Patterson-UTI Energy - Earnings Call - Q3 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Patterson UTI Energy Third Quarter twenty twenty 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. I would now like to turn the call over to Mike Ziffler, Vice President, Investor Relations.

Please go ahead.

Speaker 1

Thank you, Denise. Good morning. And on behalf of Patterson UTI Energy, I'd like to welcome you to today's conference call to discuss the results of the three and nine months ended 09/30/2020. 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 third quarter conference call. We're pleased you can join us today. Our financial results during the third quarter exceeded consensus estimates as our contract drilling business continues to prove its resilience in a downturn and our pressure pumping and directional drilling businesses showed improvement in the third quarter. Based on our customer engagement, we expect activity will continue to improve through at least the 2021.

Assuming commodity prices remain around current levels, we expect our profitability will be at or near an inflection point in the fourth quarter and will be higher in early twenty twenty one. I will now turn the call over to Andy Smith, who will review the financial results for the quarter ended September 30. I'll then comment on our operational highlights as well as our outlook before opening the call to Q and A. Andy?

Speaker 3

Thanks, Andy. As set forth in our earnings press release issued this morning, for the third quarter, we reported a net loss of $112,000,000 or $0.60 per share. Adjusted EBITDA was $43,300,000 which significantly exceeded capital expenditures of $13,400,000 Our operating results, combined with a further working capital release, led to a $57,000,000 increase in our cash balance. Our cash balance at the end of the third quarter was $3.00 $4,000,000 Activity levels have recently improved across all of our business segments. With the increased activity levels, our drilling CapEx forecast, which was expected to be $100,000,000 in 2020, is now expected to be $110,000,000 All other CapEx expectations remain the same, bringing our total CapEx expectation to $150,000,000 for 2020.

Of the $110,000,000 of drilling CapEx, dollars 49,000,000 was spent in the first quarter before the downturn began. Before I turn the call back to Andy, for the fourth quarter, we expect SG and A of approximately 22,000,000 We expect depreciation, depletion, amortization and impairment expense to be flat quarter over quarter at $157,000,000 and an effective tax rate of approximately 13%. Lastly, we will be paying our quarterly cash dividend of $02 per share on 12/17/2020, to holders of record as of 12/03/2020. With that, I will now turn the call back over to Andy Henders.

Speaker 2

Thanks, Andy. While the second quarter for our industry saw a historic decline in activity, I was pleased to see The U. S. Rig count stabilize in the third quarter and completion activity increased from the low at the end of the second For Patterson UTI, even though our activity has declined significantly from the beginning of the year, I am also pleased with the operational performance of each of our business segments and our continuing rollout of new technologies. In contract drilling, our average rig count for the third quarter was 60 rigs, including 17 rigs that were idled or contracted.

The proportion of rigs that were idled or contracted increased to 28% in the third quarter and 20% in the second quarter. This was dilutive to both average revenue per day and average cost per day during the third quarter as idled to contracted rigs generally receive reduced day rate but also carry minimal associated costs. Average rig revenue per day during the third quarter was $20,920 down from $22,970 in the second quarter. In addition to the dilution from the higher proportion of rigs receiving reduced rates, revenue per day was also impacted by less lump sum early termination revenue during the third quarter. Average rig cost per day during the third quarter was $10,750 down from $11,690 per day in the second quarter.

In addition to the dilution from the higher proportion of rigs on standby at minimal costs, operating costs benefited from a credit for sales and use tax during the quarter. Average rig margin per day of $10,170 in the third quarter benefited from unexpected lump sum early termination revenue and the credit to operating costs for sales and use tax. Excluding both of these benefits, average rig margin per day would have been approximately $9,000 which exceeded our expectation. As of 09/30/2020, we had term contracts for drilling rigs providing for approximately $3.00 $5,000,000 of future day rate drilling revenue. Based on contracts currently in place, we expect an average of 43 rigs operating under term contracts during the fourth quarter and an average of 35 rigs operating under term contracts during the four quarters ending 09/30/2021.

