Patterson-UTI Energy, Inc.

Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson UKI third quarter 2025 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, press star one again. Thank you. I will now turn the call over to Michael Sabella, Vice President of Investor Relations. Please go ahead.

Thank you, Rebecca. Good morning, and welcome to Patterson UTI's earnings conference call to discuss our third quarter 2025 results. With me today are Andy Hendricks, President and Chief Executive Officer, and Andy Smith, Chief Financial Officer. As a reminder, statements that are made in this conference call that refer to the company's or management's plans, intentions, targets, beliefs, expectations, or predictions for the future are considered forward-looking statements. 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. The required reconciliation to GAAP financial measures are included on our website at tatenergy.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.

Thank you, Mike, and welcome to our third quarter earnings conference call. The performance of Patterson UTI has continued to demonstrate resilience this year, and our teams have done a great job executing in a challenging environment and staying focused on optimizing our business in the areas that we can control. We are continuing to see success as we enhance our commercial strategies through additional service and product line integration and performance-based agreements, while at the same time lowering our cost structures. which is helping us to lessen the impact from moderating industry activity this year. Headlines over the past six months have highlighted cautionary signals, including oil supply growth from OPEC+, shifting demand patterns as trade policies evolve, and overall global macroeconomic uncertainty. But the U.S. shale picture today is more constructive than many expected just a few months ago. Oil prices have fallen, but overall have so far remained more resilient than many predicted, with long-term global demand growth continuing and anticipated supply additions slower to translate into physical barrels than headlines have suggested. At Patterson UTI, while the business environment this year has brought unique challenges, we are adapting with the market, both commercially and structurally, and we continue to generate healthy levels of free cash flows. while still investing to expand our technology edge. Our efforts and focus today center on driving improvements in our outlook for profitability and cash generation against a steady market backdrop. And each of our businesses are stepping up to this challenge. In the U.S., oil production does not yet fully reflect the impact of activity reductions over the past six months. and we believe current industry activity is already below levels needed to hold U.S. production flat. Any further activity reductions from current levels would likely result in additional pressure on future U.S. output, which could negatively impact global oil supply in 2026. On the natural gas side, the outlook as we move into 2026 appears to be favorable. Physical demand growth from LNG is now starting to come online, And our customers are beginning to make plans to satisfy the expected multi-year growth in demand, which is likely to require higher drilling and completion activity compared to current levels. Even as U.S. shale drilling and completions activity is moderated through 2025, our teams have delivered results that are far more resilient relative to prior periods of activity moderation. Our customers are sophisticated, and they are demanding innovative technologies from both our drilling and completions businesses, which is widening the performance delta among service providers. The increasing reliance on differentiated technologies puts Patterson UTI in a strong position given the high quality of our operations. We expect this relative margin resiliency to continue as customers rely more on high-end service providers. Operationally, our teams are functioning at a high level in a competitive market. Our drilling team has seen activity stabilize, and our rig count today is slightly above where we were at the end of the third quarter. Our completion activity continues today at a similar level relative to where we exited September, and we expect completion activity will remain steady for most of the quarter, although typical seasonality is likely to impact the segment during the holidays. As the market steadies, we see opportunities in both our drilling and completions businesses to invest in technologies that are in high demand and short supply, with our expectation that any incremental investments will earn strong returns. As we prepare our 2026 budget, we are working with technology-focused customers on opportunities to deploy new technologies in both drilling and completions, and expanding our competitive edge should widen the advantage we believe we have over much of the industry. As we approach 2026, while we are not ready to give specific guidance for what we expect next year to look like, we are comfortable saying that we do expect lower capital expenditures compared to 2025. Even on lower capex next year, we expect to fully maintain the high demand portion of our fleet, as well as invest in new technologies across our businesses, while still generating meaningful free cash flow for our investors. We remain committed to returning at least 50% of our annual free cash flow to shareholders through a combination of dividends and share repurchases. Moving to capital allocation, we are operating with significant flexibility, with the expectation for continued solid free cash flow and a strong balance sheet, giving us optionality for 2026 and beyond. Our leverage remains low, with net debt to EBITDA just over one-times, We closed the quarter with $187 million in cash and an undrawn $500 million revolver, and the fourth quarter should deliver our strongest free cash flow quarter of the year, which should strengthen our capital flexibility as we head into 2026. We will continue to deploy capital only towards opportunities we believe will deliver high long-term returns, including the option to further accelerate our share repurchase programs. Our U.S. contract drilling business saw activity stabilize as we exited the third quarter, and we expect this stability to continue through the rest of 2025. Recent revenue per day for drilling rigs remains in the low to mid-30s range. Our directional drilling business is performing exceptionally well, benefiting from strong service quality and new technology deliveries, as well as further integrated offerings with both our drilling rigs and our drill bits. Today, we are focused on driving further improvement beyond relying simply on a recovery and industry activity. We are looking to expand our technology-driven commercial models by growing integration across our products and services and through additional performance-based agreements, as we also work to lower our costs. Our drilling team is delivering strong operational performance for our customers by utilizing our Tier 1 Apex rigs and our suite of proprietary Cortex digital services. including adaptive auto driller and predictive models, which become platforms for future artificial intelligence, to enhance the quality of the service we are delivering for all of our customers. Our customers are seeing the benefits of using a Patterson UTI rig and our suite of digital solutions and complementary services and products. The digital and technology package remains a key factor to delivering differentiated solutions for our customers. and the investments we have made have helped margins hold above what our drilling business has achieved in previous periods of activity moderation. Our completion services segment demonstrated strong relative performance in Q3, with activity holding steady compared to the second quarter. Our commercial team did an outstanding job managing the frack calendar and aligning us with high-quality customer base, while our operations team executed at an exceptionally high level. Pricing for horsepower hour in our frack business was steady compared to the second quarter, with lower sequential revenue mostly a function of less sales of low-margin sand and chemical products. We also started to see benefit of cost reductions in the first half of the year. The completion's market remains competitive, but our operational quality is proving to be a major differentiator. We recently set a record for continuous pumping for one of our customers in the Northeast, where we safely pump 348 hours straight on a single fleet. This record highlights the capabilities of our digital performance center in Houston to implement new operating techniques with the support of our local field teams. Our new proprietary EOS completions platform is advancing our technology edge through three primary products, Vertex Automation Controls, FleetStream, and IntelliSTEMS. This platform will allow us to further implement artificial intelligence and machine learning into the completions process. After successful deployment in the third quarter, we continue to deploy our Vertex automation controls across all company fleets, with projection for full deployment by year end. This will allow us to implement closed-loop automation for all pump types to improve our operating efficiency and asset management. while delivering optimized completion designs for our customers based on real-time surface measurements. Fleetstream will provide data visualization and analytics, a platform to acquire and analyze reservoir measurements and streamline data workflows for our customers and provide a new revenue stream for our completion services segment. Finally, in combination with work done on our drilling rigs and through modern machine learning, Our Intellistim reservoir technologies leverage artificial intelligence to provide real-time reservoir insights to better understand rock properties and optimize completion designs to maximize well performance. We see multiple ways to monetize our digital investments. We are already seeing the investments lower operating and capital costs through higher asset turns. Additionally, on the revenue side, we've already signed two customers to commercial deals for 2026, specifically for our EOS platform, and we think there is significant revenue opportunity as well as a path to create closer and more integrated long-term relationships with our customers. Our Emerald fleet of 100% natural gas powered equipment remains in high demand, and we continue to strategically invest in new technologies that are driving accretive returns for the business. We've recently taken delivery of our first commercial direct-drive pumps, which will allow us to deliver 100% natural gas-powered solutions for our customers for significantly less capital deployed relative to electric track fleets. The direct-drive pumps are scheduled to begin long-term dedicated work in the fourth quarter. We think recent advancements made in high-horsepower direct-drive natural gas engines have helped make this the most capital and cost-sufficient solution for our businesses. Our drilling products business had another good quarter in North America, where our U.S. revenue per U.S. industry rig set another company record. Since we acquired Altera in 2023, we've seen a roughly 40% increase in U.S. revenue per U.S. industry rig, with a more than 10% increase in market share for our drill bit products on Patterson UTI rigs. In Canada, we saw a strong recovery in revenue coming out of spring breakup, even as total industry activity was slightly below expectations. International revenue declined, mainly in Saudi Arabia as drilling activity in that country slowed. Outside of Saudi Arabia, revenue was strong internationally, and we expect international revenue to increase in the fourth quarter. On the margin side, the quarter did see higher than normal bit repair expenses in July, which resulted in lower margins for the quarter, although margins recovered towards historical levels later in the quarter. Our fully integrated P10 Digital Performance Center, located in Houston, is the backbone for the entire company. The digital center has been critical as we execute and optimize drilling and completion designs for our customers. The information that we can provide both our team and our customers has improved the efficiency of our operations and brought us closer to our customers as we strive to provide differentiated service. While U.S. shale activity is moderated this year, we have not stood still. We are focused on finding ways to make our business more competitive, even as industry activity appears likely to remain in a tight range for the foreseeable future. We're using this relative stability to prepare for what we think the industry will look like over the next several years, commit capital to the right areas, and execute our own strategy to maximize shareholder value. We will continue to target profitable technology investments that we believe will drive strong cash returns for our shareholders, and we intend to be a leader across all of our business as shale evolves. I'll now turn it over to Andy Smith to review the financial results for the quarter.

