Earnings Call
Patterson Uti Energy Inc (PTEN)
Earnings Call Transcript - PTEN Q4 2023
Operator, Operator
Thank you for your patience. I would like to welcome you to the Patterson-UTI Energy Fourth Quarter 2023 Earnings Conference Call. I'll now pass it to Mike Sabella, VP of Investor Relations. Please proceed.
Mike Sabella, VP of Investor Relations
Thank you, operator. Good morning and welcome to Patterson-UTI's earnings conference call to discuss our fourth quarter 2023 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 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 and 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. And I will now turn the call over to Andy Hendricks, Patterson's Chief Executive Officer.
Andy Hendricks, CEO
Thank you, Mike, and welcome to Patterson UTI's fourth-quarter conference call. In the first full quarter following our combination with NexTier and Ulterra, we showcased the earnings power of the new company and delivered a quarter of strong results for our investors. Our leadership position in both US onshore drilling and completions is allowing us to strengthen partnerships with the leading US shale operators that place a high value on our technology and on our top-tier assets, which in turn is allowing us to outperform the industry. We are very pleased with our results, and the fourth quarter profitability and free cash flow highlights the benefit of the combined company. As we reflect on this past year, we take great pride in our achievements. In US contract drilling, we outperformed our peer group, both in activity and adjusted gross profit per operating day. In completions, we maintained a focus on returns while actively contributing to the advancement of lower-cost and emission-reducing assets. We delivered extremely strong results while at the same time successfully closing and integrating two transactions. Our team performed at a very high level in what was a challenging year for the industry, which reflects our ability to successfully manage our business through the cycle and consistently create value for our shareholders. All that is to say our business is performing very well and we have high conviction that we have the right strategy in place. We anticipate 2024 will be another year of strong results and considerable free cash flow. And we remain committed to our policy of returning at least half of our free cash flow to our shareholders on an annual basis. As our customers look to maximize their own returns, they are consolidating their drilling and completions budgets to fewer, higher-quality service providers, and the divergence in financial results in our sector last year's highlights the widening differential in service quality across the industry. This high-grading process positions Patterson-UTI favorably and aligns us with our customers as the industry transitions to manufacturing mode. The acquisitions of NexTier and Ulterra will significantly strengthen Patterson-UTI's competitive position over the long term as we realize the benefits of our combined expertise and continue to advance our technology lead over much of the oilfield. This should offer a tailwind for our company as the entire industry looks to grow returns in a capital constrained environment. We played a critical role in enhancing the efficiency of our customers. For Patterson-UTI, the benefit from that as these efficiency gains can largely be seen through our own improved capital efficiency, and we have worked to reduce our capital intensity even as we have improved operationally. We expect total CapEx for Patterson-UTI to decline in 2024 relative to what the combined company spent in 2023. This reflects our commitment to optimize long-term financial performance as we navigate the evolving energy sector landscape. Over the near term, the outlook for US shale activity continues to reflect the expected reduced cyclicality in our sector. This steady outlook presents us with opportunities to enhance our returns and grow our profits in the most capital-efficient manner. While we do not see a benefit to adding drilling or completion capacity into the US shale market, we do have several levers that we will focus on this year that should help us improve our returns as the year progresses. Our rig technology offerings have momentum with growing demand for our process and equipment automation packages. Alternative power solutions that use natural gas and high-line electricity to power our rigs and numerous other applications that improve efficiencies, minimize the environmental footprint, and add value to the drilling process. Our customers value the uplift provided by these technology offerings and given the value that can be unlocked, we expect our rig count will continue to outperform the industry. In frac, we're investing to convert more of our fleet to electric and other natural gas powered technologies at a measured pace over the next several years. These new technologies consistently earn a higher return over the diesel equivalent that they are replacing, which should allow us to grow profits even at a steady activity level. By mid-2024, we expect to be operating around 140,000 electric horsepower with nearly 80% of our active fleets capable of using natural gas by then. We are making this transition to electric and other natural gas-powered assets, even as CapEx for the combined completions company is expected to be down significantly from 2023. Also on the frac side, we still have considerable upside relative to where we are today as we capture synergies from the NexTier transaction. At the start of the year, we were roughly halfway to our $200 million annualized target, and we are confident we should be able to fully realize those synergies by the first quarter of 2025. Internationally, Ulterra offers long-term growth potential, expanding our footprint. Ulterra is expected to grow revenue and EBITDA in 2024 compared to 2023 with potential for record free cash flow generation that surpasses any period in the company's history prior to our acquisition. Ulterra's drill bits were used to drill over 82 million feet in 2023 for more than 625 different operators across 25 countries. The presence in these global markets will be a long-term opportunity for our company and should offer our investors growth for the next several years or more. Non-US revenues accounted for roughly 30% of Ulterra's revenues since we closed the acquisition in August, and for 2024, Ulterra's international revenue is expected to grow in the high teen percentage year over year, highlighting strong