Q1 2020 Earnings Call
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Good morning.
Yeah the name of the.
Okay.
Yeah.
Hi, it's a patterson call.
You have the belly of your first the last.
Sure Rachel are a C H E L Smith S.M.I.T.H.
Company.
[laughter] era, and I E R E.
And your cell phone number.
Two one too.
960 3697.
Yeah.
Well you know the energy sector has been deemed a critical infrastructure sector by the U.S. government and our employees are considered the central workers.
The states in which we work have followed this federal guidance, which has enabled us to continue operations and has enabled our employees to continue working despite various state issue quarantine or stay at home orders.
We continue to follow gardens issued by the CDC and other federal state and local government agencies related to among other things social distancing, including remote workers management's where possible.
Personal hygiene and cleaning and disinfecting work environments.
We have a risk mitigation plan in the event of exposure or potential exposure and we communicate regularly with our employees and customers regarding our efforts to maintain a safe work environment.
Today, we have not had any disruptions to our operations directly related to covert 19.
I would like to express my appreciation to our employees for doing their part and facing these challenges by continuing to perform their jobs as safely as possible. So that the company can continue to meet the needs of our customers.
Thank you for adhering to the additional guidelines regarding hygiene and social distancing.
By doing so you have helped us to protect the safety of welfare of all of our employees and those with whom we work.
While continuing to provide high quality service to our customers. Thanks again.
We will continue to take action to manage through this downturn as needed and our goal remains that we emerged from these difficult times as a stronger company.
As part of our dedication to our community and responding to the national need we have begun manufacturing hand, sanitizer and donating get to health care facilities.
Additionally, we are donating excess on hand, personal protective equipment or PB to hospitals and first responders.
Turning now to market conditions in response to the rapid decline in oil prices M. P companies acted swiftly to reduce activity late in the first quarter.
Yes, we're pumping activity reacted much sooner, but we're now seeing a severe drop in our rig count.
Well the circumstances, leading to this downturn in activity maybe different than prior downturns. Our response will be will be guided by the same principles that have guided us through prior downturns.
Our team knows the playbook, well and unfortunately in this environment, we must scale down the company as quickly as possible to align with lower levels of drilling and completion activity.
Well sibling concept. The key is in executing this plan effectively and efficiently and at the same time dealing with their current travel and social distancing restrictions.
While this will be a difficult down cycle, we will continue to move our technologies forward.
We've made great progress over the years in the areas of digitalization through data analytics control systems machine learning and our steps forward in remote operations in automation.
Our between plus data system is world class and its ability to measure performance in drilling operations and is the backbone for the data required by our other systems.
Our cortex automation apps tied to our control systems continue to improve drilling performance of the wealth side and the uptake was growing in the first quarter.
We are actively conducting remote directional MWD activities, reducing the required employees on the rig and have the capability to also perform above directional drilling operations.
As the only contract drillers with a large U.S. directional drilling operation very uniquely positioned to advance the automation of directional drilling was scale in onshore operations.
In 2020, we will also introduce remote blender operations in pressure pumping to reduce costs and improve performance.
Patterson UTI eyes position well to not only embraced the digitalization of the oilfield, but also to be a leader in to generate incremental revenues and returns from this me digital is that digitalization.
Turning now to the first quarter.
In contract drilling our average rig count was 123 rigs unchanged from the fourth quarter and in line with our expectation.
Profitability and contract drilling exceeded our expectation is both revenues and direct operating costs were better than expected.
Average rig cost per operating day, $14550 decreased $990 sequentially and was lower than expected due primarily to lower expenses for repairs and maintenance.
Average rig revenue per operating day was $23800 average rig margin per operating day increased to $9250.
As of March 30, Onest 2020, we had term contracts for drilling rigs, providing for approximately $440 million of future day rate drilling revenue.
Based on contracts currently in place, we expect an average of 71 rigs operating under term contracts during the second quarter and an average of 50 rigs operating under term contracts.
Orders ending March 30, Onest 2021.
Turning to the second quarter, we expected our rig count including rigs on standby will decrease by approximately one third from the first quarter average.
We expect more rigs we put on standby by the end of the second quarter. These standby rigs are under term contract, but are not currently being utilized by the operator, but still generate revenue.
The operators pay a reduced standby rate, which is dilutive to our overall average rig revenue per day, but standby rigs have minimal cost, thereby also reducing our average rig operating cost per day, such that the impact to our margin per day is limited.
Including approximately $8 million of revenue from Lumpsum early contract terminations, we expect our average rig margin per day during the second quarter to decrease by less than 5% from the first quarter.
Turning now to pressure pumping.
We averaged 10 active spreads during the first quarter in line with our expectation.
Pressure pumping revenue for the first quarter was $125 million, where the margin of $10.3 million, which exceeded our expectations.
I fully acknowledge this business has recently underperform. However, we've been in pressure pumping since 1980 with frac submitting an acid stimulation.
And we have a long history of success.
We've taken a number of steps, which I believe will make us more competitive.
Over the first half of 2019, we made progress in improving our adjusted EBITDA per spread despite activity declining.
However, with continued declines in activity in the second half of 2019, our results were negatively impacted by the slower activity and lower fixed cost absorption.
