Unconventional oil resources are being developed around the world, based on the scarcity of conventional oil reserves. When speaking of oil, unconventional resources refer to either oil sands or shale oil. For the purpose of this list, focus is on shale oil. Shale techniques have fueled the robust gains in United States land drilling companies. Since much of these areas are just beginning to see development, we could continue to see gains in these sectors for years to come.
Nabors (NBR) is the largest drilling contractor in the world. It owns and operates 550 land drilling rigs. It also has 727 land work over and well servicing rigs in North America. Nabors offshore consists of 37 platform rigs, 13 jack-ups and 3 barge rigs. Nabors manufactures top drives and other instrumentation in the drilling industry. Nabors Drilling USA LP is Nabors's largest subsidiary. It has approximately 306 drilling rigs in the lower 48 states. This company has invested in improvements to its rigs over the past few years. Currently Nabors has 113 land rigs of 1500 hp or more. Nabors has the technology and expertise to do any drilling job. Company valuations:
- P/E Ratio-91.78
- Forward P/E-13.32
- One Year PEG-1.73
- One Year Estimated Growth-53.1%
Helmerich & Payne (HP) derives almost all of its operating revenues from contract drilling. I covered this company in a previous article. In 2006, H&P had 113 U.S. land rigs. H&P now has 237, with 205 contracted. Although utilization is only 86% in 2011, it would not be a stretch to say that at current oil prices, H&P could increase utilization to 2008 levels (96%). H&P has an additional 14 Flexrigs under construction. This company has 41% of the AC drive market. AC rigs currently are 25% of the entire rig count. It seems that H&P is the go to company for shale work in the U.S. H&P recently increased its cap ex for 2011 to $850 million from $750 million. This was due to new Flexrig orders. H&P will fund all cap ex through cash from operations.
- P/E Ratio-37.71
- Forward P/E Ratio-15.96
- One Year PEG-.675
- One Year Estimated Growth-55.9%
Patterson-UTI Energy Inc. (PTEN) provides onshore contract drilling in the United States. Patterson has stated that unconventional wells have become a "game changer" for contract drillers. The problem is having the proper inventory to drill new wells. 65% of new wells are horizontals. Technology needed for unconventional well includes:
- 1000+ HP Drawworks
- High Capacity Mud Pumps
- Top Drives
- Automated drilling systems and pipe handling
- Quick moving from well completion to well spud
Patterson will have approximately 150 of these rigs by the end of this year. It currently has 230 conventional rigs. 89 of these rigs are currently working as of March 4th of this year. Patterson purchased Key Energy's (KEG) pressure pumping and wireline assets last year, to add to its well service business. Its combined pressure pumping business has over 640000 hp, of which only 100000 hp is under contract. 67.3% of revenue is from drilling and 30.9% from pressure pumping. Patterson is the second largest land contract driller and sixth largest pressure pumping business.
- P/E Ratio-38.4
- Forward P/E Ratio-14.19
- One Year PEG-.245
- One Year Estimated Growth-156.9%
Precision Drilling Corporation (PDS) recently announced the purchase of two directional drilling companies. Its expansion into this area is not surprising, as all in this sector are expanding towards unconventional plays. Since 2007, several things have happened in the United States:
- Total Oil Up 206%
- Shale Gas Rigs Up 111%
- Conventional Gas Rigs Down 74%
- Bakken Rigs Up 182%
These numbers show that new rigs with technology to drill horizontal wells are in demand. Precision's Super Series rigs are considered Tier 1 rigs. Precision's rig count is:
- 124 Super Series Rigs
- 126 Tier 2 Rigs
- 108 Tier 3 Rigs
- 148 of Rigs Top Driven
Precision added 9 rigs in 2010 and plans another 6 this year. Between 8 and 12 rigs will be upgraded this year. It should be noted that tier 2 rigs have horizontal capabilities. Majority of rigs are manufactured by Precision. Precision is also a play on Canadian resources as the company has 202 of its rigs there-- with 25% of the total fleet in Canada and 6% of the total U.S. market. Precision also has 200 service rigs. A more in depth article can be found here.
