Q2 2021 Patterson-UTI Energy Inc Earnings Call
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Good day, thank you for standing by.
And welcome to the <unk>.
Patterson UTI energy second quarter 2021 earnings conference call at.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Do I take question during the session you will need to press star 1 on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance press star Zero I would now like to hand, the call over to your host Mike Trickle Moore, Vice President of Investor Relations. Please go ahead.
Thank you for later.
Good morning, and on behalf of Patterson UTI energy I'd like to welcome you to today's conference call to discuss the results of the 3 and 6 months ended June 32021.
Participating on today's call will be Andy Hendricks, Chief Executive Officer, and Andy Smith, Chief Financial Officer.
A quick reminder, that statements.
The conference call that state, the company's or management's plans intentions beliefs expectations or predictions for the future are forward looking statements within the meaning of the U S. Private Securities Litigation Reform Act of 995, The Securities Act of $19.33, and it's the key already of Exchange Act of 1930 for these forward looking statements are subject.
The risks and uncertainties as disclosed on the company's annual report and on form 10-K, and other filings with the SEC. These risks and uncertainties could cause the company's actual results to differ materially from those suggested such forward looking statements for what the company expects the.
The company undertakes no obligation to publicly update or revise any forward looking statements the company.
Maybe on the <unk> filings, maybe obtained by contacting the company for the SEC are available through the company's website or through the SEC Edgar system.
Statements made on this conference call include non-GAAP financial measures required reconciliations of GAAP financial measures are included on our website Www Dot P. A T energy.
<unk> dot com and.
And in the company's press release issued prior to this conference call in.
In addition, you will find important information for stockholders and cautionary statements included at the end of the company's press release issued prior to this conference call.
And now it's my pleasure to turn the call over to Andy Hendricks for some opening remarks Andy.
Thanks, Mike.
Good morning, and welcome to Patterson UTI of second quarter Conference call. We are pleased you can join us today.
For the second quarter revenues and adjusted EBITDA increased sequentially as drilling and completion activity has steadily improved from the lows of last summer.
Based on conversations with customers about the remainder of this year and.
The early 2022, we expect increasing activity and increasing price.
In contract drilling since the beginning of the second quarter of rig count has increased by 8 routes.
In addition to the overall increase in our industry, we continue to see increasing customer interest in reducing emissions through the use of.
And into the power sources.
And we believe these lower emissions technologies, where we have a leadership position our differentiator.
As an example, we were recently notified by a major international E&P that we will be increasing our activity within their drilling program in activating multiple rigs over the next.
The alternative.
This measure of customer intends to use a combination of our natural gas powered and our high line utility powered rigs.
The pressure pumping we took advantage of opportunities with customers to accelerate our reactivation plans and we activated 2 spreads late in the quarter I am very pleased with the performance of our team. This.
Next year as a net margin expectations, while also incurring reactivation costs for these 2 spreads at the end of the quarter.
These 2 spreads are expected to be accretive to our average adjusted EBITDA per spread and will help improve our fixed cost coverage going forward.
We continue to see opportunities to economically reactivate.
The quarter's fuel spreads and as such we expect to reactivate another spread early in the fourth quarter.
Our pressure pumping team has done a great job of controlling costs through greater operational efficiency and has also successfully achieved higher pricing to improve margins.
With the improved pricing, we expect a meaningful improvement of our third quarter pressure.
Drilling margins.
As well with the increasing demand for lower emissions technologies and consistent with our disciplined approach to capital spending.
We plan to continue to upgrade engines on existing pump trailers to tier 4 dual fuel.
We continue to believe that 2 year for dual fuel has many.
As for pump vantages, especially over electric Frac spreads, which in reality also burn natural gas.
We believe this premium technology to generate savings and offers of operational flexibility for the customer and better economics for Patterson UTI.
We've also started to gain considerable experience performing.
Many of the time of Fracs and I believe we are 1 of a very few companies to have completed the final for us in both the northeast and in the Permian.
In directional drilling the reliability and performance of our Mercury measurement, while drilling system and our impact directional drilling motors has allowed us to continue gaining market share.
During the second quarter, we saw a 77 zero percent increase in the number of rigs on which we provided directional drilling services, which led to better than expected revenues, but margins were impacted by the higher reactivation costs as we grew.
With that I will now turn the call over to Andy Smith, who will review the.
<unk> results for the second quarter. Thank.
Thank you the A&D and good morning.
