Q4 2022 Patterson-UTI Energy Inc Earnings Call

Speaker 2: And.

Speaker 3: Good morning.

Speaker 4: My name is Colby and I will be your conference operator today.

Speaker 5: At this time, I would like to welcome everyone to the Patterson UTI Energy 4th Quarter 2022 Earnings Conference Call.

Speaker 6: All lines have been placed on meat to prevent any background noise.

Speaker 7: After the speakers are marked, there will be a question and answer session.

Speaker 8: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.

Speaker 9: If you'd like to withdraw your question, again, press star 1.

Speaker 10: Thank you.

Speaker 11: I will now turn the call over to Mike Drickamer, Vice President of Investor Relations. You may begin.

Speaker 12: Thank you, Colby. Good morning, and on behalf of Patterson UTI Energy, I'd like to welcome you to today's conference call to discuss results for three months and a December 31, 2022.

Speaker 13: Participating in today's call will be Andy Hendricks, Chief Executive Officer, Andy Smith, Chief Financial Officer, and Mike Holcomb, Chief Operating Officer. Quick reminder that statements made in this conference call that states companies or management's plans and intentions, targets, beliefs, expectations, or predictions for the future are forward-looking statements.

Speaker 14: These forward-looking statements are subject to risks and uncertainties and clothing companies' 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.

Speaker 15: David has made in this conference call include non- GAAP financial measures. The required recommendations to get financial measures are included on our website, patenergy.com and in the company's press release issue prior to this conference call. And now it's my pleasure to turn the call over to Andy Hendrix for some opening remarks. Andy? Thanks, Mike.

Speaker 16: Good morning and thank you for joining us today for Paterson UTI's fourth quarter conference call. We are pleased to report another quarter of solid financial results with improving profitability.

Speaker 17: Adjusted EBITDA grew every quarter in 2022 with fourth quarter adjusted EBITDA almost five times our fourth quarter 2021.

Speaker 18: Our fourth quarter results were driven by continued improvement in pricing and exceptional execution.

Speaker 19: Also, during the fourth quarter, we returned $74 million to shareholders through our regular quarterly dividend and $57 million of share repurchases.

Speaker 20: Additionally, we retired $22 million of long-term indebtedness through open market purchases.

Speaker 21: As we look ahead, we remain optimistic that we are in a multi-year up cycle.

Speaker 22: Tier 1 Super Spec rigs and premium pressure pumping equipment are effectively sold out due to the strong growth in activity over the past 2 and a half years.

Speaker 23: The high demand led to a notable increase in leading edge pricing in 2022, and high utilization continues to support current pricing levels.

Speaker 24: We anticipate a significant increase in earnings and cash flow during 2023 as we continue to reprice drilling rig contracts higher to current leading edge rates.

Speaker 25: From a big picture perspective, we expect oil will continue to be the primary driver of our industry, and we expect oil prices to remain at acceptable levels to support activity for this foreseeable future.

Speaker 26: With respect to natural gas drilling activity, which is a much smaller part of the total industry rig count,

Speaker 27: Our primary exposure is in the northeast.

Speaker 28: Due to constraints on gas take-away capacity in the Northeast, operators have been careful to align their drilling and completion plans with long-term goals and have tightly managed their production growth, making the Northeast less volatile than other gas markets.

Speaker 29: As a result, our customers in the Northeast are typically well-hedged and have our drilling rigs under long-term contracts.

Speaker 30: In the near term, we expect some rigs and gas basins outside of the Northeast will be let go while other rigs are reactivated to go to work in the oil basins.

Speaker 31: This may have the short term effect of moderating growth in the rig crown, but we expect utilization of Tier 1's super spec rigs to remain very high, positively supporting pricing.

Speaker 32: Turning out of my review of operations.

During the fourth quarter, our average rig count in the U.S. rose by three rigs to 131 rigs, and average revenue per day increased by about $2.5 million.

by $3,160.

Our marketing team deserves recognition for their effort in achieving this growth, which was the sharpest sequential increase in quarterly revenue per day that we have seen.

Looking forward, our technology will continue to play a key role in helping customers meet their objectives, whether it's in low carbon solutions where Patterson UTI has a leadership position with our various technology offerings.

or in data analytics and forms of automation and remote operations.

