Patterson Uti Energy Inc Q2 FY2021 Earnings Call

Good day. Thank you for joining us for the Patterson-UTI Energy Second Quarter 2021 Earnings Conference Call. I will now pass the call to your host, Mike Drickamer, Vice President of Investor Relations. Please proceed.

Thank you, Felita. Good morning. And on behalf of Patterson-UTI Energy, I'd like to welcome you to today's conference call to discuss the results of the 3 and 6 months ended June 30, 2021. Participating in today's call will be Andy Hendricks, Chief Executive Officer; and Andy Smith, Chief Financial Officer. A quick reminder that statements made in this conference call that state the company's or management's plans, intentions, beliefs, expectations or predictions for the future are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties as disclosed in the company's annual report and on Form 10-K and other filings with the SEC. These risks and uncertainties could cause the company's actual results to differ materially from those suggested in such forward-looking statements or what the company expects. The company undertakes no obligation to publicly update or revise any forward-looking statement. The company's SEC filings may be obtained by contacting the company or the SEC and are available through the company's website and through the SEC's EDGAR system. Statements made in this conference call include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website, www.patenergy.com, and in the company's press release issued prior to this conference call. In addition, you will find important information for stockholders and cautionary statements included at the end of the company's press release issued prior to this conference call. And now it's my pleasure to turn the call over to Andy Hendricks for some opening remarks. Andy?

Thanks, Mike. Good morning, and welcome to Patterson-UTI's second quarter conference call. We are pleased that you can join us today. For the second quarter, revenues and adjusted EBITDA increased sequentially as drilling and completion activity has steadily improved from the lows of last summer. Based on conversations with customers about the remainder of this year and into early 2022, we expect increasing activity and increasing pricing. In Contract Drilling, since the beginning of the second quarter, our rig count has increased by 8 rigs. In addition to the overall increase in our industry, we continue to see increasing customer interest in reducing emissions through the use of alternative power sources, and we believe these lower emissions technologies, where we have a leadership position, are a differentiator. As an example, we were recently notified by a major international E&P that we will be increasing our activity within their drilling program and activating multiple rigs over the next year. This major customer intends to use a combination of our natural gas powered and our high-line utility powered rigs. In Pressure Pumping, we took advantage of opportunities with customers to accelerate our reactivation plans, and we activated 2 spreads late in the quarter. I'm very pleased with the performance of our team this quarter as they met margin expectations while also incurring reactivation costs for these 2 spreads at the end of the quarter. These 2 spreads are expected to be accretive to our average adjusted EBITDA per spread and will help improve our fixed cost coverage going forward. We continue to see opportunities to economically reactivate additional spreads, and as such, we expect to reactivate another spread early in the fourth quarter. Our Pressure Pumping team has done a great job in controlling costs through greater operational efficiency and has also successfully achieved higher pricing to improve margins. With the improved pricing, we expect a meaningful improvement in our third quarter Pressure Pumping margins. As well with the increasing demand for lower emissions technologies and consistent with our disciplined approach to capital spending, we plan to continue to upgrade engines on existing pump trailers to Tier 4 dual fuel. We continue to believe that Tier 4 dual fuel has many advantages, especially over electric frac spreads, which in reality also burn natural gas. We believe this premium technology generates savings and offers operational flexibility for the customer and better economics for Patterson-UTI. We've also started to gain considerable experience performing simul fracs, and I believe we are one of the very few companies to have completed simul fracs in both the Northeast and in the Permian. In Directional Drilling, the reliability and performance of our Mercury Measurement While Drilling system and our impact directional drilling motors have allowed us to continue gaining market share. During the second quarter, we saw a 70% increase in the number of rigs on which we provided directional drilling services, which led to better-than-expected revenues, but margins were impacted by the higher reactivation costs as we grew. With that, I will now turn the call over to Andy Smith, who will review the financial results for the second quarter.