For the second quarter, we reported a net loss of $103 million or <unk> 55 per share while consolidated adjusted EBITDA was $35.4 million.
Before I get into the segments as a general comment due to the improving activity.
Given the levels and increasing tightened from the overall labor market, we are starting to see journal of oilfield cost inflation across our segments.
This inflation combined with the increasing challenge of attracting employees for the industry is increasing the complexity of reactivating equipment.
We believe this challenge combined with the increasing demand for premium drilling and completion services.
The final report higher pricing going forward.
Within our segments.
In contract drilling our average rig count improved for the third consecutive quarter on average 73 rigs in the second quarter up from 69 rigs on the first quarter.
Average rig margin per day during the second quarter was $6250 <unk>.
Average rig operating <unk>.
Cost per day increase relative to the first quarter due primarily the fewer rigs on low cost and by higher rig reactivation expenses and the sales of these tax refund in the first quarter that did not recur in the second quarter.
At June 32021, we had term contracts for drilling rigs providing for approximately 210.
<unk> <unk> of future day rate drilling revenue.
Based on contracts currently in place, we expect an average of 37 rigs operating under term contract during the third quarter on an average of 24 rigs operating in the term contracts during the 4 quarters ending June 32022.
For the third quarter, we expect our rig count to improve.
The average of 81 rigs and in the quarter of 83 rigs.
Contract drilling gross profit is expected to improve to approximately $46 million.
Average rig margin per day is expected to be approximately flat with the second quarter level.
In pressure pumping we average 8 active spreads during the second quarter ahead of our expectation.
<unk> for 7 spreads as we reactivated 2 spreads during the month of June.
Even after cost associated with the reactivation of the extra spread pressure pumping gross margin improved to $9.7 million for the second quarter.
Pressure pumping revenues increased almost 50% sequentially to $112 million.
For.
For the third quarter, we expect the average non active spreads pressure pumping revenues are expected to improve from second quarter levels by more than 30% to approximately $150 million on gross.
Arjun is expected to be approximately $18 million.
Turning now to directional drilling revenues for the second quarter increased 26%.
$24.9 million from $19.7 million in the first quarter as the number of rigs on which we provide a directional drilling services increased by 70% during the second quarter. However.
However, with the increase in reactivation costs gross margin for the second quarter decreased slightly to $2.5 million.
For the third quarter.
<unk>, we expect to further benefit from higher activity levels with revenues, increasing approximately 35% sequentially to $34 million.
Gross profit for the third quarter of expected to be $4 million.
Turning now to our other operations, which includes our rental technology and E&P businesses.
Revenues for the second quarter.
<unk> improved to $13.2 million and gross margin improved to $2.8 million.
For the third quarter, we expect revenues to improved to $14 million of the gross margin of $4.5 million.
On a consolidated basis for the third quarter, we expect total depreciation depletion amortization and impairment expense.
Order of approximately $141 million selling general and administrative expense is expected to be approximately $23 million from the third quarter and for the full year 2021, we expect an effective tax rate of approximately 17%.
Based on conversations with customers about increasing activity levels into 2022.
We are increasing our 2021, capex forecast to $165 million, including $105 million for contract drilling $35 million for pressure pumping and $25 million for directional drilling other than general corporate.
The increase of our Capex budget, primarily consists of investments in high demand items the generating.
Ancillary revenue, including specialty drill pipe and ESG related technologies, as well as higher maintenance capex due to increasing activity.
Also we will be paying a quarterly cash dividend of <unk> <unk> per share on September 16, 2021, the holders of record as of September <unk> 2021.
With that I'll.
The rate and call back to Andy Hendricks.
Thanks, Andy.
It's been a while since we've had this level of visibility into future quarters, and I am very encouraged by the continuing increase in E&P demand, we're seeing for our services in both drilling and completions.
While this was primarily driven by the trading range of the commodity.
Commodities over the last 6 months. It is also driven by Patterson Utis overall high level of well site performance and efficiency as.
As well as our ESG related technologies.
I expect this demand continued at least into 2022.
For Patterson UTI as we've discussed this means both increasing activity.
I'll now turn energy increasing pricing in our businesses.
Finally, let me provide a short update on our pending acquisition of pioneer of energy services.
Subject to regulatory approvals customary closing conditions and the approval the pioneer energy services stockholders. We continue to expect this acquisition will close in.
For the fourth quarter.
Pioneer has experienced people high quality assets and efficient operations in the United States and Colombia will be of valuable addition to our business.