prospects in various global markets across the world. By 2024, Ulterra's revenue from the Middle East is likely to have doubled over the past three years with additional upside potential over the next several years. In addition to the international opportunities for Ulterra, in the US, revenue per industry rig was up more than 5% sequentially, a function of steady pricing and strong market share gains and reflecting our strong performance in the US, complementing the international opportunity. Aside from these operational growth opportunities, our capital allocation strategy should offer our investors an added benefit to earnings per share and return on capital. We are committed to returning at least 50% of our free cash flow to investors, including through stock buybacks, which should help grow earnings per share in the coming years as we reduce the share count. We have committed to return at least 50% of our free cash flow to shareholders on an annual basis. And given our current share price, we are likely to exceed that commitment in 2024 as we believe investing in our own shares at this price is one of the most attractive opportunities available. We expect to return at least $400 million to shareholders in 2024 through the combination of dividends and share repurchases, which would considerably lower our share count by the end of the year. Our Board of Directors just increased our stock repurchase authorization to a total of $1 billion. As we said previously, the macro-outlook appears to be relatively stable through 2024. Current oil prices should support current oil basin activity, although we do see some potential downside in the natural gas basin. On the oil front, according to various data sources, including the EIA, US shale oil production appears to have stabilized, a function of the decline in activity over the past year. We do not believe current commodity prices will prompt a reduction in activity to levels that result in production declines. Therefore, steady activity outlook in the oil basins seems reasonable. Given that 80% of the US rigs are targeting oil, this should contribute to a relatively stable outlook for the entire industry in the coming year. In the near term, the outlook for natural gas is less certain but we do not think the downside potential will have a material impact on our business over the long term. We are working for some of the best and steadiest operators in the natural gas basins, which should help limit the downside if activity slows. But it's also worth noting that the Patterson-UTI rig count in the Northeast and the Haynesville combined is down just five rigs total over the past year, even as the industry has reduced activity in those basins by more than 30 rigs over that same time. Our resilience demonstrates our ability to navigate challenges in those basins, even in the face of declining industry activity. Further, even as our natural gas customers are slightly reducing activity in the near term, we are already having conversations with those same customers about the potential to add rigs possibly later this year but also into next year as LNG demand comes closer into focus. Over the long term, we do not anticipate a material impact to our business from the near-term softness in natural gas prices. In drilling, if natural gas activity does fall slightly, we would anticipate only a slight decline to our own activity levels, although we are halfway through this first quarter and we haven't seen much change from our customers. In the US, we started the year operating 121 rigs, and we are currently operating 122 rigs. In 2023, our rig count significantly outperformed the industry, and we achieved this while still improving our margins. The industry rig count exited 2023 over 20% lower than historical. But in contrast, Patterson-UTI's rig count, we're down just 8%, while our average daily margins in the most recent quarter were up more than 20% compared to the fourth quarter last year. We are constantly aligning ourselves with partners that offer stable drilling programs and exhibit less sensitivity to commodity prices compared to smaller operators. Our customers benefit greatly from our Tier 1 drilling rigs, which can deliver 35% more lateral footage on average per year compared to standard super-spec rigs. More than 90% of our active rigs are Tier 1 with nearly 90% utilization for this category of rig. Given the high demand and the significant value that this class of rig and technology add-ons create, average pricing on recent term contracts has been steady at close to the mid-$30,000 per day. And we do not anticipate our rates changing in a flat activity market. We believe the trend towards Tier 1 rigs should continue through 2024. On the completions front, the business is performing well through the ongoing integration. In the fourth quarter, completion services revenues exceeded $1 billion and meaningfully outperformed the completions industry average. We aligned ourselves with the right customers, which helped activity remain steady through the holidays and into the year-end. Our natural gas dual fuel assets continue to have success in the market, and we are confident that these assets will maintain competitiveness over the long term, even with the increasing market share of natural gas powered electric equipment. Notably, on several recent occasions, we have displaced the third-party 100% natural gas-powered electric fleet with one of our natural gas dual fuel fleets. We believe there are multiple technology winners, including natural gas dual fuel as the completions industry transitions. The market for horsepower remains relatively tight and equipment that can be powered by natural gas is effectively sold out. This should help limit potential downside from current natural gas prices. We are confident in our ability to achieve our goals for 2024 with a significantly reduced CapEx budget. We expect total company CapEx of $740 million for 2024. This represents a significant reduction compared to the combined CapEx budgets of Patterson-UTI, NexTier, and Ulterra that we all had in 2023. We believe we can achieve this while still maintaining our activity throughout 2024 and building on the strong technological advantage that we have over many other players in our industry. This positions us to generate strong free cash flow for the year and return significant cash to shareholders while still building on our competitive advantage over the longer term. I'll now turn it over to Andy Smith, who will review the financial results for the fourth quarter.
