Onshore contract driller Patterson-UTI Energy Inc. (PTEN) declared that its February 2011 drill rig count averaged 209, up from 204 in the previous month. The company operated 192 rigs in the U.S. and 17 in Canada in February, compared with 188 rigs in the U.S. and 16 rigs in Canada during January this year.

Patterson-UTI’s activity levels in the U.S. peaked in early October 2008 with a rig count of 275. Since then through the second quarter of 2009, the company witnessed a steep and rapid decline in rig count on the back of decreased demand, largely caused by lower commodity prices for natural gas and tighter access to credit.

However, during the last few quarters, there have been signs that companies were beginning to bring rigs back on line amid signs of economic stabilization that could push up the energy demand. This is reflected in Patterson-UTI’s monthly rig count numbers, which recovered substantially from a low of 60 in May 2009 to the current level of 209.

Our Recommendation

Even though Patterson-UTI – the second-largest North American land drilling contractor after Nabors Industries Ltd. (NBR) – has a Zacks #2 Rank (short-term Buy rating) in the short run, we are Neutral on the company in the longer term.

While we continue to like Patterson-UTI for its growing premium land rig fleet, stellar financial health (free cash flow positive, a debt-free balance sheet) and exposure to the boom in pressure pumping services, we think that the current valuation is fair and adequately reflects the company’s future growth prospects. Patterson-UTI is also faced with weak natural gas fundamentals, which are expected to further limit its ability to generate positive earnings surprises.

Houston-based Patterson-UTI is one of the largest onshore contract drillers in the U.S. with approximately 350 land-based rigs that operate primarily in the oil and natural gas producing regions of North America. Additionally, the company is engaged in the exploration and production business and provides pressure pumping services.

 
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