Patterson-UTI Energy - Q1 2024
May 2, 2024
Transcript
Operator (participant)
Welcome to the Patterson-UTI Q1 2024 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, please press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star followed by the number 1. As a reminder, today's call is being recorded. I will now hand today's call over to Mike Sabella, Vice President of Investor Relations. Please go ahead, sir.
Mike Sabella (VP of Investor Relations)
Thank you, operator. Good morning, and welcome to Patterson-UTI Earnings Conference Call to discuss our Q1 of 2024 results. With me today are Andy Hendricks, President and Chief Executive Officer, and Andy Smith, Chief Financial Officer. As 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 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 reconciliation to GAAP financial measures are included on our website, patenergy.com, and in the company's press release issued prior to this conference call.
I will now turn the call over to Andy Hendricks, President, Patterson-UTI's Chief Executive Officer.
Andy Hendricks (President and CEO)
Thank you, Mike, and welcome to Patterson-UTI's Q1 conference call. The Q1 unfolded largely as we anticipated, with another quarter of strong free cash flow. The steady environment continued in the oil basins, with activity and production relatively consistent with late last year. In natural gas basins, our customers are being impacted by weak natural gas prices, and they are responding by reducing activity as we expected. Against this backdrop, Patterson-UTI delivered strong results during the quarter, and we met our guidance in each of our operating segments. The results in the Q1 demonstrate the free cash flow generating capabilities of the company, even as we invest to maintain our position as a long-term winner in the U.S. shale drilling and completion. We expect to continue returning a significant amount of cash to shareholders.
Bifurcation amongst oil field product and service providers is presenting an opportunity for high-quality companies to generate strong free cash flow, even in a slightly softening market. We're investing in technologies that enhance the efficiency of the U.S. shale model, and this should improve the returns and free cash flow profile of our company over the long term. Our customers are recognizing and rewarding providers that have a differentiated service offering, and Patterson-UTI stands amongst the leaders across multiple product and service lines. Differentiation has defined this cycle, and we believe that if we invest in the right technologies and deliver consistent and repeatable top-quality product for our customers, we will be rewarded with higher activity and utilization, and our results are the best evidence. We delivered another strong quarter in Q1, and both our drilling and completions businesses again outperformed.
We expect this outperformance will continue over the long term. On the macro outlook in oil basins, activity has remained steady, supported by high oil prices. In the near term, customer consolidation is muting the market's response to strong oil prices. This should resolve over time, and at current oil prices, we anticipate some modest demand upside in oil basins starting later this year. Weak natural gas prices are impacting industry activity in the near term. So far, activity in natural gas basins has held up better than we had anticipated, particularly in the Northeast. But we are seeing more natural gas activity reductions continuing in Q2, and we expect natural gas activity is likely to then remain steady with Q2 levels through the rest of the year. Nevertheless, our long-term positive view on natural gas is unchanged.
New LNG exports and growing demand for power in the U.S. will require increased production, with natural gas remaining part of the industry growth narrative for 2025 and beyond. In our drilling services segment, we had another strong quarter with our rig count again outperforming the industry average. Pricing on recent term contracts remains stable, and margins have been resilient. In the U.S., we started the Q2 operating 118 rigs, and we are currently operating 116 rigs. Although we have line of sight for a couple more rig drops as our customers respond to natural gas prices, and as customer consolidation creates some potential reduction in near-term activity.
We continue to see very high demand for our Tier 1 drilling assets, and we believe our rig fleet is positioned to outperform the market, with upside even if the overall market is flat. Customer consolidation will create a period of churn, which we are starting to see in the Q2, but this should be followed by a high-grading process, and that transition is when Patterson-UTI should see the most benefit. We are excited about the way the market is taking shape over the long term. On the technology front, we're seeing great results from the investments we've made to add automation systems to the drilling rig controls. Over half of our rigs today are running our Cortex operating system and our Cortex KeyEdge devices. Demand is high, and we've allocated a portion of our CapEx to continue adding these systems.
The growing presence of these products on our rigs is enhancing the value of our service offering. We're also advancing the way we power our rigs by beginning to integrate our GridAssist package with our EcoCell lithium battery technology. Often, high line power is accessible, but not in adequate quantities to fully power the rig by itself. Our GridAssist package can complement the grid, grid power to fully power the rig, even when the utility is only providing a fraction of the electricity. GridAssist has shown the ability to substantially decrease the cost of powering a rig and slash emissions by up to 90% compared to rigs that are still using diesel generators. Our technologies differentiate Patterson-UTI's drilling business and should give our rigs a sustainable advantage over many peers in the industry. In completion services, we had another strong quarter.
The operational integration with NexTier is largely complete, marking a significant milestone for the company. The team's dedication and expertise has been exceptional. The leadership within the group has shown skill and commitment through this process, and we extend our sincerest gratitude for everyone's outstanding efforts. Looking ahead, we remain focused on identifying additional synergies to further enhance our position as a completion leader. The benefits so far have been obvious, with relatively steady financial performance compared to the pre-merger entities, even as the market has slowed. This is evidence that the merger is creating value. We have achieved our $200 million annualized synergy target faster than we initially expected. During this integration process, the team has continued to advance our transition to natural gas-powered frac equipment in a capital-efficient manner.
We deployed our latest round of Emerald electric frack equipment throughout the month of April, with the fleet integrated with our Power Solutions and going to work in West Texas for a large established customer. So far, the results have been fantastic, with the equipment averaging over 21 hours per day since it started up. A great achievement for a new fleet. We remain on track to grow our electric frack horsepower to 140,000 by the middle of the year, and upon delivery, we still expect that almost 80% of our fleets will be able to be powered by natural gas. We are also field testing other 100% natural gas-powered frack technologies, and the flexibility is one of the biggest benefits of not overly relying on one solution.
