Patterson UTI (NASDAQ:PTEN) is an oil services company that is a leading operator of high specification drilling rigs as well as an operator of a large pressure pumping fleet. Both businesses should see a dramatic recovery in margins as capacity in the industry tightens from a reacceleration in drilling activity based on exploration & production (E&P) customer budgets. To start the year, several E&P customers had acknowledged a 10-15% increase in service costs in their capital budgeting for 2017 due to a lack of availability in pressure pumping horsepower and high spec drilling rigs. Also, Patterson is about to close on its acquisition of Seventy Seven Energy, which recently emerged from bankruptcy, adding scale to both sides of its business. The stock performed poorly during the quarter as oil prices pulled back to the mid-$40 per barrel range which sparked fears that US drilling activity might slow its recovery. However, on the company’s earnings call, the company spoke to the activation of more pressure pumping crews and equipment which will be deployed in second quarter of 2017 as well as construction of two new high spec rigs for customers with day rates that are near pre-downturn levels. Both data points are indicative that our utilization and pricing recovery thesis is intact.
From Keeley All Cap Value Fund second quarter 2017 shareholder commentary.
