Patterson Uti Energy Inc Q3 FY2023 Earnings Call

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Energy Third Quarter 2023 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. At this time, I would like to turn the conference over to Mike Sibella, Vice President of Investor Relations. Please go ahead.

Thank you, Audra. Good morning, and welcome to Patterson-UTI's earnings conference call to discuss our third quarter 2023 results. With me today are Andy Hendricks, President and Chief Executive Officer; Andy Smith, Chief Financial Officer; Mike Holcomb, Chief Business Officer; and Matt Gillard, President of NexTier Completion Solutions. As a reminder, statements that are made in this conference call that refer to the company's or management's plans, intentions, targets, beliefs, expectations or predictions of the future are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties as disclosed in the company's SEC filings, which could cause the company's actual results to differ materially. The company takes no obligation to publicly update or revise any forward-looking statements. Statements made in this conference call include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website, patenergy.com and in the company's press release issued prior to this conference call. I will now turn the call over to Andy Hendricks, Patterson-UTI's Chief Executive Officer.

Thank you, Mike. Good morning, and welcome to Patterson-UTI's third quarter conference call. Our third quarter was monumental as we closed on two transactions that reshaped our company. Today, we are positioned as one of the market leaders across multiple U.S. onshore service lines with a diverse suite of products and services and a strong presence across the entire U.S. land drilling and completions value chain. We believe these transactions create a long-term competitive advantage for our company, and our wide-reaching digital strategy will help us maximize the value potential for all stakeholders. We will look to use our integrated offering to deepen the partnerships with our customers and further differentiate ourselves on service quality and efficiency. It’s becoming increasingly difficult to replicate the success of the larger oilfield services providers, and the market should continue to become more bifurcated going forward than it has been historically. We are looking for ways to help keep U.S. shale oil and natural gas competitive on a global basis, and a competitive U.S. shale is important to the success of our company. Helping our customers reach their goals is critical to allowing us to reach our own goals for a strong return on capital and to return a significant amount of capital back to our shareholders through the cycle. The NexTier and Ulterra transactions will help maximize our company's potential. We'd like to welcome the NexTier and Ulterra employees to the Patterson-UTI team. In the short time we've all been together, we've been impressed by the talent at all levels of both organizations and excited about our shared future. We're working to ensure that we put our people in the right places to succeed. Our employees have worked tirelessly to make the integration a success and have remained dedicated to our company through what has certainly been a stressful period. We believe we have made Patterson-UTI an employer of choice in the oilfield, which is already helping us attract and retain top talent and further driving our operational advantage. Operationally, we've already seen several successes by extending the NexTier wellsite integration footprint. We now have NexTier power solutions natural gas fueling system working on a legacy universal dual fuel fleet. On another universal fleet, we've added NexTier's wireline and last mile logistics. We are confident completions well site integration will lead to improved wellsite efficiency, lower cost and a safer environment for our employees, which will benefit both our company and our customers. It's been just two months since we closed the transaction, and we are already starting to see operational synergies. There are many other areas we see potential to create additional value through the merger for both Patterson-UTI and our customers. From an exterior transaction alone, we have line of sight with at least $200 million in annualized synergies by the first quarter of 2025, and we are increasingly confident in our ability to meet or even exceed that target. We brought together two of the industry's leading well completion companies and strong collaboration is already underway. On the Ulterra side, we also see opportunities for revenue synergies between our Drilling Services and Ulterra products. As you heard us say before, we cannot ignore the benefit of size and scale that comes with these transactions. This is true not only from an operational perspective but also as we navigate capital markets that are starting to take another look at our sector. The larger market cap and market trading liquidity has expanded the universe of potential investors that can make our growing investment in Patterson-UTI. We think this is a positive for all of our stakeholders. While our company is much bigger, our commitment to capital discipline is unchanged. Our capital allocation strategy is a major reason why we are excited to be considered by a broader group of investors. We like our strategy, and we think the message is being well received. For those who followed Patterson-UTI previously, our capital allocation strategy is largely unchanged. The foundation starts with a strong balance sheet as well as an organic investing strategy that helps us offer our customers differentiated products, technologies and services. On the balance sheet, we have an investment-grade credit rating at all three major rating agencies, a testament to the low leverage and significant free cash flow generating potential of the new company. We will use our strong capital structure to be opportunistic at all points in the cycle. On CapEx, we will always be disciplined in our investments and only look to put capital to work where we see opportunities to build or expand our differentiated technologies and services for our customers. We've already seen bifurcation in service quality amongst the peer group, and our CapEx strategy will look