Thanks, Andy. Total reported revenue for the quarter was $1,176,000,000. We reported a net loss attributable to common shareholders of $36 million, or 10 cents per share, and an adjusted net loss of $21 million. Adjusted EBITDA for the quarter totaled $219 million. Other operating expenses for the quarter totaled $23 million, of which $20 million resulted from the accrual of expenses associated with personal injury-related claims for incidents that occurred several years ago, partially offset by a favorable contract dispute resolution. Our weighted average share count was 383 million shares during Q3, and we exited the quarter with 379 million shares outstanding. During the first three quarters of the year, we generated $146 million of adjusted free cash flow. As expected, during the third quarter, we saw working capital benefits, and we expect working capital will be a tailwind again in the fourth quarter. During the third quarter, we returned $64 million to shareholders, including an $0.08 per share dividend and $34 million for share repurchases. Over the two full years since we closed the next-year merger and doTERRA acquisition through September 30, 2025, we have repurchased 44 million Patterson shares in the open market. We have reduced our share count by 9% since that time. This is in addition to reducing net debt, including leases, by nearly $200 million and paying a dividend that is currently an annualized 5% of our share price. In our drilling services segment, third quarter revenue was $380 million and adjusted gross profit totaled $134 million. In U.S. contract drilling, we totaled 8,737 operating days for an average operating rig count of 95 rigs. Geographically, compared to the second quarter, activity was flat outside the Permian Basin, with Permian activity responsible for the sequential decline in our rig count. For the fourth quarter in drilling services, we expect an average rig count to be similar to the third quarter. We expect adjusted gross profit will be down approximately 5% from the third quarter. Revenue for the third quarter in our completion services segment totaled $705 million with an adjusted gross profit of $111 million. We saw flat activity on a pump-hour basis compared to the second quarter, with margins benefiting from improved operating efficiency and some cost reductions that were initiated in the segment during the first half of 2025. We saw improved efficiency as several of our larger fleets that saw gaps in the second quarter had more consistent schedules. Additionally, our power solutions natural gas fueling business saw an improvement as natural gas demand in the Permian continues to grow as customers look to take advantage of weak regional natural gas prices by using more of the commodity as fuel. Overall, completion's revenue was lower on a decline in sales of low margin sand and chemicals products. For the fourth quarter, we expect completion services adjusted gross profit to be approximately $85 million, with less seasonality compared to the fourth quarter last year. Third quarter drilling products revenue totaled $86 million with an adjusted gross profit of $36 million. Performance was strong in our US and Canadian businesses, while international revenue was impacted by lower activity in Saudi Arabia, which is our largest international market. Margins were affected by higher bid repair expense in July, although they returned closer to historical levels by the end of the quarter. For the fourth quarter, we expect drilling products adjusted gross profit to improve slightly, with relatively steady results in the U.S. and Canada and higher revenue and gross profit internationally. As a reminder, roughly 70% of the revenue in our drilling products segment is generated in the U.S., with around 10% in Canada and 20% international. Other revenue totaled $5 million for the quarter, with $2 million in adjusted gross profits. We expect other adjusted gross profit in the fourth quarter to be steady compared to the third quarter. Reported selling general and administrative expenses in the third quarter were $62 million. For Q4, we expect SG&A expenses will be relatively steady sequentially. On a consolidated basis for the third quarter, depreciation, depletion, amortization, and impairment expense totaled $226 million. And for the fourth quarter, we expect it will be approximately $225 million. During Q3, total CapEx was $144 million, including $47 million in drilling services, $81 million in completion services, $13 million in drilling products, and $3 million in other and corporate. For the fourth quarter, we expect total CapEx of approximately $140 million. Our full 2025 CapEx is now expected to be less than $600 million, even before considering the benefit of $33 million in asset sales we have realized through the third quarter. Our updated capital expenditure budget is lower than previously expected. We closed Q3 with $187 million in cash on hand, and we did not have anything drawn on our $500 million revolving credit facility, and we did not have any senior note maturities until 2028. Through the first three quarters of 2025, we have returned $162 million to shareholders through dividends and share repurchases. Free cash flow is likely to remain strong in the fourth quarter, which is expected to be our highest free cash flow quarter of the year. Our board has approved an eight cent per share dividend for the fourth quarter of 2025, payable on December 15th to holders of record as of December 1st. I'll now turn it back to Andy Hendrich for closing remarks.

