Q3 2023 Patterson-UTI Energy Inc Earnings Call
Good morning, My name is Andre and I will be your conference operator today.
At this time I would like to welcome everyone to the Patterson UTI energy third quarter 2023 earnings Conference call.
<unk> conference is being recorded.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one again.
At this time I'd like to turn the conference over to Mike Sabella, Vice President of Investor Relations. Please go ahead.
Thank you good morning, and welcome to Patterson Uti's earnings conference call to discuss our third quarter 2023 results.
With me today are Andy Hendricks, President and Chief Executive Officer, Andy Smith, Chief Financial Officer, Michael Cohen, Chief Business Officer, and Matt dealer President of next year completion solutions.
As a reminder, statements that are made in this conference call that refer to the company's where management's plans intentions targets beliefs expectations or predictions of the future are considered 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 takes no obligation to publicly update or revise any forward looking statements statements made in this conference call include non-GAAP financial measures.
The required reconciliations to GAAP financial measures are included on our website <unk> dot com and in the company's press release issued prior to this conference call I will now turn the call over to Andy Hendricks Patterson Uti's Chief Executive Officer.
Thank you Mike.
Good morning, and welcome to Patterson Utis third quarter Conference call.
Our third quarter was a monumental as we closed on two transactions that reshaped our company.
Today, we are positioned as one of the market leaders across multiple U S onshore service lines.
With a diverse suite of products and services and a strong presence across the entire U S land drilling and completions value chain.
We believe these transactions create long term competitive advantage for our company.
And our wide, reaching digital strategy will help us maximize the value potential for all stakeholders.
We will look to use our integrated offering to deepen the partnerships with our customers and further differentiate ourselves on service quality and efficiency.
It's becoming increasingly difficult to replicate the success of the larger oilfield services providers in the market should continue to become more bifurcated going forward than it has been historically.
Yeah.
We are looking for ways to help keep U S shale oil and natural gas competitive on a global basis and a competitive U S. Shale is important to the success of our company helping.
Helping our customers reach their goals is critical to allowing us to reach our own goals for a strong return on capital and to return a significant amount of capital back to our shareholders through the cycle.
The next year and Alterra transactions will help maximize our company's potential.
Wed like to welcome the next year and Altair employees to the Patterson UTI team.
In the short time, we've all been together we've been impressed by the talent at all levels of both organizations and excited about our shared future.
We're working to ensure that we put our people in the right places to succeed.
Our employees have worked tirelessly to make the integration a success and remain dedicated to our company through what has certainly been a stressful period.
We believe we have made Patterson UTI and employer of choice in the oilfield, which is already helping us attract and retain top talent and further driving our operational advantage.
Operationally, we've already seen several successes by extending that extra well site integration footprint.
We now have a next year power solutions natural gas fueling system working on a legacy universal dual fuel fleet.
On another Universal fleet, we've added next year's wireline and last mile logistics.
We are confident completions well site integration will lead to improved well site efficiency lower cost and a safer environment for our employees, which will benefit both our company and our customers.
It's been just two months since we closed the transaction and we are already starting to see operational synergies.
There are many other areas, we see potential to create additional value through the merger for both Patterson UTI and our customers.
From an exterior transaction alone we have line of sight at least $200 million in annualized synergies by the first quarter of 2025, and we are increasingly confident in our ability to meet or even exceed that target.
We brought together two of the industry's leading well completion companies and strong collaboration is already underway.
On the Alterra side, we also see opportunities for revenue synergies between our drilling services and Alterra products.
As you've heard us say before we cannot we cannot ignore the benefit of size and scale that comes with these transactions.
This is true not only from an operational perspective, but also as we navigate capital markets that are starting to take another look at our sector.
The larger market cap and market trading liquidity has expanded the universe of potential investors that can maker grown investment in Patterson UTI. We think this is a positive for all of our stakeholders.
While our company is much bigger our commitment to capital discipline is unchanged our capital allocation strategy as a major reason why we are excited to be considered by a broader group of investors well.
We like our strategy and we think the message is being well received.
For those who followed Patterson UTI previously our capital allocation strategy is largely unchanged. The foundation starts with a strong balance sheet as well as organic investing strategy that helps us offer our customers differentiated products technologies and services.
On the balance sheet, we have an investment grade credit rating at all three major rating agencies.
Testament to the low leverage and significant free cash flow generating potential of the new company.
We will use our strong capital structure to be opportunistic at all points in the cycle.
Our capex, we will always be disciplined in our investments and only look to put capital to work, where we see opportunities to build or expand our differentiated technologies and services for our customers.
We've already seen bifurcation in service quality amongst the peer group and our Capex strategy will look for ways to further advance our core competencies.
