A Big Drilling Pickup for Patterson-UTIBy Toby ShuteFebruary 13,...

A Big Drilling Pickup for Patterson-UTI

By Toby Shute
February 13, 2010 | Comments (2)



We haven't had a look at Patterson-UTI's (Nasdaq: PTEN) operating trends since rig count vertigo showed signs of abating back in early June. This land driller is a fine proxy for its peer group, so such a snapshot is always instructive

Month

Average Rigs Operating / % Change from Previous Month

July 2009


65 n/a

August 2009


72 11%

September 2009


81 13%

October 2009


88 9%

November 2009


104 18%

December 2009


118 13%

January 2010


136 15%

Data from company press releases.

For the fourth quarter, Patterson-UTI's operating rig average jumped 41%, to 103, and the company is now at 145 rigs. The oil patch has clearly gotten busy since last summer, and activity continues to heat up in places like the Eagle Ford shale, where EOG Resources (NYSE: EOG) and Petrohawk Energy (NYSE: HK) are leading the charge, and the Marcellus shale, where Chesapeake Energy (NYSE: CHK) and Range Resources (NYSE: RRC) are rocking and rolling.

Showing how tightly the company's financial results are tied to activity, Patterson-UTI's EBITDA rise by 37% compared with the third quarter. Partly on account of charges taken against a sizeable retirement of rigs, earnings stayed in the red for the quarter.

Additions of new Apex rigs in 2009 -- which are designed for drilling in unconventional resource plays -- nearly offset the 21 rig retirements in the fourth quarter, so Patterson isn't exactly withering away. Nineteen of the 21 retired rigs were located in West Texas, which underlines the plunge in conventional drilling activity in that state.

Looking ahead to 2010, Patterson-UTI sees a rapid expansion in the Marcellus, where the company has 16 rigs operating. The stated plans of companies like Talisman (NYSE: TLM) and Ultra Petroleum (NYSE: UPL) certainly support that outlook. As for the second half of the year, Patterson-UTI management said the phrase "cautious optimism" is the best descriptor. You can't expect much better than that, given the low visibility into both the industrial demand and the uncertain natural gas supply profile.

As far as valuation goes, Patterson-UTI's no longer clearly trading well below replacement cost, as it was at this time last year. Things really change in a heartbeat in this business, so these shares are certainly not suitable for all investors.