Morningstar | Land Drillers Patterson and Precision See Improvement on Higher U.S. Rig Count
Land drillers Patterson and Precision posted solid third quarters, with both companies’ U.S. land drilling businesses benefiting from a 5% sequential improvement in the U.S. horizontal rig count. Patterson’s contract drilling segment saw a 4% increase in revenue owing to a 3% increase in the company’s rig count and a slight bump in day rates. Precision’s U.S. drilling business saw a 5% increase in revenue owing to a 6% increase in rig count but slightly slipping day rates. Precision’s Canadian drilling business saw its usual sharp seasonal uptick for the quarter, but revenue was also up 5% versus the prior-year quarter. Our fair value estimate for both companies and no-moat ratings remain in place.Management from both companies noted that leading edge day rates are very strong--perhaps 10% above current fleet averages for the companies. We agree that if current rig demand remained in place, the pricing outlook would appear quite rosy for the drillers. Unfortunately for the drillers, we think we think rig demand is headed downward. We forecast that the U.S. horizontal rig count will fall from about 920 in the third quarter of this year to about 650 by 2022, driven by reduced shale drilling activity as well as drilling efficiency gains.
Outside of the drilling, Patterson saw Pressure Pumping revenue decrease 1% as the company parked about 16% of its pressure pumping capacity owing to adverse market dynamics--operators’ demand for pressure pumping is temporarily waning owing to Permian Basin takeaway constraints. This issue should be alleviated by mid-2019, after which demand for pressure pumping will rebound, although we don’t think pricing will resume the upward trend seen from 2017 through early 2018 owing to fierce competition in the industry. We were impressed that Patterson’s Pressure Pumping segment adjusted operating margins for the third quarter only slipped to 4% from 5% despite the headwinds.
Patterson-UTI Energy is an oilfield services company that primarily owns and operates fleets of land-based drilling rigs and a fleet of pressure pumping equipment. The company's business segments are: contract drilling services, which markets its contract drilling services to independent and other oil and natural gas operators; pressure pumping services, which provides pressure pumping services to oil and natural gas operators, primarily in Texas, the Mid-Continent region and the Appalachian region; and directional drilling services, which provides a suite of directional drilling services, including directional drilling and downhole performance motors in various onshore oil and natural gas basins.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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