Patterson Rig Count Stays Low

Earlier today, one of the largest onshore contract drillers in the U.S., Patterson-UTI Energy, Inc. (PTEN) said its June 2009 drill rig count averaged 60, the same as in the previous month. The company operated 58 rigs in the U.S. and 2 in Canada in June, compared to 59 rigs in the U.S. and one rig in Canada during May.

Patterson’s activity levels in the U.S. peaked in early October 2008, with a rig count of 275. Since then, the company has witnessed a steep and quick decline on the back of decreased demand largely caused by lower commodity prices for natural gas.

Favorable prices over the last few years led to increased natural gas drilling, with the total onshore rig count making a new all-time high in 2008. As a result, after remaining essentially flat for almost 9 years (1998-2006), natural gas production went up by around 5.5% in 2007 and in excess of 9% in 2008.

Natural gas prices rallied earlier last year, reaching over $13 per million Btu (MMBtu) in July 2008, before trending down. Prices have since dropped sharply to the current level of around $3.6. Recessionary demand and strong supplies continue to weigh on prices. This unfavorable commodity-price backdrop together with the credit crisis has led to capex reductions by exploration and production players (natural gas producers), both public as well as private.

The resultant drop off in onshore drilling activities has weighed on the fortunes of all oilfield service players in general and land drillers (such as Patterson-UTI), in particular through a reduction in rig utilization and drilling margins. Heavy investments in rig construction during the last few years helped increase the size of the overall drilling fleet, which is now coming back to bite the industry as demand has dropped.

While the current U.S. land rig count is already down roughly 55% from its all-time peak in September 2008, it still has room to go before reaching bottom levels. This idled drilling capacity will continue to weigh on dayrates and margins into 2010, even as natural gas’ outlook improves towards the end of 2009, in our view. Patterson-UTI remains particularly exposed to this weak outlook for land drilling given its commodity rig fleet and lack of contract coverage. Considering these factors, we reiterate our Sell rating for Patterson.

The other land drilling stock in our coverage universe, Nabors Industries Ltd. (NBR) also has a Sell recommendation, reflecting our bearish outlook for the sector.

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