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52-week range: $8.64 (Dec. 5, 2008) - $37.45 (Jul. 2, 2008)
Dividend: $0.05 quarterly = 2.15% current yield
PTEN provides land-based contract drilling services to oil and gas exploration and production companies throughout areas of the US and Canada. They own about 350 land-based rigs.
Fourth quarter earnings were announced today at $0.52 versus $0.55 and with full year 2008 EPS at $2.24 against $2.79 in 2007. The shares dipped to $8.85 intraday before rallying to close at $9.30. PTEN’s shares hit their 52-week high of $37.45 last July as oil prices peaked at $147/barrel.
Earnings are quite sensitive to crude pricing, making these shares a good trading vehicle for an indirect play on oil while collecting a dividend while you wait. Patterson-UTI has zero short or long term debt and a good conservative management team.
The dividend had been initiated at $0.04 quarterly in 2004 and was increased three times to $0.16 quarterly by Q2 2008 as profits rose along with oil prices. When announcing Q4 results today the Board took the prudent step of scaling back to a $0.05 quarterly rate now that the near-term earnings outlook has weakened. The current yield of 2.15% is quite generous for PTEN shares on a historical basis and represents just an 8.9% payout ratio based on trailing 12-months earnings.
With cyclical earnings, I like to use a “normalized” EPS projection to put a value on company shares. In the 9 full years from 2000 through 2008, PTEN had cumulative net profits totaling $13.56 /share. Thus, they’ve averaged $1.51 /year since the turn of this century.
At that rate, PTEN shares finished today at just under 6.2x my normalized earnings figure. Tangible book value grew from $4.07 to over $14.00 since the end of 2000 making these shares a great value on a P/BV basis right now as well. PTEN shares traded at more than three times BV at peaks during each calendar year 2000-2006 and at more than double BV at times in 2007 and 2008 even while oil prices looked unsustainably high.
A return to even 1.5 times BV would bring these shares back to over $21.
Even 10 times normalized earnings would lead to a better than $15 share price.
Is a $15 - $21 target price rational here? Sure. The absolute low prices hit during 2004-2005-2006-2007 were $14.52, $17.15, $20.81 and $18.44 respectively. At its peaks in each of those years PTEN shares touched $20.45 - $38.49.
I’m confident that this is a solid company. I also believe that 2009 earnings will be well under 2008’s levels. How then, can these shares be played for good profits without too much risk?
Here are two buy/write plays that make sense to me:
…………………………..................…………….. Cash Outlay …...........…..…. Cash Inflow
Buy 1000 shares @$9.30 ……..........………… $9,300
Sell 10 Jan. 2010 $10 calls @ $1.90 …....................…………………..…….. $1,900
Sell 10 Jan. 2010 $10 puts @ $2.95 …...................…………………..…….. $2.950
Net Cash Out-of-Pocket …………..................………………… $4,450
On expiration date (Jan. 15, 2010) if PTEN shares are $10 or higher:
[up at least 7.6% from today’s close]
Your $10 calls will be exercised.
You will sell you shares for $10,000 cash.
Your $10 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will have collected $200 in dividends.
You will have $10,200 cash for your initial outlay of $4,450.
That’s a 129% cash-on-cash [best case scenario] return on shares that only had to rise by 7.6% over the 11.3 month period of the trade.
What’s the risk?
If PTEN shares stay below $10:
Your $10 calls will expire worthless.
Your $10 puts would be exercised.
You would have to buy an additional 1000 shares for $10,000 more cash.
You would have collected at least $200 in dividends on the original shares.
You would now own 2000 shares and $200 cash.
You will have no further option obligations.
What’s your break-even on the whole trade?
On the original 1000 shares it’s their $9.30 cost less the $1.90
call premium = $7.40 /share.
On the puts you sold it’s the $10 strike price less the $2.95
put premium = $7.05 /share.
Your net cost for the 2000 shares would be the average of those two
prices = $7.23 /share.
PTEN shares could drop by $2.07 /share or (-23%) without causing a loss from our starting price.
Nobody can guarantee these shares will not trend below $7.23 by January 2010. What I can tell you is that Patterson-UTI has not changed hands at that low a price since 2001 when book value was $4.46/share as opposed to north of $14/share today. Total revenues were $990 million in 2001 versus $2.21 billion in 2008.
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Here’s a 23.3 month play for those of you that are more comfortable looking out further for the market to return to calmer trading:
……………………………................………….. Cash Outlay ……............…. Cash Inflow
Buy 1000 shares @$9.30 ….......…………… $9,300
Sell 10 Jan. 2011 $10 calls @ $2.80 ….................…………………..…….. $2,800
Sell 10 Jan. 2011 $10 puts @ $3.60 ……................………………..…….. $3,600
Net Cash Out-of-Pocket ………………..............…………… $2,900
On expiration date (Jan. 20, 2011) if PTEN shares are $10 or higher:
[up at least 7.6% from today’s close]
Your $10 calls will be exercised.
You will sell you shares for $10,000 cash.
Your $10 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will have collected $400 in dividends.
You will have $10,400 cash for your initial outlay of $2,900.
That’s a 258% cash-on-cash [best case scenario] return on shares that only had to rise by 7.6% over the 23.3 month period of the trade.
What’s the risk?
If PTEN shares stay below $10:
Your $10 calls will expire worthless.
Your $10 puts would be exercised.
You would have to buy an additional 1000 shares for $10,000 more cash.
You would have collected at least $400 in dividends on the original shares.
You would now own 2000 shares and $400 cash.
You will have no further option obligations.
What’s your break-even on the whole trade?
On the original 1000 shares it’s their $9.30 cost less the $2.80
call premium = $6.50 /share.
On the puts you sold it’s the $10 strike price less the $3.60
put premium = $6.40 /share.
Your net cost for the 2000 shares would be the average of those two
prices = $6.45 /share.
PTEN shares could drop by $2.85 /share or (-30.6%) without causing a loss from our starting price.
Nobody can guarantee these shares will not trend below $6.45/share by January 2011. What I can tell you is that Patterson-UTI has not changed hands at that low a price since 2001 when book value was $4.46/share as opposed to north of $14/share today. Total revenues were $990 million in 2001 versus $2.21 billion in 2008.
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Well respected Guru Robert Rodriguez added to his PTEN position in the December 2008 period.
As of YE he held 4,208.000 shares or 2.72% of all outstanding shares.
This represented 8.26% of his whole portfolio and an 11.5% increase in his PTEN
holdings from the previous reporting period.
Disclosure: Author is long PTEN shares and short PTEN options.
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He bought 791,153 shares at an average cost of $11.10 according to GuruFocus data.