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spk01: This is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on hold. Thank you for your patience. Oh, my God. Good day. Thank you for standing by. And welcome to the Pedersen UTI Energy Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press Star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, press Star 0. I would now like to hand the call over to your host, Mike Drickemore, Vice President of Investor Relations. Please go ahead.
spk05: Thank you, Felita. 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 six months ended June 30th, 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 and 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. In addition, you'll find important information for stockholders and cautionary statements included at the end of 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?
spk02: Thanks, Mike. Good morning and welcome to Patterson UTI's second quarter conference call. We are pleased that you can join us today. For the second quarter, revenues and adjusted EBITDA increased sequentially as drilling and completion activity has steadily improved from the lows of last summer. Based on conversations with customers about the remainder of this year and into early 2022, we expect increasing activity and increasing pricing. In contract drilling, since the beginning of the second quarter, our rig count has increased by eight rigs. In addition to the overall increase in our industry, we continue to see increasing customer interest in reducing emissions through the use of alternative power sources, and we believe these lower emissions technologies, where we have a leadership position, are a differentiator. As an example, we were recently notified by a major international EMP that we will be increasing our activity within their drilling program and activating multiple rigs over the next year. This major customer intends to use a combination of our natural gas powered and our highline utility powered rigs. In pressure pumping, we took advantage of opportunities with customers to accelerate our reactivation plans, and we activated two spreads late in the quarter. I'm very pleased with the performance of our team this quarter as they met margin expectations while also incurring reactivation costs for these two spreads at the end of the quarter. These two spreads are expected to be accretive to our average adjusted EBITDA per spread and will help improve our fixed-cost coverage going forward. We continue to see opportunities to economically reactivate additional spreads, and as such, we expect to reactivate another spread early in the fourth quarter. Our pressure pumping team has done a great job in controlling costs through greater operational efficiency and has also successfully achieved higher pricing to improve margins. With the improved pricing, we expect a meaningful improvement in our third quarter pressure pumping margins. As well as the increasing demand for lower emissions technologies and consistent with our disciplined approach to capital spending, we plan to continue to upgrade engines on existing pump trailers to tier four dual fuel. We continue to believe that Tier 4 dual fuel has many advantages, especially over electric frac spreads, which in reality also burn natural gas. We believe this premium technology generates savings and offers operational flexibility for the customer and better economics for Patterson UTI. We've also started to gain considerable experience performing simulfracs, and I believe we are one of a very few companies to have completed simulfracs in both the Northeast and in the Permian. In directional drilling, the reliability and performance of our mercury measurement while drilling system and our impact directional drilling motors have allowed us to continue gaining market share. During the second quarter, we saw a 70% increase in the number of rigs on which we provided directional drilling services, which led to better-than-expected revenues. But margins were impacted by the higher reactivation costs as we grew. With that, I will now turn the call over to Andy Smith, who will review the financial results for the second quarter.
