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Patterson-UTI Energy Inc. (PTEN - Analyst Report), one of the largest onshore contract drillers in the U.S., reported better-than-expected fourth-quarter 2012 results. The outperformance was primarily driven by the pressure pumping operations, which held up well despite adverse market conditions.

The company’s earnings per share (EPS) came in at 40 cents, way ahead of the Zacks Consensus Estimate of 29 cents. Quarterly total revenues of $652.8 million were also above our projection of $598.0 million.

Comparing year over year, however, Patterson-UTI’s adjusted earnings per share slumped 34.4% (from 61 cents to 40 cents), and revenue fell 10.0%. The profit decline from the prior-year quarter results reflects difficult market conditions.

Rig Count Statistics

The number of operational rigs during the reported quarter averaged 205 (198 located in the U.S. and 7 in Canada) compared with 232 average rigs operational in the fourth quarter of 2011 and 216 rigs in the third quarter of 2012.

Segmental Performance

Contract Drilling: Segment revenue totaled $425.2 million (65.1% of the total revenue), down 9.5% year over year. Average revenue per operating day was $22,460, up 2.2% year over year, while average direct costs per operating day increased 6.0% year over year to $13,450. Segment operating profit decreased to $69.0 million from $95.0 million in the year-ago quarter.

Pressure Pumping: Revenue of $212.0 million was down 12.0% year over year. Segment operating profit decreased to $34.0 million from $51.3 million in the prior-year quarter due to challenging market conditions. Despite unfavorable market situations, this segment delivers much better results than expected.

Oil & Natural Gas: Revenue stood at $16.0 million, up 6.7% from the year-ago quarter. Operating income of $7.0 million was slightly down from $7.3 million earned in the prior-year quarter.

Capital Expenditure & Balance Sheet

During the quarter, Patterson-UTI spent approximately $229.6 million on capital programs (against $300.1 million in the fourth quarter of 2011). As of Dec 31, 2012, the company had $111.0 million in cash and $699.0 million in long-term debt.

The company repurchased approximately 3.4 million shares for about $60 million during the quarter.

Conclusion

The company currently carries a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.  

Patterson-UTI is the second-largest North American land drilling contractor, having a large, high-quality fleet of drilling rigs. The company’s technologically-advanced ‘Apex’ rigs are the key to its success.

Patterson-UTI’s proprietary design makes the rigs move faster than conventional rigs, drill quicker and more efficiently than conventional rigs, and allows a safer operating environment. As such, these rigs are better suited for the new demands of the exploration business and, therefore, command higher dayrates and utilization than rigs from other land drillers.

Whereas recent and substantial volatility in oil and natural gas prices, may affect the company’s results of operations. Some of the company’s customers might curtail their drilling programs, which, in most of the cases, result in a decrease in demand for drilling rigs and a reduction in dayrates and utilization.

Meanwhile, three contract drillers that are expected to outperform the equity markets in the next one to three months are Helmerich & Payne Inc. (HP - Analyst Report), Hercules Offshore Inc. (HERO - Snapshot Report) and Vantage Drilling Company (VTG - Snapshot Report). All the three stocks carry a Zacks Rank #2 (Buy).

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