Thanks, Andy, and good morning. For the second quarter, we reported a net loss of $103 million or $0.55 per share, while consolidated adjusted EBITDA was $35.4 million. Before I get into the segments, as a general comment, due to improving activity levels and increasing tightness in the overall labor market, we are starting to see general oilfield cost inflation across our segments. This inflation, combined with the increasing challenge of attracting employees to the industry, is increasing the complexity of reactivating equipment. We believe this challenge, combined with the increasing demand for premium drilling and completion services, will support higher pricing going forward. Within our segments. In Contract Drilling, our average rig count improved for the third consecutive quarter and averaged 73 rigs in the second quarter, up from 69 rigs in the first quarter. Average rig margin per day during the second quarter was $6,250. Average rig operating cost per day increased relative to the first quarter due primarily to fewer rigs on low-cost standby, higher rig reactivation expenses, and the sales and use tax refund in the first quarter that did not recur in the second quarter. At June 30, 2021, we had term contracts for drilling rigs providing for approximately $210 million of future day rate drilling revenue. Based on contracts currently in place, we expect an average of 37 rigs operating under term contracts during the third quarter at an average of 24 rigs operating under term contracts during the 4 quarters ending June 30, 2022. For the third quarter, we expect our rig count to improve to an average of 81 rigs, ending the quarter at 83 rigs. Contract Drilling gross profit is expected to improve to approximately $46 million. Average rig margin per day is expected to be approximately flat with the second quarter level. In Pressure Pumping, we averaged 8 active spreads during the second quarter, ahead of our expectation for 7 spreads as we reactivated 2 spreads during the month of June. Even after costs associated with the reactivation of the extra spread, Pressure Pumping gross margin improved to $9.7 million for the second quarter. Pressure Pumping revenues increased almost 50% sequentially to $112 million. For the third quarter, we expect to average 9 active spreads. Pressure Pumping revenues are expected to improve from second quarter levels by more than 30% to approximately $150 million and gross margin is expected to be approximately $18 million. Turning now to Directional Drilling. Revenues for the second quarter increased 26% to $24.9 million from $19.7 million in the first quarter, as the number of rigs on which we provided directional drilling services increased by 70% during the second quarter. However, with the increase in reactivation costs, gross margin for the second quarter decreased slightly to $2.5 million. For the third quarter, we expect to further benefit from higher activity levels with revenues increasing approximately 35% sequentially to $34 million. Gross profit for the third quarter is expected to be $4 million. Turning now to our other operations, which includes our rental, technology and E&P businesses. Revenues for the second quarter improved to $13.2 million and gross margin improved to $2.8 million. For the third quarter, we expect revenues to improve to $14 million with a gross margin of $4.5 million. On a consolidated basis for the third quarter, we expect total depreciation, depletion, amortization and impairment expense of approximately $141 million. Selling, general and administrative expense is expected to be approximately $23 million for the third quarter. And for the full year 2021, we expect an effective tax rate of approximately 17%. Based on conversations with customers about increasing activity levels into 2022, we are increasing our 2021 CapEx forecast to $165 million, including $105 million for Contract Drilling, $35 million for Pressure Pumping and $25 million for Directional Drilling, other and general corporate. The increase in our CapEx budget primarily consists of investments in high-demand items that generate ancillary revenue, including specialty drill pipe and ESG-related technologies as well as higher maintenance CapEx due to increasing activity. Also, we will be paying a quarterly cash dividend of $0.02 per share on September 16, 2021, to holders of record as of September 2, 2021. With that, I'll now turn the call back to Andy Hendricks.