Drilling activity stabilized during the third quarter and started to improve late in the quarter. Our rig count has improved to 61 rigs today from a low of 57 rigs in late August. We are optimistic about the outlook for drilling activity in the fourth quarter and expect to see an increase in activity later in the quarter. We expect to average 61 rigs for the fourth quarter with the proportion of rigs idled or contracted in the mid teens. By the end of the fourth quarter, we expect to be at 63 rigs, of which approximately 10% will be idled or contracted.

Average revenue per day in the fourth quarter is expected approximately 2% to 3% due primarily to the expected absence of lump sum early termination revenue in the fourth quarter. Average cost per day in the fourth quarter is expected to be negatively impacted by having a lower proportion of idled but contracted rigs. Additionally, our expected fourth quarter rig operating costs include approximately $500 per day of rig reactivation expenses. In total, average rig margin per day is expected to be approximately $7,500 per day in the fourth quarter. Going forward, our focus is shifting from stacking to reactivating rigs in the fourth quarter and the 2021.

We are in a great position to do so given our broad customer base and our fleet of super spec walking rigs such as our advanced Apex XK that we expect to be in demand as operators return to work. Across The U. S. Contract drilling industry, we believe that while pricing will be competitive as the industry emerges from the rig count bottom, we expect the financial hurdle of rig reactivation expenses should promote pricing discipline as we move into next year. Looking ahead, our expectation for the contract drilling industry is that pricing discipline will be similar to what we saw in 2016 and 2017.

As the rig count moved up from the bottom of the cycle, drilling rig dayrates also increased. And in this cycle, we expect to see more performance based contracts, which create a better balanced economic win win with operators. Turning now to Pressure Pumping. We averaged five active spreads during the third quarter, up from four active spreads in the second quarter. Pressure Pumping revenue for the third quarter increased to $72,000,000 to $59,500,000 in the second quarter, and Pressure Pumping adjusted EBITDA improved to $6,200,000 to Our active spreads were more highly utilized during the third quarter, which when combined with further improvement in efficiency led to a more than 30 increase in average stages per spread in the third quarter.

This efficiency improves our competitive position within the pressure pumping landscape. For the fourth quarter, we expect to average six active spreads and pressure pumping revenue is expected to improve approximately 10% sequentially. However, with lower utilization during the fourth quarter due to expected slowdowns around the holidays, adjusted EBITDA is expected to decrease to approximately $4,000,000 We are encouraged by the attrition occurring throughout the pressure pumping industry through mergers, bankruptcies and consumption, moving the industry directionally closer to a supply and demand balance. Turning now to Directional Drilling. Revenues were $10,300,000 and the gross margin was approximately $500,000 We were able to increase activity and gain market share in what was essentially a flat rig market during the third quarter.

Our market share increase was a result of the enhanced performance of our new technology, the mercury measurement wall drilling system and the new impact directional drilling motor sizes, which were introduced in the first quarter of the year. We also continue to make great progress in the area of remote measurement while drilling operations, whereby we were able to take an MWD technician off the rig and perform the job from our real time P10 plus performance center here in Houston. During the third quarter, we performed remote MWD operations on 28 wells, which equated to 109 MWD runs and 328,000 feet of wellbore footage drilled. For the fourth quarter, we expect Directional Drilling revenue of approximately $14,000,000 and we expect gross margin of approximately $1,500,000 Turning now to our other operations, which includes our Rental, Technology and E and P businesses. Revenues improved during the third quarter to $9,800,000 from $8,000,000 in the second quarter.

Gross profit during the third quarter was $1,200,000 For the fourth quarter, we expect revenues and gross profit to be similar to the third quarter. Before we open the call for questions, I'd like to give you an update on our technology and ESG progress. Technology and performance will be an increasing differentiator as we move into a recovery and we continue to move forward with remote operations capabilities for reduced costs and automation technologies for improved performance, wellbore quality and repeatability. These improvements are enabled by the digitization of the high frequency data and metadata originating from the well site operations as well as by digitalizing our processes and workflow. These technology investments are capital light and operate in a cloud data environment where, for example, in contract drilling and directional drilling, they can be added to our existing high performance super spec rigs such as our popular APEX XK.

