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PTEN Adding Frack Spreads, Super-Specs as Directional Drilling Debuts

North American contract driller Patterson-UTI Energy Inc. (PTEN), which has strengthened its portfolio with three key acquisitions this year, is seeing continued strong demand for high-tech equipment and enhanced completions, despite a subdued drilling count.

Chairman Mark S. Siegel during a conference call to discuss third quarter results said PTEN took “another transformational step” by completing its takeover this month of MS Energy Services, a directional drilling expert that works across the U.S. onshore.

The agreement followed a recently completed tie-up with Seventy Seven Energy Inc., which expanded the onshore rig inventory and fracturing (fracking) business. PTEN also acquired Calgary-based Warrior Rig Ltd., giving it more advanced rig and technology offerings.

Revenue gains illustrated the impact of Seventy Seven and Warrior, increasing 230% from a year ago and 18% sequentially. MS Energy will begin contributing in the fourth quarter.

The additions built PTEN’s heft, but it also has given it entree into the league of elite oilfield services providers, Siegel said.

“In addition to growing the company, broadening our service lines beyond drilling and pressure pumping has changed the identity of our company,” he told analysts. “We have long been considered a land driller that did a little pressure pumping.”

Pressure Pumping Rising

For example, five years ago, contract drilling accounted for 67% of PTEN’s revenues, while pressure pumping was just 30%. “With the acquisition of Seventy Seven Energy, our third quarter percentages were 53% of total revenues for pressure pumping and 44% for drilling,” Siegel said.

“The land drilling tag does not seem to fit any longer, yet given our considerable land drilling exposure, the pressure pumping tag does not appear appropriate either.”

With the addition of directional drilling, “I believe that the description that fits best is that of the multi-services company. I believe that our multi-services oilfield services offering and our leadership positions and our scale, we should receive evaluation in line with other multi-service companies that have scale.”

It’s still not easy out there, as CEO Andy Hendricks acknowledged, with hiccups in the quarter from Hurricane Harvey. Permian Basin operations, while hundreds of miles from the Texas coast, were impacted by the storm as PTEN waited on third-party services contracted directly by its customers. That led to decreased revenue and margins.

“While we ordinarily plan for these delays in our projections, we experienced a higher than normal degree in the third quarter,” Hendricks said.

PTEN’s rig count "was relatively stable,” he said, averaging 161 operating rigs compared to 146 during the second quarter. The 2Q2017 rig count did not include the full-quarter contribution from rigs acquired from Seventy Seven.

Average rig margin increased by $1,010/day sequentially to $7,730, mostly because of a $960/day decline in operating costs to $12,600. Additionally, rig revenue increased sequentially on average by $50/day to $20,320.

“We estimate that approximately half of the decrease in average rig operating cost per day was related to fewer rig reactivations in the third quarter and the relative stability in our rig count, both of which helped to reduce cost the repairs and maintenance, supplies and labor,” Hendricks said.

“The remainder of the decrease is believed to be largely transitory in nature as lower than expected costs for rig repairs and maintenance during the third quarter is not expected to be sustainable.”

High Super-Spec Demand

Strong demand continues for the so-called super-spec rigs, PTEN’s alternating current line equipped with advanced technology for harsh conditions and multi-well pads. Four of seven announced APEX-XK rig upgrades have been delivered, and the remaining three are under contract.

Contracts also are secured to upgrade more rigs with box-on-box substructure and integrated walking systems that are scheduled for delivery in the first half of 2018. PTEN had term contracts for drilling rigs at the end of September worth about $470 million of future dayrate drilling revenue.

For the month of October, “we we expect our rig count will average 158 rigs and for the fourth quarter, 160 rigs,” said Hendricks. “We expect slight improvement in our rig count through the end of the year” as incremental, upgraded super-spec rigs are delivered.

Average rig revenue during 4Q2017 is forecast to be flat at $20,300/day. Average operating costs are estimated at $13,000/day, with rig margin averaging $7,300/day.

“Despite softness in the industry rig count, demand for super-spec rigs remained strong,” the CEO said. “Of the 113 super-spec rigs in our fleet, 111 are currently contract. We are estimating the total industry supply of super-spec rigs in the U.S. to be approximately 500 rigs, with utilization for this class of rig exceeding 90%.”

Based on contracts now in place, PTEN expects to have an average of 87 rigs operating under term contract during the fourth quarter; it also has an average of 53 rigs operating under term contracts through next September.

Reactivating Frack Spreads

Two frack spreads were reactivated during the quarter, giving it a total of 22 at the end of September. Higher activity levels and better pricing led to a sequential increase in pressure pumping revenues to $362 million. Gross profit as a percentage of revenue increased sequentially to 19.9% from 19.4%.

However, Harvey took a bite out of the pressure pumping business too, impacting both revenue and operating costs.

“We estimate the delays associated with Hurricane Harvey reduced our pressure pumping revenues by more than $6 million,” Hendricks said, as PTEN had lower cost adsorption and higher costs for items such as diesel trucking and personnel transportation.

One more frack spread is scheduled to be reactivated by the end of the year, which would give PTEN 23 active spreads comprising around 1.5 million hp.

“Increased activity as a result of a higher spread count in the fourth quarter is expected to be somewhat offset by the seasonal impact of the holidays,” Hendricks said. “Nonetheless, higher activity, combined with better pricing, is expected to result an increase in pressure pumping revenues during the fourth quarter, approximately $390 million and gross profit as a percentage of pressure pumping revenues of approximately 22.5%.”

The Houston operator reported a net loss of $33.8 million (minus 16 cents/share) in 3Q2017 versus a year-ago loss of $84.1 million (minus 58 cents). Revenue climbed to $685 million from $206 million.

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