Patterson-UTI: 222 Rigs at Work - Analyst Blog

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Onshore contract driller Patterson-UTI Energy Inc. ( PTEN ) declared that its June 2012 drill rig count averaged 222, down marginally from 223 in the previous month. The company operated 221 rigs in the U.S. and 1 in Canada in June, compared with 223 rigs in the U.S. and none in Canada during May this year.

Patterson-UTI's activity levels in the U.S. peaked in early October 2008 with a rig count of 275. From then through the second quarter of 2009, the company witnessed a steep and rapid decline in rig count on the back of decreased demand, largely caused by lower commodity prices for natural gas and tighter access to credit.

However, during the last few quarters, there have been signs that companies were beginning to bring rigs back on line amid signs of economic stabilization pushed by energy demand. This is reflected in Patterson-UTI's monthly rig count numbers, which recovered substantially from a low of 60 in May 2009 to reach around 240 few months back.

Rating & Recommendation

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 western Canada.

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. ( NBR ) - currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating. We have also recently downgraded the company's long-term recommendation to Underperform from Neutral.

This can be mainly attributed to the higher-than-expected spike in the costs for guar gum - a key constituent of the hydraulic fracturing ("fracking") 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 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 fracking 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 expected.

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.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: NBR , PTEN

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