This should mean, a more repeatable return and free cash flow profile for our company through the cycle with a focus on both short term and long term free cash flow generation.
To reiterate we are committed to return at least 50% of our free cash flow to shareholders annually and we have returned more than $1 $2 billion to our shareholders over the past 10 plus years.
We remain committed to our dividend and we have $281 million remaining on our share repurchase authorization.
We believe this is an attractive capital allocation strategy that will allow us to invest in the future Patterson UTI to grow our competitive advantage, while also offering our investors a shareholder return program with both income through the dividend and accretion through any buyback.
Okay.
Now moving onto the macro we are extremely excited about the outlook and we think the behavior, we've seen from our competitors and customers. This year is yet another sign that we are operating in a more stable U S shale industry.
Our customers are obviously still sensitive to commodity prices, but they are looking through volatility more than they have in the past.
This allows us to better prepare and relative to prior cycles. It creates a far more predictable outlook for our operations and we think a more investable sector.
For the third quarter Patterson UTI as U S drilling activity was in line with expectations with an average of 120 rigs, including one rig that earned 44 standby days after the customer changes drilling schedule.
We ended the quarter with 117 active rigs in the U S and have seen our rig count improved to 118 today, we expect to exit the year with 120 rigs and averaged 118 for the fourth quarter.
Positive momentum should continue into 2024.
Our revenue per day is still in the mid to low thirties, and acknowledgement from our customers that they see value in our premium assets and high quality services.
Super spec rig utilization remains very high with activity for this class of rig outperforming the overall rig count.
We think super spec rig activity recovers before the idled lower spec rigs, which should position Patterson UTI to outperform the expected recovery over the next several quarters, even as we outperformed the market when the rig count moved lower this past year.
On the Frac side, there was slightly more white space in Q3 than we were anticipating as we saw one off disruptions from several customers. We continue to mostly see pricing discipline in the frac market, particularly among the dedicated natural gas powered portion of our fleet, where we have the highest returns.
As we've said previously out of our fleet of three 3 million horsepower, we're choosing to stack some equipment before working at pricing that does not meet our threshold and we continue to believe that is the right thing for our company.
We're using any downtime to maintain our equipment, where appropriate and prepare for an increase in activity in 2024.
This should put us at an advantage as we enter 2024 with a fleet that is more readily available for deployment relative to peers.
The long term outlook remains positive and our view even more so considering the delay in activity recovery, we have so far seen for our customers.
Oil prices have risen on the back of OPEC supply cuts, but importantly, absent a major macro event, we believe the global balance will need U S shale production to grow modestly over the next several years and U S shale activity like we needed to stabilize just to keep production flat.
The delayed activity response, so far should mean activity will have to catch up with deferred activity, which should be a tailwind in 2024.
On the natural gas side, we believe the shape of the forward strip is telling us that there needs to be more activity in the gas basins just to meet current natural gas demand and as we get closer to completion of new LNG export capacity later next year and into 2025, we will likely need to see natural gas activity rise again.
In short we remain optimistic for both the drilling and completions market given current commodity prices and the view that we will need a modest increase in U S shale oil and natural gas production over the next several years.
Meanwhile, the recent slowdown in Frac activity is likely to accelerate attrition beyond what service providers, where otherwise preparing for this year across the industry <unk>.
Additionally, we believe the slowdown has deferred some investments in new equipment.
Roughly two thirds of the industry fleet operating in the U S. Today can be powered by natural gas and the slowing pace of investment by service providers likely means there is a longer runway to fully replacing the diesel portion of the industry asset base.
For our next year completions segment, if we continue to see strong returns we will still plan to continue to invest to upgrade our fleet at a measured pace and any new capacity, we bring into the market would likely be 100% natural gas powered and we'd be replacement horsepower for equipment that is reaching the end of its useful life.
More broadly the industry likely needs to see around $1 5 million horsepower of new builds per year, just to keep horsepower flat and has been considerably below that over the past several years combined and.
In short the Frac fundamentals appear to be positioned to remain very strong over the next several years.
Regarding international opportunities I want to be clear that our priorities remain continued capital discipline and returning cash to shareholders.
Within our drilling and completion businesses, we occasionally participating discussions for opportunities in international markets as we have for years, but for us to deploy capital we would need to see a compelling opportunity that has a strong probability of acceptable and accretive returns for our differentiated products and services and to date, we have not found an opportunity that makes sense.
For our company and for our shareholders.
Therefore, our current pace of international expansion will be primarily focused on alterra as previously announced plans in the middle East and South America as I believe that is in the best interest of our shareholders.
I'll now turn it over to Andy Smith, who will review our financial results for the third quarter.
Thanks, Andy.
The reported financial results for the third quarter include 48 days from Altera. After that acquisition closed on August 14th and 30 days of next year after that merger closed on September one.