for ways to further advance our core competencies. This should mean a more repeatable return and free cash flow profile for our company through the cycle with a focus on both short-term and long-term free cash flow generation. To reiterate, we are committed to return at least 50% of our free cash flow to shareholders annually, and we have returned more than $1.2 billion to our shareholders over the past 10-plus years. We remain committed to our dividend, and we have $281 million remaining on our share repurchase authorization. We believe this is an attractive capital allocation strategy that will allow us to invest in the future of Patterson-UTI to grow our competitive advantage while also offering our investors a shareholder return program with both income through the dividend and accretion through any buyback. Now moving on to the macro. We are extremely excited about the outlook, and we think the behavior we have seen from our competitors and customers this year is yet another sign that we are operating in a more stable U.S. shale industry. Our customers are obviously still sensitive to commodity prices, but they are looking through volatility more than they have in the past. This allows us to better prepare and relative to prior cycles create a far more predictable outlook for our operations, and we think a more investable sector. For the third quarter, Patterson-UTI's U.S. drilling activity was in line with expectations with an average of 120 rigs, including one rig that earned 44 standby days after the customer changed its drilling schedule. We ended the quarter with 117 active rigs in the U.S. and have seen our rig count improve to 118 today. We expect to exit the year with 120 rigs and average 118 for the fourth quarter. Positive momentum should continue into 2024. Our revenue per day is still in the mid- to low 30s, which shows our customers see value in our premium assets and high-quality services. Super-spec rig utilization remains very high, with activity for this class of rig outperforming the overall rig count. We think super-spec rig activity recovers before the idle lower-spec rigs, which should position Patterson-UTI to outperform the expected recovery over the next several quarters, even as we outperformed the market when the rig count moved lower this past year. On the frac side, there was slightly more white space in Q3 than we were anticipating as we saw one-off disruptions from several customers. We continue to mostly see pricing discipline in the frac market, particularly among the dedicated natural gas-powered portion of our fleet, where we have the highest returns. As we have said previously, out of our fleet of 3.3 million horsepower, we are choosing to stack some equipment before working at pricing that does not meet our threshold, and we continue to believe that is the right thing for our company. We're using any downtime to maintain our equipment where appropriate and prepare for an increase in activity in 2024. This should put us at an advantage as we enter 2024 with a fleet that is more readily available for deployment relative to our peers. The long-term outlook remains positive in our view, even more so considering the delay in activity recovery we have so far seen for our customers. Oil prices have risen on the back of OPEC supply cuts. But importantly, absent a major macro event, we believe the global balance will need U.S. shale production to grow modestly over the next several years and U.S. shale activity likely needs to stabilize just to keep production flat. The delayed activity response so far should mean activity will have to catch up with deferred activity, which should be a tailwind in 2024. On the natural gas side, we believe the shape of the forward strip is telling us that there needs to be more activity in the gas basins just to meet current natural gas demand. And as we get closer to the completion of new LNG export capacity later next year and into 2025, we will likely need to see natural gas activity rise again. In short, we remain optimistic for both the drilling and completion markets, given current commodity prices and the view that we will need a modest increase in U.S. shale oil and natural gas production over the next several years. Meanwhile, the recent slowdown of frac activity is likely to accelerate attrition beyond what service providers were otherwise preparing for this year across the industry. Additionally, we believe the slowdown has deferred some investments in new equipment. Roughly two-thirds of the industry fleet operating in the U.S. today can be powered by natural gas, and the slowing pace of investment by service providers likely means there's a longer runway to fully replacing the diesel portion of the industry asset base. For our NexTier completion segment, if we continue to see strong returns, we will still plan to continue to invest to upgrade our fleet at a measured pace. Any new capacity we bring into the market would likely be 100% natural gas-powered and would be replacement horsepower for equipment that is reaching the end of its useful life. More broadly, the industry likely needs to see around 1.5 million horsepower new builds per year just to keep horsepower flat and has been considerably below that over the past several years combined. In short, the frac fundamentals appear to be positioned to remain very strong over the next several years. Regarding international opportunities, I want to be clear that our priorities remain continued capital discipline and returning cash to shareholders. Within our Drilling and Completions businesses, we occasionally participate in discussions for opportunities in international markets as we have for years. But for us to deploy capital, we would need to see a compelling opportunity that has a strong probability of acceptable and accretive returns for our differentiated products and services. To date, we have not found an opportunity that makes sense for our company and for our shareholders. Therefore, our current pace of international expansion will be primarily focused on Ulterra's previously announced plans in the Middle East and South America as we believe that is in the best interest of our shareholders. I'll now turn it over to Andy Smith, who will review our financial results for the third quarter.

