Patterson-UTI Energy (PTEN)

Patterson-UTI Energy, Inc. (PTEN) is one of the largest onshore contract drillers in the U.S. with approximately 350 land-based rigs that operate primarily in the oil and natural gas producing regions of North America. The company, in its current form, came into existence following a merger between Patterson Energy, Inc. and UTI Energy Corporation. Patterson-UTI operates primarily in Texas, New Mexico, Oklahoma, Arkansas, Louisiana, Mississippi, Alabama, Colorado, Utah, Wyoming, Montana, North Dakota, South Dakota, Pennsylvania, and western Canada. The company is also engaged in the businesses of pressure pumping, drilling and completion fluid services. Additionally, the company has an exploration and production business.

The company operates primarily in four segments: Contract Drilling (contributed 81% of the company's first-half 2008 revenue), Pressure Pumping (10%), Drilling & Completion Fluids (7%), and Oil & Natural Gas (2%). The company provides drilling and completion fluids services to operators offshore in the Gulf of Mexico and on land in Texas, southeastern New Mexico, Oklahoma, and the Gulf Coast region of Louisiana. The company's pressure-pumping services include well stimulation and cementing for the completion of new wells, as well as remedial work on existing wells. These services are focused primarily in the Appalachian Basin. Patterson's oil and natural gas operations are primarily focused in west and south Texas, southeastern New Mexico, Utah, and Mississippi.

Our continued Buy recommendation on Patterson-UTI shares reflects our positive view of the stock's risk-reward payoff, particularly given the favorable land drilling outlook. Growing demand, as evident from a rising rig count, is expected to get reflected in dayrate gains in the coming months and quarters. Patterson-UTI is particularly well positioned for this improving outlook, given its very high level of idle capacity (approximately 18% of its total fleet is currently idle). This gives the company very high exposure to the improving spot dayrate market through rig activations.

Patterson-UTI used the most recent drilling downturn (we are still not fully out of it though) to make significant upgrades to its drilling fleet. As a result, the company has upgraded its drilling rig fleet, including the deployment of new and equivalent rigs to meet customers' demands for increasingly complex wells. Last year, Patterson introduced its first customized NOV IDEAL rig. In the most recent quarter, the company introduced three new IDEAL rigs, which followed two rigs in the first quarter of 2008. These rigs are deployed in the Barnett Shale, Freestone County, and Haynesville plays. As of now, Patterson has deployed a total of 8 IDEAL rigs in the field. Patterson expects to complete the 7 remaining rigs of its 15 new build program by the year end. In total, Patterson plans to invest approximately $530 million in its business this year, including the continuation of rig fleet upgrades. The company plans to add another 20 new build rigs, scheduled for deliveries through early 2010. The additions will help the company increase its market share of active rigs because the majority of the current excess capacity exists with only a few industry players.

With no long-term debt, Patterson-UTI is in solid financial health. The company continues to return cash to shareholders through its growing dividend and share buyback programs. It had increased its quarterly dividend to $0.16 per share from $0.12 per share during the first quarter, the fourth consecutive year of dividend increase. After repurchasing $450 million worth of its own shares through two back-to-back authorizations during 2006, Patterson-UTI has authorized another $250 million share buyback program, of which more than 28% has already been used. These are the clearest signals of management's confidence in the company's cash flows and the overall macro outlook.

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