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Ladies and gentlemen, thank you for standing by. And welcome to the Patterson-UTI Energy First Quarter 2021 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. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]
Thank you. It is now my pleasure to turn the call over to your host, Mr. Mike Drickamer. Sir, the floor is yours.
Thank you, Sylvia. Good morning. And on behalf Patterson-UTI Energy, I’d like to welcome you to today’s conference call to discuss our results for the first quarter of 2021. Participating in today’s call will be Andy Hendricks, 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-K 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 Hendricks for some opening remarks. Andy?
Thanks, Mike. Good morning. And welcome to Patterson-UTI’s first quarter conference call. We are pleased that you can join us today. For the first quarter, revenues and adjusted EBITDA increased sequentially and exceeded our expectations, despite challenges from the extreme winter storm in the Southwest.
Both contract drilling and directional drilling posted better-than-expected results, while pressure pumping was impacted by downtime associated with the storm. Excluding the impact from the winter storm, pressure pumping results would have been consistent with our expectations.
Crude oil prices trading in a tight band around $60 have been supportive of increasing activity, and looking forward, based on conversations with customers, we now have greater confidence in further improvement in drilling and completion activity. We expect our rig count will reach approximately 80 rigs over the next three months, with most of that growth coming late in the second quarter and early in the third quarter.
Additionally, the pricing on most of our currently active rigs has been reset since the beginning of the downturn, and as such, we believe the second quarter margin per day will be the low for this cycle in drilling,
In pressure pumping, we are encouraged by signs of pricing improvement. We’ve been successful in pushing through to our customer’s higher input costs for things such as sand and trucking.
And additionally and where I would like to congratulate our leadership team in this business, we are starting to achieve better pricing for our high level of service quality. Our focus in pressure pumping remains squarely on improving pricing and margins. As demand continues to improve, we now expect to activate an eight spread late in the second quarter.
Within our directional drilling segment, there are a lot of exciting things happening. I have spoken for several quarters now of the market share we have captured in directional drilling due to the reliability and performance of our Mercury measurement while drilling system and our Mpact directional drilling motors.
This reliability and performance combined with strong alignment with our contract drilling business has allowed us to broaden our customer base. Additionally, in directional, we have worked with customers on a number of different performance based contracts.
We continue to innovate to meet our customers demand to drill higher quality wells. During the first quarter, we successfully field tested a new 5-inch drilling motor design and completed the design of a new 6.5/8 [ph] inch motor for higher performance. Additionally, we successfully field tested our new MWD data compression algorithms that allow for a higher quality wellbore placement in the reservoir for more productive wells.
With that, I will now turn the call over to Andy Smith, who will review the financial results for the first quarter.
Thanks, Andy. For the first quarter, we reported a net loss of $106 million or $0.50 per share -- $0.57 per share, while adjusted EBITDA grew 20% sequentially to $35.4 million on a 9% sequential increase in revenues.
Turning now to our segments. In contract drilling, our average rig count for the first quarter improved to 69 rigs from 62 rigs in the fourth quarter. We ended the quarter with three rigs that were idled but contracted, one of which went back to work in early April.
Average rig revenue per day for the first quarter was $21,590. This included a $2.3 million benefit from revenue that was earned during the downturn in 2020, but not recognized at that time due to concerns about the ultimate collectability of this revenue.
Compared to the fourth quarter, average rig revenue per day also benefited during the first quarter from a lower proportion of idle but contracted rigs on reduced rates and higher-than-expected revenues from ancillary services.
Contract drilling operating costs included a $6 million benefit from a refund of sales and used taxes. Excluding this benefit, average rig operating cost per day was better than we expected. With higher-than-expected revenue and lower-than-expected operating costs, average rig margin per day, even excluding the favorable benefits I previously discussed exceeded our expectation during the first quarter.
At March 31, 2021, we had term contracts for drilling rigs providing for approximately $240 million of future day rate drilling revenue. Based on contracts currently in place, we expect an average of 39 rigs operating under term contracts during the second quarter and an average of 27 rigs operating under term contracts during the four quarters ended March 31, 2022 [ph].