Thanks, Andy. The reported financial results for the third quarter include 48 days from Ulterra after the acquisition closed on August 14 and 30 days of NexTier after that merger closed on September 1. Total reported revenue for the quarter was just over $1 billion. We reported a small net income attributable to common shareholders, which was essentially breakeven on a per-share basis. This included $70 million in merger and integration expenses, partially offset by the recognition of $29 million of previously deferred revenue, which became recognizable after the customer changed its drilling schedule. Our adjusted net income attributable to common shareholders was $55 million or $0.20 per share. This excludes the merger and integration expenses, includes the previously deferred revenue and assumes a 21% federal statutory tax rate. Adjusted EBITDA totaled $277 million, which also excludes the previously mentioned merger and integration expenses and includes the previously deferred revenue. Our weighted average share count was 280 million shares during Q3, and we exited the quarter with 417 million shares outstanding. Through the third quarter, we have returned $191 million to shareholders through a combination of share repurchases and dividends. Our Board has approved a $0.08 per share dividend for Q4, and we have $281 million remaining on our share repurchase authorization. We intend to return at least 50% of our free cash flow to shareholders annually, consistent with our previous capital allocation strategy. Through the third quarter, we have returned more than 100% of our free cash flow to shareholders. And given where the share price is today, we will likely repurchase shares in the fourth quarter. As a reminder, we resegmented our reporting this quarter to better reflect the way we manage our business. Our new Drilling Services segment includes the legacy Contract Drilling and Directional Drilling segments. It also includes our Current Power, Electrical and Automation Equipment and Warrior Drilling Rig Equipment businesses, both of which were previously reported as Other operations.