Andrew Smith, CFO
Thanks, Andy. Total reported revenue for the quarter was $1,584 million. The reported net income attributable to common shareholders was $62 million, or $0.15 per share in the fourth quarter, which included $20 million in merger and integration expenses. Our adjusted net income attributable to common shareholders, excluding those expenses, was $78 million, or $0.19 per share. This adjustment assumes a 21% federal statutory tax rate on the merger and integration charges. Adjusted EBITDA for the quarter was $409 million, also excluding those expenses. Our weighted average share count was 416 million shares during Q4, and we exited the quarter with 411 million shares outstanding. Our free cash flow for the fourth quarter was $247 million. We returned $110 million to shareholders in the fourth quarter, which included an $0.08 per share dividend and $76 million to repurchase 7 million shares. Annualized, the shareholder return was nearly 10% of the market cap at the end of the fourth quarter. For the full year, we returned $301 million to shareholders, roughly 77% of our free cash flow. Our Board has approved an $0.08 per share dividend for Q1 and increased our stock repurchase authorization to $1 billion. We anticipate returning over $100 million to shareholders again in the first quarter, including about $75 million for share repurchases. In 2024, we expect to use at least $400 million on dividends and share repurchases, which exceeds our commitment to return 50% of free cash flow to shareholders. In our drilling services segment, fourth-quarter revenue was $464 million, with adjusted gross profit of $187 million. In US contract drilling, operating days totaled 10,841 days, with average rig revenue per day at $36,280. The decline of $1,830 per day was mainly due to the lack of previously deferred revenue of $2,630 per day recognized in the prior quarter. Without this deferred revenue impact, average revenue per day would have increased by $800 sequentially. Average rig operating costs per day were $19,940, an increase of $70 sequentially, although the prior quarter included $790 per day in insurance reserve adjustments and inventory write-downs. The average adjusted rig gross profit per day was $16,330, a decrease of $1,910 from the prior quarter. Excluding the previously mentioned revenue and costs, adjusted rig gross profit per day would have declined by just $70 from the prior quarter. As of December 31, we had term contracts for drilling rigs in the US that provided for approximately $700 million of future day rate drilling revenue. Based on current contracts, we expect an average of 79 rigs operating under term contracts during the first quarter of 2024 and an average of 52 rigs over the four quarters ending December 31, 2024. In our other drilling services, primarily international contract drilling and directional drilling, fourth-quarter revenue was $70 million, with an adjusted gross profit of $10 million. For Q1 in US contract drilling, we anticipate averaging 120 active rigs compared to 118 in the fourth quarter, with adjusted gross profit remaining relatively flat. Reported revenue for the fourth quarter in our completions services segment was $1,014 million, producing an adjusted gross profit of $232 million. We experienced improved returns during the quarter, despite slightly lower revenues, due to ongoing merger synergies and strong operations. Segment revenue was only 2% lower than the pro forma results for the segment in the third quarter, notably outperforming the industry. Completion activity remained steady throughout the quarter, supported by strong demand for natural gas power equipment and wellsite integration services. In the first quarter, we expect completion services revenue of $940 million to $950 million and an adjusted gross profit of $190 million to $200 million. Fourth-quarter revenue for drilling products was $88 million, up 1% from the third quarter, with an adjusted gross profit of $39 million. In the US, drilling product revenue exceeded the rig count performance, reflecting strong domestic results. Internationally, revenue remained stable. Direct operating costs included a non-cash charge of $5 million related to the asset value increase of drill bits at the time of the Ulterra transaction. This adjustment also raised reported depreciation and amortization by $10 million for the quarter. We expect these non-cash charges to continue throughout 2024. We see growth potential for Ulterra even in a flat US onshore market, with opportunities for international expansion. For Q1, we anticipate drilling products revenue of $90 million with an adjusted gross profit of $40 million. We foresee $5 million in noncash direct operating costs tied to the step-up in drill bit value at Ulterra, which would raise the segment adjusted gross profit expectation to $45 million without those charges. Other revenue was $18 million for the quarter, with $8 million in adjusted gross profit. We expect first-quarter revenue and adjusted gross profit to be flat compared to Q4. Reported selling, general, and administrative expenses in Q4 were $61 million. For Q1, we anticipate SG&A expenses of $65 million. Consolidated total depreciation, depletion, amortization, and impairment expense for Q4 was $279 million, and we expect approximately $280 million for Q1. For 2024, we project an effective tax rate of 24%, with annual cash taxes expected between $35 million and $45 million after utilizing tax attributes to offset part of our taxable income. Q4 total CapEx was $205 million, with $74 million in drilling services, $107 million in completion services, $17 million in drilling products, and $8 million in other and corporate. We expect 2024 CapEx to be $740 million, comprising $285 million for drilling services, $360 million for completion services, $55 million for drilling products, and $40 million for other and corporate. On the drilling side, we plan to fund limited rig upgrade programs for specific customers. On the completion side, we will continue to invest at a measured pace to grow our fleet of electric and natural gas-powered assets, replacing retired diesel assets. Of the $360 million in completion services CapEx, we aim for about $220 million in the first half of the year to invest in next-generation frac equipment and growth in our natural gas fueling business. We expect completion CapEx to focus mainly on maintenance in the second half of the year. Our legacy universal pressure pumping business has now been consolidated into one legal entity and operates as one completions business, marking significant progress in our integration process. We entered 2024 having achieved about half of the anticipated $200 million in annualized synergies and are confident of achieving at least $200 million in synergies by Q1 of 2025. We closed Q4 with no amounts drawn on our $600 million revolving credit facility and $193 million in cash. We have no senior debt maturities until 2028. We expect to generate another quarter of strong free cash flow in Q1, though it may not match the level of Q4, primarily due to the need to fund seasonal working capital adjustments and cash merger and integration costs. I'll now turn the call back to Andy Hendricks for closing remarks.
