Onshore contract driller
Patterson-UTI Energy Inc.
) declared that its May 2012 drill rig count averaged 223, down
from 227 in the previous month. The company operated 223 rigs in
the U.S. and none in Canada in May, compared with 226 rigs in the
U.S. and 1 rig in Canada during April this year.
Patterson-UTI's activity levels in the U.S. peaked in early
October 2008 with a rig count of 275. Since 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.
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 (an umbrella term used to describe a
number of vital services performed on new and existing wells).
Despite these positives, Patterson-UTI - the second-largest
North American land drilling contractor after
Nabors Industries Ltd.
) - currently retains a Zacks #4 Rank, which translates into a
short-term 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.
NABORS IND (NBR): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis
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