With rising oil prices and robust demand for oil and natural gas globally, oil and gas production will experience continued growth in 2023 and beyond, which will be highly beneficial for companies offering contract drilling services to the energy industry.
Given the industry’s robust outlook, fundamentally sound energy stocks Patterson-UTI Energy, Inc. (PTEN), Helmerich & Payne, Inc. (HP), and Precision Drilling Corporation (PDS) could be ideal investments for solid returns.
On top of earlier cuts made by several OPEC+ nations, Saudi Arabia, the major global crude exporter, extended its 1 million barrel per day (b/d) voluntary oil production cut until the end of 2023 last month. Fellow oil producer Russia also announced an extension of its 300,000 b/d reduction of exports until the year-end.
Further, crude oil inventories in the United States fell by 2.224 million barrels in the week ending September 29, 2023, the lowest since December 2022 on high export demand, after a 2.17 million decline in the prior period, as per data from the EIA Petroleum Status Report. Crude stockpiles fell way more than market forecasts of a 0.446 million barrels drop.
Oil prices climbed to their highest level in more than a year two weeks ago due to the production cuts by the Saudi and OPEC+ and lower crude inventories in the United States. The U.S. West Texas Intermediate futures hit $95.03 per barrel on September 28, the highest since August 2022. Also, Brent touched the highest level since November 2022.
While the rally cooled for a brief period, oil prices surged recently following Hamas’ attack on Israel amid rising fears that geopolitical tensions could disrupt global supplies.
Higher crude oil prices and soaring global demand will push operators to produce more oil and natural gas. U.S. crude oil production averaged 12.7 barrels (b/d) in the first seven months of 2023, an increase of 7% from 2022. Also, U.S. dry natural gas production stood at 103 billion cubic feet per day (bcf/d) during the first seven months, up 3% from 2022.
Higher U.S. oil and natural gas well-level productivity has contributed to increased production efficiency. Moreover, advances in hydraulic fracturing and horizontal drilling techniques improved well-level productivity.
In its September Short-Term Energy Outlook, EIA forecasts U.S. crude oil production to average a record high of 12.8 million b/d this year and 13.2 million b/d in 2024. EIA further projects dry natural gas production to rise to 102.69 bcf/d in 2023 and 104.93 bcf/d next year from a record of 98.12 bcf/d in 2022.
As per a report by Expert Market Research, the global oilfield services market is expected to reach $292.63 billion in 2023. Further, the market is projected to grow at a CAGR of 6.5% in the forecast period (2024-2032) to reach $427.60 billion by 2032. Rising demand for onshore applications to augment the market’s growth.
Moreover, in terms of production and consumption, the United States is one of the leading regions in the global oil and gas industry. In addition, the development of horizontal well bores and the rising availability of advanced completion techniques, including multi-stage hydraulic fracturing, could further boost the region’s oil services market’s growth.
In light of these encouraging trends, let’s look at the fundamentals of the three best Energy - Drilling stock picks, beginning with number 3.
Stock #3: Patterson-UTI Energy, Inc. (PTEN)
PTEN is a leading provider of oilfield services and products to oil and natural gas exploration and production companies in the United States and internationally. The company operates through three segments: Contract Drilling Services; Pressure Pumping Services; and Directional Drilling Services.
On September 1, PTEN completed its previously announced all-stock merger with NexTier Oilfield Solutions Inc., establishing a leading provider of drilling and completions services in the United States. The combined company will retain the name Patterson-UTI Energy, Inc. and continue trading under the ticker PTEN.
Andy Hendricks, President and CEO of PTEN, said, “The Company is well positioned to deliver value through our comprehensive portfolio, innovative offerings, significant free cash flow generation and strong financial position. With an outstanding combined team and collective track record of integrations, we are confident we will hit the ground running and successfully bring the businesses together.”
On August 15, PTEN announced the completion of the acquisition of Ulterra Drilling Technologies, L.P., a global provider of specialized drill bit solutions. Ulterra’s industry-leading position in the North American PDC drill bit market complements PTEN’s history of operational excellence and innovation.
Further, this strategic acquisition advances the company’s strategy to enhance its position in drilling and completion.
For the second quarter that ended June 30, 2023, PTEN’s revenues increased 22% year-over-year to $758.89 million. Its operating income was $104.58 million, up 184.5% from the prior year’s quarter. The company’s adjusted EBITDA rose 50% from the year-ago value to $233.72 million.