We expect that our EcoCell lithium battery system and automated engine power management for drilling rigs will continue to see uptake in 2023, as they have shown to reduce both fuel usage and emissions outputs from drilling operations.

We even recently tested hydrogen as a fuel and believed that we were the first to blend hydrogen on an operating drilling rate.

We are excited about the potential this has to significantly reduce emissions in the future.

In pressure pumping, we saw exceptionally high utilization in the fourth quarter, with limited weather disruptions and minimal downtime during the holiday season.

utilization in the fourth quarter with limited weather disruptions and minimal downtime during the holiday season despite the weather.

This outcome has achieved through our strategic alignment with key customers and our focus on efficient operations, which allowed us to capitalize on strong demand and secure favorable pricing for our services.

We anticipate that demand for pressure pumping services will remain robust while the supply of equipment will continue to be constrained.

The lead times for new equipment, particularly for advanced tier 4 dual fuel engines, are still longer than usual, which makes it difficult to quickly add to existing capacity.

Additionally, as customers demand for higher flow rates grow, the amount of horsepower per spread is also increasing, which will further limit the availability of pressure pumping spread.

In 2023, we will continue to convert engines to Tier 4 dual fuel so that they can use natural gas as a primary fuel and reduce operational costs and emissions.

In directional drilling, we were made focused on technology and service quality, with many new developments to improve well-bore placement and quality.

With regards to the downhole tool use of our teams, the Steer Wells, we continue to benefit from the vertical integration of engineering key components for our performance drilling impact motors and our M-Power measurements and data transmission systems.

This approach has improved our ability to drill wells faster and with better consistency.

and to have better control of our costs and supply chain.

We are also benefiting from the strategic shift towards higher margin rotary steerable and the credit

In 2022, revenues from rotary steerable work increased to approximately 20% of our directional drilling revenues.

Up from approximately 13% in 2021.

We expect our rotary sturable work will continue to grow in 2023.

With that, I will now turn the call over to Andy Smith, who will review the financial results for the fourth quarter of B.

Thanks.

Net income for the fourth quarter was $100 million or 46 cents per share, up from $61.5 million or 28 cents per share in the third quarter.

Our contract drilling business had a significant sequential increase in average adjusted rig margin per day in the US.

of $2,970.

This growth was driven by successful contract renewals at more favorable pricing than projected.

which resulted in a $3,160 increase in average revenue per day in the US.

On a year-over-year basis in the US, average-rig revenue per day increased $9,800, or 44% from the fourth quarter of 2021 to the fourth quarter of 2022.

At December 31, 2022, we had term contracts for drilling rigs in the U.S. providing for approximately $830 million of featured day-rate drilling revenue.

up from approximately $710 million at the end of the third quarter.

based on contracts currently in place in the U.S.

We've spec'd an average of 87 rigs operating under term contracts during the first quarter of 2023 and an average of 56 rigs operating under term contracts for the full year.

In Columbia, fourth quarter contract drilling revenues were $15.1 million, and adjusted gross margin was $4.9 million.

For the first quarter, we anticipate that our average rig count in the U.S. will be 130 rigs.

We also anticipate that average rig margin per day in the US will increase by approximately $1,000, which allows for an increase in average rig cost per day related to rig reactivations and cost inflation.

In Columbia, we expect to generate approximately $9 million of contract-grily revenue during the first quarter with adjusted gross margin of approximately $1.2 million.

In pressure pumping, revenues and margins improved during the fourth quarter.

Pressure pumping revenues increased to $307 million, and adjusted gross margin increased to $86 million.

For the first quarter, we are experiencing more weather disruptions than normal, and therefore expect pressure pumping revenues to be approximately $280 million.

with an adjusted gross margin of $72 million.

We expect that revenues and adjusted gross margin will improve in the second quarter with fewer weather disruptions.

In directional drilling, revenues improved to $59.5 million in the fourth quarter, from $50.8 million to $9 million in the third quarter, and adjusted gross margin improved to $11.2 million from $10.4 million.

For the first quarter, we expect revenues of $54 million with an adjusted margin of $9 million. For the second quarter, we expect revenues of $9 million with an adjusted margin of

In our other operations, which includes our rental, technology, and EMP businesses...

