Q2 2022 Patterson-UTI Energy Inc Earnings Call
Good morning, My name is David and I'll be your conference operator today at this time I'd like to welcome everyone to the Patterson UTI Energy second quarter 2022 earnings Conference call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer.
The recession, if you'd like to ask a question. During this time simply press the star followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one once again, thank you might take Rama Vice President of Investor Relations you May begin your conference.
Thank you David.
Good morning, and on behalf of Patterson UTI energy I'd like to welcome you to today's conference call to discuss the results for the three months ended June 32022.
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.
Company undertakes no obligation to publicly update or revise any forward looking statement statements.
Statements made in this conference call include non-GAAP financial measures the required reconciliations to GAAP financial measures are included on our website, 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.
Mike Good morning, and welcome to Patterson Uti's second quarter Conference call. Thank you for joining us today.
I am pleased with our outstanding second quarter results as we achieved significant increases in activity and pricing.
Market fundamentals are strong and demand is increasing for drilling and completions equipment and services.
On top of that the industry supply remains constrained.
We expect a strong market for our services to continue and we anticipate further improvements in pricing and activity. Therefore, we are increasing our forecast for 2022 consolidated adjusted EBITDA, which we now expect will exceed $600 million.
We're also slightly increasing our 2022 capex forecast to $390 million due to increasing activity, including long lead items for rigs that will return to work in 2023, along with cost inflation.
Turning me out of my review of operations.
First I'm very proud of the solid execution in each of our businesses and their success in increasing both activity and pricing this quarter, while continuing to provide the high level of service quality that our customers have come to expect from Patterson UTI.
In contract drilling our average U S rig count for the second quarter increased by six rigs to 121 rigs.
As of today, we have 127 active drilling rigs in the U S. Along with five additional rigs that are committed to return to work in 2022.
We are also finalizing contracts for some rigs to be upgraded and activated in 2023.
Pricing for contract drilling as strong as leading edge day rates for tier one super spec rigs are in the low to mid $30000 per day, and then in the mid to upper $30000 per day, when you consider all of the technology and ancillary equipment.
Across the industry, we estimate tier one super spec rig utilization is greater than 90%.
Within our own fleet utilization of our 116 tier one super spec rigs is greater than 95%.
And all of our tier one super spec rigs in the southern U S are currently active.
Industry.
Three rig demand continues to increase with the active rig count at the highest level since early 2020.
Also supplies limited with the lower cost reactivation to Super spec rigs, having already taken place.
The availability of fully crewed Super spec rigs is almost nonexistent as few customers are willing to give up rigs.
I'm aware that there are some operators that are holding off on the signing of a contract to reactivate a super spec drilling rigs because they are waiting for an active super spec rig to free up in other words, a hot rig. However, we don't have any visibility on any of our rigs coming available and anticipate that our rig count continues to move higher.
Most of the industry's idle rig capacity will likely require meaningful reactivation and upgrade capex to go to work, which will have to be supported by term contracts.
At Patterson UTI, we are well positioned to economically upgrade additional rigs many of our idle rigs are of the more modern design with the draw works up at the level of the rig floor, which will be cheaper to upgrade them to the tier one status.
And rigs that have the draw works on the ground.
In order to spend the necessary capital to upgrade and reactivate additional rigs, we expect term contracts and we will be disciplined and negotiating for these terms and in certain cases, we will be receiving upfront cash payments to derisk, our capital investment and reduce the impact that reactivation and upgrade capex will have on our cash flow.
In pressure pumping, we achieved higher activity and better pricing during the second quarter, we reactivated our 12 spread in June a tier four dual fuel spread and seven of our 12 spreads are now utilizing dual fuel.
We continue to focus on maximizing the profitability of our 12 spreads with no additional spread reactivation as planned at this time.
In directional drilling we remain focused on technology, many new developments to enhance wellbore placement performance and improved wellbore quality.
