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Patterson-UTI Poised for Growth Despite Oil Price Weakness


Trades from $3

We issued an updated research report on onshore contract driller Patterson-UTI Energy Inc. (PTEN - Analyst Report) on Oct 4, 2016. The company’s fleet includes the technologically advanced ‘Apex’ rigs, which are the key to its success.

Despite the recent improvement in oil prices since February, the commodity is still trading around the $50 per barrel mark. This is about half the level at which crude traded two years ago and is far below the breakeven price for many energy companies. Hence, Patterson-UTI’s near-term prospects do not seem too bright amid weak crude pricing.

This is reflected in Patterson-UTI’s Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.   

Patterson-UTI Energy is the second-largest North American land drilling contractor with a large, high-quality fleet of drilling rigs. The company’s proprietary design makes the rigs move faster, drill quicker and more efficiently than conventional rigs. The company’s advanced technology allows for a safer operating environment. Therefore, these rigs are better suited to fulfill the demands of the exploration business, which in turn, allows them to command higher dayrates and utilization than rigs from the other land drillers.

Moreover, the company spent more than $1 billion over the last few years to build new land drilling rigs as well as to modify, upgrade and maintain its drilling fleet. We believe that the new rigs and efficient equipment should give Patterson-UTI Energy an edge over competitors and help it weather the current volatility relatively better.

Recently, Patterson-UTI entered into an agreement to acquire Calgary, Alberta-based drilling technology company, Warrior Rig Ltd., and certain related entities. We expect this deal to improve Patterson-UTI’s competitive position within the high-spec rig market. Moreover, this transaction is anticipated to help the company expand its technology portfolio.

Additionally, Patterson-UTI's cost-control initiatives remain on track with lower average rig operating cost per day than the year-ago levels. Also, the company’s rig count continues to decline and is expected decrease further. This is likely to act as a positive step toward balancing the market which is witnessing extreme overcapacity at present.

However, like other oil services and equipment suppliers Patterson-UTI’s results too are directly exposed to crude prices, which are inherently volatile and subject to complex market forces. As a result, the ongoing slump in oil prices have curtailed drilling and dampened equipment demand, thereby adversely affecting bookings at Patterson-UTI.

Stocks to Consider

Some better-ranked players in the broader energy sector include Evolution Petroleum Corp. (EPM - Snapshot Report) , Enviva Partners, LP (EVA - Snapshot Report) and CONE Midstream Partners LP (CNNX - Snapshot Report) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last four quarters, Evolution Petroleum posted an average positive earnings surprise of 45.84%.

Enviva Partners, on the other hand, posted an average positive earnings surprise of 0.19% in the last four quarters.

In the last four quarters, CONE Midstream Partners posted an average positive earnings surprise of 19.38%.

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