Total reported revenue for the quarter was just over $1 billion.
Reported a small net income attributable to common shareholders, which was essentially breakeven on a per share basis.
This included $70 million in merger and integration expenses, partially offset by the recognition of $29 million of previously deferred revenue, which became recognizable after the customer changed its drilling schedule.
Our adjusted net income attributable to common shareholders was $55 million or <unk> 20 per share.
This excludes the merger and integration expenses includes the previously deferred revenue and assumes a 21% federal statutory tax rate.
Adjusted EBITDA totaled $277 million, which also excludes the previously mentioned merger and integration expenses and includes the previously deferred revenue.
Our weighted average share count was 280 million shares during Q3, and we exited the quarter with 417 million shares outstanding.
Through the third quarter, we have returned $191 million to shareholders through a combination of share repurchases and dividends.
Our board has approved an <unk> <unk> per share dividend for Q4, and we have $281 million remaining on our share repurchase authorization.
We intend to return at least 50% of our free cash flow to shareholders annually consistent with our previous capital allocation strategy.
Through the third quarter, we have returned more than 100% of our free cash flow to shareholders and given where the share prices today, we will likely repurchase shares in the fourth quarter.
As a reminder, we re segmented our reporting this quarter to better reflect the way we manage our business.
Our new drilling services segment includes the legacy contract drilling and directional drilling segments. It also includes our current power electrical and automation equipment and warrior drilling rig equipment businesses, both of which were previously reported as other operations.
During the third quarter drilling services revenue was $489 million, which includes the recognition of $29 million in previously deferred revenue drilling.
Drilling services gross margin totaled $209 million during the quarter.
Direct operating costs included $9 million associated with insurance reserve adjustments and inventory write downs.
And U S contract drilling we totaled 11009 operating days, including one rig that earned 45 44 days on standby after the customer changes drilling schedule.
Average rig revenue per day increased to $38 $110 with the previously deferred revenue item positively impacting reported revenue per day by 2000 and $630.
Average rig operating cost per day were $19 $870, including $790 per day and costs associated with the previously mentioned insurance reserve adjustments and inventory write downs.
The average adjusted rig margin per day was $18 $240, a $1330 per day increase from the previous quarter.
At September 30, we had term contracts for drilling rigs in the U S providing for approximately $760 million of future day rate drilling revenue.
Based on contracts currently in place, we expect an average of 74 rigs operating under term contracts during the fourth quarter of 2023, and an average of 52 rigs operating under term contracts over the four quarters ending September 32024.
And our other drilling services businesses, which is mostly international contract drilling and directional drilling third quarter revenue was $69 million with an adjusted gross margin of $8 million.
For the fourth quarter in U S contract drilling.
We expect to average 118 active rigs and exit the quarter with 120 rigs operating.
We expect an adjusted gross margin of $16100 per day with revenue per day expected to average $35400 and rig operating cost per day expected to averaged $19300.
Other drilling services revenue is expected to be $65 million with an adjusted gross margin of $10 million.
Our new completion services segment results include a full quarter of the company's legacy pressure pumping segment as well as 30 days of results from next year oilfield solutions beginning on September one 2023, and continuing through the end of the quarter.
Additionally, effective September one 2023, we began recording the cost to replace fluid ends as a direct operating costs rather than as a capital expenditure.
Reported revenue in our completion services segment totaled $460 million with an adjusted gross margin of $91 million. During the quarter segment revenue was impacted by lower customer activity and slightly lower pricing on certain products and services with demand and pricing moving lower towards the end of the quarter before.
Stabilizing thus far in Q4.
We think activity and pricing is likely to stay relatively steady at current levels through the rest of the year aside from typical seasonality.
For the fourth quarter, we expect completion services revenue of $950 million with an adjusted gross margin of $200 million.
Our drilling products segment results include 48 days from the recently acquired Altera drilling technologies, beginning on August 14th 2023, and continuing through the end of the quarter.
Additionally, upon closing the Alterra transaction in accordance with U S. GAAP, we recorded certain assets and liabilities of Alterra at fair value, which resulted in a step up in value of the drill bits that altera held at the time the transaction was closed.
This accounting adjustment will continue to impact our reported results for altera until we have fully consumed the impacted assets.
Third quarter drilling products revenue totaled $47 million with an adjusted gross margin of $14 million.
During the quarter the step up in value increase the reported segment direct operating costs by $6 million, an increase reported segment depreciation and amortization by $7 million all of which was noncash in nature.
Given the declines in industry activity, we are pleased with the stability of the drilling products segment.
For the fourth quarter, we expect drilling products revenue of $90 million with an adjusted gross margin of $30 million, we expect $10 million in non cash direct operating costs associated with the step up in value of Alterra without which the segment adjusted gross margin expectation would be $40 million.
