Drilling for Dividends

Canadians come up with a better way to wring cash from oil and gas.

Shares of Precision Drilling, a Canadian owner of oil-and-gas rigs, tripled between 2002 and last summer. But Precision recently sold its foreign units and some other operations in order to shrink and reorganize into an income trust. Why mess with success? To become an even bigger success.

Canadian firms that convert to trusts can do shareholders a big favor. Such a move shields Precision (symbol PDS (opens in new tab)) from corporate income taxes. The freed-up cash can be reinvested in the business and passed along to shareholders -- which Precision did for the first time in December. Its monthly dividend of 27 cents Canadian (23 cents in U.S. currency) gives the stock a yield of 8.3% on a mid December price of $33 (U.S.). Those dividends qualify for the 15% U.S. tax rate. And although Canada takes 15% off the top, you can recover the money by filing for a foreign tax credit.

Should energy prices and rig rents remain high, Precision says it could raise dividends another 10%. You'll know by spring. If dividends rise handsomely and all else goes well, the stock is capable of reaching $40 this year or next. Merrill Lynch analyst Alan Laws foresees the higher dividend and a 7.5% yield. That would do the trick.

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Analysts around Calgary, Precision's hometown and Canada's energy capital, have mixed opinions about Precision's potential. Randy Ollenberger, of BMO Nesbitt Burns, is neutral, predicting that Precision will track the drilling-services sector -- but he likes the sector. Kevin Lo, of First Energy Capital, is more upbeat. By focusing on acquiring other businesses in Canada, he says, Precision will both enhance its growth potential and reduce the risk attendant with international operations. The outlook obviously darkens if oil-and-gas prices fall, but significant drops are unlikely.

Jeffrey R. Kosnett
Senior Editor, Kiplinger's Personal Finance
Kosnett is the editor of Kiplinger's Investing for Income and writes the "Cash in Hand" column for Kiplinger's Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.