Stock Report

Renjun Ying

About Patterson-UTI Energy

Patterson-UTI Energy, Inc. (Called By “Patterson”

Below) is an energy company founded in 1978 and

is headquartered in Houston, Texas. It has three

subsidiaries: Patterson-UTI Drilling Company LLC,

Universal Pressure Pumping, Inc. and Universal

Well Services, Inc. Patterson-UTI Drilling

Company LLC and its subsidiaries have more than

275 marketable land-based drilling rigs and

provides contract drilling service primarily in oil

and natural gas producing regions in the continental

United States, Alaska, and western and northern

Canada. Universal Pressure Pumping, Inc. and

Universal Well Services, Inc. provide pressure-

pumping services consisting of well stimulation and

cementing for the completion of new wells

primarily in Texas and the Appalachian Region.

Also, company own and invest in oil and natural gas

assets as a non-operating working interest owner.

Our oil and natural gas working interests are located

primarily in Texas and New Mexico.

Growth

The Company reported net income

decreased by 37.22% to $188 million in 2013, from

$299 million in 2012. Revenues for the year ended

December 31, 2013 were $2.7 billion, which is

almost the same as that for 2012.

Strategy:BUY-Target Price: $41.04

Market OverviewPrice: $32.0252-Week Price Range: $18.83-$32.46 Shares Outstanding: 142.72MDividend: $0.4

Sector OverviewSector: Oil & GasIndustry: Oil Equipment & Services

Valuation MeasuresMarket Cap: $4.57BEnterprise Value: $4.84BTrailing P/E: 25.02Forward P/E: 18.51Price/Sales: 1.64Price/Book: 1.62

Financial HighlightsRevenue: $2.72BNet Income: $186.15MProfit Margin: 6.92%Return on Assets: 4.82%Return on Equity: 6.97%

Forecast Growth1-Year EPS Growth: 2-Year EPS Growth: 1-Year Dividend Growth:

RiskBeta: 1.63

Key ExecutivesMr. William Andrew Hendricks Jr., CEOMr. Cloyce A. Talbott, Co-Founder, Consultant, Director and Member of Exec. CommitteeMr. John E. Vollmer III, CFOMr. Kenneth N. Berns, CPA, VP, Director and Member of Exec. Committee

The Company declared

a quarterly cash dividend on its

common stock of $0.10 per

share, to be paid on March 27,

2014 to holders of record as of

March 12, 2014.  This dividend

represents a doubling of the

Company's recent quarterly

cash dividends.

In the past years,

company had a stable and higher utilization of its APEX® rigs. For the year 2014,

company continues to anticipate higher utilization as demand is strong for high-

specification APEX® rigs and demand has improved for our fleet of non-APEX

electric rigs. As revenue generated by Fleet of high-specification APEX® rigs and

other electric drilling rigs accounts for big proportion in overall revenue and

technology leader status remains, Company expects 2014 a fruitful year.

Economic/Industry Outlook

As global economy is recovering gradually from financial crisis, demand and

supply in several industries are ramping up. It is, however, not as the same situation as

in all industries. As to energy industry, it contends with a great amount of uncertainty

and risk, and yet companies have to focus on the future to ensure financial and

operational success. The energy industry requires long lead times for new projects, and

even though the current global economy is slowly recovering, the world’s population

continues to grow. With this growth, energy demand will increase correspondently.

For capturing those opportunities, Patterson improved its drilling rigs and equipments

so as to be more competitive than its competitors and meet the high requirements of its

customers. Balancing the need to supply the world with hydrocarbons, energy

companies are also looking at investments in alternative energy sources, including

unconventional sources, biofuels, renewable energy sources, and ways to improve

energy efficiency. Patterson has already paid attention to business opportunities

coming from unconventional resources and placed a moderate amount of rigs to work

on it. As technology leader in area of pad drilling and bi-fuel, Patterson gets work

more efficiently with lower operating cost so that makes business development more

sustainable and environment-friendly.

SWOT Analysis Of Patterson-UTI Energy, Inc.

Strength:

1. Patterson has strong service portfolio, including contract drilling, pressure

pumping and oil and natural gas working. All rounded business enable its revenue

source diversified. Also, it would change the weight on each segment according to

market demand so that keep revenue growing.

2. Leadership. Patterson is a technology leader both in the domain of natural

gas power technology for drilling rigs and in the field of drilling of conventional wells

of varying depths. In order to remain competitive, Patterson have spent over $2.0

billion during the last three years on capital expenditures to (1) build new land drilling

rigs and (2) modify, upgrade and extend the lives of components of our drilling fleet.

