Drilling And Completion Services Will Benefit From Cortex Automation

Key Takeaways

• Integrated services and operational optimization are set to drive growth by enhancing efficiencies and customer value for U.S. shale operators.
  
• Strong financial position and tech innovations, like the Cortex platform, support earnings growth and shareholder returns through operational efficiencies and strategic capital use.
  
• Persistently low oil prices may lead to reduced drilling plans and earnings, placing pressure on Patterson-UTI Energy's revenue and profitability across segments.

Catalysts

Through its subsidiaries, provides drilling and completion services to oil and natural gas exploration and production companies in the United States and internationally.

• Patterson-UTI Energy's strategic focus on optimizing core operations and disciplined capital allocation, coupled with their ability to offer integrated services across drilling and completion activities, is expected to drive future growth, potentially enhancing both revenue and net margins by maximizing operational efficiencies and customer value.
  
• The company's comprehensive service and product offerings, alongside strong customer relationships, position it to benefit from sustained demand in large, stable U.S. shale operators who are less influenced by short-term commodity price fluctuations. This strategic positioning is likely to support steady revenue streams and protect against volatile earnings.
  
• Patterson-UTI's technological investment, such as the Cortex automation platform, aims to revolutionize drilling automation by improving operational efficiency and user experience. These innovations could result in higher operational efficiencies and improved net margins, thereby boosting earnings.
  
• The increasing demand for environmentally friendly operations and the company's shift towards natural gas-powered equipment in their Completion Services segment indicate strong earnings potential through higher returns from these high-demand technologies, which may not have been fully priced into the stock yet.
  
• The financial strength, evidenced by a low leverage ratio and investment-grade credit rating, provides the capacity to pursue high-return opportunities and protect capital deployment. This strength is expected to facilitate shareholder returns through share buybacks and dividends, which should positively influence earnings per share growth over time.

Patterson-UTI Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Patterson-UTI Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Patterson-UTI Energy's revenue will decrease by 4.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -19.8% today to 3.6% in 3 years time.
• The bearish analysts expect earnings to reach $159.1 million (and earnings per share of $-0.12) by about July 2028, up from $-1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, up from -2.3x today. This future PE is greater than the current PE for the US Energy Services industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 1.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.02%, as per the Simply Wall St company report.

Patterson-UTI Energy Future Earnings Per Share Growth

Risks

• Recent commodity softness in oil prices, if persistent, could lead to customers reevaluating their drilling plans, potentially impacting Patterson-UTI Energy's revenues and net income.
  
• The performance and pricing adjustments of legacy drilling contracts rolling off may lead to a reduction in average contracted revenue, impacting earnings in the upcoming quarters.
  
• Potential white space in activity levels later in the second quarter, especially if oil prices remain low, could adversely affect utilization and profitability in the Completion Services segment.
  
• Fluctuations in costs due to tariffs and component pricing, as well as the need for alternative suppliers, present financial risks that could pressure margins if not managed effectively.
  
• While the demand for natural gas-powered equipment is strong, any delays in projected demand growth or changes in customer preferences could impact the anticipated returns on investment in this technology, affecting the company's financial performance and capital allocation strategy.

Valuation

• The assumed bearish price target for Patterson-UTI Energy is $6.25, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Patterson-UTI Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $6.25.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.4 billion, earnings will come to $159.1 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 8.0%.
• Given the current share price of $6.17, the bearish analyst price target of $6.25 is 1.3% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.