Concerns that North American oil and natural gas activity would dip in late 2017 were unfounded, according to contract driller Patterson-UTI Energy Inc. (PTEN), which reported strong demand for onshore services and upgraded rigs.

The Houston-based oilfield services (OFS) operator, whose high-tech walking rigs, i.e. “super-specs,” are a draw in unconventional projects, reported 4Q2017 and full-year results on Thursday. Chairman Mark Siegel and CEO Andy Hendricks shared a microphone during a conference call to discuss results. They also offered an encouraging outlook for 2018.

As exploration and production budgets wound down at the end of 2017, predictions were that demand for OFS would fall off as well. It never happened, Hendricks said.

“In contract drilling, despite widespread concerns of an industrywide drop in the rig count during the fourth quarter, our rig count proved resilient and rebounded during the quarter,” he said. “Even with the typical holiday related slowdown in Canada, our rig count ended the year near the highest level of 2017.”

The company’s average North American rig count in 4Q2017 was 161. In January it edged even higher, averaging 165. PTEN also was able to capture more bang for the buck.

Rig margin/day during 4Q2017 increased sequentially by an average $280 to $8,010. Rig revenue/day on average increased by $630, offsetting a typical $350 increase in daily rig operating costs, which came in part from reactivating equipment.

“Average rig revenue/day of $20,950 was better than expected, as the market for super-spec rigs remains tight,” Hendricks said. Daily rig operating costs averaged around $12,940.

PTEN started off this year with drilling rig term contracts that provide about $450 million of future dayrate drilling revenue, about $70 million more than at the end of the third quarter.

“This increase in our backlog was a function of both an increase in the number of rigs under term contracts as well as higher average term dayrates,” Hendricks said.

“Based on contracts currently in place we expect an average of 96 rigs operating under term contracts during the first quarter and an average of 67 rigs operating under term contracts during 2018.”

PTEN only had 53 rigs under 2018 term contracts in 3Q2017.

The company also is upgrading more of its Apex rigs on customer demand, with plans to revamp five for delivery in the first half of this year, up from two previously, after securing customer contracts.

“Given these upgrades, as well as the reactivation of additional rigs, we expect our rig count for the first quarter to average 169 rigs,” Hendricks said.

With an “increasing proportion of super-spec rigs” and favorable repricing of its short-term contracts, revenue/day in the first quarter is now expected to average about $300 higher than in the final three months of 2017. Average rig margin/day is forecast to be $7,700.

“We estimate there are approximately 550 super-spec rigs in the industry in the U.S. with utilization…exceeding 95%,” Hendricks said. “Within our own fleet we have 130 super-spec rigs, of which 98% have contracts.”

Idle Equipment Reactivated

Pressure pumping demand also is higher, as PTEN reactivated its 23rd spread late in the fourth quarter. Revenue during 4Q2017 increased 12% sequentially to $407 million. Gross margin was $83 million, or 20.4% of pressure pumping revenue, an increase from 19.9% from 3Q2017.

Revenue growth in the fourth quarter “exceeded our expectations,” Hendricks said, but gross margin did not improve as much as expected and still has room to improve. In light of that, PTEN has launched several initiatives.

“First, we are working to optimize our average spread size in order to gain an extra active spread from already active equipment,” he said. “We ended 2017 with 1.25 million hp active comprising 23 spreads. Early in the second quarter, we expect to go to 24 active spreads with the same 1.25 million hp.”

PTEN also plans to reposition two active spreads now working in the Midcontinent “to more profitable markets,” although Hendricks did not disclose where. Assuming demand remains as strong as expected, additional call for spreads could lead to more idle equipment being reactivated later this year.

However, cold winter weather and reactivation costs are expected to weigh on first quarter revenue by about $400 million, Hendricks said.

“We estimate weather-related downtime in January alone negatively impacted first quarter revenues by approximately $9 million,” he said. However, pressure pumping gross margin in the first quarter should increase by about $5 million.

To ensure it not only keeps its considerable hold in the North American onshore market but expands its customer base, Siegel said the company is all in on capturing more value from technologies. Last year PTEN bought MS Energy Services, which gave it directional drilling expertise; Seventy Seven Energy Inc. to expand the rig inventory and fracturing business; and Calgary-based Warrior Rig Ltd., giving it more leverage in advanced rig and technology offerings.

Siegel and Hendricks each extended PTEN’s condolences to the families and friends of the five people, including three company employees, who were killed when a PTEN rig exploded in Oklahoma last month. An investigation is underway.

“We are still assessing the financial impact of the accident in Oklahoma,” Hendricks said. “Based on the information we have available at this time, we believe that we have adequate insurance to cover any losses excluding the applicable insurance deductibles and expenses related to the investigation.”

Net income was $195 million (88 cents/share) in 4Q2017, compared with a year-ago loss of $78.1 million (minus 53 cents). Revenue increased to $787 million from $247 million. For 2017, net income was $5.9 million (3 cents/share), versus a 2016 loss of $319 million (minus $2.18). Revenue for 2017 was $2.4 billion, compared with $916 million for 2016.

Capital expenditures (capex) in 4Q2017 totaled $237 million, which brought full-year spending to $567 million.

Because of an expected increase in North American pressure pumping activity and a higher rig count, projected 2018 capex has been increased to $675 million, with $330 million set aside for drilling, $260 million for pressure pumping, $40 million for directional drilling and $45 million for other operations/corporate expenses.

“We are not budgeting for any newbuilds in 2018,” Hendricks said. “But this budget allows for 12 major rig upgrades for delivery in 2018 of which three were previously announced. Of these 12 rigs, one has already been delivered and another five were already contracted and scheduled for delivery in the first half of 2018. The remaining six provide optionality to deploy additional super-spec rigs in what we believe will be a strong rig market during the second half of this year…”

At this point, however, “we do not have plans to add incremental horsepower to our fleet.”