Company Reports

Following several years of rampant oversupply, the US rig market has spent the past several quarters operating near maximum capacity utilization, supporting significantly increased day rates. Drillers generally start to command pricing power at around 80% utilization, and the current operating environment has pushed average rig rates well over $30,000 per day. Elevated demand will preserve the status quo over the near to medium term, but we expect fierce competition among drillers will prevail in the long run. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand.

No-moat Patterson-UTI reported weaker first-quarter results, reflecting lower US oil and gas production levels, which remained in line with activity late last year. Sales dropped 5% sequentially, and adjusted EBITDA margins declined 100 basis points to 25%. The near-term shale production outlook remains somewhat tepid, and customer consolidation may present additional headwinds in the future. Currently, favorable commodities prices offer some optimism for an uptick in activity in the second half of the year, and our long-term outlook for Patterson remains unchanged overall. We also note that the firm is ahead of schedule on 2024 shareholder distributions, returning $130 million through dividends and buybacks compared with its $400 million target. We’re slightly lowering our fair value estimate to $15 from $16 following results, and shares trade at a roughly 30% discount at the time of writing.

Following several years of rampant oversupply, the U.S. rig market has spent the past several quarters operating near maximum capacity utilization, supporting significantly increased day rates. Drillers generally start to command pricing power at around 80% utilization, and the current operating environment has pushed average rig rates well over $30,000 per day. Elevated demand will preserve the status quo over the near to medium term, but we expect fierce competition among drillers will prevail in the long run. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand.

No-moat Patterson-UTI posted solid fourth-quarter results, its first full quarter following the closing of the NexTier and Ulterra acquisitions. We’ll incorporate Patterson’s full operating and financial results shortly, but after this first look, we maintain our $18 fair value estimate.

Following several years of rampant oversupply, the U.S. rig market has spent the past several quarters operating near maximum capacity utilization, supporting significantly increased day rates. Drillers generally start to command pricing power at around 80% utilization, and the current operating environment has pushed average rig rates well over $30,000 per day. Elevated demand will preserve the status quo over the near to medium term, but we expect fierce competition among drillers will prevail in the long run. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand.

No-moat Patterson-UTI posted solid second-quarter results, with revenue up 22% year over year, but down 4% sequentially as oil and gas activity growth continues to decelerate across North America. The firmwide adjusted EBITDA margin was similarly affected, expanding nearly 600 basis points year over year, but contracting 150 basis points versus last quarter. We’ll incorporate Patterson’s full operating and financial results shortly, but after this first look, we maintain our $18 fair value estimate.

Patterson-UTI announced intentions to acquire Ulterra Drilling Technologies in a mixed cash-stock deal with a nearly $800 million implied value, financed by $370 million cash plus 39.4 million shares issued. We don't foresee any material roadblocks to deal completion and expect it will close on schedule in the third quarter of 2023. The Ulterra deal comes less than a month after Patterson's merger announcement with NexTier, expected to close in the fourth quarter. By the end of 2023, Patterson's enterprise value will likely exceed $6 billion, and, assuming no material consolidation among competitors, Patterson will solidify its positioning as one of the largest oilfield service firms in North America.

Following several years of rampant oversupply, the U.S. rig market has spent the past several quarters operating near maximum capacity utilization, supporting significantly increased day rates. Drillers generally start to command pricing power at around 80% utilization, and the current operating environment has pushed average rig rates well over $30,000 per day. Elevated demand will preserve the status quo over the near-to-medium term, but we expect the fierce competition among drillers will prevail in the long run. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand.

Patterson-UTI announced a merger of equals with NexTier Oilfield Solutions through an all-stock transaction, creating a fully integrated drilling and completions oilfield services firm with an estimated $5.4 billion enterprise value. The combined entity will maintain the Patterson-UTI name and PTEN ticker following close, currently slated for the fourth quarter of this year. We're raising our fair value estimate to $17 from $15, as we expect the combination will foster more cost-efficient asset-light operations, lifting profitability and cash generation over time. We view the firms' legacy product lines as highly complementary, enabling Patterson to diversify its end-market exposure without straying too far from its core competencies—a pitfall suffered by peers in deals past. We maintain our no-moat rating, as the highly fragmented North American pressure pumping market remains prohibitive for any one firm to carve out a lasting competitive advantage.

Following several years of rampant oversupply, the U.S. rig market has spent the past several quarters operating near maximum capacity utilization, supporting significantly increased day rates. Drillers generally start to command pricing power at around 80% utilization, and the current operating environment has pushed average rig rates well over $30,000 per day. Elevated demand will preserve the status quo over the near-to-medium term, but we expect the fierce competition among drillers will prevail in the long run. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand.

The U.S. land rig market remains oversaturated, with drillers commanding lower day rates and margins than in the past. Generally, drillers can begin to command pricing power at around 80% utilization. Rig demand in North America has been strong enough to push utilization well over that 80% threshold in recent quarters, supporting significant increases in day rates. We neverthless expect competition among drillers will remain elevated over the long run. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand. Patterson acquired Pioneer Energy Services in the fourth quarter of 2021, expanding its U.S. rig capacity and adding exposure to Colombia (where Pioneer maintained eight rigs). We see more potential for drilling growth in international markets, but Patterson's exposure would be small, representing less than 5% of its total annual revenue.

