Patterson-UTI Energy Inc. (PTEN – Analyst Report), one of the leading onshore contract drillers in the U.S., has approved to purchase certain assets of onshore well service rig provider Key Energy Services (KEG – Snapshot Report) for $237.7 million. As per the deal between the two Houston-based companies, Key Energy will sell its pressure pumping and wireline businesses to Patterson-UTI. The all-cash transaction, which is subject to termination of the waiting period under the Hart-Scott-Rodino Act, is expected to close in the third quarter of 2010.

Patterson-UTI plans to finance the purchase – including pumps and related equipment to unlock oil and gas deposits from shale (dense rock formations) – with cash and its revolving credit facility. The equipment is located in the Barnett Shale (in East and North-Central Texas), Eagle Ford Shale (in South Texas) and Permian Basin (in West Texas) resource plays.

The Key Energy transaction is part of Patterson-UTI’s long-term strategic proposal and will add around 214,000 horsepower to its pressure pumping gear along with a 26-unit wireline business (of which 22 are less than five years old). Following the close of the deal, Patterson-UTI will be able to accelerate the growth of one of its core businesses (pressure pumping contributes 20% of its total revenue), as well as strengthen its geographic foothold and overall capabilities.

Apart from considerably expanding its shale drilling ability, Patterson-UTI also stands to benefit by coming out of their historical stronghold in the Appalachian Basin into the pressure pumping markets in the Barnett, Eagle Ford and Permian Basin. Considering the company’s stellar financial health (free cash flow positive and a debt-free balance sheet), we are certain that the transaction will be accretive to Patterson-UTI’s cash flows.

Patterson-UTI is one of the largest onshore contract drillers in the U.S. with approximately 350 land-based rigs that run primarily in the oil and natural gas producing regions of North America. The company primarily operates in Texas, New Mexico, Oklahoma, Arkansas, Louisiana, Mississippi, Colorado, Utah, Wyoming, Montana, North Dakota, Pennsylvania, West Virginia and Western Canada. Additionally, Patterson-UTI is engaged in the exploration and production trade and provides pressure pumping services.

Patterson-UTI is at present rated as Zacks #3 Rank (Hold), implying that the stock is anticipated to perform in line with the broader U.S. equity market over the next one to three months. This is supported by our long-term ‘Neutral’ recommendation (6+ months time period).

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