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Connecting Upstream Operators’ Capex with PTEN’s Margin

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Patterson-UTI Energy’s EBITDA margin

From 2Q17 to 3Q17, Patterson-UTI Energy’s (PTEN) EBITDA margin (or EBITDA as a percentage of revenues) rose from 22.5% to 24.5%. The EBITDA margin measures a company’s operating earnings. In 3Q16, Patterson-UTI Energy’s EBITDA margin was 19.4%. Patterson-UTI Energy accounts for 0.3% of the Vanguard Energy ETF (VDE). On September 29–November 13, 2017, VDE rose 1%—compared to the ~2% fall in Patterson-UTI Energy’s stock price during this period.

Upstream operators’ capex

As you can see in the following graph, from 2Q17 to 3Q17, the average EBITDA margin for the OFS (oilfield equipment and services) companies in the VanEck Vectors Oil Services ETF (OIH) rose from 18.6% to 19.6%. From 2Q17 to 3Q17, 20 of the top upstream companies by market capitalization in the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rose 21% in aggregate. The higher upstream capex resulted in higher prices for OFS companies, which boosted OFS companies’ operating revenues and margins.

Peers’ EBITDA margin

U.S. Silica Holdings’ (SLCA) EBITDA margin was 23.1% in 3Q17. CARBO Ceramics’ (CRR) EBITDA margin was -25% in 3Q17, while National Oilwell Varco’s (NOV) EBITDA margin was 9.1% in the same quarter.

Rig count

As of the week ending November 10, 2017, the US rig count was 907 or ~4% lower compared to the level on September 29, 2017. The international rig count rose 2% in October 2017—compared to a month ago. An acceleration or deceleration in the rig count could impact Patterson-UTI Energy’s revenues and earnings growth in 4Q17.

In the next part, we’ll discuss Patterson-UTI Energy’s net debt.

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