Thanks, Andy. I want to close the call with some comments on our company and the ministry. I'm very pleased with our team's execution in the third quarter, where we are outperforming our competitors in many areas of our market. As well, we continue to make the necessary cost reductions to align the company with the projected levels of activity and maximize long-term free cash flow. This past year has been one of the most unique years since shale emerged as a major source of oil and gas over a decade ago. In many ways, the U.S. shale oilfield services industry has outperformed each previous cycle. Our margins are holding up far better than what is typical in periods of activity moderation. Equipment bifurcation and capital availability is leading to disciplined behavior across our industry. And customer consolidation is leading to a more productive environment at the high end of the oilfield services market relative to the overall market. Our third quarter results reflected a stabilization of industry activity as we exited the period. In absent normal seasonality and our completions business, we expect activity to remain relatively steady through year end. We fully recognize and acknowledge that the macro outlook is a driving force in investment decisions. Lower commodity prices have slowed overall activity in the U.S. for the past couple of years. However, our business has remained resilient, and we are focused on investing in technology, maximizing our long-term pre-cash flow and returning cash to shareholders, and we think our strategy will create the most value for Patterson UTI shareholders over the long term. There's much to be proud of with the way our teams are operating, but even as the outlook has stabilized, we are not content to simply wait for a market recovery. We intend to stay focused on our plan to maximize the value of our unique commercial model and technology offerings across drilling and completions. And we see evidence that customers are becoming increasingly receptive to more integration and performance-based pricing as they, too, search for ways to improve their own returns. We are just at the beginning of realizing the benefits of that journey for the company. The goal for our business leaders is clear. We need to improve our position in the markets where we operate. We are confident that our teams are focused and up to the challenge, and we look forward to proving that out over the next year. As we start to prepare for 2026, what we see right now is another year of strong free cash flow. Our balance sheet is in great shape, our liquidity is strong, and we are operating with an extreme degree of capital flexibility. Our focus on capital allocation should allow us plenty of opportunities to use our free cash flow to maximize the long-term value for our shareholders including through a potential acceleration of our share repurchase program. We are pleased with the quality of our operations, and we are confident that we can make our business even better. With that, I'd like to hand the call back to Rebecca and open up for Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Aaron Jayaram with J.P. Morgan.

Good morning, team. Andy, I wanted to talk a little bit about completion services. You know, one of the narratives we've heard from your peers is pricing trends continue to moderate even at the higher end of the market, yet you highlighted how your trends on a horsepower basis were relatively flat I was wondering if you could maybe elaborate on what you think is maybe driving that differential performance there.

Listen, I think our teams are just doing a great job out there and executing in the field some of the really high-end work that we've done with large simulfracs and trimulfracs. We're burning significant amounts of natural gas. We're delivering that natural gas to location. We're maximizing displacement of diesel in some cases or on full electric jobs. or, you know, full emerald jobs, you know, providing significant amounts of natural gas and fuel savings. And everything that we have that can burn natural gas is out and working. And so, we don't feel a lot of pressure to, you know, reduce pricing from where we're at. Now, you know, we've, as you know, the industry's discussed, there's been some big tenders over the last few months. Some of those are still in process, but I think overall, you know, the industry is showing a lot of discipline from where we are right now as well.

Great, great. And maybe, Andy, you could talk a little bit about your fleet renewal programs as we think about kind of 2026. You highlighted how you expect CapEx to be down at a corporate-wide level. But talk to us about, you know, planned investments and completion services. It sounds like you're pretty – excited about the direct drive pumps in there. So how should we think about fleet replacement for P10 on a go-forward basis?

Yeah, with the 100% natural gas direct drive Emerald systems that we've just taken delivery of this quarter and just deploying, we're excited about what we believe is a better use of capital, better allocation of capital in trying to provide 100% natural gas services out in the field. And so we're excited to have, you know, a number of those out working this quarter, you know, after shaking that technology down for the last two years. When it comes to 2026, we certainly haven't finalized the budget yet. But what you've seen us do over the last several years is invest at the high end without investing at the low end and just letting the, you know, move away from attrition. You know, we've reduced the overall horsepower we've had over the last few years from 3.3 million at a peak down to 2.8 million just by letting that lower tier equipment go away. And so I think, you know, there's a chance we'll make some similar decisions next year. We haven't finalized that yet, but we're not investing at the low end. And I think that helps keep the market tight. And if we see more demand next year for more of the 100% natural gas equipment, We'll continue to invest because we're getting good returns on that technology.

