Patterson-UTI Energy [PTEN] Conference call transcript for 2023 q1
2023-04-27 14:54:02
Fiscal: 2023 q1
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Patterson-UTI Energy First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Mike Drickamer Vice President, Investor Relations. You may begin your conference.
James Drickamer: 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 results for the 3 months ended March 31, 2023. Participating in today's call will be Andy Hendricks, Chief Executive Officer; and Andy Smith, Chief Financial Officer. A quick reminder as 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 company's SEC filings, which could 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. The required reconciliations to GAAP financial measures are included on our website, patenergy.com and in the company's press release issued prior to this conference call. And now it's my pleasure to turn the call over to Andy Hendricks for some opening remarks. Andy?
William Hendricks: Thanks, Mike. Good morning, and thank you for joining us today for Patterson-UTI's first quarter conference call. We are pleased to report another quarter of solid financial results. The exceptional results in our contract drilling segment demonstrate our ongoing ability to capitalize on the robust demand for Tier 1 super-spec rigs and the renewal of drilling rig contracts at current rates. During the first quarter, we continued to return capital to shareholders and strengthen our balance sheet at the same time. We repurchased 5.6 million shares of our common stock for $73.6 million, and we repurchased $9 million of long-term indebtedness for only $7.8 million. Our pace of share repurchases accelerated as we believe the price of our shares are disconnected from the underlying fundamentals of our business and represent an outstanding opportunity. Softness in natural gas prices, along with uncertainty regarding the future trajectory of oil prices has led to what we believe to be a transitory and mid-cycle pause in activity. However, we expect relative stability in the rig count for Tier 1 super-spec rigs as operator budgets closely align with current crude oil prices due to capital discipline and current crude oil prices continue to support ongoing drilling and completion activity. The decline in the overall rig count to date during the first quarter has been both nuanced and bifurcated. Lower-spec SCR and mechanical rigs were primarily released and the net result was the high grading of the overall industry rig fleet, driven by various operators. This high grading, which positively impacts well economics has supported demand across the industry for Tier 1 super-spec rigs and maintained a high level of utilization. Looking forward, we expect that improving market fundamentals for oil will positively impact drilling activity levels, although near-term drilling and completion activity may be modestly affected by current natural gas prices. In contract drilling, we will continue to capitalize on our position as a leading provider of Tier 1 super-spec rigs and will strategically focus on profitability and cash flow over activity levels. We are confident we can best help our customers improve their drilling economics through our continued focus on operational excellence. By focusing on the efficiency gains offered by Tier 1 super-spec rigs and integrating our latest technology solutions, we help our customers improve their well economics. We anticipate the current natural gas prices will cause a small reduction in our rig count in the near term. However, the continued repricing of below market rates from contracts signed in previous years to current rates upon contract renewal this quarter is expected to lead to increased margins and increased overall contract drilling profitability in the second quarter. As we move into the second half of the year, we anticipate that our rig count will increase driven primarily by activity in oil basins. In pressure pumping, the current market environment has resulted in some softness in the spot market for frac spreads. This softness contributed to increased white space in the calendar during the first quarter which, combined with weather disruptions, reduced utilization. But despite these challenges, I'm pleased that we were able to achieve our expectations for the first quarter revenues and margins due to the strong execution of our pressure pumping team. The pressure pumping industry continues to bifurcate as dual fuel spreads remain in higher demand due to their ability to reduce operators' fuel costs. Currently, 8 of our 12 spreads are dual-fuel capable. Given the current market environment, we no longer plan to reactivate our 13th spread this year. However, we will continue to convert engines to dual fuel and expect 9 of our 12 spreads to be dual fuel capable by the end of this year. In the directional drilling segment, our focus continues to be distinguishing ourselves by leveraging technology, innovation and emphasizing exceptional service quality and reliability. We have established ourselves as leaders in conventionally drilling U-turn wells, which involves utilizing a high-performance mud motor to drill complex wells shaped like a U, enabling clients to drill 10,000-foot laterals within a single 5,000-foot section. We've even successfully drilled a well in a W shape for a customer recently. Our impact mud motors and Mpower MWD systems have demonstrated outstanding reliability, contributing to the reduction in the number of trips required to replace tools and in turn, boosting operator efficiency. By combining this enhanced efficiency with top-notch service quality that ensures the wellbore remains within the pay zone, we can effectively improve overall well economics. As we move forward, we remain dedicated to maintaining our edge in the directional drilling industry by continually refining our technologies, fostering collaboration across our business segments and delivering reliable and efficient solutions that cater to the evolving needs of our clients. With that, I will now turn the call over to Andy Smith, who will review the financial results for the first quarter.
