Q4 2024 Patterson-UTI Energy Inc Earnings Call
Thank you for standing by my name is Rebecca and I will be your conference operator today at this time I would like to welcome everyone to the Patterson U T. I fourth quarter earnings Conference call. 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 would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star. One again. Thank you I would now like to turn the call over to Michael Sabella, Vice President of Investor Relations. Please go ahead.
Michael Sabella: Thank you Rebecca good morning, and welcome to Patterson Utis earnings Conference call to discuss our fourth quarter 2024 results with me today are Andy Hendricks, President and Chief Executive Officer, and Andy Smith, Chief Financial Officer.
Michael Sabella: A reminder, statements that are made in this conference call that refer to the company's or management's plans intentions targets beliefs expectations or predictions for 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 <unk>.
Michael Sabella: Differ materially.
Michael Sabella: 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 reconciliation to GAAP financial measures are included on our website.
Speaker Change: Energy 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.
Andy Hendricks: Thank you, Mike and welcome to our fourth quarter earnings Conference call.
Andy Hendricks: In 2020 for Patterson UTI delivered on our goal to differentiate ourselves amongst the shale service peer group by using our broad service and product portfolio to deliver value accretive results for our customers and strong free cash flow for our investors.
Andy Hendricks: We balance a return of capital to shareholders with organic investments that position the company to extend our sustainable operating advantage over much of our competition and demonstrated the durable cash conversion profile of our company.
Andy Hendricks: As U S shale continues to evolve we believe service companies that deliver value accretive solutions to the customer not just the lowest price will continue to lead the industry and long term returns.
Andy Hendricks: With our high quality assets and skilled operating and commercial teams, we are confident in our ability to deliver industry leading performance.
Andy Hendricks: Ultimately this should allow us to deliver improving returns for our own shareholders in the coming years, even if you aren't U S onshore activity remains steady at current levels.
Andy Hendricks: In the fourth quarter, we delivered relatively steady adjusted gross profit per day in our U S contract drilling business effectively managed year end, operator slowdowns across the entire U S completions market and we delivered.
Andy Hendricks: Results in the drilling products segment that outperformed industry activity for the year.
Andy Hendricks: We concluded 2024 was very strong free cash flow for Patterson UTI.
Andy Hendricks: We returned significant capital to our shareholders, which reduced our total share count by more than 6%.
Andy Hendricks: We paid a cumulative dividend equal to 4% of our current market cap.
Andy Hendricks: In addition, we reduced our net debt, including leases by almost $100 million.
Andy Hendricks: Our long term strategy to create shareholder value, we will continue to focus on three key pillars.
Andy Hendricks: First on the commercial side, our goal is to monetize our value based solutions, we believe our integration strategies within the drilling and completions business can drive significant efficiencies, helping to reduce well costs and elevate returns for our customers. While also benefiting our own returns.
Andy Hendricks: As a leader across multiple service and product lines, our offering is difficult to replicate which should deliver a sustainable competitive advantage.
Andy Hendricks: Second internally, we are focused on managing our own cost structure over the past year, both our industry and our company has seen a slowdown in activity as.
Andy Hendricks: As we prepare for a relatively steady market in the coming year, we are streamlining our costs to better align with current activity levels.
Andy Hendricks: And finally capital allocation, we expect significant free cash flow generation in 2025.
Andy Hendricks: We remain committed to return at least 50% of our adjusted free cash flow to shareholders through dividends and share buybacks.
Andy Hendricks: Beyond this we expect to allocate the remainder of the free cash flow into the higher returning projects, while protecting our strong capital structure.
Andy Hendricks: Our strategy to deliver unique value based services for our customers is driving deeper integration of our core assets. This approach is paving the way for a commercial model that will allow us to capture more of the performance driven upside.
Andy Hendricks: Last year, we disclosed our first fully integrated drilling and completion arrangement with performance incentives.
Andy Hendricks: We recently completed the drilling portion of this program delivering wells significantly faster than historical averages.
Andy Hendricks: This success resulted in performance bonuses for Patterson UTI, while also delivering a significantly better outcome for the customer.
Andy Hendricks: Including bringing production forward.
Andy Hendricks: This project only marks the beginning of a strategy that should have good growth potential.
Andy Hendricks: Because we touch more of the well side than we have historically, we believe we have reduced the risk of relying on third parties, which should allow us to more closely control our own destiny and operations.
Andy Hendricks: Moving forward, our commercial strategy will emphasize more integrated and performance based agreements, which we believe will drive enhanced margins in the years ahead.
Andy Hendricks: During 2025, the macro environment should remain relatively supportive for our business and we continue to expect steady drilling activity through most of the year.
Andy Hendricks: On the oil front commodity prices are supportive of continued drilling and completion activity in the major U S oil basins.
Andy Hendricks: Our oil directed customers are increasingly focused on value drivers, resulting in a high grading of our service providers and equipment.
Andy Hendricks: Our position as a high quality service provider with top tier assets allows us to outperform.
Andy Hendricks: On the natural gas side, we see a positive outlook over the next several years with a clear need for more natural gas directed drilling and completion activity to satisfy growing natural gas demand.
Andy Hendricks: We could potentially start to see natural gas activity come back late this year and definitely into 2026.
Andy Hendricks: Our U S contract drilling business continues to deliver strong adjusted gross margins per day, driven by the efficiencies of our tier one apex rigs and the quality of the service that we offer.
Andy Hendricks: Over the past several years, we have invested to develop a very technical drilling team that integrates automation and performance data analysis into the process and strives for continuous improvement to drill a more efficient shale well for our customers.
Andy Hendricks: These people and investments are set our company apart, making it uniquely capable of handling the complexities of the modern shale well such as extended laterals and faster drilling speed we.
Andy Hendricks: We are positioned to monetize these investments and unlock the value of our advanced rig technology.
Andy Hendricks: We are transitioning more of our drilling services to an integrated commercial and operating model combining our tier one apex drillings rigs with directional drilling downhole tools like our drill bits and mud motors, well placement data analytics and ancillary services, such as drill pipe rentals in electrical engineering.