Great. Thanks a lot.

Your next question comes from the line of Scott Grubber with Citigroup.

Yes, good morning.

Good morning, Scott. Good morning, Scott.

Good morning. So power is a hot topic, and Patterson has expertise in running microgrids for drilling. So, Andy, you know, if we see the data center market pull more megawatts for on-site generation, do you think that opens an opportunity for Patterson then for the power market within the oil field? How are you viewing that opportunity today?

You know, we have significant technical expertise in power. We have our electrical engineering division that can engineer and manufacture microgrids. On any given day right now, we're producing around 500 megawatts of power across drilling incompletions. We operate generators, you know, from 1.1 megawatt all the way up to 35 megawatt turbines. And so, we have a lot of technical expertise. But when we look at, you know, some of the opportunities as you get into the larger power structures that AI and data centers are demanding, You know, you're at the 200 megawatt plus, you know, and some they're up to a gigawatt of power. That's not a mobile power solution. That starts to look more like an EPC contract where you've got a lot of big construction going on. So, you know, we're focused on what we can do and where we can bring value. We've discussed with some of our customers and still do from time to time to provide power for them in their own operations and production. And if we think that there's, you know, a reasonable market there, then we'll provide power for them. But, you know, we're very focused on delivering free cash flow. We don't want to spend a lot of capital on, you know, things that we don't think are going to bring immediate value for shareholders right now.

So the oil field production power opportunity for Patterson is still a kind of TBD. Is that the right way to frame it?

I would say we have, you know, we have discussions with our customers. These are customers that we're close to. But, you know, there's a number of companies that provide power for them already and have historically. So it's still a competitive market. If we think we can get a good return doing it, we'll do it.

Okay. And then I wanted to ask a question on the completion side. I know you guys have made some real strides in developing FAC optimization software. Can you provide some more color on this, you know, expanding opportunity, sorry, extending offering, you know, how many fleets are deploying optimization software today? And is this contributing, you know, to the improvement in segment performance despite the macro headwinds?

Yeah, so we're excited about what the team has done in terms of digital on the completion side. So they rolled out the EOS platform, and that's an evolving platform. that constitutes a large number of products, both at the Digital Center here in Houston, but also in the field. And one of those products is Vertex Automation for the frac operations. And so we've already rolled that out in the field and we continue to deploy. And it's going to be on all fleets by the end of this year. And when we say all fleets, you know, our automation can work on our Emerald, Electric, Emerald, 100% natural gas direct drive. It can work on our Tier 4 dual fuel. So we're not limited as to where we deploy the automation. And as we've discussed with a lot of you, you know, sometimes we're running blended operations with Tier 4 dual fuel and electric or 100% natural gas direct drive combined. And so, you know, our automation control software allows us to be able to work across all those platforms and combine situations as well. We have a number of customers that that's what they want to do. And so we don't have any limitations on the type of equipment we're deploying automation on and really excited about what that's going to do for us. You know, it's certainly a product we'll be able to charge for. You know, as I mentioned earlier, there's a number of products coming out of the platform that we believe we can monetize, and this is one of them. You know, it's going to, you know, probably provide some improvements to overall reliability of equipment. It's going to help us differentiate on how we deploy FRAX in the well and excited about what we can do with it.

Great. I appreciate the call, Andy. Thank you.

Thanks. Your next question comes from the line of Saurabh Pant with Bank of America.

Hi. Good morning, Andy and Andy.

Good morning. Good morning.

How are you, Saurabh?

Good, good, good, Andy. Andy, maybe I'll start with a bigger question. You talked about macro uncertainty. Things seem to have stabilized a little bit. We'll see where they go from here. As you talk to the customers, Andy, right, on the drilling side and the completion side, how does that uncertainty manifest? I'm just thinking on the drilling side, do they want shorter-term contracts to give them more flexibility on the completion side, maybe just more frequent contracts? Pricing reopeners as an example, right? How are these discussions doing, just given the uncertainty in the environment?

So, yeah, as we mentioned, activity has stabilized where we're at right now. You know, the rig count for us has come down this year, but the pricing has held up pretty well. You know, there is some pressure. It's a competitive market, but we're still in, you know, the low 30s on average, and so if you compare that to what has happened previous cycles of moderation, we're certainly in a better position today than we have been in the past as an industry. The industry is showing good discipline overall. In terms of what our customers are saying, you know, our customers are trying to keep their production up. And, you know, the wells that we're drilling, while they're becoming more efficient, are also becoming more challenging, both on the drilling side and the production side. We're drilling deeper wells. We're drilling longer laterals. And our customers are dealing, you know, in the Permian with wells that you know, have a higher gas ratio. And so, you know, all those things combined to where, you know, our customers are trying to, you know, keep up the production. And even though we're in a softer, you know, commodity environment right now, they're trying to keep their production up for their shareholders. And, you know, I think that you're going to see continuing intensity for what we do grow. And we're getting requests to add more technology to be able to meet the needs.

Right, right. No, that makes sense. That makes sense. And I agree, by the way, with your views on the activity levels. They seem like they're right at or below maintenance level, right? So, if you want to keep up your production, you've got to keep up your activities. Okay, makes sense. And then a quick follow-up, maybe, Andy Smith, for you on the 2026 shareholder returns. I don't know you'll give the framework over time, right? But At this stage, how should we think about share repurchases? It's good to see you set that up a little bit this quarter versus last quarter, but just maybe refresh us on the framework as you think about 2026.