Other revenue totaled $17 million was $6 million and adjusted gross margin.
We expect fourth quarter other revenue and adjusted gross margin to be flat with the third quarter.
Reported selling general and administrative expenses were $45 million in Q3, which includes partial periods for Alterra and next year.
For Q4, we expect.
SG&A expenses of $65 million, we expect SG&A to decline over the next year as we realized synergies from the merger with next year.
On a consolidated basis for the third quarter total depreciation depletion amortization and impairment expense totaled $198 million for the fourth quarter, we expect total depreciation depletion amortization and impairment expense of approximately $260 million we.
We expect fourth quarter cash taxes to be around $5 million.
During Q3, total capex was $160 million, including $89 million in drilling services $56 million in completion services $8 million in drilling products and $7 million in other and corporate.
Our capex in Q4 is expected to be $190 million comprised of $65 million for drilling services $105 million for completion services $15 million for drilling products and $5 million for other incorporate.
The Capex includes maintenance spending as well as some investments in next year's power solutions natural gas fueling business and other upgrades on the completions and drilling fleets.
To date, we have delivered annualized synergies totaling almost $60 million from the next year transaction with synergies only slightly impacting our Q3 results as the transaction closed late in the quarter.
By the end of Q4, we anticipate reaching an annualized synergy run rate of more than $100 million, which will mostly be backend weighted and will be more impactful to Q1 results.
We are increasingly confident that we can meet or exceed our goal for $200 million in annual synergies associated with the nextera merger by the first quarter of 2025.
During the quarter, we successfully completed a 10 year $400 million senior notes offering.
We closed Q3 with nothing drawn on our $600 million revolving credit facility.
As well as $67 million in cash on hand.
Subsequent to the close of the next year transaction and concurrent with our recent notes offering.
We now have investment grade credit ratings from all three major credit rating agencies.
Maintaining an investment grade capital structure as core to our capital allocation strategy and we intend to continue to run our business in a way that allows us to maintain our investment grade capital structure.
I'll now turn it back to Andy for closing remarks, Thanks, Andy.
With both the next year and Alterra transactions now closed our top priority is successful integration as we work to fully realize the value from these transactions our conviction on the rationale for these deals is stronger today than it's ever been and we remain on track to achieve or even exceed the $200 million in annual synergies from the next year.
<unk> by the first quarter of 2025.
Looking at the overall market the macro setup is strong and the outlook is improving we have already seen our rig activity inflect higher and we expect this positive momentum will continue in 2024.
Customers are optimistic at recent commodity prices, but are proceeding cautiously, which we think is a sign of a more stable U S shale industry and our belief that cycles will be shallower in the future.
Nonetheless, as these events play out we think convention in the cycle will improve and.
And over the long term activity and production will need to increase to meet demand based on various long term forecasts, including the IEA.
And finally, while the macro setup gives us confidence in our future earnings power, our priorities will remain sustaining a high return on capital and free cash flow, we will remain capital disciplined with our Capex and we will look to invest in areas, where we see opportunities to differentiate ourselves to our customers versus simply investing to grow fast.
<unk>.
This should help us to deliver strong returns and free cash flow through the cycle.
We remain committed to return at least 50% of our free cash flow to investors through a combination of dividends and buybacks. This is the right strategy for our company and our industry.
Before we go to Q&A I want to again acknowledge all of our employees who have continued to provide.
Great service quality, while working tirelessly to make these transactions successful.
Many of our employees have gone above and beyond their day to day roles to help make Patterson UTI and employer of choice and we would not be here today without you. So thank you.
With that I'd like to now open the lines for Q&A.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We will take our first question from Scott Gruber at Citigroup.
Yes, good morning, good morning, Scott.
Wanted to start on the completions segment, how many fleets.
<unk> today.
And thinking about.
Recovery in that count.
Given your strategy do you think e&ps will be ready to pay more reasonable rates.
For your equipment in early 'twenty, one such that you can kind of see.
The improvement in <unk> following the improvement in rig count we're starting to see.
Is there some risk that we get off to a slow start next year.
So I'll start with the horsepower. So we have $3 3 million horsepower, we're not calling out the fleets just because there's such a range of size and the fleets that we operate we could be on a smaller fleet in the Midland basin or we could be doing a sign will frac in the Delaware.
Or it could be a big fleet over in the Haynesville, So calling out the number of fleet doesn't really help people out from that standpoint, because they just vary in size and then it can actually fluctuate within a month or within a quarter. So we do have $3 3 million total horsepower. We did we did park some of that horsepower as things slowed down with the white space in the calendar and like I mentioned.