During the third quarter, Drilling Services revenue was $489 million, which includes the recognition of $29 million in previously deferred revenue. Drilling Services gross margin totaled $209 million during the quarter. Direct operating costs included $9 million associated with insurance reserve adjustments and inventory write-downs. In U.S. Contract Drilling, we totaled 11,009 operating days, including one rig that earned 44 days on standby after the customer changed its drilling schedule. Average rig revenue per day increased to $38,110 with the previously deferred revenue positively impacting reported revenue per day by $2,630. Average rig operating cost per day was $19,870, including $790 per day in costs associated with the previously mentioned insurance reserve adjustments and inventory write-downs. The average adjusted rig margin per day was $18,240, a $1,330 per day increase from the previous quarter. At September 30, we had term contracts for drilling rigs in the U.S. providing for approximately $760 million of future dayrate drilling revenue. Based on contracts currently in place, we expect an average of 74 rigs operating under term contracts during the fourth quarter of 2023 and an average of 52 rigs operating under term contracts over the four quarters ending September 30, 2024. In our Other Drilling Services businesses, which is mostly International Contract Drilling and Directional Drilling, third quarter revenue was $69 million with an adjusted gross margin of $8 million. For the fourth quarter, in U.S. Contract Drilling, we expect to average 118 active rigs and exit the quarter with 120 rigs operating. We expect an adjusted gross margin of $16,100 per day with revenue per day expected to average $35,400 and rig operating cost per day expected to average $19,300. Other Drilling Services revenue is expected to be $65 million with an adjusted gross margin of $10 million. Our new Completion Services segment results include a full quarter of the company's legacy Pressure Pumping segment as well as 30 days of results from NexTier Oilfield Solutions beginning on September 1, 2023, and continuing through the end of the quarter. Additionally, effective September 1, 2023, we began recording the cost to replace fluid ends as a direct operating cost rather than as a capital expenditure. Reported revenue in our Completion Services segment totaled $460 million, with an adjusted gross margin of $91 million. During the quarter, segment revenue was impacted by lower customer activity and slightly lower pricing on certain products and services with demand and pricing moving lower towards the end of the quarter before stabilizing thus far in Q4. We think activity and pricing is likely to stay relatively steady at current levels through the rest of the year, aside from typical seasonality. For the fourth quarter, we expect Completion Services revenue of $950 million with an adjusted gross margin of $200 million. Our Drilling Products segment results include 48 days from the recently acquired Ulterra Drilling Technologies beginning on August 14, 2023, and continuing through the end of the quarter. Additionally, upon closing the Ulterra transaction in accordance with U.S. GAAP, we recorded certain assets and liabilities of Ulterra at fair value, which resulted in the step-up in value of the drill bits that Ulterra held at the time the transaction was closed. This accounting adjustment will continue to impact the reported results for Ulterra until we have fully consumed the impacted assets. Third quarter Drilling Products revenue totaled $47 million with an adjusted gross margin of $14 million. During the quarter, the step-up in value increased the reported segment direct operating costs by $6 million and increased reported segment depreciation and amortization by $7 million, all of which was noncash in nature. Given the declines in industry activity, we are pleased with the stability of the Drilling Products segment. For the fourth quarter, we expect Drilling Products revenue of $90 million with an adjusted gross margin of $30 million. We expect $10 million in noncash direct operating costs associated with the step up in value at Ulterra. Without which, the segment adjusted gross margin expectation would be $40 million. Other revenue totaled $17 million with $6 million in adjusted gross margin. We expect fourth quarter other revenue and adjusted gross margin to be flat with the third quarter. Reported selling, general and administrative expenses were $45 million in Q3, which includes partial periods for Ulterra and NexTier. For Q4, we expect SG&A expenses of $65 million. We expect SG&A to decline over the next year as we realize synergies from the merger with NexTier. On a consolidated basis for the third quarter, total depreciation, depletion, amortization and impairment expense totaled $198 million. For the fourth quarter, we expect total depreciation, depletion amortization and impairment expense of approximately $260 million. We expect fourth quarter cash taxes to be around $5 million. During Q3, total CapEx was $160 million, including $89 million in Drilling Services, $56 million in Completion Services, $8 million in Drilling Products and $7 million in Other and Corporate. Our CapEx in Q4 is expected to be $190 million, comprised of $65 million for Drilling Services, $105 million for Completion Services, $15 million for Drilling Products and $5 million for Other and Corporate. The CapEx includes maintenance spending as well as some investments in NexTier's Power Solutions natural gas fueling business and other upgrades on both the completions and drilling fleets. To date, we have delivered annualized synergies totaling almost $60 million from the NexTier transaction, with synergies only slightly impacting our Q3 results as the transaction closed late in the quarter. By the end of Q4, we anticipate reaching an annualized synergy run rate of more than $100 million, which will mostly be back-end weighted and will be more impactful to Q1 results. We are increasingly confident that we can meet or exceed our goal for $200 million in annual synergies associated with the NexTier merger by the first quarter of 2025. During the quarter, we successfully completed a 10-year $400 million senior notes offering. We closed Q3 with nothing drawn on our $600 million revolving credit facility as well as $67 million in cash on hand. Subsequent to the close of the NexTier transaction and concur with our recent notes offering, we now have investment-grade credit ratings from all three major credit rating agencies. Maintaining an investment-grade capital structure is core to our capital allocation strategy, and we intend to continue to run our business in a way that allows us to maintain our investment-grade capital structure. I'll now turn it back to Andy for closing remarks. Thanks, Andy. With both the NexTier and Ulterra transactions now closed, our top priority is successful integration as we work to fully realize the value of these transactions. Our conviction on the rationale for these deals is stronger today than it’s ever been, and we remain on track to achieve or even exceed the $200 million in annual synergies from the NexTier transaction by the first quarter of 2025. Looking at the overall market, the macro setup is strong and the outlook is improving. We've already seen our rig activity inflect higher, and we expect this positive momentum will continue in 2024. Customers are optimistic at recent commodity prices, but are proceeding cautiously, which we think is a sign of a more stable U.S. shale industry, and our belief that cycles will be shallower in the future. Nonetheless, as these events play out, we think convention in the cycle will improve. And over the long term, activity and production will need to increase to meet demand based on various long-term forecasts, including the IEA. And finally, while the macro setup gives us confidence in our future earnings power, our priorities will remain sustaining a high return on capital and free cash flow. We remain capital disciplined with our CapEx, and we will look to invest in areas where we see opportunities to differentiate ourselves to our customers versus simply investing to grow capacity. This should help us deliver strong returns and free cash flow through the cycle. We remain committed to returning at least 50% of our free cash flow to investors through a combination of dividends and buybacks. This is the right strategy for our company and our industry. Before we go to Q&A, I want to again acknowledge all of our employees who have continued to provide great service quality while working tirelessly to make these transactions successful. Many of our employees have gone above and beyond their day-to-day roles to help make Patterson-UTI an employer of choice, and we would not be here today without you. So thank you. With that, I'd like to now open the lines for Q&A.

