Patterson-UTI Energy, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Patterson-UTI Energy, Inc. is a land-based drilling and completion services company, primarily operating in the United States and internationally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Patterson-UTI Energy, Inc., operates as an oilfield services provider. It is mainly focused on drilling services, well completion, and pressure pumping services, catering to the oil and gas industries.

The company has been facing challenging conditions with low activity levels in the oil and gas sector with some significant volatility in both revenues and earnings. However, they have emphasized their resilience and continued execution of strategic goals to navigate these difficulties.

While Patterson-UTI has taken steps towards building a long term value for shareholders it still struggles with building a wide moat. The company possesses a moat based on scale but given the cyclical and turbulent nature of the industry it is hard to put up a wide or even a narrow moat.

Moat Analysis:

  • Moat Rating: 2/5 - Patterson-UTI possesses a limited moat that is primarily based on scale within certain geographical regions and niches of the industry (especially in their Permian operation). However, this is not a long-term or hard to reproduce competitive advantage, because new entrants can come in with modern technologies and try to disrupt the industry or the existing big players.
    • Scale: The company’s large operational scale in key basins enables it to achieve cost efficiencies and potentially secure contracts, a key attribute that gives an edge over smaller competitors, although this is easily replicable. However, there is still high intensity of competition in this industry, making it not that unique of a position.
    • Switching Costs: Customers of drilling services might have switching costs based on trust in relationships and the specific nature of services performed and any special tech that is required but these costs are not high enough to create a wide moat. Switching costs do add a layer of stickiness and consistency and it is hard to simply move to a new player but this doesn’t provide that unique advantage needed to have a moat.
    • Other Competitive Advantages: the company has an experienced workforce, a geographically concentrated footprint, and a good reputation. They are continuously investing in technology and innovation. These factors, while positive, don’t create a barrier that can’t be broken by competition.
  • Justification:
    • Limited Pricing Power: As the oilfield services market tends to be commoditized in nature and has a tendency to be influenced by oil and natural gas prices, Patterson-UTI lacks pricing power in the broader market. Hence, even if the company is performing well, it does not guarantee higher than average profits. They are essentially price takers and need to provide their services with minimal price increases.
    • Ease of Replication: The services provided are not difficult to replicate. Smaller players, with modern technologies, can come in and slowly start taking away customers and market share.
    • Industry Cyclicality: The company is highly susceptible to oil and gas market volatility and fluctuations. These cyclical trends make it very difficult to sustain its value proposition long term. There may be times the company does really well, but this does not mean that the business is sustainable. The company’s strengths in scale and some customer loyalty don’t constitute a long-lasting sustainable competitive advantage when competing in such a commodity-driven, cyclical industry. These traits are easy to replicate.

Legitimate Risks to the Moat and Business Resilience:

  • Oil and Gas Price Volatility: Changes in oil and natural gas prices dramatically influence demand for PTEN’s services.
  • Competition: The oilfield services industry is extremely competitive, with many players vying for business, including many international companies. Intense competition puts pressure on prices and operating margins.
  • Technological Disruption: Innovations in drilling technologies or alternative energy sources can quickly change the landscape. Technological obsolescence can diminish the value of existing equipment and strategies.
    • Cost of Operations: Changes in interest rates and inflation can affect expenses, which could eat into the margins.
    • Regulatory Changes: Changing environmental regulations can potentially restrict the company’s operation, resulting in increased costs or inability to operate.

Business Description:

Patterson-UTI is primarily engaged in providing onshore contract drilling services to oil and natural gas companies, especially in the United States and other select regions, including Canada. This includes operations as well as offering oilfield and gas services.

