Energy

3 Top Drilling Stocks to Buy for Higher Rig Activity

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Despite the volatility in oil prices over the past month, one thing remains clear: the Permian Basin in West Texas is where the money is going, and it for sure is where the new drilling for oil is going. With oil making a sharp rebound after the summer sell-off, it makes sense for investors to not only look at the top exploration and production companies, but also the leading land drillers that are the beneficiary of expanded drilling.

A recent RBC research report makes the case that not only are drilling rigs coming online faster than their previous estimates, but the majority are headed to the Permian Basin. In fact, 41% of all drilling rigs in the United States are located there, and three top companies have the largest exposure. While vertical rig use is expected to decline, the RBC team sees horizontal rig use jumping. We highlight the three companies with the biggest Permian exposure.

Helmerich & Payne

This company primarily operates as a contract drilling company in South America, the Middle East, and Africa. Helmerich & Payne Inc. (NYSE: HP) provides drilling rigs, equipment, personnel and camps on a contract basis to explore for and develop oil and gas from onshore areas and fixed platforms, tension-leg platforms and spars in offshore areas. Its contract drilling business operates through three reportable segments: U.S. Land, Offshore and International Land.

The company posted second-quarter earnings that many felt came in much better than expected. At last report, the company’s U.S. Land rig segment, which is its largest business, had a utilization rate of 31%, compared to 68% this time last year. The International Land operations also saw utilization rates decline to 38%. What is slightly surprising, though, is that the average margin for a rig in use increased between this quarter and the same time last year.

Many top Wall Street analysts feel that the company is one of the best positioned for the U.S. land recovery, and they also cite the strong balance sheet and the sector leading dividend. The company has 1% of its rigs in the Permian, according to RBC.

Helmerich & Payne investors receive a 4.47% dividend. The Wall Street consensus price objective is $59.32. Shares closed Monday way above that level at $62.57.

Precision Drilling

This is Canada’s leading oilfield services firm that provides contract drilling, well servicing and strategic support services to its customers. Precision Drilling Corp. (NYSE: PDS) provides customers with access to an extensive fleet of contract drilling rigs, directional drilling services, well service and snubbing rigs, coil tubing services, camps, rental equipment and water treatment units backed by a comprehensive mix of technical support services and skilled, experienced personnel.

RBC notes that despite the company’s large Canadian exposure, 54% of the firm’s U.S. drilling fleet is located in the Permian Basin. Despite posting a second-quarter loss, the company sees customers starting to ramp up, and Chief Executive Officer Kevin Neveu said this when the company reported:

Our customers appear to be looking beyond the oil price lows of earlier this year, resetting spending to current commodity price levels, and beginning the early stages of planning for improved longer term fundamentals.

The consensus price target is set at $5.50. The shares closed Monday at $4.18.

Patterson-UTI Energy

This company could see meaningful business coming from Canada this year. Patterson-UTI Energy Inc. (NASDAQ: PTEN) subsidiaries provide onshore contract drilling and pressure pumping services to exploration and production companies in North America. Patterson-UTI Drilling Company and its subsidiaries operate land-based drilling rigs in oil and natural gas producing regions of the continental United States and western Canada. Universal Pressure Pumping and Universal Well Services provide pressure pumping services primarily in Texas and the Appalachian region.

The stock has been on a solid roll since late January, and the outperformance could be attributed to good execution and reduction in the cost structure. Other Wall Street analysts have noted that the company’s pressure pumping margins improved substantially. RBC says that the company currently has 32% of its rigs deployed in the Permian.

Patterson-UTI investors receive a 0.4% dividend. The consensus price target stands at $21.27. The stock closed Monday at $20.47.

The RBC report did not include target prices for these companies, but all are rated Outperform. While the spot price of oil may remain volatile, buying the top land drillers with exposure in the best basin play in the United States makes good sense for aggressive growth investors.

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