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Stock Report
Renjun Ying
About Patterson-UTI Energy
Patterson-UTI Energy, Inc. (Called By “Patterson”
Below) is an energy company founded in 1978 and
is headquartered in Houston, Texas. It has three
subsidiaries: Patterson-UTI Drilling Company LLC,
Universal Pressure Pumping, Inc. and Universal
Well Services, Inc. Patterson-UTI Drilling
Company LLC and its subsidiaries have more than
275 marketable land-based drilling rigs and
provides contract drilling service primarily in oil
and natural gas producing regions in the continental
United States, Alaska, and western and northern
Canada. Universal Pressure Pumping, Inc. and
Universal Well Services, Inc. provide pressure-
pumping services consisting of well stimulation and
cementing for the completion of new wells
primarily in Texas and the Appalachian Region.
Also, company own and invest in oil and natural gas
assets as a non-operating working interest owner.
Our oil and natural gas working interests are located
primarily in Texas and New Mexico.
Growth
The Company reported net income
decreased by 37.22% to $188 million in 2013, from
$299 million in 2012. Revenues for the year ended
December 31, 2013 were $2.7 billion, which is
almost the same as that for 2012.
Strategy:BUY-Target Price: $41.04
Market OverviewPrice: $32.0252-Week Price Range: $18.83-$32.46 Shares Outstanding: 142.72MDividend: $0.4
Sector OverviewSector: Oil & GasIndustry: Oil Equipment & Services
Valuation MeasuresMarket Cap: $4.57BEnterprise Value: $4.84BTrailing P/E: 25.02Forward P/E: 18.51Price/Sales: 1.64Price/Book: 1.62
Financial HighlightsRevenue: $2.72BNet Income: $186.15MProfit Margin: 6.92%Return on Assets: 4.82%Return on Equity: 6.97%
Forecast Growth1-Year EPS Growth: 2-Year EPS Growth: 1-Year Dividend Growth:
RiskBeta: 1.63
Key ExecutivesMr. William Andrew Hendricks Jr., CEOMr. Cloyce A. Talbott, Co-Founder, Consultant, Director and Member of Exec. CommitteeMr. John E. Vollmer III, CFOMr. Kenneth N. Berns, CPA, VP, Director and Member of Exec. Committee
The Company declared
a quarterly cash dividend on its
common stock of $0.10 per
share, to be paid on March 27,
2014 to holders of record as of
March 12, 2014. This dividend
represents a doubling of the
Company's recent quarterly
cash dividends.
In the past years,
company had a stable and higher utilization of its APEX® rigs. For the year 2014,
company continues to anticipate higher utilization as demand is strong for high-
specification APEX® rigs and demand has improved for our fleet of non-APEX
electric rigs. As revenue generated by Fleet of high-specification APEX® rigs and
other electric drilling rigs accounts for big proportion in overall revenue and
technology leader status remains, Company expects 2014 a fruitful year.
Economic/Industry Outlook
As global economy is recovering gradually from financial crisis, demand and
supply in several industries are ramping up. It is, however, not as the same situation as
in all industries. As to energy industry, it contends with a great amount of uncertainty
and risk, and yet companies have to focus on the future to ensure financial and
operational success. The energy industry requires long lead times for new projects, and
even though the current global economy is slowly recovering, the world’s population
continues to grow. With this growth, energy demand will increase correspondently.
For capturing those opportunities, Patterson improved its drilling rigs and equipments
so as to be more competitive than its competitors and meet the high requirements of its
customers. Balancing the need to supply the world with hydrocarbons, energy
companies are also looking at investments in alternative energy sources, including
unconventional sources, biofuels, renewable energy sources, and ways to improve
energy efficiency. Patterson has already paid attention to business opportunities
coming from unconventional resources and placed a moderate amount of rigs to work
on it. As technology leader in area of pad drilling and bi-fuel, Patterson gets work
more efficiently with lower operating cost so that makes business development more
sustainable and environment-friendly.
SWOT Analysis Of Patterson-UTI Energy, Inc.
Strength:
1. Patterson has strong service portfolio, including contract drilling, pressure
pumping and oil and natural gas working. All rounded business enable its revenue
source diversified. Also, it would change the weight on each segment according to
market demand so that keep revenue growing.
2. Leadership. Patterson is a technology leader both in the domain of natural
gas power technology for drilling rigs and in the field of drilling of conventional wells
of varying depths. In order to remain competitive, Patterson have spent over $2.0
billion during the last three years on capital expenditures to (1) build new land drilling
rigs and (2) modify, upgrade and extend the lives of components of our drilling fleet.
