Patterson Uti Energy Inc Q4 FY2025 Earnings Call

Thank you for your patience. My name is Freilla, and I will be your conference operator today. I would like to welcome everyone to the Patterson-UTI Fourth Quarter 2025 Earnings Conference Call. Thank you. I will now turn the conference over to Mike Sabella, Vice President of Investor Relations. You may begin.

Thank you, operator. Good morning, and welcome to Patterson-UTI's earnings conference call to discuss our fourth quarter 2025 results. With me today are Andy Hendricks, President and Chief Executive Officer; and Andy Smith, Chief Financial Officer. 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 for 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 at 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, and welcome to our fourth quarter earnings conference call. We closed 2025 with a strong fourth quarter, delivering steady results through what's typically a seasonally soft period. Our teams remain highly disciplined with strong operational execution in the field and a focus on cost controls. We are pleased with the performance across all our businesses during 2025, particularly given the challenging commodity environment we faced throughout the year. Patterson-UTI once again demonstrated its ability to generate strong free cash flow, delivering $416 million in adjusted free cash flow in 2025. Notably, the fourth quarter marked our highest adjusted free cash flow quarter since we completed our strategic transformation in 2023. This achievement highlights our ability to adapt to changing market conditions and underscores the effectiveness of our teams in maximizing our potential throughout all phases in the cycle. We are showing greater resilience to market fluctuations as we use our technology edge to deliver operational excellence. I'd like to extend my sincere appreciation to all our employees for their hard work and dedication throughout 2025. Your efforts were instrumental in our success, and we look forward to moving Patterson-UTI forward again in 2026. The industry overcame numerous challenges in 2025, including an increase in OPEC+ supply and ongoing macroeconomic uncertainties. Despite these pressures, the oil market has remained resilient with crude prices today at a similar level to those on our last quarterly earnings call. Although commodity prices remain unpredictable, in any scenario, at Patterson-UTI, we will remain committed to our core principles: delivering safe and efficient execution for our customers, investing capital responsibly in differentiated technologies and maximizing returns while generating substantial adjusted free cash flow for our investors. Our free cash flow profile continues to be robust, which gives us confidence to increase our quarterly dividend by 25% to $0.10 per share in the first quarter. We are confident that our free cash flow will exceed our dividend commitments, providing the opportunity for additional share repurchases or other investments aimed at creating further shareholder value. From a macro perspective, uncertainties remain regarding the sustainability of U.S. oil production at the current pace of activity. Recent data suggests that reduced drilling and completion programs in 2025 are beginning to impact production figures. The industry is likely approaching a point where we'll need to decide between declining production volumes or increased drilling activity to maintain production trends. Although there may be a moderate decrease in U.S. oil activity in the near term, we do not believe that the industry can continue operating at lower drilling levels without causing a more significant impact to production than what has been seen so far. We remain optimistic about the long-term prospects for natural gas, and we anticipate that a multi-year increase in drilling and completion activity will be needed to meet future demand. While there have been some incremental increases in natural gas-focused activity and natural gas prices have rebounded sharply due to winter weather demand, we expect most large customers will wait for clear commodity price signals after peak winter demand before making changes to their plans. As physical demand for natural gas for both LNG and power generation grows, we expect to see additional demand for our services in the second half of 2026. In response to the macro environment, we have reduced our gross CapEx budget by around 15% to roughly $500 million in 2026. After accounting for the expected proceeds from a typical cadence of asset sales during 2026, we continue to expect that our CapEx net of asset sales will be below $500 million this year. We have made significant progress in lowering our unit level maintenance CapEx requirements. We continue to successfully implement new digital processes that improve preventive maintenance, high grade our asset base with new technologies and consolidate facilities as we move further through the integration process of our businesses. Importantly, our 2026 CapEx budget reflects funding for high-return projects that will further enhance the quality of our operations and ensure we are well positioned with new technology that supports the next leg of customer demand. While we are substantially reducing our overall CapEx budget, we fully expect to exit 2026 with a more advanced and higher-quality asset base than at the start of the year. During the fourth quarter, our U.S. Contract Drilling Business saw relatively steady activity and pricing compared to late third quarter levels, and this stability continued into 2026. Our focus remains on identifying investing in assets and technologies that bifurcate drilling performance and create unique value for both our customers and investors. Of note, we have seen increasing acceptance of performance-based commercial agreements, and this shift reflects growing customer interest in partnering with service providers who can enhance operational efficiency. Our ability to deploy advanced APEX rig technology that enables faster drilling of more complicated wells is resonating with our customers. We are also seeing strong results from the broader adoption of our drilling automation packages. Nearly all of our rigs are now equipped with our proprietary Cortex automation applications, and demand remains high as we continue to develop new software applications to further improve drilling operations, with many of these in partnership with our customers. Looking ahead, the evolving shale landscape is characterized by more complex well designs, requiring rigs with increased load capacity that control deeper geological formations as well as longer and more complex laterals into higher pressure zones. Future demand will increasingly favor differentiated rig technology, positioning Patterson-UTI and our fleet of advanced assets and technology with a distinct advantage over much of the competition. The benefit of this differentiation has already been reflected in our ability to sustain margins at higher levels than we have seen during periods of activity moderation in prior cycles. As the market continues to favor high-quality drilling solutions, we anticipate that our advanced technology will further strengthen our position as we aim to sustain pricing and margins as customers seek out the best available drilling