Patterson-UTI Energy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 10 speakers on the call.

Operator

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson UTI Energy Third Quarter 2023 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.

Speaker 1

Quarter.

Operator

After the speakers' remarks, there will be a question and answer session. Call. At this time, I would like to turn the conference over to Mike Sabella, Vice President of Investor Relations. Please go ahead.

Speaker 2

Call. Thank you, Audra. Good morning, and welcome to Patterson UTI's earnings conference call to discuss our Q3 2023 results. With me today are Andy Hendricks, President and Chief Executive Officer Andy Smith, Chief Financial Officer Mike Holcomb, Chief Business Officer and Matt Gillard, President of NextEer Completion Solutions. As a reminder, statements that are made in this conference call that refer to the company's or management's quarter.

Speaker 2

Plans, intentions, targets, beliefs, expectations or predictions for the future are considered forward looking statements. Quarter. 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.

Speaker 2

Quarter. The required reconciliations 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, Patterson UTI's Chief Executive Officer.

Speaker 3

Quarter. Thank you, Mike. Good morning and welcome to Patterson UTI's Q3 conference call. Our Q3 was a monumental quarter. With a diverse suite of products and services and a strong presence across the entire U.

Speaker 3

S. Land drilling and completions value chain. We believe these transactions create long term competitive advantage for our company and our wide reaching digital strategy will help us maximize the value quarter. We will look to use our integrated offering to deepen the partnerships with our customers and further differentiate ourselves quarter. It's becoming increasingly difficult to replicate the success of the larger oilfield services providers and the market quarter.

Speaker 3

We are looking for ways to help keep U. S. Shale oil and natural gas competitive on a global basis and a competitive U. S. Shale is important to the success of our company.

Speaker 3

Helping our customers reach their goals is critical to allowing us to reach our own goals for a strong return on capital quarter. And to return a significant amount of capital back to our shareholders through the cycle. The NextEer and Ultera transactions will help maximize our company's potential. We'd like to welcome the NextEer and Ultera employees to the Patterson UTI team. Quarter.

Speaker 3

In the short time we've all been together, we've been impressed by the talent at all levels of both organizations and excited about our shared future. We're working to ensure that we put our people in the right places to succeed. Our employees have worked tirelessly to make the integration a success quarter and have remained dedicated to our company through what has certainly been a stressful period. We believe we have made Patterson UTI an employer of choice in the oilfield, quarter, which is already helping us attract and retain top talent and further driving our operational advantage. Operationally, We've already seen several successes by extending the Nexter well site integration footprint.

Speaker 3

We now have a Nexter Power Solutions quarter. On another universal fleet, we've added next year's wireline and last mile logistics. Call. We are confident completions well site integration will lead to improved well site efficiency, lower costs quarter. We are already starting to see operational synergies.

Speaker 3

There are many other areas we see potential to create additional value through the merger for both Patterson quarter. From the Nexter transaction alone, we have line of sight of at least $200,000,000 in annualized synergies quarter by the Q1 of 2025 and we are increasingly confident in our ability to meet or even exceed that target. Quarter. We brought together 2 of the industry's leading well completion companies and strong collaboration is already underway. Quarter.

Speaker 3

On the Ultera side, we also see opportunities for revenue synergies between our drilling services and Ultera products. Quarter. As you heard us say before, we cannot ignore the benefit of size and scale that comes with these transactions. This is true not only from an operational perspective, but also as we navigate capital markets that are starting to take another look at our sector. The larger market cap and market trading liquidity has expanded the universe of potential investors that can make or grow an investment in Patterson UTI.

Speaker 3

Quarter. We think this is a positive for all of our stakeholders. While our company is much bigger, our commitment to capital discipline is unchanged. Our capital allocation strategy is a major reason why we are excited to be considered by a broader group of investors. We like our strategy and we think the message is being well received.

Speaker 3

For those who follow Patterson UTI previously, our capital allocation strategy is largely unchanged. Quarter. The foundation starts with a strong balance sheet as well as organic investing strategy that helps us offer our customers Differentiated Products, Technologies and Services. On the balance sheet, we have an investment grade credit rating at all 3 major rating agencies, quarter, a testament to the low leverage and significant free cash flow generating potential of the new company. We will use our strong capital structure to be opportunistic at all points quarter.

Speaker 3

On CapEx, we will always be disciplined in our investments and only look to put capital to work where we see opportunities to build or expand quarter, our differentiated technologies and services for our customers. We've already seen bifurcation in service quality amongst the peer group quarter. And our CapEx strategy will look for ways to further advance our core competencies. This should mean a more repeatable return and free cash flow profile for our company through the cycle with a focus on both short term and long term free cash flow generation. Call.

Speaker 3

To reiterate, we are committed to return at least 50% of our free cash flow to shareholders annually And we have returned more than $1,200,000,000 to our shareholders over the past 10 plus years. We remain committed to our dividend and we have $281,000,000 remaining on our share repurchase authorization. We believe this is an attractive capital allocation strategy that will allow us quarter. We are pleased to invest in the future of Patterson UTI to grow our competitive advantage, while also offering our investors a shareholder return program quarter with both income through the dividend and accretion through any buyback. Now moving on to the macro.

