In an omnibus service firm article not too long ago produced for members of the Day by day Drilling Report, Patterson-UTI Vitality (NASDAQ:PTEN) was highlighted as a high decide primarily based on the monetary knowledge introduced and the ahead market alternative within the 12 months forward. PTEN was the recipient of a current improve by Raymond James analyst, James Rollyson:
“A sustained interval of underinvestment throughout an exceptionally weak macro surroundings coupled with rising power transition pressures arrange the present oil provide state of affairs, for which there is no such thing as a short-term repair.
Rollyson famous additional that the OFS sector is about up for a multi-year run as tight provides of Tier I Tremendous Spec rigs enhance day charges and margins.
Towards that backdrop we’ll evaluate key monetary knowledge reported by the corporate, and the macro image we see growing for U.S. shale.
PTEN appears properly positioned to thrive within the coming 12 months, and from what we will see, for years to return. The one solution to get oil out of shale is to first drill a gap within the floor, and that’s what corporations like PTEN are uniquely set as much as do. The extra holes you make within the floor, the extra oil you will get.
We predict there will likely be extra holes drilled within the floor subsequent 12 months, than this 12 months, and nonetheless extra within the 12 months past that, offering a fertile floor for PTEN to run as this market develops.
Be aware – this text appeared within the Day by day Drilling Report on Dec. 14th.
The thesis for PTEN
PTEN is a big technologically oriented contract driller with a major variety of extremely wanted Tier I, “strolling rigs” that may transfer round on a frack pad with out being damaged down. This protects time and enhances the worth to the shopper. Rigs present about 60% of PTEN’s income. PTEN additionally runs a small fleet of frac spreads (12-13), and has not too long ago taken steps to improve a few of its frac fleets to Tier IV standing. There may be some synergy between these companies, as when you drill a gap within the floor, and run casing, you’re prepared to start the perf and plug course of we all know as fracking. Fracking delivers about 10% of PTEN’s revenues.
What turned me round on the drillers? It is a truthful query as historically I have been a bit dour on the class, seeing them as a worth entice that might maintain all however the earliest traders underwater. Typically for years. They have been sometimes run on spec, the place an operator would possibly inform them they have been going to drill a bunch of wells and wanted rigs. Drilling contractors would then oblige, borrowing the cash to construct them…solely to be left holding the bag when oil costs dropped and the operators canceled their plans. The entire business was run this fashion for many of my 38 energetic years within the enterprise. Increase and bust.
Issues began altering a couple of years again as corporations flirting with chapter introduced on by legacy debt from the final growth and perennial low oil costs, caught a break. Oil and fuel costs bottomed after which started to rise, respiratory life right into a stagnant business. Tools was retired, stability sheets repaired, know-how supplied new sources of income and enhanced income, and by the point 2022 rolled round PTEN and its friends started to see a shift within the operator/drilling contractor dynamic.
For the primary time in nearly a decade…it was a sellers market.
Day charges have doubled this 12 months to almost $40k per day for Tier I Tremendous Spec strolling rigs. This kinds an higher threshold in opposition to which charges for decrease tier rigs additionally rise. On the horizon are electrified rigs with the corporate’s proprietary EcoCell LI batteries which have eradicated 700K gallons of diesel so far in 2022. One can presume that rigs that get rid of emissions and assist mitigate diesel consumption will obtain nonetheless additional premium pricing.
Catalysts for progress
PTEN is reactivating and upgrading 4-rigs for supply in 2023. Andy Hendricks, CEO, commented-
We’re additionally rising our 2022 CapEx forecast to roughly $425 million, up from the earlier $390 million. The rise consists of the acceleration of rig upgrades for supply in 2023 the place this CapEx is being largely funded by clients. Throughout the business, pricing continues to develop as rig demand stays sturdy. Provide continues to be restricted as a result of dwindling availability of Tier-1, tremendous spec drilling rigs mixed with the general tight labor market and challenged provide chain.
PTEN can also be rising the variety of excessive spec rigs beneath contract, rising this metric by 61% in Q-3. Many are for a only a 12 months with a rollover provision that features an escalator, Hendricks famous one three-year contract for 5-rigs.
Rising rigs and prolonged contracts are bullish for PTEN inventory.
The PTEN rig rely grew from 113 to 132 in 2022 with one other 4 decrease tier buyer funded upgrades to Tier I scheduled for 2023. What’s extra spectacular is the expansion within the late 2021 Tier I day fee from the low $20,000’s to the present $40,000’s that has led to revenues topping $702 mm for Q-3, a 64% enhance from the primary of the 12 months. $288 mm of this got here from strain pumping. EBITDA grew 4X to $198 mm. Capex for the complete 12 months is about at $425 mm, together with some $40 mm equipped by purchasers to reactivate and improve older rigs to Tier I standing. Long run debt stands at $852 mm.
The rise in income has been at more and more worthwhile phrases, bringing EPS (Earnings per Share), from -$.038 in Q-4 of 2021 to a constructive $0.18 in Q-3, 2022. With charges on the present ranges, the corporate is now in search of and getting long term 3-5 12 months contracts, which is able to stabilize money circulate at excessive ranges for years to return. This determine could enhance nonetheless additional within the 12 months to return as was famous of their Q-3 quarterly convention name the place CEO Andy Hendricks commented.
“Going into subsequent 12 months, we anticipate to see additional pricing will increase as lots of our present contracts roll over, particularly in contract drilling. As such, I imagine we nonetheless have important upside to our present margins and free money circulate.”
They’ve doubled the quarterly money dividend to $0.08 per share and elevated the share repurchase authorization to $300 million. The dividend was payable on December 15, 2022, to holders of report as of December 1, 2022.
Steerage for Q-4 was given as a repeat of Q-3.
I view PTEN as being derisked within the present market circumstances. It’s producing the money circulate to cowl curiosity funds, cowl capex, fund its dividend, and share repurchases, and pay down debt. A collapse in oil costs would clearly influence these dynamics.
As I famous above, PTEN is buying and selling at a EV/EBITDA a number of of 5.6X. Clearly PTEN just isn’t going to develop at its 2022 fee in 2023. However it’ll expertise some progress that might find yourself being important. Andy Hendricks, CEO, commented in regard to an analyst question-
Once we take a look at ourselves and what we’ll doubtless do with numerous clients and what we’ll doubtless do by way of reactivations and a few upgrades, our rig rely add in 2023 might be in that 15 to twenty rig vary.
The higher finish of that’s fairly important and will add as a lot as ~$200 mm of income and ~$65 mm of EBITDA for the 12 months, on a again of the envelope foundation.
Bottomline we’ll in all probability drill about 2,000 extra horizontal wells in 2023, than we did in 2022. The one approach we’re going to get there may be with extra rig upgrades and reactivations. The motivation so as to add to present fleets will likely be will increase within the day fee, and as I mentioned earlier, it is a sellers market.
I feel PTEN can revisit the current highs from its present 15% low cost. I would not be shocked with the market energy in shale drilling and the shift to long term contracts, to see PTEN get awarded the next a number of from the market. A 6X, not extreme in a rising market, would take the share value towards the center to higher $20’s, implying ~40% progress from current ranges.
I feel traders searching for intermediate and long run progress underpinned by strong market fundamentals could discover PTEN enticing at or close to present costs, topic to particular person tolerance for danger.