Tight U.S. Drilling Rig supply could slow production growth

[dan_s]

For the upstream oil & gas companies drilling & completion costs will be going up this year. Plus, it takes Tier One drilling rigs to drill horizontal wells with laterals over a mile. The Tier One rig market is already very tight.

From BofA Equity Research 2-14-2022

Patterson-UTI Energy (PTEN)
Tightening rig supply drives pricing power;

Reiterate Rating: BUY | PO: 14.00 USD | Price: 12.74 USD

PM Summary: US rigs have best fundamentals of all OFS
Since reporting 4Q results last Thursday (2/10), Patterson-UTI Energy (PTEN) surged
16.3%, outperforming the OSX (+3.1%) and the three other peer land drillers that rose
8.5%, on average. PTEN and the broader land driller outperformance was driven by
further evidence of US rig rate upside. Flowing through the 1Q guide that implies +/-
$87mm of EBITDA (pre-earnings’ cons = $79mm) and ‘22 guide that points to
>$450mm (pre-earnings’ cons = $407mm), we are increasing ‘22/’23 EBITDA by 7% /
10% to $454mm / $655mm, which takes our DCF-based PO up $2 to $14/shr (implied
6.0x our ’23 EBITDA). Reiterate Buy on continued strengthening of US rig fundamentals.

US rig rates surprising to upside on tight fundamentals
Just in the past 2-3 months, base rig rates have moved from the low-20k’s per day to the
mid-20k’s, with some rigs earning $30k or above when premium drill pipe, extra labor, Ecocell
upgrades, and/or ancillary services are included. The Tier 1 Super Spec (SS) rig market is
nearly sold out, operating at or above 90% today. Of the 350-400 Tier 1 SS rigs, PTEN
owns 107, with 95% utilization. The day rate premium for Tier 1 SS rigs (vs standard SS
rigs) is running north of $3k/day. PTEN believes that 300 US rigs, including 34 of
PTEN’s, can be upgraded to Tier 1 SS, half of which will require significant upgrade
costs (similar to HP ~$7mm/rig) due to old-style drawworks located on the ground.

Pressure Pumping now focused on driving better profitability
After ramping to 11 from 7 fleets during ‘21, mgmt. expects no more reactivations
beyond the 12th fleet in 1Q22. PTEN’s focus will now be on improving profitability
through increased efficiency and streamlining operations. Accordingly, it is likely that 5
fleets remain stacked unless profitability improves materially from here, as these cold
stacked fleets would require meaningful upgrade capex to Tier IV, dual-fuel capability.
FCF harvest pushed to ’23 on elevated ’22 capex ‘22 will see higher-than-expected capex of $350mm. However, capex on 20 Tier 1 SS rig upgrades at just $2mm/rig implies a really nice return at today’s dayrates, and are much
more economic than HP’s upgrades that are costing +/-$7mm. But with the higher
capex, the wall of FCF moves to ’23, when we estimate FCF surges to $241mm (8.4%
yield)