Please ensure Javascript is enabled for purposes of website accessibility

Patterson-UTI Energy's Earnings Are a Tale of 2 Businesses

By Tyler Crowe – May 2, 2018 at 10:47AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Its two business segments are running in opposite directions right now, which makes investing in the business as a whole a challenging question.

Looking at Patterson-UTI Energy (PTEN -1.35%) 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.

Drilling rig in field

Image source: Getty Images.

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)
EPS ($0.16) $0.88 ($0.40)

DATA SOURCE: PATTERSON UTI ENERGY EARNINGS RELEASE. EPS = EARNINGS PER SHARE.

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. 

PTEN operating income by business segment for Q1 2017, Q4 2017, and Q1 2018. Shows narrowing loss for contract drilling and a turn to profit for pressure pumping.

Data source: Patterson UTI-Energy earnings release. Chart by author.

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.

PTEN Chart

PTEN data by YCharts.

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.

Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Patterson-UTI Energy, Inc. Stock Quote
Patterson-UTI Energy, Inc.
PTEN
$11.68 (-1.35%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.