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Shares of land rig owners Helmerich & Payne (NYSE: HP), Nabors Industries (NYSE: NBR), and Patterson-UTI Drilling (NASDAQ: PTEN) all jumped 10% or more in November. While it was a real up and down month, these companies ended on a high note thanks to the news that OPEC will maintain its subdued production levels through 2018.
The past 12 months have been an odd time for land drilling companies. On one hand, business has been great as producers found ways to break even at much lower oil and gas prices, which meant they were all more willing to hire more rigs. There was a several month period at the beginning of 2017 where Helmerich & Payne was reactivating a new rig for a customer every 54 hours.
Moving that quickly to meet customer demand is a double-edged sword, though. All three companies noted on earnings reports that reactivating equipment at such a rapid pace meant higher-than-ordinary expenses, which ate away at any chance at a profit for several quarters. As these companies continue to spend lots of money to get their rigs back in working order, it has kept them from posting per-share profits.
Recently, the pace of reactivating rigs has slowed down a bit, but that looked like it could change as OPEC announced at its annual meeting in Vienna that it plans to maintain its current production levels throughout 2018 to protect oil prices. With many North American shale producers breaking even at today's price levels, the news that OPEC plans to hold back 1.8 million barrels per day of production suggests they can produce more without creating oversupply again like what happened in 2014-2015.
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For these drillers, that likely means more business. That's excellent news for Helmerich & Payne since it has the largest fleet of available high-specification rigs that can handle the more complex drilling jobs. By contrast, Nabors and Patterson-UTI will need to invest in the construction of new rigs if it wants to see significant gains.
The best thing that could happen to these companies is for oil prices to remain in this high $50 to low $60 per barrel range. That is high enough to incent producers to grow production, but not high enough to spend money like drunken sailors. This price range should provide an environment where rig companies can reactivate rigs at a measured pace to steadily grow revenues without incurring extraordinarily large expenses for reactivations.
Of the companies here, Helmerich & Payne probably has the best chance to win big in this environment. It still has quite a few idle rigs that are capable of today's demands, or can be upgraded for relatively lower capital costs than Nabors or Patterson, which will need to build entirely new rigs. Nabors does have an interesting partnership with Saudi Aramco that could pay dividends down the road, but the company remains stubbornly insistent on keeping its legacy rigs around for some reason. With its onerous debt load that management keeps kicking down the road, one has to wonder when the company will take the necessary steps to trim its fleet and balance sheet.
Patterson is very much in the middle of the road with this discussion, it doesn't have a whole lot of available rigs, but it also has a reasonable enough balance sheet that it could spend on expanding its fleet without too much trouble. Considering that there are still a lot of idle rigs out there, though, Patterson is likely in no rush to create another oversupply of rigs.
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