Well, do you want the good news or the bad news on Patterson-UTI (Nasdaq: PTEN ) ?
I already spelled out the reasons to dodge the land drillers last week, so we might as well start with the bad news. Recall that Patterson's monthly rig counts have been falling at an accelerating rate. From December to January, the change was a whopping 24%. The latest rig count stands at 132 -- making for a grim 38% fleet utilization, and a further 18.5% decline from last month's average. The bottom of this cycle is just not within sight today.
Some of Patterson's low quality rigs are just not worth maintaining in this environment, so 22 were retired in the fourth quarter. Like Precision Drilling Trust (NYSE: PDS ) , however, Patterson is also adding new rigs. Critically, they all have term contracts attached.
In total, Patterson has invested over $1.6 billion to overhaul its fleet and build out other assets over the past three years. This was funded by operating cash flow, and Patterson carries no debt on its balance sheet today. That's an enviable position compared to those of more leveraged players like Precision and Nabors Industries (NYSE: NBR ) . Even mighty Helmerich & Payne (NYSE: HP ) carries some net debt, though I imagine they could pay it off mighty quick.
The even better news, I think, is that Patterson is demonstrably trading below replacement cost. The math here is simple:
- Market capitalization: $1.48 billion
- Subtract net cash to arrive at enterprise value: $1.4 billion
- Compare to capital invested over the past three years alone: $1.6 billion-plus
Work in some wear and tear, and I think you're at roughly breakeven. From there, you can move on to figuring out how much Patterson's older assets are worth. The higher the number you come up with, the bigger the discount here.
Just because there's an overhang of rigs today doesn't mean that all the idle ones lack future earning power. There will be an up cycle, and the majority of these rigs will be put back into service. In short, there is significant asset value here that is being assigned a $0 price tag by investors today.