Andy Hendricks: This approach helps us to capture a greater share of the drilling spend while also enabling our customers to deliver faster more efficient wells.
Andy Hendricks: For Patterson UTI. This will likely result in our company adopting more performance based comp agreements, we see potential for margin accretive growth with this approach.
Andy Hendricks: In the U S. We are currently operating 107 rigs with activity expected to remain relatively steady across both oil and natural gas basins through the rest of the year.
Andy Hendricks: Our completion services segment navigated year end slowdowns with several of our customers by securing work with a few new customers during the quarter, while also managing costs.
Andy Hendricks: This effort was complemented by expansion of our well site integration services, particularly profit sourcing and logistics.
Andy Hendricks: And our CMG power in fueling business, we successfully launched our new field gas technology, delivering excellent results by allowing customers to use more of their trap fuel gas through our patented technology that improves gas quality and blending.
Andy Hendricks: This innovation addresses historical challenges and using field gas to fuel frac fleets, such as reduced diesel displacement and increased downtime because of inconsistent fuel gas quality or volume.
Andy Hendricks: The industry continues to transition to natural gas powered frac fleets and our completions team has led the way in adopting and deploying new solutions.
Andy Hendricks: While electric Frac is a great option for some of our customers tier four dual fuel can be more cost effective for others is the high capital cost of power generation on electric Frac remains a significant hurdle.
Andy Hendricks: As each customer evaluates our own needs our full suite of offerings will fit essentially every situation.
Andy Hendricks: As we expand our fleet of Emerald, 100% natural gas powered equipment, we've decided to support multiple technologies to retain flexibility and maximize the service offering for our customers.
Andy Hendricks: This is the prudent approach when technology options are expanding.
Andy Hendricks: And this gives us the ability to offer the best technical solution for 100% natural gas depending on specific customer applications.
Andy Hendricks: In 2024, we worked with our OEM engine supplier to field test direct drive technologies, and we intend to deploy more of this new technology into our Emerald fleet. This year.
Andy Hendricks: Direct drive systems offer a breakthrough by enabling fleets to run entirely on natural gas without requiring large capital investments for external power generation.
Andy Hendricks: These systems are generating strong commercial interest from our customers and we anticipate these direct drive technologies will gain market share in the coming years.
Andy Hendricks: Our flexible approach to technology deployment enables us to adapt quickly to the changing market demands.
Andy Hendricks: We operated more than 150000 horsepower of Emerald, 100% natural gas powered completion equipment to start the year.
Andy Hendricks: And we expect to surpass 200000 horsepower by mid 2025.
Andy Hendricks: Across the industry, we believe all equipment that can be powered by natural gas is effectively sold out including our dual fuel assets roughly 80% of our active fleet can be powered by natural gas.
Andy Hendricks: Our drilling products segment concluded a very successful year in 2024 that saw the business outperform industry activity both in the U S and internationally.
Andy Hendricks: In the U S revenue was down less than 5% year over year, despite a more than 10% decline in the industry rig count Demi.
Andy Hendricks: Demonstrating the resiliency of our business driven by superior technology, and a laser focus on customer service.
Andy Hendricks: Revenue improved year over year in our international markets as the company continues to do a great job penetrating new geographies.
Andy Hendricks: While our drilling product segment is mostly known for our old Alterra drill bits. The team has also done a great job developing new products, our downhole tools and product innovation revenue, which is essentially everything besides the drill bit more than doubled in 2024 at very strong margins.
Andy Hendricks: We have been very pleased with the entrepreneurial spirit, our drilling products business and we expect to continue to outperform the industry.
Andy Hendricks: When speaking with investors and analysts one of the most frequent topics as the outlook for power, both inside and outside of the oilfield and Patterson Uti's role in this evolving market.
Andy Hendricks: With power demand expected to grow exponentially over the next decade, the oilfield services industry is well positioned to capitalize through rising natural gas demand and our capabilities as a provider of power generation assets.
Andy Hendricks: Patterson UTI has a long history in oilfield power generation, the drilling industry transition to electrification decades before the frac sector in each of our rigs operates with over four megawatts of our own power generation.
Andy Hendricks: At peak times, our drilling operations alone have utilized more than a total of 500 megawatts of mobile power.
Andy Hendricks: Today, we also operate nearly 150 megawatts of power alongside our electric Frac fleets.
Andy Hendricks: Mobile power generation is already a core competency of Patterson UTI and we are prepared to deploy capital to satisfy increasing power demand, but only when opportunities align with return thresholds for our investors.
Andy Hendricks: We see significant potential to support our customers as they continue to electrify their compression systems and production pads that cannot be reached by the grid.
Andy Hendricks: Combined with our ability to supply natural gas to these systems are expertise positions us to expand this business profitably as the industry evolves.
Speaker Change: I'll now turn it over to Andy Smith, who will review the financial results for the fourth quarter.
Speaker Change: Thanks, Andy and good morning.
Speaker Change: Total reported revenue for the quarter was $1 million $162 million.
Speaker Change: We reported a net loss attributable to common shareholders of $52 million or <unk> 13 per share in the fourth quarter.
Speaker Change: Adjusted EBITDA for the quarter totaled $225 million.
Speaker Change: Our weighted average share count was 389 million shares during Q4, and we exited the quarter with 387 million shares outstanding.
Speaker Change: During 2024, we generated $523 million of adjusted free cash flow.
Speaker Change: During the fourth quarter, we returned $52 million to shareholders, including <unk> <unk> per share dividends and $20 million used to repurchase approximately two 6 million shares.
Speaker Change: For the full year, we used approximately $290 million to repurchase shares and we reduced our share count during the year by over 6%.
Speaker Change: This is in addition to reducing net debt, including leases on your $100 million.
Speaker Change: And paying a steady dividend.
Speaker Change: In our drilling services segment.
Speaker Change: Fourth quarter revenue was $408 million and adjusted gross profit totaled $163 million.
Speaker Change: In U S contract drilling we totaled 9617 operated.
Speaker Change: Average rig revenue per day was $35 $300 with average rig operating cost per day of $19600.
Speaker Change: The average adjusted rig gross profit per day was $15700.
