Patterson-UTI Energy - Earnings Call - Q1 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Patterson UTI Energy First Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Thank you.

It is now my pleasure to turn the call over to your host, Mr. Mike Druckenmer. Sir, the floor is yours.

Speaker 1

Thank you, Sylvia. Good morning. And on behalf of Patterson UTI Energy, I'd like to welcome you to today's conference call to discuss the results for the 2021. Participating in today's call will be Andy Hendrix, Chief Executive Officer and Andy Smith, Chief Financial Officer. A quick reminder that statements made in this conference call that state the company's or management's plans, intentions, beliefs, expectations or predictions for the future are forward looking statements within the meaning of The U.

S. Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward looking statements are subject to risks and uncertainties as disclosed in the company's annual report on Form 10 ks and other filings with the SEC. These risks and uncertainties could cause the company's actual results to differ materially from those suggested in such forward looking statements or what the company expects. The company undertakes no obligation to publicly update or revise any forward looking statement.

The company's SEC filings may be obtained by contacting the company or the SEC and are available through the company's website and through the SEC's EDGAR system. Statements made in this conference call include non GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website, www.patenergy.com and in the company's press release issued prior to this conference call. And now it's my pleasure to turn the call over to Andy Hendrix for some opening remarks. Andy?

Speaker 2

Thanks, Mike. Good morning, and welcome to Patterson UTI's first quarter conference call. We are pleased that you can join us today. For the first quarter, revenues and adjusted EBITDA increased sequentially and exceeded our expectations despite challenges from the extreme winter storm in the Southwest. Both contract drilling and directional drilling posted better than expected results while pressure pumping was impacted by downtime associated with the storm.

Excluding the impact from the winter storm, pressure pumping results would have been consistent with our expectations. Crude oil prices trading in a tight band around $60 have been supportive of increasing activity. And looking forward, based on conversations with customers, we now have greater confidence in further improvement in drilling and completion activity. We expect our rig count will reach approximately 80 rigs over the next three months with most of that growth coming late in the second quarter and early in the third quarter. Additionally, the pricing on most of our currently active rigs has been reset since the beginning of the downturn.

And as such, we believe the second quarter margin per day will be the low for this cycle in drilling. In pressure pumping, we are encouraged by signs of pricing improvement. We have been successful in pushing through to our customers higher input costs for things such as sand and trucking. And additionally, and where I would like to congratulate our leadership team in this business, we are starting to achieve better pricing for our high level of service quality. Our focus in pressure pumping remains squarely on improving pricing and margins.

As demand continues to improve, we now expect to activate an eight spread late in the second quarter. Within our Directional Drilling segment, there are a lot of exciting things happening. I have spoken for several quarters now of the market share we have captured in Directional Drilling due to the reliability and performance of our Mercury measurement wall drilling system and our impact directional drilling motors. This reliability and performance combined with strong alignment with our contract drilling business has allowed us to broaden our customer base. Additionally, in directional, we have worked with customers on a number of different performance based contracts.

Speaker 3

We continue to innovate to meet our customers' demand to drill higher quality wells. During the first quarter, we successfully field tested a new five inches drilling motor design and completed the design of a

Speaker 2

new six fiveeight inches motor for higher performance. Additionally, we successfully field tested our new MWD data compression algorithms that allow for higher quality wellbore placement in the reservoir for more productive wells. With that, I will now turn the call over to Andy Smith, who will review the financial results for the first quarter.

Speaker 4

Thanks, Andy. For the first quarter, we reported a net loss of $106,000,000 or $0.50 per share $0.57 per share, while adjusted EBITDA grew 20% sequentially to $35,400,000 on a 9% sequential increase in revenues. Turning now to our segments. In contract drilling, our average rig count for the first quarter improved to 69 rigs from 62 rigs in the fourth quarter. We ended the quarter with three rigs that were idled but contracted, one of which went back to work in early April.

Average rig revenue per day for the first quarter was $21,590 This included a $2,300,000 benefit from revenue that was earned during the downturn in 2020, but not recognized at that time due to concerns about the ultimate collectability of this revenue. Compared to the fourth quarter, average rig revenue per day also benefited during the first quarter from a lower proportion of idled and contracted rigs on reduced rigs and higher than expected revenues from ancillary services. Contract drilling operating costs included a $6,000,000 benefit from a refund of sales and use taxes. Excluding this benefit, average rig operating cost per day was better than we expected. With higher than expected revenue and lower than expected operating costs, average rig margin per day, even excluding the favorable benefits I previously discussed, exceeded our expectation during the first quarter.

