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Drill for Profits with These 3 Onshore Plays - Analyst Blog

It's usually the offshore drillers that are in news. There is a certain lure associated with drilling under the ocean, which calls for the hype surrounding them. However, being an offshore driller is just not very rewarding right now. Year-to-date, shares of major companies have significantly underperformed the broader market. What's more, according to some analysts, the worst is still to come for these drillers. (Read More: Offshore Drilling: Rough Seas Ahead. )

On the other hand, their onshore counterparts are in the middle of a bull run, benefiting from the U.S. shale bonanza.

Shale-driven Demand Backed by Rising E&P Capex

Thanks to the emergence of major shale plays yielding impressive results over the last few years, there has been an overwhelming requirement for more and more complex drilling. This has fueled huge demand for new premium land rigs, in the process placing the industry's top drillers at a competitive advantage by offering more powerful and sophisticated units.

Land-based drillers in the U.S. are also getting help from the exploration and production (E&P) companies, which continue to ramp up their budgets for equipment used to tap the oil and gas deposits.

Oil-directed Horizontal Drilling

Two years ago, onshore drillers were under severe pressure, when natural gas prices dived to a 10-year low on oversupply concerns. However, as part of strategy realignment since then, upstream firms have concentrated more on oil-based drilling with the commodity's price remaining relatively high.

There has also been a shift toward horizontal drilling, as the oil companies realized that it improved well productivity and economics considerably. Moreover, firms providing innovative technologies like horizontal drilling could charge higher rates for their offerings.

Rig Counts & Dayrates on the Rise

As a result, rig counts continue to rise, especially the horizontal oil-directed ones - that encompass new technology to drill and extract crude from onshore shale formations - at the expense of the vertical gas-directed units. Per the latest weekly release from Houston-based oilfield services company Baker Hughes Inc., horizontal rigs are just 8 shy of all-time high figure of 1,329. The efficiency of these units in drilling the more challenging wells also means higher dayrates and margins.

3 Stocks to Consider Buying

For investors wanting to take advantage of the land drilling growth, we present three companies that may deserve attention. Each of them also has a good Zacks Rank.

Patterson-UTI Energy Inc. ( PTEN ): It is one of the largest onshore contract drillers in the U.S. with approximately 216 land-based rigs that operate primarily in the oil and natural gas producing regions of North America. This Houston-TX based Zacks Rank #1 (Strong Buy) company's growing premium land rig fleet and the expected demand growth for such services helped it deliver positive surprises in 3 of the last 4 quarters with an average beat of 25.86%. With its technologically-advanced 'Apex' rigs - that command higher dayrates and utilization - making up around 65% of its total fleet, Patterson-UTI is nicely poised to further expand into the shale-drilling market.

Pioneer Energy Services Corp. ( PES ): Another Zacks Rank #1 stock, Pioneer Energy provides onshore contract drilling and production services to upstream oil and gas companies. Formerly known as Pioneer Drilling Co., it supplies rigs to operators in the prolific regions in Texas, Louisiana, Mid-Continent, Rocky Mountain, and Appalachian. With trailing 4 quarters average positive surprise of an impressive 122%, this San Antonio, TX-headquartered driller is set to grow revenue and earnings faster than its competitors on the back of a 90% utilization rate and its presence in key U.S. markets - Bakken shale, Eagle Ford shale and the Permian.

Nabors Industries Ltd. ( NBR ): Hamilton, Bermuda-based Nabors conducts oil, gas, and geothermal land drilling operations and is the largest land-drilling contractor in the world. Having done a stellar job at garnering leading positions in most natural gas and oil-based shale plays, analysts are predicting strong earnings growth for Nabors over the next couple of years. The 2014 Zacks Consensus Estimate is $1.23, representing 40% earnings per share growth over 2013. Next year's average forecast is $2.24, corresponding with 81% growth. Nabors currently has a Zacks Rank #2 (Buy).

Bottom Line

As land drilling activity continues to prosper, the higher demand will improve pricing across the fleet. The biggest benefactor would be the companies with presence in the high-growth onshore shale plays. This is why the above-mentioned stocks would make good additions to your portfolio.

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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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