Patterson-UTI Energy Inc.
) are currently trading close to its 52-week low of $13.66. The
onshore contract dealer has seen its share price fall nearly 30%
since the beginning of this year, as investors have been selling
the stock for its weak fundamentals and tepid outlook. The recent
cost escalation issues surrounding one of the company's key inputs
has added to this bearishness.
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
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 and exposure to the boom in pressure pumping
services (an umbrella term used to describe a number of vital
services performed on new and existing wells). In particular, 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.
Despite these positives, Patterson-UTI - the second-largest
North American land drilling contractor after
Nabors Industries Ltd.
) - currently retains a Zacks #5 Rank, which translates into a
short-term Strong Sell rating.
This can be mainly attributed to the higher-than-expected spike
in the costs for guar gum - a key constituent of the 'hydraulic
fracturing' procedure - which is by far the largest part of the
pressure pumping market.
Guar gum, a bean grown mostly in India, apart from being a dairy
products thickener is also a main ingredient of the hydraulic
fracturing (or fracking) process, which is used to extract natural
gas by blasting underground rock formations with a mixture of
water, sand and chemicals.
The demand for guar gum has gone through the roof in North
America following the growing use of hydraulic fracturing in the
extraction of oil and natural gas liquids from shale. This has led
to concerns about the commodity's potential shortage later in 2012,
thereby driving up guar gum prices more rapidly than previously
thought. We believe that the rising costs may affect
Patterson-UTI's second quarter profitability more than
Moreover, with natural gas fundamentals remaining weak, we see
no 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.
Given these concerns, we expect Patterson-UTI to perform below
its peers and industry levels in the coming months. As such, we see
little reason for investors to own the stock.
NABORS IND (NBR): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis
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