We have upgraded onshore contract driller Patterson-UTI Energy Inc. (PTEN) to Outperform from Neutral, reflecting strong demand for its services in North America.
Patterson-UTI has approximately 350 land-based rigs that operate primarily 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).
The company’s technologically-advanced ‘Apex’ rigs are the key to its success. Patterson-UTI’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 for the new demands of the exploration business and, therefore, command higher dayrates and utilization than rigs from other land drillers.
Patterson-UTI is also benefiting from the secular uptick in demand for pressure pumping, where the market is now enjoying around 100% effective utilization. Pricing, though lower than 2006 levels, has increased meaningfully from last year’s lows. We believe Patterson-UTI's enhanced exposure to this business and capacity additions will help earnings growth in 2011.
Further, the bullish near-term U.S. land drilling trends, where activity is being driven by horizontal drilling and liquids-rich plays, will be able to make up for the weak natural gas fundamentals. Going forward, Patterson-UTI is likely to benefit from demand improvements in select North American basins, as operators continue to make the exploitation of unconventional resources the focus of their investment.
Additionally, the company’s stellar financial health (free cash flow positive and a debt-free balance sheet) stands it in good stead. As such, we believe Patterson-UTI – the second-largest North American land drilling contractor after Nabors Industries Ltd. (NBR) is well positioned going forward and view it as an attractive investment.
Our new long-term Outperform recommendation is supported by a Zacks #1 Rank (short-term Strong Buy rating).
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PATTERSON-UTI (PTEN): Free Stock Analysis Report
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