Onshore contract driller expert Patterson-UTI Inc. reactivated two fracture spreads during the fourth quarter and began rehiring crews, as more rig equipment moved off the stacks and back to work in the oil and natural gas fields.

Rig dayrates improved only slightly from 3Q2016 to $21,870 from $21,640, but margin/day fell because fewer rigs were on standby, the Houston operator reported Thursday in its quarterly report. However, pressure pumping revenue climbed by more than one-third from the third quarter to $106 million, with margins escalating.

“Despite reactivation costs, pressure pumping gross margin as a percentage of revenues rebounded to 5.3% during the fourth quarter from 1.2% during the third quarter,” CEO Andy Hendricks said during a conference call.

Improving business conditions in late 2016 led the company to begin rehiring crews. Two fracture (frack) spreads also were reactivated in mid-December.

“Demand has been strong enough that we are preparing to activate another frack spread, which will begin working early in the second quarter,” Hendricks said. “Once this spread is active, we will have approximately 60% of our fleet, or more than $1 million frack hp, operating. These spreads are being reactivated as a result of us having the confidence of steady work and having met our previously stated price expectations.”

Pressure pumping revenue should increase by 25% sequentially through the first quarter, with “gross margin as a percentage of pressure pumping revenue to increase into the low-teens.”

Chairman Mark S. Siegel, who joined Hendricks on the conference call, said the “pace of recovery” across the U.S. onshore is accelerating. But he offered a caveat.

“While our conditions are improving, the financial challenges for our industry are far from over,” he said.

The industry downturn since late 2014 led to a massive reduction in rigs and labor, still evident in results through the end of 2016.

The company reported a net loss of $78.1 million (minus 53 cents/share) for 4Q2016, compared with losses in the year-ago period of $58.7 million (minus 40 cents). Revenues declined year/year to $247 million from $339 million. Net losses for 2016 totaled $319 million (minus $2.18/share), compared with a loss in 2015 of $294 million (minus $2.00). Revenues declined from 2015 to $916 million from $1.9 billion.

However, business activity is moving in the right direction, Hendricks said.

The company expects the 1Q2017 U.S. rig count to average 80 — 21% higher sequentially. In Canada, seasonal factors should keep only two rigs in operation through March. Overall, rig revenue/day is on average expected to be $20,900 in 1Q2016, about $700 lower than in 4Q2015 when it averaged $21,640 and from 3Q2016’s $21,870.

“This expected decrease is a continuation of rigs being reactivated, and the recontracting of rigs rolling off higher rig term contracts,” Hendricks said. “Average rig operating cost per day is expected to be $14,100, reflecting a further reduction in standby days to about 1% of the total rig operating days during the first quarter from 4% in the fourth quarter.”

The U.S. rig count is recording a steady incline.

During 4Q2016, the company’s average U.S. rig count was 66 rigs, up from 60 rigs during the third quarter. The average Canadian rig count was flat at two. During January, the average U.S. rig count had risen to 76, while Canada remained flat.

Customer demand is growing for “super-spec” rigs, technology savvy walkers with alternating-current drives. Two contract wins came in the final quarter for the company’s top-of-the-line Apex rigs.

One contract was awarded for an Apex-XK 1500 and another was for the newly introduced Apex-XC, a “pad-optimal design with greater clearance for walking over and around wellheads on a pad.” The XC model offers “larger drill pipe racking capacity for longer laterals and includes a higher-torque top drive,” part of a technology acquired through the recent buyout of Calgary-based Warrior Rig Ltd.

However, a “substantial amount of the spend” related to components for new rig designs, except for Warrior, was committed before the downturn in 2014, the CEO said.

In the U.S. drilling market, there is a “limited number of super-spec rigs. We estimate approximately 375 of these rigs across the entire U.S., and we believe that most of the super-spec rigs in stronger markets such as Texas and Oklahoma are already contracted.

“Within our own fleet, we have 65 super-spec rigs, of which 62 currently have contracts. Of the three super-spec rigs with our contracts, one each is located in Appalachia, the Bakken Shale and the Rockies.

Absent any upgrades or rig moves, the company doesn’t have any super-spec rigs available in either Texas or Oklahoma today, he said.

“Where justified we will further upgrade our fleet to meet customer demand for super-spec rigs. For a total upgrade cost per rig between $1 million and $3 million, we have 39 additional 1,500 hp Apex rigs that can be upgraded to super-spec.”

Term contracts for rigs were in place at the end of December that should provide about $417 million of future dayrate drilling revenue.

“Based on contracts currently in place, we expect an average of 44 rigs operating under term contracts during the first quarter, and an average of 37 rigs operating under term contracts during 2017,” Hendricks said.

The company also is making progress to complete before midyear a $1.76 billion takeover of U.S. driller Seventy Seven Energy Inc., announced in December.

“This merger further solidifies our position as a leading high-spec drilling company and will make us one of the largest pressure pumping companies in the industry,” Siegel said. “In January, we received early termination of the Hart-Scott-Rodino waiting period as well as filed our initial Form S-4 registration statement with the U.S. Securities and Exchange Commission.”

PTEN also completed an equity offering of 18.17 million shares of stock, including an overallotment option, which is being used to fund $470 million of Seventy Seven’s outstanding debt.

NGI’s Shale Daily will be covering many North American-focused oil and gas operator results in the coming weeks. A calendar listing is available on the website.