Revenue for the first quarter were $22.8 million with an adjusted gross margin of $8.2 million.

For the first quarter we expect revenues and adjusted gross margin to be similar to the fourth quarter.

On a consolidated basis, we expect total depreciation, depletion, amortization, and impairment expense to be approximately $123 million for the first quarter.

Selling, general and administrative expense for the fourth quarter of $34.6 million included $3.5 million of mark-to-market adjustments for incentive-based compensation, which is not expected to recur in the first quarter.

Accordingly, SG&A is expected to be approximately $31 million in the first quarter.

Interest expense for the fourth quarter of $8.1 million included a $2.5 million game from the early extinguishment of debt related to the $22 million of debt we repurchased in the fourth quarter.

For the first quarter, we expect interest expense to be approximately $10 million.

Our effective tax rate for 2022 was approximately 8%.

With our significantly improved profitability, we expect our effective tax rate for 2023 to increase to a more normal 20%.

However, we do not expect to pay any significant US federal cash taxes in 2023, and so cash taxes should be limited to state, local, and foreign jurisdictions.

We currently expect cash taxes for 2023 to be approximately $15 million.

We expect 2023 CAPEX to be approximately $550 million.

Most of this capex is for activity related maintenance and reactivation capex with growth capex focused on high return, quick payback opportunities that we expect to be margin accruate it.

Contract drilling cat-backs is expected to be approximately $320 million in 2023, of which approximately $200 million is budgeted for maintenance cat-backs and the rig reactivations.

$25 million is for customer-funded RIG upgrades, and the remaining $95 million of CAPEX is for items that increase in criminal revenue opportunities for our existing RIG fleet.

including market upgrades and rental equipment, including high margin premium drill pipe.

Pressure pumping capex for 2023 is expected to be approximately $170 million, including $140 million of maintenance capex with the remainder going to equipment upgrades and the activation of our 13th spread.

of the 140 million of maintenance capex, 35 million for maintenance of support equipment, which has been underfunded in recent years.

Directional drilling capex for 2023 is expected to be approximately $25 million, the majority of which is for growing our fleet of next generation mud motors and MWD systems to meet customer demand.

We're also continuing our strategic shift towards higher margin roadery and recovery-sturable work with the purchase of additional roadery-sturable systems.

The remaining $35 million of CapEx for 2023 is for our other segment and general corporate purposes.

Turning now to our balance sheet, we ended 2022 with $836 million of long-term debt after we repurchased approximately $22 million of debt in the fourth quarter.

Our debt to adjusted EBITDA metric improved to 1.2 times for 2022 and on a fourth quarter 2022 annualized basis.

Debt to adjusted EBITDA was less than 0.9 times gross or approximately 0.7 times net of cash.

Our cash balance improved to $138 million at the end of 2022 due to improved profitability and the benefit of a large customer prepayment during the fourth quarter.

This prepayment is reflected in our balance sheet as a short-term liability. As we work off the prepayment, the liability will decrease, resulting in increased working capital during the first half of 2023.

With that, I'll now turn the call back over to Andy Hendricks.

Thanks, Andy.

2022 was a great year for the company given the rapid growth in margins resulting primarily from improved pricing.

In contract drilling, we expect the continued high utilization of Tier 1 Super Spec rigs and premium pressure pumping equipment to be supportive of current leading edge rates.

These rates provide a strong foundation for earnings growth as we continue to reprice drilling rig contracts higher to current leading edge rates.

Looking forward, overall, I am very upbeat for 2023. As I see this is another year for growth in margins and significant growth in free cash flow.

Throughout the year, I expect the overall U.S. rig count for the industry will continue to increase, especially for super spec rigs driven by increases in the oil basins and acknowledging that there may be near-term softness in gas basins outside the Northeast.

We believe the Tier 1 Super Spec rig count continues to increase over the next year, and we expect completion activity to increase as well.

Higher activity combined with the tightness of equipment in these markets should protect and support the leading edge rates for rigs and for services over the next year.

Given our outlook for significantly higher profitability and cash flow in 2023, we continue to target a return of 50% of free cash flow to shareholders through a combination of dividends and share buybacks. With that, we would like to thank all of our employees for their hard work, efforts, and successes to help provide the world a better life.

with oil and gas for the products that make people's lives better. Colby, we would now like to open the call to questions.