Andrew Smith: Thanks. Net income for the first quarter was $99.7 million or $0.46 per share. Adjusted EBITDA improved to $256 million for the first quarter from $239 million for the fourth quarter of 2022. In contract drilling, average adjusted rig margin per day in the U.S. increased by $2,430 over the previous quarter to $15,880. This growth was driven by higher average rig revenue per day which increased $2,930 due to the successful renewal of rig contracts to current rates. Average rig operating cost per day increased $490 to $18,880. At March 31, 2023, we had term contracts for drilling rigs in the U.S., providing for approximately $890 million of future dayrate drilling revenue, up from approximately $830 million at the end of the fourth quarter. Based on contracts currently in place in the U.S., we expect an average of 79 rigs operating under term contracts during the second quarter of 2023, and an average of 53 rigs operating under term contracts for the 4 quarters ending March 31, 2024. In Colombia, first quarter contract drilling revenues were $10.6 million with an adjusted gross margin of $2.1 million. For the second quarter, we anticipate further improvement in contract drilling profitability as the increase in margins resulting from contract renewals at current rates is expected to more than offset a slight decline in our rig count. Average adjusted rig margin per day is expected to increase approximately $1,000, while our average rig count is expected to decline 2 or 3 rigs. In Colombia, we expect to generate approximately $11.5 million of contract drilling revenue during the second quarter with adjusted gross margin of approximately $2.4 million. In pressure pumping, revenues and margins were impacted by both weather disruptions and increasing white space in the calendar. Pressure pumping revenues were $293 million, with an adjusted gross margin of $73.2 million. For the second quarter, we expect additional white space in the calendar given the softness in the spot market. Accordingly, pressure pumping revenues are expected to be approximately $277 million with an adjusted gross margin of $61 million. In our directional drilling segment, we experienced a decline in revenue and margin during the first quarter due primarily to reduced activity levels. Directional drilling revenues were $56.3 million in the first quarter with an adjusted gross margin of $8.2 million. For the second quarter, we expect both revenue and margin to increase by approximately $1 million over the first quarter levels. In our other operations, which includes our rental, technology and E&P businesses, revenues for the first quarter were $23.2 million with an adjusted gross margin of $9.1 million. For the second quarter, we expect revenues and adjusted gross margin to be similar to the first quarter. On a consolidated basis, in the first quarter, the total depreciation, depletion, amortization and impairment expense amounted to $128 million, including $4.4 million of impairment charges. For the second quarter, we expect total depreciation, depletion, amortization and impairment expense of $122 million. Selling, general and administrative expense for the second quarter is expected to be approximately $30 million. Interest expense for the first quarter of $8.8 million included a $1.1 million gain from the early extinguishment of debt related to the $9 million of debt we repurchased in the first quarter. For the second quarter, we expect interest expense to be approximately $10 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. We are lowering our 2023 CapEx forecast to $510 million, which equates to $480 million when excluding $30 million of customer-funded rig upgrades. Contract drilling CapEx is expected to be approximately $290 million, down from our previous forecast of $320 million. The majority of this decrease is CapEx for maintenance and rig reactivations which is now expected to be $180 million, down from $200 million. Included in our forecast for rig reactivation CapEx is the reactivation of 6 rigs throughout 2023, and all are currently contracted. All 6 of these rig reactivations include very specific packages requested by the customers, including emission-reducing upgrades such as natural gas engines or utility skids for high line power. Additionally, approximately $30 million of this year's upgrade and reactivation CapEx was paid for by the customer. Patterson-UTI has a long history of being disciplined with our contracting strategy and we have no intention to reactivate any rigs without a term contract. Our pressure pumping CapEx forecast has been reduced by $20 million to approximately $150 million. As Andy mentioned, we no longer plan to reactivate a 13th spread but we are upgrading a spread to Tier 4 dual fuel. With that, I'll now turn the call back to Andy Hendricks.
William Hendricks: Thanks, Andy. To summarize, we believe Patterson-UTI's positioned as a leading provider of Tier 1 super-spec rigs and our ability to leverage our technology in support of our customers' well economics through increased efficiency will result in a stable to slightly increasing rig count during 2023 despite any near-term pause in market activity. Given our term contract portfolio, we expect our operating results and cash flow will improve throughout the year as we will continue to benefit from the renewal of drilling rig contracts at higher rates. Furthermore, we will continue to demonstrate Patterson-UTI's long-standing commitment to capital discipline through both our capital spending and our contracting strategies where we prioritize cash flow and margin over activity levels. With our substantial free cash flow, we will continue to target a return of 50% of free cash flow to shareholders through a combination of dividends and share buybacks. With that, we would 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 up the call to questions.
Operator: [Operator Instructions]. Your first question is from Jim Rollyson of Raymond James.
Operator: Your next question is from Saurabh Pant of Bank of America.
Operator: Your next question is from Kurt Hallead of Benchmark.
Operator: Your next question is from Derek Podhaizer of Barclays.
Operator: [Operator Instructions]. Your next question is from John Daniel of Daniel Energy Partners.
Operator: Your next question is from Don Crist of Johnson Rice.
Operator: [Operator Instructions]. Your next question is from Keith MacKey of RBC Capital Markets.
Operator: Your next question is from Kurt Hallead of Benchmark.
Operator: There are no further questions at this time. I will now turn the call over to -- we actually have one more question. John Daniel of Daniel Energy Partners.
Operator: I will now turn the call over to Andrew Hendricks for closing remarks.
William Hendricks: Well, I'd like to thank everybody who joined us on the call this morning and appreciate all the questions. And Again, thanks to our team at Patterson-UTI for the great job that everybody is doing. Thanks.
Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
