U.S. onshore drilling expert Patterson-UTI Energy Inc. is upgrading its land rigs at a fast clip and reactivating fracture spreads to keep up with customer demand, the CEO said Thursday.
The Houston-based contract driller built its hardware offerings after buying financially distressed Seventy Seven Energy Inc., a deal completed in the second quarter.
Patterson-UTI now has more than 200 high-specification (spec) rigs and one of the largest pressure pumping fleets in the industry, with more than 1.5 million hydraulic hp (hhp) across the United States and Canada. The move to take over Seventy Seven proved prescient as customer demand for high-spec rigs continues to escalate, CEO Andy Hendricks said during a conference call to discuss 2Q2017 results.
"Demand for high-spec rigs remained strong despite moderating prices for crude oil during the second quarter,” Hendricks said. "In response to customer demand for super-spec rigs we are upgrading seven of our 1,000 hp APEX 1000 rigs to APEX-XK rigs with super-spec capabilities including a 1,500 hp drawworks and a mast with a hook load rating of 750,000 pounds.
“The first of these upgraded rigs was delivered in July, with the remaining upgraded rigs expected to be delivered during the remainder of 2017. We have contracts for five of these rigs with terms ranging from 18 months to 24 months, and we expect to shortly enter into contracts for the remaining two rigs.”
The company’s average U.S. rig count was 145 rigs between April and June. For July, the average should be 159 rigs, with three more in Canada.
Also strengthening is the call for fracture (frack) crews, Hendricks said.
"During the second quarter we reactivated two frack spreads. With current demand for pressure pumping, we plan to reactivate two frack spreads late in the third quarter and one frack spread during the fourth quarter. With the addition of these three spreads in the back half of 2017, we expect to exit 2017 with 23 active spreads.”
The Seventy Seven Energy takeover has proven to be the “most significant transaction for the company since the merger of Patterson and UTI in 2001,” Chairman Mark Siegel said. Seventy Seven Energy contributed $190 million in 2Q2017 of the $274 million sequential increase in total revenues.
"Most importantly this merger has strengthened our position in both contract drilling and pressure pumping and has uniquely positioned us as a leader in both of these businesses in the United States,” Siegel said. “In addition, the merger added a new business line for us in oilfield rentals.
"Contract drilling and pressure pumping are critical to producing oil and natural gas from unconventional resources. Advancements in both of these services have increased efficiency, improved well productivity, and had a profound impact on the marginal cost of production in U.S. onshore plays such as the Permian Basin.”
The addition of Seventy Seven, however, has not come without some financial blowback. Improved rig pricing during the second quarter was offset by a combination of a higher proportion of rigs on reduced standby rates as a result of the merger and with repricing of some long-term contracts. That resulted in a $930/day decrease in average rig revenue/day to $20,270.
“This decrease was partially offset by an $890/day decrease in average rig operating costs to $13,560, which resulted from the higher proportion of rigs on standby and greater overhead absorption given the larger number of active rigs following the merger,” Hendricks said. “As a result, average rig margin per day for the second quarter of $6,710 was relatively unchanged from the first quarter at $6,750/day.”
At the end of June, the company had term contracts for drilling rigs that were providing around $535 million of future dayrate drilling revenue.
“Based on contracts currently in place, we expect an average of 94 rigs operating under term contracts during the third quarter, and an average of 60 rigs operating under term contracts” through next June.
Including one-time charges, net losses in 2Q2017 totaled $92.2 million (minus 46 cents/share), versus a year-ago loss of $85.9 million (minus 58 cents). Losses included $51.2 million related to the merger and $29 million in impairments from writing down drilling equipment related to upgrading some rigs to super-spec capabilities.
Revenues in 2Q2017 totaled $579 million, compared with year-ago revenue of $194 million. Seventy Seven contributed $190 million.
In the pressure pumping business, revenue increased to $290 million from $141 million, the result of the Seventy Seven Energy takeover, increased utilization and better-than-expected pricing. As a result, gross margins as a percentage of pressure pumping revenues improved to 19.4% from 15.7% in 1Q2017.