Patterson Beats Loss Estimates

Onshore contract driller Patterson-UTI Inc. (PTEN: 16.41 -0.28 -1.68%) reported a narrower-than-expected fourth-quarter loss of 6 cents per share (excluding items), reflecting improvement in rig count on the back of rebounding commodity prices. The Zacks Consensus Estimate was pegged at a loss of 8 cents per share.

 

Estimate Revisions Trend

 

Patterson’s outperformance didn’t come as a major surprise as estimates for the quarter have been trending up over the last month. During this period, the Zacks Consensus Estimate for quarterly loss per share narrowed from 10 cents to 8 cents. Nearly a third of the analysts covering the stock (6 out of 21) reduced their loss projections, while there were no revisions in the opposite direction.

 

With respect to earnings surprises, the stock has fluctuated substantially over the last four quarters, with two positive and two negative surprises. However, the average remained positive at 5%. This implies that Patterson has gone past the Zacks Consensus Estimate by 5% over the last four quarters, helped by the recovery in activity levels (primarily in Canada).

 

Looking ahead, the current Zacks Consensus Estimates for the first quarter and full-year 2010 are losses of 6 cents and 11 cents, respectively. But the overall trend in estimate revisions is favorable. Though there were no estimate revisions in either direction over the last 7 days, 2 (out of 14) analysts have increased their first quarter projections, while 7 (out of 20) analysts increased their full-year 2010 projections during the past month, with no downward revisions.

 

We feel that near-term visibility for improvement in rig count and utilization rates represents the key impetus for upward estimate revisions moving forward.

 

Year over Year Comparisons Down

 

In the year-ago period, Patterson earned 64 cents per share (excluding items). Revenue was down 59.8% year over year to $213.6 million. The negative comparisons compared to the year-ago period can be attributed to the still depressed drilling activity. The number of rigs operating during the quarter averaged 103 (95 rigs located in the U.S. and 8 in Canada), compared to 252 average rigs operating in the fourth quarter of 2008. However, it was up from 73 rigs operating in the September quarter.

 

Segmental Performance

 

Contract Drilling: Contract Drilling revenue totaled $159.6 million (75% of total revenue), down approximately 65.9% year-over-year. Average revenue per operating day was $16,770, down 17.0%, while average direct costs per operating day decreased 3.0% to $10,870. As a result, the segment reported an operating loss of $17.4 million as against an operating income of $138.2 million in the year-ago quarter. The weak results of this segment also reflect the significant decrease in the average number of rigs operating, compared to the year-ago period (103 as against 252).

 

Pressure Pumping: The company’s Pressure Pumping business recorded a revenue of $48.0 million, a decrease of 15.6% year-over-year. In anticipation of increased activity associated with Marcellus Shale, the company has added both equipment and workforce during recent years. However, delays in development of the shale have caused a slower ramp-up of customer activity, which in turn affected the profitability of this segment.

 

Additionally, the company’s customers have increased their focus on the development of unconventional reservoirs in the Appalachian Basin and the larger jobs related to it. As a result of this and declining commodity prices, Patterson-UTI experienced a decrease in the number of smaller traditional pressure pumping jobs, which led to an overall decrease in the number of total jobs. Consequently, the Pressure Pumping business’ operating profit was down significantly (by 84.9%) to $1.6 million.

 

Oil & Natural Gas: Revenue generated from the Oil & Natural Gas business was $6.0 million, down slightly (by 2.1%) from the year-ago quarter. This segment posted an operating income of $2.1 million, as against an operating loss of $2.3 million in the fourth quarter of 2008, as it benefited from lower costs and expenses.

 

Capital Expenditure & Balance Sheet

 

During the quarter, Patterson-UTI spent approximately $102.2 million on capital programs (bringing the 2009 full-year total to $452.6 million), of which approximately 85% went to the Contract Drilling segment. As of December 31, 2009, the company had $49.9 million in cash and no long-term debt.

 

Outlook

 

Management indicated that drilling activity is picking up, reflected by the sequential improvement in rig count. Clients are looking to up their spending plans in 2010 in the drilling and pressure pumping industries. At the same time, the company remains concerned about the large excess capacity in the sector that will weigh on dayrates and margins well into the year.