Speaker Change: On December 31, we had term contracts for drilling rigs in the U S providing for approximately $426 million.
Speaker Change: <unk> day rate drilling revenue.
Speaker Change: Based on contracts currently in place, we expect an average of 64 rigs operating under term contracts during the first quarter of 2025, and an average of 40 rigs operating under term contracts over the four quarters ending December 31 2025.
Speaker Change: And our other drilling services businesses, which is mostly international contract drilling and directional drilling.
Speaker Change: Fourth quarter revenue was $69 million with an adjusted gross profit of $12 million.
Speaker Change: For the first quarter in U S contract drilling we expect to average 106 active rigs with adjusted gross profit per operating day of approximately $15250.
Speaker Change: Adjusted gross profit per day expectations are expected to start to see some benefit from performance bonuses.
Speaker Change: We expect other drilling services adjusted gross profit to be flat compared to the fourth quarter.
Speaker Change: Revenue for the fourth quarter in our completion services segment totaled $651 million with an adjusted.
Speaker Change: Gross profit of $95 million.
Speaker Change: As expected we saw we saw white space at several of our customers slowed completion activity sequentially.
Speaker Change: However, our team did an outstanding job securing work with multiple new customers and controlling costs.
Speaker Change: Additionally, the segment benefited from greater wealth side integration of our ancillary services, most notably from our proppant sourcing and logistics.
Speaker Change: During the first quarter, we expect completion activity will seasonally recover from the year end slowdown as customer budgets reset.
Speaker Change: And we continue to see traction from our integrated completion services and ancillary revenue improves.
Speaker Change: This was partially offset by some inefficiencies early in the quarter as crews restarted following the extended slowdown in the fourth quarter.
Speaker Change: For the first quarter, we expect completion services adjusted gross profit to be approximately $100 million we.
Speaker Change: We expect equipment that can be powered by natural gas will remain effectively sold out into the second quarter.
Speaker Change: Fourth quarter drilling products revenue totaled $87 million with an adjusted gross profit of $37 million in.
In the U S. We again saw revenue outperformed the overall rig count a credit to the strong market position driven by what we believe to be superior product performance.
Speaker Change: The segment adjusted gross profit was impacted by a sequential increase and a noncash charge associated with the step up to fair value of our drill bits in accordance with purchase price accounting, which increased $2 million compared to the prior quarter.
Speaker Change: For the first quarter, we expect drilling products adjusted gross profit to be flat compared to the fourth quarter.
Speaker Change: Other revenue totaled $16 million for the quarter was $7 million and adjusted gross profit.
Speaker Change: We expect other revenue and adjusted gross profit in the first quarter to be flat with the fourth quarter.
Speaker Change: Reported selling general and administrative expenses in the fourth quarter were $73 million.
Speaker Change: For Q1, we expect SG&A expenses of approximately $67 million.
Speaker Change: On a consolidated basis for the fourth quarter total depreciation depletion amortization and impairment expense.
Speaker Change: $255 million.
Speaker Change: For the first quarter, we expect total depreciation depletion amortization and impairment expense of approximately $235 million.
Speaker Change: During Q4, total capex was $140 million, including $54 million in drilling services $61 million in completion services $60 million in drilling products and $9 million in other and corporate.
Speaker Change: As 2024 unfolded, we shared that we were nimble in our ability to adjust our spending to reflect the changing environment.
Speaker Change: Our initial capex budget for 2024 was $740 million. So we reduced our spending and ended the year with total capital expenditures of $678 million or more than $60 million lower than we initially anticipated debated we.
Speaker Change: Also received $26 million in proceeds from asset sales.
Speaker Change: This demonstrates our ability to quickly respond to the changing market.
Speaker Change: While we lowered our capex, we still exited the year with more natural gas our horsepower than we initially planned and we have one of the highest quality drilling rig and completion fleets in the industry.
Speaker Change: For 2025, we expect Capex of approximately $600 million with capital spend at each of our segment with capital spend at each of our segments to be lowered compared to 2024.
Speaker Change: We will continue to invest in next generation upgrades to our drilling rigs and natural gas powered frac horsepower, even with a smaller capex budget relative to last year.
Speaker Change: We expect to have more than 200000 horsepower of our Emerald line, a 100% natural gas powered completion assets by mid year.
Speaker Change: We closed Q4 with $241 million in cash on hand.
Speaker Change: We do not have any senior note maturities until 2028.
Speaker Change: Subsequent to the close of the quarter, we have successfully refinanced our revolving credit facility into a new five year $500 million unsecured credit facility that expires in January 2030.
Speaker Change: We expect to generate significant free cash flow again in 2025, and we again expect to return at least half of our adjusted free cash flow to investors through share buybacks and dividends.
Speaker Change: Our board has approved an <unk> <unk> per share dividend for the first quarter of 2025 payable on March 17th to holders of record as of March 3rd.
Speaker Change: I'll now turn it back to Andy Hendricks for closing remarks.
Speaker Change: Thanks, Andy.
Speaker Change: I want to close with a few key takeaways.
Speaker Change: First I would like to thank our teams across all of Patterson UTI for their outstanding achievements in 2024.
Speaker Change: We successfully completed the operational integration of our company with next year, and Altera, and we've turned our attention to streamlining costs and enhancing efficiencies.
Speaker Change: On the cost side, we are in the process of integrating back office functions, which is a key step to maximizing enterprise wide value of the merged company.
Speaker Change: We are also advancing toward a more integrated commercial model at both our drilling and completions businesses designed to further extract value from our expanded footprint.
Speaker Change: Yeah.
Speaker Change: Technology Advancement continues to be a core competency of the company and we continue to deliver exceptional service quality in both our drilling and completions businesses.
Speaker Change: And drilling a number of our apex tier one rigs have enhanced load capacities to meet the demands of deeper natural gas plays in the haynesville, while improving efficiency for longer laterals in the Permian.
Speaker Change: We are combining our tier one rigs with our downhole technologies, such as our impact mud motors in the new Alterra Maverick drill bits and we have seen a significant increase in demand for our cortex automation systems.