During this period, we continue to evaluate reduce our cost structure, but were behind the pace of the activity slowdown.
Prior to the recent slowdown at the end of the first quarter. We started implementing major structural changes to further reduce our cost structure, while maintaining our excellent service levels.
Our team has scaled the business quickly to create a much flatter and more efficient organizational structure to support what we believe is the activity level going forward in 2020.
We believe that this new structure will reduce indirect support cost pressure pumping segment by approximately $65 million on an annual basis.
For example, we have closed our facility in the mid Con region and consolidated our operations to two primary regions the south in the northeast.
Within the South we've consolidated maintenance to one facility in Midland and closed three other maintenance facilities.
In the northeast, we're closing two of our traditional support facilities.
Along with this we have centralize certain support functions between the regions in order to reduce redundancies and we've eliminated an entire level of management.
We've also worked with our vendors to reduce costs.
The downturn completions activity became quickly in March as this was a fast way for our customers to preserve capital and we ended the first quarter with five active spreads.
Based on current conversations with customers, we expect to average approximately four active spreads in the second quarter.
Excluding potential restructuring charges in the second quarter, we expect our pressure pumping segment to be adjusted EBITDA positive despite revenues declining sequentially by more than 50%.
I'm proud of what the pressure pumping management team has been able to execute over the last few months.
While there is still uncertainty in this market following restructuring costs in the second quarter on a go forward basis, we intend for our pressure pumping business to be adjusted EBITDA positive and cash flow positive in the back half of this year.
We've scaled our pressure pumping business for a four spread operation in 2020, while still preserving growth potential for a future improve markets.
Yes.
Turning now to directional drilling.
Our directional drilling financial results were in line with our expectations with directional drilling revenues of $34.5 million and a gross margin of $2.2 million.
The gross margin as a percent of revenues decreased to 6.3% as we front loaded some development costs in the first quarter in order to bring new technology to market.
In the first quarter, our directional drilling team introduced two new technologies, the Mercury empower measurements, while drilling tool for enhanced durability and tough environments and lower operating costs and the new impact drilling motor for improved directional control and higher drilling performance.
We were pleased with the customer uptake before the before the market changed and we'll be in a strong technical position when the market eventually improves.
Going forward, the new technology development costs will subside and we are centralizing repair and maintenance activities and other support infrastructure.
Which we estimate will say $10 million of annual support costs.
For the second quarter, we expect directional drilling revenues of approximately $15 million with the gross margin of approximately breakeven.
We expect to spend approximately $3 million of Capex in our directional drilling business. This year of which $2 million was spent in the first quarter and so capex going forward in this business will be limited.
Turning now to our other operations, which includes our rental technology any MP businesses.
Revenues in the first quarter were $90 million, where the gross margin of $2.9 million.
For the second quarter, we expect revenues from our other operations segment decreased by 40%.
With the gross margin as a percentage of revenues of less than 10%.
Before I turn the call back to Mark for his usual concluding remarks, I would like to say few words as this will be marks last earnings call with us.
First I would like to thank mark for his incredible commitment in energy to both Patterson UTI I ended the industry over the last 25 years.
There is visionary leadership acquisitions inorganic growth Yutai energy grew from a small regional drilling and pumping company to combined with Patterson energy and become a leading oilfield services company and a primary player in the us unconventional shale Revolution.
Mark has been a great mentor to me. He has also been a great friend and I wish him all the best as he takes more time with his family.
With that I'll hand, it over to Mark.
Andy Thanks, and I really mean it. Thank you. Thank you.
As the thing goes this isn't isn't our first rodeo we've been in this business a long time.
Actually have been through many more of these downturns that I would like to admit.
While these downturns present near term challenges. They also present long term opportunities.
We have historically seized upon these opportunities to strengthen and grow our company and I'm confident that Patterson UTI I will emerge from this down tier downturn, even stronger even more technologically advanced and even more competitive.
As you may be aware this marks my 25th year with a company it's been quite a run.
I have truly enjoyed being an important part of what weve built here at Patterson UTI.
And im extremely proud of our many accomplishments.
Over the past year.
Hi, wrestled with the decision to retire as executive Chairman.
I have such affection for and pride in the company and its management team.
And of course, I was hoping to do so during a cyclical high.
Ultimately I decided that the supremely talented management team in place, we'll continue to manage the company in a superb matter and after 25 years, it's simply time for me to let others take charge.
In the words at one of my football player favorite football players of all time when asked about as Rick <unk> retirement. He reportedly said, it's better retire one year earlier than one year late.
And of course, my retirement has nothing to do with oil prices, where the cobot 19 outbreak it simply my own sense of a term limits.
Well I am stepping down as executive Chairman and from the board of directors as of the annual meeting I'm pleased to not be disappearing completely I'm humbled that the board has asked me to provide transition support services and assist as as Andy and the board made desire.
And that serves as a way for me to put my many years of experience with Patterson UTI I ended the oil industry to good use.
Before we open the call to questions I would like to say, thank you to all of the healthcare workers on the front lines of the Cobot 19 pandemic the doctors nurses associated support staff and empties.
Also a huge thank you to all the essential plays keeping things like grocery stores and pharmacies open in operators operating.
Thank you to all the hardworking men and women, who make up Patterson UTI.