Yeah, I mean, look, it's a little early to be talking about 2026 and what our plans are. We're just on the beginning of our budget cycle, and as we get through that, we'll finalize and, you know, we'll get more color around that going forward, you know, Again, we've kind of given you the backdrop of the market. We're very focused internally, again, on our performance and making sure that we can be as efficient as we can be, and that's really where our focus is today, and we haven't really, you know, focused yet on kind of what our buyback program might look like next year.

Okay, so we'll stay tuned for that, Andy. Okay, got it. Andy, thank you.

Your next question comes from the line of Ati Modak with Golden Saks.

Hey, good morning, guys. Andy, you talked about the production impact of the activity changes, but I'm wondering if you've seen anything in the cycle times or efficiencies across the value chain that could potentially impact the response expectation you laid out.

Well, I think that, you know, what we're seeing where activity is right now, you know, it has the potential to, you know, negatively impact U.S. production a little bit. And, you know, just voicing that, you know, oil were to stay in the upper 50s for a little while, that probably brings U.S. production down further. And, you know, if you're going to bring U.S. production down further next year, well, the next reaction is you're going to have a commodity price reaction. I think there'd be nervousness in the markets. So I think it'd be self-adjusting and self-correcting. So when I think about the long term, I think we're in really good shape from a fundamental standpoint. We may have some, you know, changes in commodity prices over the near term. That may affect some activity levels. But over the long term, I think the fundamentals are still good. You know, we're still seeing long-term demand for oil growth over a multi-year period. And the U.S. has to be part of that production as well. It has to be part of that equation. You know, the discussion for OPEC Plus to bring on physical barrels, they haven't really brought as much in terms of physical barrels as has been discussed. And I think, you know, that's baked into what we're seeing, too. So, I think there's still a balance that we have right now between supply and demand. So, and we see that with some of the decisions that our customers are making, too. And like I mentioned before, you know, we have customers that are trying to maintain production for their shareholders. but also balance capital spending in a little bit lower commodity environment. But we're staying relatively steady in our activity levels as a result of that. We have customers that are wanting to deploy more technology. They're willing to pay us for it and to help them with their efficiencies in how they drill wells and how they complete wells in order to maintain their production.

Got it. So for 26, when you are guiding to steady activity levels, but also highlighting that gas could rise some. Should we think about that as gas potentially driving upside to that steady expectation, or is that offsetting some softness in oil?

I think there's upside in gas activity next year. Now, I don't think it's right away in the first quarter. I think that as we see more physical demand from LNG next year, that we've already been doing a lot of frack work in areas like the Haynesville, and there are wells that have gas behind the valves right now and ready to go. And so I think they're going to address the immediate physical needs in early 26, but eventually it's going to drive activity later in the year. And I think that's upside for us, you know, even if oil is holding steady next year.

Got it. Appreciate it. Thank you.

Your next question comes from the line of Steven Gingaro with Stifle.

Thanks. Good morning, everybody. Two questions for me. Maybe I'll start with when we think about sort of RFP season and thinking about what EMPs may or may not do next year, How are you guys thinking about pricing in the completion market next year? I'm just sort of thinking about what margins may look like on a year-over-year basis. Is there any color you can provide around that?

I think that what you'll see is that most of us have already gone through a lot of the tenders that we're having to go through right now. And so, you know, what we're saying, you know, for projections in the fourth quarter have kind of already locked in some of that pricing. And there could be a little bit of movement in next year. But as I said, you know, everything that we have that can burn natural gas today is sold out. And there's still demand for equipment that can burn natural gas because our customers are getting a good fuel savings out of that. So, you know, I don't see pricing as a huge headwind. Are things still competitive? Sure. You know, and if there's any white space in the calendar, which we all know happens from time to time and we have to fill – some dedicated work with some short-term spot work. You know, maybe we take a little bit lower price to do that in the Midland Basin or something like that. But overall, you know, I don't see like a huge headwind on the pricing because I think that the work is relatively steady outside of, you know, fourth quarter holiday slowdown.

Great. Thank you. And the other question just sort of ties into the capital allocation strategy. How do you think about You know, you obviously have a view on the market. Things seem to be stabilizing. But how do you think about capital returns versus balance sheet strength? And what sort of signs do you look for to give you confidence in accelerating or continuing to return capital in a market that has kind of disappointed us for six or seven straight quarters?

Yeah, Stephen, so this is Andy Smith. So, you know, as we look at it – you know, again, our, you know, making sure that we have the equipment in both, in all three of our major lines of business that is top of the market is probably the most important thing that we think about when we're thinking about capital. And then it really becomes, you know, what is the cadence of adding that equipment? What is the cadence of making sure that we're right sized for the opportunity set that's out there. You know, what are we looking at beyond that in terms of, you know, our balance sheet leverage? You know, I don't think that we have any issues right now with leverage, to be honest. I'm very comfortable with where we are. And so that hasn't been as much of a focus. But then we look at the return to shareholders and, you know, whether or not we want to overstep kind of our 50% commitment to our shareholder base. So that's kind of the order of operations. We will continue to high-grade our fleet. I mean, look, there are technology changes in all of our businesses over time. They won't be super lumpy, I don't think. They'll be pretty – you know, I think they'll be sort of, you know, pretty consistent over time. But we will continue to make sure that we're – you know, providing the best equipment and the best services out there because, you know, again, we've had a lot of questions about pricing on this call, and pricing is going to follow performance. And, you know, we started the call today with a point that we're focusing on the things that we can focus on, and really that's performance. And if we perform well in the field, and we did very well, we have this quarter and we have for the past several quarters, and I think we will continue to, then pricing won't be quite the issue that it is if we were just thinking about this as a commoditized, you know, equipment business. So, you know, I really think that, you know, we don't have concerns around our balance sheet, if that's a part of your question. I'm not concerned with where the leverage is from a capital allocation standpoint. And I think within our free cash flow, we have lots of opportunity to make sure that we're still providing the best services and the best equipment to our customers that we can.