We think our full suite of natural gas-powered frack assets, including our dual fuel equipment, is as competitive as any company in the industry. Overall, we expect our nameplate horsepower will continue to decline as we retire older diesel assets. We suspect others are taking similar approach to retiring older assets as the industry is getting more disciplined with capital deployment. We're also excited by what we have seen from our cementing business following the integration of Legacy Patterson-UTI and NexTier operations. We have seen strong market penetration, and as our customers are extending laterals, they are asking for higher quality cementing equipment, leading to bifurcation in this market, similar to what we are seeing in frack. We believe our cementing business is well positioned to continue to improve results.
Regarding our customer base, we believe much of the churn has already occurred for this year, and we think the rest of the year should be relatively steady, with a steady customer book and a likelihood that frack activity will improve somewhat in Q3. We think Q2 is likely the low point for our company this year in terms of frack activity. We've had some customer-specific gaps that opened up on our calendar during Q2, and those customers should resume normal activity by Q3. Our drilling products segment continues to perform exceptionally well. Ulterra reached a new company record for revenue generated per industry rig in the U.S., highlighting the strength of our offerings in the domestic market. Internationally, we saw strong growth, with revenue abroad of more than 15% compared to the Q1 a year ago.
These results highlight the effectiveness of our drilling products in meeting the evolving needs of our global customer base. We remain optimistic about the growth prospects of the drilling products segment, even in a flattish U.S. onshore market. Ulterra's international business is expected to achieve high teens revenue growth this year, primarily driven by strong performance in the Middle East. Ulterra also had its first successful run in the North Sea, which is a market where the company has not historically participated. Early results in that region have been great, and we have been awarded other sections of the project. This is a great example of an expansion into a new market. The strategic investments we are making will set us up for profitable growth, even in a relatively flat market.
At the same time, we are delivering strong free cash flow and returning a significant amount of cash back to our investors. We consider this balanced capital allocation strategy critical for enhancing shareholder value over the long term, and we are optimistic that we can continue delivering on this approach. I'll now turn it over to Andy Smith, who will review the financial results for the Q1.
Andy Smith (CFO)
Thanks, Andy. Total reported revenue for the quarter was $1.51 billion. We reported net income attributable to common shareholders of $51 million, or $0.13 per share in the Q1. This included $12 million in merger and integration expenses. Our adjusted net income attributable to common shareholders, including the merger and integration expenses, was $61 million or $0.15 per share, and assumes a 21% federal statutory tax rate on those charges. Adjusted EBITDA for the quarter totaled $375 million, which also excludes the previously mentioned merger and integration expenses. Our weighted average share count was 408 million shares during Q1, and we exited the quarter with 404 million shares outstanding. Our free cash flow for the Q1 was $139 million.
During the Q1, we returned $130 million to shareholders, including an 8 cents per share dividend and $98 million used to repurchase 9 million shares. Annualized, the amount we returned to shareholders totaled to more than 10% of the market cap at the end of the Q1. During the Q1, we generated significant free cash flow, and we opportunistically accelerated our share repurchase program, given the dislocation between the share price and our view on the intrinsic value of a share of Patterson-UTI stock. In just 2 quarters since we closed the NexTier merger and the Ulterra acquisition, we have repurchased 4% of the post-deal shares outstanding. Our board has declared an 8 cents per share dividend for Q2.
For 2024, we still expect to use at least $400 million to pay dividends and repurchase shares, which would exceed our targeted return of more than 50% of free cash flow to shareholders. In addition to the cash we returned to shareholders in the Q1, we used more than $30 million to pay down capital leases and retired debt as we look to maintain our low leverage and strong capital structure. In our drilling services segment, Q1 revenue was $458 million. Drilling services adjusted gross profit totaled $186 million during the quarter. In US contract drilling, we totaled 11,024 operating days. Average rig revenue per day was $35,680, with average rig operating costs per day of $19,510.
The average adjusted rig gross profit per day was $16,170, a decrease of less than $200 from the prior quarter. At March 31st, we had term contracts for drilling rigs in the U.S., providing for approximately $527 million of future dayrate drilling revenue. Based on contracts currently in place, we expect an average of 70 rigs operating under term contracts during the Q2 of 2024, and an average of 41 rigs operating under term contracts over the four quarters ending March 31st, 2025. In our other drilling services businesses other than U.S. contract drilling, which is mostly international contract drilling and directional drilling, Q1 revenue was $64 million, with an adjusted gross profit of $8 million.
For the Q2 in U.S. contract drilling, we expect to average 114 active rigs, compared to 121 active rigs in the Q1, with adjusted gross profit per day expected to be down roughly $300 from the Q1. Aside from U.S. contract drilling, we expect other drilling services adjusted gross profit to be down slightly compared to the Q1. Reported revenue for the Q1 in our completion services segment totaled $945 million, with an adjusted gross profit of $199 million. Most of the sequential change in revenue was a function of lower activity and a mix shift away from higher revenue jobs in the Haynesville, with some limited impact from changes in pricing relative to the Q4.
We are pleased with our results in Appalachia, where activity was relatively steady. As expected, the Haynesville was the largest declining basin during the quarter. Our natural gas powered equipment continues to be sold out, with high demand and a widening operating cost savings compared to diesel equipment. Our completion activity has declined slightly to start the Q2, mostly in natural gas basins, where customers continue to slow activity in response to low natural gas prices. Additionally, we have a few dedicated fleets that are operating with planned gaps in the schedule. For the Q2, we expect completion services revenue of approximately $860 million, with an adjusted gross profit of around $170 million. We see an improvement in activity in the Q3 as our dedicated and long-term customers resume completion activity after the pads are drilled.
Q1 drilling products revenue totaled $90 million, which was up 2% sequentially. Adjusted gross profit was $41 million. In the U.S., drilling product market share hit a record for the company in the Q1, and the segment again saw an improvement in revenue per U.S. industry rig as Alterra continues to perform very well. Internationally, revenue improved sequentially, with gains largely coming from our operations in the Middle East. Direct operating costs included a non-cash charge of $2 million associated with the step up in asset value of the drill bits that were on the books at the time the Alterra transaction closed. The same purchase price accounting adjustment increased reported segment depreciation and amortization by $6 million during the quarter.