Operator, we'd like to open the call to questions.
And thank you and just a reminder, in order to ask a question some of the Quest star and the number one on your telephone keypad.
Just a moment, while the compiled acuity roster.
And your first question comes line of Sean Meakim of JP Morgan Your line is open.
Hi, Thanks and.
Mark Best of luck. Thank you.
So just to start Andy I really appreciate the guidance for two Q in pressure pumping you're just considering.
For the completions market is headed.
The speed of the that's the decline in demand it seems.
Constructive you're able to stay EBITDA positive in the quarter.
That said it also means your negative on a cash margin basis after maintenance for the second quarter. So if you look beyond.
QQ, whereas you so much acute pressure on the producers.
Do you think you'll be able to avoid consuming cash with the business and the coming quarters and if not one of the levers do you have available to you.
Yes on good morning, So what's happening you know as we scale down the activity quickly.
Which started at the ended the first quarter and still coming down in the second quarter. We have a lot of costs that move into the second quarter that don't come out in the second quarter, but as we move past that and we get into third and fourth quarters second half of the year. It's my full expectation.
Based on the size of the business that we're going to have the size. The organization the size of the support organization et cetera that were adjusted EBITDA positive in cash flow positive on an ongoing basis after the second quarter.
Got it I appreciate that that's very helpful.
And I think so at looking at the broader business.
Activities coming off in the drilling business as well, but.
Much.
A more helpful margins as a starting point.
As you look towards the back half of the year, what's your confidence level in terms of being able to.
To generate free cash and is that the Frontloaded Capex give you a lot of the comfort or sending us with respect to working capital you'd highlight should be great to walk through some this pieces around cash flow.
Maybe that was there a little more within your control.
Yes, so overall I expected Patterson UTI generating free cash flow.
Looking at.
The term contract backlog that we have looking at the projections that we have.
Internally for the rest of the year.
No question in my mind based on what we can see today that were positive free cash flow for the company.
We've made the adjustment to the dividend we think it's prudent.
We didnt necessarily have to because we have cash available, but we just thought it was prudent based on the current overall global economic conditions. Yeah. Sean. This is Andy Smith I would also add that.
You know Andy's comments.
Don't include a huge amount of working capital.
Harvesting.
You know kind of looking forward I would expect we don't we didnt in the quarter with a huge amount of working capital I think we had $78 million working capital into the quarter X cash and I was I would.
John I guess that will probably harvest, maybe $20 million of that between now and into the year.
Got it okay. Thank you that feedback.
Okay.
And our next question comes lot of taste.
Both.
Bank of America. Your line is open.
Hey, good morning, Mark I wish you well.
Sure that you will stay in touch with the oil and gas market, but wish you well in your official retirement.
Thank you.
Oh, I guess, you know closely thinking about Twoq, you and I know that it's a little bit cloudy and murky, we think about twoq.
But we think about rig activity a couple of questions.
Number one is where do you think the rig kill bottoms for you when we.
It up.
All this shakes out.
What's the exit rig count on when we think about TQ in your implied guide.
Yes, I think the best way to describe it as the rig count is coming down fairly quickly still.
You know along the same pace.
We'll probably exit the second quarter somewhere just above 70 rigs.
You know thats, probably the best visibility, we have right now or close to 70.
I think overall this is going to be a very rapid downturn.
Our overall activity and I think it's you know.
Activity in the industry, not just us is going to come down 60% or more potentially.
But that's you know that visibility through the end of the years still a bit cloudy I would say, but we have some visibility.
Wrapping it over the next quarter and into the third quarter.
But the rig count still coming down fairly quick we have a lot of our customers that.
Our slowing their activity quickly and medium of have already made announcements in that regard.
Okay and thinking about Twoq you in your 70, I think you said 71.
Turning rigs and then you know your implied guide is about 82 or so.
Overall rig active during the quarter that implies some spot rigs.
So.
Is that really the right now in our companies actually really running some spot rigs and if so what kind of day rates DC.
No I would expect everything that we have working going forward is our rigs that are under term contract.
I wouldn't expect to see anything in the spot market you know one of the ways that the MPS are looking at.
How they decide which rigs to let go are really kind of based on the term contract structure that they have.
For the rigs at their operating so.
They're going to run their spreadsheets and decide how quickly are or what are the lower costs opportunities for them to exit rigs and of course spot is what goes away. The quickest. So I would expect to you know that what we have working going forward or all the rigs under term contract.
Okay, and you have got more questions, but I'll turn it back over the candy. Thanks.
Your next question comes lot of Kurt Hallead RBC. Your line is open.
Hey, good morning.
One of the first which.
Mark.
Joining in your retirement I think you did a great financial Stewart.
For the time as chairman.
And.
Congratulations on that and secondarily hooked to everybody and their families are healthy Patterson and say boots.
Thank you for both of those thoughts happy to report the answer to the second question is yes.
[laughter], yes.
I appreciate the color commentary on the outlook.
Things are going to really get a murky side maybe back the.
Hey.
At the land drilling question asking question on the Frac side of the business. So it looks like going to be running about four frac creep into the second quarter.
And do you think at this stage Andy that.
Kind of stabilizes at four or you think it's possible that that for could even go lower during the second half of the yet.