At this time, I would like to remind everyone in order to ask a question, press start then the number one on your telephone keypad. We'll pause just for a moment to compile the Q&A roster.

Your first question comes from the line of Arun Jayaram from JP Morgan Chase. Your line is open.

Good morning. Andy, I was wondering if you could shed some thoughts. I know you guys did a survey in October of 70 of your key customers. And it highlighted pretty meaningful planned increases in the the rig count. Obviously the gas market has changed.

survey back at the end of it September early October you know at that time WTI was trading around you know $85 a barrel and natural gas was certainly much higher and so I think there was you know a little bit more enthusiasm from the the EMPs that we talked to about what their rig count was going to do you know we've certainly seen some changes now

The interesting thing is we've worked through the year. We have seen changes in the rig count, but when you look at the breakdown of AC rigs, and especially when you look at what we're doing with Tier 1 Super Spec rigs, that market is held steady. So while we're not seeing overall growth in the rig count, because you've seen SCR mechanicals get released over the last few months,

The high-end market that we participate in is certainly keeping a very high utilization rate and supporting the leading edge pricing.

Great. And just my follow up, you know, through a decent amount of market observers, including our own, you know, we could see a 30 to 50-rig decline on the gas rig count in terms of the supply response in terms of...

the decline in gas prices just to balance the market. Is it your estimation, Andy, there's enough demand on the oil side to more than offset the decline that potentially could happen on the gas side?

Yeah, and we're already seeing that. We're already seeing where we've had two rigs go down and gas, and we're seeing discussions and requests for rigs to go into oil markets. So I think that while rigs may be coming down, we're also reactive adding rigs. And when you look at that net, what we're doing and what we're seeing with customers.

We still expect our rig count to grow in 2023. Remember, we're not participating in the SVR mechanical market. Those types of rigs aren't on long-term contracts. They're easy to release. So, outside of the Northeast, we have a large number of rigs in gas, and those are primarily under-term contracts with hedged customers. There's gonna be some softness.

in the natural gas markets outside of that one, and we certainly recognize that. But when we look at what's happening with AC, high-spec, super-spec rigs, we still see a very tight market for those rigs.

Great, thanks a lot Andy. Thanks.

Your next question comes from the line of Jim Moraleson from Raymond James. Your line is open. Hey, good morning, guys. Andy, I'm on the re-activation of the 13th spread. Just kind of curious to get your view and decision process when you guys go through that.

Obviously last year everything was up into the ride and with the rig count kind of more flattening out from from the trajectory we saw

So we've been looking at what it would take to reactivate that 13th spread for over a year now since we've had 12 running. And what's happened in the market is as we would start to slowly reactivate pumps and add more pumps to what we have in circulation across all of our spreads between too.

active in the field and maintenance, getting ready for spread 13 and doing the calculations on that, what we've been seeing is that existing customers have been absorbing the pump supply. And I believe that's happening across the industry. The amount of horsepower per spread for the type of high-end work we do in places like the Delaware, you know, in the Utica.

You know, we've seen EMPs just want to you know pump it higher flow rates and higher pressures and You know, we those are the high-end markets that we participate in in pressure pumping and so we've seen that absorbed So you know the in other words what's happening with our 13th? It's just been pushed and so while we thought you know There might have been a chance to do it

At the end of 2022, we've just been absorbing our current horsepower that's been active into existing spreads. But as we get into 2023, we'll be able to free up some of that horsepower, and we should have sufficient towards the end of 2023 to activate that 13th spread. So that's a late year ad, it sounds like.

Be a lady you're at. And then just as a follow up on the on the share of purchase side, obviously good to see you guys actually, you know, executing on the program during the fourth quarter. Curious how the plan is for that is that just kind of as you generate free cashflow over and above the dividends that you'll buy it kind of, you know.

periodically across the year or is it opportunistic or how do you see that?

