Patterson-UTI: Ulterra Purchase Will Augment North American Drilling and Completion Capabilities

Patterson-UTI Energy PTEN 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.

We’re raising our fair value estimate to $18 per share from $17 following the news, primarily due to diversified revenue opportunities and slight margin expansion moving forward. We maintain our no-moat rating since Patterson will remain focused on drilling and fracking in North America, two extremely competitive end markets that are historically unconducive to maintaining a long-term competitive advantage.

Ulterra designs and manufactures polycrystalline diamond cutter drill bits used in oil and gas drilling worldwide. More than 75% of its annual revenue comes from North America, where the firm commands over 90% of the U.S. drill bits market, according to management. Drill bits represent a minuscule proportion of overall well costs—usually less than 1%, on average—but drill bit functionality significantly affects overall drilling efficiency. Ulterra’s products could reduce drilling operations by a few days, an especially attractive offering considering drilling costs currently exceed about $30,000 per day.