Patterson-UTI Trumps Forecast - Analyst Blog

Onshore contract driller Patterson-UTI Energy Inc. (PTEN) reported better-than-expected third-quarter results, reflecting strong land drilling margins and robust pressure pumping activity.

Earnings per share excluding financing costs came in at 21 cents, well ahead of the Zacks Consensus estimate of 18 cents. In the year-ago period, the company lost 12 cents.

Quarterly revenue of $378.7 million was up 137.2% from the year-earlier level and was 4.9% above our projection.

Rig Count Statistics

The number of rigs operating during the quarter averaged 178 (170 rigs located in the U.S. and 8 in Canada), compared with 73 average rigs operating in the third quarter of 2009. The count was also up from 156 rigs operating in the June quarter.

Segmental Performance

Contract Drilling: Contract Drilling revenue totaled $290.8 million (77% of total revenue), up approximately 158.9% year over year. Average revenue per operating day was $17,730, up 5.5%, while average direct costs per operating day increased only marginally (by 0.4%) to $10,670. Additionally, the average number of rigs operating jumped year over year, from 73 to 178, driving the segment operating profit to $41.5 million (as against a loss of $19.9 million incurred in the year ago quarter).

Pressure Pumping: The Pressure Pumping business recorded revenues of $81.1 million, a rise of 94.6% year over year. In anticipation of increased activity associated with Marcellus Shale, the company has added both equipment and workforce during the recent years, which continued to experience ramped-up customer demand. Consequently, the Pressure Pumping business' operating profit of $17.6 million was a significant improvement over the prior-year's income of $1.2 million. The segment results were also buoyed by the recent acquisition of certain assets of onshore well service rig provider Key Energy Services (KEG), which has helped Patterson-UTI to get out of its historical stronghold in the Appalachian Basin into the pressure pumping markets in the Barnett, Eagle Ford and Permian Basins.

Oil & Natural Gas: Revenue generated from the Oil & Natural Gas business was $6.8 million, up 19.5% from the year-ago quarter. This segment posted an operating income of $2.5 million, up from $1.9 million earned in the prior year quarter, benefiting from improved oil drilling activity.

Capital Expenditure & Balance Sheet

During the quarter, Patterson-UTI spent approximately $214.8 million on capital programs (as against $103.9 million in the third quarter of 2009), of which approximately 89% went to the Contract Drilling segment. As of September 30, 2010, the company had $73.9 million in cash and no long-term debt.

Outlook

Management indicated that U.S. drilling activity is picking up, reflected by the sequential improvement in rig count. Patterson-UTI also stated that there is a considerable tightness in the market for shale-suitable rigs, and dayrates across the rig fleet have been going up. The company activated 5 new technologically-advanced ‘Apex' rigs during the third quarter of 2010 and expects to activate a total of 21 during the year. Patterson-UTI has entered into long-term contracts for all of these new rigs.

We have a long-term Outperform recommendation on Patterson-UTI Energy shares, reflecting its promising prospects. The company, which had heavy spot market exposure, was hit badly by the financial crisis with operators tending to release land rigs to preserve cash. However, Patterson-UTI Energy has recovered almost all its lost market share, benefiting from its growing premium land rig fleet and the current boom in pressure pumping services. Additionally, the company's stellar financial health (free cash flow positive and a debt-free balance sheet) stands it in good stead. As such, we believe Patterson-UTI Energy is well positioned going forward and view it as an attractive investment.