Patterson-UTI Highly Energized

Our continued Buy recommendation on Patterson-UTI Energy, Inc. (PTEN - Analyst Report) shares reflects our positive view of the stock’s risk-reward payoff. We say this particularly given the turnaround in natural-gas price outlook following a favorable heating season.

The company’s shares have performed strongly in recent days on the back of an improving outlook for onshore drilling. This followed favorable winter and spring seasons that meaningfully brought down the storage overhang plaguing the natural gas market. We expect a significant uptick in onshore actively levels later this year, which should help improve utilization and spot dayrates.

Patterson-UTI is expected to be a key beneficiary of this improving macro backdrop given its industry leading idle capacity. This gives the company strong leverage to the improving spot market.

Our expectation of continued strength in rig count reflects the fact that the number of wells drilled need to increase to keep pace with rising demand, steep decline rates, and lower quality reservoirs. The company is in excellent financial health and is increasingly returning greater amounts to shareholders through a growing dividend and buybacks. Based on most conventional valuation metrics, the stock is cheap at current levels.

Patterson-UTI expects to receive all rigs under its 15-rig package with National Oilwell Varco (NOV - Analyst Report) by the end of this year. Patterson plans to invest approximately $500 million this year, including the continuation of rig fleet upgrades.

Patterson-UTI has been a beneficiary of the improving natural gas supply-demand outlook as evident from recent stock-price performance. As such, we see significant upside from current levels and our new $40 price objective, increased from $33 before, reflects 2009 P/E and EV/EBITDA multiples of 15.4x and 6.7x, respectively, both well within historical trading ranges.

Read the full analyst report on PTEN

Read the full analyst report on NOV