Earlier, we're using that period, just to do some maintenance to be ready for the inflection because we can already see the inflection in our own rig count at Patterson UTI and I realize we've been outperforming the market in general and with our drilling rig count but.
Based on how commodity prices have been trading, especially the forward strip on natural gas I think youll see an inflection in the overall rig count now we're going to see the traditional lag between the drilling rigs picking up.
And the Frac operations, just because there is really no ducks out there right now.
We've got Frac spreads bumping into drilling rigs and drilling rig activity does need to pick up so that frac activity can pick up so as as we see those increases in early 'twenty four.
We're already seeing the inflection now, but as we see the increases in early 'twenty four on the drilling side, there's going to be a bit of a lag on the completion, but then youre going to see completion activity the activity pickup following drilling activity.
Okay got it and then ill turn to to Capex next year.
I know you guys haven't set the budget, but just kind of.
I wanted to get your thoughts on the moving pieces.
Yes based upon the re segmentation I have drilling services.
We're north of 300 for this year, maybe 320.
So wanted to see if that is a good number for next year Thats down and then.
Well the completion services Capex for next year kind of being a high single digit range next year, you talked about eight 9% of revenues.
So it's maybe kind of mid three hundreds and then.
If I added 65 25 for other kind of get pretty close to consensus is at kind of what are your early thoughts on the pieces and what is the total.
Hey, Scott this is Andy.
Again, we haven't gone through our full budgeting process, but I think if you look at where our fourth quarter is coming in.
Not necessarily looking at the.
No.
The buckets of it but if you look at the total number.
The sort of 190 guide I would think that on a quarter to quarter basis in 2024, we're pretty comfortable in the $190 million to $200 million range on a quarterly basis.
Okay.
Appreciate it thank you.
We'll move next to Jim Rollyson at Raymond James.
Hey, good morning, guys and congrats on getting everything put together.
Andy when we think about the rig market, obviously youre talking about.
Your bottoms in and starting to improve.
So your average rate this last quarter average revenue per day.
The one customer situation was kind of in the mid <unk>.
You've talked about low to mid 30% is kind of where the market is right now just trying to think through as we roll through next year your rig count presumably gradually improves when do margins bottom. If you kind of look at where your pricing rigs today versus what contracts are falling off how do you think about that.
Hey, good morning, Jim.
First I want to congratulate the drilling team they've done a great job through 2023.
Managing the rig count.
This is really a testament to the service quality to the continued rollout of technology that we're doing on our drilling rigs and.
The partnerships, we have with various customers out there that want to keep using its even when things are getting a bit soft in the market. So that's going really well in terms of leading edge rates.
We're higher earlier in the year, they have softened a little bit, but they really haven't come down that much.
I'd say it is mid to low <unk>, because it's more in the mid than it is in the low.
So that's kind of how I characterize it and I do expect that that will start to move up early next year as the rig count starts to push up as well past this inflection that we're seeing.
So given that I think.
Margins are likely to bottom.
Around Q1, maybe Q2, but we will also have some extra costs in Q1 that we have on an annual basis. So that's that's likely to to kind of put that inflection on the margins around Q1.
Yes that makes perfect sense and as you put rigs back to work lack.
Last year until we got into late last year, you were putting things out in <unk>.
Relatively short terms and then I think around late third quarter, you started terming up a few things which proved to be pretty fortuitous.
But curious as you're having conversations and putting rigs back to work right now maybe the kind of tenor of the contracts that these guys are looking for.
Yes, we're definitely waiting them to the shorter side because.
Because we do think we have upside in 'twenty four just based on the macro outlook going into 'twenty five.
We're starting with some shorter contracts or some agreements that allow us to move that up next year.
Great. Thanks again for the color. Thanks.
Thanks, Tim.
And next we'll move to Steven Zingaro at Stifel.
Thanks, Good morning, everybody.
I guess two for me the first.
Your current take.
On the supply demand fundamentals on.
On the passenger pumping side, but maybe talk a little bit about if you can.
Material bifurcation youre seeing between the lower emission assets and sort of traditional assets and kind of where your fleet stands right now.
So let.
Let me start off by saying I want to thank everybody in our well completions business at Patterson UTI for all the hard work they've been doing.
We closed on this merger on September one about a month earlier than we had originally planned and.
There was just so much work that was done by the teams to get ready for day, one and day one for US was on a Friday before labor day weekend and that weekend, we didn't miss any sand, we didn't miss any work trucks.
Trucks moved equipment.
Pumps cap pumping every haynesville work like it was supposed to you on day, one and so hats off to the team on all the planning that was done through this integration process, which started right. After we announced the Alterra transaction and we jumped into the integration work. So integration is going very smoothly.