Speaker 3

Call. We are extremely excited about the outlook and we think the behavior we have seen from our competitors and customers this year is yet another sign that we are operating in a more quarter. Our customers are obviously still sensitive to commodity prices, but they are looking through volatility more than they have in the past. Quarter. This allows us to better prepare and relative to prior cycle to create the far more predictable outlook for our operations and we think a more investable sector.

Speaker 3

Quarter. For the Q3, Patterson UTI's U. S. Drilling activity was in line with expectations with an average of 120 rigs, quarter including 1 rig that earned 44 standby days after the customer changed its drilling schedule. We ended the quarter with 117 active rigs in the U.

Speaker 3

S. And have seen our rig count improve to 118 today. We expect to exit the year with 120 rigs quarter. Positive momentum should continue into 2024. Our revenue per day is Still in the mid to low 30s, an acknowledgment from our customers that they see value in our premium assets and high quality services.

Speaker 3

Super spec rig utilization remains very high with activity for this class of rig outperforming the overall rig count. We think super spec rig activity recovers before the idle lower spec rigs, which should position Patterson UTI to outperform the quarter. We expect the expected recovery over the next several quarters, even as we outperformed the market when the rig count moved lower this past year. Quarter. On the frac side, there was slightly more white space in Q3 than we were anticipating as we saw one off disruptions from several customers.

Speaker 3

Quarter. We continue to mostly see pricing discipline in the frac market, particularly among the dedicated natural gas powered portion of our fleet, where we have the highest returns. Quarter. As we have said previously, out of our fleet of 3,300,000 horsepower, we are choosing to stack some equipment before working at pricing that does not meet our threshold quarter. And we continue to believe that is the right thing for our company.

Speaker 3

We're using any downtime to maintain our equipment where appropriate and prepare for an increase in activity in 2024. Quarter. This should put us at an advantage as we enter 2024 with a fleet that is more readily available for deployment relative to peers. Quarter. The long term outlook remains positive in our view, even more so considering the delay in activity recovery we have so far seen for our customers.

Speaker 3

Quarter. Oil prices have risen on the back of OPEC supply cuts, but importantly absent a major macro event, we believe the global balance will need U. S. Shale production quarter to grow modestly over the next several years and U. S.

Speaker 3

Shale activity likely needs to stabilize just to keep production flat. Quarter. The delayed activity response so far should mean activity will have to catch up with deferred activity, which should be a tailwind in 2024. On the natural gas side, we believe the shape of the forward strip is telling us that there needs to be more activity in the gas basins just to meet current natural gas demand. Quarter.

Speaker 3

And as we get closer to completion of new LNG export capacity later next year and into 2025, we will likely need to see natural gas activity rise again. Quarter. In short, we remain optimistic for both the drilling and completions markets given current commodity prices and the view that we will need quarter. A modest increase in U. S.

Speaker 3

Shale oil and natural gas production over the next several years. Meanwhile, the recent slowdown in frac activity is likely to quarter. Accelerate attrition beyond what service providers were otherwise preparing for this year across the industry. Additionally, we believe the slowdown has deferred some investments in new equipment. Roughly 2 thirds of the industry fleet operating in the U.

Speaker 3

S. Today can be powered by natural gas quarter. And the slowing pace of investment by service providers likely means there's a longer runway to fully replacing the diesel portion of the industry asset base. Quarter. For our next year completion segment, if we continue to see strong returns, we will still plan to continue to invest to upgrade our fleet at a measured pace.

Speaker 3

And any new capacity we bring into the market would likely be 100% natural gas powered and would be replacement horsepower for equipment that is reaching the end of its useful life. Quarter. More broadly, the industry likely needs to see around 1,500,000 horsepower of new builds per year just to keep horsepower flat quarter. And has been considerably below that over the past several years combined. In short, the frac fundamentals appear to be positioned to remain very strong over the next several years.

Speaker 3

Quarter. Regarding international opportunities, I want to be clear that our priorities remain continued capital discipline and returning cash to shareholders. Quarter. Within our drilling and completion businesses, we occasionally participate in discussions for opportunities in international markets as we have for years. But for us to deploy capital, we would need to see a compelling opportunity that has a strong probability of acceptable and accretive returns for our differentiated products and services.

Speaker 3

Quarter. To date, we have not found an opportunity that makes sense for our company and for our shareholders. Therefore, our current pace of international quarter. Expansion will be primarily focused on Ultera's previously announced plans in the Middle East and South America, as we believe that is in the best interest of our shareholders. Quarter.

Speaker 3

I'll now turn it over to Andy Smith, who will review our financial results for the Q3.

Speaker 4

Thanks, Andy. Quarter. The reported financial results for the Q3 include 48 days from Ultera after that acquisition closed on August 14 30 days of next year after that merger closed on September 1. Total reported revenue for the quarter was just over $1,000,000,000 quarter. We reported a small net income attributable to common shareholders, which was essentially breakeven on a per share basis.

Speaker 4

This included $70,000,000 in merger and integration quarter. We also expect to continue to be in the range of $29,000,000 of previously deferred revenue, which became recognizable quarter after the customer changed its drilling schedule. Our adjusted net income attributable to common shareholders was $55,000,000 or $0.20 per share. This excludes the merger and integration expenses, includes the previously deferred revenue and assumes a 21% federal statutory tax rate. Quarter.

