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Customer Demand Drives Patterson-UTI Focus on High-Tech Rigs, HP

Patterson-UTI Energy Inc. (PTEN) expects to have an estimated 27% more in onshore horsepower capacity for its pressure pumping fleet services by the middle of 2015 as customers push for more intense hydraulic fracturing (frack) services, executives said Thursday.

The move aligns with customer demands, Chairman Mark Siegel said during a conference call to discuss 3Q2014 results. As PTEN's customers ask for more high-tech rigs and more high-tech wells, the company is moving to supply what they want. Fifty-five mechanical rigs have been retired, and the manufacturing capacity has been raised to deliver more top-of-the-line Apex rigs, which now are sold out through the middle of 2015.

"The shift is from mechanicals to modern, high-spec rigs, Apex rigs," Siegel said. Apex rigs, high-spec walkers easily move on multi-well pads. Forty-four mechanicals still will run in the fleet, with cash flow used to fund the Apex newbuilds.

Plans now are to build 30 Apex rigs through next September, with six by the end of the year. As of Thursday, 22 already had been contracted, said CEO Andy Hendricks.

"We are keenly aware of investor concern that land rigs may oversupply the market," he said. "However, instead of building to a theoretical capacity, we are building to ongoing market demand. We are sold out through the middle of 2015. We are confident that we will contract the remaining available...There are no indications that any of the newbuilds will replace any of the existing rigs in the fleet..."

At the end of September, PTEN had 209 rigs running in the U.S. onshore, up from 201 at the end of June. It also had 10 rigs running in Canada, the same level as in the second quarter. By the end of December, an estimated 214 PTEN rigs should be running on U.S. land, with 10 in Canada.

Along with the solid rig demand, PTEN also is seeing a big need for a lot of horsepower for more pressure pumping services. To meet that higher demand, the company added 180,000 hp during the quarter, including 148,250 hp for activity in South and East Texas.

PTEN now has 918,000 hp for pressure pumping, and it should have "more than 1 million hp by the middle of 2015," Hendricks said. At the end of June, it had around 790,000 hp (see Shale Daily, July 28).

"In pressure pumping, demand is increasing due to greater horizontal drilling and greater frack intensity per well," said Siegel. "Supply frack intensity is a differentiator among competitors..."

PTEN also has ordered three horizontal frack spreads, plus spares totaling 155,000 hp "in response to multiple customers" that have requested more intense drilling services, Hendricks said. The first of the new spreads went to work in early-October, and the two remaining are scheduled for delivery in the first half of 2015.

The pressure pumping segment was impacted by higher costs in 3Q2014 on a variety of factors, mostly related to sand transportation and equipment maintenance. At the end of September, heavy rain in West Texas caused flooding in some Permian Basin activities, which also increased costs for sand demurrage and crews on suspended jobs.

Still, the strong demand for the high-specification rigs positively impacted rig pricing and rig margins from the second quarter. Average rig revenue/day increased $380 sequentially to $24,010, while average rig margin/day increased by $290 sequentially to $10,160.

At the end of September, term contracts for drilling rigs were in place that provide for close to $1.7 billion of future dayrate drilling revenue. Based on contracts now in place, "we expect an average of 157 rigs operating under term contracts during the fourth quarter, and an average of 93 rigs operating under term contracts during 2015," Hendricks said.

In part on the mechanical rig retirement and write-off of related spare parts, PTEN's net earnings in 3Q2014 dropped to $16 million (11 cents/share) in 3Q2014 from year-ago profits of $74.4 million (51 cents). The rig retirement charge totaled $77.9 million. Revenues in 3Q2014 set a record at $846 million versus $731 million in the year-ago period.

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