For the second quarter, we expect our rig count to improve to 73 rigs from 69 in the first quarter. Average rig revenue per day is expected to be approximately $20,900 in the second quarter, with an average rig margin of approximately $6,200.
In pressure pumping, we averaged seven active spreads during the first quarter with an effective utilization of 5.5 spreads. Downtime during the quarter was primarily associated with the winter storm and the mobilization during the quarter of one of our spreads from the Northeast to Texas. The startup of the spread that mobilized to Texas was also delayed due to the winter storm.
Pressure pumping revenues during the first quarter decreased to $75.8 million and gross margin was a loss of $700,000. But for the effects of the winter storm, first quarter results were consistent with our expectations.
For the second quarter, we expect to average seven active spreads with utilization improving from the first quarter level. Pressure pumping revenues are expected to improve to $120 million and gross margin is expected to improve to 9$ million.
Turning now to directional drilling, revenues for the first quarter improved to $19.7 million and the gross margin improved to $3 million. For the second quarter, we expect directional drilling revenues to improve to $22.5 million, with gross margin of $3.2 million.
Turning now to our other operations, which includes our rental, technology and E&P businesses. Revenues for the first quarter improved to $11.9 million and gross margin improved to $1.7 million. For the second quarter, we expect other operations revenues to improve to approximately $13 million, with a gross profit of approximately $3.5 million.
Before I turn the call back to Andy, for the second quarter, we expect depreciation, depletion, amortization and impairment expense of approximately $145 million. Selling, general and administrative expense is expected to be approximately $22 million for the second quarter. And for the full year 2021, we expect an effective tax rate of approximately 17%. Also, we will be paying a quarterly cash dividend of $0.02 per share on June 17, 2021, to holders of record as of June 3, 2021.
With that, I’ll now turn the call back to Andy Hendricks.
Across the industry, the U.S. land rig count has nearly doubled over the past nine months. Over this timeframe, private operators have increased their rig count by more than 150%, while publicly traded operators have had a more modest growth rate as they were balancing capital discipline relative to budget in crude oil prices.
The pressure on our customers and on the industry to exercise capital discipline and work within cash flow has been growing and it is a shift for the majority of the years in the U.S. on conventional’s revolution.
As we exited 2020 and moved into 2021, we continued to see greater capital discipline from our operators and a more orderly progression in activity. The interesting point is that this capital discipline is relative to the 2021 budgets, which were based on lower commodity prices than we’ve had over the last few months.
And I believe that with improving operator cash flow, we will see further increases in activity through the year. This is still in line with capital discipline, as increasing activity can be funded within cash flow.
We’re encouraged by this capital discipline across the energy sector that still allows for further increases in industry activity, where premium contractors with superior performance and technology offerings will be rewarded for the value they create for the customers and where there will be opportunity to increase pricing as the industry activates more equipment.
Within this environment, as a premium service provider, we are well-positioned. We’re the only drilling contractor in the U.S. with a significant presence in directional drilling. Through the use of technology be it remote operations or the automation of certain operations, we are uniquely positioned to better integrate directional drilling operations into the drilling rig and improve wellbore quality and performance.
We are also well-positioned to benefit from our leadership position in the use of alternative fuels and power sources to help our customers reduce costs and emissions at the well site. For example, we have the ability to substitute cleaner burning natural gas for diesel in many of our drilling rigs and frac spreads.
Additionally, we have the ability with our EcoCell lithium battery hybrid energy management system to more efficiently manage the power generated at the rig, thereby reducing fuel consumption and emissions.
As well as to further minimize emissions at the well site, we have the ability to run drilling rigs on high-line power from the utility. For more information on these technologies, please refer to our updated Corporate Sustainability report that we published during the first quarter.
We see 2021 as a year of steadily increasing activity, driven initially by private and agile public operators and then by major operators, and we are encouraged by the opportunities that we are hearing from our customers for Patterson-UTI.