As well, we believe that we have a leadership position technologies that enable the use of alternative fuels for cost savings and for reducing emissions. We are seeing increased interest through more operator focus on ESG and carbon emissions in a number of our technology solutions. For example, in contract drilling, we have the largest fleet of 100% natural gas engines available in The U. S. We are the first contractors to operate a rig with lithium battery hybrid hardware and energy management software and automated energy transfer systems that can replace a complete generator using energy storage.

Our electrical engineering and technology division, Current Power, we offer a solution and have experience tying directly into high line utility power for an emissions free drilling operation at the well site. And our pressure pumping division, Universal, is one of the most experienced frac companies operating natural gas dual fuel engines. All this combines with Patterson UTI's technology leadership position in the increasing importance of ESG in our industry and with an eye on the future energy transition. We can continue these capital light and technology focused investments with a long term perspective because at Patterson UTI, we have a strong balance sheet, produce positive cash flow and have highly effective operational themes. With that, we'd like to thank the hardworking men and women who make up this company as they have worked diligently and effectively through a very challenging time, both in our industry and in general.

And we appreciate your continuing efforts. Denise, with that, I'd like to open the call up for questions.

Speaker 0

Your first question comes from Sean Meakim with JPMorgan. Your line is open.

Speaker 4

Thanks. Hey, good morning.

Speaker 3

Good morning, Sean.

Speaker 4

So as we think about the '21, you've indicated that we expect to see continued activity in that time that seems consistent with what we've what we've heard. You know, you're moving up your spread count in the fourth quarter in anticipation of that, and so there will be a little bit of a lull around the holidays. Can we just talk about confidence level in terms of being able to drive improving profitability for pressure pumping in the first quarter? And as we look beyond that, as assuming that the that the frac crew count for the lower 48 moves towards the maintenance level, which is substantially higher than where it is today, Andy, I'd love just to get your thoughts around how the industry will progress from being able to currently reactivate fleets at minimal cost versus requiring some form of remuneration from your customers or, to reactivate crews that have a higher threshold to bring them back to market?

Speaker 2

Hey, good morning, Sean. So I'll try to circle back on all that. So in pressure pumping, first off, our philosophy is if we're looking at activating a spread, we need this to be cash flow accretive to the business. And when you look at the activations that we've made, we've been improving the margin in the business. And so the increase in activity and the other spread that will activate where we'll average up to six in the fourth quarter is not so much for looking forward to 2021, but because of the work that we have in the fourth quarter now certainly, you know, we'll go forward into '21 as well.

I believe just because of the increasing activity in general and increasing rig count that we're seeing. But you know, we're activating another spread going into the fourth quarter because we believe it's going to be cash flow accretive to that business. In terms of 2021, you know, have some visibility going into the fourth quarter, And we don't normally call out projections that far but we thought because we have visibility. We would go ahead and discuss that today- you know I think though in terms of pressure pumping margin. As we continue to activate spreads and it's accretive to cash flow, it also improves the margin and we have more fixed cost coverage in that business as well in terms of the G and A for that business.

So I think that helps and I'm certainly positive and upbeat on how our teams at Universal Pressure Pumping is performing these days.

Speaker 4

Okay. Fair enough. I appreciate that context. And then so on the drilling side, you'll see improving activity, not the same magnitude, maybe as completions early on. And you indicated that you think things will be similar to the last cycle in which, directionally, as as activity improves, you'll see a commensurate improvement in rates.

As we think about how that flows through the model where you've got a mix of, you know, near term idle idle rigs going back and they're on rate going back to work. Eventually, we added new rigs, presumably at lower gate day rates than the average. There's often that point in cycle where your average rate may actually come down for a period before it reverts higher. Just let me hear how how you see those competing forces unfolding in the first half of next year.