Andy Hendricks, CEO
Thanks, Andy. I want to close the call by quickly reiterating how we see 2024 unfolding. Macro conditions give us confidence for relatively stable near-term industry activity, considering both the oil and natural gas markets. US oil production is expected to have stabilized according to EIA and others, which should be a positive for global oil markets. At current oil prices, we do not anticipate much change in the oil rig count with oil-focused activity about 80% of the industry activity. On the natural gas side, yes, there could be some decline in industry activity in the near term, but we do not expect it will be material to our business over the long term. The outlook for natural gas activity could improve later this year and into next year as LNG demand comes closer into focus. For Patterson-UTI, this relatively steady industry environment in 2024 should give us opportunities to focus on high-return capital efficient ways to grow our profitability. We expect to enhance our technology offerings in both drilling and completions. We still have runway to benefit from the synergies associated with the NexTier merger and Ulterra's long-term growth prospects in the Middle East are very promising. Our current expectation is that we will return at least $400 million to shareholders this year through dividends and share repurchases, which should improve our earnings per share and return on capital through a steady reduction in share count. We believe these profitability growth initiatives are achievable even in a steady recount environment. We're excited about the year ahead and expect to deliver another year of strong results for our investors. Before we go to Q&A, I'd like to thank the women and men of Patterson-UTI for all of your hard work and all of your accomplishments. You had a record year performance in 2023, transformed the company, and you knocked it out of the park. So thank you. With that, I'll turn it over to Adam for questions.
Operator, Operator
Our first question comes from Arun Jayaram with JPMorgan.
Arun Jayaram, Analyst
Good morning, Andy. I wanted to focus on the completion services segment. Your outlook is for $195 million of gross profit in the first quarter. As you think about the full year, do you believe this is a good baseline, especially with the additional capacity expected by midyear? How should we consider a baseline for that segment in a relatively steady state environment in US shale?
Andy Hendricks, CEO
Yeah. We're really excited about how the completions business has been performing. I mean, you see it in the Q4 results. The teams who have had to integrate and come together are just doing a fantastic job. And it is one company today. It is NexTier. And they're just doing a great job. I can't say enough for the teams that are performing every day. When you look at Q1, what we're projecting on Q1 in terms of revenue and profitability is relatively steady activity, but also some whitespace in there as we move some fleets around. And so I think as I look out across 2024 for completions and it holds for drilling as well, we're seeing relatively steady. And I realize that natural gas is trading at a low level, and there's probably some concerns over that market. But I think we've shown that last year, whether it's drilling or completions that we're working for the right customers in these basins and that we can keep things relatively steady. So when it comes to the profitability on completions, I think as we continue to roll out some new technology, even in steady activity, there's some potential to improve the profitability as we work towards the end of the year. So we've got, as I mentioned earlier, we've got various levers that we can pull through both technologies, through integration, through performance. And I still think that we can still work to some higher profitability even in a steady environment.
Arun Jayaram, Analyst
Great. Andy, my follow up is just kind of an industry question. One of your peers in earnings season highlighted how they expect to get caught 40% of their frac fleets to be e-fleets by the end of this year. Another of your peers mentioned that 25% of their fleets would be next-generation e-fleets and dual fuel by the end of the year. How does that influence your strategy? and talk to us maybe about the types of returns on capital you're seeing on some of the fleet horsepower you're expected deployed by midyear.