We'll take our first question from Scott Gruber at Citigroup.

I want to start on the Completions segment. How many fleets do you have active today? And thinking about the recovery in that count, just given your strategy, do you think E&Ps will be ready to pay more reasonable rates for your equipment in early '21, such that you can kind of see a steady improvement in count following the improvement in rig count we're starting to see? Or is there some risk that we get off to a slow start next year?

I'll begin with the horsepower. We have 3.3 million horsepower available. We're not specifying the number of fleets because their sizes vary significantly. We could be operating a smaller fleet in the Midland Basin, a simul frac in the Delaware, or a larger fleet in the Haynesville. Mentioning the fleet count doesn't provide much clarity since they differ in size and can change within a month or quarter. We do have 3.3 million total horsepower, but we have parked some of it as activities slowed down and we have time in the schedule for maintenance to prepare for the expected uptick. We are already noticing the rise in our rig count at Patterson-UTI, and while we're outperforming the market regarding our drilling rig count, I believe the overall rig count will see an increase based on commodity price trends, particularly in the forward strip for natural gas. There will be a typical lag between increased drilling rigs and frac operations due to the current lack of drilled but uncompleted wells (DUCs). Frac spreads are hitting the drilling rigs, and we need to see more drilling rig activity for frac work to increase. As we anticipate more drilling in early 2024, there will be a delay in completion activity, but completion efforts will follow the uptick in drilling.

Got it. I want to turn to CapEx next year. I know you guys haven't set the budget, but just kind of want to get your thoughts on the moving pieces based upon the resegmentation. I have Drilling Services somewhere north of 300 for this year, maybe 320. So I want to see if that is a good number for next year, if that's down? And then will the Completion services CapEx for next year kind of be in a high single-digit range? NexTier, you just talked about 8%, 9% of revenues. So that's maybe kind of mid-300s. And then if I add in 65 for Ulterra, maybe 25 for other, I kind of get pretty close to consensus. Is it kind of one of your early thoughts on the pieces and what it could total?

Yes. Scott, this is Andy. Again, we haven't gone through a full budgeting process. But I think if you look at where our fourth quarter is coming in, not necessarily looking at the bucketing of it, but if you look at the total number, the sort of $190 million guide, I would think that on a quarter-to-quarter basis in 2024, we're pretty comfortable in the $190 million to $200 million range on a quarterly basis.

We'll move next to Jim Rollyson at Raymond James.

Congratulations on getting everything organized. Andy, regarding the rig market, you're noting that we are seeing the bottom and it is starting to improve. Your average revenue per day last quarter, excluding one customer's situation, was in the mid-30s, and you've mentioned that the current market is around low to mid-30s. As we look ahead to next year, it's expected that your rig count will gradually improve. When do you anticipate margins will reach their lowest point when considering your current rig pricing against the upcoming contracts that will be expiring? How do you view this?

So first, I want to congratulate the drilling team. They've done a great job through 2023, managing the rig count. This is really a testament to the service quality to the continued rollout of technology that we are doing on our drilling rigs and the partnerships we have with various customers out there that want to keep using us even when things are getting a bit soft in the market. So that's going really well. In terms of leading-edge rates, they were higher earlier in the year. They've softened a little bit, but they really haven't come down that much. I'd say it is mid- to low 30s because it's more in the mid than it is in the low. So that's kind of how I characterize it. And I do expect that, that will start to move up early next year as the rig count starts to push up as well past this inflection that we're seeing. So given that, I think margins are likely to bottom around Q1, maybe Q2, but we'll also have some extra costs in Q1 that we have on an annual basis. So that's likely to kind of put that inflection on the margins around Q1.

Yes, that makes perfect sense. And as you put rigs back to work, last year until we got into late last year, you were putting things out and relatively short terms. And then I think around the late third quarter, you started terming up a few things, which proved to be pretty fortuitous. But curious, as you're having conversations and putting rigs back to work right now, maybe the kind of tenor of the contracts that these guys are looking for?