Speaker 2

Yeah There's certainly a number of moving parts, know, as we come off the bottom and go into more recovery mode with our rig count increasing in the fourth quarter and then the first quarter. As you mentioned, we've got the rigs that are idled or contracted. Those will go back to work. Costs roughly neutral. As activity in our drilling business moves up, we get better fixed cost coverage.

That's positive for the margins. We also have all the ancillary charges that we have on the rigs as well. And so you know, there's a number of things happening. Sure leading edge day rates are going to get more competitive for a period. But like we saw in 'sixteen and 'seventeen as we came off the bottom there, happens for a period of time.

But then as the rig count moves up, we see those day rates move up as well. We said that we're basically going to get to an inflection point in the fourth quarter and profitability moves up in the first quarter next year, primarily driven by the drilling business because of its relative size within our organization.

Speaker 4

Got it. Great. Thanks, Andy.

Speaker 0

Your next question comes from Chris Voigt with Wells Fargo. Your line is open.

Speaker 2

Thanks. Good morning. Good morning.

Speaker 5

So on rigs, I guess, I wonder if you can comment on the nature of dayrate discussions currently. It sounds like you have visibility for an increase in the fourth quarter and the first quarter. Are we still talking mostly direct negotiations? Or are there any competitively bid kind of rigs coming to market at this point?

Speaker 2

So just to clarify, we have visibility to activities moving up in the fourth quarter and the first quarter. I think that because we are at essentially a bottom in U. S. Rig count activity as an industry, there's still going to be some competitive pricing out there. But with the activity improvements we're seeing, that's why we see an inflection in the profitability in the fourth quarter and moving up in the first quarter.

But there will be some competitive day rates out there that are bid. But remember, we also have our ancillary services that we provide on top of those day rates. So we see that as a positive.

Speaker 5

Sure. And then when I think about the last cycle and the tailwind for rates, I think the upgrade piece of that was a pretty big driver. They need to, you know, create more super spec rigs. Just curious, Is there any more of that- on on the horizon for you guys as as more rates go back to work other new technology that anything along the lines of ESG or the stuff that operators gonna want to put on to rates. That might be a tailwind for rates going forward.

Speaker 2

I certainly don't see it as a tailwind for well, it's certainly positive for rates. Let me clarify that. Know, anything that customers want us to do in the area of ESG and technology is positive for those day rates, whether it's adding 100% natural gas engines or it's adding our HECOcell lithium battery hybrid energy storage solution, that's positive for the day rates. And I think we'll have to wait and see how much interest it moves into in 'twenty one, but there's certainly interest today, and we're in those types of discussions. And we're operating some of that equipment today.

I think that you know, the ancillary equipment that we provide, not just the new technology, but, you know, the ancillary equipment that we've been providing for years, has still been very supportive. And that's why, you know, for the fourth quarter, we're seeing average revenue per day still above $20,000

Speaker 6

Your

Speaker 0

next question comes from Taylor Vergil with Tudor, Pickering.

Speaker 7

Thanks, and good morning. First question is on some of this or the wave of upstream consolidation we've seen over the past few months. On the one hand, it's creating fewer customers for you, which is not going be a good thing. The other hand, you've got larger, well capitalized or better capitalized players that probably are more interested in higher technology and efficiency improvement service offering that you have. And so as you blend that all together, I'm just curious how you think this wave of upstream consolidation is going to impact your business over the next twelve to twenty four months?

Speaker 2

Well, we're very fortunate Patterson UTI and our teams have done a great job where we have a very broad customer base from the largest oil and gas companies that you buy gasoline from at the corner down to private companies that you may have never heard of. And this broad customer base has always been a positive for us. It was a positive in the downturn until rig count stabilized in the third quarter and it's going to be a positive for us in the recovery. Sure, some consolidation creates some near term challenges, but we still have a very large number of customers that we work for. And I think while that does create some near term challenges with consolidation, it probably creates some long term stability in the market as well.