Are you talking about synergies, we have a high level of confidence in hitting the synergy number there and so I got to start with that and just say, thanks to everybody and our well completions team for everything they've done so far to get us where we are really excited about how this is going.
<unk> and other things so we've had a softening in the market just really kind of tied to the overall rig count in the industry and like I mentioned earlier, we've had frac spreads that are bumping up against drilling rigs with the softening in the market and so it's going to take an increase in drilling activity.
Really move that now when it comes to.
<unk>.
The pumps and the equipment and the fleets that they remain stickier in this softer market. It certainly is weighted to the primarily natural gas fueled systems.
Whether it's dual fuel or other and so.
That certainly caused a bifurcation in the market when you look at our well completions equipment roughly two thirds of that is primarily natural gas powered and so we're in a really good position and it's why we've seen a softening in the market, but certainly not any more than that.
So really excited about how our teams have done through this period, even with the wide space that we've seen in the third quarter, that's going to adjust itself.
If you look forward, we are going to see maybe a little bit of slowdown towards the end of Q4 based on the holiday period, maybe a little bit of winter baked into some of those projections just in case, we get some cold weather.
So we'll see how some of that plays out but.
Very upbeat for what 2024 can hold going forward, there and excited for what we can offer to the customers.
Thank you and I know it's been.
Well, it's been two months now I guess since the deal closed but has there been anything that has really stood out as you've kind of looked at the next year way of doing business on the completion side.
That surprised here that's materially different like anything that's really jumped out since the merger closed that.
<unk> has been an upside or downside surprise for you.
I'm going to start with the people the people who are great. We're excited to have him as part of the team and they've got a lot of energy. There is a lot of excitement and tried to pull everything together and everybody is just doing a fantastic job a lot of high quality individuals and so that's where it starts and really excited about that.
We're already familiar with the equipment.
We understood what next year was doing in terms of integrating services, whether it's wireline last mile logistics to power solutions with the natural gas <unk> and blending at the well site. All of these things have made next year successful and we've watched that over the years.
Patterson UTI years ago pre Covid, we actually looked at adding wireline to our frac spread because we understand and we get it you don't want $50 million worth of Frac waiting on $1 billion of wireline at the well site and so that integration is important to efficiencies and just continuity of service and to keep pumps pumping.
And so the ability to pull all this together and then bring those integration piece.
Pieces into Frac spreads that didn't have it previously is powerful for this business. So excited about that.
Excellent thanks for the details.
We will take our next question from Derik parties are at Barclays.
Two.
Asking about the synergies I know the guy it sounds like <unk> to reach over $100 million by the end of the year. It seems ahead of schedule maybe.
Maybe can you break that down to the different category you discussed, but now I believe it was SG&A on the cost side you have the revenue synergies and then you had the non payroll spend maybe just an update there to help just expand on that synergy number.
Yes.
I'd say that as we get through the fourth quarter.
We are looking at.
Right now on the synergy side, the SG&A synergies are probably about.
Again, a third of kind of the run rate that we'll see and then.
Probably.
About half of it is probably coming out of procurement at this point in time and the rest is the integrated and the integrated.
Revenue opportunities.
Got it that's helpful and then on the on the merger expense side I believe it was $80 million and I know you just posted 70 I thought there might have been a split between the expense side and the Capex side can you just update us there clearly there's a benefit to closing early you're able to capture a lot of those onetime.
One time cost already she those all be fully recognized within this year or will there be any leak over into 2024.
I'm, sorry, you were asking.
Computers, or youre, asking about expenses and capex.
Yes, I think the original $80 million, one time expenses I thought that was split between some opex and capex, but just seeing that 70 million number this quarter.
That $80 million fully recognized in 2023, and maybe just some updates.
If it's Opex Capex I thought it was $65 15 split for the Opex.
So a lot of it.
So some of it will be.
We will leak into 2024 and the reason for that is again as you go through some things until you have defined plans on what youre going to do around certain items youre not really allowed to sort of recognize.
Those expenses, so they will slip a little beyond 2023 and into 2024 as well.
Got it.
And then just a quick follow up on the drilling side.
You are obviously coming off the bottom, but it seems like activity has been a little bit more lethargic.
People originally.
Thought it was going to be could you maybe expand on the.
The privates the public's maybe the different basins, what surprises to the downside I know you guys are constructive on 24, you went over that but why isn't that we'd been limping into year and just maybe some more color on that.
That's a great question I think we've been having those discussions ourselves but.
Not any one particular area that you can that you can call it out.
A mixture of publix, a mixture of privates that are both being cautious and inflicting at the same time, so even though our rig count adds that we're looking at going into year end or a mixture of publics and privates.
