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Weatherford, Patterson-UTI, Helmerich Execs Not Calling Trough in North American Onshore

Weatherford International plc expects that half of its North American (NAM) drilling equipment may be stacked by the end of June following a "miserable" performance in the first quarter, the company’s CEO said Thursday. Onshore drilling contractor Patterson-UTI Inc. (PTEN) already has stacked about one-third of its hydraulic fracturing equipment because there's "no real demand" for rigs anywhere, CEO Andy Hendricks said.

Helmerich & Payne Inc. (HP) now is forecasting that the U.S. land market may trough at 750-850 rigs. "That is a reasonable fairway, given the oil price environment and discussions with customers," CEO John Lindsay said.

Thursday was a big day for the oilfield service (OFS) sector, with No. 4 global operator Weatherford delivering its results, with separate reports by North American OFS leaders PTEN and HP. Business was dismal in the first three months, and it doesn't look any better into the third quarter, executives said during their quarterly conference calls.

Weatherford CEO Bernard Durock-Danner didn't mince many words during an hour-long discussion. "The geography fully explains this quarter." International operations performed well, with margins actually rising sequentially. However, "NAM was miserable." Producers working in core, Tier 1 areas, of onshore basins continue to provide some work, but most of Weatherford's is in the Tier 2 and 3 areas, the CEO said.

"The fact is, our client base in the United States is Tier 2 and 3 in size, which isn't desirable...And the client base dropped much faster than Tier 1..."

Shocked by Speed of Downturn

U.S. operational performance in the first three months was the worst Durock-Danner said he had ever seen. Canada losses also came as a shock, as the second quarter usually is the one when OFS business declines on the winter breakup. That makes results for the second quarter also dicey.

The Swiss-based operator, whose main offices are in Houston, plans to shutter seven manufacturing facilities and close or consolidate 60 U.S. offices. NAM operations spun out of control more quickly than management could imagine, the CEO said.

"However fast we could have reacted, we could not have prevented the losses." First quarter revenues fell 22% year/year and 25% sequentially, with NAM revenues down 34% from 4Q2014 and 34% sequentially. International revenues declined by 17% sequentially.

Weatherford is increasing its layoffs; it already had planned to fire 8,000 people. Another 10,000 will be given their walking papers by the end of June.

"Our headcount at the end of the quarter dipped to 49,000 from 56,000 at the start of the year," the CEO said. "This is rapid progress. Our current 18% headcount reduction goal for the year will leave us with about 39,000 employees in our core businesses and 6,000 rig employees." Capital expenditures (capex) also have been reduced to $850 million, 41% less than in 2014.

Weatherford's NAM operating losses were $10 million in 1Q2015, down $296 million sequentially and off $213 million year/year, which management attributed to land rig count losses and pricing pressures that broadly impacted all of its U.S./Canada product lines. Sequential decremental margins were 48.8% "as cost reductions did not keep pace with the activity and pricing declines, marginally worse than the 44.9% decrementals experienced in the first quarter of 2009," during the recession.

The plan now is to emerge from the downcycle, whenever that may be, "a leaner, fitter and much more disciplined company, poised to improve margins with strong incrementals going forward," said the Weatherford CEO. He had nothing to offer analysts who asked for his outlook. His best estimate was "June, maybe July" before the bloodbath in the onshore rig count ends.

“Over the next few quarters, we will continue to proactively review activity levels and rapidly adjust our direct and structural cost base as needed."

Durock-Danner was asked how Weatherford would be able to pick up the pace once drillers get back to work.

"We're not alone in these cost-reduction efforts," he said. "They are very similar to what other companies are doing," and "arguably, there will be a lot of people available in the market...The main thing is to keep in touch with customers and their needs...I can't foresee what's coming up...There's no silver bullet here, but we have the capability to bounce back if the need arises."

Houston-based PTEN, which provides land-based contract drilling and pressure pumping services to exploration and production (E&P) companies, has reduced its capex by another $40 million, and now plans to spend about $710 million this year.

No Demand for Rigs

"There's just no real demand for rigs," Hendricks said. "The rig count continues to come down for us, and we see it continue to come down for industry...We're not having those discussions" with any customers about adding rigs. E&Ps "are certainly under pricing pressure as they work through the downcycle..."