So I think it's neutral for us to have the consolidation that we're seeing when I look at our customer base. So I don't see a big concern there for us.

Speaker 7

Okay. And my follow-up is on free cash flow. Over the past, really, several quarters, you've been generating some pretty healthy free cash flow, growing the cash balance, and a lot of that's been chewing through some legacy contract drilling backlog and working capital benefits moving forward. Both of those benefits are likely to turn the other way. And so I was hoping you could help us think about free cash flow expectations over the next six to twelve months and whether you think you can stay positive from a free cash flow perspective in that time frame.

Speaker 3

Yes. I mean, look, near term, I certainly think that our results should outperform our CapEx. On the working capital side, as activity trends up, we will invest a little bit more in working capital. But I don't suspect that it will be enough to overwhelm sort of the spread between what are our sort of operating results and our CapEx. So I would expect to remain free cash flow positive.

Speaker 7

Your

Speaker 0

next question comes from Scott Gruber with Citigroup.

Speaker 2

Good morning.

Speaker 6

I want to come back to the rate inflation comments during the upcoming cycle. Andy, you touched on the technology and ancillary service benefits. But do you think that quality companies such as Patterson will also need to be more demanding in terms of pushing for improved pricing at a certain point in the recovery? I know I know we're not there today, but at a certain point, do you think you need to be more demanding? Do you think, or do you think that pricing power, you know, could swing back your way, you know, without demanding price increases?

I'm just wondering whether you really need to show a willingness that you're going to to lose share. Obviously, the the first request for any type of price increase will invariably be denied. But do you do you think that you and and other quality peers just need to, at a certain point, sit back and say, you know, we're just not gonna work for these rates any longer and show a real willingness to to lose share?

Speaker 2

So I think it's interesting because we've never been a company that focused on market share. We've always focused on the margin. In doing so, though, we ended up gaining share in the downturn in all of our product lines. But we're always focused on the margin. So yes, there will be times during 2021 that we actually lose out because we are pushing pricing.

You know our teams are are always doing the best they can to push pricing. To where it makes sense and so I think that- you know we're going to keep that same focus to stay focused on the margins.

Speaker 6

Yeah. I'm just wondering whether there's, you know,

Speaker 8

a point

Speaker 6

where, you can put a little more emphasis on on the pricing side and say, hey. We need more. You know, we can go to work, know, put a put a fleet back to work at a positive cash margin here, but it's just not giving us the the returns that we're really looking for, you know, on a on a long term basis. So is it is there an inflection point? Or do you get to a certain rig count and just say enough is enough?

You know, we need to step up in pricing from the week beyond this level and what that level could be.

Speaker 2

It'll happen in 2021. Think similar to how it happened in 2016 and '17. Know, when we're coming off the bottom, you know, there's always that competitive nature. Everybody wants to get their rigs back to work. But once you start putting rigs out, then discussions start to change, and I think pricing will move up in 2021.

Speaker 6

Gotcha. And then just in terms of the cadence of recovery, I guess, one, do you think there's going to be inflection in the cadence upon a budget refresh in 1Q? And secondly, yeah, think the current forward strip for oil and gas. But when do you think we can get back to those maintenance levels of activities? Is that possible in

Speaker 3

the '21?

Speaker 6

Is it more second half or two uncertainty?

Speaker 2

You know, it appears that the '21 and the activity increases that we're seeing are really about a mixture of different philosophies at different customers. You've got some customers that just need to go back and drill some wells and maintain some production. You got some customers that feel like they're profitably economic at this point on some of their fields and some of the pads that we're going to go back and drill. So it's two different mindsets. So I think that drives the first 2021.

I think that the second '21, you know, it's really gonna be more about the macro. What are global economies doing? Are we finally starting to open up and move past all this mess that we've all been dealing with? And I'm hopeful there. I think we're all tired of it, but I'm hopeful that as we get into the 2021, the economies are more open and that's going to drive energy demand.

Speaker 6

We're all open. Thanks for the color, Andy. Appreciate

Speaker 2

it. Thanks.