So I'll start and then I'll hand it over to Andy Smith. You know, we're committed to giving at least 50% of our free cash flow back to shareholders through dividends and share buybacks. You know, as a publicly traded company, we have blackout periods during the year, so there's only certain windows that we can get into the market and acquire shares and we'll do our best.

you know at those points you know outside of the dividend when we're looking at buybacks to buyback shares and those windows that are open to us I'll hand it over to Andy. Yeah I don't have a lot to add to that you know other than to say

again reiterate that we are committed to our return.

metrics. So, you know, again, that 50% of free cash flow coming back to shareholders in some form or another will be opportunistic more on the buy back side, but certainly, you know, we're committed to that to that 50% return.

Great, helpful. Thanks. Your next question comes from the line of Scott Gruber from CityGrupp. Your line is open.

Yes, good morning. Good morning.

Andy, how many great reactivations are embedded in the budget this year? And of those, you know, how many have contracts today? And we're kind of on the site you have the additional contracts on those reactivations.

So right now we're planning eight reactivations in the CAPEX budget and we have line of sight on those eight. So we think our rig count still grows. We do recognize there's some near-term softness with the gas markets, but I think overall we're going to see growth through 2023.

Got it. And just to go back to Roon's question on potential downside risk on the gas side, just help us think about how do you guys, if the downside case, you know, kind of materializers. And just to go back to Roon's question on potential downside risk on the gas side, just help us think about how do you guys, if the downside case, you know, kind of materializers.

Yeah, how do you think about marketing near your fleet? Do the reactivations kind of replace?

some older rages or do you modulate those and kind of pull them back? How do you think about managing the crew count? Just trying to get a better sense of as you think about scenario analysis, what's the management of the market at GLEE in the more of a downside scenario?

Yeah, and we certainly recognize there's potential for a downside case, but I think it affects different companies differently. And back to the discussion of Northeast versus the other gas basins.

You know, the way that our customers have been behaving and we, you know, in discussions with our customers, we believe that market remains relatively steady for us in both drilling and completions.

Our customers are well hedged up there. The rigs are working under long-term contracts. So if there's a downside case materializing, it's likely happening outside of the Northeast, whether it's East Texas, North Louisiana, Haynesville, maybe areas of South Texas, Oklahoma, where you still have a lot of gas production. But with a number of...

of rigs we have working in the Haynesville, that's only 10% of our rig count. So I think we're kind of limited in a downside case in those basins. Got it. I appreciate the additional color. I'll turn it back. Thanks, Andy. Thanks.

Your next question comes from the line of Sarabh Pant from Bank of America. Your line is open.

Hi Andy and Andy, just quickly following up on the prior question from Scott I think you said your Capix budget is baking in 8 rig reactivations. I'm just trying to understand right I mean how flexible are you going to be on that approach? If you don't get the right contract, right duration, right pricing.

How willing would you be to say that okay, I'm not reactivating, reactivating hatred, I'm only doing four or five or whatever the number is right I'm just trying to understand the flexibility because again, I'm looking at the stock so your stock is down 10% after a fantastic fourth quarter Right, obviously people are concerned about the man and I would appreciate if you can talk to your flexibility in that decision making trust

and leading its price. I see a 2023 that we will continue to reprise rig contracts from early 22 to the 23 rate. And so we're still projecting steady growth and margin, steady growth and pre-cash growth throughout 23 because of that.

Even if we didn't activate any ricks, but we will because we do have a line of sight. And so we've got eight rig reactivations planned in our CapEx budget. We're certainly not ignoring what can potentially happen in the gas markets outside of the Northeast. We think it's a limited effect on what we do because it's a strong demand for tier one super spec rigs.

Okay, no, Andy, appreciate that. And then quickly in terms of what to expect in terms of how Riggs reprised through the course of 2023, obviously very solid improvement in average revenue per day. In the fourth quarter, more than $3,000 you are guiding to, I think if I got the number right, the cash margin increasing $1,000.

In the first quarter, first quickly, maybe you can talk to the split between how much revenue per day is going up versus op-ex because first quarter tends to be seasonally just to hire op-ex, quarter to do a bunch of factors if you can talk to the split between that. And then just in general, what should we expect through the remainder of the year? How does your book reprice?

through the course of the year. Yeah, I think, you know, what's getting lost in all the discussion right now is our ability to reprise rigs from early 22 levels to where we are today in 2023. You know, we're probably going to reprise around 30 contracts in the first half of 2023.