Andy Hendricks, CEO
So as we mentioned, we are deploying the e-fleets this year and we're going to start to grow our presence in that. But our strategy is more of a measured pace because our focus is returning cash to shareholders. We do see the opportunity to improve the profitability in the completions business by rolling out the e-fleets. But we also have other things we're doing in '24 to improve profitability, including integrating some of the vertical services that NexTier has been offering for years on some of the fleets that aren't currently operating those. When you look at specifically at the e-fleets, there's also some other technologies that we're going to be looking at rolling out later this year too that are 100% natural gas, and there's just going to be a variety of solutions. So it's not a one size fits all. We don't think the entire industry converts over to electric. We think there's still solid markets for high-performing dual fuel natural gas-powered systems. But we will continue to push technology. We will continue to invest in both electric and other new technologies. But for us, it's going to be more of a measured pace as we focus on returns to shareholders.
Scott Gruber, Analyst
Yes, good morning. I want to come back to the completion outlook, if you don't mind. It's just the focal point today for folks. Within the white space, does that start to emerge early in the first quarter? Or is that more of a second half of the quarter impact? And then as you reposition fleet, those getting picked up in the oil basins. Yeah. I'm just trying to think about the trend into the second quarter, assuming gas activity stays weak. Does the second quarter activity end up looking better than the first quarter? Can you get some more oil activity or is it potentially down versus the first because gas is weak and that's a full quarter impact? Are you able to provide some more color there?
Andy Hendricks, CEO
I think, you know, there's given that natural gas has only recently dropped below . We don't know the full impact of that yet, but we are working for some good customers in these gas basins, and we are repositioning some of our horsepower into more liquids, more oil. So we're going to have some exposure to gas, but we had exposure to gas last year and we still had strong performance. So we still think that we're going to have some relatively steady activity. If I had to make a guess right now in Q2, I'd say just consider it relatively steady to what we're seeing in Q1, including the whitespace. I think there still is some uncertainty out there. But also, I think we have the potential to improve some profitability as we roll out some new technology and enhance some of the integration.
Scott Gruber, Analyst
That's great. And just on that point, wondered debating points post deal was your ability to secure revenue synergies and can do so in a timely fashion. Can you just speak to what you're seeing on that front? What type of revenue synergies you've already achieved? And then what do you think occurs in '24?
Andy Hendricks, CEO
Yeah, so if you go back to pre-closing, which go back to the summer of 2023, Patterson-UTI universal division was operating in 12 frac fleets. And those frac fleets were performing well. But the market softened. But look at what NexTier was doing with vertical integration and all the other services they provide. They provide the wireline services. They're providing power solution CNG. Creating CNG, transporting to wellsite, blending it with natural gas that's available in the fuel gas. And look at the trucking and logistics operation that NexTier has. We're well over 600 people in that business alone. And so there's a lot of verticals that we didn't have at Patterson-UTI. So one of the first things that we did as part of the synergies will start to reach out to customers to say, look, we believe we can improve your service if we have control of some of these other services that are affecting logistics and efficiencies and performance at the wellsite. And so we have added wireline. We have added trucking and logistics. We have added some power solutions onto some of those fleets that didn't have that pre-close. And so that's been progressing. And we had some quick early wins, but we think we'll have continued wins on that from a revenue and profitability standpoint throughout 2024. So that's really how it's playing out. And our teams are doing a great job working together to make this happen.
Andrew Smith, CFO
Yeah, I would also point out on that one again and Andy mentioned but I would just highlight it that really the productivity gains that we're getting, again, kind of pushing that fully integrated wellsite offering onto the legacy EPP fleets is really improvement as well and overall profit.
Derek Podhaizer, Analyst
Hey, good morning, guys. I want to talk about your shareholder returns and maybe just how you're thinking about the remaining free cash flow over that 50%. Talk about maybe some of your M&A, whether it be tuck-ins or bolt-ons or what can we expect out of that debt? I know the maturities are far out to 2028, but a servicing of debt that you're looking at. And really just trying to get at what the upside to that return number could look like.
Andrew Smith, CFO
Yeah, so look on the return to number that we've given the $400 million that we expect for the year, that's above our 50% commitment. I would say that right now, M&A is not a high priority. Again, it's hard to predict when it comes, and we'll certainly look at a lot of things, but it's not the highest priority for us right now, Neither is in this market just yet, I think in account of significant debt reduction, from time to time, we remain nimble with debt. If we think there's a good buy to buy some back on the open market, we'll do that. But I don't see anything right now that warrants us making any kind of a large debt reduction.
Derek Podhaizer, Analyst
Okay. That's helpful. Switching over to the drilling side, can you just walk us through the daily margin trajectory that you're thinking about for first quarter and for the rest of the year? The cost per day had a big step up there. Could that come back a little bit? Just curious what's going on there. And then how should we think about the revenue per day as you have some contract churn and you've talked about leading price in that mid-30s, but just a little help to break apart those two, the revenue per day and the cost per day?