We expect the impact of these non-cash charges will reduce as we move through 2024 and will likely be negligible thereafter. For the Q2, we expect drilling products results to be roughly in line compared to the Q1. We see growth internationally, largely offsetting typical seasonality in Canada with the spring breakup. Other revenue totaled $18 million for the quarter, with $7 million in adjusted gross profit. We expect other Q2 revenue and adjusted gross profit to be flat with the Q1. Reported selling general and administrative expense in the Q1 was $65 million. For Q2, we expect SG&A expense of $65 million. On a consolidated basis for the Q1, total depreciation, depletion, amortization, and impairment expense totaled $275 million.
For the Q2, we expect total depreciation, depletion, amortization, and impairment expense of approximately $265 million. During Q1, total CapEx was $227 million, including $83 million in drilling services, $123 million in completion services, $16 million in drilling products, and $5 million in other and corporate. For the Q2, we expect total CapEx of roughly $180 million, with most of the sequential reduction coming from a decline in CapEx in the Completion Services segment. We expect our annual CapEx spend will be $740 million or less. Our focus remains on maintaining flexibility to adapt to market conditions as needed, and we continue to expect to convert at least 40% of our adjusted EBITDA to free cash flow in 2024.
We closed Q1 with nothing drawn on our revolving credit facility, as well as $170 million of cash on hand. We do not have any senior note maturities until 2028. We expect to generate another quarter of strong free cash flow in the Q2, although likely slightly below what we saw in the Q1. We have a long track record of returning substantial cash to our investors. Since the start of 2022, we have returned more than 80% of our free cash flow to our investors. Over that same time, we have seen a steady improvement in our free cash flow conversion. Simply put, we are turning more of our adjusted EBITDA into free cash flow than in the past, and we are committed to giving a significant amount of that free cash flow back to shareholders.
In the eight months since the merger between NexTier and Patterson-UTI was finalized, our integration efforts have exceeded our most optimistic expectations. The team's achievements during this relatively short time frame are evident, and the completion services segment has remained resilient despite challenging market conditions. The operational integration is largely complete, and we have now achieved our goal to realize more than $200 million in annualized synergies, which we announced at the time of the transaction. We remain committed to identifying additional cost synergies and revenue opportunities. There is still ample room for improvement in our completions business, and we are actively pursuing strategies to enhance its performance. We are confident in our ability to deliver additional value to our shareholders through these efforts. I'll now turn the call back over to Andy Hendricks for closing remarks.
Andy Hendricks (President and CEO)
Thanks, Andy. As we've discussed, the results for the Q1 of 2024 were strong, and I'm still very constructive on our industry for all of 2024, with Patterson-UTI positioned to continue to generate strong free cash flow. Oil prices have shown relative stability, and there is no visibility on any substantial or additional supplies of crude entering the market that will change the current commodity price dynamic. The oil basins in the U.S. drive the vast majority of our activity. There continues to be strong demand for technology in today's market, including more drilling rig control automation, natural gas-fueled frack technology using electric pumps, well placement analytics, and new drill bit designs.
As well, the last year in our industry has demonstrated how the service market in the US has become more disciplined, where although we have seen some softness in the gas markets, overall activity and pricing has held up better than in similar historical years. We believe all this translates to a better operational environment for our company and a more investable sector for the market. I'd like to thank all of our teams across Patterson-UTI for all their hard work to successfully integrate the companies over the last eight months and achieve the targeted synergies of over $200 million. Patterson-UTI remains in a strong position. We continue to focus on high returns, capital-efficient ways to grow our profitability, and to return cash to shareholders through our regular dividend and share buybacks.
We still expect that we will return at least $400 million this year through dividends and share repurchases, which in a flat market, should mean further growth in our earnings per share and also return on capital through a steady reduction in share count. Finally, I'd like to thank all the hardworking women and men at Patterson-UTI for what they do to responsibly provide energy to the world. With that, I'd like to hand it back to Tamika, and we'll open the lines for Q&A.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star one. We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Luke Lemoine with Piper Sandler.
Luke Lemoine (Managing Director)
Hey, good morning.
Andy Hendricks (President and CEO)
Good morning.
Luke Lemoine (Managing Director)
Andy, hey, could you talk a little bit about where you are with your well site integration within frack?
Andy Hendricks (President and CEO)
Yeah. So, you know, one of the premises of the merger and, you know, certainly one of the big synergy buckets is the integration of services, you know, that are vertical to us on, you know, what was essentially the frack fleets that we had at Patterson-UTI before the merger. So just to remind everybody, you know, at Nextier, really excited about what they've accomplished over the years, especially with the ability to integrate wireline systems, cased-hole wireline and perforating. And, the real benefit to that is you don't have, you know, as I said before, a $50 million frack spread waiting on a $1 million wireline truck. We'll essentially make sure that everything's working like it needs to, to be as efficient as possible.
You know, next to that, you have NexMile Logistics, which is a trucking delivery company of substantial size, which makes sure that our frack fleets are never waiting on sand, that we always have the sand we need delivered to the pads when we need it, both dry sand, wet sand, you know, whatever is required for those particular jobs. And when you think about how, you know, we're doing more simul-frac and sometimes trimul-frac, those are very large volumes of sand that have to be delivered, and you never want to be able to hold up operations, hold up the number of stages per day. You know, next on the list would be the power solution systems that we have, where we actually create CNG in the basin.
We can deliver CNG to the well site, we can blend natural gas, and, we can do that and efficiently power the systems at the well site. And what that does for us, by being able to manage that blending of fuel gas and CNG at the well site, we can increase the percent substitution. So we can reduce fuel costs for customers in the field. We can also reduce emissions by burning more natural gas. So in general, we believe that we get higher substitutions because we have this capability than, than other companies. After that, you've got, the NexHub and the real-time systems, and we're monitoring equipment, we're monitoring the status of equipment.
We're, you know, trying to do predictive analysis on when we need to make changes in the field just to maximize the uptime on the equipment and maximize the number of stages per week and stages per month that we get. And so we continue to add each of those into the, you know, fleets we had at Patterson-UTI pre-merger and work through all that. I would say it's still an ongoing process, and we'll work through it for the rest of the year, but we had several wins early on last year and continue to roll it out. It's just part of the normal operation these days as we've really essentially completed the integration.