Speaker 4

Adjusted EBITDA totaled $277,000,000 which also excludes the previously mentioned merger and integration expenses and includes the previously deferred revenue. Quarter. Our weighted average share count was 280,000,000 shares during Q3 and we exited the quarter with 417,000,000 shares outstanding. Through the Q3, we have returned $191,000,000 to shareholders through a combination of share repurchases and dividends. Our Board has approved an $0.08 per share dividend for Q4 and we have $281,000,000 remaining on our share repurchase authorization.

Speaker 4

Quarter. We intend to return at least 50% of our free cash flow to shareholders annually consistent with our previous capital allocation strategy. Through the Q3, we have returned more than 100% of our free cash flow to shareholders. And given where the share price is today, we will likely repurchase shares in the 4th quarter. Quarter.

Speaker 4

As a reminder, we re segmented our reporting this quarter to better reflect the way we manage our business. Our new Drilling Services segment includes the legacy contract drilling and directional drilling segments. It also includes our current power, electrical and automation equipment and Warrior Drilling Rig Equipment Businesses, both of which were previously reported as other operations. Quarter. During the Q3, drilling services revenue was $489,000,000 which includes the recognition of $29,000,000 in previously deferred revenue.

Speaker 4

Drilling services gross margin totaled $209,000,000 during the quarter. Direct operating costs included $9,000,000 associated with insurance reserve adjustments and inventory write downs. In U. S. Contract drilling, we totaled 11,009 operating days, quarter including 1 rig that earned 44 days on standby after the customer changed its drilling schedule.

Speaker 4

Average rig revenue per day increased to $38,110 with the previously deferred revenue item positively impacting reported revenue per day quarter by $2,630 Average rig operating costs per day were $19,870 Including $7.90 per day in costs associated with the previously mentioned insurance reserve adjustments and inventory write downs. Quarter. The average adjusted rig margin per day was $18,240 a $13.30 per day increase from the previous quarter. At September 30, we had term contracts for drilling rigs in the U. S.

Speaker 4

Providing for approximately $760,000,000 of future dayrate drilling revenue. Quarter. Based on contracts currently in place, we expect an average of 74 rigs operating under term contracts during the Q4 of 2023 And an average of 52 rigs operating under term contracts over the 4 quarters ending September 30, 2024. Quarter. In our other drilling services businesses, which is mostly international contract drilling and directional drilling, 3rd quarter revenue was $69,000,000 quarter.

Speaker 4

We expect an adjusted gross margin of $16,100 per day With revenue per day expected to average $35,400 and rig operating cost per day expected to average $19,300 Other Drilling Services revenue is expected to be $65,000,000 with an adjusted gross margin of $10,000,000 Our new Completion Services segment results include a full quarter of the company's legacy Pressure Pumping segment, as well as 30 days of results from NextEer Oilfield Solutions, beginning on September 1, 2023 and continuing through the end of the quarter. Additionally, effective September 1, 2023, We began recording the cost to replace fluid ends as a direct operating cost rather than as a capital expenditure. Quarter. Reported revenue in our Completion Services segment totaled $460,000,000 with an adjusted gross margin of $91,000,000 quarter. During the quarter, segment revenue was impacted by lower customer activity and slightly lower pricing on certain products and services, quarter with demand and pricing moving lower towards the end of the quarter before stabilizing thus far in Q4.

Speaker 4

We think activity and pricing is likely to stay relatively steady at current levels through the rest of the year aside from typical seasonality. Quarter. For the Q4, we expect completion services revenue of $950,000,000 with an adjusted gross margin of $200,000,000 call. Our Drilling Products segment results include 48 days from the recently acquired Ultera Drilling Technologies quarter beginning on August 14, 2023 and continuing through the end of the quarter. Additionally, upon closing the Ultera transaction in accordance with U.

Speaker 4

S. GAAP, We recorded certain assets and liabilities of Ultera at fair value, which resulted in the step up in value of the drill bits that Ultera held at the time the transaction was closed. This accounting adjustment will continue to impact the reported results for Ultera until we have fully consumed the impacted assets. 3rd quarter drilling products revenue totaled $47,000,000 with an adjusted gross margin of $14,000,000 During the quarter, the step up in value increased the reported segment direct operating costs by $6,000,000 and quarter. And increased reported segment depreciation and amortization by $7,000,000 all of which was non cash in nature.

Speaker 4

Quarter. Given the declines in industry activity, we are pleased with the stability of the Drilling Products segment. For the Q4, we expect Drilling Products revenue of $90,000,000 With an adjusted gross margin of $30,000,000 We expect $10,000,000 in non cash direct operating costs associated with the step up in value at Ultera, quarter. Without which the segment adjusted gross margin expectation would be $40,000,000 Other revenue totaled $17,000,000 quarter with $6,000,000 in adjusted gross margin. We expect 4th quarter other revenue and adjusted gross margin to be flat with the 3rd quarter.

Speaker 4

Quarter. Reported selling, general and administrative expenses were $45,000,000 in Q3, which includes partial periods for Ultera and Next Tier. Quarter. For Q4, we expect SG and A expenses of $65,000,000 We expect SG and A to decline over the next quarter as we realized synergies from the merger with Next Tier. On a consolidated basis for the 3rd quarter, quarter.

