In general, the slump in oil and gas prices has resulted in bearish sentiments for onshore and offshore drilling service providers. With the exception of few companies, the industry has suffered due to contract cancellations, lower utilization and lower day rates. Patterson-UTI Energy (PTEN, Financial) is just another onshore drilling stock that has declined as a result of lower oil prices and I believe that the bearish phase for the stock is far from over. This article will discuss the reasons to remain bearish on the stock in the foreseeable future.
The biggest reasons to be bearish on Patterson-UTI Energy come from the company’s 4Q14 result release. The company’s results do not seem to be negative, but the company’s outlook for the coming quarters is certainly negative and this will take the stock lower in the coming months.
Patterson-UTI Energy reported revenue of $901 million for 4Q14 as compared to revenue of $659 million for 4Q13. The company’s net income also surged to $57.9 million in 4Q14 as compared to $16.6 million in 4Q13. According to the company, the strong results mark the end of a positive results cycle, and the management expects bearish results in the coming quarters.
While that was expected, I am of the view that the company’s results can surprise on the downside in the coming quarters considering the fact that the company’s rig with term-contracts has declined significantly in the recent past. This is an indication of contract cancellations as oil and gas companies curtail their capital expenditure due to lower energy prices.
To put things into perspective, Patterson-UTI Energy expects an average of 138 rigs operating under term contracts during the first quarter, and an average of 104 rigs operating under term contracts during 2015. Considering the fact that the company has 210 rigs in the US in 4Q14, the number of rigs under term-contract is low and this will have a direct impact on the company’s revenue and EBITDA margin.
Further, according to the management, the extent of downturn is still uncertain and this is a critical point when it comes to the revenue and EBITDA visibility for 2015. With oil prices remaining at lower levels, it is likely that the company’s revenue and EBITDA will be hit hard in the coming quarters and it is also very likely that the company’s term-contracts will witness further cancellations. I therefore expect the company’s coming quarters to be uncertain with a negative bias. In such a scenario, it would be best to avoid the stock.
I must also add here that the company has already planned to reduce 2015 capital expenditure by 29% to $750 million. If oil prices remain at current levels for the next 3-6 months, I expect further revision to the capital expenditure. Therefore, the timeline for oil price recovery is the critical factor and with significant supply of oil coupled with a global economic slowdown, oil price recovery is not coming anytime soon.
In conclusion, Patterson-UTI Energy has some big challenges ahead and it would be best to avoid the stock even if the company’s fundamentals do not worsen significantly in the coming quarters. My view is to wait for some stability in oil prices and some signs of recovery in the global economy before considering exposure to this stock.