Speaker 0

Your next question comes from Kurt Hallead with RBC. Your line is open.

Speaker 9

Hey, good morning.

Speaker 2

Good morning, Kurt.

Speaker 9

So, Andy, you made a you made a reference earlier on about, you know, increased performance related, you know, fee contracting and- revenue stream and so on so forth so. Sorry to give us an update on that I think you referenced some percentage I think in the last quarter. Want to yell at was progressing- here in the third quarter then. Maybe I I see that evolving as you get into 2021.

Speaker 2

So this quarter we have about the same percentage of non traditional day rate contracts as we had last quarter, which is about 30%. I think that's you know, will be similar in the fourth quarter. Will be more into 2021. As you know, rig count improves a little bit more than I think we'll have that kind of opportunity. I think that.

In the discussions we're having with customers today. They're intently focused on, you know, the day rates and trying to get the best deal they can, but I think that will shift. In 2021 as more rigs go back to work, and I see that we're going to have more opportunity to have more of these nontraditional day rate contracts, which I think are more of a win win, not just for us, but drilling contractors in general. So I can see that happening as we get further into 2021.

Speaker 9

Great That's great. And you know you made you made a reference both in your prepared commentary and in the press release about the lithium battery powered and energy storage dynamic. I think that that that relates to drilling rig itself. Right? So what what yeah.

Where it's always been a fairly slow evolution for the industry to adopt new ways of doing things. Right? And it took, what, a full, almost ten year period for the EP industry to fully, you know, embrace the AC rate, dynamic and make that the rate of choice for virtually every every player. So I don't Could you put this lithium battery powered dynamic into context for us and historic context for us and give us some sense of how quickly maybe this this go around if there's gonna be an acceleration in that adoption and and when that you know when that- acceleration might start to occur.

Speaker 2

So you know some of these changes don't happen very fast at the bottom of the cycles that. Since we have visibility that we're coming off the bottom I think we're going to see some nice uptake in a number of these technologies. The EcoCell lithium battery hybrid storage system that we have, it also comes with an energy transfer automation system that moves the energy between the engines and the lithium battery storage system. And this can be put on any of our APEX rigs. And the good news is this is all relatively capital wide investments compared to the investments that we've made in past years.

And so that technology as well as others, which are even lighter on the capital side, are exciting for us because we can improve the performance of the operation. We can save an operator money on costs. We can reduce emissions in a number of these technology cases. And I think these are all the pluses for us. It makes us very competitive out there, and it allows us to push rates in places as well.

Speaker 5

And thanks, maybe that as a follow-up.

Speaker 9

Are you seeing that, you know, the oil and gas operators are now To require lower emission standards from their frack and drilling contractors. I

Speaker 2

think it depends on the operator I think you see some operators moving in that direction I think that way will continue, but I think it's still very early days. And so there's still upside there for years.

Speaker 6

Okay. Thank you.

Speaker 0

Your next question comes from Jacob Lundberg with Credit Suisse. Your line is open.

Speaker 10

Hey, good morning, guys. Thanks for taking the question. I wanted to start off by just kind of following up on the performance based contracts. Could you remind us how you structure your performance based contracts first? And then secondly, any color in terms of how daily margin on those contracts looks relative to traditional would be helpful.

Speaker 2

Yeah in terms of structure what I said before is we do various things and it really depends on the operator and what their focus is. In some cases, these are indexed to commodity. In some cases, they might be about. Footage per day. How many wells per month, you know, in that kind of term.

In other cases, it might be tied to reduce downtime, reduce non productive time at the well site, so it really depends. On the focus of the operator and what they're trying to accomplish and what they're trying to improve. And I certainly wouldn't want to get into a discussion about what it can do for our margins, but we wouldn't do it if it wasn't accretive to margins.

Speaker 10

Okay. Fair enough. I guess second unrelated question then. Curious what you're seeing in terms of appetite to add rigs kind of bucketed by customer type. So is there a particular type of customer where you're seeing more or less willingness or aggressiveness in their plans to kind of add rigs over the next couple of months?

