Bank Of America: With Sold-Out Capacity, 'Room To Run' For Drillers

With land-drilling stocks up more than 50 percent year to date, one sector analyst said Monday the lack of spare capacity for high-tech horizontal drilling rigs suggests they still have "room to run."

The sector was broadly down Monday, however, on lower crude oil prices.

Bank of America's Douglas L. Becker said rates paid for high-tech rigs continue to rise while profit margins of top industry players widens.

Top picks for Becker are Patterson-UTI PTEN and Nabors NBR. Becker also maintained Buy ratings on Helmerich & Payne HP and Precision Drilling PDS.

The market for newer, high-tech rigs is "now effectively sold out through the first half of 2015," Becker said in a note.

Seven years ago, only one in 10 rigs was drilling horizontal well bores, while today, more than 60 percent of all active rigs now are drilling horizontally, according to the American Oil & Gas Reporter, noting that rig technology is in the midst of rapid transformation.

Becker expects 200 new rigs will be constructed in the coming year, but only half will meet his definition of "preferred," i.e., able to drill horizontal wells with ultra-high power 1500 HP engines, a top drive and designed for quick relocation.

The horizontal rig count is up 22 percent to 230 units since a trough a year ago, Becker said. But over the same time, excess hydraulic fracturing capacity fell to less than 10 percent -- half of that is due to repairs and travel.

Along with his top sector picks, Becker also singles out with a Buy rating U.S. Silica SLCA Halliburton HAL and Schlumberger Ltd. SLB.