You know, we've committed to give back 50% of our free cash flow to shareholders, and we're on track right now to where it's almost 60% for the year. And when we look at these capital allocation decisions, as Andy mentioned, you know, we have opportunities for new technology, and we'll look at each of those on a project-by-project basis. And in some cases, it makes more sense for us to invest in these new technologies and drilling and completions versus buying back the shares. But we're certainly committed to at least 50%. to shareholders and we're, you know, we're running ahead of that right now.

Great. No, thank you for all the color. It's very helpful.

Thanks, Steven.

Your next question comes from the line of Derek Todd-Haffer with Piper Sandler.

Hey, good morning, Andy. I just wanted to go back to Scott's question. I fully appreciate your views and discipline around power and what you can bring to the table currently. But just maybe can we have an EcoCell update? I know typically that's replacing a diesel generator on the rig with a battery, but just given the outlook for this type of technology, are there potential opportunities outside of oil and gas for EcoCell and within your subsidiary of Current Power?

Hey, thanks. Good morning, Derek. So I think there could be, and we've had some of those discussions. I think for us, though, You know, the way you can sell is packaged. It's designed for hazardous environment operations and drilling. It can fit in a production environment. You know, you don't need all those qualifications just to put it next to a data center or an industrial application. You know, we're certainly open, and our teams continue to explore those possibilities. Again, you know, when you get into that space of EPC construction and, you know, you're over 200 megawatts and approaching a gigawatt of power, you're competing with a lot of different companies out there. And sometimes, you know, when it's an EPC project like that that's big, you know, the winner is essentially the lowest bidder, and that doesn't necessarily bring value for us. And so we're going to focus on things that we think can produce strong free cash flow. Okay, very helpful. It's designed for as well as a variable load because, you know, You know, a drilling rig surges as you engage the draw works or you engage the pumps in ways that, you know, industrial applications don't see. And so, we've written custom software to manage that. So, you know, it's just a little bit of a different configuration and setup versus what you do for industrial applications.

Got it. That's very helpful. I wanted to ask a question around drilling. So you talked about Permian being a soft spot here, but obviously pockets of strength specifically in the gas basin. So just thinking about the rig count, it's up a little bit from where you were. You're going to be steady. But think about the upside to rig count next year, whether that's gas or even the Permian recovering. How should we think about the required OpEx or CapEx invested back into these rigs that have been sidelined? And just thinking about what that could mean for, you know, the future margin expansion once we roll through all this contractor and all this pricing and the year-round actually having to reinvest back into these rigs that have been sidelined for quite some time now. Just maybe some updated thoughts how we should think about that with your rig count today.

Yeah, we haven't done any of that math recently, but I can tell you historically, you know, when we reactivated a rig, it's been, you know, several million dollars to get a rig reactivated from a capital standpoint. And so, you know, we would take that into account in any agreement that we're working out. But the other is that, you know, as we have some of these discussions with EMPs for what they're going to need over the next couple years, they're also wanting to more technology on the rig, more capacity on the rig, longer laterals, you know, deeper Hainesville gas, things like that. And so that's going to drive some larger conversations, but it's also going to drive larger day rates. And so, you know, we will look at them on a project-by-project basis like we always do when we restart a rig. And if we're adding more technology than we normally would or we're doing structural upgrades, then, you know, we'll get paid for that at a high return as well.

Got it. Very helpful, Andy. Thank you. I'll turn it back.

Thanks.

Your next question comes from the line of Keith Mackey with RBC.

Hi. Good morning. I just wanted to start out first on the drilling services guide for Q4. I talk about a 5% decline in adjusted gross profit, though, on steady activity levels. So, Can you maybe just give us a little bit more color in terms of the drivers of that 5% decline? Is it more seasonal or is there a continued kind of lowering in average pricing on the rigs or something like that?

There's a little bit of decline in the pricing in general. It's relatively steady in terms of activity from where we are today, but we have seen you know, a decline in the overall industry rig count and our rig count since the beginning of the year. So a little bit of a softening in the market that we're dealing with. But my expectation is going forward after Q4 outside of, you know, some seasonal things that we have in Q1 to be relatively steady.

Got it, okay, thanks for that. And Andy, just wanted to follow up on the last question about the rig technology and the incremental capacity that E&Ps are looking for. Can you give us a few examples of the types of things that your customers are asking you for as they look to drill longer wells in various areas across the US?

Yeah, we could talk about a few of those points. You know, first, the easy one is structural. So as we drill deeper wells in the western Haynesville with the laterals that they're drilling, the casing loads are getting bigger. So the structural capacity is moving up from, say, what we've had over the last decade, which has been a 750,000-pound rig in general for the industry, you know, up to a million pounds. And so we're seeing those requests for the structural upgrades. But we have EMPs that are wanting that as well for – The Delaware, where we're drilling, you know, deeper and longer laterals, and they're using more drill pipe, and they want to stay efficient, not have to lay down the drill pipe. So they want that structural capacity to be able to rack back more pipe just for those efficiencies in the Delaware. So it's a combination of the two. And, you know, for those different plays, but it's a similar rig style and similar engineering that we have to do for that as well. The other piece is automation. I'm really excited about what's happening in the areas of automation and what our teams are doing with artificial intelligence. I'll just let everybody know we had an update with the board this quarter on all the different artificial intelligence projects that we're doing in the company, and we've let those grow up from our engineering teams and drilling and completion and excited about the way they're looking at things. And when we say artificial intelligence, for us it's not necessarily you know, your traditional large language model that everybody uses on a daily basis. We do a lot with artificial intelligence and machine learning, and we feed data into our systems from our data science teams to allow our models to learn how wells have been drilled so that we can take that forward into the field and deploy those automation and machine learning models onto the equipment, whether it's drilling or completions. and so that, you know, the equipment can now function at a higher level with more efficiency, which improves reliability, longevity of the equipment, and also brings benefit to the EMPs as well.

Got it. Appreciate the color. Thanks very much.

Your next question comes from the line of Jim Rolison with Raymond James.

