We issued an updated research report on onshore contract driller Patterson-UTI Energy Inc. (PTEN - Free Report) on Nov 28, 2016.
Despite the 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. This, in turn, dims the near-term prospects of the company. However, to tackle the weakness in commodity prices, Patterson-UTI has come up with several cost-control initiatives. This has helped it to lower average rig operating cost per day.
As a result, Patterson-UTI currently has a 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 fleet includes the technologically advanced ‘Apex’ rigs, which are the key to its success. The company’s proprietary design makes the rigs move faster, drill quicker and more efficiently than conventional rigs. The company’s advanced technology ensures 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 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 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 are on track with lower average rig operating cost per day than the year-ago levels. Also, the company’s rig count continues to decline. This is likely to act as a positive step toward balancing the market, which is witnessing extreme overcapacity at present.
Like other oil services and equipment suppliers, however, Patterson-UTI’s results 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.
Also, new rig contracts are expected to be signed at rates that are 30–40% less than the pre-downturn levels. This will result in lower rig margins.
Stocks to Consider
Some better-ranked players in the broader energy sector include Braskem S.A. (BAK - Free Report) , Ultra Petroleum Corp. and McDermott International Inc. (MDR - Free 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, Braskem posted an average positive earnings surprise of 105.5%.
Ultra Petroleum, on the other hand, posted an average positive earnings surprise of 65.91% in the last four quarters.
In the last four quarters, McDermott posted an average positive earnings surprise of 250.00%.
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