Yes. We're definitely weighing them to the shorter side because we do think we have upside in '24 just based on the macro outlook going into '25. So we're starting with some shorter contracts or some agreements that allow us to move that up next year.

And next, we'll move to Stephen Gengaro at Stifel.

I have two questions. First, can you share your current perspective on the supply-demand fundamentals in the Pressure Pumping sector? Additionally, could you discuss any significant differences you are observing between lower emission assets and traditional assets, as well as the current status of your fleet?

I want to start by thanking everyone in our well completions business at Patterson-UTI for their hard work. We completed our merger on September 1, which was about a month earlier than planned. The teams worked diligently to prepare for day one, which fell on a Friday before Labor Day weekend. During that weekend, we did not experience any delays; all operations ran smoothly with equipment moving and pumps operating as expected. Kudos to the team for their meticulous planning throughout the integration process that began after we announced the Ulterra transaction. The integration is progressing well, and we are already discussing synergies with a strong confidence in achieving our targets. I appreciate the efforts of everyone in our well completions team that have led us to this point, and I am excited about our potential. As for market conditions, we have noticed a softening primarily linked to the overall rig count in the industry. The frac spreads are encountering drilling rigs as the market cools, and it will take an uptick in drilling activity to stimulate movement. Our pumps, equipment, and fleet are remaining resilient in this softer environment, especially those powered by natural gas, whether dual fuel or otherwise. About two-thirds of our well completions equipment operates on natural gas, placing us in a solid position. While we are seeing a market softening, it is manageable, and I am pleased with how our teams have handled this period. Looking ahead, we might encounter a slight slowdown towards the end of Q4 due to the holiday season and the possibility of cold weather impacting our projections. Nonetheless, I am optimistic about what 2024 has in store and enthusiastic about the services we can provide to our customers.

I know it's been two months since the deal closed. Has there been anything that has really stood out to you about the NexTier way of doing business on the completion side that surprised you or is materially different? Has anything jumped out since the merger closed that has been either an upside or downside surprise for you?

I'm going to start with the people. The people are great. We're excited to have them as part of the team. And they've got a lot of energy. There's a lot of excitement in trying to pull everything together, and everybody is just doing a fantastic job, a lot of high-quality individuals. And so that's where it starts and really excited about that. We were already familiar with the equipment. We understood what NexTier was doing in terms of integrating services, whether it's wireline, last mile logistics, the power solutions with the natural gas, CNG and blending at the well site. All these things have made next year successful, and we've watched that over the years. At Patterson-UTI years ago, pre-COVID, we actually looked at adding wireline to our frac spread because we understand and we get it. You don't want $50 million worth of frac waiting on $1 million of wireline at the well site. And so that integration is important to efficiencies and just continuity of service and to keep pumps pumping. And so the ability to pull all this together and then bring those integration pieces into frac spreads that didn't have it previously is powerful for this business, so excited about that.

We'll take our next question from Derek Podhaizer at Barclays.

to ask about the synergies. I know the guide sounds like you reached over $100 million by the end of the year. It seems ahead of schedule. Maybe can you break that down to the different categories you discussed? But now I believe there was SG&A on the cost side, you have the revenue synergies and then you had some nonpayroll spend. Maybe just an update there and to help just expand on that synergy number?

Yes. So I would say that as we go through the fourth quarter, we are looking at right now on the synergy side. The SG&A synergies are probably about, again, one-third of kind of the run rate that we'll see and then probably about half of it is probably coming out of procurement at this point in time, and then the rest is in the integrated revenue opportunities.

Got it. That's helpful. And then on the merger expense side, I believe it was $80 million, and I know you just posted $70 million. I thought there might have been a split between the expense side and the CapEx side. Can you just update us there? Clearly, there's a benefit to closing earlier, you're able to capture a lot of those onetime costs already. Should those all be fully recognized within this year? Or will there be any leak over into 2024?

I'm sorry, I got confused; were you asking about expenses and CapEx?

Yes. I think the original $80 million onetime expenses, I thought that was split between some OpEx and CapEx, but you're seeing that $70 million number this quarter. Will that $80 million fully recognized in 2023, maybe just some updates on if it's OpEx or CapEx? I thought it was 65:15 split for the OpEx and CapEx.