Andy Hendricks, CEO
I am really pleased with our drilling team. Their year-over-year performance from 2022 to 2023 was significant, as they improved our field performance to maintain our activity levels and outperform competitors while increasing profitability per rig. It was an impressive achievement. As we progress through this year, we've noticed some softening in rig demand towards the end of last year, which we have acknowledged in previous calls. We anticipate some decline in leading edge but are still operating in the mid-30s for our performance and additional technology options on the rigs. While costs have risen, I expect them to remain steady, and I believe margins will also stabilize. Our teams have done an excellent job. I don't foresee the same level of profitability increase in 2023 compared to 2022, but I believe our business will continue to generate substantial free cash flow.
Andrew Smith, CFO
Yeah, I would reiterate that. I would just say that from this point forward through the year and we view it today, we look at both revenue and cost being relatively steady.
Derek Podhaizer, Analyst
And maybe just a quick follow up. The cost per day, but what was the lead driver of that step up?
Andrew Smith, CFO
There are many factors at the end of the year, such as adjusting cost estimates. Nothing particularly significant stood out. Throughout the quarters, various elements like working capital or insurance reserves can fluctuate. These items impacted our workers' compensation. While these factors can create some variations in the fourth quarter, I don't believe anything notable emerged.
Jim Rollyson, Analyst
Good morning, everyone. Great job on the quarter and the free cash flow. Andy, I have a couple of questions regarding the rigs. Are you at 122 in January or is that the current count? We're halfway through the quarter and the guidance is set at 120, which suggests a decrease. I'm curious about what you're observing on the rig side in the gas basins. Are you considering moving any rigs from gas basins to oil basins, similar to your approach with completions? Could you provide some insights on that?
Andy Hendricks, CEO
Sure. For now, we expect the oil basins to remain relatively stable. Approximately 70% of our rigs are operating in those oil basins. Although 30% are in gas basins, some of them are focused on gas liquids rather than dry gas, so the actual percentage drilling dry gas is likely closer to 20% to 25%. We anticipate stability in the oil and gas liquids basins. As for natural gas, we expect some softness, possibly reducing our rig count by around three to five rigs in the next few months, depending on current natural gas prices. However, this would be from a starting point of 122 rigs. Looking ahead, as we approach the demands for LNG takeaway, we may see changes, but any softening in natural gas won't significantly impact our company or profit margins. We are performing well and do not plan to reduce rates. It's unlikely we will move rigs out of the gas basins because they may be needed there by 2025. Overall, I would consider the situation relatively steady, despite some anticipated softening in the gas sector.
Jim Rollyson, Analyst
Got it. That's helpful. And you mentioned rig upgrades. Normally when we're in an upward trajectory market, you guys are reactivating rigs, upgrading rigs and getting a lot of that covered or all of that covered on term contracts. Can you talk about what the specific rig upgrades you're doing for specific customers and kind of how you see capturing that capital back and the return on that capital in this kind of market where we're more steady instead of upward moving?
Andy Hendricks, CEO
Yes. One of the upgrades I'm really excited about is some of the upgrades and latest technology in terms of process automation packages that we're putting on the rig. This is really a capital light upgrade. It had to do with electrical systems and software. And when we layer that onto a rig, we add automation capabilities to improve performance and consistency of the drilling operations. And so we're going to go through a steady pace of doing rigs and transforming that. And our customers are excited about that. They want this. This is something that they're asking for and in demand. But again, it's a capital light type upgrade.
Stephen Gengaro, Analyst
Thanks. Good morning, gentlemen. A couple of things for me, and it's probably a long question. So I apologize. But when we think about the wellsite integration on the frac side, I have got like two or three questions around that. And one is can you give us a sense for the percentage of assets that are kind of at the high end of integrated services versus the low end. And I'm not sure if there's a way to kind of give us any color around the profitability gap and I know legacy NexTier provided some color on that. And then just the final part of that long question, is that any impact on your ability to do that with the M&A of your customers or the larger customers more or less willing? And how should we think about that?
Andrew Smith, CFO
Yeah, I'll answer the first part of that, and I'll let Andy talk to the customers. The harder question. Yeah, right now, in terms of the integrated wellsite offering and sort of how that works across our fleet, where you think about a heavy concentration versus, it's about 50-50 on the fleet. We saw a lot of opportunity to push more that integrated offering across our work in the pressure pumping space.
Andy Hendricks, CEO
Yeah, in terms of customers and M&A, we all can see that there's been huge waves of consolidation from the E&P customers. And when that happens, you're going to get a pause in activity. And for some customers that we're working for that might be a pause for us. For some other customers, it might be kind of a neutral for us in the near term. But you're going to get a pause until they decide what resources they want to use and what they want to do going forward from an operation standpoint. But when they evaluate that, I think, we are well positioned with our ability to integrate the necessary services to enhance performance on the completion side and even on the drilling side with the new technologies that we're rolling out. So I think we're in great shape for this wave of consolidation that's happening on the E&P side.