Some of those contracts have rigs that are still working at 19,000, 20,000 a day. Those are going to be going up to 35,000 a day, plus when you add in drill pipe and extra people and the other upgrades people want. You're at rig rates around 40,000 a day. These are still huge movements in revenue per day and margin per day.

in re-pricing these contracts. And that's still going to happen because the overall utilization for tier one super spec is still high, despite what's happening in recent releases of SCR mechanical rigs. It just doesn't affect what we're doing right now. Andy, you want to comment more on the?

So on revenue per day and cost per day, you can expect revenue up about 1500 a day and cost up about 500.

Okay, perfect. Okay Andy, thank you very much. I'll turn it back.

Thanks. Your next question comes from the line of Kurt.

Khalid from Benchmark, your line is open.

Hey, good morning everybody. Hey Andy, sounds like you guys got a unique line of sight on some opportunities that some of your competitors didn't seem to kind of discuss on their conference calls today to activate, you know, these eight-rains or so.

The 13th spread is more of a Q4 event. Five of these we announced back in September , so I don't know why this is so hard to understand. We've got three more on top of five. That's not a big number. We've got line of sight on this, and that's how we see this progress. Okay, great. Then, in the context of the frac root addition coming up here, is that a situation where you have identified a customer and a contract opportunity for it, and are they waiting on that crew to come out, or are you going to be actively marketing it between now and then? We're in discussions. In the pressure pumping... Tailor-ULC is a

market, we don't participate or try to compete in the lower end, lower pressure Midland Basin or lower pressure Marcellus. Our crews are set up and working the higher end, higher technology, deep Utica, deep Delaware, higher pressure, higher rates.

areas and so we've got a great reputation for what we do at that level of performance and so you know We've got a few customers that are looking to expand what they're doing because they're going to be adding drilling rigs this year And so yeah, we do have some line of side on on possibilities for our crews

Great. And then last follow up here, you mentioned the free pricing 30 rigs in the first half of the year. What point do you think you'll have the vast majority of your rig fleet on?

Let's call it that 35 to 40k a day kind of leading edge. You know, it's certainly front end loaded in the year, but it will continue throughout 2023. And I've discussed this a few times. But just to kind of clarify for everybody, I don't think we get everything up to leading edge in 23. I think some of this continues into 24. It's certainly heavily weighted into the first.

to start out, maybe if you could just take a bit of time here and compare and contrast. What you're seeing between the land drilling and pressure pumping markets, do you expect one to be stronger than the other in terms of 2023 profitability to move rates or utilization?

as pricing, you know, we're producing top quartile, you bit up for spread right now. I think the real opportunity for us is on the drilling side because of the number of term contracts that we were signing in early 22. And so, you know, like I mentioned, we're going to be repricing about 30 contracts in the first half of 23. And these are big movements on these contracts.

just to get customers up to where the market is today. They've certainly had a huge benefit over the last year with the rig rates they've been paying versus where the market's been moving to. And so these adjustments are gonna happen in 23. And that's why I see that.

You know, I think that's the underappreciated part of the story is our ability Even if we weren't putting out any more rigs, even if I said our recount was going to be flat Which is not you know what we're projecting We're still going to grow margin and grow free cash flow because of the repricing.

Got it. Makes sense. And maybe if you can just talk a little bit about what you're seeing in terms of operating costs on the drilling and the pressure pumping side, up extra days, about 18, 3 or so in Q4, where do you see that going for drilling? And then maybe if you can just comment a little bit as well too.

the map there. On the pressure-pumping side, same thing although probably a little bit more, less so maybe on labor and a little bit more on some of the R&M. Inflation is real on that side of the business, so it's crept up a little bit, but pricing has stayed ahead of it.

we're still seeing net pricing gains.

We're still seeing net pricing gains. Okay, appreciate the color. Thanks very much.

Your next question comes from a line of Don Christ from Johnson Rice. Your line is open.

Your next question comes from a line of Don Christ from Johnson Rice. Your line is open. More in gentlemen, how are you?

Good. Two questions for me. Number one, you know in the past you've done a lot of work on the overall rig count. I know a lot of the analysts are in print saying that that it could pretty much moderate this year, maybe dip in the first half and and kind of build up in the in the second half of the year assuming that the gas.

Strip comes back. Can you offer your thoughts on on how you see that the land rate count kind of progressed through the year and possibly where it may end this year?