Yes. A portion of the expenses will carry over into 2024. The reason for this is that until we have clearly defined plans for certain items, we are unable to recognize those expenses. Therefore, they will extend slightly beyond 2023 and into 2024.

Got it. And then just a quick follow-up on the drilling side. You're obviously coming off the bottom, but it seems slight activity has been a little bit more lethargic than people originally thought it was going to be. Can you maybe expand on the privates, the publics, maybe the different basins, what surprised to the downside? I know you guys are constructive on '24, you went over that. But why is the thing that we've been limping into year-end? Just maybe some more color around that?

That's a great question. We've been having those discussions ourselves, but there's not a specific area to pinpoint. It's a combination of both public and private companies that are being cautious and showing some growth at the same time. Our rig count additions for year-end reflect this mix. In natural gas plays, there's still some hesitation to pick up drilling rigs, which is understandable. However, as we look at the forward pricing, this situation should improve, albeit later than we initially anticipated. Currently, our rig count stands at 218, and we might exit the fourth quarter at 220, indicating an upward trend. Overall, I believe the rig count will increase later on. Much depends on the general outlook for commodities, and many public firms are waiting for guidance from their investors about capitalizing on higher commodity prices, especially in gas. I think these conversations are happening between our clients and their investors. Still, I'm optimistic about 2024. When we discuss natural gas and an increase in activity for 2024, I maintain that this is a two-step process. We will see an initial increase driven by the forward pricing, leading to moderate growth, and then another increase towards the end of 2024 in preparation for 2025 and LNG takeaway.

We'll go next to Kurt Hallead at Benchmark.

Thanks for all the color and info and insight on how you guys pull this thing together. A lot of hard work in short period of time, for sure. So I'm kind of curious, as you look at the drilling products business, Andy, what kind of baseline growth should we be thinking about for that business, right? The vast majority of the business is U.S. directed so we can kind of kind of map that out to rig count, right? And it sounds like you got some growth opportunities international. So question, net-net, is really kind of geared toward outside of North America, what kind of growth you expect in Drilling Products for 2024?

Yes. Thanks, Kurt. So their growth is really going to be tied to the overall rig count growth as we go forward into '24. Roughly about 70% of their activity is tied to the U.S. rig count onshore. And so it's really going to follow that trend. We're really excited about their performance. They're doing really well. Even with the softness in the market, the slowdown in the rig count, when you look at it on a revenue per rig basis, they're still holding up well. And so the team is doing a great job. The market is what it is, but we are optimistic about the rig count in '24. And so you're going to see growth from their business tied to that U.S. rig count growth in '24. On the international front, roughly 30% is tied to international growth, and we're excited about that potential there. There are countries outside of North America that they've been in, and they're still increasing their footprint. And so that 30% could grow to be a bigger percentage of that slice of the pie through '24 and into 2025. And we're excited to see how that's going to play out.

Great. Really appreciate that. And so it sounds like you reiterated a lot of your few points that you had back in early September about an improvement in U.S. land drilling related activity. I think back then, you kind of gave an indication that you thought the U.S. land rig count would get back above 700 sometime in the latter part of 2024. Given how slow things have been progressing through the end of this year, do you still have a lot of conviction in the rig count getting back to 700? Or is it recent activity levels kind of pulling that back a little bit?

Yes, the increase has been slower than I anticipated for the end of this year. A lot of this can be attributed to budgets and our customers determining their plans. However, I maintain my outlook. If you examine the future pricing of natural gas and the general behavior of oil throughout 2023, we’ve experienced some dips, but overall, oil commodity prices have remained healthy. I believe that trend will continue. Therefore, I expect the industry rig count to approach 700 by the end of 2024.

We'll move next to Keith MacKey at Calgary.

Can we just first talk about the potential, I guess, cross-selling revenue synergies between drilling and pumping? Certainly, that's been a potential benefit of the recent transactions. But Andy, how is that playing out relative to your expectations? Are there any notable wins or activities you could point to on that front as yet?

Yes, that's a great question. We've been in both businesses for a long time now in decades. I wouldn't characterize it as cross-selling per se. But what I do characterize is strengthening the partnerships that we have with our customers. And when we announced these transactions, we received nothing but positive feedback from customers. We had long time partners who have been our customers for decades, who called me up and said, 'Look, a stronger Patterson-UTI is good for us.' And so having the strength to be able to address their needs across all these services has allowed us to have those conversations. And I wouldn't necessarily, as I said, characterize it as cross-selling. But when you have those strong partnerships at a high level and now you have more capacity to service their needs, that's the bonus.