At 03/31/2021, we had term contracts for drilling rigs providing for approximately $240,000,000 of future day rate drilling revenue. Based on contracts currently in place, we expect an average of 39 rigs operating under term contracts during the second quarter and an average of 27 rigs operating under term contracts during four quarters ended 03/31/2022. For the second quarter, we expect our rig count to improve to 73 rigs from 69 in the first quarter. Average rig revenue per day is expected to be approximately $20,900 in the second quarter with an average rig margin of approximately $6,200 In pressure pumping, we averaged seven active spreads during the first quarter with an effective utilization of 5.5 spreads. Downtime during the quarter was primarily associated with the winter storm and the mobilization during the quarter of one of our spreads from the Northeast to Texas.

The startup of the spread that mobilized to Texas was also delayed due to the winter storm. Pressure pumping revenues during the first quarter decreased to $75,800,000 and gross margin was a loss of approximately $700,000 But for the effects of the winter storm, first quarter results were consistent with our expectations. For the second quarter, we expect to average seven active spreads with utilization improving from the first quarter level. Pressure pumping revenues are expected to improve to $120,000,000 and gross margin is expected to improve to $9,000,000 Turning now to Directional Drilling. Revenues for the first quarter improved to $19,700,000 and the gross margin improved to $3,000,000 For the second quarter, we expect Directional Drilling revenues to improve to $22,500,000 with gross margin of $3,200,000 Turning

Speaker 3

now

Speaker 4

to our other operations, which includes our rental, technology and E and P businesses. Revenues for the first quarter improved to $11,900,000 and gross margin improved to $1,700,000 For the second quarter, we expect other operations revenues to improve to approximately $13,000,000 with a gross profit of approximately $3,500,000 Before I turn the call back to Andy, for the second quarter, we expect depreciation, depletion, amortization and impairment expense of approximately $145,000,000 Selling, general and administrative expense is expected to be approximately $22,000,000 for the second quarter. And for the full year 2021, we expect an effective tax rate of approximately 17%. Also, we will be paying a quarterly cash dividend of $02 per share on 06/17/2021 to holders of record as of 06/03/2021. With that, I'll now turn the call back to Andy Hendricks.

Speaker 2

Across the industry, The U. S. Land rig count has nearly doubled over the past nine months. Over this time frame, private operators have increased their rig count by more than 150%, while publicly traded operators have had a more modest growth rate as they were balancing capital discipline relative to budgeted crude oil prices. The pressure on our customers and on the industry to exercise capital discipline and work within cash flow has been growing and is a shift from the majority of the years in The U.

S. Unconventionals revolution. As we exited 2020 and moved into 2021, we continued to see greater capital discipline from operators and a more orderly progression in activity. The interesting point is that this capital discipline is relative to the 2021 budgets, which were based on lower commodity prices than we've had over the last few months. And I believe that with improving operator cash flow, we will see further increases in activity through the year.

This is still in line discipline as increasing activity can be funded within cash flow. We're encouraged by this capital discipline across the energy sector that still allows for further increases in industry activity where premium contractors with superior performance offerings will be rewarded for the value they create for the customers and where there will be opportunity to increase pricing as the industry activates more equipment. Within this environment, as a premium service provider, we are well positioned. We are the only drilling contractor in The U. S.

With a significant presence in directional drilling. Through the use of technology, be it remote operations or the automation of certain operations, we are uniquely positioned to better integrate directional drilling operations into the drilling improve wellbore quality and performance. We are also well positioned to benefit from our leadership position in the use of alternative fuels and power sources to help our customers reduce costs and emissions at the well site. For example, we have the ability to substitute cleaner burning natural gas for diesel in many of our drilling rigs and frac spreads. Additionally, we have the ability with our EcoCell lithium battery hybrid energy management system to more efficiently manage the power generated at the rig, thereby reducing fuel consumption and emissions.

