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Onshore contract driller Patterson-UTI Energy Inc. (PTEN - Analyst Report) declared that its February 2012 drill rig count averaged 240, essentially flat from 241 in the previous month. The company operated 224 rigs in the U.S. and 16 in Canada in February, compared with 225 rigs in the U.S. and 16 rigs in Canada during January this year.
Patterson-UTI’s activity levels in the U.S. peaked in early October 2008 with a rig count of 275. Since then through the second quarter of 2009, the company witnessed a steep and rapid decline in rig count on the back of decreased demand, largely caused by lower commodity prices for natural gas and tighter access to credit.
However, during the last few quarters, there have been signs that companies were beginning to bring rigs back on line amid signs of economic stabilization pushed by energy demand. This is reflected in Patterson-UTI’s monthly rig count numbers, which recovered substantially from a low of 60 in May 2009 to the current level of 240.
We believe the bullish near-term U.S. land drilling trends, where activity is being driven by horizontal drilling and liquids-rich plays, will be able to make up for the weak natural gas fundamentals. Going forward, Patterson-UTI is likely to benefit from demand improvements in select North American basins, as operators continue to make the exploitation of unconventional resources the focus of their investment.
Additionally, the growth in global energy demand has continued to boost drilling activity, with the employment of technology to find and recover oil/gas resources. With it, opportunities for oilfield services companies like Patterson-UTI has also improved, as it captures the economic benefit of this trend.
Rating & Recommendation
Patterson-UTI, the second-largest North American land drilling contractor after Nabors Industries Ltd. (NBR - Analyst Report), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
There is considerable tightness in the market for shale-suitable rigs, and dayrates across the rig fleet have been going up. In the near term, Patterson-UTI stands to benefit from the current boom in pressure pumping services (an umbrella term used to describe a number of vital services performed on new and existing wells). Additional positives in the company’s story include its growing premium land rig fleet and stellar financial health (free cash flow positive and a debt-free balance sheet).
However, with natural gas fundamentals remaining weak, we see no significant price upside for Patterson-UTI stock in the near-to-medium term. Plus, increased labor costs for contract drilling may put a brake on the segment’s margin expansion, which could further limit the company’s ability to generate positive earnings surprises.