Stephen Gengaro, Analyst
Thank you. I have a quick follow-up. When considering the underlying price, excluding the impact of increased offerings, if we projected stable frac prices from current levels for 2024, would that be acceptable to you? How do you view that scenario?
Andy Hendricks, CEO
Yeah, we acknowledge that there was softening in completions pricing and rig pricing in H2 last year. But I think from where we are this year, it's going to be relatively steady for us. And I want to qualify that for us because we are seeing some whitespace as we discussed earlier, and we are moving some assets. But part of that is just because we don't feel like we want to take lower rates. And so we're going to work to protect pricing in the markets and protect our margins in the markets. And so for us, I think it's relatively steady.
Saurabh Pant, Analyst
Hi. Good morning, Andy and Andy. If you can spend, Andy, a little time on your e-fleet strategy. I'm thinking from the perspective of leasing versus buying and then also from a perspective of when you're buying something, how important it is in your mind to own that technology versus just buy it off the shelf from a vendor? And then related to that, how should we think about power solutions in the context of that 80% of your fleet is going to be natural gas fired by the middle of '24? How much of that do you think is being supported by power solutions at that point?
Andy Hendricks, CEO
So I'm going to start, and then I'll let Andy Smith talk about this as well from a business growth profitability standpoint. When you think about the e-fleets, we certainly realize there's customer demand out there. We want to have those technology offerings as well. There is improved profitability to be able to do that. And so we are investing in e, but also some other technologies as well, not just the e. So yes, we are working with a couple of different suppliers of electric frac equipment to look and see how the performance is on different types of equipment. And we've tested other equipment in the past. We do request some changes when we get some of this equipment delivered. So what we offer may be slightly different from others using similar equipment. But we have some experience and we're excited about this offering. We'll continue to evaluate who our suppliers should be and who we want to work with going forward. But suffice to say that we are moving in that direction. And I'll add that we also have a drilling company that has a great history of operating over 1,000 AC induction motors. We also have an electrical engineering company that has experience building high voltage control systems for AC induction electric motors, including for electric frac. And so stay tuned. And we'll keep you posted on how this is going to evolve from a technology standpoint. But we're in it. That's for sure.
Andrew Smith, CFO
Yeah, right now, in terms of power solutions supporting our own work, right, about 40% of our work out there is supported by power solutions, and we've got opportunities to grow that in the current year.
Waqar Syed, Analyst
Thanks for taking my question, Andy. You mentioned the synergies amounting to $100 million from various sources. I would like to dive a bit deeper into that. Could you specify which sources contribute more or perhaps share some figures on what has been accomplished from these different sources and what is still outstanding?
Andy Hendricks, CEO
Yeah. Hey, good morning, Waqar. So a month ago, we talked about three different buckets, one being revenue, one being supply chain, one being cost. I think that to the ones that went the fastest were probably related to supply chain and some savings that we picked up last year as the市场 softened as well. And we were able to accelerate some of those. You also had some quick wins on the revenue, but the revenue will still continue kind of at a steady pace for the next four quarters. We saw some cost improvements last year, but we'll see some further cost improvements this year. But the early ones to move probably the fastest were on supply chain. So hats off to the team to pull that off.
Andrew Smith, CFO
Yeah, I would even say on the G&A side, so there is obvious things around again to larger corporate companies coming together. So you've got, you know, and a lot of savings in terms of overall top-level management. Those have been achieved, obviously. But then as you go through, there's still a lot of consolidation savings come from a lot of that some of that is from third-party services, whether it's insurance, outside advisors, things like that. And then some of it is just over time as you continue to sort of rationalize systems and processes, things like that and you do achieve the same.
Don Crist, Analyst
Good morning, gentlemen. We've covered a lot of ground here today, but just wanted to ask one about the international markets. You know, Ulterra gives you an entry point into the Middle East in particular? Do you have aspirations to move either rigs and or pressure pumping or other service lines into the area? And what kind of opportunities are there for you?
Andy Hendricks, CEO
Yeah, first, we're really excited about Ulterra and their ability to grow internationally. It's got the potential for double-digit growth in these markets, not just with the activity level in these markets, but increasing share in these markets. And so that is our focus on the international. You ask about moving rigs from the US to other markets, typically, it takes a fairly significant capital upgrade to move a rig to a different market outside of the US because we become very specific about what we do here in the US. Right now, our focus is on returning cash to shareholders. So our international focus is growing Ulterra. And overall, that's part of what we're trying to do to return cash to shareholders. So there could be an opportunity longer term, but this year, our focus is returning cash to shareholders.
