Despite what any financial academic or
advocate tells you, the
isn't perfectly rational. If it were, then it would be impossible
to identify a stock that is meaningfully undervalued.
There would literally be no way for an active stock picker to beat
the market -- other than blind luck.
But, as I was saying... that's not the case. The market is good,
but it's not perfect -- it makes mistakes.
And we should all be thankful for that. Otherwise, there'd never be
any exceptional buys. You can't get ahead by paying full price all
the time. And we only get to buy stocks at attractive discounts of
50% or more because the market goofs up from time to time.
That said, I think the market is making a big mistake with
Patterson-UTI Energy (Nasdaq:
right now. Here's the story...
Patterson-UTI is a leading provider of land-based contract drilling
services. The company also assists with other critical tasks such
as hydraulic fracturing and well cementing. The firm has a large
fleet of 350 drilling rigs at its disposal, which are dispatched
all across North America.
Demand for drilling rigs tends to rise and fall along with the
peaks and valleys of oil and gas prices.
Like most of the companies in the energy drilling space, the
company got hammered in 2008 when oil prices nosedived from around
$150 to $40 a barrel.
The company's drilling business was essentially cut in half over
that difficult stretch. The stock followed suit, plunging from a
high of $37 a share to a low in the single digits.
But Patterson made a remarkable comeback in 2011. The company
caters mainly to small- and medium-sized independent producers --
and those customers ramped up their drilling activity in a big way
The company started the year with 194 rigs working in the field and
ended with 232. Aside from the stronger fleet utilization,
customers were also willing to pay higher rates. In fact, each of
the firm's rigs raked in an average of $21,980 for every day on the
job in the fourth quarter -- up from $19,090 a year earlier.
All told, the company boosted drilling revenue 70% in 2011,
rebounding from $1.0 billion to $1.7 billion. More important,
zoomed 175% to reach $322 million, or $2.06 a share.
And there's been even more progress thus far in 2012. As of
February, the active rig count has risen to 240. About half of
those are locked up under long-term contracts that will throw off
$1.8 billion in guaranteed future revenue. Those fixed contracts
should help insulate against any temporary decline in onshore
Yet despite triple-digit growth rates and insulation from falling
have still retreated from $34 to $18.
Much of the decline can be traced back to weak natural gas prices,
which have slowed activity in places such as Louisiana's
Haynesville Shale. But investors are missing the point. Customers
aren't cutting back -- they're just shifting the focus from
gas-directed drilling to oil-directed drilling.
The natural-gas rig count has fallen consistently for several
weeks, but the oil-rig count has exploded. Back in 2009, there were
fewer than 200 rigs drilling for oil in the U.S. By this time last
year, that number had quadrupled to 800.
Right now, there are about 1,272 rigs working in places such as the
Bakken Shale -- the highest since
Baker Hughes (NYSE:
started tracking this statistic a quarter-century ago.
So these rigs aren't idle, they have just moved to wetter plays
Risks to Consider:
Of course, with investing nothing is 100% certain. Any
sustained drop in oil prices could bite into exploration and
production expenditures and thus drilling activity. Patterson still
has many outdated rigs that will need to be retired and replaced.
The regulatory environment for hydraulic fracturing is also still
something of a wild card.
Action to Take -->
But with shares trading close to their
, PTEN may be approaching its bottom. And with the company trading
at just seven times
and at a
ratio of .30 -- now could be a good time to gain exposure to this
fast-growing energy company.
-- Nathan Slaughter
P.S. -- To learn more about investment opportunities in the
energy field, don't miss my recent presentation about energy
royalty trusts. This field is small -- only about two dozen trade
on the market. But we've found one trust yielding up to 17.1%. For
more information -- including names and ticker symbols -- visit
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.