With that, we would like to thank all of our employees for their hard work, efforts and successes through a very challenging time both in our industry and in general, and we look forward to a much better year ahead.
Sylvia, we’d like to open the call for questions now.
Thank you. [Operator Instructions] Your first question comes from the line of Mike Sabella from Bank of America.
Just real quick on kind of on the margin guided rate, did you all give it or did I just miss it for 2Q?
Mike, what was the question?
Just on the margin guide for drilling in 2Q. Did you all give it and I just missed it or…
Yeah. It was $6,200 per day.
$6,200. Okay. So when we think about kind of 2Q and I know, Andy, you mentioned 2Q being the low point for the year. One of your peers is out talking about possibly pushing pricing. You all seem like maybe that’s possible as well. Can we talk about how pricing plays into that, maybe where spot rates are leading edge day rates are today relative to the overall total and where we think they can go to in second half?
We don’t typically get into what we think they are publicly for competitive reasons. But I’ll tell you there’s still a bit of a range of day rates on the spot price out there. But we believe that as we start to put up more rigs later in the second quarter that we’ll have opportunities for pricing to move up at the end of the second quarter and into the third quarter and then through the rest of the year.
And we’ve seen this in other downturns in the past where especially with the super spec rigs that we offer in the industry. As the rig count starts to move up, pricing has the opportunity to move up as well.
Got it. And then just kind of, I guess, a higher level question, you’re several years away from the last big M&A move for the company. As we sit here, kind of the outlook internationally looks a little better. If we think about Patterson over the next couple of years, is there anything internationally you guys are interested in? If not internationally, is there anything in the U.S. you could see kind of fitting well in the portfolio?
I think the best way for me to answer that question is just to say, we maintain a healthy balance sheet. That’s our history. And we try to find opportunities to exercise the strength of our balance sheet when we come out of these cycles and we’ll just have to see what happens at this point.
Understood. Thanks, guys.
[Operator Instructions] Your next question comes from the line of Taylor Zurcher from Tudor, Pickering, Holt.
Hey. Good morning and thank you. In pressure pumping, the Q2 guidance looks really strong. Revenues obviously up huge as you’ll get much better utilization following the winter storm. I’m curious it doesn’t seem like in the Q2 guidance just based on the implied incrementals that there’s a whole lot of pricing uplift baked in into there. So I’m curious if you could frame for us if you normalize for some of this weather-related noise and what sort of efficiency improvement you might be seeing from a, however, you want to define it stages per day metric? And then looking longer term for pressure pumping or maybe exiting 2021, I mean, do you think you can get back to sort of a double-digit gross margin run rate without a whole lot of pricing improvement just as activity continues to trend higher?
Yeah. I think that the pressure pumping sector is starting to become structurally in a better place. We’ve certainly seen attrition through various companies over the last year and it becomes more challenging for companies to put spreads back to work.
That being said, we’re going to put another spread back to work towards the end of the second quarter. We may put a couple more out before the end of the year. Every spread we’ve put out has been forecasted on our plan to be accretive and cash flow positive and so that’s the only reason we would put a spread out or even consider putting a spread out.
And so when we look at that, we believe that there’s opportunity for pricing to continue to move up through the rest of the year as activity moves up. Having the opportunity to talk about pricing moving up in pressure pumping has been a rare thing. I think the last time I did this was third quarter of 2017.
So the market has had a lot of equipment and a lot of overhang for a few years, but I think it’s tightening up this year. And as we continue to put out some spreads then we see that as accretive and we think that the pricing will move up.
In the second quarter, we had the chance to move some pricing on a couple spreads. I don’t want to get into the numbers. But it was certainly a positive for us, as we haven’t seen that in a while in the industry.
Okay. That’s encouraging. And contract drilling looks like the OpEx guidance, if you just take the revenue less the margin that you guided to is about $14,700 a day. Could you remind us where you expect that that number to trend as activity continues to trend higher and you get better fixed cost absorption?