Thanks, Andy. It's been a while since we've had this level of visibility into future quarters, and I'm very encouraged by the continuing increase in E&P demand that we are seeing for our services in drilling and completions. While this was primarily driven by the trading ranges of commodities over the last 6 months, it is also driven by Patterson-UTI's overall high level of well site performance and efficiency as well as our ESG-related technologies. I expect this demand continues at least into 2022. For Patterson-UTI, as we've discussed, this means both increasing activity and increasing pricing in our businesses. Finally, let me provide a short update on our pending acquisition of Pioneer Energy Services. Subject to regulatory approvals, customary closing conditions and the approval of Pioneer Energy Services stockholders, we continue to expect this acquisition will close in the fourth quarter. Pioneer's experienced people, high-quality assets, and efficient operations in the United States and Colombia will be a valuable addition to our business. With that, we would like to thank all of our employees for their hard work, efforts and successes both in our industry and in general, and we look forward to a stronger second half of the year. Felita, we would now like to open the call to questions.

And your first question comes from the line of Mike Sabella with Bank of America.

So Andy, you have mentioned some upgrades on the frac fleet to Tier 4 dual fuel. Maybe you could just give us an idea, I guess, where you are today in terms of kind of capacity of next-gen frac equipment and if any of the CapEx bump that you all announced today is on the frac upgrades. And then as we think about that, maybe talk us through economics on what we see from those upgraded fleets today.

We are currently upgrading the engines from older models to the new Tier 4 dual fuel. This involves swapping out the engines on the trailers without changing the horsepower. We initiated this process a few months ago and will continue to allocate capital expenditures to complete these upgrades throughout this year and into next year, aiming for a full fleet readiness by the first quarter of next year. While there is some capital expenditure involved, it is relatively minor compared to our overall capital expenditures for the company. We view this as a cost-effective way to enhance the technology of our existing equipment without increasing horsepower in the market.

Understood. Can you discuss the rig side and where you think customer interest is headed in the near future? This year, the demand for additional rigs has primarily come from private exploration and production companies. It appears that the inventory of drilled but uncompleted wells held by public exploration and production companies has mostly been used up. It seems that public companies will have to return to the market for rigs. Do you agree with that view? If that happens, could you explain what it would mean for Patterson in a market that has been primarily influenced by private exploration and production companies?

Yes. Certainly, as we came off the downturn last year, it was private that moved quicker. But when you look into what we're seeing in the second half of this year and into 2022, it's really broad. I mean it's privates that are going to add rigs, it's midsized publics. It's large international E&Ps. So we're just seeing more of a broad-based uptake in rigs with the discussions that are happening going into early '22.

Your next question comes from the line of Vaibhav Vaishnav from Coker & Palmer.

So I guess if we talk about Pressure Pumping, could you help us think about like in the market, are we today where we actually can get better pricing for ESG-friendly fleet versus conventional fleets?

Yes. We believe that by changing the engines and offering Tier 4 dual fuel on our existing pump trailers, we can not only take on more work but also achieve better pricing and margins for that work. This presents numerous advantages for customers in terms of cost savings, and as I mentioned earlier, it also provides favorable economics for us.

Okay. Switching to land drilling. As we move from here into 2022, 2023, I'm not trying to pin you down for a number, but just generally, how do you think about where the land drilling margins could go back to versus what we saw in the prior cycles? Obviously, one change is like now you are providing more services on the same rig. So just putting that in context would be helpful.

So the way that I see this evolving because we're already in discussions for putting up rigs across the second half of this year and into '22, it's actually quite interesting. Like I mentioned, we just haven't had this level of visibility in a long while. And my concern is that we've got some of our operators, customers that are still working through their budget process and they may not even make decisions until late this year or early next year on rigs they want. And by that time, some of the rigs that they've been used to running are not going to be available. And so I think you're going to have this situation as we move into 2022 that's more of a fear of missing out. And there's going to be more of a scramble for the best super-spec rigs that are out there. And now granted, we all have a lot of high-spec rigs. But when you talk about the best-performing super-spec rigs and with some of the operators a little bit slower in their budget cycles, I think they're going to land in a space in early '22 that they're not going to have necessarily the rigs that they want to have. And when you see that happening in the cycle, that's really a big push on pricing, and that's a big push on margins. It's been a while since we've seen that, too. And so I do think it evolves into '22 that we have the possibility to get back to some of the higher margins that we've seen in the past and other cycles. And part of what may drive that is when some of these larger operators that are a little bit slower decide that they want to add rigs and they can't get all the specs that they want, they've now got to work with the drilling contractor to pay for upgrades and those kind of discussions drive pricing. And I think you'll hear more of that as we get into 2022.