With that we'd like to thank all of our employees for their hard work efforts and successes both in our industry and in general when we look forward to a stronger second half.
For the year.
We would now like to open the call for questions.
At this time, if you would like to ask a question press the star and the number 1 on your telephone keypad.
Star 1 to ask a question on your first question comes from the line of Mike <unk> with Bank of America.
Hey, good morning, everyone.
Good morning.
And you had mentioned some upgrades.
On the frankly, the tiered for deal flow.
Maybe you could just give us an idea of I guess, where you are today in terms of kind of capacity of Nextgen frac equipment.
Any of the Capex bump.
Are you on that today is.
On the Frac upgrades.
As we think about that.
Maybe you can talk us through economics on what we see from those upgraded fleet today.
Yes, what we're doing is we're actually changing the engines from the.
Older models of engines to the new tier 4 dual fuel so it's not of changing.
Of the horsepower to an engine swap on the trailer. We started this a few months ago with tier 4 dual fuel and we're going to continue to invest some capex.
To do this for the rest of this year and into next year to get ready to have.
Even in other full spread ready for Q1 next year. This is.
There is certainly some capex in there, but it's the relatively small amount compared to overall capex for the company, but we see this as a very cost effective solution to.
The upgrade the level of technology on our existing equipment without adding horsepower into the market.
Understood.
And then maybe.
You can just I guess pockets through.
On the rig side, maybe describe kind of where you think customer interest is coming from as we look a little further out obviously this year the rig demand we prevent the rig demand has been dominated by private e&ps.
On the of the DUC inventory.
By the by the public E&ps looks like its largely been exhausted. So it seems like the set up there that the the public e&ps have to come back for rigs as well.
Would you agree with that assessment and if it plays out that way just talk through what it means for Patterson kind.
Relative to a market that's been more dominated by private e&ps.
Certainly as we came off of the downturn last year it was private debt.
Move quicker, but when you look into what we're seeing in the second half of this year and into 2022, it's really broad.
Privates that are going to add rigs at mid sized publix, it's large international E&ps. So we're just seeing more.
The broad based uptake and rigs with the discussions we're having going into early 'twenty 2.
Got it thanks.
Your next question comes from the line of the call.
Copper.
The PX the Sham with Coker, Inc.
Palmer and Coker.
Hey, Matt. Thank you for trying and thank you for taking my question gentlemen.
Good morning Bill.
Good morning.
So I guess, if we talk about pressure pumping could you help us think about Nick.
In the March.
More of a book to meet the day, where we actually can get better pricing for the EAC affirm the fleet versus conventional fleet.
Yes, we believe that.
By changing out the engines on offering tier 4 dual fuel on existing pump trailers.
Debt.
Mark we can pick up more work, but we can also get better pricing and margins on that particular work I mean, it offers a lot of benefits for the customer in terms of cost savings, but as I mentioned earlier. There is also good economics for us.
Okay.
Yeah.
Switching to land drilling.
The move from here.
Now for the 'twenty 'twenty 2 'twenty 3 I'm not trying to pin you down for them, but just generally how do you think about the lack of the margins could go back to let's say what the saw in the prior cycle.
Given the changes like now you've got providing more services on the fund on the same branch sales.
Just putting that in context would be helpful.
So.
The way that I see this evolving because we're already in discussions for putting up rigs across the second half of this year.
And into 'twenty 2.
It's actually quite interesting like I mentioned.
Mentioned, we just haven't had this level of visibility and a long while.
And.
My concern is that.
<unk> got some of our operators customers that are still working through their budget process and they may not even make decisions.
Until late this year or early next year on rig day, 1 and by that.
At times some of the rigs that they've been used to running are not going to be available and so I think youre going to have the situation as we move into 2022, that's more of a fear of missing out.
There's going to be of more of a scramble for the best Super spec rigs that are out there and on branded we all have a lot of high spec rigs, but when you talk about.
The best performing Super spec rigs.
And with some of the operators a little bit slower on their budget cycles, I think theyre going to land in the space and early 'twenty 2.
They're not going to have necessarily of the rigs that they want to have.
And when you see that happening in the cycle, that's really a big push on pricing and Thats, the big push on margins and it's.
Since we've seen that too and so I do think it evolves into 'twenty 2 the.
We have the possibility to get back to some of the higher margins that we've seen in the past in other cycles.
And part of what May drive that is when some of these larger operators that are a little bit slower decide that they want to add rigs and they can't.
