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Undervalued, Historical Circle

|Includes: Patterson-UTI Energy, Inc. (PTEN)

Falling oil prices in recent weeks remind me of 2008 oil prices "crisis", which collapse from 145.16 (Jul 2008) to 44.6 (Dec 2008).similarly to current condition (from 107.95 in Jun 2014 to 53.45 in the end of year). It a bit odd in my point of view regards to stock performance, Patterson-UTI Energy drop since Jun in 52% compare to 66% drop (almost 1:1 ratio between crude oil and Patterson-UTI Energy price change)
Now let's review financial report for the past 9 years and examine the bottom line:

Year

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

Operating cost/

Operating revenue

93.39%

88.14%

81.74%

79.52%

86.27%

106.17%

73.55%

66.60%

57.08%

64.80%

Average Oil prices

93.48

98

94

94.9

79.5

61.96

99.67

72.34

66.05

56.64

Patterson-UTI Energy doesn't directly dependent on oil price, low price doesn't necessarily mean worse revenues condition. If you take a look on 2005 and 2006 for example which oil prices were lower and operation expense ratios were better than 2009. Lower prices seems to contribute to higher operating income.

There might be several reasons for particular situation but I think the major ones were:

  1. Drop in Oil prices - oil average prices drop from 99.7 to 62 and simultaneously inventories rise so therefore the market experience lack of contract drilling demands.

  1. Slipping into recession after Lehman brothers collapse - U.S market slipped into recession therefore lack of demand for oil.

2009 was the worst year in 9 years after oil prices collapse, operating income was negative and the company lost money in upper line which improved a year later.


Major Decline in revenues started only in the first quarter of 2009 by 41% but the bottom line was still positive, net income of 16.2 Million USD.
So I don't expect the upcoming reports to be dramatically worst however the second quarter should be a bit challenging because then the company might feel a deeply change in revenue and even report on loss.
The follow chart represents percentage change quarter on quarter revenue since 2007 till 2009:

The company will suffer from bad performance in the short run however in the long one the company will be back to normal, the question here is if PTEN have strong balance sheet and positive cash flow to hold on the follow periods. Let's take a look on balance sheet compare to previous oil "crisis" and economy recession.

 

2008

2009

2014Q3

Current assets

641,374

457,268

748,096

Total assets

2,712,817

2,662,152

4,968,349

Current Liabilities

302,613

193,308

587,449

Total Liabilities

585,875

580,452

2,108,889

Equity

2,126,942

2,081,700

2,859,460

current ratio

2.12

2.37

1.27

equity / total assets

78.40%

78.20%

57.55%

Cash

81,223

49,877

38,594

In the past the company was much more liquid than now and financial methodology has been changed since 2008, equity covers only 57% of total assets compare to 78%. Finance condition changed since 2008, the company increase total liabilities by 260% but I do think they have enough gap to hold on another drop in oil price as long as U.S economy won't slide into recession again.
The company needs to repay 40% of long term debt after 2018, it gives the company the flex ability to roll short terms loan to medium terms, as you can see in the follow table:

Year

Repayment Amount

Repayment %

2014

2,500

0.36%

2015

12,500

1.82%

2016

28,750

4.20%

2017

41,250

6.02%

2018

0

0.00%

Thereafter

600,000

87.59%

Total

685,000

 

Moreover they have 700 Million USD credit facilities agreement with Wells Fargo and they had available borrowing capacity of approximately $460 million, should also help to serve current and medium term liabilities.

In 2014 the board increase cash dividend amount to 0.1 per share for each period (total dividend amount of 58Mio USD) compare to 0.05 per share for each period in 2013 (total dividend amount of 29Mio USD). Therefore as they did in 2008 I believe we should expect dividend cut by 0.05 per share (in 2008 total yearly dividend was 0.6 compare to 0.2 in 2009)
I don't expect more than 0.05 cut because the correct Environment

Is not the same.

Conclusion

In my opinion the company would be able to serve obligation even in shocking era. 2008 era was much worsen and uncertainty than now.
PTEN trades at 29% discount from yesterday closing (14.69), target price of 19$. Pay attention to upcoming report, which should release on Feb 5th 2015. Again the revenue in end of year and first quarter should fall by 15% and 35%. Operating income should decline by half but stay in positive side along the way unlike 2009.
In addition, I believe on upcoming yearly release the stock should have up side correction.
if you believe in correction as I am but afraid of volatile you can buy 1 month covered call which can pay decent amount of 145$ (10.7%) with 8% down side protection. It would be better position for risk hater or if you believe price will keep falling in short term. But will return to normal in 2 month time frame.

Disclosure: The author is long PTEN.