Speaker Change: Together, we think this offering delivers the most cost effective wells for our customers.
Speaker Change: And completions, we expanded our Emerald line of 100% natural gas powered frac equipment, while working with one of our engine suppliers to field test and commercialize their new natural gas reciprocating direct drive system.
Speaker Change: We plan to deploy additional technology in 2025.
Speaker Change: We're in the early stages of realizing the full benefits of our scale across the entire well construction process, our world class Pizza and performance Center is nearing completion, and our Houston headquarters, where we will centralized data management across all our businesses to drive improved performance for both our customers and for Patterson.
Speaker Change: In UTI.
Speaker Change: Our pizza and advantaged commercial model is focused on delivering integrated drilling and completions packages and based on customer feedback is likely to become a bigger part of our business.
Speaker Change: Our ability to deliver this full suite of services and products sets us apart in the industry, reducing reliance on third parties and enhancing operational efficiency.
Given the strong feedback we've received so far we think there is a significant upside for our shareholders through a performance based commercial model, while also benefiting our customers.
Speaker Change: On the topic of power our expertise in power generation has been demonstrated over decades, beginning with the electrification of our drilling rigs.
Speaker Change: We have leveraged our technical capabilities to generate power from a variety of sources, including diesel natural gas reciprocating generators and gas turbine generators.
Speaker Change: Today, our power assets generate over half a gigawatt per day of electricity and we have supply enough CMG and fuel gas to support around one gigawatt of costs at power generation power.
Speaker Change: Power is already a core competency of our company.
Speaker Change: From our perspective electrical powers of service can be divided into three distinct markets, where grid power is not currently positioned to meet demand.
Speaker Change: You have power for Frac operations.
Speaker Change: Power for E&P production and midstream facilities as a subset of industrial.
Power for the largest potential future consumers hyperscale data centers.
Speaker Change: Each of these end markets presents unique opportunities and specific technology requirements.
Speaker Change: For example in electric Frac, our current preferred option is a high capacity turbine.
Speaker Change: Currently the power for our Frac fleets is financed through operating leases, but we recognize that in the future we may choose to deploy capital to own these assets.
Speaker Change: Given the SaaS based evolution in the market, we have chosen to be measured with our capital before committing to a particular solution.
Speaker Change: This prudent investing strategy has proven effective in our emerald investments within our Frac business and we are focused on ensuring that we make the right investments to optimize the long term capital efficiency of our fleet.
Speaker Change: The site power requirements for our E&P customers are significantly less as they develop production pads and midstream compression facilities through discussions with suppliers. We have found that the capital cost per megawatt for the smaller units is roughly half the cost of the larger units used to power our frac fleets.
Speaker Change: Data centers require another level of power consumption, requiring have a gigawatt or more capacity depending on the size of the project.
Speaker Change: The capital cost here appears to range from 600000 to $1 million per megawatt.
Speaker Change: Data Center power demand will continue to grow despite recent news on AI with new data centers required for the private sector government and military applications.
Speaker Change: The power demand for new data centers is now triple that of the older facilities with additional increases driven by the growing need for AI infrastructure.
Speaker Change: So, whereas our focus at Patterson UTI.
Speaker Change: Based on discussions with our suppliers, we know that large gas turbine manufacturers are already in direct discussions with the data center companies.
Speaker Change: While there is keen interest in how companies like ours could provide power to data centers, we believe that given the competitive landscape and the enormous capital requirements to meet the power demand for this market.
Speaker Change: The data center end market does not appear to be a likely higher return path for Patterson UTI.
Speaker Change: We are instead, focusing our efforts on the areas, where we can most effectively leverage our strengths and deliver value to our customers.
Speaker Change: Within oil and gas, we have the right relationships geographic support and experience to offer an integrated power solution for our own E&P customers.
Speaker Change: We are currently we currently have more than 15 megawatts of idle natural gas power generation capacity that we can repurpose.
Speaker Change: This gives us the opportunity to assess potential returns before deciding whether this is a market where we want to deploy significant incremental capital.
Speaker Change: While we do not want to create is a commoditized generator rental business that competes with the existing rental companies are.
Speaker Change: Our value proposition lies and combining power generation with other products and services that we have in our portfolio.
Speaker Change: Such as our real time monitoring our micro grid engineering and manufacturing our battery backup systems that are rated for well site environments, and <unk> delivery and fuel gas blending.
Speaker Change: By integrating these offerings, we can deliver an integrated power solution that is hard to replicate leveraging our broader Patterson UTI capabilities.
Speaker Change: From what we see right now if we choose to deploy capital in this space, we are more likely to do so through organic investment rather than acquisition.
Speaker Change: We've seen several potential acquisitions in the oilfield power generation sector, but we have found the ash prices to be too high.
Some of the valuations we are seeing are multiples of the capital cost of purchasing new generators in the acquired assets have significant hours already on them.
Speaker Change: While these acquisitions might be accretive to current EBITDA multiples the replacement and maintenance costs associated with these assets could limit their accretive potential on our return on capital basis, which is our primary valuation metric.
Speaker Change: We recognized the potential market growth for off grid utility power solutions within the oil and gas space, particularly in the Permian and we are actively exploring opportunities in this market.
Speaker Change: One third party source estimates that the demand for off grid power in remote areas of the Permian will will grow by more than four gigawatts over the next 10 years, driven by midstream and production system needs.
Speaker Change: We intend to stay disciplined in our capital approach to this market aiming to generate strong returns for our investors. We do not believe that deploying capital just to buy and rent commoditized generators with low cash flow margins is in the interest of our shareholders.
Speaker Change: However, we are well positioned to offer integrated power solutions to our customers and we will continue to explore these opportunities.
Speaker Change: Over the past couple of years, we acknowledge that we have seen a steady decline in demand for oilfield services in the U S as evidenced by the declining rig count.
Speaker Change: Portion of this can be attributed to increasing efficiencies with additional impact from the mergers of various e&ps, which has resulted in lower activity at the newly combined entity compared to the pre merger operations.
Speaker Change: However, we are seeing evidence that these mergers while they are a headwind for overall industry activity could be a relative tailwind for the high end service providers such as Patterson UTI.
