Precision Drilling's Delisting: A Catalyst for Undervalued Canadian Energy Plays?

The removal of Precision Drilling (TSX: PD) from the S&P/TSX Capped Energy Index on June 23, 2025, underscores the challenges facing Canada's energy sector amid investor skepticism. Yet, beneath the headline of exclusion lies a compelling story of a company positioned to capitalize on structural opportunities in a misunderstood market. For contrarian investors, PD's delisting may mark a buying opportunity in a sector where valuation multiples have become disconnected from fundamental strengths.

The Delisting Context: A Symptom of Sector Headwinds

Precision Drilling was ousted from the index due to its market capitalization falling below the threshold required for inclusion—a reflection of broader investor disfavor toward Canadian energy equities. The Canadian energy sector has faced persistent headwinds, including geopolitical uncertainties, infrastructure bottlenecks, and ESG-driven capital reallocation. However, Precision's fundamentals suggest the delisting is more a commentary on short-term market sentiment than long-term viability.

The company's Q1 2025 results reveal a disciplined focus on deleveraging and cost control. demonstrates financial prudence, while its Canadian rig utilization (74 active rigs in Q1 2025) aligns with sector-wide demand stability. Crucially, Precision's international contracts—such as 5-year agreements in the Middle East—provide a cash flow buffer against North American volatility.

Valuation: A Discounted Asset in a Strategic Sector

Precision's stock price in June 2025 traded at roughly 65–70 CAD, down from a 52-week high of 109.20 CAD. This compression creates a valuation disconnect: . The low multiple reflects investor pessimism about oil prices and Canadian energy infrastructure. Yet, Precision's Adjusted EBITDA of CAD 137 million in Q1—despite U.S. market headwinds—supports a contrarian case.

The Canadian drilling market itself remains underappreciated. Infrastructure projects like the Trans Mountain pipeline expansion and LNG Canada terminal are poised to boost demand for Precision's pad-capable rigs. Meanwhile, the company's Q2 outlook anticipates 45–48 active rigs during the spring break-up period, up from 43 in 2024, signaling sustained operational momentum.

Risks and Mitigants: Navigating the Sector's Volatility

Undoubtedly, risks linger. Oil prices dipping toward USD 60 per barrel could pressure drilling budgets, while geopolitical conflicts (e.g., OPEC+ production cuts) add uncertainty. Precision's debt-to-equity ratio, though improved, remains a concern. However, its commitment to reducing debt by CAD 100 million in 2025—and its CAD 28 million in Q1 cash reserves—suggests a path to further deleverage.

The delisting itself is not terminal. Companies excluded from the S&P/TSX must wait a year to requalify, but this period could allow Precision to rebuild its valuation through disciplined capital allocation. The company's focus on share buybacks—having reduced outstanding shares by 7% over four quarters—further supports equity value over time.

Investment Thesis: A Contrarian Play on Canadian Resilience

Precision Drilling presents a compelling risk-reward proposition for investors willing to look past short-term volatility. Key catalysts include:
1. Infrastructure-led demand: The Trans Mountain and LNG Canada projects will drive Canadian oil production growth, benefiting rig operators.
2. Debt reduction: A lower leverage ratio improves financial flexibility and reduces refinancing risks.
3. International diversification: Middle Eastern contracts provide a steady cash flow anchor.

The stock's current valuation offers a margin of safety, particularly if oil prices stabilize above USD 70. A rebound in Canadian drilling activity could re-rate the stock, while the delisting itself removes index-driven selling pressure.

Final Considerations

Investors must weigh the risks: a prolonged oil price slump or delays in infrastructure projects could prolong the undervaluation. However, Precision's operational discipline and the Canadian market's structural tailwinds suggest this is a company—and sector—poised to outperform once sentiment turns.

For the patient investor, Precision Drilling represents a rare opportunity to buy quality at a discount in an energy landscape often dismissed as obsolete. The delisting is less an epitaph and more a reset—a chance to capitalize on a resilient operator in a misunderstood corner of the energy world.

Recommendation: Consider a gradual position in PD.TO for a 12–18 month horizon, with a focus on catalysts like infrastructure approvals and debt reduction milestones. Monitor oil price stability and the company's Q3 2025 earnings for further signals.