Can Patterson-UTI Quality Rigs Drive Growth Amid Oil Slump? - Analyst Blog

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We issued an updated research report on onshore contract driller, Patterson-UTI Energy Inc.PTEN on Apr 9, 2015. Patterson-UTI is the second-largest North American land drilling contractor, having a large, high-quality fleet of drilling rigs. However, it seems that the company's near-term revenues, earnings and cash flow might remain under pressure amid weak crude pricing.

This is reflected in Patterson-UTI's current Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Patterson-UTI's high-quality fleet of drilling rigs include technologically advanced 'Apex' rigs − the key to its success. The company's proprietary design makes the rigs move faster than conventional rigs, drill quicker and more efficiently than conventional rigs, and allows for a safer operating environment. As such, these rigs are better suited to meet the new demands of the exploration business and, therefore, command higher dayrates and utilization than rigs from other land drillers.

Additionally, the company spent more than $1 billion during the last few years on building new land drilling rigs, as well as to modify, upgrade and maintain its drilling fleet. We believe that the new rigs and efficient equipment should give Patterson-UTI Energy an edge over its competitors and help it to weather the current volatile environment relatively better. Demand for newbuilds remains far more robust than the older commodity units given their ability to drill the more challenging wells in the emerging resource plays. As such, dayrates for these rigs are expected to hold up much better.

However, the free fall in crude price during the last few months along with the anticipation that commodity price will remain soft seems discouraging for Patterson-UTI. This is because the company's business is positively correlated with the price of oil.

Moreover, Patterson-UTI's operating cost has been increasing significantly over the last five quarters. If the trend continues, the profitability of the company might be hampered considerably.

Investors should note that Patterson-UTI plans to release its first-quarter 2015 results on Apr 23. The Zacks Consensus Estimate for the company's first quarter is 5 cents per share.

Stocks to Consider

Better-ranked players in the energy sector include Marathon Petroleum Corporation MPC , Western Gas Equity Partners LP WGP and Valero Energy Partners LP VLP . All these stocks sport a Zacks Rank #1 (Strong Buy).

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PATTERSON-UTI (PTEN): Free Stock Analysis Report

WESTERN GAS EP (WGP): Free Stock Analysis Report

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VALERO EGY PTNR (VLP): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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