We continue to grow our rotary <unk> systems service, where we have acquired additional rotary <unk> tools and hired and trained more personnel with experience on these systems.
Additionally, we have been successful in reducing the number of people on the rig and improving margins by utilizing remote operations to transition one of the well site technicians to a remote position here in Houston at our M. S. Directional go check center.
We recently commercialized our directional drilling advisory program, Hi Fi guidance.
This cloud based program increases the reliability and consistency of directional drilling services to improve wellbore quality increased rate of penetration and also reduced drilling days higher.
Our guidance is also designed to communicate with our drilling rigs cortex automation control systems for improved directional performance.
Looking ahead, we continue to believe that the industry is in a multiyear up cycle, we expect the U S onshore industry rig count to increase through 2023. Therefore, we are currently in discussions with a number of operators to add rigs in 2023, where reactivation and upgrade capex on those particular rigs could be $4 million or more.
More and with the expectation of a term contract to achieve sufficient cash returns.
With that I will now turn the call over to Andy Smith, who will review the financial results for the second quarter.
Thanks, and good morning.
As Andy said, we're pleased with our second quarter results, where we achieved improved revenues and margins across all of our segments.
Net income for the second quarter was $21 9 million or <unk> 10 per share compared to a net loss of $28 8 million or 13 cents per share in the first quarter.
Financial results for the second quarter include a noncash gain of $11 $5 million related to the release of a cumulative foreign currency translation adjustment associated with the substantial completion of our exit from Canadian operations.
Okay.
In contract drilling revenues and margins increased significantly in the second quarter due to continued day rate pricing momentum contract renewals in rig reactivation.
In the U S. Our average adjusted rig margin per day increased by 2000 and $220 as average rig revenue per day increased by 2000 and $770 average rig operating cost per day increased $550 to $16500 as expected.
At June 30, we had term contracts for drilling rigs in the U S providing for approximately $440 million of future day rate drilling revenue up from approximately $400 million at the end of the first quarter.
Based on contracts currently in place in the U S. We expect an average of 71 rigs operating under term contracts during the third quarter at an average of 46 rigs operating under term contracts over the four quarters ending June 32023.
At the beginning of the third quarter, we implemented a wage increase for our U S drilling rig based personnel with.
We passed this wage increase through to our customers such that we expect the impact of both our average revenue per day and rig cost per day to be approximately $600 with limited impact to our average adjusted rig margin per day.
For the third quarter, we expect our average rig count in the U S to increase by seven rigs to 128 rigs.
Including the impact from the wage increase we expect our average revenue per day to increase approximately $2100 per day to $28000 and we expect our average adjusted rig margin per day to increase by approximately $1000 to $10400.
In Colombia, one of our rigs is anticipated to have standby time during the third quarter, which is expected to reduce both revenues and costs, while having a minimal impact on margins for the third quarter, we expect to generate approximately $15 $5 million of revenue in Colombia with adjusted gross margin of approximately $4 8 million.
In pressure pumping revenues and margins improved during the second quarter due to better pricing higher utilization and more favorable contract terms pressure.
Pressure pumping revenues were $238 million for the second quarter, an increase of $48 8 million or 26% from the first quarter.
Adjusted gross margin was $46 9 million.
An increase of $14 8 million or 46% from the first quarter.
For the third quarter, we expect pressure pumping revenue to increase to $250 million and adjusted gross margin to improve to $52 million.
In directional drilling during the second quarter, we were able to achieve better pricing with higher activity levels, resulting in increased revenues and margins.
Directional drilling revenues increased 27% in the second quarter to $54 $8 million and adjusted gross margin improved to $9 4 million.
For the third quarter, we expect incremental pricing gains with activity levels consistent with the second quarter as.
As such we see third quarter revenue essentially flat at $55 million, while adjusted gross margin is expected to grow to approximately $10 million.