I don’t think we’ll see a big change in that number. But I think we’ll have the opportunity to push day rates on rigs towards the end of the year. So I see that, that’s why we’re projecting that we’re going to have margin improvement through the rest of the year and that Q2 is a bottom in this cycle force and drilling for the margin per day.
Okay. Good to hear. Thanks, guys.
I see no further -- I’m sorry, you have a question from the line of Waqar Syed from ATB Capital Markets.
Thank you for taking my question. Andy, the incremental demand that you’re seeing both in drilling and pumping, where is it coming from, public E&Ps, private or is it a mix of both? Could you maybe characterize that?
Yeah. It’s really been kind of a change in the landscape whereas coming out of the downturn the first out of the gate were really the privates that put up a lot of rigs initially and then some of the more nimble, what we refer to as nimble publics.
But some of the larger public and even some of the IOCs are discussing putting up rigs in the U.S. as well. And so we’re encouraged by these discussions through the rest of this year and even somewhat into 2022. So, that’s our view of the market that, it’s -- while it’s been a transition, it seems like all of the various customers or classifications of operators that we have were talking about putting up rigs.
And again, like I mentioned, I think, this is still working within the capital discipline that investors want from these companies, because the initial rig forecasts that they made that they were considering doing for 2021 were based on a lower commodity price than they actually have today.
So our customers, the operators are seeing better cash flows and potentially better cash flow projections for the year and they’re reconsidering what their activity levels might be and we have a large number of customers that are discussing putting up more rigs towards the -- throughout the year.
Now, there was a -- there’s been a view in the industry that you need about, let’s say, 500 rigs working for maintenance type production and roughly 220 type of pressure pumping active crews to keep production flat. Based on your discussions, do you think that overall industry activity is going to get ahead of those numbers into as you look into 2022 or we kind of capped around that -- those kind of numbers?
It’s really a basin-by-basin economic discussion where we’re seeing Permian operators improve the economics of what they’re doing where they can afford to increase activity a little bit and increase production. WTI is moving up to a level that is starting to interest Bakken producers and picking up rigs and even South Texas. So it’s really a basin-by-basin discussion.
And then you’ve got, of course, the Haynesville gas in East Texas and North Louisiana, which is completely separate from that. And even in a lot of cases, separate from Henry Hub commodity, because you’ve got a number of our customers over there that have contracts for LNG export or they’re drilling to hold land in that area. So there’s -- you really have to look at it on a basin-by-basin case these days and the economics in each one.
Just on that question of LNG, what’s your -- what’s the opportunity set in terms of additional rig activity on that LNG theme for the next, let’s say, 12 months, 24 months? Have you had any long-term discussions with the operators and -- about locking up high end rigs for that?
I would say, overall, activity in that area is steady and slightly increasing, is the best way to characterize that. And I think that, while you haven’t seen operators lock up necessarily long-term contracts, the economics for that could improve over the year as well.
Okay. And then just final question on the super-spec rig fleet, given your activity is going to go up quite a bit, some of your peers also seeing that. Where do you think utilization is right now for the super-spec kind of high end ready rigs? And then whether it could be and when do you see pricing kind of move up in decent increments?
Yeah. I don’t have the numbers for utilization on super-spec is right now. But I’ll also throw out that our -- it doesn’t really matter so much. The super-spec rig is a hot commodity rig item and what we’ve seen historically is, as those rigs start to go to work then pricing tends to move up.
And they also creates a phenomenon which could likely happen towards the end of this year where you have operators in the fear of missing out and not getting the rig they want and that’s always good for us too.
Absolutely. Great. Thank you very much and appreciate the comments.
And I show no further questions at this time. I will now turn the call back to Mr. Andy Hendricks.
Thanks, Sylvia. I just want to thank everybody at Patterson-UTI for all the great work they did in the first quarter, especially navigating the winter storms and thanks for the team and a good quarter. Thank you.
Ladies and gentlemen, that does conclude today’s conference. Thank you again for your participation. You may now all disconnect.