Onshore contract driller
Patterson-UTI Energy Inc.
) 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
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. We have also recently downgraded the
company's long-term recommendation to Underperform from
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
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.
NABORS IND (NBR): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis
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