In addition, the company’s net income and net income per common share were $84.61 million and $0.40, increases of 286.6% and 300% year-over-year, respectively.
Analysts expect PTEN’s EPS for the fiscal year (ending December 2023) to increase 112.4% year-over-year to $1.51. The consensus revenue estimate of $4.19 billion for the current year reflects a 58.4% year-over-year improvement. Additionally, the company surpassed the consensus revenue estimates in all four trailing quarters.
PTEN’s shares have gained 8% over the past six months to close the last trading session at $13.23.
PTEN’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an A grade for Momentum and a B for Value and Quality. It has ranked #4 out of 16 stocks in the Energy - Drilling industry.
In addition to the POWR Ratings I’ve just highlighted, you can see PTEN’s ratings for Growth, Stability and Sentiment here.
Stock #2: Helmerich & Payne, Inc. (HP)
HP offers drilling services and solutions for exploration and production companies. It operates through North America Solutions; Offshore Gulf of Mexico; and International Solutions segments. The company operates a fleet of more than 236 land rigs in North America, 28 international land rigs, and seven offshore platform rigs.
On August 31, HP paid its quarterly base cash dividend of $0.25 per share and a supplemental cash dividend of $0.235 per share to stockholders of record at the close of business on August 17. The company pays an annual dividend of $1, which translates to a yield of 2.41% at the current price level.
HP’s operating revenues increased 1.6% year-over-year to $723.96 million for the third quarter that ended June 30, 2023. Its operating income from continuing operations grew 341.1% from the prior-year quarter to $148.74 million. Also, the company’s net income and earnings per common share came in at $95.29 million and $0.93, up 436.8% and 481.3% year-over-year, respectively.
Street expects HP’s revenue to increase by 39.5% year-over-year to $2.87 billion for the fiscal year that ended September 2023. The company’s EPS for the same period is expected to grow significantly year-over-year to $4.23. Moreover, it has topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 13% over the past six months to close the last trading session at $41.51.
HP’s POWR Ratings reflect this robust outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
HP has an A grade for Momentum and a B for Growth and Quality. It is ranked #3 of 15 stocks in the Energy - Drilling industry.
Click here for additional ratings for HP’s Value, Sentiment, and Stability.
Stock #1: Precision Drilling Corporation (PDS)
Headquartered in Calgary, Canada, PDS provides onshore drilling, completion, and production services to exploration and production companies in the oil and natural gas; and geothermal industries in North America and the Middle East. The company operates through Contract Drilling Services and Completion and Production Services segments.
On September 7, PDS announced that it had agreed to acquire all the issued and outstanding common shares of CWC Energy Services Corp. With this acquisition, Precision adds well-positioned, high-quality assets to its fleet: 62 marketed service rigs in Canada, seven marketed drilling rigs in Canada, and 11 drilling rigs in the United States.
With the anticipated material synergies and further leveraging its scale, this transaction will be accretive to the company’s earnings and provide significant cash flow to boost shareholder returns and support its debt reduction strategy.
For the second quarter that ended June 30, 2023, PDS’ revenue increased 30.6% year-over-year to C$425.62 million ($313.19 million). Its adjusted EBITDA grew 121.7% from the year-ago value to C$142.09 million ($104.56 million). Also, cash provided by operations stood at C$213.46 million ($157.07 million), an increase of 57.9% year-over-year.
Furthermore, the company’s net earnings came in at C$26.90 million ($19.79 million) and C$1.63 per share, compared to a net loss of C$24.61 million ($18.11 million) and C$1.81 per share in the prior year’s quarter, respectively.
For the fiscal year ending December 2023, PDS’ revenue is expected to grow 20.1% year-over-year to $1.44 billion. Furthermore, analysts expect the company’s revenue and EPS for the fiscal year 2024 to increase 10% and 24% from the prior year to $1.59 billion and $12.68, respectively.
In addition, the company topped the consensus revenue estimates in all four trailing quarters, which is remarkable.
Shares of PDS have gained 23.2% over the past six months and 13.4% over the past year to close the last trading session at $62.28.
PDS’ solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
PDS has an A grade for Momentum and a B for Growth, Value, Quality, and Sentiment. It is ranked first in the same industry.
To access additional PDS ratings for Stability, Sentiment, and Quality, click here.
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PTEN shares were unchanged in premarket trading Wednesday. Year-to-date, PTEN has declined -19.92%, versus a 14.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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