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An Oil Patch Darling


By Mara Der Hovanesian

Shares of Patterson-UTI Energy (PTEN) have tripled, to 32, since their September lows. That may only be the beginning of the story. Sure, the fate of the Snyder (Tex.) company, which supplies drilling rigs mostly for natural gas, is pegged to an economic recovery. But even if natural gas prices don't budge from here, the company's profits could balloon.

Analyst James Wicklund of Banc of America Securities (neither he nor it has a stake) says Patterson-UTI's fortunes "are as simple as sitting back and watching the drilling cycle run." The company owns 324 rigs, making it the No. 2 land-based fleet in North America. In the drilling boom, which peaked in July, 2001, clients paid up to $15,000 a day for crew and equipment. But in the downturn, rates plummeted to $6,500--breakeven.

Lately, day rates have crept back to $8,000 and are moving up, says Wicklund. Also, a dwindling supply of natural gas has caused prices to double since January, to $3.50 per 1,000 cubic feet (mcf)--still way off highs of $10/mcf set in 2000. In highly leveraged rig-leasing, operating margins increase geometrically as the number of rigs and lease rates rise--money that goes right to Patterson-UTI's pocket. It's not showing through on earnings yet: Net income fell to 5 cents a share in the quarter ended Mar. 31, an 89% year-over-year decline. For 2002, Wicklund sees earnings of 24 cents, jumping to $1.51 in 2003. Earnings could hit $7 a share in 24 months if day rates hit $15,000 again, he says.

Allen Brooks of CIBC World Markets, which managed or co-managed two equity offerings in late 2000, reiterated a "strong buy" rating on May 3. He raised his earnings estimates to 31 cents a share for this year, above Wall Street's consensus of 22 cents. He sees profits of $1.73 per share next year, vs. a market consensus of $1.44. Gene G. Marcial is on vacation.


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