Yesterday I discussed the fact that there remain
large untapped reserves of oil and gas in North
. And despite weakness in the market, and energy in particular,
there are still solid fundamental reasons to be an energy
According to oil services company
Baker Hughes (
, which has been keeping tabs on all types of drilling activity
since 1944, there are now 1,974 oil rigs operating in the U.S. as
of August 19th, an increase of 323 from this time last year. Canada
has seen its rig count increase by 107, to 486 rigs, over the last
Investors who own a portfolio of U.S. listed land based oil
exploration and production stocks will be well positioned to match
investment gains with increases in the price of oil. Think about it
- if oil prices are going higher over the long-term don't you want
to own part of the companies that produce and drill for the oil? If
this logic makes sense, than now is a good time to be looking
around for stocks to begin positions in.
strategy is to own shares of several companies, from big to small,
and including both production and drilling companies.
One of my favorite small cap stocks is
Patterson-UTI Energy (Nasdaq: PTEN)
, a land based driller that pays a small dividend of just over 1
percent at the current share price.
Concerns over limited oil production capabilities in the Middle
East point directly toward the growing importance of domestic
The Obama administration, just like every administration before,
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 remains a
sector likely to see continued growth.
Patterson UTI Energy is a Texas-based company that drills onshore
wells for other companies that are exploring for oil and natural
Think of Patterson UTI as a hired gun. Unlike oil and gas
exploration companies, Patterson UTI doesn't have exploration risk.
Instead, the company is hired by exploration and production
companies to drill oil and natural gas wells. The company gets paid
an agreed upon rate per day of drilling services, whether its
clients hit pay-dirt or not.
Patterson UTI, with a $2.9 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 Paterson lease their rigs for a flat
fee per day - known as "day rates." When demand for rigs is up,
Patterson can raise its rates.
With the price of crude oil between $80 and $100, demand for
land-based drilling has been increasing. This is a big positive
catalyst for Patterson UTI, which was able to generate $21,000 per
rig per day in the most recent quarter.
Not only is Patterson UTI raising rates, but it's also growing the
number of operating rigs. Over the last year it has increased its
rig count by 50, to 215 rigs in the United States and Canada.
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 will be 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 guarantee revenues.
I think a fair value for the stock today is $30.00. With 50 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 around 1 percent.