Speaker 4

Total depreciation, depletion, amortization and impairment expense totaled $198,000,000 For the 4th quarter, We expect total depreciation, depletion, amortization and impairment expense of approximately $260,000,000 quarter. We expect 4th quarter cash taxes to be around $5,000,000 During Q3, total CapEx was $160,000,000 quarter, including $89,000,000 in drilling services, dollars 56,000,000 in completion services, dollars 8,000,000 in drilling products $7,000,000 in other and corporate. Our CapEx in Q4 is expected to be $190,000,000 quarter comprised of $65,000,000 for drilling services, dollars 105,000,000 for completion services, dollars 15,000,000 for drilling products $5,000,000 for other and corporate. The CapEx includes maintenance spending as well as some investments in NextEars Power Solutions Natural Gas Fueling Business and other upgrades on both the completions and drilling fleets. To date, we have delivered annualized synergies totaling almost $60,000,000 from the quarter transaction with synergies only slightly impacting our Q3 results as the transaction closed late in the quarter.

Speaker 4

By the end of Q4, We anticipate reaching an annualized synergy run rate of more than $100,000,000 which will mostly be back end weighted and will be more impactful to Q1 results. We are increasingly confident that we can meet or exceed our goal for $200,000,000 in annual synergies associated with the NextEra merger by the Q1 of 2025. During the quarter, we successfully completed a 10 year $400,000,000 senior notes offering. We closed Q3 with nothing drawn on our $600,000,000 revolving credit facility as well as $67,000,000 in cash on hand. Quarter.

Speaker 4

Subsequent to the close of the NextEer transaction and concurrent with our recent notes offering, we now have investment grade credit ratings from all 3 major credit rating agencies. Maintaining an investment grade capital structure is core to our capital allocation strategy and we intend to continue to run our business in a way that allows us to maintain quarter, our investment grade capital structure. I'll now turn it back to Andy for closing remarks.

Speaker 3

Thanks, Andy. Quarter. With both the Next Tier and Ultera transactions now closed, our top priority is successful integration as we work to fully realize the value from these transactions. Our conviction on the rationale for these deals is stronger today than it's ever been and we remain on track to achieve or even exceed the $200,000,000 in annual synergies quarter. Looking at the overall market, the macro setup is strong and the outlook is improving.

Speaker 3

We've already seen our rig activity inflect higher and we expect this positive momentum will continue in 2024. Quarter. Customers are optimistic at recent commodity prices, but are proceeding cautiously, which we think is a sign of a more stable U. S. Shale industry quarter and our belief that cycles will be shallower in the future.

Speaker 3

Nonetheless, as these events play out, we think convention in the cycle will improve quarter. And over the long term activity and production will need to increase to meet demand based on various long term forecasts including the IEA. Quarter. And finally, while the macro setup gives us confidence in our future earnings power, our priorities will remain sustaining a high return on capital and free cash flow. We will remain capital disciplined with our CapEx and we will look to invest in areas where we see opportunities quarter to differentiate ourselves to our customers versus simply investing to grow capacity.

Speaker 3

This should help us to deliver strong returns and free cash flow through the cycle. Quarter. We remain committed to return at least 50% of our free cash flow to investors through a combination of dividends and buybacks. Quarter. This is the right strategy for our company and our industry.

Speaker 3

Before we go to Q and A, I want to again acknowledge all of our employees who have continued to provide Great service quality while working tirelessly to make these transactions successful. Many of our employees have gone above and beyond their day to day roles to help quarter. Patterson UTI an employer of choice and we would not be here today without you. So thank you. With that, I'd like to now open the lines for Q and A.

Speaker 1

Quarter.

Operator

Thank you. Quarter. We'll take our first question from Scott Gruber at Citigroup.

Speaker 5

Yes. Good morning.

Speaker 3

Good morning, Scott.

Speaker 5

Quarter. I want to start on the completion segment. How many fleets do you have active today? And thinking about The recovery in that count, just given your strategy, do you think E and Ps will be ready to pay more reasonable rates For your equipment in early 2021 such that you can kind of see a steady improvement in count following the improvement in rig count we're starting to see Or is there some risk that we get off to a slow start next year?

Speaker 3

So I'll start with the horsepower. So we have 3,300,000 horsepower. We're not calling out the fleets just because there's such a range of size in the fleets that we operate. We could be on a smaller fleet in the Midland Basin Or we could be doing a simulfrac in the Delaware or it could be a big fleet over in the Haynesville. So calling out the number of fleets doesn't really help people out from that standpoint because they did vary in size and they can actually fluctuate within a month or within a quarter.

Speaker 3

So we do have 3,300,000 total horsepower. We did park some of that horsepower as things slowed down with the white space in the calendar. And like I mentioned earlier, we're using that period just to do some maintenance to be ready for the inflection, because we can already see the inflection in our own rig count at Patterson UTI. And I realize we've been outperforming the market in general And with our drilling rig count, but based on how commodity prices have been trading, especially the forward strip on natural gas, I think you'll see an inflection in the overall rig count. Now, we're going to see the traditional lag between the drilling rigs picking up And the frac operations just because there's really no DUCs out there right now.

Speaker 3

We've got frac spreads bumping into drilling rigs and drilling rig activity does need to pick up so that frac activity can pick up. So As we see those increases in early 2024, we're already seeing the inflection now, but as we see the increases in early 2024 on the drilling side, There's going to be a bit of lag on the completion, but then you're going to see completion activity pick up following drilling activity.