Hey, good morning, everyone. Andy, you've been through a lot of cycles, and I think you've talked about a little bit on this call. This cycle has definitely been a bit different than typical cycles. And in that, I'm kind of curious, as you think through 26, 27, you know, historically, we've come down in a pretty violent manner, and When U.S. land balances, it kind of comes from both drilling and frack, and you ultimately get pricing leverage again after you've had it going the wrong way for you. And this cycle's kind of played out differently in that pricing has held up better. There's a lot of technology you've kind of discussed. I'm just curious as you think through, you know, once we hit the bottom and the gas rig count starts to go up and oil rig count eventually starts to recover to replace production, How do you think about how this cycle unfolds? Because I'm assuming BRAC probably has a better chance of getting pricing sooner, but then you've got the technology kind of benefits coming on both sides. So maybe lay out how you, in your world, how you think this plays out as we get to the other side of this kind of dip.

Hey, thanks, Jim. And thanks for reminding me that I've seen a lot of cycles. Appreciate that this morning. Yeah, you know, this one has been an interesting one where it's really been about two and a half years of activity coming down across drilling and completions for various commodity reasons. And so, you know, we've had to, you know, look and say, okay, what's happening next? How do we adjust the company and the structure for where we are, where we think it's going? And we continue to do that. So even though we're saying, you know, that we think activity is relatively steady from here, you know, we continue to look at the structure of the company and make sure we're right sized for where we are and where we're going. You know, with it coming down in the pattern that it has this time, you know, I think there's a chance that the reverse looks similar. But, you know, there could be a little bit quicker inflection on the gas side. But either way, we see upside from where we are. Whether it's continuing to adjust our company for where we are in the market or upside from gas activity later in 26 and 27, we still see upside. So we think we're in a great position. We've got strong balance sheet, lots of flexibility with the cash, and continue to deploy technology and get paid for it. And so, you know, even though it's – you know, we're in this – what do you want to call it, a softening market or moderating market or however you want to describe it over the last period, you know, we're still upbeat about where we are and where the company is in the market.

Got it. That's helpful context. And then maybe lastly, just on the kind of digital suite that you laid out, you know, in the completion side that you've already started putting on. And I think you mentioned every fleet will have it by the end of the year. Maybe some goalposts around, you know, what is like the revenue and profit opportunity in that space if you get, you know, a high rate of customer adoption just to, you know, we can think about how that maybe offsets the general activity trend that we've seen as we go forward.

I think it's still early days, and on the completion side, we're still signing some contracts to do that and providing those digital services for next year. On the drilling side, it's millions of dollars a year in revenue that we're generating off the digital. We rolled out our Cortex operating system years ago, and we continue to add applications to that on the drilling side. And now those applications, through our data science team, are incorporating artificial intelligence It will be layered into those as well. And so that's just going to enhance the productivity of those applications. So, you know, I think it's still early days in the technology journey. We've built out the infrastructure. For those of you that have come to see our P10 Digital Performance Center, you know we've made the investment. We've got the platform. And so now we've got teams that are building on top of that. And we're talking software. This is not heavy capital in terms of an investment. But yet there's revenue upside for us.

Got it. Thank you, sir. Appreciate it.

Thanks. Your next question comes from the line of Dan Cutts with Morgan Stanley.

Hey, thanks. Good morning.

Good morning.

So, just wanted to ask on the kind of name plate size, I think last quarter you guys said that you had over 225,000 horsepower of capacity. And then you flagged the latest direct drive delivery at the end of this last quarter. Could you just update us on what kind of the Emerald fleet size is after that latest delivery?

Thanks. Yeah, it's around that 250,000 level right now. We've still got some more of those Emerald 100% natural gas that are being delivered this quarter. We're deploying them this quarter and still have some more coming in. But it's still around that level. In the overall horsepower, which I think is even more interesting, like I mentioned earlier, we had had as much as 3.3 million, but we brought that down to 2.8. I think there's others in the market that are doing similar, and that's why I'm constructive on the market for completions and pressure pumping, just because I think that overall horsepower continues to come down in the market.

Maybe just to close that out, after everything that has been ordered or you're still waiting for delivery? After all that's delivered, maybe by the end of this quarter, what's kind of the capacity of the Emerald fleet at that point?

It'll be a little over $250,000, and we'll update you on the next call when we have all those numbers.

Okay, great. Understood. And then maybe you guys have already shared a lot of this, but maybe just to kind of asked directly if you could juxtapose some of the differences between the Emerald electric fleets and the direct drive fleets, just on a relative basis, the build cost and maintenance costs, kind of fuel and operating costs, operating efficiencies, and maybe a lot of that remains to be seen as you guys, you know, deploy the direct drive fleet and actually, you know, get the real But, yeah, wondering if you could just, at this point, how are you thinking the two types of technology would perform and, you know, the relative kind of build and maintenance cost between the two?

Thanks. Sure. Let me just explain it this way, and I'll give you some high-level round numbers on it. So, you know, our Emerald Electric is performing really well in the field. We have customers that want to use that. We actually grew the amount of horsepower in our Emerald Electric this year because we had customers that wanted to move from standard frac size to simulfrac and trimalfrac with the electric. When we do that, you also have to increase the power supply at the well site. And so we've gone from, you know, for instance, on one job, a single 35 megawatt turbine up to a 35 megawatt turbine and combine it with some smaller turbines as well to generate enough power. to run, you know, larger frac spreads than what we would normally do with a 35 megawatt turbine. The turbines are expensive, you know, 35 megawatt turbine in general, you're talking about capital costs deployed in the field, you know, in the 40 to $45 million range. And then when we put the smaller turbines out there as well, you're in the 15 to $20 million range per turbine. So you're talking about a lot of capital costs tied up just on power. And you're also competing in the market for that power. with everything that everybody else has talked about and where power is going to go over the next couple of years. So it's not just capital costs, but you're competing for those types of power generating devices as well. When we look at the 100% natural gas drive engines, and these are high horsepower engines, 3,600 horsepower, so it's a new technology that's being deployed versus other technology that may have been deployed in the past couple of years. We're excited about this. This is a great supplier, well-known manufacturer of the engines and the transmissions, and then we spec out the rest of it, including our own control systems on it. And we think that with our control systems on it, we can help manage it. When you look at the overall capital cost versus an electric with the turbines, I don't have the actual numbers and differentials in front of me, but it's certainly lower. Our teams have done all the work on that. When you look at the OPEX, the OPEX for a natural gas direct drive engine is going to be higher than a diesel, but the overall OPEX for 100% natural gas direct drive engine in our projections is lower than trying to maintain both electric pumps and the turbine generators at the same time. Overall, when we look at the amount of capital deployed, you're talking about 25%, maybe 30% reduction in some cases to get the same amount of horsepower at location where you're still burning 100% natural gas. Does that help?