I think that for now our visibility is that we stabilized at that number four frac spreads in Q2 and.
Past Q2, you know it is very ended the year, we don't have a lot of visibility that's going to be a ways off but I would say that to you know we stabilize around that number four frac spreads and hence that's why we restructured the entire organization and the supporting structures around that number.
Just a quick follow up thanks for that in the context then is.
The dynamic at play in the Frac market is there incremental pricing pressures or again is it pricing at a level that so low that it's really going to wind up stabilizing.
Yeah, I think that pricing was already pretty low after you know oilfield services activity in 2019 dropped by about a third.
Pricing was already under pressure, we don't see any significant pricing pressure at this point, it's more about discussions of either you need a frac spread or you don't need to frac spreads.
Okay got it maybe one for Andy Smith.
Your next nearest maturity in 2022 at $100 million.
What was the game plan is there any thought essentially paying that down earlier than 2022.
Yeah, I would say in today's environment, we don't see any need to take it down earlier look we've got again a lot of cash on the balance sheet and completely undrawn $600 million revolver, so, which which doesnt expire until.
Yes, 2020 sort of five.
So there's there's no point and getting ahead of it in my mind in todays type of environment.
Got it okay. Thanks for that appreciate it.
And our next question comes from Scott Group from Citigroup. Your line is open.
Good morning, you know a.
Also a push marker.
Very happy retirement, it's a pleasure watching you helps you Patterson over the years and interacting with you So best of luck and enjoy.
Thanks for those comments.
Andy how should we think about the evolution of your daily drilling cost over the next several quarters you have.
Increased stacking costs here in Twoq, but those fade.
Then the second half a year, you'll have a less of the support costs being absorbed.
Across fewer operating rigs how should we think about.
The daily drilling expense over the next several quarters.
Yeah, there's going to be a number of moving parts in that number as we proceed through the year. So you've got the rig count coming down.
We're adjusting the cost around that and then we can only just so far.
Then.
It is the rig count gets lower later in the year.
To be less fixed cost absorption. We also have rigs that will go on standby where costs go to zero, but the margins are not too far off from what they were when the rig was working.
So thats going to change some of the cost structure. It's also going to change some of the revenue per day. So it's how all those things fit together.
Is really going to be a affecting.
How you model our cost per day in our revenue per day, so I would say that.
All that is moving significantly in the second quarter and into the third quarter. So.
Theres, there's just a lot of moving pieces in those numbers for the next few quarters.
Got it understood and I appreciate all the detail on the pumping restructuring.
How are you thinking about your footprint on the drilling side have you guys.
Reassessed the number of operating locations support facilities on on the drilling side is there.
Any a penny downsizing certainly from an operational.
Got a regional standpoint.
That makes sense, given what what could be a lower activity said coming out of this.
Yeah in general, we Havent had to make too many changes in terms of facilities and support structure facilities in drilling as you can imagine the Bakken is slowed down significantly for everybody and so we've made some some of the bigger reductions up there.
But in general.
We were we were rightsized with the facilities for the number of rigs and remember we're still working over 100 rigs so.
We still have a fair amount of activity out there today.
But.
No.
With all of our businesses you know unfortunately were scalable and we'll have to scale because of.
The downturn, we're going through.
And as I've mentioned Q2 is probably the biggest challenge to try to model everything because things are still coming down quickly in Q2, and the cost reductions are right behind the activity.
Yes, Hey, Scott, Yes, Andy Smith.
I would say that while we called out more around directional drilling in pressure pumping certainly you know across the board everyone within all units within the organization or looking at their costs and our costs coming out certainly into support level.
They're just not to the degree to that we called out in pressure pumping.
Got you one last one I missed the DNA guide what was that again.
$26 million.
And that's for Twoq, you is that a good run yet.
The full idols, it'll it'll continue to come down from there.
Okay.
Thank you.
Yes.
And your next question comes line of exactly.
Please go ahead your line is open.
Hey, good morning. Thank you Andy that there's a lot of talk right now about frac holidays over the course of Q2 and how your guidance probably.
Reflects that for Q2, but if you look from an industry wide perspective, do you think Q2 might mark the low point from the U.S. completions activity standpoint, and we see some some element of a bounce in the back half or is maybe the visibility you have to date today to load it to make that assumption.
Yeah, I think the term frac holiday, maybe overstating, what's going on I think that you know completion activity continues to come down we've got.
Visibility on what our rigs are going to do and you know with with what we see as overall activity there coming down in the range of 60% or more.
I don't see how completion makes a bounce back certainly not in the third quarter.
And fourth quarters still a ways off but I would say that to your completion activity still going to be coming down as well.
Yes, the DUC inventory is likely to increase we've got a number of.
Our customers, who we completed.
You know frac operations in a middle of the pad and then moved on but Theres no intent to bring those wells online right now so those ducs will be out there, but I don't think we'll see people move on.
Towards the end of year, unless we get some significant change in commodity prices.
Okay. That's helpful and it's encouraging that the guidance around even a positive in cash flow positive even over the back half a year in pressure pumping last year. I think you retired about 300000 horsepower and sound like going for you've.
Gotten that the business in a good position around a four active spreads.
With the rest of the equipment, you have them and clearly demand way down in 2020, <unk> at what point or what do you need to see to to go ahead and and retire some some more equipment over the course of 2020.