Get all of the specs that they want they've now got to work with the drilling contractor to pay for upgrades and those those kind of discussions drive pricing and I think you'll hear more of that as we get into 2022.
So maybe what I'm hearing is really as opposed to I mean, correct me if.
Misinterpreting this but what I'm hearing really is in the fourth quarter. When we typically think about lack of decline.
Given where the commodity prices and based on your customer conversations actually we can see more rig increases in <unk> is that fair at the tradition of what Youre, saying.
I think you can take fourth quarter decline and thrown out the.
The window. This year, you look at where commodity prices are trading.
Oil WTO of about $65, a barrel of natural gas above 3.
Considering the fourth quarter decline.
That's very helpful and thank you for taking my question gentlemen.
Yes.
Okay.
Cash flow question Press Star 1 on your telephone keypad the star 1 to ask the question.
Your next question is from the line of John Daniel with Daniel Energy.
Hey, guys. Good morning. Thank you good morning, John.
Just I know you can't name the E&P company I'm, not asking for that but you talked about the international.
On to E&P, thus, presumably of large 1 picking up multiple rigs.
Curious if.
If you could just maybe.
<unk> the gas as to what the relative change in incremental rigs versus where they are today just frame it for us.
And when that would happen if you can.
<unk> I'm, just trying to we own and the reason I'm asking is obviously like you see the private is going from zero to 1.1 to 2 I mean, the percentage changes for huge.
And you know we typically think of these large guys is being disciplined but like everything would suggest they're going to be adding rigs.
And maybe the significantly so just your thoughts.
So I think there's maybe.
Maybe the situation that's specific for us because this is the large major E&P that has the drilling program that may not that may grow their drilling program somewhat.
But we're very likelihood of growing share within their existing drilling program. So I think theres still relative discipline out there I'm not calling of lack.
The discipline or a big ramp up in their particular program, but because of the technology because of the performance and efficiency that we've been offering with this particular operator over the last few years. Our team has done a great job and we see ourselves growing share in ESG and the emissions related technology of our part of that equation as.
Well, Okay fair enough on the Frac side I, just want make sure I've got this the sequencing right youre running 8 today is that right.
Going to 9.
Correct.
On.
And then did you were at 9 we just finished the yes, we do.
The activated number non and then we're going to turn.
Early Q4 could be late Q3, but likely early Q4, okay.
If you said this I apologize.
The number of let's.
Let's just say at year end.
At year end, what would it be roughly the tier 4 DGB split.
Within your fleet given the investment.
So we have a number of different things on our fleet, we have tier 2 dual fuel we have tier for the a tier 4 dual fuel by the end of this year with the changing out more engines will be up to a full spread of tier 4 dual fuel and they will also be set up for a second tier or second spread of tier 4 dual fuel next year okay.
Alright, guys. Thank you very much for answering the questions.
Thanks, Jeremy.
Your next question is from the line of Scott Levine with Bloomberg.
Hi, good morning, guys.
Good morning.
So.
Yes, I wanted to see if I.
Okay.
Of your outlook for net pricing.
For both drilling and pressure pumping for the back.
Half of this year, if I heard correctly in your prepared comments you said you expected your average daily rig margins to hold about flat in the third quarter and Thats, what I think the herd.
Out of 1 of your competitor.
Can get US yes your day.
But your activity levels are increasing and we've seen the inventory.
Of docs.
So off pretty considerably recently, so is it fair to assume that the pace of activity in drilling accelerates, but maybe the net pricing.
<unk> lagged a bit behind the recovery net pricing in pressure pumping.
Or are you seeing it from a different vantage point from from your perspective, just curious there.
So our view is we're seeing a steady increase in rig count throughout <unk> and into 2022.
We're also seeing an.
An increase in pricing, but we've also had some cost inflation as well so the cost inflation of keeping the margins flat quarter on quarter, but then we expect margins to improve after that.
And on the pumping side is it is it a different situation or is the magnitude of.
Any different or is it a roughly similar trend as far as you can say.
I would say pumping is coming off of a more challenging bottom and as we increase the number of spreads. We're operating we're improving margins by a mixture of increasing pricing and better fixed cost coverage as well.
Understood. Thank.
Thanks.
Well get in order to ask the question Press Star 1 on your telephone keypad the star 1 to ask a question.
There are no other questions at this time.
Thank you for us well, we thank everybody for dialing into our earnings call. This morning.
Have a good quarter. Thanks.
This concludes today's conference call you may now disconnect.
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