So I need to kind of parse that into two different types of rig classes because our visibility and our drilling business is really around AC, high-spec, super-spec rigs. And then SERs and mechanicals just kind of do what they do and are treated more on a spot market.

But the AC high-spec, super-spec rigs primarily working on term contracts and getting reprised right now. We're seeing that market to be tight near 100% utilization today. We expect that our rig count in that sector continues to grow in 2023. Now, if you look at SCR mechanicals, those are down probably 30 rigs.

since the beginning of this year, but that doesn't affect what we do. That's just a separate part of the market from where we participate. It's kind of hard to predict what that part of the market is going to do. Those aren't necessarily types of customers we work for. You're going to see some moving in the RIC count because of what's happening in natural gas.

But we don't have any visibility that that's really going to have any effect on Tier 1's Super Spec rigs and the overall utilization and leading edge pricing there because the overall demand. We're still in discussions with EMPs and the oil basins on increasing activity and the oil basins.

Okay, and shifting gears just to the cost side and supply chain in particular, rolled steel pricing has come back quite a bit, but pipe pricing really hasn't moderated at all. Are you seeing...

Just with a little bit of weakness in the overall rig count. Are you seeing the supply chain kind of loosen up a little bit and pricing kind of moderating?

So.

So, you know, new drill pipe, which is what we buy, you know, that's consumed in...

In the way we do it in our rigs, we buy a lot of what we call high torque double-shoulder drill pipe. We rent a lot of that pipe on the market. That's not the type of pipe that's used on SCR and mechanical rigs. So when SCR and mechanical rig slow down, it doesn't change anything in the high-spec drill pipe market.

Double shoulder high torque connection drill pipe pricing has been moving up. Lead times haven't really come down. It's still around a year lead time for buying pipe.

So that market for high end drill pipe which we use on tier one super spec rigs is still tight We still have to order a year in advance and that's not gonna be affected by low end rig slowing down

And anything on maybe mud pumps or any other equipment that may be duplicated on those low quality rigs?

No, it's a you know these are just very different systems ours are AC motor driven mud pumps that are not the same as what you Have on an SCR mechanical rig.

Okay, I appreciate the color. Thanks. We'll turn it back.

Your next question comes from the line of John Daniel from Daniel Energy Partners. Your line is open.

Hey, one of guys. First one for me, not into the modeling right now. The blended hydrogen project that you talked about, Andy, can you just elaborate on what exactly was involved and then...

You know, it's kind of a long ways off just the speed of adoption and opportunities out there.

long ways off just the speed of adoption and opportunities out there. And how did it go, the trial?

So, overall the trial went really well. The engines worked successfully on a blend of hydrogen along with the natural gas. Really excited about how that test went. It wasn't a high percentage of hydrogen, but the point was just to try to test the systems, make sure that the spark ignition engines were still going to function properly under that type of environment.

and overall good. I would say that when you step back technically, you success. The next step is to try to increase the percent blend of hydrogen. But overall, the economics for hydrogen, I would say today, still probably present some challenges.

Now, I think that market has potential to move quickly. It's about how do you procure hydrogen, how do you transport hydrogen, storing it, and then putting it into the systems. I think all those things are going to get worked out. I think over the next year or so, we'll probably see more of an uptake there.

And we'll be doing some testing on the pressure pumping systems too and blending hydrogen with the natural gas on there as well this year.

Okay, can you say where, what region that was tested in?

what region that was tested in? We did our test up in the northeast.

Okay, cool. The 13th fleet when it gets reactivated is a system that's a Tier 4 dual-2 upgrade. Correct.

Okay. And then what type of...

contract duration or customers willing to entertain today versus call it six to 12 months ago.

We're still seeing discussions in a year or more for contracts for drilling rigs.

Yeah, okay, I mean that kind of um

I had to dumb it down so that just the bifurcation was going on because when I heard all I was trying to get a sense for where the Rit count's going but the way you describe it seems to me You actually you have this scenario where the overall Rit count might bleed a little bit lower But those with like you all with high spec rigs continue to see your market share and prove that that's certainly our view And I'm gonna just explain today You know the the SCR mechanical rigs are gonna do what they do on the spot markets because they're not covered with term contracts and we don't operate those rigs so I think it's gonna affect the overall Rit count because you know it's about a quarter of the overall Rit count.

but it doesn't affect drilling contractors that are running AC high spec, super spec rigs.

