Nobody should be surprised that onshore drilling-rig operator Patterson-UTI Energy (NASDAQ:PTEN) turned in poor results for Q4 2019 on Feb. 6. The entire oil-field services industry had a rough quarter, and many companies have seen their share prices tumble after releasing their numbers. The stock market was particularly hard on Patterson, sending shares down 16.4% in the wake of its earnings miss.

But that's not the worst of it: Patterson's stock actually got hit twice this earnings season! 

An onshore oil drilling rig with workers in silhouette

Patterson-UTI Energy's rig count slipped again in Q4, resulting in further underperformance. Image source: Getty Images.

By the numbers

Metric Q4 2019 Q3 2019 Q4 2018 Change YOY (Decline)
Revenue $492.3 million $598.5 million $795.9 million (38.1%)
Adjusted net income (loss) ($85.9 million) ($52.9 million) ($9.0 million) N/A
Adjusted earnings (loss) per share ($0.44) ($0.27) ($0.04) N/A
Average rigs in service 123 142 183 (32.8%)

YOY = Year over year. Data source: Patterson-UTI Energy. 

The year-over-year decrease in revenue is concerning, but hardly surprising given the corresponding drop in average rig count. The market, which had been expecting a Q4 net loss of just $0.41 a share, wasn't happy with the results (especially since the company reported higher-than-expected quarterly revenue) and sent shares downward. 

The company's income statement is pretty much a disaster from top to bottom. About the only bright spot was a 4.4% year-over-year improvement in average drilling rig revenue per operating day. Unfortunately, that was more than eaten up by a 14.4% increase in average operating costs per day, which resulted in lower margins overall. Even if we look at adjusted EBITDA, which strips out one-time charges, the companywide trend is clear, and it isn't pretty:

A bar chart showing Patterson-UTI's adjusted EBITDA by segment

EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization. Data source: Patterson-UTI Energy. Chart by author.

So the 16.4% haircut the stock took in the wake of the announcement seems more than warranted. But it wasn't the only hit the company took. In mid-January, after major oil-field services companies SchlumbergerHalliburton, and Baker Hughes reported disappointing earnings, the market saw the writing on the wall for Patterson, and sold off shares to the tune of 20.9% over the following two weeks. Since Jan. 16, the day before Schlumberger reported earnings, Patterson's shares have lost nearly a quarter of their value. 

What management had to say

In a press release, CEO Andy Hendricks seemed cautiously optimistic that the worst was behind the company:

We believe our rig count bottomed in the fourth quarter and will modestly increase in early 2020. Lower-than-expected rig activity and higher-than-expected operating costs in the fourth quarter were the result of changes in our geographic mix and gaps in rig activity between jobs. In the first quarter, increasing rig count in the Permian should more than offset lower activity in other markets.

In contract drilling, our rig count averaged 123 rigs in the fourth quarter, down from 142 rigs in the third quarter. The decrease in activity primarily occurred early in the fourth quarter with our December rig count showing the first increase in a year. For the first quarter, we expect activity will improve from December levels and result in an average rig count similar to the fourth quarter.

The rig data he cites is accurate, but missing some context. December's rig count did indeed rise from November's, but only by three rigs to 122. Patterson has already released its January rig count of 123, up just one from December. Still, it is indeed an improvement. The big question is whether the company can sustain that improvement in the wake of lower oil and gas prices.

Hendricks also believes that fluctuations in drilling activity during Q4 were partly responsible for the company's poor performance:

[T]he fluctuation in activity resulted in increased revenues and expenses associated with stacking rigs in some basins, while reactivating rigs in the Permian. Additionally, gaps in the work schedule resulted in some rigs being stacked early in the quarter and being reactivated later in the quarter, which required us to carry extra labor while the rigs were not generating revenue or operating days. Therefore, average rig revenue per operating day and average rig direct operating cost per day of $23,980 and $15,540, respectively, were both higher than expected.  

Buyer beware

Patterson-UTI had a rough quarter, no question. But that was par for the course for the energy industry, where times are tough all over. 

The trouble is, Patterson has been a consistent underperformer for the last five years. Shares are down 54.6% during that period, and the company has only managed to post positive quarterly net income (unadjusted) twice in the last five years:

PTEN Chart

PTEN data by YCharts.

That doesn't look like a winning combination. And with oil and gas prices dropping sharply in February, management's hope that the worst is behind it may not pan out.

In 2016, the company slashed its quarterly dividend from $0.10 a share to just $0.02, and it's only raised it to $0.04 since. The current 2.1% yield won't be of much interest to dividend investors. While shares are certainly cheap compared with top oil-field services companies like Schlumberger, Halliburton, and Baker Hughes, you get what you pay for. Best to leave Patterson-UTI alone until it can demonstrate that it can outperform in the current low-price energy environment.