- P/E Ratio-61.55
- Forward P/E Ratio-16.56
- One Year PEG Ratio-1.40
- One Year Estimated Growth-44%
Pioneer Drilling Company (PDC) is up since I published this article. This little company has been sneaking under the radar, not even taking the time to test the 50 day moving average. To be honest, I like the company, but its move up is incredible. Its fleet is:
- 75% shale capable
- 69% have over 1000 HP
- 49% have top drives
- 42% are electric
Horizontal rig counts in the U.S. have increased quickly. Today we have more active horizontal rigs than the peak of 2008. This will benefit Pioneer in two ways. Its rig utilization will improve, and its oil service business will also be busier. Horizontal rigs need 3 to 5 times as much service.
- P/E Ratio-N/A
- Forward P/E-25.48
- One Year PEG Ratio-N/A
- One Year Estimated Growth-153.6%
Unit Corporation (UNT) has three separate divisions of its company:
- Unit Petroleum Company
- Superior Pipeline Company
- Unit Drilling Company
Unit Drilling has increased rig counts by 157% since 2001. It is the fifth largest U.S. deep drilling onshore contractor. As of 2-15-11, Unit had utilization of approximately 58%. Most of the rigs not utilized are in the 450 hp to 750 hp group and over 2500 hp rigs. 66 Unit rigs are equipped with integrated top drives. Day rates and margins have both been increasing since the first quarter of 2010.
- P/E Ratio-20.53
- Forward P/E Ratio-14.92
- One Year PEG Ratio-1.09
- One Year Estimated Growth-18.8%
Union Drilling Inc. (UDRL) is a contract driller of 71 land rigs. This company began drilling horizontal wells for natural gas, and now is using that expertise on liquids. Union will relocate wells to areas with higher margins. Union now has 11 rigs in the Permian drilling for oil This number has increased from just 1 rig in 2009. Union has made significant investments in its fleet:
- 22 new rig purchases since 2006 and will add one more next quarter
- 29 top drives with 3 on order
- 7 rigs with walking or skidding systems
- 11 electric rigs
- 21 pairs of 1300-1600 hp mud pumps
- 8 rigs with iron mud pumps, and 8 more this year
Union has 24 rigs with 1000+ hp. 45 rigs have 750+ hp. 31 of the companies rigs are idle. From the 3rd quarter of 2010 to the 4th quarter of 2010, margins have increased by 37% or $1285/day. In the 3rd quarter of 2009, Union's utilization rate was 30%. This has almost doubled since. It has a reasonable debt to cap of 13%.
Bronco Drilling Company Inc. (BRNC) provides contract land drilling and work over services to natural gas and oil companies. This company started in 2001, when it purchased one 650 hp rig, refurbished and deployed it. Since then, it has done the same to 21 others. All work is done in-house as Bronco has a full machine shop that can repair, improve or build rigs. It now has 37 land and 61 work over rigs. Bronco has a 20% equity interest in Bronco MX. Bronco provides contract land rigs and leases land rigs to PEMEX and the companies PEMEX works with. It also has a 25% investment in Challenger Limited. Challenger provides land drilling services to companies in Libya.
- P/E Ratio-N/A
- Forward P/E Ratio-29.03
- One Year PEG Ratio-N/A
- One Year Estimated Growth-133.3%
In summary, I have put together a small list of companies that have drilling rigs or are building rigs capable of drilling in the United States' toughest shales. Companies focused on tier 1 rigs will continue to do well in this market. As the United States is able to produce more liquids from its shales, only companies with the technology to pull the commodity from the ground will have work. In my opinion, H&P looks to have an advantage here. This company has done a much better job of positioning themselves for the future.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HP over the next 72 hours.