Andy Smith (CFO)
Yeah, hey, Luke, I would add to that a little bit. Talking broader about the synergies and sort of what we said early on, you know, recall that of the $200 million that we expected to get, we thought that would be about a third supply chain, a third SG&A, and a third on the sales sort of integration side. You know, well site integration side. I would say that we've overachieved in supply chain, probably hit our number pretty close on SG&A, and are probably a little bit under on the well site integration, but that's largely due to market backdrop. So we've got additional opportunity there as we go forward. If the market conditions improve, I think we've got more opportunity to really increase the amount we get out of that.
Luke Lemoine (Managing Director)
Okay. That's, that's helpful. And then you both talked about the gaps in the dedicated fleets in 2Q. Is this just on natural gas or these oil basins as well? And then you talked about 3Q frack, Andy, being up from 2Q. I realize it's early, but could this be above 1Q as well in 3Q, or would between 1Q and 2Q kinda be a good starting point for now?
Andy Hendricks (President and CEO)
So we have, we have some white space in the calendar in Q2, where we have actually more than one of our E&P customers that, you know, completion has been running so efficient that we're bumping up against the drilling rig. And so, in discussions with the teams, it looks like we'll have more inventory in place in Q3. So we're just-- we're in a situation where we're bumping up the drilling rigs in Q2, and then in Q3, we'll have steadier work out of those same frack fleets.
Luke Lemoine (Managing Director)
Okay. All right. Thanks so much.
Operator (participant)
Your next question is from the line of Jim Rollyson with Raymond James.
Jim Rollyson (Director and Equity Research Analyst)
Hey, good morning, guys.
Andy Hendricks (President and CEO)
Morning, Jim.
Jim Rollyson (Director and Equity Research Analyst)
Andy, there's... You mentioned this, and it's been a pretty popular topic. You know, obviously, the gas market's been pretty soft here of late, but the setup going into next year and probably for the next few years seems to be gaining traction, both on the LNG front and the kind of data center-driven electricity implications for gas demand. Have you guys put any pencil to paper just to think about what you believe the impact will be on both frack and drilling activity as we roll into 25 and beyond on, you know, how much activity do we need to actually produce the volumes that are required based on where some of the demand estimates are? I'm just curious. It seems like we're in this short term.
People have been focused on this soft market condition, but as we go into next year, it seems like this is gonna rapidly change and tighten up markets, especially on the gas side, which tightens the overall thing. But just kind of curious your big picture view as we roll into next year.
Andy Hendricks (President and CEO)
Yeah. So, you know, we've got natural gas production, you know, along the Gulf Coast and, you know, feeding into Henry Hub, and then, of course, we have all the associated gas coming in from the Permian these days. This year, we were supposed to get another BCF in the pipelines coming out of the Permian, you know, competing against gas essentially in the Haynesville, which is why we've seen, you know, the Haynesville continue to stay soft. We don't today have visibility on any increase in natural gas for the end of 2024. We do have some natural gas customers that have been talking to us about adding a rig or increasing activity to start to plan for things in 2025.
I think we're all just trying to understand right now, you know, what does it look like in terms of more pipeline capacity coming from the Permian, and how does that compete against Haynesville Gas? Interestingly enough, I was talking to one of our customers the other day, and we were discussing takeaway from the Permian. Some of the E&Ps actually have natural gas takeaway over to California at the same time. So not all the associated gas is coming, you know, from the Permian to the Gulf Coast and hitting Henry Hub. And California is still gonna have strong demand for utilities, you know, with natural gas. You know, that gets into the whole data center discussion. Over, you know, 2025 and going forward, you know, the U.S. is gonna be exporting more LNG.
There's contracts in place for the new plants coming online, especially on the Texas Gulf Coast. The Texas Gulf Coast is gonna require more natural gas. It's not apparent that there's enough pipelines coming from the Permian that negates the need for Haynesville Gas. So it does seem like that the Haynesville Gas is gonna be required sometime in 2025 to start increasing activity and certainly going into 2026. And so structurally, you know, I'm bullish for what's happening. With LNG exports, with the increasing need for data centers in the US, with natural gas going over to California from the Permian, so that it's not all competing, you know, in the Gulf Coast area, it sets it up structurally well for 2025 and beyond.
Andy Smith (CFO)
Yep, that's kind of what I was thinking. And switching gears a little bit, just on the drilling services side for your U.S. rig business, you know, costs have obviously trended up over time for a whole host of reasons, but did notice that they actually ticked down for the first time in several quarters this quarter. And I'm just curious what the driver was and maybe how you guys are thinking about costs going forward, you know, in part in the Q2 related to the $300 daily margin drop, but also just beyond the Q2.
Andy Hendricks (President and CEO)
Yeah, and some of it's related to the change in the rig count. And, you know, our rig count in Q1 held up better than we thought it would. And so, you know, we do think we lose a couple more rigs going into Q2 from where we are today, but not a big change. So I think you are gonna see, you know, our costs because of the changes in the rig count, you know, on a quarter-to-quarter basis, kind of moving up and down. But essentially, it's, they're still relatively flat if you had a flat rig count. You know, we will see maintenance CapEx moderate as activity moderates, and then maintenance CapEx come back up as activity comes back up as well.
So, you know, all in all, you know, we think we're in line there and still producing strong free cash flow.
Andy Smith (CFO)
Great. Thanks, Andy.
Andy Hendricks (President and CEO)
Thanks.
Operator (participant)
Your next question is from the line of Scott Gruber with Citigroup.
Scott Gruber (Director of Oilfield Services and Equipment Research)
Yes, good morning.
Andy Hendricks (President and CEO)
Morning.
Andy Smith (CFO)
Morning.
Scott Gruber (Director of Oilfield Services and Equipment Research)
So staying on the rig side, Andy, if your rig count is flattish from here, you know, from that Q2 level, do we expect margins to be flattish as well in Q3 and Q4?