And our other operations, which includes our rental technology and E&P businesses revenues for the second quarter improved to $24 $5 million and adjusted gross margin improved $10 7 million.
For the third quarter, we expect both revenues and adjusted gross margin of our other operations to be similar to second quarter levels.
On a consolidated basis, we expect total depreciation depletion amortization and impairment expense to be approximately $121 million for the third quarter.
Selling general and administrative expense for the third quarter is expected to be approximately $26 $5 million.
We do not expect a meaningful amount of tax expense, our cash taxes for 2022.
Turning now to our cash flow.
Revenues, resulting from the significant increase in activity and pricing in the first half of the year has resulted in a larger than anticipated working capital build. Additionally, the combination of a large prepaid revenue amount late last year and shorter payment terms on critical items have resulted in lower cash flow in the front half of this year.
We anticipate these issues will abate in the back half of the year and given our current levels of profitability. We continue to expect positive cash flow for 2022.
With that I'll now turn the call back over to <unk>.
Thanks, Andy we believe that commitment to financial discipline seen throughout the energy sector has changed the playbook and we continue to believe that we are in a multiyear up cycle.
The U S is not likely to be the swing producer in the global crude oil markets as public E&P companies have shown strong financial discipline to prioritize returns over growth, which should help to reduce the magnitude of the cyclical swings relative to what has been seen over the past decade.
Similarly U S oilfield service companies have shown incredible discipline, and reactivating and upgrading equipment, which has supported unprecedented growth in pricing for drilling and completion equipment and services and allowed oilfield services companies to share in more of the financial benefits that are being realized by E&P companies from increased efficiency.
Fees and higher commodity prices.
Patterson UTI is well positioned to benefit from the current strength and market fundamentals as the only company in the U S. It offers contract drilling pressure pumping and directional drilling services.
We're uniquely positioned to benefit from the concurrent strength across the U S oil service market.
As a leading provider of tier one super spec rigs, we will continue to push day rates and contract terms, while maintaining a disciplined approach to activity growth.
As well in pressure pumping, we will continue to push pricing, especially as demand remains high for dual fuel spreads, which are capable of reducing fuel consumption and emissions.
In directional drilling we will continue to leverage our technology position to more efficiently drill better wells, allowing us to grow our revenues and margins.
In summary, I'm very pleased with our second quarter results and the strong market fundamentals.
<unk> UTI, we are well positioned to benefit from what we believe will be a multiyear up cycle.
With that we'd like to thank all of our employees in the U S and Colombia for their hard work efforts and successes to help provide the world with oil and gas for the products that make people's lives better.
David We would now like to open the call to questions.
Thank you at this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
We will take our first question from Chase Mulvehill with Bank of America. Your line is now open.
Hey, good morning, everyone.
Morning.
Good morning, Andy.
My first question.
If we look at that if you look at the rig count where you guided I think 128.
And if my math is that correct, where your rig count is today versus kind of where you would exit and I think that's kind of three years or so rigs that would be added over the last couple of months.
So a little bit of slowing momentum on rig adds which I don't think is going to surprise anybody.
But my broader question is is as we look into <unk>.
Would we expect kind of still slowing momentum or do you think that rig activity will actually pick up in the fourth quarter.
So we are we have five additional rigs that are committed to go to work in 2022.
We're still going to see activity increases.
Not quite at the pace that we've seen for the last year and a half, but it's still going to increase going through the rest of the year.
There are some constraints on rig supply, but that's positive for pricing in the market.
Then I think as we get into 2023, we're going to see a step up in activity. So we see continuing increasing activity in the rig market.
Okay Alright.
Kind of I guess follow up there if we kind of exit around 135, I guess, it's kind of what youre, saying areas thereabouts and just kind of look at your contract coverage into the first half of 2023, we tried to do some math there I think it's about 20% of that 135 rigs contracted in the first half of next year.
So I guess my question would be with leading edge day rates, where they are low to mid 'twenty, sorry, low to mid thirties.