contractor to meet their increasingly complex needs. In Argentina, we are excited about our recent agreement to lease two high-spec rigs for work in the Vaca Muerta field. The multi-year agreement is a capital-efficient way for us to put idle assets in the U.S. to work internationally. The opportunity in Argentina is one of the most promising that we see to put our idle assets to work globally, and our fleet of rigs in the U.S. are well suited to meet the region's growing demand for unconventional drilling over the next few years. The expansion also complements our established position in drilling products, including Ulterra drill bits in Argentina. We believe that further planned increases in drilling activity in Argentina will reduce the available supply in the U.S. Our Completion Services segment delivered strong results in the fourth quarter. Segment adjusted EBITDA for the second half of the year was higher than the first half, reflecting the quality of our operations and the steps we have taken over the past year to add new technology to our portfolio, streamline operations through our digital platform and improve our cost structure. Our team effectively managed holiday downtime across several of our larger fleets, successfully securing work to maintain high utilization. Pricing and activity remained steady compared to the third quarter. Our frac assets remain highly utilized in the first quarter with almost 2.5 million horsepower either deployed in the field or in normal maintenance cycles. We have very little spare capacity, and our idle horsepower consists entirely of older diesel equipment that is not part of our long-term strategy. As we direct our capital towards high grading our asset base with additional Emerald 100% natural gas equipment, we are likely to have fewer fleets in operation as we continue to idle lower-quality diesel assets and focus on the premium market. Our equipment that can utilize natural gas as fuel is fully utilized. Our asset base will continue to reflect this high-grading strategy. Our nameplate horsepower totaled 2.7 million at the close of 2025, which is down more than 600,000 horsepower from two years ago. And we are likely to see a further reduction this year. Within our Completion Services segment, we continue to see growth opportunities in high-end natural gas powered frac equipment in our industry-leading and proprietary digital completions platform, which we call eos. Our Emerald 100% natural gas-powered footprint will grow again in 2026. By the end of the year, we expect that more than 85% of our assets will be capable of using natural gas as fuel in some capacity. We believe our asset quality is among the best in the industry and the strong demand and returns for our high-end equipment position us to maintain resilient margins across our higher technology assets. We will reduce capacity of our older assets, and we believe the industry is also doing the same. Although public estimates of U.S. industry fleet count shows a decline, the total horsepower deployed has not declined and has remained roughly consistent. The frac industry is evolving towards larger fleets at the well site, a trend that we believe is being overlooked by public industry data on the number of active fleets, resulting in the frac fleet count becoming less of a reliable metric to determine industry completion activity. At the same time, the significant increase in pumping hours per day over the past several years has likely run its course. Some providers are encountering technical limitations on most of their fleets with our average frac fleet now pumping over 22 hours per day. With continuous pumping, our team has been leaders in executing on the growing trend to achieve 24-hour operations. However, continuous pumping fleets require significantly more equipment on location relative to more normal operation, which increases the cost of continuous pumping and further restricts supply. We have successfully executed several continuous pumping jobs to date as customers are currently evaluating whether the incremental increase in uptime justifies the additional cost. During the fourth quarter, we launched our proprietary eos Completions Digital Platform. Eos connects our customers directly with their live field data, allowing the customer and our Completions teams to improve real-time decision-making on the same platform. Our customers can eliminate the need for multiple third-party software platforms in their data flow and improve their overall data quality with a direct link to our digital performance center. The eos platform is hardware-agnostic, allowing our completions data and also third-party data sets to be delivered to customers on the same platform with no delays. The eos platform includes our advanced Vertex automated frac controls, which to date have been deployed across most of our active fleets and regardless of frac power type. Eos also supports our other services such as waterline, pump down, natural gas delivery and proppant logistics. This takes our completions segment to the ultimate goal of push-button frac, and soon, with closed-loop decision-making, which will deliver more consistent completions to our customers and over time lower our operating and equipment maintenance costs. We have revenue-generating agreements in place now and are seeing increased customer interest in deploying this platform. Our Drilling Products segment delivered another strong quarter in North America. Revenue per industry rig remained close to company record levels in both the U.S. and Canada, underscoring our robust market position in drill bits. Additionally, we are having continued success with new downhole tool product innovations helping us to maintain relative strength in these markets. Internationally, revenue experienced a slight decline from the third quarter, primarily on lower-than-expected revenue in the Middle East. However, we achieved revenue growth in several important regions, including Latin America and Asia Pacific. Looking ahead, we remain optimistic that the international outlook for our Drilling Products segment will improve as we progress through 2026. We have opened a new manufacturing facility in Saudi Arabia that is now manufacturing drill bits in country, which should give us an advantage as growth resumes in the Middle East. Patterson-UTI continues to look to extend our leadership position while the U.S. shale industry undergoes significant changes. The company's operational excellence within both the drilling and completions segments has provided a competitive advantage, enabling effective navigation through the current commodity environment. Target investments across businesses will remain a potential focus. These strategic efforts are evident in the company's ability to generate robust free cash flow and maintain relatively resilient margins, even through periods of activity moderation. Even with ongoing commodity volatility, we are well positioned to deploy capital in ways that add value for shareholders, including through additional shareholder returns. We will continue to be flexible with capital deployment and evaluate a mix of dividends, buybacks and other potential growth opportunities. I'll now turn it over to Andy Smith, who will review the financial results for the quarter.

