Looking at Patterson-UTI Energy (NASDAQ:PTEN) is like looking at two sides of a coin. While one of its large business segments is still posting losses despite North American drilling going gangbusters right now, the other is cashing in. This dichotomy likely has investors wondering what exactly to make of this company and the prospects of its stock.
So let's drill down into the company's most recent earnings release to see what these numbers mean and what investors should make of the whole situation.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$809.2 million||$787.3 million||$305.1 million|
|Operating income||($22.1 million)||($21.6 million)||($92.9 million)|
|Net income||($34.4 million)||$195.4 million||($63.5 million)|
The number that stands out in these results is the 165% increase in revenue from this time last year, but remember that Patterson has made two major acquisitions since this time last year. So it's not as though its organic revenue has grown that much. It also helps to explain why revenue has grown so much but the company is still producing operating losses.
Patterson is unique among rig companies because it has a second large business line with its pressure pumping services. This is the business of doing the actual pumping of hydraulic fracturing fluid into newly drilled wells. Unlike the rig business that is still suffering from an oversupply of rigs, the supply of pressure pumping equipment is extremely tight, and other oil services companies have mentioned that their frack spreads (industry lingo for the equipment needed to frack one well) are running at a record pace.
It shouldn't be too much of a surprise that Patterson's pressure pumping business is back to turning a profit while its contract drilling services is still posting a loss. It also doesn't help that, like its peers, Patterson is spending a lot of money to upgrade any idle rigs to meet producers' high specification requirements. In the company's press release, CEO Andy Hendricks said it has 12 rigs undergoing or having recently completed an upgrade. These rig upgrade costs are pretty much wiping out any chance of this business turning a profit right now.
The more reassuring thing is that, despite these net income losses, the company is generating enough cash to cover capital spending, dividends, and even buy back some stock in the quarter. It has maintained a relatively conservative balance sheet and has more than $300 million in cash on the books to ensure against any unforeseen issues.
What management had to say
Also as part of the company's press release, Chairman Mark Siegel gave a high-level view of this past quarter as well as what investors should expect for the rest of the year.
Our first quarter results for pressure pumping were impacted by well-publicized industry issues that were primarily the result of weather conditions. Despite these challenges, we are pleased with our overall first-quarter results. We believe these issues were transitory in nature, and their impact on the remainder of 2018 will be minimal.
In fact, we are optimistic on the outlook for the remainder of 2018. Commodity prices remain favorable for increasing oilfield activity and the strong growth in the rig count year-to-date bodes well for increasing pressure pumping demand. Patterson-UTI is the only company in the U.S. unconventional market with significant scale in contract drilling, pressure pumping, and directional drilling.
Striking a balance
The good thing for Patterson is that it has one business line going absolutely bonkers that is helping to offset the weakness at its other businesses. So there shouldn't be any real concerns that additional spending for upgrading its fleet will do any damage to the balance sheet over the long term. Also, with about 85% of its fleet of rigs either at or being upgraded to these high specifications currently utilized, it's likely we will see costs decline relatively soon and its contract drilling business pull out of the loss column.
The downside is that there isn't a whole lot more room for the company to run from here. Sure, it can squeeze out some better margins here and there, and it can grow its nascent directional drilling business, but there are too many unused rigs out there right now to justify spending on new ones. Also, it's likely that it will have to increase spending to replace frack spreads that are running the gauntlet out in the field. If this is about as good as it gets for Patterson for a while, it's not exactly an enticing offer for investors.