Patterson-UTI Gains From Apex Rigs, Oil Concerns Remain

We issued an updated research report on onshore contract driller Patterson-UTI (NASDAQ:PTEN) on Aug 23. The company's large, high-quality fleet of drilling rigs – especially the technologically advanced Apex ones – is the key to its success. Despite this positive, weak oil and gas prices have been negatively impacting the company’s core operations since the beginning of 2016.

The company currently carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Patterson-UTI is one of the largest North American land drilling contractors, having a large, high-quality fleet of drilling rigs. The company’s proprietary design makes the rigs move faster than conventional rigs, drill quicker and more efficiently than conventional rigs, and allows for a safer operating environment. As such, these rigs are better suited for new demand in the exploration business and, therefore, command higher dayrates and utilization than rigs of other land drillers.

The company’s earnings surprise history is impressive. Patterson-UTI managed to beat the Zacks Consensus Estimate for earnings in each of the prior four quarters with an average positive surprise of 8.27%. We also expect the company to witness year-over-year earnings improvement of 58.2% in 2017.

Also, the company’s long-term debt has reduced considerably since the beginning of 2016. In fact, the company’s debt-to-capitalization ratio is about 16.5%, reflecting a strong balance sheet.

However, the persistently weak oil and gas pricing has affected the company’s business. This is reflected by the fact that net cash flow from operations for Patterson-UTI has slipped below $200 million from $1000 million recorded in the beginning of 2016.

We are particularly worried about the labor inflation associated with Patterson-UTI’s conventional contract drilling rig fleet, which might lead to slower margin growth.

Moreover, the company’s pricing chart fails to impress. Over the past one year, Patterson-UTI stock – belonging to the Zacks Oil Drilling industry – lost almost 25%.

Stocks to Consider

A few better-ranked players in the ednergy sector are TransCanada Corporation (TO:TRP) , Transmontaigne Partners LP (NYSE:TLP) and Range Resources Corporation (NYSE:RRC) . All the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Calgary, Canada, TransCanada is a midstream energy firm in North America. The company posted an average positive earnings surprise of 4.06% over the last four quarters.

Transmontaigne – headquartered in Denver, CO – involves in transporting and storing refined petroleum products. The firm posted an average positive earnings surprise of 6.60% over the last four quarters.

Based in Fort Worth, TX, Range Resources is an independent oil and gas company, engaged in the exploration, development and acquisition of U.S. oil and gas resources. The company’s 2017 earnings are estimated to grow 116.5%.

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