Speaker Change: Our well site integration across our drilling and completions businesses is driving value for both our customers and our shareholders.
Speaker Change: We are increasing product sales into international target markets and we are actively seeking to balance our company size for the anticipated activity. This year in the U S.
Speaker Change: This offers upside for our investors and even in a steady oilfield services market in the U S. Patterson UTI is positioned favorably to create significant value for our shareholders and drive improving EPS over multiple years.
Speaker Change: Looking past 2025, there is a discussion about the need for more natural gas production in the U S to supply LNG takeaway at the Gulf Coast.
For gas exports to Mexico, and also for further base load electricity demand in the U S including for data centers.
Speaker Change: One major midstream company estimates natural gas production will need to grow by 28 Bcf per day between now and 2030.
Speaker Change: We are bullish on the long term prospects for natural gas and what that means for more potential activity in natural gas basins and for Patterson UTI.
Speaker Change: I am upbeat about our company's position in 2025 and beyond and we expect to continue to generate significant free cash flow.
Speaker Change: And we will continue to return at least 50% of our adjusted free cash flow to our investors through buybacks and dividends.
Speaker Change: With that wed like to thank all of our employees for their hard work efforts and successes both in our industry and in general in 2024, and we look forward to a strong 2025.
Speaker Change: Rebecca we'd now like to open the lines for the Q&A.
Speaker Change: 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 will pause for a moment to compile the Q&A roster.
Speaker Change: Okay.
Speaker Change: Your first question comes from <unk>.
Jim Rollyson: Line of Jim Rollyson with Raymond James Please go ahead.
Jim Rollyson: Hey, good morning, everyone.
Speaker Change: Jim and.
If we circle back on the performance based contracts you first kind of started talking about this early last year, if I recall correctly and now you've had a bit of time to kind of work through some of those early contracts in the evolution of that and it sounds like its gaining traction from your comments earlier.
Speaker Change: <unk>.
Speaker Change: Maybe if you could just provide a little bit of color kind of on the financial benefits. We obviously look at the way you report things in terms of rig margins and margins in the completion service businesses et cetera, but as you think about this over the next two.
Speaker Change: Two to three years or beyond.
Speaker Change: How maybe just talk about the financial benefits.
Speaker Change: Does this end up driving more activity, but just kind of put numbers to the concept here if that makes sense yes.
Yeah sure. So let me just start by saying we've participated in various types of performance contracts for individual service alone three years some.
Speaker Change: Some of that based on increasing efficiencies are pulling production forward and we've even had some contracts that at times that are tied to commodity prices.
And so we have participated in these various risk reward scenarios for years.
But what's with the mergers and acquisitions that we've done over the last couple of years now and the integration of the operations in 2024.
Speaker Change: We offer a large number of different products and services across the value chain in drilling and completions that allows us to be able to do more control more and improve efficiencies in various aspects of the operation.
Speaker Change: Lower some of the costs for the customer and well construction and then also last but not least just pull production forward.
And so combining all of these elements like we started doing across drilling completions in 2024 with <unk> advantage.
Speaker Change: It's been exciting to see how the teams have come together across our different segments and pulled in their service and products.
Speaker Change: To work for improving these types of efficiency.
Speaker Change: What's interesting is in particular case for the project that we've been on where we talk about how we've completed the drilling and now we're moving onto the completion phase is it's not just the upside that we have on the performance.
Speaker Change: Through the arrangement that we have but also the pull through on services that may not have been part of that package, but when we come together and present a more.
Speaker Change: More holistic operational solution for some of these customers and they're very interested to look at services, maybe they wouldn't have used in the first place. So the pull through on services as well as the potential upside that we may get in the arrangement as well.
Speaker Change: The types of E&P customers that this is really set up for us did not necessarily the large multinationals that you buy gas from its corn station.
Speaker Change: Those companies have large teams of people that are focused on performance, but when you get into more of the mid tier e&ps that probably have a lot of acreage may be smaller staffs, we can step in and help them bridge the gaps there and help them look at their performance in soup, we can do to improve it.
Speaker Change: He asks about putting numbers to it I think it's still early days, but certainly based on the feedback that we're getting today. It has the potential to grow to be a more significant part of what we do.
Speaker Change: I appreciate all that color and as a follow up.
When we were sitting here about this time last year I think there was some kind of hopeful expectation on gas activity and maybe the winter didn't play out quite like we thought then in LNG projects kind of slid to the right a bit.
Speaker Change: Getting closer to that day.
Speaker Change: I'm curious with your comments and just basically what youre seeing from customers is it too early to start seeing guys, giving you calls on an activity potential at this point or maybe just a little bit color what youre hearing from your customers, Yes, I think today.
Speaker Change: We are hearing various things from customers. We have some very large customers that have wells behind pipe behind the wellhead ready to go and what they are telling us is they're going to be measured on how they bring those wells online. So it doesn't negatively affect <unk>.
Speaker Change: Natural gas commodity prices.
Speaker Change: We also have customers that are expanding what they do in some of the deeper and more prolific plays the haynesville and they are excited about that.
Speaker Change: On the western flank and so there's various things that are going on but we're also looking at the macro and the demand and not just what youre hearing from the LNG companies as they prepare.
Speaker Change: Prepare their facilities on the Gulf Coast.
Speaker Change: But also you know what the midstream companies are talking about in total natural gas demand that they're seeing from the deliveries that theyre going to have to make over the next couple of years and so while we think 2025 will be relatively steady and the natural gas there is some potential for upside, but if you're looking at the macro.
Speaker Change: The LNG commentary with the midstream commentary then it really looks like there's some upside in the natural gas demand in 'twenty six 'twenty seven and so we're looking at it from the macro standpoint, while our customers are managing their budgets for this year, but the macro is very favorable longer term.
Speaker Change: Got it I appreciate that color. Thanks, Andy.
Speaker Change: Your next question comes from the line of way core side with ATB capital markets. Please go ahead.
Speaker Change: Good morning, this is <unk>.
Speaker Change: Andy.
Speaker Change: Could you provide some.