Thanks, Andy. Total reported revenue for the quarter was $1.151 billion. We reported a net loss attributable to common shareholders of $9 million or $0.02 per share. Adjusted EBITDA for the quarter totaled $221 million. Our weighted average share count was 379 million shares during Q4. During 2025, we once again showed the cash generation potential of our company with adjusted free cash flow totaling $416 million for the year. As expected, the fourth quarter was the strongest cash-generating quarter of the year by a wide margin. It is important to remember that given the timing of some working capital items, including significant customer prepayments that we typically receive in the fourth quarter for work to be performed during the first half of the following year, it is far more meaningful to analyze our free cash flow on a full-year basis as the quarterly results can show greater variability. For year-over-year comparisons, the customer prepayments we received in the fourth quarter of 2025 were roughly $15 million higher than those we received in the fourth quarter of 2024. Before we get into the segment discussion and the outlook, I want to give an update regarding the impact from severe winter weather that has already occurred during the first quarter. The January 2026 winter storm disrupted large portions of our operations for several days, and we believe the full impact of the disruption will have a negative impact on our first quarter adjusted gross profit, particularly in our Completion Services segment. The estimated impact of this event is included in the quarterly guidance numbers we will discuss. In our Drilling Services segment, fourth quarter revenue was $361 million and adjusted gross profit totaled $132 million. In U.S. Contract Drilling, we totaled 8,596 operating days for an average operating rig count of 93 rigs. Our successful cost reduction measures mostly offset the revenue decrease during the quarter. For the first quarter in Drilling Services, we expect our average rig count to be in the low to mid-90s. We expect adjusted gross profit within the Drilling Services segment will decline by less than 5% from the fourth quarter. Revenue for the fourth quarter in our Completion Services segment totaled $702 million with an adjusted gross profit of $111 million. Activity and pricing were mostly steady compared to the third quarter with minimal seasonal downtime. For the first quarter, we expect Completion Services adjusted gross profit to be approximately $95 million with slightly lower activity given the impact of the first quarter winter weather. Fourth quarter Drilling Products revenue totaled $84 million with an adjusted gross profit of $34 million. Revenue per industry rig in the U.S. remains near company record levels. We saw a decrease in revenue from our international operations, mostly from lower-than-expected sales in the Middle East, although we did see revenue growth in several markets, including Latin America and Asia Pacific. For the first quarter, we expect Drilling Products adjusted gross profit to improve slightly with slightly lower revenue in the U.S. offset by an increase in activity and revenue from our international business. As we move through 2026, we expect to see an improvement in international revenue in the Drilling Products segment as activity improves, primarily in Saudi Arabia. We also expect to see growth in downhole tools and new product development. Other revenue totaled $5 million for the quarter with $1 million in adjusted gross profit. We expect other adjusted gross profit in the first quarter to be steady compared to the fourth quarter. Selling, general and administrative expenses in the fourth quarter were $62 million. For Q1, we expect SG&A expenses will be approximately $65 million. On a consolidated basis for the fourth quarter, depreciation, depletion, amortization and impairment expense totaled $221 million. For the first quarter, we expect it will be approximately $225 million. During Q4, total CapEx was $139 million, including $61 million in Drilling Services, $59 million in Completion Services, $15 million in Drilling Products and $4 million in Other and corporate. For 2026, we expect gross CapEx to approximate $500 million and to be below $500 million net of asset sales. We expect CapEx will be weighted towards the first half of the year as we bring in new technologies into both the Drilling and Completion Services businesses. We closed Q4 with $421 million in cash on hand and we did not have anything drawn on our $500 million revolving credit facility. We do not have any senior note maturities until 2028. During 2025, we returned $119 million to shareholders through dividends and share repurchases. Since the start of 2024, we have returned roughly two-thirds of our adjusted free cash flow to shareholders through dividends and buybacks, and we remain committed to returning at least 50% of our adjusted free cash flow to shareholders. Our Board has approved a 25% increase in our quarterly dividend to $0.10 per share, payable on March 16 to holders of record as of March 2. I'll now turn it back to Andy Hendricks for closing remarks.