Andy Hendricks (President and CEO)
Yeah, I was just looking at projections again, and, you know, what we're seeing is, you know, like I said, we're gonna have a couple more rigs coming down in Q2, and I think that margins and rig count are likely to bottom somewhere in that Q2, Q3 timeframe this year. Whereas, you know, it's a little bit different on the completion side. As I mentioned earlier, you know, completions had a different circumstance, where we're gonna see their activity bump up a little bit in Q3 with less white space. So, you know, Q2 is kind of the bottom for completions for us, but on the rig side, it's probably across Q2, Q3.
Scott Gruber (Director of Oilfield Services and Equipment Research)
Gotcha. And then, you know, on the completion side, obviously, the gas side of the business is weak today, hopefully bottoming out. And obviously, you highlighted that the gaps in the schedules that will impact Q2. But just curious, you know, in Texas and on the oil side, has the business been pretty steady for you guys, or have you guys, you know, seen some reduction in activity on that side of the business as well? And if you have, you know, do you see a path to recapture some of that share in the second half?
Andy Hendricks (President and CEO)
Yeah, in the oil basins, we just remain relatively steady outside of, you know, completions, efficiency being higher than we'd planned, and bumping up against the drilling rigs and, and needing some more inventory. But we've seen it relatively steady in the oil basins. You know, everybody's talked about the decreases in gas in the Haynesville. You know, we're gonna see the Northeast moderate a little bit, but I believe that's transitory, as structurally, they just kind of get that market back into balance. Which is why, you know, I think that, you know, Q2 is likely to bottom in completions and then, you know, across Q2, Q3 for, for drilling. But back to oil, it's just been steady and, you know, oil is 80% of what happens in the U.S. market today.
Scott Gruber (Director of Oilfield Services and Equipment Research)
I got it. Thank you.
Andy Hendricks (President and CEO)
Thanks.
Operator (participant)
Your next question is from the line of Alexa Patrick with Goldman Sachs.
Alexa Patrick (VP)
Hey, good morning, team. I wanted to touch on capital returns briefly. How should we be thinking about the cadence of share repurchases through 2024? And then, is this level of capital returns something we should view as standard going forward when we think about free cash flow payout? Thank you.
Andy Smith (CFO)
Yeah, in terms of the cadence of how we intend to sort of buy back stock, I don't wanna forecast too much, obviously. I mean, we're committed to returning at least 50% this year. We've committed to returning at least $400 million, combined between dividends and buybacks. But I don't wanna give certainly too much of an expectation as to how exactly we're gonna do that. We'll remain opportunistic as best we can, but still stay within those sort of parameters and those commitment levels that we've given you. And then going forward, again, I don't wanna give too much of an expectation going into 2025. We are still committed to the 50% return, but we'll just have to judge at the time how and we expect to do that.
Andy Hendricks (President and CEO)
Yeah, the part that's exciting to me is that, you know, with the structural changes in the oil market that we've seen over the last few years and the increased level of discipline that we've seen in oil field services, we're just in a really good position to generate strong free cash flow and return cash to shareholders. And so, you know, we're still confident in our ability to commit to returning at least $400 million this year through dividends and buybacks. And what we've said, as, as Andy mentioned, is, you know, we wanna give at least 50% of our free cash flow back to shareholders, but this market's in really good shape for us to do that for a multiyear period.
Andy Smith (CFO)
Yeah, I mean, touching on what Andy just said, it's a bit of a unique situation for us right now because we're generating what we think is a pretty good amount of free cash flow. At the same time, our stock price is just not where we would expect it to be, given the, you know, operational backdrop that we have. And so we think it's a great opportunity to buy back shares in this type of an environment.
Alexa Patrick (VP)
Okay, that's very helpful. And then on M&A, briefly, you've been historically very acquisitive. How are you thinking about M&A, just with all this industry consolidation picking up? And then do you think there's any incremental opportunities for technology-focused M&A?
Andy Hendricks (President and CEO)
So in general, we've been, you know, busy over the last year plus, and, you know, for the last 8 months, focused on integration and still working on some integration. We're really happy with the structure of the company that we have right now. You know, we cover a lot of the sector between contract drilling, directional drilling, drill bits, completions, wireline, cementing, natural gas power systems. I mean, you name it, we're covering right now, and very strong in all those sectors across North America. And we have international growth opportunities with Ulterra Drill Bits, and so, we just think we're in really good shape. So there's, you know, people have asked at times, "Hey, is there anything more that you believe that you need in the company?" And the answer is no. We have everything we need right now.
We have done acquisitions in the technology space in the past, you know, relatively small to what we've done in the previous year. There may be opportunities to do that going forward. We'll just have to wait and see. But, you know, we're really focused on just, you know, running what we have today and continuing integration, continuing to capture synergies. I do think there's room for more, consolidation in the sector, and I think there probably will be companies that you see that come together, especially when you get into the companies that are smaller market caps than we are. I think you'll see that some of those companies find opportunities to pull themselves together and, and create new entities, and that's gonna be very positive structurally for the market.
As I mentioned earlier, I'm upbeat about the structure of the market today, and I actually only think it improves going forward.
Alexa Patrick (VP)
Thanks, team. That's very helpful. I'll turn it over.
Operator (participant)
Your next question is from the line of Derek Podhaizer with Barclays.
Derek Podhaizer (VP of Equity Research)
Hey, guys. Wanted to ask about that $10 million gain that we saw at a completion services. Maybe if you could expand on what that is and if it's repeatable going forward?
Andy Smith (CFO)
Yeah, I wouldn't say it's repeatable going forward. This was a legal situation we got into with one of our suppliers that finally settled. We settled it in the quarter and, you know, it's a one-time event.
Derek Podhaizer (VP of Equity Research)
Got it. And then maybe just to go back to Lou's question up at the top of the call, asking about, you know, where completion services can go from a gross profit perspective, just the fact that you have fleets going back to work, utilization picking up in the Q3. Can we get back to Q1 levels, or it'll fall somewhere between one and two Q?