Still a strong demand from the E&ps out there to lock up these rigs I would've thought that may be a little bit more contract coverage out there. So I guess, maybe just talk about your strategy I guess does it mean that you think that day rates still have significant more upside or is there a little bit more reluctance on the e&ps.
Go ahead and lock in more rigs for 2023.
So definitely the leading edge day rates has been moving up quickly faster than we've ever seen in the industry and you know we're working 127 rigs now are adding five more for the rest of the year, but we still think there's opportunity to push the day rates on a large number of the rigs that are still working and so we haven't gone.
To sign a law firm contracts yet.
Look at our average length of the term right now it's in the range of six months to a year, but we expect that to extend so so you'll see that extend as we get into rig signings for 2023 deliveries.
Okay, and when we think about day rates into 2023, and if you are starting to kind of sign some of those today would you think that you would get them kind of at or above kind of leading edge of that low to mid thirty's or kind of just more in line or do you get out to 2023 are you seeing the curve backwardation at all.
So when you when you see the you know the rate at which the <unk> the.
The leading edge day rate has gone up and I want to make sure I explained. This so everybody understands this thing is moving fast.
And it's going to continue to move up activity is still going up and there is constraints in the availability of tier one super spec rigs and so for us to deliver more tier one super spec rigs, we're going to be in further negotiations.
With increasing day rates at that leading edge.
Okay, Alright makes sense I'll turn it back over thanks Sandy.
Okay.
Next we'll go to Derik part Hazer with Barclays. Your line is now open.
Hey, Good morning, guys just wanted to ask more about on the daily required for next year in term could you maybe break it down into the different buckets as far as what upgrades are required beat in a low single digit millions mid to high single digit millions and then moving up to the low double digit millions.
To get some more color on what day rate you would need in what type of term you would need in order to hit the payback that youre looking for and to get those rigs out into the field for next year really just how do we how do we move from low to mid 30 day rates too to high <unk>, just some more color on that would be helpful.
Yeah. So when we say low to mid thirties. That's just the rig by itself doesn't include all the ancillary equipment and technology that we layer on when you add all of that in your in the upper thirties and approaching $40.
And so we're really encouraged by how this market shaping up and these day rates aren't necessarily always tied to what.
What what an upgrade may cost, we're just talking about what the market is and what.
E&ps are willing to pay in a tight market for drilling rigs.
When we do look at the upgrades going into 2023, we've got a number of them that we're going to do in that $4 million range and.
That's that's what it costs us to do some of these upgrades, we're well positioned with some of the rigs that we have in the fleet to do some upgrades that we think are really economical to get them to tier one super spec.
But aside from that it's not directly related to what the day rate as the day rate is based on how tightened constrained. This market is right now and the demand for rigs.
Got it okay. That's helpful switching.
Switching over to pressure pumping obviously historic quarter for you guys. You are at about a $15 million EBITDA per fleet guiding to around 16 ish 16, five clearly $20 million is in the line of sight. They know the messages you're staying at 12 spreads today, but the question is could you add more if he wanted to given these pricing signals and what tier.
Two diesel is going forward in setting the market could you add 13, 14 or what any incremental.
Our capacity has to be new.
New pumps new builds.
A couple of things on that so we're really pleased with the success of the team at Universal pressure pumping and how they've been able to react to the market and push the pricing up and improve the margins and the EBITDA per spread they're doing a great job. There. They're also doing a great job from a service quality standpoint out in the field that allows us to move pricing.
And I expect there's still some more pricing movement that can happen there.
With the type of work, we do is pretty intense we do a lot of high pressure work. So the number of pumps per spread has gone up I would say across our fleet and that's not uncommon across the industry today, especially when you look at the Utica in the Delaware.
And you know occasionally we're doing some simulcast <unk> two where you have.
Large number of pumps on location so.
To get to number 13 may require us to.
