Relief that had been expected for the oil and gas sector isn’t going to happen, and the situation may deteriorate even more, Patterson-UTI Inc. management said Thursday.

Because of reduced spending by the exploration and production sector, “2016 is likely to be even more challenging, and we do not expect this to change until commodity prices improve,” Chairman Mark Siegel said during a quarterly conference call.

PTEN provides contract drilling rigs and pressure pumping services to North American operators. PTEN now has 161 Apex rigs, its top-tier line of alternating-current walkers, and it has more than 1 million hp of pressure pumping equipment.

“Last quarter, we discussed that the industry had reached a point where it was Darwinian and the weak may not survive. We believe the industry is becoming increasingly bifurcated between the financially weak and financially strong. The financially strong, such as Patterson-UTI, are seen as survivors, while those that are financially weak may not survive, at least in their current form.”

Asset sales and reorganizations, as well as equipment attrition because of the lack of maintenance, are going to impair the ability of some operators to respond when the market recovers, Siegel said, echoing comments by National Oilwell Varco Inc.’s CEO on Wednesday (see Shale Daily, Feb. 3).

The Houston-based contract driller’s rig count in the final three months of 2015 averaged 88 U.S. rigs and three Canadian rigs, down sequentially from 105 U.S. and four Canadian rigs. But the rig count isn’t holding up.

“Based on contracts currently in place, we expect an average of 59 rigs operating under term contracts during the first quarter, and an average of 46 rigs operating under term contracts during 2016,” CEO Andy Hendricks said during the call. At the end of December, PTEN had term contracts for about $710 million for future dayrate drilling revenue.

“Looking forward, we have limited visibility into activity beyond the current quarter,” Hendricks said. “We expect to see continued weakness, and commodity prices will lead to further rig count reductions across the industry. As such, we expect our rig counts during the first quarter will average 70 rigs in the U.S. and four rigs in Canada.”

There’s no place in the onshore where business is better, he said.

“We have the challenge with commodity prices” in both the Texas region, because of low West Texas Intermediate crude oil prices, and “low natural gas prices in the Northeast.”

Average rig margin per day, excluding early termination revenues, is expected to decrease by about $900/day in the first quarter. Capital spending for 2016 is set at $190 million, substantially lower than planned 2015 spend of $750 million (see Shale Daily, Feb. 5, 2015).

“Given our focus on protecting the balance sheet, we will be prudent with our spending and may not spend all of the budget amount if market conditions do not improve,” Hendricks said.

Total contract drilling revenues during 4Q2015 were $202 million, including $9.2 million from early contract terminations. Excluding early termination revenues, average rig revenue/day would have been $23,140, flat from the third quarter, Hendricks said. Total average rig operating cost/day fell $940 sequentially to $12,640, with about one-third of the decrease related to cost savings and remainder for a higher proportion of rigs on standby.

Pressure pumping activity fell in the fourth quarter, better than expected, but revenue may decline by about 25% in the first quarter, Hendricks said. Revenue during 4Q2015 totaled $132 million, down sequentially from $154 million in 3Q2015. Gross margin, as a percentage of revenue, improved slightly to 10.4%

Since the beginning of 2016, PTEN has stacked about 140,000 hp used in fracturing, and in total, “we now have stacked slightly more than half of our fleet of more than 1 million hydraulic fracturing hp…

“What we said before and what still holds true is the pricing, in general, in the pressure pumping industry is just really unsustainable,” Hendricks said. “It’s too low. And that’s why you see us stacking 140,000 hp since the beginning of the year…I think pricing is the primary driver of most operators’ decisions right now when it comes to services. But there is also an element of service quality, and that’s partially what’s driving our results as well. Our team have shown historically over the years that they’re very competitive when it comes to operational efficiencies at the well site. And I do believe that’s one of the reasons why you see our margins holding up, relatively speaking, in a very difficult market.”