Patterson-UTI Energy: Consolidating At Current Levels

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Mar 17, 2015

Among onshore drillers, Patterson-UTI Energy (PTEN, Financial) is certainly a stock to consider for investors who are looking at a relatively long-term horizon. This article discusses the recent stock movement trend and the reasons to be bullish on the stock for the long term.

The first point that I want to mention here is that U.S. rig count has declined by 684 as of March 13, 2015 as compared to the same period last year. Even for the last week, the U.S. rig count slumped by 67. Therefore, when it comes to sentiments related to onshore rig activity, the overall mood is bearish as oil prices continue to trade at lower levels.

However, there is one important point that needs to be noted in relation to Patterson-UTI Energy. As of November 28, 2014, the stock was trading at $1.69. Almost 3.5 months down the line, the stock is trading at $17.06. In other words, the stock has remained sideways in the last few months even as the U.S. onshore rig count continues to slump.

The important point here is that the stock declined from $37.73 on July 25, 2014 to $14.33 by December 15, 2015. Since that time, the stock has moved marginally higher. The point that I want to stress here is that the stock has discounted (in all probability) the negative sentiments related to a decline in rig count. Therefore, even with continued flow of bad news, the stock remains resilient.

In my view, the stock has limited downside from current levels and the stock can be considered for gradual accumulation at these levels. I emphasize gradual accumulation as any further decline in oil prices can still result in another 5% to 10% correction in the stock. While I believe that oil prices might not decline sharply again, investors still need to exercise caution.

Coming to the reasons to be bullish on Patterson-UTI Energy for the long-term, the company has 149 APEX rigs that are considered to be of high quality. By December 2015, the APEX rigs will increase to 161 and a high percentage of APEX rigs as compared to mechanical or other electric rig can be considered as a big long-term positive.

The positive of APEX rig include enhanced mobility, advanced environmental spill control integrated in drilling floor and full multi-directional walking capability. The impact of APEX rigs is clear considering the fact that the average rig revenue per day for Patterson-UTI Energy has gradually trended higher in the last 1-2 years due to high quality rigs.

Besides the factor of quality rigs that can command a high day rate and will be in strong demand when the onshore drilling market recovers, Patterson-UTI Energy also has strong financial flexibility. As of FY14, the company had a debt to capital ratio of 24% and a net debt of $943 million. The important point here is that $600 million of the total debt is due only on or after 2020. Therefore, the debt maturity profile is excellent and ensures no immediate debt refinancing pressure.

Further, as of December 2014, Patterson-UTI Energy had a cash position of $43 million and an undrawn credit facility of $157 million. This gives the company a total liquidity buffer of $200 million into 2015. From a shareholder value creation perspective, Patterson-UTI Energy has not diluted equity since 14 years and the company has also bought back 26 million shares since 2005. In addition, the stock also offers a dividend yield of 2.3% at a current stock price of $17.06 per share.

Therefore, Patterson-UTI Energy is worth considering from a asset quality perspective and also from a sound financial perspective. In my view, the stock is unlikely to make a big move in 2015. However, the stock has bottomed out in all probability and the current levels are excellent for gradual long-term accumulation of this quality stock.