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spk05: Ladies and gentlemen, this is the operator. Today's call will begin momentarily. Thank you for your patience. Thank you for standing by. At this time, I would like to welcome everyone to the Paterson UTI Energy second quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Mike Drickmer, Vice President of Events to Relations, you may begin your conference.
spk01: Thank you, Cheryl. Good morning, and on behalf of Patterson UTI Energy, I'd like to welcome you to today's conference call to discuss the results for the three-month end of June 30th, 2023. Participating in today's call will be Andy Hendricks, Chief Executive Officer, Andy Smith, Chief Financial Officer, and Mike Holcomb, Chief Operating Officer. A quick reminder that statements made in this conference call that state the company's or management's plans, intentions, Targets, beliefs, expectations, or predictions for the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties as disclosed in the company's SEC filings, which should cause the company's actual results to differ materially. The company undertakes no obligation to publicly update or revise any forward-looking statement. Statements made in this conference call include non-GAAP financial measures. 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. And now, it's my pleasure to turn the call over to Andy Hendricks for some opening remarks.
spk00: Andy? Thanks, Mike. Good morning, and welcome to Patterson UTI's second quarter conference call. Our drilling business performed very well, with sequential increases in both revenues and margins. Contract renewals favorably impacted our average revenue and adjusted margin on a per day basis, offsetting the slight decline in our rig count. The improvement in contract drilling revenues and margin during the second quarter met our expectation and our rig count outperformed the broader industry decrease. The decline in industry activity had a more significant impact on our pressure pumping business with volatility and white space impacting results. The commodity price volatility in June led to some customers deciding to reduce drilling and or completion activity. For us, the decrease in frac activity occurred much faster than the decrease in our rig count, and as such, we believe our pressure pumping activity has already reached a trough here in July, while we expect additional rig releases over the next few weeks. With the recent strength in oil prices along with natural gas futures in contango, we believe the industry rig count is near a bottom, and both rig count and frac activity will improve later in the year and in 2024. In contract drilling, we ended the second quarter with 127 active rigs and expect a reduction of approximately 10 rigs during the third quarter, of which six have already been released and two more are expected to occur within the next week. These releases are the result of notifications received primarily in late June. Following these near-term rig releases, we expect our rig count to stabilize and are optimistic that the recent strength in oil prices may positively impact future drilling activity. Despite recent rig releases, day rates remain strong, with recent contract renewals for super spec rigs in the low to mid-30s, including ancillary revenue. As previously discussed, we continue to prioritize margins over activity. In pressure pumping, we believe the decline in activity is already behind us, and we have additional work scheduled to begin later this quarter. Based on current activity levels, we stacked a Tier 2 diesel spread in order to accelerate its conversion to a Tier 4 dual fuel. When this conversion is complete, 10 of our 12 spreads will be dual fuel capable, including four spreads that will be Tier 4 dual fuel, which better positions us to take advantage of what we expect to be increasing completion activity later in the year and in 2024. Pressure pumping pricing has been challenged recently given the decrease in activity, but the market pricing for dedicated work has held up better than spot work. With that, I'll turn the call over to Andy Smith, who will review the financial results for the second quarter. Thanks, Andy.
spk02: Net income for the second quarter was $84.6 million, or 40 cents per share, which included $7.9 million of merger and integration expense and $3.8 million of impairment expense in our E&P business. During the second quarter, we repurchased 1.8 million shares, which brings the total repurchases under our share repurchase program through the first half of the year to 7.4 million shares, or approximately 3.5% of the shares that were outstanding at the beginning of the year. Including $33.5 million of dividends, we have returned approximately $126 million of cash to our shareholders through the first six months of 2023. At June 30th, $281 million remained under our share repurchase authorization. However, our ability to repurchase shares during the third quarter may be limited due to the pending merger with NextYear. We remain committed to targeting a return of 50% of free cash flow to shareholders through a combination of dividends and buybacks. Through the first half of 2023, we're well ahead of this target as we opportunistically repurchase shares during the first quarter. Based on our outlook for the second half of the year, we're lowering our 2023 CapEx forecast to $485 million. This forecast is comprised of approximately $280 million of CapEx for contract drilling, $140 million for pressure pumping, $20 million for directional drilling, and $45 million for our other businesses and general corporate purposes. In contract drilling, average adjusted rig margin per day in the U.S. increased $1,030 sequentially to $16,910, driven by a $1,190 increase in average rig revenue per day to $35,940. At June 30, 2023, We had term contracts for drilling rigs in the U.S. providing for approximately $760 million of future day rate drilling revenue. Based on contracts currently in place in the U.S., we expect an average of 71 rigs operating under term contracts during the third quarter of 2023 and an average of 44 rigs operating under term contracts over the four quarters ending June 30th, 2024. In Colombia, second quarter contract drilling