Q1 2022 Patterson-UTI Energy Inc Earnings Call
Please standby we're about to begin.
Good morning, ladies and gentlemen, and welcome to the Patterson UTI Energy first quarter 2022 earnings conference call. At this time all participants are in a listen only mode and please be advised that this call is being recorded after the speakers' prepared remarks, there will be a question and answer session. If you'd like to ask a question. During this time.
My Star one followed excuse me star one on your telephone keypad. If you would like to withdraw your question Press Star. One again now at this time I will turn things over to Mr. Mike <unk>, Vice President Investor Relations.
Thank you Bob.
And on behalf of Patterson UTI energy I'd like to welcome you to todays conference call to discuss the results for the three months ended March 31 2022.
Participating in today's call will be Andy Hendricks, Chief Executive Officer, and Andy Smith, Chief Financial Officer.
A quick reminder, that statements made in this conference call that state the company's or management's plans intentions beliefs expectations or predictions for the future are forward looking statements. These forward looking statements are subject to risks and uncertainties as disclosed in the company's SEC filings, which could cause the company's actual results to differ materially.
The company undertakes no obligation to publicly update or revise any forward looking statement.
Statements made in this conference call include non-GAAP financial measures.
Reconciliations to GAAP financial measures are included on our website Www Dot Pat energy Dot com and in 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 Utis first quarter conference call. Thank you for joining US today I am very pleased with our first quarter results, especially within contract drilling where our better than expected revenue per day during the quarter illustrates how quickly day rates are increasing our.
Our average adjusted margin in the U S increased by $1720 $20 per day in the first quarter and we expect further margin growth in the second quarter of an additional $1100 per day, driven by a 1600 dollar increase in average rig revenue per day for.
Perspective. This is the strongest daily margin growth, we have seen since 2013 in 2014.
The base, leading edge day rates for tier one rigs is now in the upper 20, thousands and including ancillary equipment easily over $30000 per day at the leading edge driven by increasing demand and a limited supply of readily available rigs.
With the tight market some customers are already planning for their additional needs in 2023, which we expect to drive demand for longer term contracts and also increased contract backlog.
We are also seeing significant price increases for our services in both pressure pumping and directional drilling and in our pressure pumping business. We are obtaining more favorable standby terms to help offset customer related downtime.
With that I will now turn the call over to Andy Smith, who will review the financial results for the first quarter.
Thanks, Andy and good morning.
As Andy said, we're pleased with our first quarter results and encouraged by our outlook, we expect pricing momentum for our services to continue and as such we are increasing our expectation for total adjusted EBITDA for 2022 to exceed $500 million.
In contract drilling revenues and margins increased significantly over the fourth quarter due to higher activity, increasing day rates and lower operating costs on a per day basis.
In the U S. Our rig count for the first quarter increased by nine rigs sequentially the 115 rigs.
And to the higher rig count average adjusted margin per rig day increased by $1720 per day to $7170 per day as average rig revenue per day increased by $1100 and average rig operating cost per day decreased by $620.
In Colombia contract drilling revenues increased to $17 million for the first quarter compared to $15 8 million for the fourth quarter and adjusted gross margin improved to $5 $6 billion from $5 $3 million in the fourth quarter.
At March 31, 2022, we had term contracts for drilling rigs in the U S providing for approximately $400 million of future day rate drilling revenue up from approximately $325 million at the end of the fourth quarter.
Based on contracts currently in place in the U S. We expect an average of 57 rigs operating under term contracts during the second quarter at an average of 43 rigs operating under term contracts during the four quarters ending March 31 2023.
For the second quarter in the U S. We expect our average rig count to grow to 122 rigs while average rig margin per day is expected to increase by $1100 per day, driven by a $600 increase in average rig revenue per day.
In Colombia, we expect to generate approximately $18 million of revenue in the second quarter with approximately $4 $5 million of adjusted gross margin.
In pressure pumping revenues and margins improved during the first quarter due to better pricing and the full quarter impact of the spread that was reactivated in the fourth quarter.
Pressure pumping revenues increased during the first quarter to $190 million and adjusted gross margin improved to $32 1 million, which included a $9 $9 million benefit related to a sales and use tax refund.
Additionally, we incurred approximately $2 $5 million of expenses in the quarter due to increased receipts of spare parts and maintenance items as we work to stay ahead of any supply chain issues on critical items.
Adjusted gross margin was impacted during the quarter by customer related downtime with.
But the current market tightness, we have recently been able to increase the standby rates, we received for customer related downtime.
The reactivation of our 12 spread has been delayed due to the tight supply chain conditions for hardware components. We now expect to reactivate our 12 spread late in the second quarter.
