Patterson-UTI Downgraded to Neutral - Analyst Blog

We have downgraded onshore contract driller Patterson-UTI Energy Inc. (PTEN) to Neutral from Outperform; the primary factor being increased labor costs for contract drilling that may lead to slower margin growth going forward.

Patterson-UTI has approximately 350 land-based rigs that operate mainly in the oil and natural gas producing regions of North America. The company operates primarily in Texas, New Mexico, Oklahoma, Arkansas, Louisiana, Mississippi, Colorado, Utah, Wyoming, Montana, North Dakota, Pennsylvania, West Virginia and western Canada.

Additionally, Patterson-UTI is engaged in the exploration and production business and provides pressure pumping services (an umbrella term used to describe a number of vital services performed on new and existing wells).

While we continue to like the company for its growing premium land rig fleet, stellar financial health (free cash flow positive and a debt-free balance sheet) and exposure to the boom in pressure pumping services, we don't see any obvious catalyst in National Oilwell's business to significantly push the stock price higher.

We remain particularly worried about the labor inflation associated with Patterson-UTI's conventional contract drilling rig fleet, which may put a brake on the segment's margin expansion. To make matters worse, the company seems unable to make up for this with higher pricing in pressure pumping.

The second-largest North American land drilling contractor after Nabors Industries Ltd. (NBR) is also faced with weak natural gas fundamentals, which are expected to further limit its ability to generate positive earnings surprises.

The glut in domestic gas supplies still exists, with storage levels remaining well above their five-year average. This will continue to weigh on natural gas prices in the near-to-medium term. Patterson-UTI remains particularly exposed to this situation since its business is heavily biased to domestic gas drilling. Adding further pressure to the commodity is the rapid rise in the number of sophisticated drilling rigs working in the U.S. and robust production from dense rock formations (shale).

Considering these factors, we think that the current valuation is fair and adequately reflects Patterson-UTI's future growth prospects. As such, we prefer to remain on the sidelines at this point. Our new long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).

NABORS IND ( NBR ): Free Stock Analysis Report

PATTERSON-UTI ( PTEN ): Free Stock Analysis Report

Zacks Investment Research

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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