The improvement of technology makes the rigs move faster than conventional rigs,

drill quicker and more efficiently than conventional rigs, and allows for a safer

operating environment. As such, these rigs are better suited for the new demands of

the exploration business and, therefore, command higher day rates and utilization than

rigs from other land drillers.

3. Technological advantage. Patterson has technological advantages in aspects

of bi-fuel and pad drilling, which makes work more efficiently and operating cost

reduced. Thus, these strengths enable average daily revenue per rig increased, thereby

increasing the annual sales turnover.

Weakness:

1. Geographic concentration. Patterson operates its business primarily in

United States and some regions in Canada. It signals that its revenue sources mainly

come from North American market and its business is subject to economy in that

region due to the geographic concentration.

2. Patterson has no control over following aspects:

a. Prices, and expectations about future prices, of oil and natural gas,

b. Development of alternative fuel.

c. Shortages, Delays in Delivery and Interruptions in Supply of Drill Pipe,

Replacement Parts, Other Equipment, Supplies and Materials Adversely Affect Our

Operating Results.

3. Natural hazard. Our operations are subject to many hazards inherent in the

contract drilling and pressure pumping businesses, including inclement weather,

blowouts, well fires, loss of well control, pollution, exposure and reservoir damage.

These hazards could cause personal injury or death, work stoppage, and serious

damage to equipment and other property, as well as significant environmental and

reservoir damages.

Opportunities:

1. Patterson has added capacity over the years to meet the increased demand

for our services as customers expand development of unconventional oil and gas

resources and expand development of traditional resources by drilling horizontal

wells.

2. Technological improvement of rigs renders work more efficient and makes

Patterson more competitive in peer market, which makes it cater to the specialized

demand from customers. Thus, it could bring about more business opportunities to

Patterson.

3. Recovery of Global economy, together with rise of emerging market, may

lead to increasing demand of oil and natural gas. Patterson would confront with much

more opportunities to expand its business.

Threat:

1. Legislation and Regulation of Greenhouse Gases Could Adversely Affect

Company’s Business. For example, any contamination found on, under or originating

from the properties may be subject to remediation requirements under federal, state,

foreign, regional and local laws, rules and regulations. Federal, state, foreign, regional

and local environmental laws, rules and regulations currently apply to daily operations

and may become more stringent in the future.

2.Global Economic Conditions May Adversely Affect Our Operating Results.

Global economic conditions and volatility in commodity prices may cause our

customers to reduce or curtail their drilling and well completion programs, which

could result in a decrease in demand for our services. In addition, uncertainty in the

capital markets may result in reduced access to financing by our customers and

reduced demand for our services. Furthermore, these factors may result in certain of

our customers experiencing an inability to pay suppliers, including us.

3. Our Business Is Subject to Cyber security Risks and Threats. These threats

include loss of intellectual property, disruption of our and customers’ business

operations and safety procedures, loss or damage to our worksite data delivery

systems, and increased costs to prevent, respond to or mitigate cybersecurity events.

Valuation

Stock price of Patterson jumped to $32.99 on April 17, 2014, from $22.94 one

year ago. Patterson still has the power to push its stock price up to $33.39 of my

estimation, a gain of 1.21% from present price. The reasons for this prediction are: 1.

The growing number of APEX® rigs and increasing demand for high-specification

APEX® rigs; 2. Technology advantage such as bi-fuel and pad drilling makes work

efficiently and operating cost reduced; 3. Company has a strong financial position

with a great amount of line of credit and cash at hand.

The discounted cash flow model below shows stock price of $33.39 calculated

by free cash flow to firm value and of $41.99 calculated by free cash flow to

shareholders value. Revenues have a forecasted growth of 20.75%. The cash flows are

discounted with a WACC of 11.16%.

WACC

Cost of Equity: 12.49% Cost of debt: 6.55% Capital Structure

Beta: 1.63 Tax Rate: 36.6% Equity: 84.06%

Risk Free Return: 3.46% After-Tax Cost of Debt: 4.15% Debt: 15.94%

Market Return: 9% Total: 100%

WACC = 84.06%*12.49%+15.94%*(1-36.6%)*6.55% = 11.16%

WACC Sensitivity to Beta vs. Capital Structure

% Equity50% 55% 60% 65% 70% 75% 80% 85% 90%

1.3 7.41% 7.73% 8.06% 8.38% 8.71% 9.03% 9.36% 9.69% 10.01%1.4 7.68% 8.04% 8.39% 8.74% 9.10% 9.45% 9.80% 10.16% 10.51%

