Patterson-UTI: Good Entry Point

We are maintaining our Buy recommendation for Patterson-UTI Energy, Inc. (PTEN) shares following strong quarterly results, reflecting a much-improved land-drilling environment. 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. We have raised our estimates (2008: $2.25 vs. $2.15; 2009: $2.80 vs. $2.60) to reflect utilization and dayrate gains in the coming quarters. Our unchanged $40 price objective reflects 2009 P/E and EV/EBITDA multiples of 14.3x and 6.2x, respectively, both well within historical trading ranges.

Patterson-UTI used the most recent drilling downturn to make significant upgrades to its drilling fleet. As a result, the company has upgraded its drilling rig fleet, including the deployment of new and equivalent rigs to meet customers’ demands for increasingly complex wells. In the most recent quarter, the company introduced three new IDEAL rigs, which followed two rigs in the first quarter of 2008.

Our expectation of continued strength in rig count reflects the fact that the number of wells drilled needs 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.

Read the full analyst report on PTEN

Read the full analyst report on PTEN