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Growth of Onshore Rig Count to Slow in 2012, Says Analyst

A Jefferies & Co. analyst this week cut his 2012 earnings forecasts and price targets by 30-50% for some of the biggest domestic onshore drillers and well service companies because he expects to see slower growth for oil and gas rigs.

Fewer rigs in operation will limit prices and profit margins for drillers and oilfield service operators next year, Jefferies analyst Judson Bailey said in a note to clients. However, he said he would maintain a "buy" rating for most of the companies in the sector because of a premature sell-off by investors who may be expecting a bigger slowdown than he is forecasting.

The U.S. land rig count by the end of 2012 should be around 1,925, which is down from a previous forecast of 2,100 rigs, said Bailey. There are about 1,824 land rigs now in operation across the United States.

However, unlike the extreme onshore rig decline in 2009, Bailey predicts that the falloff in rigs next year will mimic 2007, as expansion in some of the more active shale plays, like the Marcellus and the Eagle Ford, offset declines in conventional fields.

Meanwhile, Houston-based driller and pressure pumping specialist Patterson-UTI Energy Inc. (PTEN) said its 3Q2011 profits should be higher than in 2Q2011, despite a slowdown in the Appalachian Basin from recent flooding and higher overall labor costs. PTEN, one of the largest North American onshore drillers, has about 350 marketable land-based drilling rigs. Units also provide pressure pumping services primarily in Texas and the Appalachian region.

The third quarter ended Sept. 30 and earnings season will kick off in earnest for the energy sector in the next two weeks.

PTEN said revenues for 3Q2011 increased by 12% sequentially to $674 million from $600 million. The company is expecting a $50 million increase in its drilling segment and a $25 million hike from pressure pumping in the latest period, which is partially offset by a drop in revenue from the sale of oil and natural gas.

"The improved drilling revenue results from both higher rig count and average revenue per operating day," the company said. "Pressure pumping revenue increased more than 12% sequentially despite the interruption of operations caused by hurricane-related flooding in Appalachia."

Increases in operating expenses and noncash costs (depreciation, depletion, amortization and impairment) mostly are expected to offset revenue improvements.

"Operating expenses for both drilling and pressure pumping increased as a result of higher activity levels and some cost inflation," said PTEN. "Sequentially, average costs per operating day in the drilling segment also increased primarily as a result of higher repairs, maintenance and labor costs. Unusually high levels of repairs and maintenance expenses were incurred during the quarter in connection with operating the company's conventional rig fleet. Improvements were made to allow these rigs to continue to operate at high utilization and to perform efficiently in the current environment."

The company also is seeing rising labor costs "primarily as a result of higher wages and additional training costs for field personnel in certain of the markets in which we operate. Operating expenses as a percentage of revenue for pressure pumping were higher primarily as a result of the weather delays in Appalachia."

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