Energy Prospectus

This was just posted to my blog on the National Eagles and Angels Association website. All EPG members are NEAA Red Level members so you should check my blog over there from time-to-time. - Dan

Onshore Drillers – Bullish Outlook

The demand for onshore drilling rigs and press pumping services in the U.S. is red hot. I’m very bullish on all of the drilling companies we’re tracking over on the Energy Prospectus Group website (www.energyprospectus.com) but PTEN tops my list.

Patterson-UTI Energy, Inc. (PTEN) was my NEAA “Energy Pick of the Month” for June.

Second quarter results were very strong, beating my earnings per share forecast by three cents. The outlook for the rest of this year and 2012 is much stronger than the current First Call EPS forecasts. Therefore, I’m expecting to see a lot of analysts’ upgrades for PTEN over the next few days.

I have increased my Fair Value estimate for PTEN by $2.00 to $42.00 per share.

I now have a high level of confidence in my forecast model for PTEN. At the current share price, the stock is trading for less than 6X estimated cash flow per share. That is extremely low for a company of this quality. I believe PTEN deserves even a higher target price than what I’ve assigned for the following reasons.

• Eight new Patterson APEX rigs have been placed in service so far this year. A total of 25 will be completed this year and they are all booked under long-term contracts. Patterson announced today that they will add 30 more APEX rigs in 2012 to their fleet. These rigs are perfect for the major shale plays and E&P companies cannot wait to get their hands on one.
• The company increased their rigs operating under long-term contracts by 20% in the 2nd quarter. With increased visibility, the company’s stock deserves a much higher multiple.
• Patterson’s pressure pumping business generated 33.4% of the company’s revenues in the 2nd quarter. They will be adding more equipment and more crews in the next quarter.
• Patterson is a leader in the Eagle Ford Shale, the Permian Basin and the Marcellus Shale. These are three of the hottest areas in North America.
• The company’s rigs under contract will increase significantly during the next two quarters and they should exit this year with over 240 rigs under contract (compared to 202 in the 2nd quarter). Combined with increasing dayrates, the firm’s top line revenues are going to soar.

I now track more than 50 U.S. and Canadian based exploration & production companies. All of them are expanding their drilling budgets and most of them plan to increase their rig count. This is very bullish news for all of the onshore drillers and oil field service firms, especially those focused on the shale plays.

Increasing Rig Utilization and Dayrates
Forecast rig count (annual average):
Year U.S Canada
2010A 1,509 348
2011E 1,764 414
2012E 2,001 435
2013E 2,243 458
Source: Morgan Stanley’s Oilfield Services Report dated June 14

Notice that the current U.S. active rig count (1,916) is already well above this forecast from Morgan Stanley.

Very bullish for onshore drillers and oilfield service firms. On their CC, Patterson said demand for their rigs in the Permian Basin has really picked up in July and they have already put ten more rigs to work in Canada since the end of June.

Dan:
As always, thanks for all of your wonderful insight! I have been slowly accumulating a few shares of PTEN, and bought more today after the conference call. Thanks for helping to cut through the fog of the current macro environment!!

That is why you guys pay me the Big Bucks!

Let's hope the rest of the Sweet 16 report strong 2nd quarter results like PTEN. I believe they will.

My updated forecast model for PTEN is now available to EPG members under our Sweet 16. Just log-in, click on the Sweet 16 tab, and click on the PTEN logo.

The forecast shows how I arrive at my new Fair Value estimate. I think you will find that we have a lot more upside in PTEN.

Patterson-UTI Energy (NasdaqGS: PTEN - News) just jumped into a new multi-year high after reporting strong Q2 results that included an 8% earnings surprise. With a bullish next-year estimate calling for 28% growth, this Zacks #1 Rank stock has plenty of momentum.

Company Description

Patterson-UTI Energy, Inc. operates as a drilling services contractor in the United States. The company was founded in 1978 and has a market cap of $5 billion.

Shares of PTEN got a nice boost into a new multi-year high in late July after the company reported strong Q2 results that came in ahead of expectations.

Second-Quarter Results

Revenue for the period almost doubled from last year, climbing to $600 million. Earnings also looked good coming in at 52 cents, 8% ahead of the Zacks Consensus Estimate, where the company has an average earnings surprise of 9% over the last four quarters.

The good quarter was driven by surging demand that saw the company's average rig count in July increase 25% from last year to 215.

Estimates

We some a little movement in estimates off the good quarter, with the current year adding 2 cents to $2.16 while the next-year estimate added 6 cents to $2.76, a bullish 28% growth projection.

Valuation

But in spite of the gains, the valuation still looks good, with PTEN's forward P/E of 15X a discount to its peer average of 17X.

BRIEF-Patterson UTI sees Q3 pressure pumping rev up sequentially 08/01 02:12 PM

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(In July 28 brief, corrects headline and bullet points to clarify that the third-quarter revenue and margin outlook was for the pressure pumping business, not the whole company)

July 28 (Reuters) - Patterson-UTI Energy Inc (PTEN:$31.52,00$-1.01,00-3.10%) : * Expects $25-$30 million sequential increase in Q3 pressure pumping revenue - conf call * Sees Q3 pressure pumping business gross margins of 37 percent - conf call

Remember that I told you guys about this way before the other analysts figured it out. PTEN's profit margin on pressure pumping services is 36% and growing.