  • Revenues: Patterson-UTI’s revenue is mainly composed of two main business segments
    • Drilling Services: This segment involves contracting its drilling rigs, including super-spec rigs and pad-optimal rigs, to oil and gas operators for exploration and production activities.
      • The drilling services division provides revenues by operating in well-established plays such as the Permian, Eagle Ford, Marcellus and Haynesville shale basins. As can be seen from the financial statements, this segment represents more than 75% of their revenues.
    • Completion Services: This division includes providing services to help complete a well such as pumping, wireline services, coil tubing, and other associated services.
      • This segment adds revenue via completions and well-site related services in well-established plays and unconventional formations. However, this is a much smaller operation than the drilling division.
  • Industry Trends:
    • Increased focus on technology and efficiency: The industry is increasingly adopting automation, data analytics, and digital technologies to improve drilling efficiency and reduce operational costs.
    • Shifting demand for horizontal drilling: The use of horizontal drilling is increasing, making advanced, adaptable rigs more valuable.
    • Growing use of artificial lift: Production levels are further being maintained by increasing artificial lift systems, which prolongs the lifespan of wells.
  • Oil and gas market prices: Oil prices largely dictate the demand for the company’s services.
  • Consolidation: The industry is seeing further consolidation in an effort to reduce costs and compete in a volatile and dynamic market.
  • Margins:
    • Patterson-UTI’s operating and net profit margins are variable due to cyclical nature of the industry and highly influenceable by market prices, but as of recently, both the gross margins and the operation margins are in the low teens, representing a struggle with profitability due to an unfavorable environment in both their drilling and completion markets.
  • The company has implemented cost-cutting measures, but these have only improved profitability by a limited amount, and are not able to help them maintain long-term profits. * The operating profit percentage as a function of total revenues hovers in the range of low-single digits.
  • Competitive Landscape:
    • The company competes with many large national as well as regional players in the industry. Smaller companies also provide strong competition, and so this leads to a price competitive market.
  • What Makes PTEN Different:
    • They focus on long-term customer relationships with major oil and gas companies
    • They’re a leading provider of well-site integration and planning services, which improves the overall efficiency of the project.
    • They are using a “modern fleet” of highly capable and mobile drilling rigs that are meant to handle the needs of future industry requirements. This means a better capacity to drill longer horizontal wells, thus improving overall project returns for their clients, making them a potential provider of choice.
  • Management Commentary and Recent Concerns:
    • The company acknowledges ongoing market volatility, especially in relation to oil and natural gas prices, which can have direct impact on revenue.
    • Management has talked about challenges stemming from global supply chains, increased inflation, and potential issues with interest rate changes, which are impacting both demand and their operating costs and margins.
    • They emphasize the company is executing on its strategic priorities to maintain resilience and manage cash flow while investing in long term business growth.
    • The company is focusing on cost management and operational improvements, but that there are signs that the markets are starting to recover.
    • The company is implementing a range of cost-cutting measures, and intends to maintain a robust financial position.
    • The CEO is focused on the long-term benefits of investments into their business and technological improvements

Financial Analysis:

  • Income Statement:
  • Revenue has increased considerably over the last two years mainly due to increasing market prices of crude oil. The revenue breakdown shows a large emphasis on drilling revenues rather than completions, therefore, PTEN benefits more from the price of oil than from natural gas.
  • Although the company does increase revenue, it still struggles with profitability. Even though revenue has dramatically improved, the operation margins and net income are still in the single-digit range, reflecting a competitive landscape, a cyclical industry, and increasing costs.
    • SG&A expenses remain largely consistent over the years, with a slight increase in research and development. It is important to see if this will translate to a better profit margin in the coming years.
  • Balance Sheet:
    • The company maintains a strong level of current assets and liabilities. The company has low cash and short-term investments which shows they are investing in the business itself.
    • They have a very stable level of long term debt, with no maturities in the immediate few years, which implies good liquidity.
    • The company’s leverage is relatively consistent and in a safe zone.
    • The company has increased retained earnings dramatically, indicating an expectation for more positive results going forward.
  • Cash Flow Statement:
  • The company’s operating cash flow has drastically improved over the last few years, showing a large positive amount, though this was negative or low in the previous years. However, this indicates a high operating efficiency. The company is using this to pay off debt, as well as invest in the business.
    • The company also does tend to buyback shares, showing they still think it is an attractive price.

Understandability Rating: 3/5

  • Patterson-UTI’s business model is fairly straightforward: they provide drilling and completion services to oil and gas companies. They lease out drilling rigs as well as provide well-site services. The cyclical nature of their industry and accounting principles, though, can make it a challenge to assess the company for new investors. Moreover, it is difficult to keep up with the news and other factors that influence pricing and earnings in the oil and gas market.
  • The financial statements are readily available and easily accessed, therefore, this area is transparent. However, to gain a deep understanding, the investor has to look at a lot of the details and notes, as well as understanding the industry.

Balance Sheet Health Rating: 4/5

  • Patterson-UTI shows good financial health with a stable level of current and total assets to liabilities, however the company relies significantly on equipment (such as drilling rigs), which are high maintenance and are depreciating assets. This can affect the long term profitability in a downturn.
  • The company has also a relatively small amount of current liabilities to total debt, giving them financial stability. *The company shows good and consistent cash flow numbers, but this does not translate to higher net profits and better metrics. Therefore, profitability and cash flow generation can be a potential issue in the long term. *Overall, they have a solid financial position, with low debt, high amounts of liquidity, which helps in this volatile and cyclical environment.