Thanks, Andy. I want to close the call with some comments on our company and the industry. I'm very pleased with how our segments performed in the fourth quarter, where we were able to show improvements in controlling costs and keeping them in line with the activity changes. This is a testament to focusing on what we do best: providing products and services to efficiently drill and complete wells. The result is that we were able to generate strong free cash flow to close out 2025. Additionally, I'm pleased to see the stable activity continue into the first quarter of 2026. The outlook for 2026 has the challenge of some commodity uncertainty. With oil prices trading near $60 per barrel, my expectation is that activity in oil basins remains relatively steady from where we are today. Oil markets have remained resilient, looking ahead to continuing economic growth, along with some geopolitical unrest. Gas markets remain steady and have the potential for some activity upside later in the year. It's early to predict how 2026 will play out, but I'm encouraged by our current activity levels so far in the first quarter. We continue to invest in new technology in both drilling and completions, where we are seeing strong returns on our capital investments. In Drilling Services, we are being asked for new Cortex automation applications by our customers, along with upgrades to our APEX rig structures to drill deeper geological horizons and longer laterals. In Completion Services, we will continue to add new Emerald 100% natural gas fuel technology to our fleet and continue the rollout of the eos platform, which includes the Vertex automated frac system. In Saudi Arabia, Ulterra manufactured their first drill bit in-country in December. This new manufacturing capacity, combined with our strong performance in the region and the planned increase in drilling in Saudi Arabia, gives our drill bit business some international upside this year. These technology and manufacturing investments allow us to continue to differentiate ourselves versus our competitors and maximize the margins we can earn. And we're doing all of this while reducing our overall capital expenditures in 2026. We remain focused on generating strong free cash flow for our shareholders and, over the last year, we have a higher level of cash than what is currently required to sustain our business. Given our cash generation potential, I am pleased that our Board has approved a 25% increase in our quarterly dividend as part of our overall commitment to return cash to shareholders. With our current cash position and after capital expenditures, we will continue to repurchase shares in the market where it makes sense and also continue to look for growth opportunities. Once again, I'd like to thank the men and women of Patterson-UTI Energy for their outstanding performance in 2025 and for helping to responsibly provide energy to the world. Thank you for joining us today for our Q4 2025 earnings call. We'd now like to open the lines for Q&A.

Your first question comes from Scott Gruber with Citi.

Andy, I appreciate all the color on the dynamics at play in the frac market today. How do you see the U.S. frac supply/demand balance today given the enlargement of the average fleet? It's grown a long way here over the last couple of years. And do you have a sense of roughly the fleet utilization for the market? And can attrition alone drive us back to a relatively tight market balance in the not-too-distant future?

Yes. In terms of fleet activity, it's really an interesting situation. We've been trying to explain for a while now the dynamics in the data that you're getting from various public sources. If you look at what we did across 2025 last year, public data is showing a reduction in our fleet count. But at the same time, the size of our fleet, the amount of horsepower on location has just been continuing to grow. We're doing more simul-frac. We're doing more trimul-frac. Even on the same simul-frac, we're getting requests for higher rates and higher pressures. So that's causing us to put more equipment on location. When we do put more equipment on location, we certainly factor that into the pricing for the job. We're committing more assets, so it costs the operator more, but they're getting a cost benefit. They've done their economic evaluation on what it takes to maximize production out of their wellbore, and that's what they've determined. So in some ways, it's been a win-win. But the challenge for people trying to understand the business is that while the fleet count looks like it's going down, we've actually remained relatively steady in the amount of horsepower that's been deployed. So we've been moving horsepower around to different places, and growing the amount that we have on the well site. I see that trend continuing, at maybe a measured pace in 2026, but you see that trend continuing. And what that means is it continues to reduce overall supply in the frac market. All the equipment that we have that can burn natural gas is certainly not working, and that has a cost benefit to operators when they convert natural gas. So that market still remains very tight because of the amount of horsepower growth on a per fleet basis.

I appreciate all that. And then I think your current power business is looking at some opportunities to supply energy storage systems at data centers and other applications outside of oil and gas. Can you provide some color on that initiative?