So what I'm understanding is that in the fourth quarter, when we usually expect a decline, based on where the commodity prices are and your discussions with customers, we might actually see more rig increases in that time. Is that a fair interpretation of your point?

I think you can take fourth quarter decline and throw it out the window this year. If you look at where commodity prices are trading, oil WTI above $65 a barrel in natural gas above $3, we're not considering a fourth quarter decline.

Your next question is from John Daniel with Daniel Energy.

I understand you can't name the exploration and production company, and I'm not asking you to. However, you mentioned an international exploration and production company that seems to be acquiring multiple rigs. I'm interested in your thoughts on the potential change in the number of incremental rigs compared to their current position. Can you give us an estimate of when that might occur? If you cannot provide specifics, that's okay. The reason I'm asking is that we've seen private companies rapidly increase their rig counts, and while we generally see larger companies as more disciplined, it appears they might begin to add rigs significantly. I'd appreciate your insights on this.

I believe this situation may be unique to us because we are a large major exploration and production company with a drilling program that might increase, but we are likely to gain market share within their ongoing drilling efforts. There is still a level of discipline in the market. I'm not suggesting there's a loss of discipline or a significant increase in their specific program. However, due to the technology and the performance and efficiency we've provided to this particular operator over the past few years, our team has performed excellently, and we anticipate growing our share. Additionally, our focus on environmental, social, and governance (ESG) issues and emissions-related technology contributes to this growth.

Okay. Fair enough. On the frac side, I just want to make sure I've got the sequencing right, you're running 8 today. Is that right, going to 9?

Correct. 8 going to 9.

And then did you...

We're currently at 9, having just activated it. We plan to move to 10 in early Q4, possibly late Q3 but more likely early Q4.

Okay. If you mentioned this, I apologize. At year-end, what would be the approximate Tier 4 DGB split within your fleet, considering the investment?

We have various types of equipment in our fleet. We currently have Tier 2 dual fuel and Tier 4. By the end of this year, we will have Tier 4 dual fuel as we replace more engines. We aim to achieve a full range of Tier 4 dual fuel, and we will also prepare for an additional range of Tier 4 dual fuel next year.

Your next question is from the line of Scott Levine with Bloomberg.

So I wanted to see if I can get a sense of your outlook for net pricing for both drilling and pressure pumping for the back half of this year. If I heard correctly in your prepared comments, you said you expected your average daily rig margins to hold about flat in the third quarter, and that's what I think we heard out of one of your competitors yesterday. But your activity levels are increasing, and we've seen the inventory of DUCs drop pretty considerably recently. So is it fair to assume that the pace of activity and drilling accelerates, but maybe the net pricing lags a bit behind the recovery in net pricing in Pressure Pumping? Or are you seeing it from a different vantage point from your perspective? Just curious there.

Yes. So our view is we're seeing a steady increase in rig count throughout H2 and into 2022. We're also seeing an increase in pricing, but we've also had some cost inflation as well. So the cost inflation is keeping the margins flat quarter-on-quarter, but then we expect margins to improve after that.

And on the pumping side, is it a different situation? Or is the magnitude any different? Or is it roughly similar trend as far as you can say?

I'd say pumping is coming off a more challenging bottom. And as we increase the number of spreads we're operating, we're improving margins by a mixture of increasing pricing and then better fixed-cost coverage as well.

There are no other questions at this time.

All right. Well, we thank everybody for dialing into our earnings call this morning, and have a good quarter. Thanks.

This concludes today's conference call. You may now disconnect.