Fair enough. Last one for me, and this one, not to be a WDW downer here, but let's assume that you do see softening in a place like the Hainesville and just make up a number. Four to five, for act fleets, get sort of displaced, if you will. And the owners of those fleets naturally say, well, let's move them to an oily basin. And so, you know, you look west, you go to Midland. Is there, is the, do you think the Permian market is tight enough where those four to five fleets plus the incremental ones that are getting reactivated, it can absorb it easily, or does that then create a headache back half of this year?

So I think there's there's two things that are happening in the pressure pumping market that are keeping that market type for equipment that are probably underappreciated unless you're living it day to day like our teams are.

One is this absorption of increased horsepower per spread. You know, is straining us and others in the industry as we try to, you know, operate more pumps into those, into those spreads. And so, you know, the need to have pumps cycling back to maintenance is stretched right now. And so...

equipment still needs to come into our systems to efficiently operate at the higher horse power per spread rate. So that's tight and that's going to absorb more horsepower. The other is the projections of how many spreads are potentially coming out in 23 is either you're going to.

be delayed or it's back in loaded because the availability of equipment and engines and pumps is still tight coming from manufacturers.

And so, you know, the forecast for how many spreads are coming in, I think, you know, that gets pushed in the year. And so that's why I think any spreads freed up coming out of East Texas, North Louisiana are going to, you know, that horsepower is either going to get absorbed into the increased horsepower per spread.

or it's going to go to work in an oil basin where equipment that's planned to show up is going to be delayed.

Thank you for entertaining my questions.

Your next question comes from a line of Derek Podhiser from Barclays. Your line is open.

Hey guys, not to the labor of the point on leading edge, but maybe what would be, and it was the biggest threat on that 40,000 leading edge day rate. I mean, some investors, the way they look at it, they'll think a lot of these rigs, the 40,000 supported the significant cat-bex acquired to reactivate these rigs. They've been out for a little bit. They've earned their pay.

We have a lot of discussion about that, but at the end of the day, our focus is on margin. Our focus and our duty to our shareholders is to maximize our margin. On one side, we're going to try to protect that leading edge day rate, and that's what we plan to do. But on the other side, the demand is just still tight. We're at 100% utilization. And even if something frees up in the...

Switching over to international, Columbia, it seemed like the guide was a little weak there. Can you maybe talk about how many rigs are active there? Are there any that are going to idle? And then maybe other potential opportunities in the Latin America region where you could move some of those idle rigs out of Columbia and into different countries and just what are the overall growth prospects down there.

Yeah, so you know there has been some changes in the Columbia market. We were working as you know six seven rigs And now our recounts coming down It's a lot of it's due to changes and you know the fiscal Set up for the operators down there the operators are trying to work through that and see how that's gonna affect them We do expect our recount to move up again in Columbia

but we also see potential for some possibilities in Ecuador as well and we continue to work on that.

Great, appreciate the color. Thanks, guys.

Again, if you'd like to ask a question, press star then the number one on your telephone keep that.

Your next question comes from a line of Luke Bimoin from Piper Sandler. Your line is open.

Hey, good morning. I wanted to see if you could talk a little more about the 95 million cat-backs in your drilling budget for incremental grab opportunities.

Andy, you mentioned premium drill pipe, but what else is in this budget? What paybacks are you getting on these investments? I guess maybe some of this is EcoCell. Could you also just refresh us where you are on that initiative? Andy Lebron-Forschner It's EcoCell. It's going to be general market upgrades, third pumps, fourth generators, things like that.

or upgrading a rig without working and getting a little bit more rate. On the drill pipe and the ECO cells, those are sort of all the card items that pay back pretty quick inside of.

You know, maybe a year and a half, two years.

Okay, got it. That's it for me.

That's it for me. Thank you. Thank you, everyone. Thank you.

There are no further questions at this time. I will now turn the call back over to Andy Hendrix, CEO for closing remarks.

We appreciate everybody's time this morning. Thanks for dialing in and we appreciate the questions.

Have a good day. Thank you.

This concludes today's conference call. You may now disconnect.