Yes. We do have an electrical engineering division called Current Power. They've built and engineered specific microgrids, and they do battery storage for mainly our drilling rigs. There may be an opportunity in the future for them to do some measured type of storage for data centers, but that would be a pretty large-scale project even for us. There's some technology there that could be interesting, but I'd say it's very early to see if that pans out to anything.

Your next question comes from the line of Saurabh Pant with Bank of America.

Andy, maybe I'll just start with a bigger picture question. I think you were talking about increasing differentiation in your prepared remarks. I see that in the kimberlite data as well, right? I think your performance, your value proposition seems to be improving in the eyes of the customers in both drilling and completion. As I think about what it means for financials, it seems to me like the gap between the top 2, 3, call it, 4 players, including yourselves, and the other small medium-sized providers is actually increasing, right? So it should be good for your pricing power in the market. So maybe just talk to that dynamic a little bit, differentiation and pricing power and how pricing has held up a lot better.

Yes, I appreciate that question, and thanks for noticing some third-party data that shows that we continue to improve our operations. I'm really pleased with how the teams have improved execution over the years. It gives us confidence to continue to fund them with capital for new technology. We do think that continues to differentiate us in the market, both on Drilling Services and Completion Services. So really pleased with the overall performance of the teams. We're working for some of the biggest E&Ps in the U.S. in both drilling and completions. It's the size and scale of the operations, the breadth of services that we can provide, the level of technology we can provide and the execution that we're providing in the field that's really driving all that. So it's not just one thing in particular but it's multiple factors, and just really pleased with how that's been working out. In terms of pricing, one of the things that we've shown here over the last couple of years is that even though you've seen especially in drilling a decline in the rig count, you haven't seen compression in margins like you've seen in previous years. Technology is a big part of that driver where we can differentiate certainly for much smaller companies. It helps to shore up our ability to protect the pricing and margins where we can. Our business is certainly still competitive in nature, especially in West Texas, where you're seeing a little bit more slowdown in the oil markets versus the gas market. So there's still a competitive market out there. But I'm pleased with how we're performing in general and very pleased at how well we've been able to keep the margins up relative to previous cycles.

No, that's fantastic, Andy. And then maybe just a quick follow-up on what Scott was asking on the supply/demand side of things. I know it's very early to ask about pricing power coming back to the market, but I know it will at some point, right? So in some ways, Andy, how should we think about how much incremental demand maybe on the rig side and on the frac side would it take for soft pricing power to come back to the industry? Now I don't know when it happens, but just some sense of what kind of demand pull we might need for that.

Yes. It's a really interesting situation, especially for us, where all of our equipment that can burn natural gas is out working today. If we see the activity increase in the natural gas basins towards the end of this year to supply both LNG demand initially and, over time, increasing power demand in the U.S., that draw on natural gas is going to cause an increase in activity in both drilling and completions. On the completions side, we are essentially sold out of all of our equipment to convert natural gas. When you're working in those gas markets, the operators, the E&P certainly want to fuel that equipment with natural gas. We'll have to add to our asset base at that point, and that's going to cause a significant inflection in pricing at that point. My expectation is that once we see an increase in activity in these gas basins, it is really going to drive an increase in pricing on the completions as well because we will have to add assets to do that.

Got it. Right. No, I think things move pretty quickly on both sides, right? So we should not forget that. And a very quick follow-up for Andy, if you don't mind. Andy, you were talking about some weather impact on your first quarter guidance. Did you quantify the impact, if I missed that, if you have any color on how big that impact is?

We didn't quantify it, but it's in the range of $5 million to $10 million. It's included in our guidance. So it's certainly not incremental to anything. It's already included, but it's probably in the $5 million to $10 million range.

And your next question comes from the line of Jim Rollyson with Raymond James.

Andy, you mentioned the demand side regarding your technology and the challenges you've faced in the market over the past couple of years. One notable aspect over the last half of 2025, or possibly longer, is what your team has been accomplishing on the cost front. This was evident initially in Completion Services and has also become apparent in Drilling Services this quarter. Could you discuss the measures you are taking to reduce your cost structure and provide some insight on your progress, particularly as we consider the possibility of a stable market and how margins might evolve in both of these businesses moving forward?

Yes. So my hats off to the teams. They've really been digging in hard as to how we're spending every dollar out there in both OpEx and CapEx. You look at maintenance CapEx, what are we spending our money on? Are there things that we can do to refurb versus buy new parts? Are there things we can do to negotiate with some of our suppliers given the state of the market? There are a number of efforts out there to try to rein that in. I'll also say that the teams have worked to become more efficient, so they can do more with the same amount of people and get more accomplished from a maintenance standpoint. Maintenance has been a big driver in the cost savings in both the Drilling Services and Completion Services segment, both OpEx and CapEx.