Yes at this time as you mentioned, we took a write down last year and we don't have any plans to ride anymore equipment down.
Yeah, we wouldn't make those kind of decisions on equipment in any of our businesses until we get through this down cycle and understand what the market looks like on the other side of the down cycle. That's when you would evaluate how much of the equipment is marketable how much do you think you'll use again and so it's we're way too early to them to make those decisions in the cycle.
Alright, Thanks, I'll turn it back.
Next question comes lot of Jeffrey Campbell of Tuohy Brothers. Please go ahead. Your line is open.
Good morning.
I wanted to say congratulations to mark on your retirement and.
I will Miss your commentary this quarter.
Thank you realize.
Appreciate that.
Andy.
Looking at current market struggles, we're still starting to see some.
Stickiness with electric Frac spreads a little bit attraction beginning to happen. Just wondering is patterson looking toward this technology at any point and the narrow or the further future.
No. We don't have any plans to do anything in the area of electric Frac.
We've we've looked at that both financially and technically I'll start with the technical side. You know we have a control systems company within Patterson UTI eyes called current power and we have the ability.
To actually engineer and manufacture our own control systems for electric Frac and all the electrical drive systems and we've done it for other electric Frac companies.
But back to the financial piece, we just never thought we'd get an adequate return on investment yes, we see that there are some contracts out there that are sticky because.
You know in order to build some of that equipment. Some company signed up some contracts around that but we just never felt like the profile a return made sense for us to do that.
We are actually more excited about other technologies and that's using natural gas as a fuel and when you look at what we do today, we're one of the the leading companies in terms of using natural gas is a fuel where you can substitute up to 70% today.
And on some of the new engines that are out there that we're looking at you can substitute up to 85% of the diesel with natural gas. So there's huge cost savings there for the operators is also improvements on the SG side through the dual fuel and it doesn't require the capital outlay of an electric Frac system. So we're more excited.
Brian area than electric track, but we've we've looked at it.
Okay. Thanks for that and one other kind of high level question I was just wondering.
If there any specific changes to normal business practices, you've had to employ specifically due to covert 19.
I have emerged as unexpected positives that might prove sticky even after some recovery. Thanks.
So I want to.
I want to say, thanks, and congratulations so far to our team that's been managing our risk in our business continuity around this.
It's been a huge effort on the HR side, the supply chain side to try to manage what's happening and all the various states in regions that we work and the you know the recommendations and regulations that are coming through and also just trying to understand from the CDC what are the best practices.
We think we are managing this well or as well as can be expected.
We've only had two positive cases of koby 19 in the company.
One was office based personnel one was drilling rig based personnel and we had plans to be able to manage that so we havent had any operational disruptions are directly related to covert 19, and you got to remember that our workforce in the field for the most part doesn't come from the bigger cities that comes from the small.
Our more rural areas of the country, where you have.
Less of the infection rate of the virus and so I think that helps us out and then when people rotate to a rig or to have pressure pumping side. There are there for you know up to two weeks at a time. So we have everybody together there and then when they go home.
We encourage everybody to continue the social distancing when they're on the days off but so far it's it's something that we've been able to manage and you don't want to thank our teams our employees for everything to do try to manage at the same time.
Your next question comes a lot of John Daniel <unk> Energy Partners. Please go ahead, Sir your line is open.
Hi, Thank you and I appreciate you put in a little Diane.
Okay.
Mark also my congratulations to you just launching I appreciate all the sports you've given me over the years wishing that best of luck.
Hopefully had a great time, John thing, Andrew that and let me congratulate you on your new firm.
Thank you.
Interesting times started farm.
Lisa.
Andy in your prepared remarks, you noted efforts to develop remote lender operations can you just expand a little bit about what you're doing when it started what's involved.
Yeah. We started this effort over a year ago looking at the the challenges in you know how frac operations work and where there are opportunities to improve things both from a performance and efficiency standpoint, but also from an HSC standpoint, and that's an area that we focused.
On first we're already a controlling the engines in the industry has been doing that for years. The blender was the next area to look at and because we have current power.
Universal pressure pumping a current power were able to work together to do come up with a solution for that and you will start field testing that this year and so we think that that's an.
An interesting first step in improving the efficiency of the current assets that the industry owns and we'll we'll continue down the path.
To try to move that forward.
Okay.
Thank you and I just have one more you mentioned.
Shutting down some facilities like lot of people are doing right now at some point the market is going to recover.
At least I hope so when it does.
Do you see yourself moving back into that do you see yourself moving back into those regions.
Where do you just stick sort of with one to two core core areas of operation is how will that help you look at those decisions.
So the way we see this happening.
Not unlike some other downturns, we've had to experience in the past, where we've consolidated into a certain facilities to reduce the cost.
As the industry comes out of this down cycle and starts to pick up activity if the activities not.
Per se near the region that were working we can still support that.
The maintenance facility that we have until we get critical mass in a region to reopened a maintenance facility. So it really based on you know if we get back to a critical mass in a certain region, but it doesn't mean, we can't work in the other regions, where we don't have the maintenance facility.
Is it safe to assume that they did the profitability on those fleets has to be significantly higher than what you might get your existing operation. It would seem obvious to me, but just just curious.