As well as to further minimize emissions at the wellsite, we have the ability to run drilling rigs on high line power from the utility. For more information on these technologies, please refer to our updated corporate sustainability report that we published during the first quarter. We see 2021 as a year of steadily increasing activity, driven initially by private and agile public operators and then by major operators. And we are encouraged by the opportunities that we are hearing from our customers for Patterson UTI. With that, we would like to thank all of our employees for their hard work, efforts and successes through a very challenging time, both in our industry and in general, and we look forward to a much better year ahead.

Sylvia, we'd like to open the call for questions now.

Speaker 4

Thank you.

Speaker 0

Your first question comes from the line of Mike Sciabella from Bank of America.

Speaker 5

Just real quick on the margin guide and Rick, did you all give it or did I just miss it

Speaker 4

for 2Q? Sorry, what was the question?

Speaker 5

On margin guide for drilling in 2Q, did you all give it and I just missed it or?

Speaker 4

Yes, it was $6,200 per day.

Speaker 3

$6,200 Okay.

Speaker 5

So when we think about kind of 2Q and I know, Andy, you mentioned 2Q being the low point for the year. One of peers is out talking about possibly pushing pricing. You all seem like maybe that's possible as well. Can we talk about how pricing plays into that maybe spot rates are leading edge day rates are today relative to overall total and where we think they can go to in the second half?

Speaker 2

We don't typically get into what we think they are publicly for competitive reasons. But I'll tell you there's still a bit of a range of day rates on the spot price out there. But we believe that as we start to put up more rigs later in the second quarter that we'll have opportunities for pricing to move up at the end of the second quarter and into the third quarter and then through the rest of the year. And we've seen this in other downturns in the past where especially with the super spec rigs that we offer in the industry, as the rig count starts to move up, pricing has the opportunity to move up as well.

Speaker 3

Got it. And then just kind

Speaker 5

of, I guess, higher level question. You're several years away from the last big M and A move for the company. As we sit here, kind of the outlook internationally looks a little better. If we think about Patterson over the next couple of years, is there anything internationally you guys are interested If not internationally, is there anything in The U. S.

You could see kind of fitting well in the portfolio?

Speaker 2

I think the best way for me to answer that question is just to say we maintain a healthy balance sheet. That's our history. And we try to find opportunities to exercise the strength of our balance sheet when we come out of these cycles. And we'll just have to see what happens at this point.

Speaker 5

Understood. Thanks,

Speaker 0

Your next question comes from the line of Taylor Zegerer from Tudor Pickering Holt.

Speaker 6

Hey, morning and thank you. In Pressure Pumping, Q2 guidance looks really strong. Revenue is obviously up huge as you get much better utilization following the winter storm. I'm curious, it doesn't seem like in the Q2 guidance, just based on the implied incrementals, there's a whole lot of pricing uplift baked into there. So I'm curious if you could frame for us if you normalize for some of this weather related noise and what sort of efficiency improvement you might be seeing from a however you want to define it stages per day metric?

And then looking longer term for pressure pumping or maybe exiting 2021, I mean, you think you can get back to sort of a double digit gross margin run rate without a whole lot of pricing improvement just as activity continues to trend higher?

Speaker 2

Yes. I think that the pressure pumping sector is starting to become structurally in a better place. We've certainly seen attrition through various companies over the last year, and it becomes more challenging for companies to put spreads back to work. That being said, we're going to put another spread back to work towards the end of the second quarter. We may put a couple more out before the end of the year.

Every spread we put out has been forecasted on our plan to be accretive and cash flow positive. And so that's the only reason we would put a spread out or even consider putting a spread out. And so when we look at that, we believe that there's opportunity for pricing to continue to move up through the rest of the year as activity moves up. Having the opportunity to talk about pricing moving up in pressure pumping has been a rare thing. I think the last time I did this was 2017.

So the market has had a lot of equipment and a lot of overhang for a few years, but I think it's tightening up this year. And as we continue to put out some spreads, then we see that as accretive, and we think that the price will move up. In the second quarter, we had the chance to move some pricing on a couple of spreads. I don't want to get into the numbers, but it was certainly a positive for us as we haven't seen that in a while in the industry.