Speaker 2

Well, think this is similar to previous downturns where your largest E and P companies out there have very, I'll say, budgeting processes to go with their size. So they take some time to make some decisions and react. And it's going to be your more nimble private companies and your more nimble publicly mid tier companies that are going to move quicker off the bottom. I think that's what we're going to see. And I think you'll see that in the rig count data as things become more public.

But over time, you start to see the larger companies kick into gear as well. So we're very fortunate in the broad base of customers that we have today. And like I said before, hats off to our marketing and operations team to put that customer base in place in all of our businesses.

Speaker 10

All right. Thanks. I'll turn it back. Thanks.

Speaker 0

Your next question comes from Blake Gendron with Wolfe Research. Your line is open.

Speaker 11

Yes. Thanks. Good morning. So my question is kind of on the same line. There's a lot of other questions that have been asked.

But the exercise in the last cycle or maybe last several cycles was this is what a Tier one rig is. This is what demand is. And so we kind of back into utilization. If we were to appreciate the fact that Tier one and those goalposts have shifted even from cycle to cycle and now you're starting to layer on these digital and ESG type considerations, I know that these are capital light add ons, but I would imagine you've been doing this a long time. Not all of these digital and ESG offerings are really the same.

If you were to designate sort of a, call it, smart rig contingent, have you tried to itemize or tried to figure out how many of

Speaker 5

these rigs are actually in

Speaker 11

the market being, marketed today? Just so we could maybe try to back into a utilization level needed, to to start seeing some bifurcation in the pricing.

Speaker 2

Yeah I think it's you know, it's still early, and I think it's probably difficult to get visibility on, you know, especially across the industry. What's out there and what's happening? I will say this. I think that the rig this the rig discussions today begin with the structure of the rig. And you guys know I keep calling out the Apex XK.

We also have our XC and PK, but it really starts with a discussion on what the rig structure looks like and what's the clearance under the floor. Can we get back on the pads that we were on previously? Can we walk over and across various wellheads and production equipment on a pad? And what's the flexibility there? And that's why our Apex XK has been so popular in the market because you have a draw work up design, you have a lot of clearance underneath, and you can move around the path.

And that's really the base of where all these discussions start. And after that, you start to get into what can you do to reduce fuel costs, what can you do to improve emissions and help the operator on their ESG score. And then what does remote operations do to reduce costs, and what does automation do to improve performance, efficiency, and repeatability and drill better quality wellbores? And so every operator has a different take on what's important to them right now. And so it's hard to itemize technologies for those various reasons, and you're going to see rigs that are out there working with various levels of technology depending on the operate.

Speaker 11

So just following on that answer there with the emergence of Simon frac of the nascent, crew sizes are getting bigger on the frac side. Are the wellheads and the production stacks are are they getting bigger as well where, you know, clearance becomes an even bigger issue here in the coming quarters and years?

Speaker 2

I think Clarence is a bigger issue this year because you've left pads that you want to get back on. You've done things on those pads. You've gone back and fracked wells. Maybe you haven't completed all the drilling on those wells. And so now you've got to get back around wellheads and trees and production equipment.

And so that's why I think a lot of these discussions really start with, let's talk about the clearance and how you can walk around these various systems on a pad and have that mobility in place. And then the discussion is around laying around technology.

Speaker 11

Understood. One more quick follow-up, I can. Just on the directional drilling side, you know, we've we've seen, obviously, rotary steerables become a more involved technology. But in the lower 48, it seems like motors are becoming increasingly capable to do the same things. You have a bundled solution.

You know, some of your drilling peers have a bundled solution. How how can the third party directional drilling companies really compete in this lower activity environment? And and what are you seeing competitive lead that would suggest that they'll hang around or that we could see some attrition on on that side of the market?

Speaker 2

Well, I think the, you know, the most compelling data right now is that we've been gaining share. And we've been gaining share in a flat rate environment. The new technology has proven to be very reliable. And when other companies are having challenges and we get a phone call, we replace them and we keep that rig and we keep that operation. And so that team has been performing great.