Yeah.
You know when you're when you're managing the the operations, especially pressure pumping remotely in your you're moving equipment long distances, you're incurring those costs and move that equipment and so once you get a certain number spreads in the cost to move those spreads you get to a cost breakover, where it makes more sense to rolling back to me.
Okay, that's much closer rather than burn the diesel so it's really kind of that math that we would look at so if you know if you get back to two or three spreads in a particular base and then it's probably worthwhile to reopen a maintenance facility at that point.
Fair enough. Okay, guys. Thank you and good luck this quarter.
Thanks, good to talk to you.
Our next question comes in light of James with Evercore ISI. Your line is open.
Hey, good morning, guys.
And Barca Especial special Thanks to you for Oh, all the years of importing your wisdom and guidance I think it doing from a 20 years now so I'm sorry to see you retire but congratulations on your retirement and you you're you're wisdom, Oh, we will be law.
But oh, we enjoy your retirement.
James Thank you for those kind remarks, but I think that Andy Andy.
[laughter] can Seth and the rest of the team are all very very capable of.
Managing for the future so I'm I'm.
I'm feeling very very comfortable about my continued investment in Patterson and the continued direction of the company. So.
Just wanted to state that they're not about I think you for your kind words.
Great, Thanks, Mark and it out about that.
Andy.
Bigger picture question for me.
Obviously near term can be tough, but on the other side of this if we're looking at A.H.
Land market that it provides a less production when it does today, let's let's this years we've been talking.
All right at Evercore about 2 million barrels a day.
And a rig market that perhaps needs.
400, 450 rigs, including the 75 or so gas rigs.
I'm, assuming we do LNG again, but.
You know what.
Do you guys think about the market or are you thinking about the Mark I know things are moving to Bassinger downturns, probably top is top of mind, but do you think about the other side of this and what sure.
Business should be skilled for in a there's a lower market a environment going forward.
Yeah first off our liquidity position allows us to think about the other side. So it's good that we can have that conversation this morning sure.
I don't think I don't think anybody has a clear view of what the other side looks like if everything comes back to the same level of activity or if it's some kind of reduced level of activity.
But let's just say, okay, maybe it's a reduced level of activity I think in that case, especially on the rigs side, you see continuing shift to higher spec and super spec rigs, you'll have much less as a percentage of the SCR and so I think that.
Plays in our favor.
You know in terms of the completion side not sure how thats going to too.
Grow back I mean, there's going to be a number of ducs that are going to have to be fracked and so there may be an opportunity to get on ducks.
Right away as as drilling rigs come back on at the same time versus the normal lag with completion bond drilling.
But you know it's one of the reasons, we've scaled that our pressure pumping business the way we have.
We wanted to be able to grow but we're not sure to what level, it's going to grow too. So I don't think we have that kind of visibility your crystal ball to know.
What level it all comes back to but I think that we're still a scalable company and we can adjust to that especially on the drilling side I think it's going to be heavily weighted to the high spec super spec rigs as things come back.
Sure no doubt about Oh, that's all I had a guys or India, thanks send that and Mark again congrats.
I think.
Okay.
Next question comes lineup like Gendron Research your line is open.
Thanks. Good morning, guys. Appreciate the comments on standby termination dynamic can be somewhat noisy model. It from here on the now I'm also appreciate the fact that fewer rigs on contract this downturn versus last so probably more termination. This go around but that being said when we think about standby over the next.
Order to our your.
Forecasts are your guidance on the rig count inclusive of some moderate outperformance of the broader industry rig count then if we think about terminations you get the backlog indeed, the number of rigs on term.
Is there any way you can educate us on you know maybe the conversion the cash conversion.
As as rigs get terminated its a way to think about termination lump sum as a percentage of the contract backlog that'd be helpful. Thanks.
Okay, let's let's start with a few things so.
In terms of our projections on what we think our rig counts doing versus the broader market.
I think that in general we do pick up a little bit of share just because the market shifts over to the high spec Super spec rigs is the primary rigs that are gonna be working during this downturn is because of the term contract coverage.
But we don't really look at that way per se. What we're giving you is really based on the direct knowledge of what RMP customers are going to deal with their operations you know over the second quarter and into the third quarter. So I think thats an important point that this is a through a lot of discussions with our customers we have to stay close to that.
Customers right now and I don't want to congratulate our teams in all our businesses for doing that.
In terms of the early term you know these are customer by customer decisions, sometimes things change in the middle core we may have one plan right now two months from now that might change a little bit. So don't have any good rules for you.
In terms of of how to to look at that but certainly if theres an early termination of there's likely cash that's coming back to the company.
So a wall the.
Losing the rig is not good guy the cash coming back to the balance sheet. In this type of environment is a good guy for us.
Yeah.
Gotcha and that's there just given the lack of visibility I'm just one follow up on the directional drilling comment. This is a business even moving out substantially and have gotten out ahead of others.
We've heard a lot about remote operations, you mentioned that I clearly the incumbents are you know the slumber day Baker Halliburton to the world, but I'm wondering just given you know maybe a concerted shift toward remote operations, whether that's an opportunity for you.
To take additional share from some of the smaller providers that may not have the same our capabilities or scale built up in this specific.
