Shares of major onshore drillers have significantly outperformed the broader market over the past 3 months. In particular, stocks of Patterson-UTI Energy Inc. PTEN, Nabors Industries Ltd. NBR, Pioneer Energy Services Corp. PES and Helmerich & Payne Inc. HP are up approximately 11%, 18%, 37% and 12%, respectively, while the broad-based S&P 500 index has been essentially flat over the same period.
Is Now the Time to Take a Little Cash Off the Table?
Despite the good run, some analysts believe a correction is just around the corner and are advising clients to take some profits now. Let's take a look at the bearish arguments for the drillers, and whether they make sense.
Spending Cuts by E&Ps Hurting Shale-Driven Demand
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 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.
But with oil remaining in a bearish territory, the top energy companies have cut spending (particularly on the costly drilling projects) on the back of lower profit margins. This, in turn, has meant less work for the beleaguered drillers as exploration for new oil and gas projects has almost come to a standstill.
Decline in Rig Activity Volume
In its latest report, oil services player Baker Hughes Inc. BHI said that land rigs engaged in exploration and production in the U.S. totaled 853 for the week ended May 22, 2015, the lowest level in almost 6 years. What’s more, following the latest decline, the current nationwide onshore rig count is now less than half of the prior-year level of 1,783.
In particular, the horizontal oil-directed ones (encompassing new technology to drill and extract crude from onshore shale formations) – at 683 – are well below the previous year’s rig count of 1,243.
Rig Oversupply
With large, multinational energy firms looking to reign in their skyrocketing capital expenses, the drilling space is witnessing intense competition, as multiple firms chase a single contract. This excess capacity, in turn, could lead to further lowering of utilization or dayrates.
The Bottom Line
Considering the above arguments, it seems that the onshore contract driller stocks have run a little bit ahead of themselves. Therefore it might be prudent for income investors to take some profits, sit back and wait.
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