The day Patterson-UTI Energy Inc. (PTEN) delivered its third quarter results last October, crude oil was trading at $82/bbl, and there was "concern about a little bit of oil price softness," said Chairman Mark Siegel. It's since become a "full-fledged downturn, of a magnitude and duration, we do not yet know..."
The onshore drilling operator lost 10% of its U.S. operating rigs between December and January (see Shale Daily, Feb. 4). However, the contraction since October is 17%, the company revealed on Thursday.
"As the saying goes, this isn't our first rodeo," Siegel told analysts during a conference call to discuss quarterly results. "The playbook is simple: scale down as quickly as possible to align with lower drilling. It's simple in concept. The key is to implement it effectively and efficiently."
Neither Siegel, nor CEO Andy Hendricks could offer much clarity on what's ahead. The last quarter actually started well, Hendricks said.
"Drilling in the early part of the fourth quarter was steady when oil was above $70..." The company delivered six of its high-spec Apex walking rigs during the period, and the average rig count was "relatively flat" sequentially. The average rig margin per day increased $270 sequentially to $10,430, as the average rig revenue per day increased $430 to $24,440.
Then the bottom began to fall out toward the end of the year.
"Beginning late in the quarter and into the first quarter, the downturn accelerated," Hendricks said. Most exploration and production (E&P) companies quickly have become "indifferent to the the type of rigs released." Horizontal, vertical, high-spec or mechanical -- nothing is off the table.
The first rigs to fall for the most part are the ones with the shortest contracts left, he said. As of Dec. 31, PTEN had term contracts providing for about $1.5 billion of future dayrate drilling revenue. In January, the company stacked for rigs with payments that totaled about $5 million. It has 138 rigs operating under contract through March and 104 with terms this year.
"We have received indications from customers whose intent is to terminate term contracts," which would provide PTEN with early release funds. However, the company isn't certain how many rigs might be canceled now under contract. "It could be 20 rigs, $40 million in the first half...This is the visibility that we have today."
Through March, PTEN expects to be running about 165 land rigs in the United States and eight in Canada. In January, it had 188 rigs operating in the United States and 10 in Canada.
"The playbook in this point in the cycle is to reduce costs, scale to the amount of work available," Hendricks told analysts. Today the "drilling head count is slightly higher than the rig count...Unfortunately, it's a part of scaling down, and we've taken the necessary steps to retain the most experienced, needed personnel..."
Because completions lag initial drilling, average rig revenue per day is expected to be relatively flat with the final three months of 2014, the CEO said. "Spot day rates are under pressure," but with most of its rigs contracted, PTEN has little exposure to the spot market. The company also should benefit because of its rig mix -- the Apex has captured a growing share of the high-spec rig market.
"In this downturn, this focus on horizontal drilling will support the rig count, but without meaningful change, the industry rig count will continue lower."
PTEN, which also provides pressure pumping services, has begun to see an impact. It didn't activate a new spread scheduled for the field during this quarter. It has a remaining fracturing spread already under contract that is scheduled for the Northeast (i.e., Appalachian Basin), that was designed specifically for cold temperatures.
Based on discussions with customers, pressure pumping in 1Q2015 is expected to fall by 25% sequentially "on lower utilization and pricing," Hendricks said. "We will stack spreads where work is not available and we are working with suppliers to reduce costs..."
The CEO said "a lot of commentary over the last few weeks is over E&Ps wanting to get to price reductions. But it's not about price reductions. It's about getting total costs down. There's a lot of discussion about how to get costs out of the system. There are certain operators willing to use different sand, costs, stages...
"Things are going to play out with utilization. There are pricing challenges for some of these customers and some are laying down rigs...and so this is going to affect utilization. We may find ourselves having to stack fleets if we can't get the margin that we'd like to see...This is a high magnitude downturn on the order of 2009, 2002 and 1998..."
PTEN has cut its capital expenditure for 2015 by 29% to $750 million. About $525 million is for drilling, with $200 million or so for pressure pumping services.
Part of this decrease in capex "is achieved by a reduction in our new Apex rig manufacturing program from the previously announced plan of eight rigs per quarter to a total of 16 new Apex deliveries planned in 2015, all of which have term contracts," Hendricks said.
Net income in 4Q2014 was $57.6 million (39 cents/share), versus year-ago profits of $16.6 million (11 cents). Revenues hit a record $901 million, versus $659 million. One-time impairments totaling $16.8 million, which reduced net income by 14 cents, related to oil and natural gas properties, reflecting the carrying value resulting from lower commodity prices.