|Shares Out. (in M):||147||P/E||NA||NA|
|Market Cap (in $M):||2,805||P/FCF||NA||NA|
|Net Debt (in $M):||742||EBIT||-483||-365|
|Borrow Cost:||Available 0-15% cost|
Company: Patterson-UTI Energy, Inc.
Investment: Equity Short
Timeline: One Year
Current Price: $19.06
Target Price: $12.00
Business Description: PTEN own and operates one of the largest fleets of land-based drilling rigs in the United States and a large fleet of pressure pumping equipment.
Investment Overview Thesis: PTEN’s stock is up 50% in the past three months, due to the increase in oil prices, not due to a significant change in the company’s underlying business. The key driver for PTEN – rig utilization - continues to decline.
While leverage is manageable today at 2.4x (run rate EBITDA, less early termination fees), if the investment thesis holds, leverage will increase to 4.1x by year our 2016 EST, creating the stock at 17.2x 2016 EBITDA, compared to 9.9x EV/EBITDA (run rate EBITDA, less early termination fees). Applying a 10x multiple on our $207MM EBITDA 2016 results, implies a stock price of $9.00 (PTEN traded at 10x in Q4’09 – the previous cycle’s bottom), we use a 12x multiple for our stock target - resulting in a target of $12, as PTEN’s fleet is of high quality compared to its previous downtown.
1) Contract Drilling
A drilling rig includes the structure, power source and machinery necessary to cause a drill bit to penetrate the earth to a depth desired by the customer. A drilling rig is marketable at a point in time if it is operating or can be made ready to operate without significant capital expenditures.
At December 31, 2015, PTEN had a drilling fleet that consisted of 221 marketable land-based drilling rigs. Of which, 80 drilling rigs were operating in the United States, a decrease of 63% from the recent peak of 214 rigs in October 2014. PTEN’s operating rig count has continued to decline in 2016, with on average, 78 operated rigs in the United States during January 2016. PTEN also has a substantial inventory of drill pipe and drilling rig components that support drilling operations.
46 in west Texas and southeastern New Mexico,
17 in north central and east Texas and northern Louisiana
36 in the Rocky Mountain region (Colorado, Wyoming and North Dakota),
37 in south Texas,
29 in western Oklahoma,
45 in the Appalachian region (Pennsylvania, Ohio and West Virginia), and
11 in western Canada.
PTEN talks extensively about its APEX rigs, which make up ~73% of its 221 rig fleet, or 161 APEX rigs (as of the 3/8/16 Raymond James call, though from the below HP presentation – HP claims they are not all AC drive rigs). The company started building these in 2006 (its averaged ~20 rigs a year from ~2009-~2014).As not all APEX rigs are equal, this particular part of the rig fleet divides as follows: 128 are 1,500 horsepower, 30 are 1,000 horsepower, and a few are 2,000 horsepower. The APEX rigs drive the majority of PTEN’s EBITDA and as of early March all of PTEN’s active rigs were APEX rigs and one mechanical rig (non-APEX). The APEX rig is a called ‘a walking rig’ because the rig's walking system allows it to move across the drilling location while crews continue to work around the unit. The drill pipe is carried in the derrick when the rig is walked - because drill pipe does not need to be laid down, additional time is saved. The company’s APEX-XK 1500 is it’s best with the latest in AC drilling technology and can move from wellhead to wellhead in about 45 minutes, and be back to drilling in three hours
For years PTEN was viewed as having older, less high tech rigs versus its peer Helmerich & Payne, PTEN’s focus on APEX rigs was a bid to catch up to its rival. The problem is, PTEN wasn’t the only one who pushed into new high tech rigs to get a head in the industry. Everyone in the industry leading into the oil correction built its own high tech rigs, whether there were called a FlexRig (Helmerich & Payne), ShaleDriller (Independence Contract Drilling), APEX (Patterson-UTI), PACE-X (Nabors Industries Ltd.), Super Triple (Precision Drilling), ADR (Ensign Energy Services), BOSS (Unit Corp.) or other Tier 1 shale rig, the industry witnessed a large build up in new high spec land rigs to gain on performance and cut costs.
Just how many ‘high spec’ rigs were built in the US? Unfortunately there is no rig SAAR, however….
“At the end of 2009, there were only about 275 AC rigs, accounting for 37% of horizontal and directional activity….The industry has added consistently 50 to 150 AC rigs per year, totaling about 800 rigs by the fourth-quarter 2014 peak and accounting for 50% of total horizontal and directional activity. Since the 4Q 2014, AC rigs have fallen at a slower pace than less capable rigs and now account for about 67% of horizontal and directional activity.” E&P Magazine, 6/1/15
With the 4/22/16 US Land Rig Count at 401, and ~800+ of AC rigs in the market, there are today too many AC drive rigs in the market…
“The tone in 2016 has shifted to lower for longer. The industry has idled over 1,400 rigs in the U.S. since the peak rig count in October of 2014, and it continues to decline. Of those 1,400 rigs that have been idled, approximately 900 are legacy SCR and mechanical rigs, and approximately 500 are AC drive rigs. The industry is experiencing dramatic reductions in personnel and investments, and clearly, a number of companies are struggling to survive.” HP 1/28/16 Q1’16 Earnings Call
The high tech rig prices are not immune to the downturn….
“Average FlexRig spot pricing is down by more than 35%, as compared to spot pricing at the peak in November 2014, and it may continue to decline.” Helmerich & Payne Scotia Howard Weill 44th Annual Energy Conference March 22-23 2016
However, rates may have approached a bottom….
“Excluding the impact of revenues corresponding to early terminated long term contracts, we expect our average rig revenue per day to be roughly flat….” HP 1/28/16 Q1’16 Earnings Call
Too bad utilization hasn’t….”Looking ahead to the second quarter of fiscal 2016, we expect revenue days to decrease by close to 20% quarter-to-quarter.” HP 1/28/16 Q1’16 Earnings Call
PTEN gives us a good idea of how utilization has declined in the past few months.