spk07: Thank you, Andy, and good morning. For the second quarter, we reported a net loss of $103 million, or 55 cents per share, while consolidated adjusted EBITDA was $35.4 million. Before I get into the segments, as a general comment, due to improving activity levels and increasing tightness in the overall labor market, we are starting to see general oilfield cost inflation across our segments. This inflation, combined with the increasing challenge of attracting employees to the industry, is increasing the complexity of reactivating equipment. We believe this challenge, combined with the increasing demand for premium drilling and completion services, will support higher pricing going forward. Within our segments, in contract drilling, our average rig count improved for the third consecutive quarter and averaged 73 rigs in the second quarter, up from 69 rigs in the first quarter. Average rig margin per day during the second quarter was $6,250. Average rig operating cost per day increased relative to the first quarter due primarily to fewer rigs on low-cost standby higher rig reactivation expenses, and the sales and use tax refund in the first quarter that did not recur in the second quarter. At June 30th, 2021, we had term contracts for drilling rigs providing for approximately $210 million of future day rate drilling revenue. Based on contracts currently in place, we expect an average of 37 rigs operating under term contracts during the third quarter, and an average of 24 rigs operating under term contracts during the four quarters ending June 30th, 2022. For the third quarter, we expect our rig count to improve to an average of 81 rigs, ending the quarter at 83 rigs. Contract drilling gross profit is expected to improve to approximately $46 million. Average rig margin per day is expected to be approximately flat with the second quarter level. In pressure pumping, we averaged eight active spreads during the second quarter, ahead of our expectation for seven spreads as we reactivated two spreads during the month of June. Even after costs associated with the reactivation of the extra spread, pressure pumping gross margin improved to $9.7 million for the second quarter. Pressure pumping revenues increased almost 50% sequentially to $112 million. For the third quarter, we expect to average nine active spreads. Pressure pumping revenues are expected to improve from second quarter levels by more than 30% to approximately $150 million, and gross margin is expected to be approximately $18 million. Turning now to directional drilling, revenues for the second quarter increased 26% to $24.9 million from $19.7 million in the first quarter, as the number of rigs on which we provided directional drilling services increased by 70% during the second quarter. However, with the increase in reactivation costs, gross margin for the second quarter decreased slightly to $2.5 million. For the third quarter, we expect to further benefit from higher activity levels with revenues increasing approximately 35% sequentially to $34 million. Gross profit for the third quarter is expected to be $4 million. Turning now to our other operations, which includes our rental, technology, and E&P businesses. Revenues for the second quarter improved to $13.2 million, and gross margin improved to $2.8 million. For the third quarter, we expect revenues to improve to $14 million with a gross margin of $4.5 million. On a consolidated basis for the third quarter, we expect total depreciation, depletion, amortization, and impairment expense of approximately $141 million. Selling, general, and administrative expense is expected to be approximately $23 million for the third quarter, And for the full year 2021, we expect an effective tax rate of approximately 17%. Based on conversations with customers about increasing activity levels into 2022, we are increasing our 2021 CapEx forecast to $165 million, including $105 million for contract drilling, $35 million for pressure pumping, and $25 million for directional drilling, other and general corporates. The increase in our capex budget primarily consists of investments in high-demand items that generate ancillary revenue, including specialty drill pipe and ESG-related technologies, as well as higher maintenance capex due to increasing activity. Also, we will be paying a quarterly cash dividend of two cents per share on September 16th, 2021, to holders of record as of September 2nd, 2021. With that, I'll now turn the call back to Andy Hendricks.
spk02: Thanks, Andy. It's been a while since we've had this level of visibility into future quarters, and I'm very encouraged by the continuing increase in EMP demand that we are seeing for our services in both drilling and completions. While this is primarily driven by the trading ranges of commodities over the last six months, it is also driven by Patterson UTI's overall high level of well-site performance and efficiency, as well as our ESG-related technologies. I expect this demand continues at least into 2022. For Patterson UTI, as we've discussed, this means both increasing activity and increasing pricing in our businesses. Finally, let me provide a short update on our pending acquisition of Pioneer Energy Services. Subject to regulatory approvals, customary closing conditions, and the approval of Pioneer Energy Services stockholders, we continue to expect this acquisition will close in the fourth quarter. Pioneer's experienced people, high-quality assets, and efficient operations in the United States and Colombia will be a valuable addition to our business. With that, we would like to thank all of our employees for their hard work, efforts, and successes, both in our industry and in general, and we look forward to a stronger second half of the year. Kalita, we would now like to open the call to questions.
spk01: At this time, if you would like to ask a question, press star and the number one on your telephone keypad. That's star one to ask a question. And your first question comes from the line of Mike Sadala with Bank of America.
spk06: Hey, good morning, everyone. Good morning. So, Andy, you had mentioned some upgrades on the FRAC fleet, the Tier 4 dual fuel. Maybe you could just give us an idea, I guess, where you are today in terms of kind of capacity of next-gen FRAC equipment and if any of the CapEx bumps. that you all announced today is on the frac upgrades. And as we think about that, you know, maybe talk us through economics on what we see from those upgraded plates today.