revenues were $12.9 million with an adjusted gross margin of $3.7 million. For the third quarter in the U.S., we expect our average rig count will be 119 rigs. Average rig revenue per day is expected to be approximately $35,500, and average rig operating cost per day is expected to be $19,400, which reflects a slight increase in operating costs associated with the number of rigs being stacked this quarter. In Columbia, we expect to generate approximately $8.4 million of contract drilling revenue during the third quarter, with adjusted gross margin of approximately $2 million. In pressure pumping during the second quarter, increased white space in the calendar and lower pricing on primarily spot market work contributed to a sequential decrease in revenues and margins. Second quarter pressure pumping revenues were $250 million, with an adjusted gross margin of $53.8 million. For the third quarter, we plan to operate 11 spreads. We have had substantial white space in July, but we expect improving utilization through the remainder of the quarter. Maintaining enough crews for the increasing work will negatively impact margins in the third quarter. Accordingly, for the third quarter, pressure pumping revenues are expected to be approximately $230 million with an adjusted gross margin of $37 million. In our directional drilling segment, We experienced a decline in revenue and margin during the second quarter due primarily to reduced activity levels. Directional drilling revenues were $55.1 million in the second quarter, with an adjusted gross margin of $7.8 million. For the third quarter, we expect directional drilling revenues to decrease to $52 million, although expected adjusted gross margin is expected to be approximately flat with the second quarter. In our other operations, which includes our rental, technology, and EMP businesses, revenues for the second quarter were $21.1 million with an adjusted gross margin of $8.3 million. For the third quarter, we expect revenues and adjusted gross margin to be similar to the second quarter. On a consolidated basis in the second quarter, the total depreciation, depletion, amortization, and impairment expense amounted to $127 million, including $3.8 million of impairment charges at our EMP business. For the third quarter, we expect total depreciation, depletion, amortization, and impairment expense of approximately $122 million. Selling general and administrative expense for the third quarter is expected to be approximately $31 million. Our effective tax rate for 2023 is expected to be approximately 17%, although we do not expect to pay any significant U.S. federal cash taxes. With that, I'll now turn the call back to Andy Hendricks.
spk00: Thanks, Andy. Looking ahead, we are constructive on the overall U.S. onshore market. With WTI trading above $75 and natural gas futures above $3.50 in forward months, EMP operators should see significant improvement in their well economics. We expect that some operators will increase their activity in drilling and completions by year end and into 2024. As 2025 is planned to be a big year for LNG export, we expect to see activity in gas basins recover in 2024 to previous levels or higher. With the increasing activity in the gas markets, we expect overall utilization and pricing to improve into next year across the U.S. The U.S. onshore market is poised to remain steady and strong for the foreseeable future. Also, we are very excited about the recent announced transactions to strengthen our position as a leading provider of drilling and completion services in the United States. The merger with NextTier will bring together two top-tier and technology-driven drilling and well-completions businesses, creating a leading platform at the forefront of innovation. Similarly, Altera's leading position in the PDC drill bit business will expand our operational and technology platforms. expand our data portfolio, and broaden our geographic footprint through strong relationships with key international customers, especially in the Middle East. We continue to work toward closing these transactions and look forward to welcoming employees from both Nextier and Altera to the Patterson UTI team. With that, we'd like to thank all of our employees for their hard work, efforts, and successes to help provide the world with oil and gas for the products that make people's lives better. Cheryl, we'd now like to open the call to questions.
spk05: To ask a question, please press star 1 on your telephone keypad. Your first question is from Arun Jaronian of J.P. Morgan. Please go ahead. Your line is open.
spk03: Good morning, Andy and team. Andy, you guys have been able to kind of hold leading-edge day rates at attractive levels. You mentioned low to mid-30s. As we think about You know, 2024, you know, what's your confidence in being able to hold those types of day rates as we start thinking about kind of fine-tuning our model, you know, for next year?
spk00: You know, as we mentioned before, and good morning, Arun, as we mentioned before, we're really focused on trying to maintain, you know, day rates and margins, not focused on a market share. You know, things have gotten a little bit more competitive recently when you're not on term contract. And we decided we don't want to fight all these, and our rig count is going to go down a little bit. But this is more of a softness that we see improving later in the year and certainly going into next year. But it's our objective to try to maintain pricing where we can. And when you look at the leading edge down into maybe low 30s to mid 30s, And that's including everything. It really hasn't come down that much. Let me hand it over to Mike Holcomb. He'll have some more comments on that, too.
spk04: I think the thing that I would add is, I mean, for us, leading edge this quarter has met renewals with existing customers and clients. And there's probably some work out in the market that's a bit more competitive than that. But if you think about it looking forward, commodity prices stay in the more recent range going forward. then we're very confident that pricing is going to be stable with some upside as we move into the next year. I think there it really depends on
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