It's really kind of across the board I think in the natural gas plays we're still seeing a little bit of hesitation to pick up drilling rigs and I can understand that but I think that when you look at the forward strip that's going to work itself out so maybe a little bit later than we initially thought but again when we're talking about our rig count.
<unk>.
218, now and possibly exiting the fourth quarter at $2 20.
This is an inflection in our rig count and I think that Youll see the overall rig count kind of move higher a little bit later as well I think a lot's going to depend on.
How the overall commodity outlook is and.
And also I think you've got a lot of publics that are really kind of waiting for some signals from their own investors is to.
To say Hey are you going to take advantage of these higher commodity prices, especially on the gas and the forward strip. So I think those discussions are probably happening for our customers with their investors and.
I'm still optimistic about 24, when we talk about natural gas.
And increases in activity in 'twenty four I've said this before I still think it holds true it's really kind of a two step function youre going to see an initial step up just kind of based on the on the forward strip will be some moderate growth there you'll see another step up towards the end of 'twenty for getting ready for 'twenty five in LNG takeaway.
Great. Thanks for the color guys I'll turn it back.
Yes.
We will go next to Curt Hollywood at benchmark.
Hey, good morning, guys.
Good morning.
So on.
Thanks for all the.
Color.
Info and insights on how you guys pull this thing together.
A lot of hard work in short period of time for sure.
So I'm kind of curious.
You look at the drilling products business, Andy what kind of.
Kind of baseline growth.
Should we be thinking about for that for that business right. The vast majority of the businesses is U S. Directed so we can kind of kind of map that out to rig count right.
And it sounds like you got some growth opportunities international so as Coca question net net is really kind of geared toward outside of North America, what kind of growth you expect in drilling products for 2024.
Yes, thanks, Curt so their growth is really going to be tied to the overall rig count growth as.
As we go forward into <unk> into 'twenty, four roughly about 70% of their activities tied to the U S rig count onshore.
So it's really going to follow that trend, we're really excited about their performance and they are doing really well even with the softness in the market and the slowdown in the rig count when you look at it on a revenue per rig basis, there is still holding up well and so the team's doing a great job.
It is what it is but we are optimistic about the rig count in 'twenty, four and so youre going to see growth.
From their business tied to that U S rig count growth in 24 on the international front, roughly 30% is tied to international growth and.
We're excited about that potential there.
Countries.
Outside of North America that.
They've been in and there are still increasing their footprints and so.
That is at 30% could grow to be a bigger percentage of that slice of the pie.
Through 'twenty, four and into 2025, and we're excited to see how thats going to play out.
Yes.
Great. Thanks really appreciate that.
So it sounds like you've reiterated a lot of your viewpoints that you had back in early September about an improvement in.
In U S land drilling related activity I think back then you kind of.
Do you have an indication that you thought the U S land rig count.
Get back above 700 sometime in the latter part of 2024.
Even how slow things have been progressing through the end of this year you still have a lot of conviction in the rig count getting back to 700 or is it.
Recent activity levels kind of.
Pulling that back a little bit.
Yes, it has a little bit of a little bit slower on the uptick than I thought it was going to be for the end of this year I think a lot of that has to do with budgets and.
Our customers trying to work out exactly what their plans are but im going to stick with that I think that if you look at the forward strip on natural gas and the way oil has behaved in general across 23, we've had a couple of dips, but in general the oil commodity prices had been at a healthy level.
I think that trend is going to continue so yes, let's let's go with that I think we're going to be close to 700 towards the end of 'twenty four.
As an industry rig count.
Hey, appreciate appreciate that Andy Thanks, a lot.
We'll move next to Keith Markey at Calgary.
Hi, Thanks, and good morning.
Can we just first talk about.
The potential I guess cross selling revenue synergies between drilling and pumping certainly that's been a potential benefit of the recent transactions, but Andy how is that playing out relative to your expectations are there any any notable wins our activities you could you could point to on that front as yet.
Yes, that's a great question, we've been in both businesses for a long time now decades, I wouldn't characterize it as cross selling per se, but what would you characterize it as strengthening the partnerships, we have with our customers and when we announced these transactions.
Received nothing but positive feedback from customers. We had longtime partners who are have been our customers for decades, who called me up and said look.
<unk> Patterson UTI is good for us.
<unk>.
So having the strength to be able to.
Address their needs across all of these services has allowed us to have those conversations.
I wouldn't necessarily as I said characterized it as cross selling but when you have those strong partnerships at a high level and now you have more capacity to service their needs.
That's the bonus.
I see thanks, thanks for that.
<unk>.
Maybe just to follow up on your comment in the prepared remarks around it was when you were talking about capital allocation capital allocation strategy.
Using our strong balance sheet to be opportunistic at all points through the cycle.
Certainly have been been sell lately, but can you just expand on that comment a little bit more in terms of how youre thinking about about <unk>.