Speaker 5

Got it. I want to turn to CapEx next year. I know you guys haven't set the budget, but just kind of quarter. Want to get your thoughts on the moving pieces. Based upon the resegmentation, I have drilling services Somewhere north of $300,000,000 for this year, maybe $320,000,000 So I want to see if that is a good number for next year, if that's down?

Speaker 5

And Will the completion services CapEx for next year kind of be in a high single digit range? Next year, you just talk about 8%, 9% of revenues. So that's maybe kind of mid-300s. And then if I add in 65 for Ultera, maybe 25 for other, I kind of get pretty close to consensus. Is it kind of one of your early thoughts on the pieces and what it could total?

Speaker 4

Yes. Hey, Scott, this is Andy. Again, we haven't gone through a full budgeting process, but I think if you look at where our Q4 is coming in, Not necessarily looking at the bucketing of it, but if you look at the total number, The sort of $190,000,000 guide, I would think that on a quarter to quarter basis in 2024, we're pretty comfortable in the $190,000,000 to $200,000,000 range on a quarterly basis.

Operator

Quarter. We'll move next to Jim Rollison at Raymond James.

Speaker 6

Hey, good morning guys and congrats on getting everything put together. Quarter. Andy, when we think about the rig market, obviously, you're talking about your bottoms in and starting to improve. So your average rate this last quarter average revenue per day ex the one customer situation was kind of in the mid-30s And you've talked about low to mid-30s is kind of where the market is right now. Just trying to think through as we roll through next year, your rig count presumably quarter.

Speaker 6

Gradually improves. When do margins bottom if you kind of look at where your pricing rigs today versus what contracts are falling off. How do you think about that?

Speaker 3

Hey, good morning, Jim. So, first, I want to Congratulate the drilling team. They've done a great job through 2023 managing the rig count. This is really a testament to the service quality, to the continued rollout of technology that we are doing on our drilling rigs and The partnerships we have with various customers out there that want to keep using us even when things are getting a bit soft in the market. So That's going really well.

Speaker 3

In terms of leading edge rates, they were higher earlier in the year. They've softened a little bit, but they really haven't come down that much. I say it is mid to low 30s because it's more in the mid than it is in the low. So that's kind of how I characterize it. Quarter.

Speaker 3

And I do expect that that will start to move up early next year as the rig count starts to push up as well past this inflection that we're seeing. So given that, I think margins are likely to bottom around Q1, maybe Q2, but We will also have some extra costs in Q1 that we have on an annual basis. So that's likely To kind of put that inflection on the margins around Q1.

Speaker 6

Yes, that makes perfect sense. And as you put rigs back to work, quarter. Last year until we got into late last year, you were putting things out in relatively short terms. And then I think around the Late Q3, you started terming up a few things, which proved to be pretty fortuitous. But curious, as you're having conversations and putting rigs back to work right now, maybe the kind of tenor of the contracts that these guys are looking for.

Speaker 3

Yes, we're definitely weighing them to the shorter side Because we do think we have upside in 'twenty four just based on the macro outlook going into 'twenty five. So we're starting with some shorter contracts and Or some agreements that allow us to move that up next year.

Speaker 6

Great. Thanks again for the color.

Speaker 5

Thanks, Jim.

Operator

Quarter. And next we'll move to Stephen Gengaro at Stifel.

Speaker 7

Thanks. Good morning, everybody. I guess 2 for me. The first, just your current take on sort of supply demand fundamentals On the pressure pumping side, but maybe talk a little bit about the if you can, any material bifurcation you're seeing between The lower emission assets and sort of traditional assets and kind of and where your fleet stands right now?

Speaker 3

Quarter. So let me start off by saying, I want to thank everybody in our well completions business at Patterson UTI quarter. For all the hard work they've been doing, we closed on this merger on September 1, about a month earlier than we had originally planned. And There was just so much work that was done by the teams to get ready for day 1 and day 1 for us was on a Friday before Labor Day weekend. Quarter.

Speaker 3

And that weekend, we didn't miss any sand, we didn't miss any work. Trucks moved equipment, pumps kept pumping, everything just worked like it was quarter. So hats off to the team on all the planning that was done through this integration process, which started right after we announced The Ultera transaction and we jumped into the integration work. So integration is going very smoothly. We're already talking about synergies.

Speaker 3

We have a high level of confidence in hitting the synergy number there. And so, I got to start with that and just say thanks to everybody And our well completions team for everything they've done so far to get us where we are, really excited about how this is going. Yes, the market is another thing. So we've had a softening in the market just really kind of tied to the overall rig count in the industry. And like I mentioned earlier, we've had frac spreads that are bumping up against drilling rigs with the softening in the market.

Speaker 3

And so it's going to take an increase in drilling activity to really move that. Quarter. Now when it comes to the pumps and the equipment and the fleets that have remained stickier in this softer market, it certainly is weighted To the primarily natural gas fueled systems, whether it's dual fuel or other. And so that certainly caused a bifurcation in the market. When you look at our well completions equipment, roughly 2 thirds of that is primarily natural gas powered.