Kurt Hallead, Analyst
Hey, good morning, everybody. Thanks for just letting me in here. So, Andy Hendricks, you have definitely intrigued on me context of what's going on with the evolution of the land drilling fleet? And it seems like there's a seems like there's a new category super-duper spec rigs versus just plain super-spec rigs. So just kind of curious as to what the dynamics here are differentiating, you know, even the higher-end assets or technologies you talked about automation, but kind of curious like what makes up this new class of rigs that everybody wants versus what they thought they wanted a year ago?
Andy Hendricks, CEO
I’m not sure how much time we have on this call, but there are several initiatives underway that our teams are leveraging to enhance overall performance. We are making various upgrades to our rigs, such as adding pumps for improved hydraulics for longer laterals and transitioning to lithium battery hybrids for better fuel efficiency and cost savings. We also produce transformer stations for high-line power in the energy sector. On the performance front, we focus on optimizing our real-time data centers and sharing data across rigs and throughout the field. Our teams are engaged in data analytics and performance monitoring to ensure we maximize efficiency. We're integrating new software and automation technology, including upgrades to the electrical systems of some rigs and the addition of new automation software. We are currently implementing these changes on multiple rigs and plan to maintain a steady pace for further rollout, which is gaining significant traction in the market. It’s not just one aspect that contributes to our success; our teams excel in operations, engineering, technology, real-time performance, and data analytics, all of which are reflected in our results.
Dan Kutz, Analyst
Hey, thanks. Good morning. Thanks for squeezing me in on. So I just wanted to ask one more on the international space. And I think you guys mentioned that the Ulterra outlook is for high 10s growth this year on that kind of compares to what seems like the industry bogey for international growth being kind of high single digits, low double digits. I assume there's market share gains and pricing factored into your outlook. But I wanted to ask whether kind of Patterson or the Ulterra team would be more or less constructive on kind of the total addressable market growth in the international space versus that kind of 10% growth consensus view? Thanks.
Andy Hendricks, CEO
Well, we're excited about the double-digit growth. We're going to see, I think that you are. So there are some projections on double-digit growth in the internationals. We'll see how that plays out in terms of activity. But I think whenever that is on activity, we'll outperform that in terms of growth on the Ulterra side. In terms of product sales, I've got a big focus on the Middle East right now. We're still working on transitioning from just do a drill bit remanufacturing in Saudi to full manufacturing in Saudi. And that's going to increase our ability not only to support Ramco in Saudi Arabia but also be able to export from Saudi into some of the GCC countries nearby and so on. We are we're excited about that. But what drives this growth relative to others performance, and we've talked about this before. You know, Ulterra has a unique ability in the industry to turnaround designs and make the improvements that the operators ask for based on the type of formation and rock that they're drilling. And that team does a great job at that. And so as we start to do more and more work in countries outside of North America in those countries, you're going to experience those performance improvements as well. But so that's why we're really confident about our ability to grow.
Andrew Smith, CFO
Just a quick one on the completion services upgrades and investments. Are there any Tier 2 to Tier 4 upgrades contemplated or it's mainly just on the dual fuel upgrades and the electric frac investments and stuff.
Andy Hendricks, CEO
So we're not doing any Tier 2 to Tier 4 upgrades. Tier 2 is going to fade away. We're going to start to wind down maintenance investment on those older assets. We've got Tier 4 DGB in place. We still think there's a very strong market and that's going to go for years and Tier 4 DGB. But as some of the older technology rolls out, we're going to see more electric, but also other types of new technology come in different hundred percent natural gas. And so that's how we're making that transition. We're doing it at a measured pace that we think fits the capital allocation and meets the needs of our shareholders who are looking for returns right now. But we're still excited about these investments in technologies that we're making.
Sean Mitchell, Analyst
Thanks for having me. Andy, I have a question about the electric equipment. Will the 140,000 horsepower expected by mid-year come from several full spreads, or will it be distributed across your other fleets?
Andy Hendricks, CEO
Some of that's already out there working in the field, has been for a while. And this is a key addition to what we have out there. You're going to see more of it come in really kind of Q2 Q3. And so that's where you know, we'll get some improved profitability from that horsepower that's working in the field second and third quarters going forward. And so we're really going to it's going to add roughly a couple of more fleets to what we're already working in the field today.
Andrew Smith, CFO
I believe we have those numbers and will share them with you. I think it was over $900 million.
Operator, Operator
I will now turn the call back over to Andy Hendricks for closing remarks.
Andy Hendricks, CEO
I want to thank everybody for dialing in today for the call. 2023 was a great year for us. I want to thank our team at Patterson-UTI for everything they did in '23. It was a great year, and we're looking forward to another good year '24, especially free cash flow and returning cash to shareholders. So thanks for that.
Operator, Operator
Ladies and gentlemen, that concludes today's call and thank you all for joining. You may now disconnect.