Yes, Jim, I would add to that. So yes, as Andy said, crew sizes, particularly around in the Completion Services area, as well as the support structure footprint, as we have consolidated these businesses over time, we've looked to co-locate where we can or slim down sort of our fixed asset footprint in terms of our support facilities. On the SG&A side, as we've gone through and tried to integrate the back office even more, consolidate, and centralize, it allows us to control some of those costs, get them out of the businesses and let them be managed from the corporate side. So we turn the business units loose to focus more on their operations than kind of what they're doing on the back office side. So I would say all of those things have an effect, and we'll continue to do more on those. But yes, it's been a real focused effort over the last year or two.

Yes. Well, it's been impressive. And then just as a follow-up, you kind of took upon this path of returning at least half your free cash flow a couple of years or so back. You've obviously exceeded that number pretty candidly each year. You just raised the dividend by 25%. And I presume with all the things going on, your free cash flow conversion rate should probably be pretty stable at least. Just curious, you didn't buy a whole lot of stock back in 4Q. Even with the dividend hike and kind of where numbers are, you have quite a bit of room to buy back stock throughout 2026. Just maybe your philosophy on that given that your share price hasn't ripped but it's certainly improved a little bit from where it was at the bottom. So I’m just kind of curious about the philosophy there.

This is Andy Smith. I would say that nothing has really changed philosophically for us, Jim. It's pretty clear for those that have been following us for a while that we run this company to maximize free cash flow. As we look at anything on the capital allocation front, that's kind of our primary focus; whether it's looking at reinvesting into our fleet, whether it's looking at buying back shares, whether it's looking at M&A, we kind of look at them all in terms of how much cash flow per share accretion can we get out of those opportunities. In the fourth quarter, the reason there was a little bit of pause on the buyback was more about lumpiness of working capital and things like that, and it kind of came in late in the quarter. So nothing really has changed. We continue to look at all of our capital allocation priorities through that free cash flow per share metric, and we ultimately think that in the end, that serves us pretty well and that's how we run the business. So again, I wouldn't say to read too much into that. I don't think anything has really changed in terms of our philosophy.

Yes, I agree. I don't think anything has changed in how we look at that. One thing, when you look at the bigger macro and what's happening in the industry over the last couple of years, the market has softened, but we're still generating strong free cash flow, that's our focus. That gave us the confidence to go ahead and just raise the dividend. Here we are in a softer portion of the market, yet we're still producing strong free cash flow, and we still have forward visibility on that.

And your next question comes from the line of Derek Podhaizer with Piper Sandler.

I know you mentioned some comments around Argentina and setting some of your idle rigs down there. Maybe just give us a sense of as you walk around the world, you're seeing all the unconventional development pick up. I think it's specifically about your Turn Well JV over in the UAE. What can we think about as you guys explore these international regions, starting with Argentina, maybe UAE, or anywhere else? Just some comments and thoughts around that.

Yes. We've looked at these markets for more than a decade to try to see where we can fit in and where it makes sense and where we can get decent earnings out of it. These markets have various competitors, but they also have rig specifications that differ from the U.S. in a lot of markets. The interesting thing about Argentina is it's almost an identical rig specification to what we have here in the U.S. It's easy from a technology transfer and even a capital efficiency standpoint to say, okay, yes, we can move a drilling rig down in Argentina and work in that environment without big technical changes. As the Vaca Muerta activity continues to grow, they're looking to the U.S. to bring rigs down from various drilling contractors. This agreement worked out for us to partner with a local supplier who has a good reputation in the region and is working for some of the biggest E&Ps there. This worked out really well for us to be able to get to an agreement with them to provide a couple of drilling rigs to go down there. While it's only two rigs leaving the U.S. market, I think everybody who's been following Argentina knows that you've got operators that are over there currently, and U.S. operators looking to move into Argentina. Activity will continue to grow in Argentina over the next five years, and those rigs are going to come out of the U.S. market, over time reducing the U.S. rig supply.

Got it. That makes sense. Very helpful color. And then just thinking about the frac side of things, I appreciate the comments quantifying some of the impact here in the first quarter due to winter. But maybe you can take a chance on walking through the second quarter, third quarter, what you see out there, your customer conversations. Will we get a snap back in utilization? Just trying to think through the different crosswinds around pricing resetting. Just maybe some help understanding, as we move through the year, what we could see out of the completion side of the business.

Yes. We were really pleased to see that the first quarter was still relatively steady. In the fourth quarter, we were able to exceed expectations in overall activity relative to how a fourth quarter normally plays out. Then relatively stable into the first quarter, with the weather issues aside that everybody went through. As we go through the year, if the commodity prices stay in the $60 range, my expectation is that the oil markets stay relatively steady. Many of our customers had challenges deciding what their activity is going to be during the year due to varying oil commodity prices in December while working on budgets. However, we've seen more resilience than many expected. If that resilience persists and oil stays in the upper $50 to $60 range, then the market will likely remain relatively steady.