That was very helpful. Thank you very much, Andy. I'll turn it back.

Thanks. Your next question comes from Lon up comes from the line of Sean Mitchell with Daniel Energy Partners.

Good morning, guys. Can you hear me okay?

Yeah, I hear Sean.

Good morning, Sean. Thanks for taking the question. But you kind of hit it on the drilling guy, but I want to turn to the completion guy a little bit, trying to better understand the typical seasonal slowdown and budget shortfalls. I'm hoping you guys might be able to offer some color on this. At this point, do you have any fleets which have been idled? where you know that fleet will go back to its prior customer in the first half of 26, and maybe any way you can frame the 92, that might be helpful.

So we haven't idled any fleets per se, and the best way I can describe that is quarter on quarter, we're still working the same amount of horsepower, pumping similar horsepower hours in the field, but we've grown some fleets to do more simulfrac and trimulfrac. So there's been... you know, a shuffling of horsepower around to different places. You know, the fleet count at the end of the day is really kind of hard to judge. It's not such a great metric because of the fluctuation in fleet size as we do more simulfrac and trimulfrac. And I think you'll see, you know, companies like ourselves where the actual, you know, horsepower per fleet grows a bit because we're doing, you know, higher intensity fracs. We're doing more frac volumes on pads, things like that. So, but we, you know, to sum it up, we were working the same amount of horsepower, pumping similar horsepower hours quarter on quarter.

You know, we didn't really stack any technology. Yeah, Sean, I'll just add to that. You know, when we look out at the fourth quarter and try to predict seasonality, I mean, we're given a little bit of, you know, we take an assumption around kind of what we think we'll see in terms of some downtime around the holidays, maybe potentially some downtime around some weather. And sometimes it's better, sometimes it's worse. And so it's, you know, you just, as you go through the quarter, you just have to kind of, you know, kind of play it as it comes.

Yeah. Maybe one more. As you talk about a lot of technology, some exciting stuff in the industry today, how much of the improvement initiatives that you're seeing are self-directed versus kind of maybe being requested or suggested by your customers?

I think... I think, you know, it's kind of even balance. We've got customers that request certain things, but we've also got a lot of smart engineers in the company that say, hey, you know, if I deploy machine learning in this way, then we can do this, and it's going to improve our ability to, you know, drill a longer lateral or, you know, manage how we pump, you know, a stage into a well. And so, you know, I think it's a mix of both.

Got it. Thanks for taking the time. Question.

Your next question comes from the line of Don Christ with Johnson Rice.

Morning, guys. Andy, I wanted to first applaud you for sticking to your guns and what y'all do as a core competency and not chasing the latest fad as some of your competitors, including very large competitors, are doing. But in that vein, I kind of wanted to ask a question about M&A. You know, we've seen a lot through the E&P side, and investors keep on asking all the analysts, you know, is there going to be another wave of M&A on the oilfield service side? And a lot of us don't really see it. But do you see some of your larger competitors that are chasing the power side actually freeing up some of that equipment that could be attractive to y'all in the future to where you could, you know, number one, stick to your core competencies, but, you know, go into another kind of M&A transaction that would be accretive in the future, possibly overseas?

Okay. There were several different questions in that one, but let me try to take some of that. So, first off, I'll say we don't have to do any M&A. We're really happy with where the company is today, you know, the cash production profile that we have of the company, the technology deployment that we're doing. So there's nothing that we need to do. We've got great segments that are doing great work and strong competitors in the market today and leading in a lot of areas. So happy with what we have. You know, in terms of some consolidation, I think that, you know, let's say on the completion side there's probably still some room for for some smaller companies to get together. And I think that would shore up some of the completions market if that happens over time. When you look at drilling, it's already a disciplined market. And so not really anything to do there. And so we just don't see a lot. And we've looked at a lot of things. We've tried to see if there's anything out there similar to an Altera. We really like the profile of that company where it's relatively low capex. compared to, you know, our bigger businesses that are heavier in CapEx. And we like what we've done there, and that team's doing a fantastic job. But we're happy with what we have. We don't have to do anything.

Yeah, Don, I would just add, as it relates to, you know, some of our current competition or industry participants that would be pivoting away from maybe their core businesses, I kind of find that hard to buy today that there would be a wholesale pivot. And so to the extent they would be selling anything – out of their sort of fleet, it's probably not going to be at the level of technology that we'd want to participate in or want to buy. So I think probably the likelihood of that is pretty low.

Would that include some international operations? Like I know Baker has sold something to Cactus recently and there may be some other opportunities there. Would something to get a stranglehold on the Middle East be kind of attractive to you all?

Well, I mean, I think we'd certainly be interested in looking at it, but I don't put a high likelihood on anything being separated out in terms of our core businesses right now that would come across our .

I appreciate the color. Thanks.

At this time, there are no further questions. I will now turn the call back over to Andy Hendricks for closing remarks.

Well, I want to thank everybody who dialed in this morning. It was a really strong third quarter for us. I want to thank all the men and women at Patterson UTI across all of our segments for everything they're doing and all the great results they had in the third quarter, and just want to say thanks. Appreciate it.

Ladies and gentlemen that concludes today's call. Thank you all for joining. You may now disconnect.