Is it Worth Holding Patterson-UTI (PTEN) Amid Low Oil Price?
We issued an updated research report on onshore contract driller Patterson-UTI Energy Inc.PTEN on Jun 10, 2016. The company's fleet includes the technologically advanced 'Apex' rigs, which are the key to its success.
Despite the recent improvement in oil prices since February, the commodity is still trading under the $50 per barrel mark. This is about half the level at which crude traded two years ago and is far below the breakeven price for many energy companies. Hence, Patterson-UTI's near-term prospects do not seem too bright amid weak crude pricing.
This is reflected in Patterson-UTI's Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.
Patterson-UTI Energy is the second-largest North American land drilling contractor with a large, high-quality fleet of drilling rigs. The company's proprietary design makes the rigs move faster, drill quicker and more efficiently than the conventional rigs. The company's advanced technology allows for a safer operating environment. As such, these rigs are better suited to fulfill the demands of the exploration business and, therefore, command higher dayrates and utilization than rigs from the other land drillers.
Moreover, the company spent more than $1 billion over the last few years to build 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 competitors and help it weather the current volatile environment relatively better.
Demand for newbuilds remains far more robust than older commodity units given their ability to drill the more challenging wells in emerging resource plays. As such, the dayrates for these rigs are expected to be higher.
Additionally, Patterson-UTI's cost-control initiatives remain on track with lower average rig operating cost per day than the year-ago levels. Also, the company's rig count continues to decline and the company is expecting it to go down further. This is likely to act as a positive step toward balancing the market, given the extreme overcapacity.
However, as is the case with the other oil services and equipment suppliers, results for Patterson-UTI are directly exposed to crude prices, which are inherently volatile and subject to complex market forces. As a result, the ongoing slump in oil prices have curtailed drilling and dampened equipment demand, thereby adversely affecting bookings at Patterson-UTI.
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