spk02: Yeah, what we're doing is we're actually changing the engines from, you know, older models of engines to the new Tier 4 dual fuels. So it's not a change in the horsepower. It's an engine swap on the trailer. We started this a few months ago with Tier 4 dual fuel, and we're going to continue to invest some capex to do this for the rest of this year and into next year to get ready to have even another full spread ready for Q1 next year. This is – I mean, there's certainly some CapEx in there, but it's a relatively small amount compared to overall CapEx for the company. But we see this as a very cost-effective solution to, you know, upgrade the level of technology on our existing equipment without adding horsepower into the market.
spk06: Understood. And then maybe – You know, you can just, I guess, talk us through just on the rig side, maybe describe kind of where you think customer interest is coming from as we look a little further out. You know, obviously this year, the rig demand, you know, incremental rig demand has been dominated by private EMPs. You know, the duct inventory that was held by the public EMPs looks like it's largely been exhausted. So it seems like the setup's there that the public EMPs have to come back for rigs as well. Do you, I guess, agree with that assessment? And if it plays out that way, just talk through what it means for Patterson, you know, kind of relative to, you know, a market that's been more dominated by private EMPs.
spk02: Yeah, certainly, you know, as we came off the downturn last year, it was privates that moved quicker. But, you know, when you look into what we're seeing in the second half of this year and into 2022, it's really broad. I mean, it's privates that are going to add RIGS. It's mid-sized publics. It's large international EMPs. So we're just seeing more of a broad-based uptake in RIGS with the discussions we're having going into early 2022. Got it. Thanks.
spk01: Your next question comes from the line of Vibs Coker. Vibs, the sham with Coker and Palmer and Coker.
spk00: Hey, thank you for trying, and thank you for taking my question, gentlemen. Good morning, Bev. Good morning. So I guess if we talk about pressure pumping, could you help us think about, like, in the market, are we today where we actually can get better pricing for ESG-friendly fleet versus conventional fleets?
spk02: Yeah, we believe that... You know, by changing out the engines and offering tier four dual fuel on existing pump trailers that, you know, not only can pick up more work, but we can also get better pricing and margins on that particular work. I mean, it offers a lot of benefits for the customer in terms of cost savings. But as I mentioned earlier, there's also good economics for us.
spk00: Okay. Switching to land drilling, as we move from here into 2022, 2023, I'm not trying to bring you down for number, but just generally, how do you think about where the land drilling margins could go back to versus what we saw in the prior cycles? Obviously, one change is like now you're providing more services on the same rig, so just putting that in context would be helpful.
spk02: The way that I see this evolving, because we're already in discussions from putting up rigs across the second half of this year and into 22, it's actually quite interesting. Like I mentioned, we just haven't had this level of visibility in a long while, and my concern is that You know, we've got some of our operators, customers that are still working through their budget process, and they may not even make decisions until late this year or early next year on rigs they want. And by that time, some of the rigs that they've been used to running are not going to be available. And so I think you're going to have this situation as we move into 2022 that's more of a fear of missing out. And, you know, there's going to be more of a scramble for the best super spec rigs that are out there. Now, granted, we all have a lot of high spec rigs, but when you talk about, you know, the best performing super spec rigs and with some of the operators a little bit slower in their budget cycles, I think they're going to land in a space in early 22 that they're not going to have necessarily the rigs that they want to have. And when you see that happening in the cycle, that's really a big push on pricing and that's a big push on margins. It's been a while since we've seen that too. And so I do think it evolves into 22 that we have the possibility to get back to some of the higher margins that we've seen in the past and other cycles. And part of what may drive that is when some of these larger operators that are a little bit slower decide that they want to add rigs and they can't get all the specs that they want they've now got to work with a drilling contractor to pay for upgrades and those those kind of discussions drive pricing and i think you'll hear more of that as we get into 2022. so maybe what i'm hearing is really as opposed to i mean correct me if i'm if i'm misinterpreting this but what i'm hearing really is in fourth quarter when we typically think about like a decline
spk00: Given where the commodity prices are, and based on your customer conversation, actually we can see more rig increases in 4Q. Is that fair interpretation of what you're saying?
