On Nov 13, 2013, we retained our Neutral recommendation on
onshore contract driller
Patterson-UTI Energy Inc.
). Our investment thesis is supported by a Zacks Rank #3 (Hold).
MATADOR RESOURC (MTDR): Free Stock Analysis
NABORS IND (NBR): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis
SM ENERGY CO (SM): Free Stock Analysis Report
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Why the Reiteration?
Buoyed by Patterson-UTI's growing premium land rig fleet and the
expected demand uptick for such services; we think that the
current valuation is fair and adequately reflects the company's
future growth prospects.
However, we remain wary of increased labor costs for contract
drilling that may lead to slower margin growth going forward.
Lastly, Patterson-UTI is faced with volatile natural gas
fundamentals, which are expected to further limit its ability to
generate positive earnings surprises.
We remain encouraged by the strong demand for Patterson-UTI's
services in the unconventional oil and liquids-rich plays. In
particular, 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 for 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.
The second-largest North American land drilling contractor after
Nabors Industries Ltd.
) is also benefiting from the 2010 acquisition of certain assets
of Key Energy Services, an onshore well service rig provider.
Through this transaction, Patterson-UTI has not only expanded its
shale drilling ability, it also stands to benefit by coming out
of their historical stronghold in the Appalachian Basin into the
pressure pumping markets of the Barnett, Eagle Ford and Permian
We also like Patterson-UTI Energy's recent decision to retire 36
rigs from its fleet. We expect the retirement to act as a
positive step towards balancing the market, given the extreme
overcapacity caused by depressed natural gas prices.
However, with natural gas fundamentals remaining volatile, we see
no significant 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
is likely to further limit the company's ability to generate
positive earnings surprises.
Stocks That Warrant a Look
While we expect Patterson-UTI to perform in line with its peers
and industry levels in the coming months and advice investors to
wait for a better entry point before accumulating shares, one can
Matador Resources Co.
SM Energy Co.
) as good buying opportunities. These U.S. upstream energy
operators - sporting a Zacks Rank #1 (Strong Buy) - have solid
secular growth stories with the potential to rise significantly
from the current levels.