Why I'm bullish on the onshore drillers

[dan_s]

When oil prices go up sharply, like we saw in the 1st quarter, the E&P companies spend more on seismic and they drill more wells. Mitcham Industries confirmed that demand for seismic world wide is going up sharply.

This from today's Global Hunter upgrade of PTEN.

Summary: We have increased our rig count forecast, expecting the 2011 US rig count average to increase 21% over 2010's average, exiting the year just above 1,900 rigs. We also forecast a 9% increase in 2012, eclipsing 2,000 rigs in 2H. Flowing through our revised assumptions increases our 2011 and 2012 EPS estimates 22% and 48%, respectively, putting us 38% and 66% above respective consensus estimates.

Our price targets increase for each driller and, on average, suggest 46% upside from current levels. We reiterate our Accumulate rating on Bronco (BRNC) and Helmerich & Payne (HP) and maintain our Buy rating on Pioneer (PDC). We are lowering our rating on Nabors (NBR) from Buy to Accumulate and upgrading Patterson-UTI (PTEN) and Union (UDRL) to Buy from Accumulate.

Highlights
Public E&Ps intend to increase their rig count up to 24% this year. We surveyed 74 public operators, which represent 67% of the current rig count. Of the 74 E&Ps surveyed, relative to their Q1 2011 rig count exit, 70% expect to grow their rig count, 20% intend to keep their rig count flat, and 10% anticipate reducing their rig count.

Our survey suggests public operators may add up to 268 rigs (+24%) by year-end.

Revising our 2011 and 2012 US rig count forecast higher. We now expect the average 2011 US rig count to increase 21% over 2010’s average, exiting the year just above 1,900 rigs, and forecast a 9% increase in 2012, eclipsing 2,000 rigs in 2H. The delta in our 2011 quarterly and annual rig count forecast is less than 1% from our December 2010 published estimate. However, our 2012 forecast now assumes an average of ~1,960 rigs, which is approximately 125 rigs, or 6.8%, above our prior estimate. Our increased 2012 rig count forecast is a function of our bullish outlook for U.S. oil and liquids-rich drilling, which we contend makes the land drillers more of a secular than cyclical play than when the rig count relied heavily on natural gas activity.

Public drillers are the beneficiaries. As the majors and large caps will be the catalysts for most rig count growth, we expect the public land drillers to benefit given the higher emphasis on safety and existing customer relationships. We model the land drillers based on our market share expectations, which suggests the public land drillers under our coverage increase their rig count by 80-90 rigs by year-end and post similar gains in 2012.

Rig count momentum bodes well for oncoming completions and stimulation equipment. Specifically, NBR likely benefits through its pressure pumping and workover rig exposure, PTEN with its pressure pumping segment, and PDC with its workover and wireline assets. As such, we now apply modestly higher growth rates than our prior assumptions.