The U.S. onshore oil rig count has fallen for twenty-six consecutive weeks as a result of weak oil prices. Because of that there are now only 868 active oil and gas rigs drilling in the U.S., which is a 12-year low.
However, at some point oil companies in the U.S. will need to add rigs, as the current rig count isn't sufficient to meet future oil demand. When that happens the companies that own onshore drilling rigs will benefit, with Precision Drilling Corp (NYSE:PDS), Seventy Seven Energy Inc (NYSE:SSE), and Pioneer Energy Services Corp (NYSE:PES) among those that have the greatest upside thanks to their growing fleets and balance sheet capacities to fund future growth.
But all three may be better suited for a watch list right now, as it could be quite some time before rigs start heading back to work.
Why Seventy Seven Energy?
Seventy Seven Energy is off to an awful start since being spun off of Chesapeake Energy (NYSE:CHK). The stock is down more than 75% since its debut, in large part due to weaker oil prices. That said, the company has a strong rig fleet that currently consists of 26 Tier 1 rigs, 57 Tier 2 rigs, and seven Tier 3 rigs, making it the fifth largest rig contractor in the U.S. Further, the company has nine more rigs under construction to be delivered over the next year.
In the near-term, a number of the company's rigs are already under contract this year, which provides it with some stability during the downturn. In fact, its overall contracted backlog, which include drilling and completion services, will provide the company 60%-70% of its revenue this year.
That said, Seventy Seven Energy still has a lot of rigs without contracts, which will limit its profitability and growth potential until drilling activity begins to resume.
Why Pioneer Energy Services?
While Pioneer Energy Services doesn't have an overly large fleet at just 28 rigs in the U.S., the company still has a lot of upside when conditions improve. That said, right now times are tough, as only 58% of its rigs are currently being utilized as the company has been hit fairly hard by early contract terminations. Those terminations are a reason why the stock is down more than 50% over the past year.
However, the company has a very strong balance sheet, with the third lowest total debt-to-EBITDA ratio in its peer group, which gives it flexibility to capture future growth opportunities. Unfortunately, it could be a while before industry activity levels justify a growing rig count, which is why this stock is best watched at the moment.
Why Precision Drilling?
Canada's Precision Drilling has the largest rig fleet in this group with 234 total Tier 1 rigs, as it is a leading North American onshore drilling contractor. Further, the company continues to add new rigs, and has 17 newbuild Super Series rigs expected to be delivered this year. Precision also boasts some near-term stability, as a large number of its rigs are under contract -- it has 104 rigs already under contract for this year and another 58 next year. In addition to that, the company has a strong balance sheet, with $449 million of cash along with total liquidity of $1.3 billion, giving it plenty of financial flexibility to weather the downturn. The company certainly will rely on its financial strength, because at the moment there are no signs that the rig count has even bottomed, let alone is poised for a recovery.
Right now there's not a whole lot of demand for oil rigs in the U.S. However, at some point demand will improve as oil companies will need more rigs to produce enough oil to meet future demand. When that demand starts to return, Precision Drilling, Seventy Seven Energy, and Pioneer Energy Services should all benefit -- but you might not want to jump in until then.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.