For the second quarter, we expect our pressure pumping activity to increase as the weather improves taking into account the delayed spread reactivation, we expect pressure pumping revenues to increase during the second quarter $205 million and adjusted gross margin to improve to $33 million.
In directional drilling first quarter revenues and margins increased due to higher activity and more favorable pricing.
Threshold drilling revenues increased 23% in the first quarter to $43.3 million.
<unk> gross margin improved to $66 $4 million.
For the second quarter, we expect revenues to increase to approximately $50 million with an adjusted gross margin of approximately $8 million.
And our other operations, which includes our rental technology and E&P businesses.
Revenues for the first quarter improved to $19 $8 million and adjusted gross margin improved to $7 $7 million for.
For the second quarter, we expect both revenues and adjusted gross margin and our other operations to be similar to first quarter levels.
On a consolidated basis, we expect total depreciation depletion amortization and impairment expense to be approximately $116 million for the second quarter.
Selling general and administrative expense during the first quarter included $3 1 million of higher than expected compensation expense directly related to the increase in our share price late in the quarter.
For the second quarter SG&A is expected to be approximately $25 million.
We do not expect a meaningful amount of tax expense or cash taxes for 2022.
For Capex, we are maintaining our 2022 forecast of approximately $350 million we.
We expect our capex spend to be more heavily weighted to the first half of the year as we try to stay ahead of increasingly lead times for various parts and components.
Turning now to our cash flow increasing working capital was a drag on cash flow during the first quarter as we worked off some prepaid revenue during the quarter and made payments of some large accrued expenses.
We believe this was a largely we believe this was largely a function of timing and we expect working capital to moderate and our cash balance to increase over the remainder of the year.
With that I'll now turn the call back to Andy Hendricks.
Thanks, Andy I'll start by saying that we fully recognize what is happening in Ukraine as a human tragedy and I can't imagine the suffering of the people in that region.
And while this tragic event drove world oil prices higher it was not the catalyst for increasing activity levels.
The increase in demand for oil and gas was driven by the reopening of world economies.
It is this fundamental increase in oil and gas demand over the last six months. It has driven a rapid increase in the demand for equipment and services in the U S drilling and completions markets.
This has led to a strong pricing environment, where drilling and completion pricing has climbed rapidly I don't recall, another period, where leading edge day rates for drilling rigs moved up this quickly.
The supply of high quality equipment is now very limited.
And any meaningful increase in drilling or completion equipment capacity across the market has further limited by global supply chain challenges, where there are longer lead times for various raw materials and manufactured components, such as structural steel steel tubular <unk> engines and electrical components.
With regards to labor as we have discussed before last year, we ramped up our systems for recruiting Onboarding and training in order to find the people that we need and while we haven't missed any work. It is a challenge in the current market to hire and retain people.
E&P operators are used to picking up the phone and being able to get what they want from drilling contractors and service companies, but the industry no longer has this excess capacity.
Some operators may not recall similar market conditions. The industry has had in the past such as the period from 2012 to 2014.
We have recently seen situations where for various reasons a few operators have been slow to commit and then the assets were no longer available or the pricing in the market had taken another step up.
And now as I've said, we're in a very tight market.
At this point if you were an operator looking to increase your activity and you don't have an agreement for a tier one super spec rig or for a frac spread you may have a challenge to find what you want.
We will always try to work with our customers to get them the equipment and services they need but the industry is now constrained in its ability to respond as quickly as the industry had in the past.
Our expectation is that going forward operators will have to commit to higher prices to keep the equipment and crews. They have today. So they don't lose them to other operators.
Based on the current global energy situation, we expect the market for our equipment and services to continue to remain tight for pricing to continue to increase.
Market conditions for contract drilling and other oilfield services are likely to be the best that has been seen in a decade.
It continues to be an exciting time for Patterson UTI and we look forward to the continuing financial growth.
With that we would like to thank all of our employees for their hard work efforts and successes to drilling complete wells better each day.
So we'd like to now turn the call over for questions.
Thank you Mr Hendrix, ladies and gentlemen at this time, if you do you have any questions or comments simply press star one and if you do find to your question has been answered you can't remove yourself from the queue by pressing star. One again, we go first this morning to Carnival at Morgan Stanley .
Thank you.
Obviously, the anecdote that we're hearing on that leading edge pricing on both drilling and pressure pumping are very strong I guess just to level set.
In terms of your ability to price to that leading edge is it as simple as just looking at your.
Contracts book Roll off do you think that we should expect that sort of high <unk> to even up to $30000 a day to be something that we see in your numbers later this year or early next year, how would you recommend we think about that.
Yes, I think there is theres still a lot of upside to what we have in our average rig revenue and margin per day as we work through that we have a number of agreements that are currently in place that have been in place for a while but as things reprice Theyre just going to continue to move upward.
So just just to be clear do you think that.