Andy Hendricks (President and CEO)
I actually think we can get back to the Q1 levels, 'cause I think what you're gonna see from some of our E&P customers over the next year is they're looking at how much improvement they've been getting in frac efficiency, and now how they're short on inventory. And so you actually may see them increase, you know, drilling capacity by adding a rig here or there, just so that they can keep inventory in front of the frac spread. And that's what we need to be able to do that, is just take some of that white space out of the calendar. But I think we'll see some of the E&Ps do that.
Derek Podhaizer (VP of Equity Research)
Got it. That's helpful. Appreciate that. The last one, just an update around eFrac. Sounds like you put another Emerald fleet out there, and you're gonna be at 140,000 horsepower by midyear. Can you just discuss about, are you getting multiyear contracts here? What are the payback looks like? Any early results, indications on that R&M expense, maintenance, CapEx? Just, just help us understand more about the benefits you're seeing out of your eFrac program so far. And also, are you buying power or are you leasing power?
Andy Hendricks (President and CEO)
So today we're getting long-term agreements with customers who have multiyear drilling programs, and so that suits us really well for deployment of the, the new E fleets and the Emerald systems. Really excited about how that deployment's gone. As I mentioned earlier, you know, the startup on those operations has gone really smooth. We are actually buying the equipment in terms of the frac spread, unlike others who are probably out there leasing equipment. But we are leasing the power, because the power gets used in, in different ways, where we feel it's in our best interest to own the actual frac equipment and actually buy it with, you know, using CapEx. So you actually see the, the electric frac spreads fleets in our CapEx budget, but we are leasing the power system.
Derek Podhaizer (VP of Equity Research)
Great. Appreciate the color. I'll turn it back.
Operator (participant)
Your next question is from the line of Arun Jayaram with J.P. Morgan.
Arun Jayaram (Stock Analyst)
Yeah, good morning. Andy, maybe just to follow up. You, you guys have always taken a pragmatic approach regarding fleet renewal, and I was wondering if you could maybe comment on thoughts on incremental E fleet, you know, deployments versus the 100% gas technology. Sounds like that you were looking at. Maybe you could discuss some of the pros and cons around each of those technologies.
Andy Hendricks (President and CEO)
Sure. So, you know, we continue to roll out the E fleets this year, and we will likely continue to roll out E fleets over the next few years as well as part of our CapEx budget and retire older equipment at the same time. There is demand for the E fleets. We get agreements for multi-year projects with some of the bigger operators. And so, you know, there is demand for that. You've got certain operators that say, "Yeah, I'd really like to have the E-fleet, and, you know, it's part of our competency that we have in the company, and we like the way they run.
But we also, at the same time, don't wanna be tied to a single solution in terms of new technology. And so, you know, we are running some 100% gas recip engines that are direct drive into pumps. We do that on some jobs. We run turbine direct drive systems on some jobs as well. In general, we use those to supplement the dual fuel to increase the natural gas consumption and substitution on some of those jobs. But you know, clients still like the flexibility out there with the dual fuel. We still have some customers that have gas on some pads, but they don't have gas on all pads, and in some cases, you know, distances for CNG trucking don't necessarily make sense. And so I think you're gonna see multiple solutions.
It's, you know, Tier 4 DGB is still gonna be a strong part of the market and a large part of what we do. You'll see us continue to add electric spreads, you know, tied to 100% natural gas generators. And then, you'll see us add, you know, other newer technologies, whether it be gas recip, direct drive to the pumps, or turbines direct drive to the pumps, for various reasons, depending on what makes sense in the basin for different customers. But we have experience operating all those systems, and, we'll take a balanced approach on the new technology.
Arun Jayaram (Stock Analyst)
Great. Thanks, Andy. A quick follow-up. On the E&P side, Andy, we continued to see efficiency gains with, you know, E&Ps, you know, we're regularly touting the ability to, you know, 18-21 hour pumping hours per day, a pretty remarkable achievements. And on the drilling side, we continue to see a lot of efficiency gains, you know, faster cycle times. I was wondering, given this dynamic, you know, customers are working your equipment harder and harder, are you shifting your philosophy on performance-based contracts from day work? And talk to us on some of the ways you're adapting your contracting structure to take you know, to win in some of these efficiency gains that you're providing at the well site.
Andy Hendricks (President and CEO)
Yeah, I'll start with completions first. You know, we essentially get paid by the stage, so we, you know, the faster we get the stages out there per week, per month, the better that is in terms of capital efficiency for us. So, that's certainly a win. And on the Power Solutions, as we continue to integrate Power Solutions onto our frac fleets, you know, we can play in the arbitrage on the natural gas prices and, you know, generate, you know, additional revenue around there, and, and we get part of that fuel savings. On the drilling side, we do have some performance-based contracts in place. We also continue to work with operators for various other things.
There's technology additions that are happening on the rigs as well, and so we do believe that we continue to push up, you know, revenue per day, through the addition of technology. You know, one of the things to consider is when you're looking across all the companies, you're really apples and oranges because different companies report different services in that revenue per day. And so when we report revenue per day for our contract drilling business, we're giving you the revenue per day for the contract drilling rigs without other services blended in. But we do believe we're very competitive. You know, when we're out there, you know, bidding on work, and, you know, we are certainly up there in the top quartile of what we earn on the rigs.
Arun Jayaram (Stock Analyst)
Great. Thanks a lot.
Andy Hendricks (President and CEO)
Thanks.
Operator (participant)
Your next question is from the line of Stephen Gengaro with Stifel.
Stephen Gengaro (Managing Director)
Thanks. Good morning, everybody. Two things for me. The first, you mentioned owning the E-fleets. I'm pretty sure next year, you used to lease at least a couple of those E-fleets. Have you purchased those, or are they still on a sort of a lease-to-own arrangement?
Andy Smith (CFO)
No, we never leased any E-fleets. We did have some leased equipment. We bought some of that equipment out. We still have some small leases, but we've never leased an E-fleet.
Stephen Gengaro (Managing Director)
Okay. So I apologize. I thought there were some on that type of arrangement. So from a bigger picture perspective, you mentioned sort of the efficiencies on the frac side and how that has played into maybe a little white space on the calendar. When we think about just kind of the market, you know, in the medium term, are efficiency gains on the completion side outpacing the rig side at this point? And does that impact sort of the way we should think about the number of completion crews necessary relative to the rig count?