And your next question comes from the line of Stephen Gengaro with Stifel.

I guess, on the frac side, I was just curious what your view is on two things. One is if you think we'll see further consolidation in the business. And maybe tied to that, do you feel like over the last, I don't know, six months or a year that the behavior of the industry and the peers has been fairly good? Or do you still see some people who are underpricing the market?

I think the frac market has been evolving from a technology standpoint. You're seeing differentiation with the top three or four players versus others. That technology differentiation continues for the next few years. You can see it in where we're investing dollars. We continue to invest in the 100% natural gas Emerald fleets that we have deployed. There's still strong demand for equipment that can burn 100% natural gas, and we're going to continue to grow our capacity of that high-end frac equipment probably higher than some of the others are deploying today. Digital still has a lot of evolution to go in the frac space. We recently announced a big event at an industry conference where our teams rolled out the new eos platform for digital. It allows our customers to aggregate all their data and work with it. This investment in higher-end technology will allow us to continue to differentiate. I believe it's going to roll up to the top three or four players that can do that and differentiate from the others.

Okay, that's helpful. And just the other quick question. Just on the rig side, just on the North American market, do you feel like pricing has stabilized?

I think where we are today, you have some available rigs in West Texas. It's still a price competitive environment out there. I'm pleased with our ability to protect our pricing and margins. We'll just have to see how it plays out. The determined pricing will depend largely on where the commodity price lands as an average for the year. If it stays in the upper $50 to $60 range, I believe pricing remains relatively stable. It will get more competitive if we see a different commodity price drop.

And your next question comes from the line of Arun Jayaram with JPMorgan.

I was wondering if we could start with the CapEx. You mentioned how you're reducing CapEx by around 15% to less than $500 million. I was wondering if you could unpack the year-over-year decline, what that kind of represents, maybe a little bit of a mix between drilling and completions and perhaps how much of the CapEx is going to be earmarked for the Emerald direct drive kind of horsepower.

Yes. So I can give you a bit of color on that. Of our total CapEx projection or CapEx guidance, about 40% of it is going to drilling, about 45% of it going to Completion Services, a little over 10% is going to Drilling Products. The rest is sort of Corporate and Other on a percentage basis. In Completions, of that 45%, gross dollars, about $65 million or so is going to new Emerald equipment that will be coming into the fleet over the course of the year.

That's super helpful. Andy, for you. I wondered if you could elaborate on this trend you're seeing with continuous pumping. I think in one of your previous slides I've seen that you've talked about how simul-frac now is representing about 30% frac activity today. Where are we in terms of continuous pumping? Is it advantageous for operators such as Patterson to pursue continuous pumping? Just obviously, I assume you're getting paid for the extra horsepower on site.

Yes. Continuous pumping is interesting in that there are certain advantages for the E&P: if they don't have to stop, you're essentially pulling production forward. So there's a value to the E&P to do that. The E&P has to work through those economics to decide what that value is. If we aim to take our average from 22 hours per day to 24, we may have to deploy, in terms of capital, another 20% to 30% of capital allocation with more frac pumps, high-pressure iron, and valves to achieve that. We charge for all that equipment when it goes on location. Our continuous pumping allows them to bring higher production forward, and we've seen a number of E&Ps trial it. We are working with several customers to reduce those costs and implement these methods. But the end decision will be up to the E&P and that economic sense for them.

Okay. If I could just sneak in one more. Andy, I believe you were anticipating running around 2 million horsepower plus or minus in 1Q or currently. What is your average fleet size in terms of horsepower today?

There's no average fleet size. Every fleet that we have deployed is of a different size. It can depend on the Midland Basin, the Delaware Basin, whether it's simul-frac in the Delaware Basin or pumping in the Haynesville. Everyone is different and tailored to the operation the operator is trying to accomplish. Even in a simul-frac job today, we might have a simul-frac job that's got 20% more horsepower than last year because they want to do it at higher rates and pressures.

And your next question comes from the line of Ati Modak with Goldman Sachs.

Andy, I was wondering if you could give us color on the private versus public customer conversations as we think about your exposure in the U.S.

Yes. We work for some of the biggest publics and we also work for some of the biggest privates in the U.S. I'd say that the large privates think of things long term just like the large publics. They take a multi-year view to everything and that's how they look at it. We do some work for some of the small private equity-backed privates, but that's a very small percentage of what we do. We're heavily weighted to the largest E&Ps in the U.S., whether they're public or private.

Got it. And the Saudi opportunity, it sounded like it's mostly on the bit size because of in-country value. Is that the right way to think about it? Or are there other strategic opportunities for you down the road?