I see. Maybe just a follow-up on your comments in the prepared remarks around it was when you were talking about capital allocation strategy using a strong balance sheet to be opportunistic at all points through the cycle. Certainly, you've have been so lately. But can you just expand on that comment a little bit more in terms of how you're thinking about being opportunistic through the cycle at all points?

When we're talking about being opportunistic over cycles, we're talking about over the next five to ten years. Right now, we're focused on integration of the businesses. We still have some work to do, and we're focused on realizing these synergies of $200 million or greater on the synergy with the NexTier deal and integrating the operations and working on supply chain pieces as well. So that's our primary focus. But historically, we have been opportunistic through the cycles. There's been a number of times when we've gone through dips in the cycle, and we've seen softening that we've had opportunities to do things with our balance sheet. But I would say right now, we're just focused on integration.

We'll take our next question from Sean Mitchell at Daniel Energy Partners.

Kind of as we see a lot around M&A over the last several weeks, as you see the E&P space consolidate, it would seem logical that the kind of consolidators here want to work with suppliers who have scale. First, I would say, do you agree with this assessment? And then secondly, if so, do you think that pushes more consolidation in the service sector?

The first part of your question, I think you answered yourself. We believe that as you see some of these large exploration and production companies take on even larger companies and grow in the space, they will work with suppliers who have the scale to meet their needs, and we are well-positioned for that. We're excited about this potential. We notice that when these transactions occur in the exploration and production sector, there tends to be a temporary pause in activity, but then things start to regain momentum. So we see good possibilities ahead. Regarding further mergers and acquisitions in the service sector, I think it's possible, but I don't want to speculate on that right now since our focus is on integration. However, I do believe there are opportunities out there.

Maybe one more. Can you just address the labor market today, Andy and specifically how you and the consolidated companies have managed labor this year as activity has moderated and maybe provide us your thoughts on finding people today and the ability for the industry to scale up again should that be necessary?

Even over the last few years with the massive ramp-up in activity that we've had, we were able to cover all the work. And we had to invest in the systems and the people for recruiting and onboarding and training to be able to do that. And it definitely was tougher over the last few years than it had been in previous upturns, given the strength in the economy over the last few years. But that investment that we've made allows us to get the people that we need to cover the work that's out there. And so we didn't miss any work for lack of people. This has only been a softening in the market. And we're expecting, as we pass this inflection, to increase activity in 2024. And so with the moderated growth we're expecting in 2024 versus the softening we had this year, I don't anticipate we're going to have trouble adding staff back to do the work.

And our next question comes from Don Crist at Johnson Rice.

Andy, regarding your earlier mention of Pressure Pumping being somewhat at odds with rigs, how do you expect that to develop? From our perspective, it seems that efficiency improvements in Pressure Pumping have outstripped those in the rig sector. Do you think this will lead to a reduced Pressure Pumping fleet across the industry in the future? Can you elaborate on that?

There are a few aspects to consider regarding that question, and I appreciate it. First, we are indeed reaching our limits with rigs, so an increase in rig activity is necessary. Currently, there are not many drilled but uncompleted wells available, and we need more rig activity to enhance production. As for frac efficiency, it's remarkable what the industry’s top players have achieved over the past years, with some reports of pumping well over 20 hours a day. However, I believe there isn't much room left for improvement in efficiency. We're not going to reach 25-hour pumping days, as we are already operating at high levels on many of our fleets. The teams are performing excellently, and while efficiency has improved significantly, I think we will see it level off moving forward. Additionally, as we recover from the current market softening and ramp up activity, we will face a tighter frac market. We will need to invest in new equipment to replace older machines, which will promote capital discipline in the sector. Furthermore, as we enter late 2024 and into 2025, the demand for natural gas and increased activity will likely drive prices up, leading to tighter market conditions for equipment as we transition past the inflection point of growing activity in 2024.

And at this time, there are no further questions. I would like to turn the conference over to Andy Hendricks for closing remarks.

Thank you. I just want to thank everybody for tuning in this morning. Once again, I want to thank the employees of Patterson-UTI. You all are doing an amazing job as we work through everything we're working through these integrations over the last few months, and it's just been impressive to watch such high-caliber people work through all these. Thanks for what you're doing. Appreciate it.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.