Patterson-UTI: Positive Cash Flow And Solid Balance Sheet

Oct. 15, 2019 12:16 PM ETPatterson-UTI Energy, Inc. (PTEN)
Praveen_Chawla profile picture
Praveen_Chawla
1.63K Followers

Summary

  • PTEN stock is at 10-year lows but it is thriving.
  • However, the company has solid free cash flow and a strong balance sheet.
  • PTEN is well positioned to ride out the current down cycle in oil exploration.

Investment Thesis

While we cannot time the bottom, a good time to buy cyclical oil & gas names is at multi-year lows with the caveat that they should be able to survive the downturn. North American contract land driller Patterson-UTI Energy Inc. (NASDAQ:PTEN) appears to be in a good position to do just that, as it is free cash flow positive, has a good balance sheet, and is selling at below tangible book value with stock price at a 10-year low.

Image result for patterson uti rig

Positive Free Cash Flow

Patterson-UTI has been cutting capital expenditure in response to lower oil prices. While revenue has dropped, capex cuts have boosted cash flow from operations (orange line, in Chart 1 below) and free cash flow (blue line).

Chart 1: Stock price, WTI price, Operating Cash Flow, Free Cash Flow, and Revenue per share. (Source: Gurufocus.com)

The company repurchased $150 million shares during the first half of 2019, representing 5.5% of the outstanding shares at the beginning of the year. In the back half of this year, the company plans to both pay down debt and purchase more shares.

Chart 2: Cash Flow. (Source: Author with data from Gurufocus.com)

Below is the revenue break down by segment for the last 3.5 years.

Revenue/Segment/$'000 FY 16 FY 17 FY 18 YTD Q2 19
Contract drilling 543,663 1,040,033 1,430,492 720,530
Pressure pumping 354,070 1,200,311 1,573,396 498,609
Directional drilling - 45,580 209,275 103,177
Other 18,133 70,760 113,834 57,620
Total 915,866 2,356,684 3,326,997 1,379,936

Chart 3: Segment Data

PTEN stock is selling for below tangible book value of $13.14 per share. Given the decent balance sheet and positive free cash flow profile, it appears to be good bet to take a position and ride out this deep value cyclical name.

Good Balance Sheet

PTEN has negotiated a new $150 million term loan with a 3-year term due June 2022 at interest of LIBOR + 112.5 basis points. It plans to use proceeds from term loan plus cash on hand to repay $300 million debt due October 2020. This will reduce total debt by $150 million and extend nearest term debt maturity to June 2022. This also reduces interest expense as new term loan has lower interest rate than 4.97% debt being repaid.

Chart 4: Liquidity & Debt. Source: Company presentation. (September 2019)

Chart 5: Balance Sheet. Source: Author with Data from Gurufocus.com

Conclusion

PTEN has a solid market position in the Permian and is the market leader in high spec mobile rigs which can move from pad to pad. While this is a buyers' market with a lot of idle rigs, the fact that PTEN is able to thrive in this market is good indicator that it will be a winner. Morningstar analyst does not think the company has a moat as technical advances in land rigs are quickly replicated and labor costs, which are the major cost component, do not give any contract driller an advantage.

The history of oil production since the start of the industry in the mid-1800s to today has been that of boom and bust. The cycle is predictable, though the timing is not. In this cycle over the last two decades, innovation has come from the shale producers and the nimble contract drillers and frackers such as PTEN who can quickly ramp drilling and pumping up and down to take advantage of price and demand. With the continued growth in global oil demand (see below), we will eventually transition into a boom period. When that becomes obvious, oil prices will again rise, bringing profits to the industry and higher capital spending on new projects.

Chart 6: Global Oil Demand

This article was written by

Praveen_Chawla profile picture
1.63K Followers
Pharmacist, MBA. Full time Investor. Early retired. Worked in the pharmaceutical industry most of my life. Learnt investing by making mistakes. Eight figure portfolio with double digit returns over 20 years.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PTEN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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