That sort of high <unk>.
<unk> indicative of what most of your rigs can price out or is that sort of the best rig in the market and we should receive lower I appreciate you're probably trying to put too fine a point on it but just trying to get some directional guidance there.
Yeah I think.
This is leading edge day rates for tier one super spec rigs today, we're working 109 of those in our fleet and that will increase as we do upgrades this year and so I still see that there's a lot of room to move pricing up and it will extend into 2023, it's hard to put the timing on when it's all going to move to leading edge.
In the upper Twenty's for the base rate or over 30000 with everything in but it's continuing to move out into next year.
Okay got it and then on the on the supply chain and labor side of things do you see obviously price is going to happen with higher for a lot of things labor potentially included do you see a potential needs too.
Either yourselves or the industry in general to raise wages in order to attract labor or do you view that as more of a structural issue that can't be addressed with price.
We gave some large wage increases last year and those have been baked into our numbers since Q4 results.
And at this time, we're still recruiting and we're still hiring.
But at this time, we don't have visibility on a strong need to raise wages from where we are maybe some small increases going forward, but not to the extent that we did last year at least on our current visibility.
Alright, thanks, very much I'll turn it back.
Thank you we'll go next to Don Crist of Johnson Rice.
Good morning, gentlemen, how are you all this morning.
Good morning.
I think you know a lot of us have scratched our heads over the last quarter as the rig count has moved as fast as it has.
Obviously, the rig count as the rig market is very tight today, but I know in the past I'll throw them out where you all think the rig count may be at year end or you are still sticking to that kind of 700 ish range 725, or so range at year end and do you think that it gets kind of friction Wilson here.
In the rig market.
So I think it somewhat depends on how youre looking at the numbers in the rig market.
I was saying for the last couple of quarters that you know that the overall industry rig market by the end of the year would go to $6 50 to 700.
I was wrong on that I think it's going to be higher I think it's going to be above 700 rigs in the total count at.
At the end of the year.
Think we're going to see continued.
Activation of rigs as we work through this year.
So the market is just that strong right now.
Okay.
Obviously super spec rigs are an impediment, but are there any other impediments out there from a casing or a drill pipe or any other perspective.
It could impede.
A significant amount of rigs coming back to the market say, another 50 rigs coming into the market today.
Yeah, So when I talk about rig count going up over 700 that includes operators that have programs in place that have their casing on order et cetera. So that number I don't think has impeded I think.
There are constraints on what you know for operators buying casing for us buying drill pipe and other components, but you know it's.
It's just about planning around longer lead times.
No.
The visibility we have on the increasing rig count tells US you know and the discussions that we're in with operators that they've already lined up the things they need on their side and we'll be working to lineup the things we need on our side.
Okay, and just one more if I could sneak it in at the end here what is your average contract duration now in or the majority of your contracts going to roll to higher prices. This year.
So yeah. The majority of our projects I'll work backwards theyre going to roll to higher prices no question.
The duration has been shorter we've signed contracts we've signed over the last year have been short in that six month range.
But we're going to start to extend that the market is just that tight dayrates are are that high that.
We will be signing more certain contracts and increasing backlog as we work through the year.
Okay, I'll turn it back thanks for the answers.
Sure. Thanks.
Thank you we'll go next to Ian Macpherson at Piper Sandler.
Yeah.
Thanks, Good morning, Andy anymore.
You've got the unique perspective of the hybrid driller and pumper and we know that everything is site do you see the ratio of rigs in spreads as being in balance in the second half year I think there's been we've obviously seen an ability and demonstrated trend of rigs recut.
Recovering more.
Then maybe frac activity has.
Year to date.
Maybe frac will be a little more capacity constrained in the back half of this year, but how do you see how do you see that ratio.
Unfolding over you know beyond this year into 2023.
Yeah. So if you look at the data back into 'twenty, one and you look at our data specifically on spread count and rig count you saw our spread count start to move up about six months before a rig count really starting to move up and so we had a number of operators that we're reacting reactivating spreads in 'twenty one.
To you know go through and Frac ducks it still existed after the downturn of 'twenty and then we saw the rig count start to ramp up about six months after that following the spread count ramp up so while youre seeing that in this year's numbers I think things are normalizing back to a level, where we have a normal number of rigs in front of the spreads and so.
Even though yes drilling efficiency has improved but also frac efficiency has improved so I think we'll get back to the normal number of rigs in front of the spreads that we've had in the past pre 'twenty.
We've got improvements and efficiencies in both but.
We get back to those same levels.
I think the DUC count is essentially worked through and we're having to drill new wells.
Yeah.
So the other question I had for you, but what do you think happens when we get a we're getting closer to running out of.
Super spec rigs and then we're going to have to have.