Service any any high level commentary would be helpful on that thanks.
Yeah, I'm really excited about all the adjustments that are directional drilling business has made over the last year and ended the first quarter of 2020, and we're very excited about the new technology that we're rolling out in the first quarter and it was part of a technology introduction that.
We did it.
The annual conference. It was a joint Society Petroleum Engineers International Association of drilling contractors and the uptake for the technology in the field was really growing in the first quarter until things changed on us so with the new MWD tool the new motors sizes in designs that we have out there in the field.
Things are really moving forward and my expectation until the market change was that our directional drilling business was going to see nice growth in 2020 and was going to gain market share because of that.
And that was going to be very positive for the returns in that business now things have shifted that directional drilling business will slow down along with the overall broad industry rig count because we work for a broad number of customers out there.
But I am very excited about how that business has positioned itself and with the new technology.
Thats going to help sustain us and then that technology also helps us.
Do more remote operations, just because of the a.
Higher service quality, that's happening at the well site with the new technology, we can do more in the area of remote operations and we're making that adjustment in the downturn, we were moving that way anyways, but you know the down cycle allows you sometimes to move some certain initiatives faster than others and this is one of them.
Deal interested to follow that on the back end of this thanks, a lot from color I'll turn it back.
And our next question comes right away girlfriends about the core capital.
Thank you for taking my question and efforts to fall on a mock up. Thank you for August service and conversations ongoing retirement.
I have no known you for about 15, 20 years and I've always enjoyed your comments and commentary. So we missed that going forward, but I do want to know what has that.
Since I've known you you've always talked about a the tons in cash and Oh shit Wonder fendi practices in something that's become a mantra and now I, but you'd being ahead of the Calvin you'd be speaking about that to ever since that no. One he was so.
Thank you for that and again congratulations on the other time and.
Okay. Thank you for that as you know that's been my mantra from day, one and I think it will continue to be pot pattersons mantra going forward.
And he said I know that its that certainly that to know.
Today.
[laughter] absolutely.
My question, Andy you talk about early termination revenues for the second quarter any thoughts on one of what they could look like for the third quarter a second half.
I think a third quarter is still a little bit too far out there for us to try to estimate what to early terms are going to look like at this point or how much cash we get back from that.
Okay, well, but any portion of that 8 million is is for that you know I am I looking on the anytime to through the quarter advocating that.
As a based on what it would have looked like had those contracts being in working.
No. That's that's just based on the contract ending in the cash coming back.
Okay, and then off a low eightys rigs that maybe working in the second quarter, how many of those would be on standby.
[noise], but don't have that number in front of me.
Okay and you also adopted today and the board did the shareholder rights plan could you maybe comment on that.
What car I think all the comments about that really are in that press release I'll be happy to try to respond anything else you have but you know in our minds.
Significant market disruption caused by you know the rapid sharp decline in oil prices.
Cash provided by the Cobot 19 pandemic another macroeconomic factors, leading real steep decline in our stock price and increased trading volume made it prudent for us to do that.
Yeah, No makes sense and then just last question Andy often for pressure pumping crews that you have how many of them are in the northeast and how many in the Texas area.
Well first of all circle back on your rig standby question. So by the end of the second quarter, we expect the number of rigs on standby to be in the low twentys.
Then in terms of the split we're going to be split with two spreads in the northeast in two working in this out.
Okay.
Great. Thank you very much.
Thanks.
Your next question comes line of dealing Gloucester and energy and mining.
Hi, Good morning, guys. Thanks for squeezing me in.
When I I know, it's extremely difficult to predict someone the other side. This colossal look like but if you guys had to give a range of.
Where we might see the industry recount trough, but what would that be in your opinion and when would you expect us to hit the bottom.
I don't think we have visibility exactly of when and what the bottom looks like we have visibility that our activity in general is going to come down in the range of 60% or more.
But it's it's hard to know if that's the bottom or you know if there might be a little bit more than that so that's that's the best visibility that we have so far can I just add to that they did it strikes us as really difficult to make accurate prediction, just given the macroeconomic and international players.
As all of whom are apparently going to act on international oil prices. So given that uncertainty is pretty hard to for any company to make it villa judgment about what a long term <unk> oil prices or even six months oil prices.
Yeah, absolutely I guess, just going off that I know, it's hard it would be hard to predict an exact a range for this to you, but it's just for is the conversations you guys have been adding with with customers about leading edge day rates and where those might be going as we enter 2021.
<unk> do you suspect that we will you know I guess, how big how significant of the decline do you expect there to be in just a leading edge day rates for your Super spec rigs.
Well I think sometimes you know history as it is a good predicts or what can happen in the future and if you look at the downturn in that we had in 15 and 16, you see a recurring theme, especially in contract drilling where contract drilling for high spec Super spec rigs is a relatively consolidated sector with.
As a relative price discipline and so it doesn't get pushed to cash breakeven and it didnt back in 15 16, I don't expect.
It will get pushed the cash break even you know even in this downturn just because of the relative consolidation in the relative discipline I. Suppose you know, we're projecting that that business days cash positive now what happens to leading edge day rates.
It's too early to predict what that is but my expectation is those will still be.
Cash flow positive number.
Okay.
