as defined in Cowen and Company, LLC's ratings definitions. (c) Corresponds to "Underperform" as defined in Cowen and Company, LLC's ratings definitions. Note: "Buy", "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in its ratings system and should not be construed as investment options. Rather, these ratings terms are used illustratively to comply with FINRA and NYSE regulations. (1):$9.00 11/19/12 14 12 10 8 6 4 2 0 (1):$10.00 08/08/13 (1):$12.00 10/08/13 (1):$13.00 03/07/14 Rating History as of 11/13/2015 (1):$12.00 08/11/14 (1):$11.00 10/17/14 powered by: BlueMatrix (1):$8.00 12/08/14 (2):$5.00 02/04/15 (2):$3.25 10/07/15 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Closing Price Target Price 8
(2):NA 11/16/12 30 25 20 15 10 5 (1):$28.00 02/27/13 90 80 70 60 50 40 30 20 10 (1):$42.00 04/30/15 (2):$13.00 06/03/13 (2):$14.00 07/24/13 (2):$16.00 10/08/13 (2):$21.00 04/23/14 RPC Rating History as of 11/13/2015 (2):$25.00 07/23/14 (1):$23.00 10/17/14 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 (1):$32.00 10/08/13 (1):$39.00 11/08/13 (1):$38.50 01/07/14 powered by: BlueMatrix Closing Price (1):$22.00 10/29/14 (1):$18.00 12/08/14 Target Price U.S. Silica Holdings Rating History as of 11/13/2015 (1):$33.00 02/05/14 (1):$38.00 02/27/14 (1):$48.00 04/30/14 (1):$20.00 04/30/15 (1):$16.00 07/30/15 (1):$14.00 10/15/15 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015 Jul 2015 Oct 2015 (1):$30.00 07/30/15 Legend for Price Chart: (1):$27.00 10/29/15 powered by: BlueMatrix Closing Price (1):$60.00 06/30/14 (1):$67.00 07/29/14 Target Price (1):$83.00 09/11/14 (1):$67.00 10/17/14 (1):$43.00 12/08/14 (1):$35.00 01/14/15 I = Initiation 1 = Outperform 2 = Market Perform 3 = Underperform UR = Price Target Under Review T = Terminated Coverage $xx = Price Target NA = Not Available S=Suspended 9
Points Of Contact Analyst Profiles Marc Bianchi, CFA New York 646.562.1393 marc.bianchi@cowen.com Marc Bianchi is an analyst covering oilfield services. He joined Cowen in May 2013, and has worked at Turner Investments. Reaching Cowen Main U.S. Locations New York 599 Lexington Avenue New York, NY 10022 646.562.1000 800.221.5616 Atlanta 3399 Peachtree Road NE Suite 417 Atlanta, GA 30326 866.544.7009 International Locations Cowen International Limited London 1 Snowden Street - 11th Floor London EC2A 2DQ United Kingdom 44.20.7071.7500 Boston Two International Place Boston, MA 02110 617.946.3700 800.343.7068 Chicago Jonathan Hunter New York 646.562.1407 jonathan.hunter@cowen.com Jonathan Hunter is an associate covering oilfield services. He joined Cowen in March 2013 through the merger with Dahlman Rose. 181 West Madison Street Suite 3135 Chicago, IL 60602 312.577.2240 Cowen and Company (Asia) Limited Hong Kong Suite 1401 Henley Building No. 5 Queens Road Central Central, Hong Kong 852 3752 2333 Cleveland 20006 Detroit Road Suite 100 Rocky River, OH 44116 440.331.3531 San Francisco One Maritime Plaza, 9th Floor San Francisco, CA 94111 415.646.7200 800.858.9316 @CowenResearch Cowen and Company 10