Patterson-UTI commenced 2023 on solid footing, with total revenue up 55% year over year, driven by continued strength in North American drilling and pressure pumping markets. Elevated equipment demand facilitated further pricing gains, which bolstered Patterson-UTI’s overall profitability. The firm’s adjusted EBITDA margin reached 32% (compared with 20% last year), approaching the mid-2010 average of roughly 35%. We’ll incorporate the firm’s full financial and operating results shortly, but after this first look, we maintain our no-moat rating and $15 fair value estimate.

The U.S. land rig market remains oversaturated, with drillers commanding lower day rates and margins than in the past. We expect utilization for Tier 1 rigs (high-quality AC rigs with 1.5k-plus horsepower and multiwell pad drilling capabilities) to remain below 70% at midcycle. Generally, drillers can begin to command pricing power at around 80% utilization. Even as demand for oil (and thus rigs) recovers, we expect competition among drillers will remain elevated. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand. Patterson acquired Pioneer Energy Services in the fourth quarter of 2021, expanding its U.S. rig capacity and adding exposure to Colombia (where Pioneer maintained eight rigs). We see more potential for drilling growth in international markets, but Patterson's exposure would be small, representing less than 5% of its total annual revenue.

Patterson-UTI’s fourth-quarter results were a stellar conclusion to a very strong fiscal 2022. Total annual revenue increased 95% year over year as elevated demand for drilling rigs and pressure pumping equipment persisted throughout 2022. Adjusted EBITDA margin also doubled year over year, reaching 26%, surpassing prepandemic levels but still a far cry from its mid-2010s average of about 35%. We’ll incorporate the firm’s full financial and operating results shortly, but after this first look our no-moat rating, stable trend, and $15 fair value estimate are unchanged.

After incorporating Patterson-UTI’s full third-quarter results into our forecast, we’re raising our fair value estimate to $15 per share from $12. We forecast firmwide revenue will increase 21% per year over the next five years on average. The growth will be primarily driven by exceptionally strong activity in North American drilling and completions activity through 2023. Contract drilling and pressure pumping services together comprise nearly 90% of Patterson’s overall business. The firm has benefited from a very favorable operating environment over the past several quarters, as high demand for drilling rigs and pressure pumping equipment has kept the North American market operating near full capacity. We expect the supply-demand imbalance will foster continued margin expansion for Patterson over the next few years, and by our estimate, the firmwide operating margin will average about 13% over the next five years.

The U.S. land rig market remains oversaturated, with drillers commanding lower day rates and margins than in the past. We expect utilization for Tier 1 rigs (high-quality AC rigs with 1.5k-plus horsepower and multiwell pad drilling capabilities) to remain below 70% at midcycle. Generally, drillers can begin to command pricing power at around 80% utilization. Even as demand for oil (and thus rigs) recovers, we expect competition among drillers will remain elevated. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand. Patterson acquired Pioneer Energy Services in the fourth quarter of 2021, expanding its U.S. rig capacity and adding exposure to Colombia (where Pioneer maintained eight rigs). We see more potential for drilling growth in international markets, but Patterson's exposure would be small, representing less than 5% of its total annual revenue.

Patterson-UTI had a strong third quarter, with revenue increasing 17% quarter over quarter, and doubling year over year (though some of this is attributable to the firm's acquisition of Pioneer Energy Services in October 2021). We'll incorporate the firm's full financial and operating results shortly, but after this first look, our fair value estimate is unchanged at $12. We also maintain our no moat rating, stable moat trend, and Morningstar Uncertainty Rating of Very High.

Patterson-UTI Energy reported solid results for the second quarter as demand for drilling rig equipment and pressure pumping services remains strong throughout North America. After incorporating higher-than-expected day rates and higher estimated rig counts moving forward, we have increased our fair value to $12 from $9. While second-quarter results point to a favorable operating environment for its services in the near term, we think the market is a bit optimistic regarding Patterson's long-term prospects. As the tight supply-demand balance levels out, we expect tough price competition will return to the drilling market.

The U.S. land rig market remains oversaturated, with drillers commanding lower day rates and margins than in the past. We expect utilization for Tier 1 rigs (high-quality AC rigs with 1.5k-plus horsepower and multiwell pad drilling capabilities) to remain below 70% at midcycle. Generally, drillers can begin to command pricing power at around 80% utilization. Even as demand for oil (and thus rigs) recovers, we expect competition among drillers will remain elevated. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand. Patterson acquired Pioneer Energy Services in the fourth quarter of 2021, expanding its U.S. rig capacity and adding exposure to Colombia (where Pioneer maintained eight rigs). We see more potential for drilling growth in international markets, but Patterson's exposure would be small, representing less than 5% of its total annual revenue.

The U.S. land rig market remains oversaturated, with drillers commanding lower day rates and margins than in the past. We expect utilization for Tier 1 rigs (high-quality AC rigs with 1.5k-plus horsepower and multiwell pad drilling capabilities) to remain below 70% at midcycle. Generally, drillers can begin to command pricing power at around 80% utilization. Even as demand for oil (and thus rigs) recovers, we expect competition among drillers will remain elevated. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand. Patterson acquired Pioneer Energy Services in the fourth quarter of 2021, expanding its U.S. rig capacity and adding exposure to Colombia (where Pioneer maintained eight rigs). We see more potential for drilling growth in international markets, but Patterson's exposure would be small, representing less than 5% of its total annual revenue.