On Dec 27, Zacks Investment Research downgraded the oil and gas drilling company Patterson-UTI Energy, Inc. (PTEN) to a Zacks Rank #4 (Sell).
Why the Downgrade?
Being a leading North American land drilling contractor, business of Patterson-UTI is dependent on crude oil and natural gas prices. Crude oil has witnessed a massive fall since June and is currently trading in the mid-$50s, nearly half of its peak level. Moving with trend, the Patterson-UTI stock has also slumped about 50% over the past 6 months.
With this fall in oil price, top energy companies are reducing expenditures (particularly on the costly upstream projects) due to low profit margins, resulting in less work for drillers like Patterson-UTI. The upcoming year, too, is expected to be a challenging one with pricing likely to remain weak.
Also, in its most recent fleet update, the company announced that its November drilling rig count has decreased by two from the prior month. The company operated 209 rigs in the U.S. and 10 in Canada.
We also remain concerned about the labor inflation associated with Patterson-UTI’s conventional contract drilling rig fleet, which may lead to slower margin growth for the segment. To make matters worse, the company seems unable to make up for this even with higher pricing in pressure pumping.
Moreover, a majority of the brokerage firms have lowered the current quarter and current year earnings estimates for Patterson-UTI, signaling further bearishness ahead.
Other Stock Picks
Despite the current weakness in the broader energy sector, one could consider better-ranked stocks like Seadrill Partners LLC (SDLP), Spectra Energy Partners, LP (SEP) and QEP Midstream Partners, LP (QEPM). All these stocks sport a Zacks Rank #1 (Strong Buy).
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