Saudi for now is focused on drill bits for us. It's the in-country value equation that the country uses. If you manufacture in-country, it improves your score, allowing your customers to buy more products from you. If you're manufacturing in-country and exporting to other countries in the region, that improves your score and allows your customer there to buy more from you. We think that’s certainly a benefit for us, and our team has done a great job of getting us to this point.

And your next question comes from the line of Keith Mackey with RBC Capital Markets.

Just wanted to start out on the rig side. Can you just talk through some of the technology offerings on your rigs? How has that changed? And what sort of revenue or just net benefit uplift do you get from the technology in this market? And finally to that, more of your customers are starting to talk about robotics on the rig floor. What's your view there?

In our Cortex automation is a number of applications that enhance our control systems and automate several of the functions a driller might normally do when operating a drilling rig. We've developed a number of these applications over the years, which allows us to better serve our customers by optimizing their workflows. We charge for these, and it also makes us more important to that customer. Robotics are something our teams are looking at, but there are big costs associated with that. We've done groundwork to deploy it and we'll do that as customers request it.

Got it. And just finally, Q4, we're expecting a lot more seasonality from you and several of your peers. Can you just give us a little bit more color on really why you think that didn't happen and things were a lot more resilient? Is there some element of the E&Ps just not being able to slow down given where current activity levels are? Or are there pricing incentives given to keep fleets going? Just what is your sense of really why activity was so resilient in Q4?

For us, it was a combination of two main factors. It was our customer base. We work for some of the largest customers in the U.S. Those customers have stayed more resilient than we thought and just kept working through the quarter maybe more than they typically would. For some of those customers that may have slowed down, our teams have done a real good job of placing that equipment in other places. So the focus was really on our customer base and the ability of our teams to know all the customers so they can efficiently move equipment around.

And your next question comes from the line of Edward Kim with Barclays.

Just wanted to dig into the Completion Services guide for the first quarter. You said you expected gross profit of around $95 million, which represents about a 14% sequential decline. At the same time, you said you expected activity to decline only slightly in the first quarter due to winter weather. That would seem to imply a not insignificant pricing decline from fourth quarter to first quarter. Is that a fair assessment? Should we expect that to be a headwind for you as your fleets move on to this lower pricing level as we move throughout the year?

No, not at all. I wouldn't say this is any significant pricing decline by any means. I think this is all more activity-related. You can go back and look at the number of days below freezing in the Permian or heavy snowfall in Pennsylvania, and that's where we were held up in activity for the first quarter. That's just pushing revenue from the first quarter into the second quarter. So this isn't pricing-driven. In terms of pricing decline, we've mentioned before, we expect a slight decline in many rates, likely in single digits. But the decrease in gross profit is more due to the weather and segment mix than anything else.

Got it. Got it. Okay. My follow-up is just you opened a new manufacturing facility in Saudi. You said you're manufacturing drill bits in the country. Could you talk about the growth ramp-up you expect in Saudi maybe this year and next? Do you think Saudi demand will be sufficient to absorb all that capacity coming out of that new facility? Or will there be opportunities to sell drill bits into other countries in that region in a couple of years?

We've been monitoring the rig count and the recent announcements regarding increased rig counts in Saudi Arabia, as this is crucial for our drill bit business. There has been a significant slowdown in onshore and jack-up drilling rigs in Saudi, but we are starting to see requests to reactivate the onshore drilling rigs. Drilling contractors have announced plans to boost rig counts in Saudi, which will drive demand for drill bits. Our customers may start by using existing drill bits stored in their warehouses, but as they deplete their supply, they will reach out for new drill bits, and we have the capacity to fulfill that demand. We will likely continue shipping some drill bits from the U.S. simultaneously.

And we'll take our last question coming from Jeff Bellman with Daniel Energy Partners.

Andy, bit of a high-level question, and definitely related to some of what you've already addressed, but I wanted to get your take. If I had a thesis that the U.S. industry has gone a long way working through their Tier 1 inventory and activity is going to have to increasingly shift towards, let's say, more complex or Tier 2 resources, how do you view that transition for Patterson? How does your asset base help operators kind of extend their economic life and expand the resource base if that shift actually has to occur?

Sure. There's a lot of talk about shifting from Tier 1 to Tier 2, and I really think that's operator-specific. We work for some E&Ps that tell us they have another decade of Tier 1 that they're still working on. We also have some E&Ps that will begin looking at some of the Tier 2 or deeper geological horizons. For us to do that means more service intensity, and more intensity means positive pricing. It also means we may need to add capacity on the size of the rig we’re using, along with requiring more horsepower on location for deeper plays. It just increases overall service intensity, which benefits us. Thank you. I appreciate everybody dialing in today, and we'll wrap up this call for the Q4 2025. I look forward to talking to you again in April. Thank you.

Thank you, presenters. This concludes today's conference call. Thank you all for joining. You may now disconnect.