That's helpful. Thank you and my last question just is more of a point of clarity and when you guys talked about positive dawn and cash flow and the second half 2020 was that on a consultative consolidated basis or is that just within pressure pumping that you're referring to.
Yeah, I would say that's above.
Okay, I think we were probably making comments about it in pressure pumping, but but I would say it's above.
Okay. Thanks, guys I'll turn back.
Your next question comes lot of Chris <unk> and Wells Fargo line is open.
Thanks. Good morning, just wanted to ask on you guys had been willing to give a little bit more color than than other people, so far or any trends developing in terms of operator type in their behavior, how much visibility different sets are providing or how much.
The decline you see across different types of operator.
Well first let me just say that you know I think we're able to give more color than some of the other companies you've heard from so far because we're drilling contractor and the drilling contractor historically has always gotten the first call. A you know whenever an operator wants to start changing their plans and so we have some relative.
His ability in what's going to happen in so I think we've been able to give you more color from that respect and also manage our other businesses.
In our portfolio because of that market visibility.
When I talk to some of our customers there all.
They all have slightly different playbooks.
Some of our customers have some hedges in place some hedges are longer than others. Some of our customers work strictly on cash flow and I also had some conversations with customers here over the last week on what they're doing on their production and their takeaway we've got.
Some customers that are telling us that they're not having any problem would take away from west, Texas because of the relationships they have with the pipeline companies.
Got some I've got a few customers that are shutting in all their production right now and I've got to customers are shutting in half their production. So it really depends on the economics of the MP.
You know what their their financial structure is in terms of hedges or their philosophy on how they run their business. So we've got a mix of customers. You know just like we talk about some of the other calls where you've got the majors you've got the large publicly traded independents, you've got the large private independence of small.
But im independence, they've all got to different playbooks, even within those groups of types of customers that we have.
Okay. That's helpful.
And then to follow up on on the pressure pumping side, so planning to dropped to four fleets and planning to be free cash flow positive or EBITDA positive, sorry, and well sorry, both of those in the back half in deposit in first half you know I imagine you have to making utilization assumptions around that probably relatively high utilization do you have kind of.
Confidence or assurance from the customers that are working those fleet that they plan to keep working continuously or is there a decent amount of risk I think there can be stoppages with those four fleets.
Well I think its best if I clarify that we're not planning on high levels of utilization, we're planning on a calendar that has breaks in it.
We also have some spot work that we think we'll do within those breaks, but we classified as a low probability so what we're doing our projections I.
I wouldn't say at all that we're counting on high levels of activity. The calendar still has whitespace in it and I think weve adequately adjusted Arses, our support structure costs to account for that same time.
Okay. Thanks for taking my questions.
Thanks.
And your next question comes on at Tommy Mall Stephens. Your line is open.
Good morning, and thanks for taking my question.
Any time Warner.
[noise] Ah Theres still lot of focus on your commentary regarding pressure pumping for the second half.
Being both EBITDA and cash flow positive.
My follow up on that theme what are you assuming for Capex for that segment in the second half.
So a lot of that Capex was front end loaded some of it carryover from last year I'll hand, it over to Andy Smith, you can give you some more color on that yeah, Hey, Tommy we we did kind of front end load that capex. Some of the sharp decline in activity, we had some built up sort of inventory.
So we're looking at remaining Capex for the back half a year, probably in the 8 million dollar type range.
Okay. That's very helpful. Thank you.
And then shifting to a broader capital allocation question.
You've moved quickly to reduce capex overall as well as the dividend.
Andy You mentioned earlier, you don't have any maturities until 2022 and plenty of.
Hi capacity on an undrawn revolver so.
As we go into this downturn just high level, how do you think about balancing.
Decisions to invest in terms of capex decisions to potentially just dividend again.
De lever, but just build a cash.
Get a sense of how you're balancing all those priorities.
Yeah, I'll start and I'm sure others will one.
Well I want to doing them, but you know as weak as we came into this kind of real sharp decline at the end of March you know I think we like most other industry participants sort of said, okay, well, let's I think right now the most valuable thing we haven't liquidity, so we sort of prioritize liquidity.
That was kind of our thinking as we we went for the last month or two.
Things stabilize and we see it maybe a little bit of light at the end of the tunnel and potentially even an upturn our thinking may change, but I think it's too soon to really call when that will happen and what will what we'll do at that point in time.
I would agree to that.
At the start the most important thing is to make sure that you have liquidity you need.
Later on you can be you can think about what are the choices you though.
Yeah, I mean time, and we don't have any concerns around our ability to drawn our line I mean, you know or anything like that we just.
You know again, not really not really knowing where all this was going to shake out early in March.
Yeah, we wanted to maintain the flexibility and that with liquidity comes flexibility.
Fair enough. Thank you for the answers and I'll turn it back.
Thank you, ladies and gentlemen, I'd now like to turn the call back to Mr. Mark Siegel.
Yes.
Ladies and gentlemen, thank you for joining us on our conference call for the second quarter and.
Allows me to see a final thank you to each and every one of you.
I had many interactions over many years and insight. Thank you for all of those and look forward to see you in a personal capacity separately.
The time Goodbye comes as the time goes by thanks, everybody Bye.
[noise] and this concludes today's conference you may now disconnect.
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