Patterson UTI-Energy (PTEN 2.29%) is uniquely positioned compared to its other land driller peers in North America because it is the only one that also has other oil services businesses. For the past few quarters, the strong performance of its pressure pumping business has helped to partially offset the losses in its other segments as drilling activity picks back up again. This most recent quarter, the company started to make headway on its other large business line that helped get the company one step closer to profitability.
Let's take a look at Patterson's most recent earnings results to see how close Patterson UTI is to getting back to posting consistent profits.
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By the numbers
| Metric | Q2 2018 | Q1 2018 | Q2 2017 |
|---|---|---|---|
| Revenue | $854 million | $809.2 million | $579 million |
| Operating income | ($9.0 million) | ($22.1 million) | ($140.2 million) |
| Net income | ($10.7 million) | ($34.4 million) | ($92.8 million) |
| Diluted EPS | ($0.05) | ($0.16) | ($0.46) |
DATA SOURCE: PATTERSON UTI ENERGY EARNINGS RELEASE. EPS = EARNINGS PER SHARE.
Compared to revenue results at Patterson's competition, its 47% year-over-year gain looks rather impressive. Some of those gains came from two acquisitions within the past year that led to the formation of its directional drilling segment, but the gains in revenue were spread rather evenly between its two large businesses: contract drilling and pressure pumping.
Pressure pumping has been the lone bright spot in the company's prior earnings results as demand for fracking equipment and crews is incredibly tight in hot-bed drilling regions such as the Permian Basin. This past quarter, though, the company's rig utilization rate and average revenue rates increased enough such that its contract drilling segment narrowed its operating loss to less than $1 million.
Data source: Patterson-UTI Energy earnings release. Chart by author.
The improving results from contract drilling and steady performance of its pressure pumping business gave management enough confidence to raise its dividend and buy back stock. That is a bit surprising considering that Patterson is still posting negative earnings results, but there are a lot of non-cash expenses in there such as depreciation dragging on the bottom line. From a cash flow perspective, the company is generating cash at a sufficient rate and gives management a little flexibility to make these moves.
What management had to say
Here's Chairman Mark Siegel press release statement on Patterson UTI's outlook for the rest of the year, and some of the things he and his team see going on in the oil patch:
With relatively high oil prices, industry demand for super-spec rigs remains strong. In contract drilling, which generated approximately two-thirds of our consolidated EBITDA in the second quarter, we expect further improvement in both dayrates and activity. In pressure pumping, we are seeing industry softness due to oversupply, and because some E&P [exploration and prodcution] companies' activity and capital spend are ahead of budget. We believe the pressure pumping issues are short-term in nature, and we remain positive on the long-term outlook for the business.
Our 2018 capex budget remains unchanged at $675 million. With compelling economics for super-spec rigs, we are allocating additional capital to contract drilling. At the same time, in pressure pumping, improvements in our fleet maintenance operations have allowed us to reduce our capex.
Some promising signs
It's encouraging to see Patterson UTI's contract drilling business get back to basically break-even operations. Not all rig companies in the U.S. have achieved that point yet, and the company has a little room to grow here as it deploys either some of its recently upgraded or newbuild rigs. The upside here isn't immense because there is still a decent amount of idle equipment out there, so margins will still be tight for this business. As those rigs get deployed, though, pricing power will start to lean back toward Patterson and its peers.
Patterson is one of the first companies to mention that it is seeing demand for pressure pumping cool off, but that isn't completely surprising because there has been a lot of chatter about the lack of transportation infrastructure and the ability to move oil and gas to markets. There are several pipes in the works right now, but they will take some time to get built.
Overall, though, Patterson's results look good. Even though it is posting losses, they are mostly for non-cash expenses such as depreciation. The company's revenue is growing at a steady rate, and cash coming in the door is giving management some spending flexibility. We can probably expect losses for at least a few more quarters as the rig market tightens and Patterson maintains a relatively high spending rate, but as those things happen, its earnings should improve significantly.