Speaker 3

And so we're in a really good position and it's why We've seen a softening in the market, but certainly not any more than that. So really excited about how Our teams have done through this period even with the white space that we've seen in the Q3. That's going to adjust itself. If you look forward, we are going to see quarter. Maybe a little bit of slowdown towards the end of Q4 based on the holiday period, maybe a little bit of winter baked into some of those projections quarter.

Speaker 3

Just in case we get some cold weather. So we'll see how some of that plays out. But I'm very upbeat for what 2024 can hold quarter going forward there and excited for what we can offer to the customers.

Speaker 7

Thank you. And I know it's been Well, it's been 2 months now, I guess, since the deal closed. But has there been anything that has really stood out as you've Kind of looked at the next year way of doing business on the completion side. That surprised you Like anything that's really jumped out since the merger closed that has been an upside or downside surprise for you?

Speaker 3

I'm going to start with the people. The people are great. We're excited to have them as part of the team. And they've got a lot of energy. There's a lot of excitement in trying to pull everything together.

Speaker 3

Quarter. And everybody is just doing a fantastic job, a lot of high quality individuals. And so that's where it starts and really excited about that. We were already familiar with the equipment. We understood what NextGear was doing in terms of integrating services, Whether it's wireline, last mile logistics, the power solutions with the natural gas, CNG and blending at the well site, All these things have made Next Tier successful and we've watched that over the years.

Speaker 3

At Patterson UTI, years ago pre COVID, we actually looked at adding wireline to our frac spread because we understand and we get it. We don't want $50,000,000 worth of frac waiting on $1,000,000 of wireline at the wellsite. And so that integration is important to efficiencies And just continuity of service and to keep pumps pumping. And so the ability to pull all this together and then bring those integration thesis into frac spreads that didn't have it previously is powerful for this business. So excited about that.

Speaker 7

Quarter. Excellent. Thanks for the details.

Operator

We'll take our next question from Derek Pothaser at Barclays.

Speaker 1

To ask about the synergies, I know the guide sounds like you're going to reach over 100,000,000 by the end of the year. It seems ahead of schedule. Maybe can you break that down in the different categories you discussed? But now I believe it was SG and A on the cost side, you have the revenue synergies and then you had some non payroll spend. Maybe just an update there to help just expand on that synergy number.

Speaker 4

Yes. So, I would say that as we go through the Q4, we are looking at Right now, on the synergy side, the SG and A synergies are probably about, Again, a third of kind of the run rate that we'll see and then probably about half of it's probably coming out of Chairman at this point in time and the rest of the integrated revenue opportunities.

Speaker 1

Got it. That's helpful. And then on the merger expense side, I believe it was $80,000,000 and I know you just posted $70,000,000 I love there might have been a split between the expense side and the CapEx side. Can you just update us there? Clearly, there's a benefit to closing earlier, able to capture a lot of those one time cost already.

Speaker 1

Should those all be fully recognized within this year or will there be any leak over to 2024?

Speaker 4

I'm sorry, you were asking I got confused. Are you asking about expenses and CapEx?

Speaker 1

Yes. I think the original $80,000,000 one time expenses, I thought that split between some OpEx and CapEx. We're just seeing that $70,000,000 number this quarter. Will that $80,000,000 fully be recognized in 2023? Maybe just some updates If it's OpEx, CapEx.

Speaker 1

I thought it was 65, 15 split for the OpEx CapEx.

Speaker 4

Yes. I mean, so a lot of it So some of it will be will leak into 2024. And the reason for that is, again, as you go through some things, Until you have defined plans on what you're going to do around certain items, you're not really allowed to sort of recognize Those expenses, so they will slip a little beyond 2023 and into 2024 as well.

Speaker 1

Quarter. Got it. And then just a quick follow-up on the drilling side. You're obviously coming off the bottom, but it seems like activity has been a little bit more lethargic than People originally thought it was going to be. Can you maybe expand on the privates, the publics, maybe the different basins?

Speaker 1

What surprises you to the downside? I know you guys are quarter. You went over that. But why does it seem that we've been limping into year end? Just maybe some more color around that.

Speaker 3

That's a great question. I think we've been having those discussions ourselves, but there's not any one particular area that you call it out. It's a mixture of publics, a mixture of privates that are both being cautious and inflecting at the same time. Even our rig count adds that we're looking at going into year end are a mixture of publics and privates. So it's really kind of across the board.

Speaker 3

I think in the natural gas plays, we're still seeing a little bit of hesitation to pick up drilling rigs and quarter. I can understand that, but I think that when you look at the forward strip, that's going to work itself out. So maybe a little bit later than we initially thought. Quarter. But again, when we're talking about our rig count, 218 now and then possibly exiting the Q4 at 220, This is an inflection in our rig count and I think that you'll see the overall rig count kind of move higher a little bit later as well.

Speaker 3

I I think a lot is going to depend on how the overall commodity outlook is. And also, I think you've got a lot of publics That are really kind of waiting for some signals from their own investors to say, hey, are you going to take advantage of these higher commodity prices, especially on gas and the forward strip? So I think those discussions are probably happening for our customers, with their investors. And but I'm still optimistic about 'twenty four. When we talk about natural gas and increases in activity in 2024, I've said this before, I still think it holds true.

Speaker 3

It's really kind of a 2 step function. You're going to see an initial step up just kind of based on the forward strip, will be some moderate growth there. We'll see another step up towards the end of 'twenty four, quarter. Getting ready for 2025 and LNG takeaway.