PTEN expects to see "pricing challenges as we come out of this into some kind of recovery," and improve "as the first wave of rigs come back after the recovery, which will come because it always does."

In the “latter half of the first quarter we experienced a dramatic decrease in activity" because of the "sharp reduction in the rig count, which began late in the fourth quarter," Hendricks said. "Additionally, as pricing came under pressure during the first quarter, we were unwilling to pursue work at what we consider extremely low margins.

"Looking forward, we will stay close to our customers and continue to focus on the things we have the ability to control. We've been successful in lowering costs for materials, such as sand and chemicals, sand hauling and for capital items such as fluid ends. We will continue to focus on reducing costs and finding work at acceptable pricing. But to the extent that we were unable to do so, we will continue stacking equipment. To date we have stacked approximately one-third of our horsepower."

Pressure pumping revenues between April and June are expected to be down by one-third sequentially, Hendricks said. "Pricing pressure in this segment is increasing, with a decrease in industry utilization. And although we are achieving significant cost savings with our suppliers and continue to scale our business, we expect gross profit as a percentage of revenues to decrease by approximately 8%."

On the back of its high-tech drilling fleet spearheaded by the Atex line, PTEN actually gained a bit of market share in the quarter from contract drilling. However, the rig fleet is taking a big hit, no matter how respectable.

Between January and March, PTEN had on average 165 rigs operating in the United States and eight in Canada. The average rig count for April is expected to fall to 130 U.S. rigs, with two in Canada, as E&Ps continue to trim spending. That compares with the PTEN rig count at the end of March 2014, when it had 193 U.S. onshore rigs in operation and 10 working in Canada.

Early contract terminations are on the minds of E&P management teams, Hendricks said. PTEN gained $15.8 million in first quarter revenue from that category alone. However, contracts are falling off through the end of the year.

"Based on contracts currently in place, we expect an average of 110 rigs operating under term contracts during the second quarter, and an average of 83 rigs operating under term contracts during the remaining three quarters of 2015," Hendricks said.

No Predictions

"I'd very much like to say it will trough at 110, but I'm not comfortable" with a forecast, he said in response to a question. "We'll see how comfortable E&Ps are getting with commodity prices and where they are. There's still some uncertainty," and it's unclear what conditions will look like beyond the second quarter.

PTEN's total operating days fell to 15,520 from the year-ago total of 18,214. U.S. days fell to 14,827 from 17,325, while in Canada they were 693 versus 889. The company performed 216 fracturing jobs during 1Q2015, versus 243 a year ago.

Low commodity prices are "impacting work" even as oil prices slightly increase, said HP's Lindsay. "Customers continue to release rigs, albeit at a slower pace." Stability in the market "is uncertain and customers are cautious." The rig count has "been more severe than we expected in January, and we were more bearish than most then...I don't believe we've reached an absolute bottom yet, but I believe the trough is nearing."

HP customers have been "indiscriminate in reductions," behavior that began early this year. He estimated that "regardless of rig performance," about 40% of HP's mechanical rigs are sidelined, while 31% of the silicone rectifiers have been laid down, along with 29% of the alternating current rigs.

However, there are glimmers of activity and signs that a bottom could be near, Lindsay said. The Tulsa-based OFS recently contracted a "handful" of its high-spec FlexRigs, which some of its top customers want to trade out to high-grade drilling. But that's only a few, and it's the E&Ps with solid credit.

Fiscal 2Q2015 results were surprisingly strong on net income of $150 million ($1.37/share), versus year-ago profits of $175 million ($1.59). Operating revenues also were close at $883 million in the latest quarter, compared with $893 million in fiscal 2Q2014.

Like PTEN, some of the revenue gains, which added $47 million to profits, came from early rig termination fees as E&Ps stopped drilling. However, Lindsay admitted he has no forecast about when the pain may ease.

"The results corresponding to our second fiscal quarter were stronger than expected, but low oil prices continue to depress demand levels for drilling services during the third fiscal quarter. However, the company has prospered through many cycles, and we believe that today we are very well positioned to emerge stronger from this steep industry downturn."

He said "experienced personnel, a strong balance sheet and backlog, and the most modern and highly capable rig fleet in the industry" should help buoy HP until the turn.

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