Patterson-UTI Inc. (PTEN) reported a narrower-than-expected third-quarter loss of 12 cents per share, reflecting a recovery in rig demand as customers prepare for ramped up drilling activities in 2010. The Zacks Consensus Estimate was pegged at a loss of 16 cents per share.
In the year-ago period, the company earned 69 cents per share. Revenue was down 71.1% year over year to $176.2 million. The negative comparisons compared to the year-ago period reflect lower drilling activity. The number of rigs operating during the quarter averaged 73 (70 located in the U.S. and 3 in Canada), compared to 276 average rigs operating in the third quarter of 2008. However, it was up from 63 rigs operating in the June quarter.
Contract Drilling
Contract Drilling revenue totaled $112.3 million (64% of total revenue), down approximately 77.5% year-over-year. Average revenue per operating day was $16,800, down 5.5% sequentially, while average direct costs per operating day increased 6.7% to reach $10,630. The segment reported an operating loss of $19.9 million as against operating income of $157.2 million in the year-ago quarter. The weak results of this segment primarily reflect the significant decrease in the average number of rigs operating, compared to the year-ago period (73 as against 276) on the back of decreased demand largely caused by lower commodity prices for natural gas and oil.
Pressure Pumping
The company’s Pressure Pumping business recorded revenue of $41.7 million, a decrease of 31.2% year-over-year. In anticipation of increased activity associated with Marcellus Shale, the company has added equipment and workforce during recent years. However, delays in development of the shale have caused a slower ramp-up of customer activity, which in turn affected the profitability of this segment.
Additionally, the company’s customers have increased their focus on the development of unconventional reservoirs in the Appalachian Basin and the larger jobs related to it. As a result of this and declining commodity prices, Patterson-UTI experienced a decrease in the number of smaller traditional pressure pumping jobs, which led to an overall decrease in the number of total jobs. Consequently, the Pressure Pumping business’ operating profit was down significantly (by 90.6%) to $1.2 million.
Drilling & Completion Fluids
Revenue from Drilling & Completion Fluids fell 53.9% year over year to $16.5 million. The segment reported an operating loss of $2.3 million, $1.4 million more than that recorded during the third quarter of 2008. The weak results can be attributed to decreased sales volumes, both on land and offshore in the Gulf of Mexico.
Oil & Natural Gas
Revenue generated from the Oil & Natural Gas business was $5.7 million, down 58.4% from the year-ago quarter. This segment posted an operating income of $1.9 million, down significantly from the year-ago period, as it suffered from lower average sales prices of oil and natural gas.
Capital Expenditure & Balance Sheet
During the quarter, Patterson-UTI spent approximately $104.1 million on capital programs, of which approximately 90% went to the Contract Drilling segment. As of September 30, 2009, the company had $119.2 million in cash and no long-term debt.
Outlook
We remain concerned about the North American land drilling scene and its impact on Patterson-UTI, one of the largest onshore drillers. We believe that the current supply overhang in the natural gas market will continue to weigh on the company’s dayrates and margins during the next few quarters.
On the positive side, Patterson-UTI’s premium newbuild fleet and stellar financial health (free cash flow positive and a debt-free balance sheet) should help it weather the downturn better than its peers, such as Nabors Industries (NBR). Considering these factors, we believe that Patterson-UTI shares are fairly valued at current levels. As such, we see the stock performing in line with the broader market and rate it as Neutral.
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