Andy Hendricks (President and CEO)
I think what will happen is you'll see an increase in the rig count. I think that, you know, operators are seeing, you know, companies like ourselves improve efficiencies over the last couple of years. And, you know, what they were planning in terms of inventory, you know, we're catching up on that. And so I think, like I mentioned earlier, you'll see a few that, you know, may add rigs. And part of that is because, you know, we're drilling longer laterals, and so we're on the locations a little bit longer with the rigs than we were in the past as well. And so when you add up multiple wells on a pad at longer laterals than what we drilled in the past, but then the completion is bumping up against it.
Stephen Gengaro (Managing Director)
Okay. Very good. Thank you.
Andy Hendricks (President and CEO)
Thank you.
Operator (participant)
Your next question is from the line of Saurabh Pant with Bank of America.
Saurabh Pant (Director and Equity Research Analyst)
... Hi, good morning, Andy. Maybe I'll just ask one on the e-fleet side first. Last quarter, Andy, if I remember correctly, you teased us a little bit about some technologies you are developing in-house. Can you give us a little update on that? What are you doing, if you can talk to that, and what should we expect over the next couple of years from in-house development standpoint?
Andy Hendricks (President and CEO)
So, you know, post-merger, I would say that's still pretty new. The teams have been looking at, you know, what do we think, you know, e-fleet should look like going forward and in the future. And when I say the teams, I'm talking about the experience we have in our NexTier completions and the teams that have been operating the e-fleets that we've been running, plus our teams within our current power electrical engineering division that have actually built some of the control systems and variable frequency drive houses for e-fleets in the past, and do that for our drilling systems, and have experience, you know, running .s of AC induction motors and other systems.
And then, you know, even on our drilling side, where we have, you know, manufactured and assembled drilling rigs with table management systems and, you know, power systems and battery backup systems. And so, you know, putting all those teams together puts us in a unique position to take a fresh look at what we think eFrac needs to look like. And so I'd say it's still early days, but I am excited from what I've been hearing from the workshops that the teams have been running. I don't think you'll see anything new from us this year, 'cause it does take time to, you know, engineer and manufacture. But, you know, we'll keep you posted as we work through it.
Saurabh Pant (Director and Equity Research Analyst)
Okay. No, that's helpful, Andy. Thank you. And then, one, Andy Smith, maybe for you. I know you reiterated that at least 40% EBITDA to free cash flow conversion outlook. Can you give us a little help on the moving pieces within that, Andy? I know you got it to the CapEx number. I'm assuming that's unchanged. Maybe a little bit color on working capital, cash taxes, anything else that we should be mindful of as we think about conversion?
Andy Smith (CFO)
Yeah. So, working capital, again, will fluctuate throughout the year. Recall, if you recall, in the Q4 of last year, we received a relatively large prepayment from one of our customers. That has worked itself off in the Q1. Now, what will happen, that's again, it's a large customer, it will, we'll rebuild some receivable from that customer over the course of the Q2. So I would expect that the Q2 is a little lighter than the Q1, but then we'll kind of get back to the same sort of working capital performance that we had in the Q1 and the third. And then in the Q4, depending upon what they decide to do, and historically, they've decided to sort of advance pay in the Q4.
We'll see if that comes through this year or not. So, that's not really been counted on in terms of our free cash flow conversion, so that would be upside. But, you know, I would expect that, you know, you'll see it kind of working capital will be a little bit less of a source in the Q2, and then more of a source of cash in the third and Q4.
Saurabh Pant (Director and Equity Research Analyst)
Okay. Okay, perfect. And anything on cash taxes we should be mindful of, Andy, for this year versus last year?
Andy Smith (CFO)
Cash tax is pretty negligible. You know, we're planning for somewhere in the neighborhood of $20 million-$30 million this year of cash tax.
Saurabh Pant (Director and Equity Research Analyst)
Okay. Okay, awesome. Okay, Andy, thank you. I'll turn it back.
Andy Smith (CFO)
Thank you.
Operator (participant)
Your next question is from the line of Waqar Syed with ATB Capital Markets.
Waqar Syed (Managing Director of Energy Technology and Services and Head of Research)
Thank you for taking my question. Andy, in terms of active pressure pumping fleets, how have they changed over the last couple of quarters?
Andy Hendricks (President and CEO)
Well, morning, Waqar. It's actually hard to quantify because we've had to take some fleets and put them together to do Simul-Fracs and Trimul-Fracs. And so, you know, the fleet count actually changes on a month-to-month basis internally as we look at the numbers. And so we really try to stay focused more on, you know, hydraulic horsepower hours in terms of how we look at the business. And so, you know, internally, it becomes less of an interesting number to try to assess how many fleets we have out there, and more about how much active horsepower that we have out there. And when we're looking to do calculations on the business, like I said, we're using hydraulic horsepower hours, because that takes into account flow rates, pressures, volumes, and how much time we're out on location doing things.
Waqar Syed (Managing Director of Energy Technology and Services and Head of Research)
So maybe if I ask in a different way, how has the manned horsepower changed in the last couple of quarters? Has it remained relatively similar and all, you know, the changes in revenues are more a factor of that horsepower having less utilization? Or is it more that, you know, some of the horsepower you've set aside as well because of weaker demand?
Andy Hendricks (President and CEO)
Yeah. So, if you look at it across all the horsepower that we're running, you know, there's still strong demand for the electrics. Total horsepower active that we're using has come down a little bit, just because of the softening in the market. And also a little bit of softening in pricing that you've seen and not new to anybody in the industry. But I expect, you know, that really kind of bottoms in the Q2, and we see a little bit of an inflection in the Q3.
Waqar Syed (Managing Director of Energy Technology and Services and Head of Research)
Okay. And do you... Could you provide us a color with, like, what's the mix of e-fleets, you know, Tier 4 DGBs, and then Tier 2 dual fuel and Tier 2 diesel?