Speaker Change: Our fans love to think about how the capital is going to be capex is going to be allocated between the different business lines in 2025.
Speaker Change: Yeah, I would say that.
Speaker Change: Let's just talk about the three major business lines Youre looking at.
Speaker Change: Probably 35% of it between into drilling.
Speaker Change: Probably about 50% of it in the completions.
Speaker Change: With the balance between products and other.
Speaker Change: Okay.
Speaker Change: And then in terms of.
Speaker Change: U S drilling business do you think the margins at this 15% to <unk> is that the bottom or do you think that it could be.
Speaker Change: But the pressure as we get into that in Q2 and beyond.
Speaker Change: I would say that.
Speaker Change: Where we are in the market with a relatively steady rig count which is our visibility for 2025.
Speaker Change: That.
Speaker Change: Pricing for the rigs is relatively steady.
Speaker Change: For the base rig itself.
Speaker Change: Think our teams have some potential to do some things to maybe slightly improved margin as we work through the year with some technology deployments and some other initiatives.
Speaker Change: So we're relatively upbeat on that business and what we can do there.
Speaker Change: Great.
Speaker Change: And then.
Speaker Change: On the on the pumping side.
Speaker Change: Any any thoughts beyond Q1, do you expect sub seasonal pickup and just utilization in Q <unk> four.
Speaker Change: Thanks Todd.
Speaker Change: In a change in Appalachia Haynesville is validating the summer months.
Speaker Change: Right now I'll start by saying Q4 hats off to the team performance was a little bit better than we thought it was going to be in the fourth quarter.
Speaker Change: Then the ramp up in Q1 is probably happening a little faster than we had planned as well customers who slowed down in Q4 seem to go back to work very quickly in the first quarter.
Speaker Change: So we're seeing that ramp up in activity.
Speaker Change: We're going to be deploying on stall. The horsepower we have got here going into Q2 and Q3 for the projects that were on.
Speaker Change: Seeing increased percentage of simultaneous and more complex type frac operations, a little bit more horsepower on location on a per fleet basis.
Speaker Change: And activity is going to be busy the interesting thing is in.
Speaker Change: In the second quarter I think we're gonna be essentially sold out not just Patterson UTI, but the industry of equipment that can burn natural gas and so the market is really going to be tight in the second quarter in the third quarter.
Speaker Change: In terms of what can burn natural gas so if theres any.
Speaker Change: <unk> call on more equipment later in the year.
Speaker Change: That's going to be a challenge for the industry.
Speaker Change: Q4 is still relatively unknown at this point in the year.
Speaker Change: Does it look like 2024 does it stay steady through the end of the year based on gas demand I think that's that's we still don't have the visibility on yet but overall.
Speaker Change: Our teams are performing well.
Speaker Change: We're upbeat for 2025.
Speaker Change: Your next question comes from the line of Keith Mackey with RBC.
Keith Mackey: Hi, good morning.
Speaker Change: Hey, Jason.
Speaker Change: Hey, good morning, just maybe to start on a broad question of how you see drilling youre drilling versus completions segment.
Speaker Change: Performance unfold through the year and when you think about the factors like demand pricing margins.
Speaker Change: And then translating that all the way down to EBITDA, and a directional sense, which which one do you think ultimately does it does a little bit stronger.
Speaker Change: As the year unfolds.
Speaker Change: Well I'll go first and I'll, let Andy Smith weigh in as well if you look at the business lines drilling from an activity standpoint has stayed a little more stable in terms of contract drilling.
Speaker Change: And <unk> got some relative price discipline in that sector of the market compared to others.
Speaker Change: On the completion side in 2024.
Speaker Change: I would say, we could've done a little bit better job and there's things that are happening now to improve that but also you've had some general market softening as well so as we talked about earlier, we're going to be essentially sold out in Q2, and Q3 of agreement that can burn natural gas and if theres any call on that upside.
Speaker Change: There's going to be more relative torque on what happens in that completion sector. Yes, I don't have a whole lot to add to that I would say that.
Speaker Change: Given the nature of the business as you would expect.
Speaker Change: The drilling will be relatively stable throughout the year.
Speaker Change: But you have more upside potential coming out of the.
Speaker Change: Completions business now all of that as a caveat it by sort of what is the fourth quarter of next year looks like it's kind of similar in our customers behave similarly to what they did this year that could sort of effect.
Speaker Change: The cadence of it but I do think that you have more upside potential on the completion side.
Speaker Change: Yeah understood Okay.
Speaker Change: Maybe just going back to the integrated and performance based contracts.
Speaker Change: Certainly Andy here your comment on that some customers will want this and some may not need it.
Speaker Change: But certainly there has been a lot of customer consolidation and the larger customers are doing a much more a much higher percentage of overall activity. So can you just give us maybe a little bit more of a sense of what the market size could look like like from that.
Speaker Change: From that offering both maybe on the drilling and completion side as you as you build it out.
Speaker Change: Yes.
<unk> been kicking that around and trying to really understand what that market looks like and what we think the uptake is going to be.
It's early days, but.
Speaker Change: I think over the next few years is certainly has the potential to be in the range of 10% to 20% of what we do and with.
Speaker Change: The improved profitability to improve pull through of those types of projects that certainly material to the investment community.
Speaker Change: Again, it's early days and we're still trying to understand but.
Speaker Change: Certainly the feedback has been very favorable.
Speaker Change: We're pleased with how the teams are performing.
Speaker Change: Your next question comes from the line.
Rabe Pan: So rabe Pan with Bank of America.
Rabe Pan: Hi, good morning, Andy and Andy.
Speaker Change: Thanks, Rob.
Speaker Change: Andy maybe I would just continue with that line of questioning on completions and like you said, it's really encouraging to see you sold out on that.
Speaker Change: Not too many guys pulpwood side of the equation for <unk>.
Speaker Change: If I can just continue with that logic and then they could do pricing and think about where pricing is heading from head on how should we think about the potential Andy for you to get back to let's say roughly third quarter of 2024 kind of profitability and in fact, I think we can get there by by the summer, let's say third quarter is that a little bit of a stretch.