Speaker 1

Great. Thanks for the color, guys. I'll turn it back. Thanks.

Speaker 4

Thanks.

Operator

Quarter. We'll go next to Kurt Hallead at Benchmark.

Speaker 8

Hey, good morning, guys.

Speaker 3

Good morning.

Speaker 8

So, thanks for all the color and info and insight on how you guys pull this thing together. Quarter. A lot of hard work in short period of time, for sure. So I'm kind of curious, as you look at the Drilling Products business, Andy, what kind of baseline growth should we be thinking about For that business, right? The vast majority of the business is U.

Speaker 8

S. Directed, so we can kind of map that out to rig count, right? Quarter. And it sounds like you got some growth opportunities international. So I guess the question net net is really kind of geared toward outside of North America, what kind of growth you expect And Drilling Products for 2024.

Speaker 3

Yes. Thanks, Kurt. So their growth is really going to be tied to the overall rig count growth As we go forward into 'twenty four, roughly about 70% of their activity is tied to the U. S. Rig count onshore.

Speaker 3

Quarter. And so, it's really going to follow that trend. We're really excited about their performance. They're doing really well. Even with the softness in the market and slowdown in the rig count.

Speaker 3

When you look at it on a revenue per rig basis, they're still holding up well. And so, the team is doing a great job. The market is what it is, but we are optimistic about the rig count in 'twenty four. And so you're going to see growth from their business tied to that U. S.

Speaker 3

Rig count growth 3rd. On the international front, roughly 30% is tied to international growth and we're excited about that potential there. There's countries outside of North America that they've been in and they're still increasing their footprints. And That 30% could grow to be a bigger percentage of that slice of the pie through 'twenty four and into 2025, and We're excited to see how that's going to play out.

Speaker 8

Great. Thanks. Really appreciate that. And quarter. So it sounds like you've reiterated a lot of your viewpoints that you had back in early September about an improvement and U.

Speaker 8

S. Land drilling related activity. I think back then you kind of gave an indication that you thought the U. S. Land rig count would Get back above 700 sometime in the latter part of 2024.

Speaker 8

Given how slow things have been progressing through the end of this year, You still have a lot of conviction in the rig count getting back to 700 or is it recent activity levels kind of pulling that back a little bit?

Speaker 3

Yes. It has been a little bit slower on the uptick than I thought it was going to be for the end of this year. I think a lot of that has to do with budgets and Our customers trying to work out exactly what their plans are, but I'm going to stick with that. I think that if you look at the forward strip on natural gas And the way oil has behaved in general across 2023, we've had a couple of dips. But in general, oil commodity prices have been at a healthy level.

Speaker 3

And I think that trend is going to continue. So, yes, let's go with that. I think let's we're going to be close to 700 towards the end of 'twenty four As an industry rig count.

Speaker 8

Hey, appreciate that, Andy. Thanks a lot.

Operator

Quarter. We'll move next to Keith Mackey at Calgary.

Speaker 9

Hi, thanks and good morning. Can we just first talk about the potential, I guess, cross selling revenue synergies between Drilling and Pumping. Certainly, that's been a potential benefit of the recent transactions. But Andy, How is that playing out relative to your expectations? Are there any notable wins or activities you could point to on that front as yet?

Speaker 3

Quarter. Yes, that's a great question. We've been in both businesses for a long time now, decades. I wouldn't characterize it as cross selling per se, quarter. What I do characterize is strengthening the partnerships that we have with our customers.

Speaker 3

And when we announced these transactions, Yes. We received nothing but positive feedback from customers. We had long time partners who have been our customers for decades Who called me up and said, look, a stronger Patterson UTI is good for us. And so having the strength to be able to Address their needs across all these services has allowed us to have those conversations. And I wouldn't necessarily, as I said, characterize it as cross selling.

Speaker 3

When you have those strong partnerships at a high level and now you have more capacity to service their needs, that's the bonus.

Speaker 9

Quarter. I see. Thanks for that color. Maybe just to follow-up on your comment in the prepared remarks around it When you're talking about capital allocation strategy, using a strong balance sheet to be opportunistic at all points through the cycle, certainly have been so lately. But can you just expand on that comment a little bit more in terms of how you're thinking about being opportunistic through the cycle at all points.

Speaker 3

When we're talking about being opportunistic over cycles we're talking about over the next 5 to 10 years. Right now, we're focused on integration of the businesses. We still have some work to do We're focused on realizing these synergies of $200,000,000 or greater $1,000,000 on the synergy with the Next Tier deal Integrating the operations and working on supply chains pieces as well. So that's our primary focus. Quarter.

Speaker 3

Historically, we have been opportunistic through the cycles. There's been a number of times when we've You've gone through dips in the cycle and we've seen softening that we've had opportunities to do things with our balance sheet. But I would say right now we're just focused on integration.

Speaker 9

Got it. I'll leave it there. Thanks very much.

Operator

Quarter. We'll take our next question from Shawn Mitchell at Daniel Energy Partners.

Speaker 8

Good morning, guys. Thanks for taking my question. Kind of as we

Speaker 6

see a lot around M and A over the last several weeks. As you see the E and P space consolidate, it would seem logical The kind of consolidators here will want to work with suppliers who have scale. First, I would say, do you agree with this assessment? And then secondly, If so, do you think that pushes more consolidation in the service sector?