And I'm still very optimistic about their growth potential. Even though our drilling activity is moving up in the fourth quarter and the first quarter, I think our directional drilling business can grow at a faster rate than the rig count. Again, that's still a capital light business. So I think with what we're doing there in terms of performance on the technology we introduced this year, combined with the technologies of remote operations and automation that will tie directional closer to the rig, I think it will be tougher for smaller directional companies to compete in The U. S.

Market.

Speaker 11

Got it. Thanks.

Speaker 0

Your next question comes from Gil Marchant with Knights of Columbus. Your line is open.

Speaker 8

Hi. Thanks for accepting my question. Just wondering with the bonds trading at a somewhat stressed level, if you are contemplating using some of your cash to do some balance sheet optimization.

Speaker 3

Yes. Hi, Gil. Obviously, earlier in the year with the sort of severe downturn, sort of made a concerted effort to focus on liquidity throughout the year. And look, as the outlook has brightened and we've we've got a little bit more visibility, you know, we've we've entered into a a sort of a a time where, you know, we look at our liquidity and say, maybe, you know, we've got plenty. I don't wanna set any expectations on this call, but know that we're thinking about a number of different things, but but just not ready to sort of publicly set an expectation for what we'll do.

Speaker 8

Thanks. That's fair. And then one stupid question. I I I just peaked at the release, and the the debt seemed like it was at the same level as last year, but your interest expense was it seemed like it was cut in half. What's behind that, or am I reading that wrong?

Speaker 3

You know, again, I'm I'm having to write a life and we do some things. We probably had some early retirement. Some make holes in our interest expense last year.

Speaker 6

Okay. Thank you.

Speaker 3

Yeah.

Speaker 0

Your next question comes from Chris Voie with Wells Fargo. Your line is open.

Speaker 5

Thanks for letting me back in. Just to expand on earlier line of thought, there's been discussion of pricing moving up, but not really from what level. I don't know if you can, you know, comment on where you think, you know, these big rigs will be. Is that gonna be, like, mid single digit thousand per day? And if not, maybe if we could get some color on on the 43 rigs that are on term in the fourth quarter, you know, versus the seven five hundred margin per day.

Like, how many of those rigs pre date to q twenty, if if there's some kind of pieces you can give us there?

Speaker 2

Yeah. No. The day rates will be competitive at the leading edge as we come off the bottom just like they have in the past cycles. I don't want to go and really discuss what levels I think those are at because they are competitive. And we want to stay competitive.

We also want to try to push pricing where we can, too. But remember, we also have all those ancillary services as well, which really boost the revenue per day. And that's why I said I expect our average revenue per day in the fourth quarter to still be over $20,000 per day. I don't have in front of me those with, you know, the numbers that would help you understand, you know, what those rigs would look like on the contracts. That so I can't help you Yes.

Speaker 5

That's fair. And then this one is a bit of kind of like a crystal ball kind of question, but you have visibility for activity going up. Wonder if you have any thoughts on the kind of range that the rig count for you guys might be at exiting the first quarter. I understand that it's guesswork, but do you do you think it could be, you know, ten percent twenty percent growth or any any way to bucket what the opportunity is?

Speaker 2

Think right now it's still early for us to call what the overall first quarter looks like outside of, you know, just the visibility we have there. Rig counts going up, and that happened for us earlier in the first quarter. So I really can't speak to what happens later in the first quarter yet. Yet.

Speaker 6

Okay. Fair enough. Thank you.

Speaker 2

Appreciate it.

Speaker 0

There are no further questions queued up at this time. I'll turn the call back over to mister Hendrix for closing remarks.

Speaker 2

Well, I'd like to thank everybody for joining in today. Denise, thanks for managing our call. And on behalf of Patterson UTI Energy and all the people that are working hard every day to do the great things they do, we appreciate your time. Thanks.

Speaker 0

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