spk02: I think you can take fourth quarter decline and throw it out the window this year. You look at where commodity prices are trading, you know, oil, WTI above $65 a barrel, natural gas above $3. We're not considering a fourth quarter decline.
spk00: That's very helpful, and thank you for taking my question, gentlemen.
spk01: Again, in order to ask a question, press star 1 on your telephone keypad. That's star 1 to ask a question. Your next question is from the line of John Daniel with Daniel Energy.
spk04: Hey, guys. Good morning. Thank you. Morning, John. Hey, I know you can't name the E&P company. I'm not asking for that, but you talked about the international E&P, thus presumably a large one picking up multiple rigs. I'm curious if you could just maybe explain hazard a guess as to what that relative change in incremental rigs versus where they are today. Just frame it for us. And when that would happen. If you can't, that's fine. And the reason I'm asking is, obviously, you see the privates going from zero to one, one to two. I mean, the percentage changes are huge. And we typically think of these large guys as being disciplined, but everything would suggest they're going to be adding rigs, and maybe significantly. So just your thoughts.
spk02: So I think this may be a situation that's specific to us because this is a large major EMP that has a drilling program that may grow their drilling program somewhat, but we're very likely to be growing share within their existing drilling program. So I think there's still relative discipline out there. I'm not calling it a lack of discipline or a big ramp-up in their particular program. But because of the technology, because of the performance and efficiency that we've been offering with this particular operator over the last few years, our team has done a great job, and we see ourselves growing share. And ESG and emissions-related technology are part of that equation as well.
spk04: Okay. Fair enough. On the frack side, I just want to make sure I've got this sequencing right. You're running eight today. Is that right? Going to nine?
spk02: Correct. Eight going to nine. Okay. We're at nine. We just finished it. Yeah, we just activated number nine. And then we're going to 10 early Q4. Could be late Q3, but likely early Q4. Okay.
spk04: And if you said this, I apologize. The number of tier, let's just say year end, what would be roughly the tier four DGB split within your fleet given the investments?
spk02: So, you know, we have a number of different things in our fleet. We have Tier 2 dual fuel. We have Tier 4. We have Tier 4 dual fuel. By the end of this year, with changing out more engines, we'll be up to a full spread of Tier 4 dual fuel, and then we'll also be set up for a second spread of Tier 4 dual fuel next year.
spk04: Okay. All right, guys. Thank you very much for answering the questions.
spk02: Thanks.
spk01: Your next question is from the line of Scott Levine with Bloomberg.
spk03: Hi. Good morning, guys. Good morning. So I wanted to see if I can get a sense of your outlook for net pricing for both drilling and pressure pumping for the back half of this year. If I heard correctly in your prepared comments, you said you expected your average daily rig margins to hold about flat in the third quarter, and that's what I think we heard out of one of your competitors yesterday. But your activity levels are increasing, and we've seen the inventory of ducks drop pretty considerably recently. So is it fair to assume that The pace of activity and drilling accelerates, but maybe the net pricing lags a bit behind the recovery net pricing and pressure pumping? Or are you seeing it from a different vantage point from your perspective? Just curious there.
spk02: Yeah, so our view is we're seeing a steady increase in rig count throughout H2 and into 2022. We're also seeing an increase in pricing, but we've also had some cost inflation as well. So the cost inflation is keeping the margins flat quarter on quarter, but then we expect margins to improve after that.
spk03: And on the pumping side, is it a different situation or is the magnitude any different or is it a roughly similar trend as far as you can say?
spk02: I think pumping is coming off a more challenging bottom, and as we increase the number of spreads we're operating, we're improving margins by a mixture of increasing pricing and then better fixed cost coverage as well.
spk03: Understood. Thank you.
spk02: Thanks.
spk01: Okay. In order to ask a question, press star 1 on your telephone keypad. Press star 1 to ask a question. There are no other questions at this time.
spk02: All right. Well, we thank everybody for dialing in to our earnings call this morning, and have a good quarter. Thanks.
spk01: This concludes today's conference call. You may now disconnect.
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