A combination of much more expensive reactivation with with more substantial upgrades on SCR rigs or whatever.
Tier three rigs can be upgraded.
Well, we'll have to go to new builds or we'll have to go to customers.
<unk> lower spec rigs at lower price points.
So I guess those are probably three options for when the rig count gets too high.
Where do you think that the demand is likely to go first if we.
To that point.
First I'm going to scratch one of your options. So newbuild rigs is not on the table.
There is a sufficient number of rigs that are good quality rigs that can be upgraded to super spec in tier one super spec. So that can still happen. So we're not even thinking or considering new builds.
And when you look at our.
Our budget and our plan. This year, we've got about 10 upgrades that we're doing in the budget. We've got another two dozen rigs that can be upgraded it at relatively low capex to get them to what we call tier one super spec. So we still have the ability to do that it does take time, there's lead times to do.
But as well you pointed out that you know there are existing rigs that can go back to work and I think youll see some of those go back to work as well because if you need a rig in the next two months you need to take something that exists today without significant upgrade but if you want the upgrades, you're just going to have to wait till we can get the components and get that done.
Okay.
Right.
Thank you.
Yes.
Thank you the next now to tailored Berkshire at Tudor Pickering Holt.
Hey, Thanks for taking my question My first one you talked a little bit about them.
Contract durations likely extending moving forward and I guess I'm just curious about the pulse of E&P operators today with respect to.
The pricing momentum and that's happened pretty suddenly here when you talk about extending durations I mean is there an appetite from the customer perspective to lock in terms for multi years and in the high Twenty's low thirty's or are we talking kind of 12 month term contracts.
On the com, when you're talking about longer duration.
I think there is appetite, especially among the operators that have large programs to lock in contracts for longer periods. Just so they can protect themselves, but I think when we talk about the pulse of the operator as you stated it it's still evolving they're still getting used to this market. This market has been moving rig.
Really fast and as I tried to explain.
We've had a number of conversations with operators that while they go back and think about what they want to do and they call us back its like sorry that that asset is gone or the market's moved up again and so those have been some tough discussions with operators, but that's what's happening in the market today.
Got it and then a follow up on contract drilling. So if I was doing the math correctly on the guidance I mean, you're basically at mid $16000. A day type of Opex per day for Q2 in a quarter, where you don't have much reactivation constantly.
Optically so I'm just curious with all of these inflationary dynamics at play if you know the new normalized type of Opex at the rig level somewhere in the mid $16000 a day arrangement before.
I think it's going to depend on the quarter and depending on the number of rigs that were working with fixed cost coverage et cetera, or activations, but we think it's around 16000 to 16500 today.
Got it and one last one for me on pressure pumping.
The market is likely to be a pretty tight here for the balance of 2022 I imagine at some point pricing if it's not already there today, you know that it'll get there to Incent you to at least consider reactivating more spread so I'm curious for the latest and greatest there when it comes to reactivating spreads 13, 14 and beyond for for Patterson.
Yes.
Not even discussing reactivation at this point.
We're very focused and the team is doing a great job at working with our customers to get things closer to leading edge in terms of pricing.
And that's that's our focus today.
Understood. Thanks for the answers.
Thanks.
Thank you and just a quick reminder, ladies and gentlemen star one for any questions well go next now to John Daniel Daniel Energy Partners.
Guys. Thanks, again critical too.
Two quick ones for you just what's the lead time completely odd.
No problem.
So lead time on drill pipe is running around a year I would say for double shoulder high torque connections and so we were we were ordering drill pipe in November for delivery. This November so it's just a matter of staying ahead, and we started adjusting our orders and lead times last.
Year for that.
Okay. Thank you and then the second one is as you're talking to customers.
Yeah.
I look forward to 2023, just getting outside everything is today.
With respect that.
The increase in rig activity in 'twenty, three or is it just a slow grind higher.
21, and 2022 have really been led by the privates in terms of rig count increases, especially privates with large programs and I think what youre going to see as we work into 2023 as some of the larger publics kick in with some of their programs and increased rig count.
There and so.
It's kind of hard to predict exactly what that was going to look like on a chart right terms of pace and all but I think you are going to see somewhat of a step up in 'twenty three just based on discussions that were having.
Okay. Thank you very much.
Thank you and Mr. Hinrichs. It appears we have no further questions. This morning, So I will turn the conference back to you for any closing comments.
Thanks, Bo that's fine we know it's a busy day for a number of calls and we appreciate everybody that dialed in and appreciate the questions today and again, thanks to all of our team at Patterson UTI for a great quarter.
Thanks.
Thank you and ladies and gentlemen that will conclude today's Patterson UTI energy first quarter 2020 earnings conference call, we'd like to thank you all so much for joining us and wish you all a great day Goodbye.
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