The improvement of technology makes the rigs move faster than conventional rigs,
drill quicker and more efficiently than conventional rigs, and allows for a safer
operating environment. As such, these rigs are better suited for the new demands of
the exploration business and, therefore, command higher day rates and utilization than
rigs from other land drillers.
3. Technological advantage. Patterson has technological advantages in aspects
of bi-fuel and pad drilling, which makes work more efficiently and operating cost
reduced. Thus, these strengths enable average daily revenue per rig increased, thereby
increasing the annual sales turnover.
Weakness:
1. Geographic concentration. Patterson operates its business primarily in
United States and some regions in Canada. It signals that its revenue sources mainly
come from North American market and its business is subject to economy in that
region due to the geographic concentration.
2. Patterson has no control over following aspects:
a. Prices, and expectations about future prices, of oil and natural gas,
b. Development of alternative fuel.
c. Shortages, Delays in Delivery and Interruptions in Supply of Drill Pipe,
Replacement Parts, Other Equipment, Supplies and Materials Adversely Affect Our
Operating Results.
3. Natural hazard. Our operations are subject to many hazards inherent in the
contract drilling and pressure pumping businesses, including inclement weather,
blowouts, well fires, loss of well control, pollution, exposure and reservoir damage.
These hazards could cause personal injury or death, work stoppage, and serious
damage to equipment and other property, as well as significant environmental and
reservoir damages.
Opportunities:
1. Patterson has added capacity over the years to meet the increased demand
for our services as customers expand development of unconventional oil and gas
resources and expand development of traditional resources by drilling horizontal
wells.
2. Technological improvement of rigs renders work more efficient and makes
Patterson more competitive in peer market, which makes it cater to the specialized
demand from customers. Thus, it could bring about more business opportunities to
Patterson.
3. Recovery of Global economy, together with rise of emerging market, may
lead to increasing demand of oil and natural gas. Patterson would confront with much
more opportunities to expand its business.
Threat:
1. Legislation and Regulation of Greenhouse Gases Could Adversely Affect
Company’s Business. For example, any contamination found on, under or originating
from the properties may be subject to remediation requirements under federal, state,
foreign, regional and local laws, rules and regulations. Federal, state, foreign, regional
and local environmental laws, rules and regulations currently apply to daily operations
and may become more stringent in the future.
2.Global Economic Conditions May Adversely Affect Our Operating Results.
Global economic conditions and volatility in commodity prices may cause our
customers to reduce or curtail their drilling and well completion programs, which
could result in a decrease in demand for our services. In addition, uncertainty in the
capital markets may result in reduced access to financing by our customers and
reduced demand for our services. Furthermore, these factors may result in certain of
our customers experiencing an inability to pay suppliers, including us.
3. Our Business Is Subject to Cyber security Risks and Threats. These threats
include loss of intellectual property, disruption of our and customers’ business
operations and safety procedures, loss or damage to our worksite data delivery
systems, and increased costs to prevent, respond to or mitigate cybersecurity events.
Valuation
Stock price of Patterson jumped to $32.99 on April 17, 2014, from $22.94 one
year ago. Patterson still has the power to push its stock price up to $33.39 of my
estimation, a gain of 1.21% from present price. The reasons for this prediction are: 1.
The growing number of APEX® rigs and increasing demand for high-specification
APEX® rigs; 2. Technology advantage such as bi-fuel and pad drilling makes work
efficiently and operating cost reduced; 3. Company has a strong financial position
with a great amount of line of credit and cash at hand.
The discounted cash flow model below shows stock price of $33.39 calculated
by free cash flow to firm value and of $41.99 calculated by free cash flow to
shareholders value. Revenues have a forecasted growth of 20.75%. The cash flows are
discounted with a WACC of 11.16%.