Speaker Change: But certainly what you are hearing across the industry is that pricing is coming down in 'twenty five relative to 'twenty four.
Speaker Change: No.
Speaker Change: Our E&P customers did a good job to take advantage of the slowdown in Q4, pushing the pricing across the industry not just us but across the industry.
But with the market for natural gas equipment across the industry.
Speaker Change: Hearing to be sold out in the second and third quarters.
Speaker Change: That is a positive place for the sector to be so.
Speaker Change: Any any call on improved activity later in 'twenty, five and certainly in 'twenty six.
Speaker Change: We shift the pricing ability back towards.
Speaker Change: The service side in that respect because we'd have to go out and acquire new equipment, we're going to want to do it at a return that makes sense for the shareholders and so.
Speaker Change: It's from our side, it's a good position to be in the second and third quarter of this year.
Speaker Change: Mhm no that makes sense you got to take one step at a time.
Speaker Change: And then maybe one on the cost.
Speaker Change: Cost cutting cost rationalization.
Speaker Change: And so I'm thinking about the entire business not just one business, but like you said on the Capex front you did a really good deal, bringing capex down to $600 million this year.
Speaker Change: Should we think about Andy maybe Andy Smith, you want to weigh in as well.
Speaker Change: The overall cost structure in the business, both the drilling and Frac fleets.
How are you making to further optimize that cost structure.
Speaker Change: I don't want to get too specific with targets, but as you can imagine.
Speaker Change: As we've gone through these acquisitions and we've achieved a lot of operational synergies there are still things to be done.
Speaker Change: Streamlining of systems.
Speaker Change: Certainly more centralization of back.
Speaker Change: Back office processes, and then you have the typical things that we look at just around discretionary cost spend and where does that fit relative to the opportunity in the marketplace.
Speaker Change: Looking at all of those costs. So there is there's a lot of things that we're looking at how we're organized and necessarily from an operational standpoint, but more from like I said this back office functions.
Yeah.
Speaker Change: We do this all the time, but I think right now given the kind of what I would say, it's a pretty big change we've gone through as an organization with the two significant acquisitions.
Speaker Change: It will ramp up quite a bit on the back office side of things and so we'll see that.
Speaker Change: Happening over the course of this year and even into next year.
Speaker Change: Your next question comes from the line of <unk> Kim with Barclays.
Speaker Change: Okay.
Kim: Hi, good morning.
Speaker Change: Just wanted to ask if you could provide some color on what youre seeing on just on the pricing front in the completions business. We've heard from some of your peers that there definitely seeing some pricing pressure on the frac side of their business is even on kind of the tier four dual fuel fleets.
Kim: <unk> seen.
Kim: Something similar there and when do you expect pricing to kind of bottom out here is is it at second quarter or third quarter event before some of the gas related activity potentially picks up in the back half of the year just some color on what youre seeing on pricing dynamics in the completions business.
Kim: Yes.
Kim: <unk> customers did a good job at the end of last year, especially taking advantage of the slowdown to put some pressure not just on us but across the completions.
Kim: Market too.
Kim: Get more value out of it and push our pricing down so our pricing is coming down year over year, but I would say that 90% of those discussions are in the rearview mirror the pricing is what it is right now.
Kim: We're ramping up activity in the Q1 so.
Kim: <unk>.
Kim: It's not a steady state quarter to really see how those numbers look so I would say.
Kim: Q2, Q3 ish is probably.
Kim: How you look at the bottom just in the financial results, but in terms of negotiations and discussions with the customers that pretty much wrapped up at the end of last year.
Kim: But again the interesting thing is that being sold out on 100% natural gas equipment, not just us but across the industry in the second and third quarters.
Kim: Any any uptick that we have later this year or certainly into 'twenty six.
Kim: Would cause pricing to move up in the completion sector.
Speaker Change: Got it got it that's very helpful.
Speaker Change: And my follow up is just on <unk> comments on kind of the mobile power market. You mentioned, you're currently operate about 150 megawatts.
Speaker Change: Mainly to support your electric Frac fleets, one of your peers, just announced kind of a big investment <unk> been making over the next two years.
Speaker Change: Their power Gen capacity, but it's clear based on your comments that you are taking a bit of.
Speaker Change: A different and more more cautious approach.
Speaker Change: I guess with that said could you maybe just talk in broad terms about if there is a certain type of returns threshold or payback period.
Speaker Change: Keep in mind.
Speaker Change: I don't know three years or five years.
Speaker Change: In which you would consider.
Speaker Change: Deploying capital.
Speaker Change: And to the multiple power markets.
Speaker Change: Yes, let me start by saying.
Speaker Change: We spent a lot of time looking at the power market.
Speaker Change: And a lot of time discussing.
Speaker Change: The generators that are available from our suppliers and all of the different sizes, whether it's gas reset in the small to medium size or in gas turbines in the medium to large size.
Speaker Change: And.
Speaker Change: There's.
Speaker Change: There's a lot of things that are happening and when you start to segregate the market and break it down into different types.
Speaker Change: You have different generator applications. So for instance, when.
Speaker Change: We look at the Frac power market.
Speaker Change: We like the turbines and we like the large capacity turbines and so.
Speaker Change: Thats, what releasing today in the future we may decide to own those turbines if it makes.
Speaker Change: From a return standpoint.
Speaker Change: But the turbine as the right application when you get into the E&P production facilities.
Speaker Change: If they're in disparate locations in the Permian, you're probably into some smaller or medium sized natural gas reshape type engine generators, which we also have some experience with and so.
Speaker Change: Thats a separate application.
Speaker Change: As I mentioned earlier, what were not trying to do is just be a commodity generated rental company you have those companies that are out there already.
Speaker Change: We're not going to bring value in that sector, but if we're combining.
Speaker Change: Our power solution for one of our customers along with services or technologies that we're already providing in other areas such as real time monitoring or engineering Accustom Microgrid forum in deploying that or maybe a battery storage system remember our battery storage systems are designed for hazardous well site operations. So they can fit easy.
Speaker Change: In our production area as well.
Speaker Change: And you've got our <unk> delivery systems, you've got a fuel gas blending.
