Concerns over limited future oil production in the Middle East
point to the growing importance of domestic energy production. The
Obama administration, just like every administration before it,
appears adamant that domestic energy production must grow.
While there remain concerns about the future of offshore oil
exploration in the wake of the
disaster, land-based drilling for oil and natural gas is a sector
likely to see continued growth.
One standout contender is
Patterson UTI Energy (Nasdaq: PTEN)
, a Texas-based company that drills onshore wells for other
companies that explore for oil and natural gas.
Patterson UTI, with a $4.9 billion market capitalization, owned 341
land-based drilling rigs at the end of 2010. This made the company
the second largest operator in the U.S. The company offers well
drilling services in many of the most promising regions for
domestic oil and gas production, including the Bakken Shale, The
Marcellus Shale, and the Eagle Ford.
This company benefits when demand for rigs outpaces supply, which
results in higher rig utilization rates and increased contract
fees. You see - companies like Patterson lease their rigs for a
flat fee per day - known as "day rates." When demand for rigs is
up, Patterson can raise its rates.
The demand for land based drilling increases with the price of
crude oil. This relationship is a big positive catalyst for
Patterson UTI, which was able to raise its day rates by $760 in the
second quarter of 2011 to $21,000 per rig per day.
Not only is Patterson UTI raising rates, but it's also growing its
fleet of operating rigs. In the second quarter, the company
increased its rig count by 5.3 percent compared to the first
quarter. By the end of July, the total number of rigs in operation
had grown to 215.
While growing the average billable rate has been a boon to
Patterson UTI, the company also benefits from the stability offered
by long-term contracts. During 2011, roughly 40 percent of the
company's rigs are under long-term contracts. While these contracts
limit the upside opportunity from increased day rates, they do
provide safety and security to the company since this commitment
Patterson UTI's growth has been downright impressive. In 2010, the
company grew revenues by an astounding 87 percent to $1.46 billion.
The company that lost $38 million in 2009 turned around and
delivered a profit of $117 million, or $0.72 per share, last year.
Growth in 2011 has been similarly impressive. Last Thursday,
Patterson reported that net income rose to $81.6 million, or 52
cents a share, compared with $29.5 million, or 19 cents per share a
year earlier. Revenue practically doubled to $600 million from $307
million a year earlier.
With all of this growth, investors might expect Patterson UTI
shares to command a healthy premium. If that were the case, I
wouldn't be telling you about the company though.
Shares of Patterson UTI are a steal, trading at just 11.5-times EPS
estimates for next year. It's extremely rare to find a stock
growing at such a rapid clip, yet trading at such a reasonable
Given the company's room for continued growth in 2011 and 2012,
shares are undervalued. I think a fair value for the stock today is
$38. With 18 percent upside to the stock, Patterson UTI looks quite
attractive. The company also pays a small $0.20 dividend per share,
providing a yield of 0.6 percent.
If you believe that oil and natural gas prices are going up then
investing in Patterson UTI is a great way to gain exposure to the