Being opportunistic through through the cycle at all points.
When we're talking about being opportunistic over cycles, we're talking about over the next five to 10 years right. Now we're focused on integration of the businesses. We still have some work to do and we're focused on realizing the synergies of 200 or greater.
On the synergy with the Nextera deal.
Integrating the operations and working on supply chain pieces as well. So that's our primary focus but historically, we have been opportunistic through the cycles.
Been a number of times when we've gone through dips in the cycle and we've seen softening that we've had opportunities to do things with our balance sheet.
But I would say right now we're just focused on integration.
Got it I'll leave it there thanks very much.
We will take our next question from Sean Michel Let Daniel Energy partners.
Good morning, guys. Thanks for taking my question.
Kind of as we see a.
A lot around M&A over the last several weeks as you see the E&P space consolidate it would seem logical that the kind of consolidators Haile where want to work with suppliers who have.
Scale first I would say do you agree with this assessment and then secondly, if so do you think that pushes more consolidation in the service sector.
Well the first part of your question I think you answered yourself and we believe that is as you see some of these large e&ps take.
Take on even large e&ps and become even larger in the space. We believe they are going to work with companies that have the scale to be able to service their needs and we fit right into that so we're excited about that potential we do see when these transactions on the E&P side happen you get a pause in activity but.
Then.
Things start to pick up again so.
We think those are good possibilities, but in terms of further M&A in the service space I think it's possible.
I don't want to speculate because we're focused on integration right now so.
I do think there's probably some opportunity out there.
Maybe one more can you just address the labor market today, Andy and specifically, how you and the consolidated companies have maintenance labor. This year as activity has moderated and maybe provide us your thoughts on finding people today and the ability for the industry to scale up again should that be necessary.
Yes.
Even over the last few years with the <unk>.
Our massive ramp up in activity that we've had we were able to cover all of the work and.
We had to invest in the systems and the people for recruiting and Onboarding and training to be able to do that and it definitely was tougher over the last few years.
Than it had been in previous upturns.
Given the strength in the economy over the last few years.
But that investment that we've made allows us to get the people that we needed to cover the work that's out there and so we didn't miss any work for lack of people.
This has only been a softening in the market and that we're expecting.
We passed this inflection to increase activity in 2024, and so with a moderated growth we're expecting in 2024 versus the softening. We had this year I don't anticipate we're going to have trouble.
Adding staff back to to do the work.
Okay. Thanks rich thanks.
For the sure answer appreciate it thanks.
And our next question comes from Don Crist at Johnson Rice.
Morning, Thanks for letting me in here at the end Andy your previous comment about pressure pumping kind of bumping up against rigs how do you think that plays out.
Appears to us looking from the outside that.
<unk> sees on the pressure pumping side I have kind of outpaced efficiencies on the on the rig side.
Do you think that kind of results in a smaller pressure pumping fleet industry wide going forward or how do you can you talk to that just a little bit.
I think theres a couple of pieces to that question that I can touch on so I appreciate it.
One is yes, we are bumping up against the rigs and so we do need to increase in rig activity. There's just really no ducks out there.
At this point in the cycle and where we are from the softening.
We do need to rig activity to pick up in terms of Frac efficiency.
It's just been amazing what the teams across the industry have accomplished over the last few years in terms of frac efficiency for the top tier players.
There is lots of anecdotes of pumping well over 20 hours a day.
That being said I am not sure we have a lot of room to grow efficiency.
I don't think we're going to need less frac out there I mean, we're not going above 25 hours a day. So we're already at some pretty high levels of pump hours on a number of our fleets that are out there working and Theyre just doing a great job. So you've seen that increasing efficiency over the last few years.
But.
I think efficiency will kind of slow at this point in terms of what we're going to see across the industry.
As well I do think that.
As we come out of this softening in the market and we increase activity youre going to see a tighter frac market.
<unk>.
We are going to have to add some equipment to replace older equipment, that's going to drive capital discipline across this sector. It's also going to cause as you get into later 'twenty four 'twenty five with natural gas demand with increasing activity, that's going to cause pricing to move up at that point as well and so we're going to see tightness in the <unk>.
<unk> from equipment standpoint, as we start to get past.
Past the.
<unk>.
The inflection point in activity moving up in 'twenty four.
I appreciate the color I'll turn it back thanks.
Yes.
And at this time there are no further questions I would like to turn the conference over to Andy Hendricks for closing remarks. Thank you I just wanted to thank everybody for tuning in this morning.
Once again I want to thank the employees of Patterson UTI yard doing an amazing job as we work through everything we're working through these integrations over the last few months and it's just been impressive to watch such high caliber people worked through all of this so thanks for what you're doing I appreciate it.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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