Patterson-UTI Energy (PTEN)

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See all Bulls Reasons Bulls: Reasons To Buy Patterson has committed $1.7 billion to upgrading its fleet 0% agree Patterson has committed $1.7 billion to upgrading its fleet Patterson has committed $1.7 billion to upgrading its fleet. Newer rigs and efficient equipments should give PTEN an edge over competitors. View or Edit Reason 0 votes 0% agree High Oil Prices will encourage drilling and exploration 0% agree High Oil Prices will encourage drilling and exploration High Oil Prices will encourage drilling and exploration. Patterson-UTI's fleet is well placed to take advantage of such growth. View or Edit Reason 0 votes 0% agree Bears: Reasons To Sell Feeling Bearish? Be the first to explain why this would make a poor investment Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Patterson-UTI Energy, formed through the merger of Patterson Energy and UTI, is the largest provider contract drilling services in the US with 2006 revenues of $2.55B.^[1] The Texas based company provides onshore contract drilling services to major independent oil and natural gas providers. It owns 325 land rigs and operates mainly in Texas, New Mexico, Utah, Oklahoma, North Dakota, South Dakota, Wyoming, Montana, Louisiana and Western Canada.^[2]

In recent years, PTEN has also managed to increase it's fleet size relatively inexpensively, mainly by acquiring other companies in the business. This has been a major driver of the firm's profitability. However, the US drilling industry has been consolidating over the last few years, and increased competition has driven up the price of oil rigs.

Although company operates in the U.S., it has also benefited from the tremendous growth of energy demand sparked by China and other developing countries. As their demand has driven up the price of oil and natural gas across the globe, Oil and gas companies have increased their drilling activity substantially. The increased demand for its services combined with the company's selectivity- only accepting day contracts and very profitable long-term contracts has led to growing profitability over the last few years. PTEN's 2006 revenue was more that 5 times that of its 2002 revenue.

[edit] Business Factors

PTEN's services include drilling, oil and natural gas exploration and production, pressure pumping, and completion fluid services. All of it's businesses are independently profitable.

The company provides services under daywork, footage or turnkey basis. Most of its contracts are daywork -- PTEN provides the drilling rig and crew to the customer and charges the customer on a per day contracted rate. Under footage contracts, the Company contracts to drill a well to a certain depth under specified conditions for a fixed price per foot. Finally, turnkey contracts span over longer time horizons and the company provides additional services along with regular drilling. The company commits to drill a well for a customer to a specified depth and under specified conditions for a fixed price regardless of the time and expense required to drill the well.

Technically, turnkey contracts are riskier for PTEN than daywork contracts but can prevent the company from under-utilization during periods of lower demand. However under the current environment the company prefers daywork contracts. In fact, in 2006, 98 percent of the drilling revenues were generated from such contracts.

Industry observers have noted that while most of Patterson-UTI's fleet is comprised of older commodity land rigs, the company has invested $800 million over the last three years. Moreover, even though PTEN owns 19 percent of the land rigs in the US, these rigs remain highly competitive and account for roughly 30 percent of total footage drilled.

PTEN's revenues and profitability has increased dramatically since 2002. This is in part do to increased demand for oil and natural gas. PTEN is more selective than its peers and tends to select only the most profitable jobs. As a result it has a utilization rate of around 50%, but has been extremely profitable.

[edit] Trends and Forces

• Impact of Energy Prices: Since PTEN is a drilling company, oil and natural gas prices does not affect it directly. However, in recent years, PTEN has benefited from the higher prices of both oil and natural gas. Since oil and natural gas producers are more likely to invest in drilling new wells if the prices of these commodities are high, there is a strong correlation between high prices of these commodities and demand for PTEN's services. Oil and Natural gas prices have broken new records due in part to the voracious appetites of developing countries like China and India.

• New Rigs and Competitive Forces: In recent years PTEN's utilization has lagged its peers and now averages around 50 percent. The recent influx of new rigs have caused PTEN to relax its utilization standards in order to maintain prices.

• Alternative energy threat: Alternative energy is still some years off from widespread adoption; alternative energy challenges like low production volume, low of production efficiency, and lack of infrastructure (some new fuels require distribution infrastructure separate from existing oil pipelines) all have yet to be overcome. However, energy sources such as ethanol, solar or wind end up taking off, the negative impact on the oil and gas industry could be huge -- and would be felt by the drilling service providers.

[edit] Competitors

Major competitors include:

• Unit (UNT): Larger than PTEN in terms of revenues, but has a strong focus on production and pipeline logistics. Offers it's drilling services to other independent oil companies. Owns 128 drilling rigs.^[6]

• Pioneer Drilling Co (PDC): Operates mainly around Texas with a fleet of 66 land drilling rigs.

• Grey Wolf (GW): Primarily focuses on drilling contracts in the US with a fleet size of 84 drilling rigs.

• Petroleum Development (PETD): Mainly deals in producing and marketing natural gas and oil in the US. However, drills well for other companies on a partnership basis.

• Nabors Industries (NBR): World's largest drilling contractor with a fleet 600 land drilling rigs and 780 land-over-work. Focuses primarily on land drilling operations, but has offshore capabilities. Has operations in North America, Middle East, South America, Africa and Far East.^[7]

[edit] Footnotes

1. ↑ from 2006 10-K (page 18)
2. ↑ from 2006 10-K (page 3-4)
3. ↑ Data for Fiscal years ending December 31. Taken from 2006 10-K ("Selected Financial Data" section, page 20)
4. ↑ from 2006 10-K ("Selected Financial Data" section, page 20)
5. ↑ from 2006 10-K (page 3-4)
6. ↑ http://www.unitcorp.com/rigfleetmap.html
7. ↑ http://www.nabors.com/Public/Index.asp?Page_ID=38