Purchased some additional pumps, it's not out of the question in the future, but today, we're still going to stick at 12, we think that's the right answer for investors.
Our focus is trying to return cash to shareholders and our team at Universal today is focused on pushing pricing.
<unk> taken advantage of the market conditions that we have in and improving our margins in that business and so there is not a reason for us to activate another spread today, we don't think we get judged on.
Our market share we are judged on the earnings we produce and we want to have our earnings that we can return to shareholders. So we'll evaluate all of this but today, we're just going to stick at 12 spreads.
Got it that makes sense and just to sneak one more in about pushing price what kind of openers do you have on the overall overall fleet. How quickly can you move that EBITDA per fleet up the curve. If you could just talk about the openers there would be helpful.
Yes, with 12, working and a you know a number of agreements in place.
Not right away, but I think as.
The market is essentially sold out for Frac.
And it's created this condition that has allowed us to move price, we'll just have to wait and see how some of these agreements repriced as we work over the next six months or so.
Got it alright.
Very helpful. I'll turn it back thank you.
Next we'll go to Don Crist with Johnson Rice Your line is open.
Good morning, gentlemen, how are you all this morning.
Great.
Yeah.
Andy I wanted to ask about the capex for rigs going into next year.
I'm guessing that those are long lead time items like pumps and generators that you need to buy to to upgrade the rigs and.
I just wanted to get any more color around that and kind of the supply chain for that equipment is it is it a six month wait for most of that equipment or is it longer than that.
Yeah, Hey, this is Andy Smith, Yes, we're seeing lead times on that stuff.
Six months right now is probably a base level and then you get a little bit longer than that on a few items.
So that's one of the reasons that we've got it up.
Capex a little bit is that we've got to get in front of some of it. This year. Some some payments out to get that stuff and to have them ready for next year.
Okay, and I wanted to ask about that.
The contract coverage between private and public I think we're all in agreement that the publics will probably add a significant amount of rigs in the first quarter of next year as they.
Fluids through their capex plans and when those rigs come from debate displace the privates that are kind of working today or is it all going to be incremental new rigs that kind of come off the fence.
This is a great thing about large private e&ps, they get to do whatever they want and right now, they're not giving up drilling rigs they want to drill they are producing.
Great cash flow and that's.
That's what private companies do and some of these private companies are large and you've got a public company that's about to be private so.
I suspect that Theyre, just going to keep drilling.
The the adds that the large publics will eventually make are going to be incremental nobody's, giving up drilling rigs right now.
Okay I appreciate the color I'll turn it back thank you.
Yes.
Next we'll go to Sean Mitchel, It's Daniel Energy Partners. Your line is now open.
Good morning, guys. Thanks for taking my question.
Im just wondering can you provide any additional color you talked a little bit about the rig upgrades and that $4 million category have you tried to frame numbers around how many of those opportunities are available 123 would be the first question and then a second one is we've heard.
At least last quarter, there was lots of questions on these calls about labor issues and I haven't really heard much talk about labor issues. This quarter. What are you guys seeing on the labor side as you kind of bring things back to work and things heat up visit still really really hard to find folks or any commentary around labor would be helpful.
Sure. So I'll start with the drilling rigs and the Capex. So we have about 19 in total which means about 14 left in 2023 that fall into that $4 million range and Theres a number of things that will happen to those rigs. They may get an upgrade on a pumper Jen said there.
It may get an upgrade on rack back capacity structurally and then some of that Capex is just funds the reactivation for those rigs as well and so it's a it's a mix that's in there, but we have a large number that we think are economical and so we think we're in really good position to be efficient with capital and be competitive on the market to be able to activate rigs.
The people question is still it's still out there maybe you haven't heard as much and we didn't particularly mentioned it today.
We'll give hats off to our HR teams across Patterson UTI across all of our businesses are doing a great job finding people, we're not missing work because we don't have people, but it is a lot of work to go find the people we have to hire a large number for the few that decided to stay. This work is not for everybody people have choices in the economy today.
