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Thanks to gains in drilling efficiency, companies can drill more wells with fewer rigs. But not all land rigs are the same. Older mechanical drilling rigs aren't capable of drilling the long, complex, horizontal wells used to produce oil and natural gas from shale fields, explains Elliott Gue, editor of Energy and Income Advisor.

Our investment thesis: Patterson-UTI Energy (PTEN) continues to upgrade its fleet of drilling rigs, replacing older units with advanced APEX Walking rigs.

In a traditional drilling operation, the rig would be completely disassembled (rigged down, in industry parlance) after completing a well, and then moved to the next drilling location for reassembly (rigging up).

APEX Walking rigs can walk up to 150 feet in any direction on a drilling pad. These advanced rigs can travel ten feet to 20 feet in about 45 minutes. Best of all, the rigs do not have to be rigged down before they're moved to their next drilling location, but can walk across a pad fully assembled.

Patterson's new fleet of Walking Rigs command higher day-rates—the fee Patterson charges producers to lease a rig—and will boost the firm's profitability.

The company will accelerate this fleet renewal program, adding 12 advanced rigs in the first half of next year. By comparison, the contract driller added about six APEX Walking units in the back half of 2013.

The company expects strong demand for these high-specification rigs to continue, though day-rates for older rigs have softened in the spot market. On balance, management forecasts that the average day-rates earned by the company's fleet will increase to $22,900 in the fourth quarter, with revenue from newly delivered rigs offsetting contract resets on its mechanical units.

We expect Patterson-UTI Energy's profitability to continue to improve, as the company upgrades its rig portfolio. Shares of Patterson-UTI Energy trade at an undemanding valuation and rate a buy up to US$27.00.

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