Is This the Right Time to Dump Patterson-UTI (PTEN) Stock?
On Mar 4, Zacks Investment Research downgraded the oil and gas drilling company Patterson-UTI Energy, Inc. PTEN to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Being a leading North American land drilling contractor, Patterson-UTI’s business is dependent on crude oil and natural gas prices. Both oil and natural gas prices have been weak for a considerable length of time, primarily owing to a supply glut in the face of lackluster global demand.
Crude oil price has witnessed a massive fall from the $100 per barrel mark and has kept sliding since Jun 2014 to the current trading level of around $35 per barrel. Natural gas, on the other hand, is trading around $1.7 per MMBtu, substantially down from a peak of $13.50 per MMBtu in 2008.
The fall in commodity prices has led the leading upstream players to curtail drilling, thereby dampening the demand for the requisite equipments. This, in turn has adversely affected the bookings for drillers like Patterson-UTI, thereby resulting in less work.
Per the company’s latest fleet update, its Feb 2016 drill rig count averaged 70 in the U.S. and four in Canada. This marks a substantial decrease from the company’s year-ago average rig count of 164 in the U.S. and nine in Canada. In the midst of declining dayrates and fewer new drilling contracts, Patterson-UTI undertook this measure to maintain profitability and curb operating expenses.
Rig utilization and margins are expected to be low for the foreseeable future as new drilling contracts are being signed at much lower rates than the pre-downturn levels. Also, we expect the company’s earnings, revenues and cash flows to be negatively affected in the upcoming quarters owing to declining rig counts and falling commodity prices.
These bearish factors have prompted downward estimate revisions for the company in recent times. In fact, over the last 60 days, nine out of 13 analysts lowered their estimates for the current quarter. This resulted in the Zacks Consensus Estimate widening from a loss of 51 cents per share to a loss of 53 cents. Also, for the year 2016, 13 out of 14 analysts have made negative estimate revisions on the stock over the same period.
Key Stock Picks
Despite the current weakness in the broader energy sector, one could consider some better-ranked stocks like SunPower Corporation SPWR, Petróleo Brasileiro S.A. - Petrobras PBR.A and Braskem S.A. BAK. All these stocks sport a Zacks Rank #1 (Strong Buy).
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