This valuation was performed to further analyze our portfolio's exposure to energy risk as the fracking boom started to take off.

1. DeWitt October23, 2013
PattersonUTI EnergyCorp.;NASDAQ:PTEN
Sector: Basic Materials Recommendation: Hold
Industry: Oil & Gas Drilling Valuation: $23.92
Profile
Patterson UTI provides onshorecontract drillingservices
to major and independent oil and natural gas operators in the
United States and Canada.The company offers pressure
pumping services that consistof well stimulation and
cementing for completion of new wells and remedial work on
existingwells,as well as hydraulic fracturing,nitrogen,
cementing, and acid pumpingservices. Patterson-UTI Energy,
Inc.was founded in 1978 and is headquartered in Houston,
Texas.
Macroeconomic/IndustryProspects
Patterson will be subjectlargely to domestic trends, as it
has zero international exposure. However, Yellen’s
appointment as Bernanke’s successor means thatmonetary
tightening will continuefor the time being.
The real problem Patterson has rightnow is thatthere is
an oversupply of natural gas from the energy sector, making
their primary competitive value(rigrefurbishment) much less
attractive. Horizontal wells requirea premium rig, which
means that Patterson must operate outside their traditional
core competencies to be successful. However, Patterson has
seen some success in the frackingboom. Their second-
quarter revenue from horizontal wells was a record $255
million. This had the benefit of boostingEBITDA by 6%.
Patterson Summary
Stock Price $23.53
52-Week Range $15.58 - $25.48
Average Volume 2,381,760
Market Capitalization $3,430,000,000
P/E Ratio 16.94
Dividends Per Share $.20
S&P Credit Rating N/A
Valuation Model Calculated Value
Dividend Growth Not Used
Market Multiples $23.15
EnterpriseValue $28.57
Residual Income $20.02
Holding Period Return Not Used
Key Ratio Analysis
Several key ratios were analyzed to examine Patterson’s
performance in distinction to their competitors and the
industry in general. These competitors were: Baker Hughes
Incorporated (BHI), Helmerich & Payne Inc.(HP), Nabors
Industries,Ltd (NBR).
Patterson does have the highest inventory turnover of any
of their peers, by a massivemargin. This indicates thatthey
face tough pricingpressures,sincetheir net profit margin is
only a third of Helmerich & Payne. Their assetturnover
seems to be aboutpar for the industry,and the same could
be said for their debt-to-assets ratio.
Even in the areas where they lagbehind the competition,
Patterson is still doinga good job. Their Interest coverage
ratio is a very respectable13, whiletheir current ratio is over
two. Whilebeing the lowest of their peers, these ratios are
still quitegood, showinga decent prospectof growth without
overreach.

2. DeWitt October23, 2013
PattersonUTI EnergyCorp.;NASDAQ:PTEN
Patterson does not excel in any one area, but rather
focuses on shiftingtheir attention to a new, more profitable
segment of business. Patterson is undertakingthis shiftin a
deliberate fashion,in order to generate lasting,sustainable
returns.
Financial Summary
Patterson has suffered some nasty losses of late. Their
EPS briefly dropped to -.25 per sharein 2009, before
rebounding in 2011,and taperingoff by nearly 25% year-to-
date. Obviously,this indicates a certain level of volatility in
the oil & gas drillingmarket. Furthermore, ValueLine analysts
only estimate 1% annual growth for Patterson—a troubling
sign indeed.
Strengths and Opportunities
Patterson has a strong presence in the continental US and
Alaska,allowingitto develop key contacts and networks
there and more effectively manage its operations.
Patterson has also managed to upgrade its drillingfleetto
take advantageof the recent frackingcrazethat has
oversupplied the US natural gas/crudeoil markets.
WeaknessesandThreats
Patterson has zero international exposure,and therefore
is only diversified in a very limited way. Its clusteringof rigs
will posea problem if any natural disasters should strike.
Furthermore, Patterson’s position is limited to “upstream”
operations,further reducing their diversification relativeto
major integrated oil concerns.
Also,the shaleoil boomdomestically will drivedown
energy prices. The effect of this has already madeitself
painfully apparentin Patterson’s net profitmargin. Since
Patterson is so geographically focused and customer-
concentrated, if prices fall enough Patterson could take a
serious hit.
ValuationMethodologies
Three models were used to valuePatterson’s stock.
Regrettably, due to Patterson’s dividend model and low
income growth, the constantgrowth dividend model and the
holdingperiod return model produced outliers,and could not
be considered valid. These models were market multiples,
enterprise value,and residual income. An average was then
taken of these three models to determine a priceestimate.
Several competitors were selected by examining
Patterson’s segment (Basic Material,Oil & Gas Drilling),and
findingsimilar firms thatalso operatewithin the
Drilling/Exploration market. The firms selected were Baker
Hughes Incorporated (BHI), Helmerich & Payne Inc.(HP),
Nabors Industries,Ltd (NBR).
The market multiples method uses similarfirms in the
marketplace to valuethe firm being analyzed. To start,an
average forward P/E ratio was calculated fromeach
competitor. This ratio was multiplied by the forward earnings
estimate for Patterson to arriveatan estimated price. The
same was done usingthe trailingP/Eratio and Patterson’s
2012 EPS, as well as the competitor’s market-to-book ratio
and Patterson’s book valueper share. An interesting note
here: the forward P/E pricefor Patterson was almostexactly
half the trailingP/Eprice, indicatinga lowered willingness by
investors to purchasePatterson’s shares. These three stock
prices were then weight-averaged to calculatea stock priceof
$23.15.
The enterprise valuemodel uses a similar rationaleto the
market multiples method. The EV/EBITDA of Patterson’s
competitors was averaged, and multiplied by Patterson’s
EBITDA to estimate Patterson’s enterprise value. Patterson’s
cash equivalents were added to this,and debt subtracted.
The resultingequity estimate was divided by shares
outstandingto calculatea sharepriceof $28.57.
The residual incomemodel uses several industry-specific
formulae. To value Patterson, the energy sector model was
used. Book valueper sharewas multiplied by the cost of
equity, and subtracted from the estimated earnings of next
year. An interestingnote here is that the residual valuewas
negative, indicatingan expected loss of profitability in the
future. The process was repeated for next year, and the
formula calculated an estimated priceof $20.02.
Recommendation
Based on our analysisof Patterson’s industry,outlook and
fundamentals,we value the stock at $23.92. At the current
priceof $23.53, we recommend Patterson be held in the
portfolio atits current weight. We expect that Patterson will
experience turbulent, possibly negativegrowth for a number
of years until the frackingdrivedies down or recedes.
Furthermore, based on the various notes provided in the
valuations and financial summary,we recommend that
Patterson be closely monitored, and if itrises to a $4 per
shareovervalued state, be dropped from the portfolio.
Ratios PTEN BHI HP NBR
Current Ratio 2.19 2.42 2.96 2.45
Inventory Turnover 64.44 4.64 23.27 16.97
Net Profit Margin (%) 7.88 4.67 21.89 3.05
Debt-to-Assets (%) 14.74 14.04 3.15 33.19
RoE (%) 7.71 5.88 18.51 3.39
Asset Turnover .58 .8 .57 .52
Interest Coverage 13.27 N/A 187.24 N/A
Debt-to-Equity (%) 25 22 5 69