Beta 1.5 7.96% 8.34% 8.72% 9.10% 9.48% 9.87% 10.25% 10.63% 11.01%1.6 8.24% 8.65% 9.06% 9.46% 9.87% 10.28% 10.69% 11.10% 11.51%1.7 8.52% 8.95% 9.39% 9.82% 10.26% 10.70% 11.13% 11.57% 12.01%1.8 8.79% 9.26% 9.72% 10.18% 10.65% 11.11% 11.58% 12.04% 12.50%1.9 9.07% 9.56% 10.05% 10.54% 11.04% 11.53% 12.02% 12.51% 13.00%

DCF Model

Income Statement($ Millions) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15

Sales/Revenue 781.95 1462.93 2565.94 2723.41 2716.03 3292.88 3992.23Cost of Goods Sold (COGS) incl. D&A 779.03 1231.29 1981.07 2194.28 2323.38 2812.86 3410.27

Gross Income 2.92 231.64 584.87 529.13 392.66 480.01 581.96

SG&A Expense 43.94 53.04 64.27 64.47 73.85 110.87 134.42

Other Operating Expense 7.20 -22.33 -5.00 -32.70 -3.38 -14.00 -16.98

EBIT (Operating Income) 48.21 200.93 525.60 497.36 322.19 383.14 464.51

Nonoperating Income (Expense) - Net 0.81 2.60 0.77 1.06 2.61 2.94 3.56

Interest Expense 4.15 12.77 15.65 22.75 28.36 28.36 28.36

Unusual Expense (Income) - Net -4.33 -0.96 -0.37 0.00 0.00 -4.17 -5.06

Pretax Income -55.89 189.81 510.35 475.67 296.44 353.55 434.66

Income Taxes -17.60 72.86 187.94 176.20 108.43 135.11 163.81

Equity in Earnings of Affiliates 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Consolidated Net Income -38.29 116.95 322.42 299.48 188.00 218.43 270.85

Minority Interest Expense 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net Income -38.29 116.95 322.42 299.48 188.00 218.43 270.85

a. Cash Flow Analysis (Free Cash Flow to Firm)

($ Millions) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15

EBIT*(1-Tax) 31.77 124.18 332.18 313.34 204.27 242.15 292.39

+D&A 289.85 333.49 437.28 526.61 597.47 775.54 936.43

-Chg. In WC 45.40 -72.81 -66.84 29.31 30.23 -425.38 -114.91

-CAPEX 452.65 738.09 1010.00 973.99 662.46 1363.34 1646.18

Free Cash Flow to Firm -239.97 -207.61 -173.70 -163.35 109.05 79.73 -302.44

Terminal value: $6,474.23

The total PV of FCFF: $6037.98

-Net Debt: $1272.4

$4,631.57

Per share Value: $32.45

b. Cash Flow Analysis (Free Cash Flow to Shareholder)

($ Millions) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15

Net Income 38.29 116.95 322.42 299.48 188.01 217.43 268.43

+D&A 289.85 333.49 437.28 526.61 597.47 775.54 936.43

-Chg. In WC 45.40 -72.81 -66.84 29.31 30.23 -425.38 -114.91

-CAPEX 452.65 738.09 1010.00 973.99 662.46 1363.34 1646.18

Free Cash Flow to Shareholder -246.49 -214.84 -183.46 -177.21 92.79 55.01 -326.41

Terminal value: $6,450.26

The total PV of FCFF: $5,857.69

Per share Value: $41.04

DCF Assumption Based on History

Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Average

Revenue Growth -64.62% 87.09% 75.40% 6.14% -0.27% 20.75%

COGS as % of Sales 99.6% 84.2% 77.2% 80.6% 85.5% 85.4%

D&A as % of Sales 37.1% 22.8% 17.0% 19.3% 22.0% 23.6%

Gross Margin 0.37% 15.83% 22.79% 19.43% 14.46% 14.58%

SG&A/Sales 5.62% 3.63% 2.50% 2.37% 2.72% 3.37%

Nonoperating Income (Expense) Growth

0.10% 0.18% 0.03% 0.04% 0.10% 0.09%

Interest Expense Growth

558.41% 207.71% 22.55% 45.37% 24.66% 0.00%

Effective Tax Rate 34.10% 38.20% 36.80% 37.00% 36.60% 36.54%

CAPEX as % of Sales 57.89% 50.45% 39.36% 35.76% 24.39% 41.57%

WACC 11.16%

# Of Shares Outstanding (millions)

142.72

Current Stock Price: $32.02

Next FY EPS: $1.53

P/E Terminal Multiple: 25.02