Patterson-UTI Energy, Inc. (PTEN) is an land drilling rig contractor and is doing exactly the right things to profit from the increased drilling activity and hydraulic fracturing in the US. Patterson acquired certain assets of Key Energy Pressure Pumping Services LLC in October 2010 and this acquisition has quantitatively and qualitatively improved revenues from the pressure pumping segment.
The crash of 2008 took a huge toll on Patterson-UTI's operations. Revenues collapsed from $2 billion to $780 million and the company reported a net loss of $34 million in 2009. Recovery has been slow and the company crossed the 2008 water mark just last year.
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The company categorizes its operations as contract drilling, pressure pumping and its investments in oil and gas assets. As revenues and profits recover, the point to be noted is the change in the revenue mix for the Patterson-UTI.
Oil and natural gas
Revenues from pressure pumping increased from 10% of the total revenues in 2008 to 33% in 2011. The pressure pumping division provides well simulation and cementing services to oil and natural gas operators. Well simulation is an integral part of extracting gas and oil from shale rock and other unconventional plays. With analysts forecasting that gas trapped in the shale rock will last 100 years, here is a company that is strategically moving to capitalize on it.
After its 2010 acquisition Patterson-UTI now has a capacity of 631,000 hydraulic horsepower in its pressure pumping fleet. This acquisition has taken Patterson-UTI up the value chain in terms of the complexity of the jobs that it can perform and the pricing that it can command. Here is a table that clearly shows the manifold increase in the average revenue per job because of this acquisition:
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* Revenue in thousands
Patterson-UTI acquired these assets from Key Energy for a cash payment of $238 million. One segment, classified as the electric wireline business was separated and sold in January 2011 for $25.5 million. Thus the entire acquisition cost Patterson-UTI only $212.5 million. The remaining business contributed revenues of $456 million and an operating income of $106 million in 2011.
Patterson-UTI operates a rig fleet of 328 land based rigs of which only 91 are the technologically advanced APEX rigs. It plans to complete and deliver 30 new APEX rigs in 2012 (click here to read how an advanced rig fleet changed Helmerich & Payne Inc.'s (HP) fortunes. Utilization rates for the rig fleet remain below optimum levels and like a lot of other companies Patterson-UTI faces the challenge of upgrading its aging rig fleet.
Oil and Gas Assets
Patterson-UTI invests in oil and natural gas assets as a non-operating working interest owner, which means it does not participate or have responsibility for operating the wells. Less than 2% of its revenues came from this segment and such assets are less than 1% of its consolidated assets - which is a good sign. Oil and Gas exploration and production is a specialized and risky business best left to E&P companies that develop the resources to effectively handle the risks. In another report, I pointed out how Nabors Industries (NBR) has been subject to huge write downs and losses due to investing in E&P activities (click here to read about it).
Including principal, interest and contractual obligations Patterson-UTI has net commitments of $1.04 billion. In August 2010, the company entered into a credit agreement which gave it a revolving credit facility of $400 million and a term loan facility of $100 million. It has already drawn $92.5 million under the term loan agreement due August 2014 and $110 million under the revolving credit line due by August 2013. It also has $300 million in Series A senior notes due in Oct 2020.
The interest component for the current year of all these borrowings comes to $32.2 million whereas the company has cash and cash equivalents of only $23.9 million. Apart from this Patterson-UTI has entered into contractual agreement to purchase equipment and inventory worth $365.2 million. This brings the total payments to be made in 2012 to $397.4 million. To be fair to the company, it has $249 million available under the credit agreement, $518 million in account receivables and had reported operating cash flows of $868 million in 2011. So it is unlikely that Patterson-UTI will face any immediate liquidity problems. Such a high pressure scenario is bearable right now, but in times of crisis it could be a cause for concern.
In comparison to the other land drilling plays available in the market, Patterson-UTI scores on both the PE multiple and the Return on Assets.
Trailing P/E (TTM)
Nabors Industries Ltd.
Patterson-UTI Energy Inc.
Helmerich & Payne Inc.
Drilling for oil and gas well has traditionally been highly correlated to the price of oil and gas. Oil (The United States Oil ETF, LP: USO) prices are down 25% since the year highs, and Natural Gas (The United States Natural Gas ETF, LP: UNG) prices seem to have stabilized a bit after falling to multi-year lows. As oil companies move towards drilling more and more horizontal wells, it remains to be seen if Patterson-UTI can beat its peers with its mix of drilling and pressure pumping services.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.