And so it is a lot of work to go out and recruit and find the people and we have.
Broad systems to be able to do that we have in person recruiting we have online systems.
That we're using in our HR team is testing some new artificial intelligence driven systems online where people can log in and do this over the weekend to try to get an interview with us and we can do that pretty fast we're trying our best to increase the turnaround time from.
From the time, we first meet somebody to the time, we get into the first paycheck.
And once we get somebody working for us if we can keep them for a while we generally keep them for a long time and so that's our objective and we're also looking at lifestyle out in the field and things like that it's still a challenge like I said, we havent Miss work, but it's a huge effort from our HR teams across our company.
And it's a good time for me to think of them. This morning.
Thank you that's great.
And I'd like to remind everyone if you'd like to ask a question Press Star then the number one on your telephone keypad next we'll go to Keith Mackey with RBC capital markets. Your line is now open.
Good morning, Thanks for taking my questions. Just first wanted to start off on on cash flow and you think you've talked about positive free cash flow for 2022.
It looks like the <unk>.
The one that'll be working capitals. So maybe if you could just give a bit more color on what you expect for working capital and free cash flow over over the back half of the year. Please.
Yes, so the first half of the year, obviously, it was a struggle a bit with.
Sharply increasing revenue sharply.
<unk> increasing prop.
Profitability, but also revenue obviously the collection of that profitability takes a little bit of time to work itself through the system. So we've added some working capital in the first half. The first half is also <unk>.
Usually a little tougher just generally P&C seasonality issues, you know theres a lot of a lot of items to get paid sort of in the front half of the year and then they build up on the balance sheet sort of on the liability side throughout the back half of the year. So.
I think the lion's share of any kind of working capital build is behind US. We may you know increase working capital over the back half of the year, another may be $20 million, but I don't.
We've bumped it up year to date.
By about 140, so I think.
Sort of flat to that $20 million number's, probably where we've seen the rest of the year going.
Thanks, that's helpful and second question is on Colombia.
Certainly the market seems like Theres, a bit more uncertainty there given political regime in.
You did talk about a little bit of standby time.
For rig down there I was just curious if those two things are at all related and what Youre seeing more broadly for the Columbia market.
Yeah, So really pleased with the performance of our team in Colombia.
Start out and just address the standby time, it's just part of the drilling program that we have with some of the customers. There are times when those breaks between pads and we do have some standby time, but that's just part of the course of normal operation down there nothing related to any change in the political climate, what we're seeing so far from the elections is.
Basically nothing has changed for us and what we do.
And our rigs down in Columbia today are drilling for gas that service the utilities in Colombia, and we still have drilling programs with the various customers that we have we have a number of different customers. It's not just one and all of these customers are signed up with contracts to service the utilities at various parts of the country and so.
We don't anticipate any change to our drilling programs just because of the nature of what we're doing in and the use of that production.
Yes.
Thank you and maybe I'll sneak one more in certainly talk a lot about the.
The utilization for tier one super spec rigs in the market and operators are clearly focused on efficiencies.
Throughout throat operations and drilling.
But curious if you think that there is a point, where we start to go with.
Operators accepting less efficient rigs as opposed to paying for contracted upgrades like do you think there is a point where that starts to happen or or or not so much.
I think it's just kind of a low probability and there may be a few operators out there that say well I'll go get a rig that's not a tier one super spec class, but thats generally not our customer and when we look at our customer base, we see increasing activity.
Perfect. Thanks for color I'll turn it back to the operator.
Showing no further questions I will now turn the call back over to Andy Hendricks for any closing remarks.
Once again I'd just like to thank everybody at Patterson UTI and thanks to everybody who joined US. This morning, we appreciate.
All the hard work that our people in the field are doing and we know everybody is busy and just wanted to say thanks.
And that does conclude today's conference you may now disconnect.
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