WACC
Cost of Equity: 12.49% Cost of debt: 6.55% Capital Structure
Beta: 1.63 Tax Rate: 36.6% Equity: 84.06%
Risk Free Return: 3.46% After-Tax Cost of Debt: 4.15% Debt: 15.94%
Market Return: 9% Total: 100%
WACC = 84.06%*12.49%+15.94%*(1-36.6%)*6.55% = 11.16%
WACC Sensitivity to Beta vs. Capital Structure
% Equity50% 55% 60% 65% 70% 75% 80% 85% 90%
1.3 7.41% 7.73% 8.06% 8.38% 8.71% 9.03% 9.36% 9.69% 10.01%1.4 7.68% 8.04% 8.39% 8.74% 9.10% 9.45% 9.80% 10.16% 10.51%
Beta 1.5 7.96% 8.34% 8.72% 9.10% 9.48% 9.87% 10.25% 10.63% 11.01%1.6 8.24% 8.65% 9.06% 9.46% 9.87% 10.28% 10.69% 11.10% 11.51%1.7 8.52% 8.95% 9.39% 9.82% 10.26% 10.70% 11.13% 11.57% 12.01%1.8 8.79% 9.26% 9.72% 10.18% 10.65% 11.11% 11.58% 12.04% 12.50%1.9 9.07% 9.56% 10.05% 10.54% 11.04% 11.53% 12.02% 12.51% 13.00%
DCF Model
Income Statement($ Millions) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15
Sales/Revenue 781.95 1462.93 2565.94 2723.41 2716.03 3292.88 3992.23Cost of Goods Sold (COGS) incl. D&A 779.03 1231.29 1981.07 2194.28 2323.38 2812.86 3410.27
Gross Income 2.92 231.64 584.87 529.13 392.66 480.01 581.96
SG&A Expense 43.94 53.04 64.27 64.47 73.85 110.87 134.42
Other Operating Expense 7.20 -22.33 -5.00 -32.70 -3.38 -14.00 -16.98
EBIT (Operating Income) 48.21 200.93 525.60 497.36 322.19 383.14 464.51
Nonoperating Income (Expense) - Net 0.81 2.60 0.77 1.06 2.61 2.94 3.56
Interest Expense 4.15 12.77 15.65 22.75 28.36 28.36 28.36
Unusual Expense (Income) - Net -4.33 -0.96 -0.37 0.00 0.00 -4.17 -5.06
Pretax Income -55.89 189.81 510.35 475.67 296.44 353.55 434.66
Income Taxes -17.60 72.86 187.94 176.20 108.43 135.11 163.81
Equity in Earnings of Affiliates 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Consolidated Net Income -38.29 116.95 322.42 299.48 188.00 218.43 270.85
Minority Interest Expense 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net Income -38.29 116.95 322.42 299.48 188.00 218.43 270.85
a. Cash Flow Analysis (Free Cash Flow to Firm)
($ Millions) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15
EBIT*(1-Tax) 31.77 124.18 332.18 313.34 204.27 242.15 292.39
+D&A 289.85 333.49 437.28 526.61 597.47 775.54 936.43
-Chg. In WC 45.40 -72.81 -66.84 29.31 30.23 -425.38 -114.91
-CAPEX 452.65 738.09 1010.00 973.99 662.46 1363.34 1646.18
Free Cash Flow to Firm -239.97 -207.61 -173.70 -163.35 109.05 79.73 -302.44
Terminal value: $6,474.23
The total PV of FCFF: $6037.98
-Net Debt: $1272.4
$4,631.57
Per share Value: $32.45
b. Cash Flow Analysis (Free Cash Flow to Shareholder)
($ Millions) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15
Net Income 38.29 116.95 322.42 299.48 188.01 217.43 268.43
+D&A 289.85 333.49 437.28 526.61 597.47 775.54 936.43
-Chg. In WC 45.40 -72.81 -66.84 29.31 30.23 -425.38 -114.91
-CAPEX 452.65 738.09 1010.00 973.99 662.46 1363.34 1646.18
Free Cash Flow to Shareholder -246.49 -214.84 -183.46 -177.21 92.79 55.01 -326.41
Terminal value: $6,450.26
The total PV of FCFF: $5,857.69
Per share Value: $41.04
DCF Assumption Based on History
Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Average
Revenue Growth -64.62% 87.09% 75.40% 6.14% -0.27% 20.75%
COGS as % of Sales 99.6% 84.2% 77.2% 80.6% 85.5% 85.4%
D&A as % of Sales 37.1% 22.8% 17.0% 19.3% 22.0% 23.6%
Gross Margin 0.37% 15.83% 22.79% 19.43% 14.46% 14.58%
SG&A/Sales 5.62% 3.63% 2.50% 2.37% 2.72% 3.37%
Nonoperating Income (Expense) Growth
0.10% 0.18% 0.03% 0.04% 0.10% 0.09%
Interest Expense Growth
558.41% 207.71% 22.55% 45.37% 24.66% 0.00%
Effective Tax Rate 34.10% 38.20% 36.80% 37.00% 36.60% 36.54%
CAPEX as % of Sales 57.89% 50.45% 39.36% 35.76% 24.39% 41.57%
WACC 11.16%
# Of Shares Outstanding (millions)
142.72
Current Stock Price: $32.02
Next FY EPS: $1.53
P/E Terminal Multiple: 25.02
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