Patterson-UTI: 224 Rigs at Work

Onshore contract driller Patterson-UTI Energy Inc. (PTEN - Analyst Report) declared that its July 2012 drill rig count averaged 224, up marginally from 222 in the previous month. The company operated 219 rigs in the U.S. and 5 in Canada in July, compared with 221 rigs in the U.S. and one in Canada during June this year.

Patterson-UTI’s activity levels in the U.S. peaked in early October 2008 with a rig count of 275. From 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 reach around 240 few months back.

Rating

Patterson-UTI has approximately 330 land-based rigs that operate mainly in the oil and natural gas producing regions of North America. The company operates primarily in Texas, New Mexico, Oklahoma, Arkansas, Louisiana, Mississippi, Colorado, Utah, Wyoming, Montana, North Dakota, Pennsylvania, West Virginia and western Canada.

Additionally, Patterson-UTI is engaged in the exploration and production business and provides pressure pumping services (an umbrella term used to describe a number of vital services performed on new and existing wells).

We continue to appreciate the company for its growing premium land rig fleet, un-levered balance sheet and cost containment efforts.

Despite these positives, Patterson-UTI – the second-largest North American land drilling contractor after Nabors Industries Ltd. (NBR - Analyst Report) – currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.

This can be mainly attributed to pricing and utilization challenges in the pressure pumping market that are likely to push margins lower during the second half of the year. Moreover, with natural gas fundamentals remaining uncertain, we see no price upside for Patterson-UTI stock in the near-to-medium term.