Speaker 6

Okay. That's encouraging. And in contract drilling, it looks like the OpEx guidance, if you just take the revenue less the margin that you guided to, is about $14,700 a day. Could you remind us where you expect that number to trend as activity continues to trend higher and you get better fixed cost absorption?

Speaker 2

I don't think we'll see a big change in that number. But I think we'll have the opportunity to push dayrates on rigs towards the end of the year. So I see that's why we're projecting that we're going to have margin improvement through the rest of the year and that Q2 is the bottom in this cycle for us in drilling for the margin per day.

Speaker 3

Okay. Good to hear. Thanks, guys.

Speaker 0

I show no further I'm sorry. You have a question from the line of Waqar Syed from ATB Capital Markets.

Speaker 3

Thank you for taking my question. Andy, the incremental demand that you're seeing both on drilling and pumping, where is it coming from public E and Ps, privates? Or is it the mix of both? Could you maybe characterize that?

Speaker 2

Yes. It's really been kind of a change in the landscape, whereas coming out of the downturn, the first out of the gate were really the privates that put up a lot of rigs initially. And then some of the more nimble, what we refer to as nimble publics, but some of the larger publics and even some of the IOCs are discussing putting up rigs in The U. S. As well.

And so we're encouraged by these discussions through the rest of this year and even somewhat into 2022. So that's our view of the market that while it's been a transition, it seems like all of the various customers or class classifications of operators that we have are talking about putting up rigs. And again, like I mentioned, I think this is still working within the capital discipline that investors want from these companies because the initial rig forecasts that they made that they were considering doing for 2021 were based on a lower commodity price than they actually have today. So our customers, the operators are seeing better cash flows and potentially better cash flow projections for the year, and they're reconsidering what their activity levels might be. And we have a large number of customers that are discussing putting up more rigs towards the throughout the year.

Speaker 3

Now there's been a view in the industry that you need about, let's say, 100 rigs working for maintenance type production and roughly two twenty type pressure pumping active crews to keep production flat. Based on your discussions, do you think that overall industry activity is going to get ahead of those numbers into as you look into 2022? Or we kind of cap around that those kind of numbers?

Speaker 2

It's really a basin by basin economic discussion where we're seeing Permian operators improve the economics of what they're doing, where they can afford to increase activity a little bit and increase production. WTI is moving up to a level that is starting to interest Bakken producers in picking up rigs and even South Texas. So it's really a basin by basin discussion. And then you've got, of course, the Haynesville gas in East Texas and North Louisiana, which is completely separate from that. And even in a lot of cases separate from Henry Hub commodity because you've got a number of our customers over there that have contracts for LNG export or they're drilling to hold land in that area.

So there's you really have to look at it on a basin by basin case these days and the economics in each one.

Speaker 3

Just on that question of LNG, what's your what's the opportunity set in terms of additional rig activity on that LNG theme for the next, let's say, twelve to twenty four months. Have you had any long term discussions with operators and about locking up high end rigs for that?

Speaker 2

I would say overall activity in that area is steady and slightly increasing is the best way to characterize that. And I think that while you haven't seen operators lock up necessarily long term contracts, the economics for that could improve over the year as well.

Speaker 3

Okay. And then just a final question on the super spec rig fleet. Given your activity is going to go up quite a bit, some of your peers also seeing that, Where do you think utilization is right now for the super spec kind of high end ready rigs? And then where it could be? And when do you see pricing kind of move up in decent increments?

Speaker 2

Yes. I don't have the numbers for what utilization on super spec is right now. But I'll also throw out that it doesn't really matter so much. The super spec rig is a hot commodity rig item. And what we've seen historically is as those rigs start to go to work, then pricing tends to move up.

And there also creates a phenomenon, which could likely happen towards the end of this year, where you have operators and the fear of missing out and not getting the rig they want, and that's always good for us too.

Speaker 3

Absolutely. Great. Thank you very much, Andy. Appreciate the comments.

Speaker 0

And I show no further questions at this time. I will now turn the call back to Mr. Andy Hendrix.

Speaker 2

Thanks, Sylvia. I just want to thank everybody at Patterson UTI for all the great work they did in the first quarter, especially navigating the winter storms. And thanks for the team and a good quarter. Thank you.

Speaker 0

Ladies and gentlemen, that does conclude today's conference. Thank you again for your participation. You may now all disconnect.