Andy Hendricks (President and CEO)
... Yeah, we have 140,000 horsepower that we'll have of E this year, and overall, it's about 80% of our fleet can burn natural gas. So that leaves you with about 20% that are just Tier 2, that don't have the ability to run dual fuel. And as we progress through this year and next year, you'll see that just kind of fade away and drop out. You'll see us, over time, I believe, you know, slowly reduce the amount of horsepower overall, just because, you know, we just don't need that Tier 2 anymore. And we're gonna be disciplined about how we add, you know, new technology as we go.
Waqar Syed (Managing Director of Energy Technology and Services and Head of Research)
Okay, great. Well, that's all for me. Thank you very much.
Andy Hendricks (President and CEO)
Thanks.
Operator (participant)
Your next question is from the line of Keith Mackey with RBC Capital Markets.
Keith Mackey (Director of Global Equity Research, Oil and Gas Services)
Hi, good morning. Just wanted to ask about rig pricing. Specifically, Andy, how are conversations unfolding on the rig side? You know, certainly things have been a little bit more stable than they might have been in prior cycles, but rig count has come down, and there is quite a bit of impending consolidation, especially in the Permian. Maybe some are looking to use that to get you know, discounts on rigs. So just curious how those conversations are unfolding, and what is your message or your mechanism to maintain an appropriate price or what you view as an appropriate price in this market that's maybe driving some of that stability?
Andy Hendricks (President and CEO)
Yeah, I think what you see in the market today is when we talk about Tier 1 super-spec rigs, that pricing is stable. So even though some of them may not be working right now, just because the changes in the market with consolidation that you're seeing, those rigs will go back to work at some point. As the consolidation process happens, you'll see lower-tier rigs drop out of that consolidation process and get replaced back to Tier 1 super-spec. So what we've seen is at the Tier 1 super-spec, that market has remained relatively stable.
Keith Mackey (Director of Global Equity Research, Oil and Gas Services)
Okay, perfect. That's it for me. Thanks so much.
Andy Hendricks (President and CEO)
Thanks.
Operator (participant)
Your next question is from the line of John Daniel with Daniel Energy Partners.
John Daniel (Founder and President)
Hey, good morning. Andy, you noted that the market structure is likely to improve, and I think we all believe and hope that activity starts to rebound late this year a little bit, but probably a bit more next year. I'm just wondering, when you have that, the combo of those two things, it would seem that things could tighten relatively quickly. So what would your approach be to pricing?
Andy Hendricks (President and CEO)
Well, typically, you know, in a very disciplined environment, as activity moves up, pricing moves up.
John Daniel (Founder and President)
Sure.
Andy Hendricks (President and CEO)
When you see... You know, when you look at the Tier 1 super-spec rig market, historically, that's how it's played out. As that, the demand for those rigs have increased, you've seen increases in pricing along with activity. And, you know, it's interesting how the, on the completion side, the market has structurally improved over the last few years, and I think there is a bifurcation in the market. And so, you know, as leading technology players find themselves in higher demand, then I think you're gonna see those same companies have the ability to move pricing up at the same time as well.
John Daniel (Founder and President)
Okay. I mean, I figured that as much. I just didn't know with the current sort of pressures by some within the E&P industry to sort of eke out concessions and take advantage despite $80 oil, if there would be kind of a leading question, but maybe a bit more incentive to push pricing a little bit harder.
Andy Hendricks (President and CEO)
Yeah.
John Daniel (Founder and President)
Do you want-
Andy Hendricks (President and CEO)
I think all of us in the industry have, you know, discussed over our last couple of calls is, you know, as the natural gas markets have softened, that there's been a softening in pricing there, as well.
John Daniel (Founder and President)
Yeah.
Andy Hendricks (President and CEO)
I think you're hearing from the E&Ps that they've got some concessions. But I really think at this point, you know, especially given our view of where we are and when we think our various service lines are gonna bottom out, that, you know, you're, you're hearing that concessions have happened. I don't think you're gonna hear a lot about concessions going forward.
John Daniel (Founder and President)
Right.
Andy Hendricks (President and CEO)
I think that, you know, pricing is really stabilized at this point, and with any activity increase in your Tier 1 super-spec rig or e-frac, or, you know, higher-end technology and completions, that you're gonna see pricing move up on those.
John Daniel (Founder and President)
Cool. Okay, and then I know you, you mentioned, in response to one question, that you'll likely expand the E fleets next year. Not looking for you to necessarily quantify that, but given the lead times on various components, have you, have you gone ahead and started placing those orders? And what are they telling you in terms of when you get them?
Andy Hendricks (President and CEO)
So we've been working with suppliers, and so we understand their ability to deliver, and their ability to, you know, meet our needs as we get into next year. And so, no, no real challenges there for us delivering more, next year. I would say that, you know, our, our teams are working well with the suppliers and no issue. And it's just... You know, we've mentioned it before, now that we're a larger company in terms of completions and with the size and scale that we have, with the demand on the new technology, we certainly want to be a part of that. And so we will continue to add, you know, electric and other new technologies a little bit at a time, over, you know, in a measured way, over the next few years as part of our CapEx budget.
John Daniel (Founder and President)
Okay. And then the final one for me, just going back to the comment you made about market structure likely to improve. I'm assuming you were talking about the completions market, but by any chance, were you also applying that to the drilling space as well?
Andy Hendricks (President and CEO)
John, I appreciate the clarification because I was really leaning more towards completions and completions-related services, you know, not just hydraulic fracturing, but you've got cased-hole wireline, you've got others. I think over time, you'll see some of the smaller companies or smaller public market cap companies start to come together, and that'll just structurally improve the market over the next year or two.
John Daniel (Founder and President)
Got it. Thank you for including me.
Andy Hendricks (President and CEO)
Thanks.
Operator (participant)
At this time, there are no further audio questions. I'll now hand the call back over to the presenters for any closing remarks.
Andy Hendricks (President and CEO)
Thanks, Tamika. I'd like to thank everybody that dialed into the call today. We're really excited about where we are in the market and our ability to generate strong free cash flow and return that to shareholders, even in a relatively steady market. So thanks a lot.
Operator (participant)
This concludes today's call. Thank you for joining. You may now disconnect your lines.