Speaker Change: Systems in which we have new IP on some of that technology and so it's really about.
Speaker Change: Can we find the right package that makes sense for our customer.
Speaker Change: So we will continue to explore these opportunities.
Speaker Change: We're in discussions and we will continue to explore this and.
Speaker Change: We'll try to do things that bring value for the investors at the end of the day.
Speaker Change: Your next question comes from the line of Kirk <unk> with benchmark.
Kirk <unk>: Hey, good morning, everybody good morning.
Speaker Change: Sure.
Speaker Change: Maybe a lot to digest here a lot of good color a lot of good context as always.
Speaker Change: I think I'm going to.
Speaker Change: And then maybe ask a strategic question and you might not have spitz.
Speaker Change: Specific answers, but thats fine just wanted to kind of get a feel for how youre looking at the.
Speaker Change: The longer term opportunities for this power business right.
Speaker Change: And I know you gave us some insights during the call, but I guess I have to.
Speaker Change: Trying to think what kind of.
Speaker Change: What kind of level of investment.
Do you think it'll take to get you the scale.
Speaker Change: Bert you want to capitalize on the opportunity.
Speaker Change: Again, you don't have to get too specific but kind of curious about that and then.
Speaker Change: As a follow up to that.
Speaker Change: Is this a situation where at some point.
Speaker Change: This business becomes its own standalone entity.
Speaker Change: Yeah. So look let's talk about the growing market demand and really the Permian Permian is our backyard and Theres estimates for the Permian growing power demand to be in the range of.
Four gigawatts over the next 10 years of power demand that would be not connected to the utility grid.
Speaker Change: Because the utility is going to grow their power supply for our customers out there and for other applications in the Permian.
Speaker Change: But you've also got this delta that's about.
Speaker Change: Four gigawatts over the next 10 years is just that of demand thats not going to be connected to the utility.
Speaker Change: And so there's going to be multiple opportunities for multiple companies to step in and fill that demand with power generation sources.
Speaker Change: What separates us and our capabilities is the fact that it wouldn't be just.
Speaker Change: US going out and buying a generator and running into this type of operation necessarily but combining them with other things that we do to where we can provide a solution that differentiates us from just a standalone generator rental company and so I think those opportunities is going to exist again, it's a longer term play.
Speaker Change: So over the next 10 years, you're going to have this.
Speaker Change: This gap.
Speaker Change: Power demand exceeds supply from the grid and so its not something were rushing into it's something that our E&P customers are looking at over the long term as well.
Speaker Change: And we'll see how it goes now when you talk about scale.
Speaker Change: It's an interesting discussion because.
Speaker Change: It's not that we may need to have a certain number of assets to be efficient necessarily we may take it on a project by project basis, where.
Speaker Change: We're building out in more of a project type.
Speaker Change: Work as opposed to just saying, hey, we need to own a large number of assets to be efficient and so.
Speaker Change: We'll keep you posted as we work through this.
Speaker Change: And see how it works out but again, we're really focused on what we think is that we need to have a reasonable return for investors as we grow this out.
Speaker Change: Will this be a separate segment someday I'm hopeful that it will I think we're a couple of years from that again. This is a long term play in the Permian for demand for power off grid to grow. So this is not something that's going to happen right away for us to break it off as a separate segment, but hey in a couple of years, we might be doing that because of <unk>.
Speaker Change: Might be material enough that we have to report it separately.
Speaker Change: Your next question comes from the line of Jeff Leblanc with T P J and company.
Jeff LeBlanc: Good morning, Andy and team. Thank you for taking my question.
Jeff LeBlanc: I just had one question regarding <unk>.
Jeff LeBlanc: Retirement.
Jeff LeBlanc: In the Frac business, how should we think about retirements over the next several years in Lincoln easier towards 100% natural gas burning Glenn Thank you.
Jeff LeBlanc: Yes, I mean look we will continue we still operate.
Jeff LeBlanc: Some older equipment, some tier two equipment in a non <unk> type stuff and we will continue to look to retire that subsidy kind of reaches the end of its life, we're not going to take it out of service.
Jeff LeBlanc: It's working.
Jeff LeBlanc: Obviously, we're not going to invest a lot in kind of replenishing that level of equipment either.
Jeff LeBlanc: I don't have a specific horsepower number then I want to get tied down to you right now, but certainly that stuff's, reaching the end of its lines over the next two three years or so and so we will continue to pull that out and then replace it with something that is more fit for the current opportunity set in the market, which is natural gas Bernie.
Jeff LeBlanc: Yeah.
Speaker Change: Your next question comes from the line of Doug Becker with capital one securities.
Doug Becker: Thank you I wanted to circle back on the U S drilling margins.
Doug Becker: Andy you characterized pricing on the base rigs is stable you have.
Doug Becker: Potential upside on the technology deployments and then at the same time, you're streamlining costs payroll taxes declined in the second quarter, just trying to get a sense for what factors do you see.
Doug Becker: Keeping <unk> from being the margin trough in that business.
Doug Becker: Okay.
Doug Becker: Yes.
Speaker Change: There are several things that we're working on there is the pace of.
Speaker Change: We deployed new technology out on the rig systems there is.
Speaker Change: The pace that we're going to move at streamlining some cost structures. There because we certainly want to protect performance inefficiencies efficiency at the same time. So we'll just see how it plays out but overall through the year I think that youll see some improvements there.
Speaker Change: Makes sense, that's all I had.
Speaker Change: Thanks.
Speaker Change: I will now turn the call back over to Andy Hendricks for closing remarks.
Andy Hendricks: Thank you Rebecca I want to thank everybody that dialed in today for our call again.
Andy Hendricks: Again, I want to thank all of our employees our team at Patterson UTI for everything they did to make 2020 for great year, and we look forward to a great 25 as well so thank you very much.
Andy Hendricks: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Andy Hendricks: [music].
Andy Hendricks: Sure.
Andy Hendricks: [music].
Andy Hendricks: Sure.
Andy Hendricks: [music].
Andy Hendricks: Sure.
Andy Hendricks: [music].
Andy Hendricks: Yes.