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PTEN Still Not Calling Bottom, Sees More Rigs Falling

A handful of onshore operators are reactivating rigs but others are planning to drop equipment, "collectively leading to a flat rig count" through the rest of the year, Patterson-UTI Energy Inc.'s management team said Thursday.

"With the recent oil price declines and the reduced near-term optimism for natural gas, further rig count reductions are not out of the question," Chairman Mark Siegel said during a conference call to discuss second quarter results.

The Houston-based drilling and pressure pumping contractor is one of the largest onshore oilfield service providers in the continental United States and Western Canada. About one-third of its equipment has been stacked for months, and there was no forecast on when that may change.

The company reported a net loss of $19.0 million (minus 13 cents/share) in 2Q2015, versus profits of $54.3 million (37 cents) in the year-ago period. Revenues declined to $473 million from $757 million.

"There's no visibility in the timing, shape or magnitude of a recovery," Siegel said, basically repeating the outlook from April, when management said it could not call a bottom on the market (see Shale DailyApril 23).

A "litany of exogenous factors" has increased volatility and "patience may be required" until there's more global stability from OPEC's production plans, Middle Eastern turmoil and the financial problems in Greece.

CEO Andy Hendricks said "the conversation has changed" in just the past few weeks as the oil price has fallen to about $50/bbl. Customers now are wanting even more pricing concessions, and there isn't a lot more room to give.

"With the customer mix we have, we have held up relatively well," he said. "But we still see a significant amount of equipment parked on the side."

PTEN's U.S. rig count in 2Q2015 averaged 122 rigs, with two in Canada, down sequentially from 165 U.S. rigs and eight in Canada. However, the rig count today is lower. July's exit rate is forecast to be flat from June, with an average 110 rigs working in the United States and three in Canada.

Between July and September, PTEN expects to see its U.S. rig count fall to 107 on average, with four rigs running in Canada. As for the pressure pumping services, that business may not hit bottom in 3Q2015. "We don't know right now," Hendricks said. "There are too many variables out there."

Seven high-tech Apex rigs were added to the fleet in 2Q2015, bringing the total count to 158 for the alternating current walkers. Three more, already under contract, are to be completed by the end of the year. However, no new Apex rigs are planned for 2016.

Once customers know what they plan to do, PTEN should have a better idea of whether to make more investments, said Hendricks. Unless there are term contracts in place, though, don't expect any newbuilds.

"We hear anecdotal stories, and we have visibility in some basins where we see attrition taking place," he said. "Some pressure pumper operators are maintaining equipment to the same level we are, the quality players...But it's hard to say what the future impact of that is, or the magnitude."

The market will recover as it always does, he said. Once that happens, expect to see the best equipment ramping up.

"What could happen in 2016 [is] we really think the market is going to be around the 1,500 hp rig with walking systems for multi-well pads," Hendricks said. "And we think the 1,000 hp rigs will be more challenged to go back to work. There is that possibility that we could be building more rigs before the 1,000 hp rigs go back to work."

More consolidation within the industry is likely, but PTEN in no hurry to pick up equipment from cash-starved competitors. In the past the company was known for its acquisitiveness. That's unlikely this time, Hendricks said.

The problem with a lot of the equipment now stacked is that it may sit for "a year or two," he said. "How do you value that piece of equipment, especially if it doesn't have a similar transmission, engine type...? We look at all of these things in great detail."

PTEN has a smaller workforce, and that could be as big an issue once the recovery is in gear.

"Our employee headcount is not what it was," Hendricks noted. "When we start to pick up equipment, we will have to recruit employees. It's not a problem getting them back, but the employee market will tighten up before the equipment market does."

PTEN has stacked about one-third of its equipment, and there are no indications when utilization will strengthen, said Hendricks. On top of that, contract drilling revenues are falling as the operator cuts prices to its customers.

Term contracts are in place for 85 rigs in the third quarter, with an average of 77 under contract in the second half of this year. There are customers that are dropping rigs with contracts, leading to early termination fees, and that's providing some lift in the downturn, Hendricks noted.

The breakup fees added $15.6 million of revenue in 2Q2015, or about $1,300/day to average rig revenues of $25,720/day. Excluding early break-up fees, total average revenues would have been almost flat sequentially at $24,330/day.

At the end of June, term contracts were in place to provide about $1 billion of future dayrate drilling revenue. About 85 rigs on average should be operating under term contracts during 3Q2015, with an average of 77 in operation during the second half of the year.

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