Pacific Drilling: The Short-Term Outlook

Pacific Drilling S.A. (PACD) is a small off shore driller, which currently operates five rigs globally and has four additional drill ships under construction. With the addition of Pacific Kharmsin to the fleet on December 17, 2013 its total contract value has grown by 35 percent per day. In second quarter of 2014 Pacific Sharav will join the fleet increasing contract revenue by an additional 26 percent. When combining the contribution of these 2 rigs total contract value per day is expected to grow by 61 percent. The average EPS estimate for 2013 is currently an EPS of 39 cents. In the second quarter of 2013 Pacific Drilling refinanced their long term debt and incurred substantial cost. In order to accurately reflect their strong operational performance the company reported both GAAP and Non-GAAP earnings per share figures. To account for the fact that net loss reported thus far cannot be attributed to the companies performance, analysts chose to exclude the net loss from their estimates; to include it would be misleading. Pacific Drilling has entered a short, much anticipated, period of explosive revenue growth which equates to "implied volatility". According to average forward EPS calculations Pacific Drilling has completed a strong 4th quarter and should be rated "buy" ahead of the annual report for the twelve months ended December 31, 2013.

Average Foreword Earnings Per Share

Average forward earnings per share (AFEPS) are a financial metric I created and use to analyze offshore drillers. In my article, "Seadrill Offers Dividend and Growth" average forward EPS are explained in detail and are used to analyze Seadrill Ltd. (SDRL). AFEPS brought me to the conclusion that Seadrill would rally based off of stronger than expected performance before the market was able to draw the same conclusion. When analyzing Pacific Drilling utilizing AFEPS I made two important discoveries. The first discovery I made was more of an important confirmation; the company completed a strong quarter. The second was that it was impossible for Pacific Drilling to earn the average analyst estimate of 39 cents per share as long as the analysts were estimating GAAP earnings. As of the nine months ended September 30, 2013 Pacific Drilling has reported a net loss of $188,000.00. Further research indicated this loss is attributed to costs associated with refinancing of long term debt in the second quarter. Because of these refinancing costs the company reported a loss of 21 cents for the second quarter and a loss of 14 cents for the six months ended June 30, which resulted in the 188 thousand dollar loss for the 9 months ended September 30. The net loss reported thus far into 2013 does not accurately reflect the company's performance, which explains why analysts chose to exclude it from their estimates and most analytic journalists have all but failed to mention it. Since costs associated with refinancing are irrelevant to the companies performance, combined with the fact that the market didn't seem to care, I will also exclude the net loss from my average forward EPS estimate.

(click to enlarge)

Source: Page 5 Pacific Drilling Q313 Form 6K

The Estimates

Depicted in the chart below is a numerical breakdown of analyst's Non-GAAP expectations for 2013.

1,896,980	Fleet Day Rate
X 365	Multiplied by days in a year
=692,397,700	Total contract value
+9,240,000	Plus new contract revenue from Pacific Khamsin in Dec.
=701,637,700	Total contract value inclusive of new contract revenue
x.915	Average estimated revenue efficiency
= 641,998,495.5	Average contract revenue estimate
X .132	Multiplied by Average Estimated Profit Margin
=84,743,801.406	Estimated Net Income
/ 217,002,361	Divided by shares outstanding
=0.3905	Average Estimated EPS

Below Average Forward Earnings Per Share are Calculated for the Period Ended December 31, 2013.

545,028,000	Contract Drilling Revenue as of 9/30/13
+167,495,450	4th Quarter Contract Revenue Adjusted For Fleet Downtime
=712,523,450	Annual Contract Revenue Before New Contract From Pacific Khamsin
+9,240,000	Plus 14 Days of Revenue From Pacific Khamsin
=721,763,450
X 0.915	Multiplied by Average Estimated Operating Efficiency
=660,413,556.75
X 0.132	Multiplied By Average Estimated Profit Margin
=87,174,589.491	Equals Forward Average Net Income Estimate
/217,002,361	Divided By Shares Outstanding
=0.4017	Equals Average Forward EPS

New Revenue For 2014

Amount	Description
7,211,400	Total Increase in Pacific Scirocco contract 357 Days
240,900,000	Total Value of Pacific Khamsin Contract 365 Days
102,120,000	Total Estimated Contribution from Pacific Sharav 184 Days
350,231,400	Total Possible New Revenue For 2014

-On January 8th the Pacific Scirocco dayrate will increase by 20,200 per day, totaling 7,211,400 per year

- On December 17th 2013 Pacific Khamsin began earning 660,000 per day, with a total contract value of 240,900,000 per year

-The company expects the Pacific Sharav contract to begin early 3rd Quarter. Should it begin July 1st the contract has a total contract value of 102,120,000 for the remainder of 2014.

-Based off of the figures in the table above total contract revenue should increase by 48.5%

Conclusion

After calculating average forward earnings per share and comparing them with the current average EPS estimate they don't provide shocking news of a substantial increase in EPS, as in the case of my Seadrill Ltd. analysis, but instead offer confirmation of a strong 4th Quarter. With blatantly obvious revenue growth on the horizon it is logical to conclude that Pacific Drilling will begin its rally on the news of a solid fourth quarter. Since the new contract revenue from Pacific Khamsin has already begun to impact the income statement in the beginning of 1st Quarter 2014 and two additional rigs are expected to leave the ship yard over the next 7 months investors should take their positions in Pacific Drilling prior to the official news of a strong 4th quarter 2013. Many cautious investors, such as myself, have likely held out to see how the market would react to such dismal GAAP EPS figures. Since the market, analysts included, isn't concerned with dismal GAAP earnings and prefers to focus on the strong performance in 2013 and the substantial revenue growth expected in 2014, expect cautious investors to come off of the sidelines with interest in Pacific Drilling, resulting in an excellent shorting opportunity.

Source: Pacific Drilling: The Short-Term Outlook

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in PACD, over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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