Patterson-UTI: The Future's So Bright

Summary

  • Patterson-UTI Energy has positioned itself for growth with strategic transactions and attractive free cash flow yield.
  • Positive drivers are emerging for drilling to recover in the macro market, potentially leading to better times for the company.
  • Patterson-UTI Energy's acquisitions and market position make it a solid investment case for long-term growth and moderate to increasing income.
  • We rate Patterson-UTI Energy stock as a buy at current levels for investors with a healthy tolerance for risk.

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Introduction

Patterson-UTI Energy (NASDAQ:PTEN) has revamped itself with two strategic transactions closed over the summer that could position it for growth in the coming year. The company is trading an attractive free cash flow yield-14-15%, in comparison with keyHPreceived an upgrade on that basis

PTEN price chart (Seeking Alpha)

The macro U.S. market

We think super-spec rig activity recovers before the idle lower-spec rigs, which should position Patterson-UTI to outperform the expected recovery over the next several quarters, even as we outperformed the market when the rig count moved lower this past year.

The thesis for PTEN

PTEN Revenue chart (PTEN)

PTEN Ulterra BIt chart (PTEN)

PTEN Drill bit performance (PTEN)

A catalyst for PTEN

Absent a major macro event, we believe the global balance will need U.S. shale production to grow modestly over the next several years and U.S. shale activity likely need to stabilize just to keep production flat.

The delayed activity response so far should mean activity will have to catch up with deferred activity, which should be a tailwind in 2024. On the natural gas side, we believe the shape of the forward strip is telling us that there needs to be more activity in the gas basins just to meet current natural gas demand. And as we get closer to completion of new LNG export capacity later next year and into 2025, we will likely need to see natural gas activity rise again.

In terms of leading-edge rates, they were higher earlier in the year. They've softened a little bit, but they really haven't come down that much. I'd say it is mid- to low 30s because it's more in the mid than it is in the low. So that's kind of how I characterize it. And I do expect that, that will start to move up early next year as the rig count starts to push up as well past this inflection that we're seeing.

Risks

Q3 2023 and forward guidance

Your takeaway

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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