Morningstar | Patterson Sees Mixed 4Q, with Pressure Pumping Weakness Offset by Contract Drilling Strength
Patterson reported mixed fourth-quarter results. Revenue decreased 8% sequentially as a 24% decrease in the pressure pumping segment offset a 6% decrease in the contract drilling segment. Adjusted operating margin actually crept up slightly to negative 0.9% from negative 1.4% previously, owing to a strong performance in contract drilling and surprisingly resilient (given the revenue drop) margins in pressure pumping. Our fair value estimate and no-moat rating are unchanged.As we've previously noted, the bottleneck in Permian Basin takeaway capacity has caused a slowdown in U.S. shale completions activity, affecting utilization and pricing for pressure pumpers. This completions slowdown accelerated in the fourth quarter. However, the takeaway constraints are still set to be alleviated by the second half of 2019, meaning that these issues are largely temporary.
Patterson certainly was affected by this issue, as it took a very large top-line hit in pressure pumping. However, adjusted operating income only fell slightly (to 0% from 4%), reflecting strong efficiency improvements in the quarter, according to management.
In contract drilling, Patterson benefited from about a 3% sequential improvement in its rig count (running slightly ahead of the 1.6% increase in the U.S. horizontal rig count), as well as gross margin jumping to $9,400 per rig day from $8,500 previously owing to stronger pricing. This resulted in a segment-adjusted operating margin of 7%, the company's best result since the first quarter of 2015. Still, we remain pessimistic on the long-term prospects of U.S. land drillers owing to our view that the U.S. horizontal rig count will decrease from almost 900 currently to around 700 by midcycle (2023).
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.
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