Speaker 3

Well, the first part of your question, I think you answered yourself and we believe that. As you see some of these large E and Ps take on even large E and Ps and become even larger in the space, We believe they are going to work with companies that have the scale to be able to service their needs and we fit right into that. So we're excited about that potential. We do see when these transactions on the E and P side happen, you get a pause in activity, but then things start to pick up again. So we think those are good possibilities.

Speaker 3

But in terms of further M and A in the service space, I think it's possible. I don't want to speculate because we're focused on integration right now. So but I do think there's probably some opportunity out there.

Speaker 6

Quarter. Maybe one more. Can you just address the labor market today, Andy, and specifically how you and the consolidated companies have managed labor this year This activity has moderated and maybe provide us your thoughts on finding people today and the ability for the industry to scale up again, should that be necessary?

Speaker 3

Quarter. Even over the last few years with the massive ramp up in activity that we've had, We were able to cover all the work and we had to invest in the systems and the people for recruiting and quarter. And on boarding and training to be able to do that and it definitely was tougher over the last few years than it had been in previous upturns quarter given the strength in the economy over the last few years. But that investment that we've made allows us to get the people that we need to cover the work quarter. And so we didn't miss any work for lack of people.

Speaker 3

This has only been a softening in the market and we're expecting As we pass this inflection to increase activity in 2024 and so with the moderated growth we're expecting in 2024 Versus the softening we had this year, I don't anticipate we're going to have trouble adding staff back to do the work.

Speaker 6

Call. Okay. Thanks for answering this. Appreciate it. Thanks.

Operator

Quarter. And our next question comes from Don Crist at Johnson Rice.

Speaker 3

Good morning. Thanks for letting me in here at the end. Quarter. Andy, your previous comment about pressure pumping kind of bumping up against rigs, how do you think that plays out? I mean, it quarter.

Speaker 3

Appears to us looking from the outside that the efficiencies on the pressure pumping side have kind of outpaced efficiencies On the rig side, do you think that kind of results in a smaller pressure pumping fleet industry wide going forward? Or quarter. Can you talk to that just a little bit? Well, I think there's a couple of pieces to that question that I can touch on. So I appreciate it.

Speaker 3

One is, yes, we are bumping up against the rigs and so we do need an increase in rig activity. There's just really no DUCs out there At this point in the cycle and where we are from the softening, so we do need the rig activity to pick up. But in terms of frac efficiency, quarter. It's just been amazing what the teams across the industry have accomplished over the last few years in terms of frac efficiency for the top tier players. There's lots of anecdotes of pumping well over 20 hours a day.

Speaker 3

Now that being said, I'm not sure we have a lot of room to grow efficiency. So, I don't think we're going to need less frac out there. I mean, we're not going to pump 25 hours a day. So, we're already at some pretty high levels of pump hours On a number of our fleets that are out there working and they're just doing a great job. So you've seen that increasing efficiency over the last few years, But I think efficiency will kind of slow at this point in terms of what we're going to see across the industry.

Speaker 3

As well, I do think that as we come out of this softening in the market and we increase activity, you're going to see a tighter frac market. Quarter. And we are going to have to add some equipment to replace older equipment. It's going to drive capital discipline across the sector. It's also going to cause, as you get into later 'twenty four to 'twenty five with natural gas demand, with increasing activity, It's going to cause pricing to move up at that point as well.

Speaker 3

And so we're going to see tightness in the market from equipment standpoint As we start to get past the inflection point in activity moving up in 'twenty four. Quarter. I appreciate the color. I'll turn it back. Thanks.

Speaker 3

Thanks.

Operator

Call. And at this time, there are no further questions. I would like to turn the conference over to Andy Hendricks for closing remarks.

Speaker 3

Thank you. I just want to thank everybody for tuning in this morning. Once again, I want to thank the employees of Patterson UTI. You all are doing an amazing job as we work through everything we're working through these integrations quarter over the last few months and it's just been impressive to watch such high caliber people work through all this. So thanks for what you're doing.

Speaker 3

Appreciate it.

Operator

Call. And this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Closed the acquisitions of NextEer Completion Solutions and Ultera Drilling Technologies, targeting at least $200 million in annualized synergies by Q1 2025 and already on track to exceed $100 million run-rate by end of 2023.
  • Integrated drilling and completion platform now includes 120 active U.S. rigs and a 3.3 million HP frac fleet (two-thirds gas-powered), driving improved wellsite efficiency, higher super-spec utilization, and early operational cost savings.
  • Maintaining strict capital discipline with an investment-grade balance sheet, committing to return at least 50% of free cash flow to shareholders; Q3 saw $191 million in buybacks/dividends and $281 million remaining repurchase capacity.
  • Reported Q3 2023 results of just over $1 billion in revenue, $277 million adjusted EBITDA, and $55 million adjusted net income ($0.20/share), including $29 million of previously deferred revenue; Q4 revenues are expected to be around $1.1 billion with stable margins.
  • Outlook sees U.S. land rig count bottoming at 117 rigs in Q3 and rising to ~120 by year-end, with frac activity recovery in 2024 driven by the need for modest shale production growth to meet global oil and gas demand.
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Earnings Conference Call
Patterson-UTI Energy Q3 2023
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