Operational delays at multiple well sites, combined with too much pressure pumping competition across the U.S. onshore led to a slow quarter for Patterson-UTI Energy Inc., but management expects the issues to be short-lived.

Chairman Mark Siegel and CEO Andy Hendricks shared a microphone last week to discuss second quarter performance and provide an outlook going forward for the Houston-based contract driller.

“With relatively high oil prices, industry demand for super-spec rigs remains strong,” Siegel said. Contract drilling generated about two-thirds of consolidated profits in 2Q2018, and “we expect further improvement in both dayrates and activity.”

However, in the pressure pumping business, “we are seeing industry softness due to oversupply” as well as some exploration and production companies “are ahead of budget” on activity and capital spend.

“We believe the pressure pumping issues are short-term in nature, and we remain positive on the long-term outlook for the business.”

In the contract drilling business, the average rig count increased by seven to 176 rigs in the quarter and should average around 180 during the third quarter, said Hendricks.

Average rig margins per day increased by a better-than-expected $700 to $8,270. A $330 sequential increase per day in average rig revenue and the decrease in average rig operating costs “were both better than expected.”

Per-day rig revenue averaged $21,870, and rig operating costs averaged $13,610.

“We recently signed customer contracts to deliver four additional rigs with major upgrades to super-spec for the Permian Basin,” Hendricks said. “The favorable dayrates and four-year term durations of these contracts provide compelling economics and are expected to pay back the capital investment within the terms of the contracts.

“Since the beginning of 2018, we have delivered nine rigs with major upgrades, and we have customer contracts to deliver an additional seven rigs with major upgrades through early 2019.”

At the end of June, PTEN had term drilling rig contracts for about $680 million of future dayrate drilling revenue, a sequential increase from $600 million. The company since has signed contracts that should provide an additional $200 million-plus of future dayrate drilling revenue.

Based on the contracts now in hand PTEN expects to have on average 119 rigs operating under term contracts during the third quarter, with 81 rigs on average operating under term contracts through next June.

There is continued demand for the high-tech super-specs, walking rigs with remote technology that can be moved easily.

PTEN has 142 super-specs in its fleet, and Hendricks said the United States eventually should have about 600 in operation.

“Across the industry many of the easy upgrades were performed in 2016 and 2017,” Hendricks noted. Upgrades to super-spec capability has increased but “the pace of which upgraded super-spec rigs are being delivered to the market has slowed. We estimate only 50 rigs have been upgraded to super-spec capability through the first half of this year, and the super-spec rig market remains very tight.”

The CEO spent a few minutes discussing the Permian Basin, where activity remains strong while supplies and people have at times been in short supply. That hasn’t affected the call for super-specs, he said.

The investment community “has concerns about the industry, including the potential risk to activity and pricing from Permian differentials. However, we expect demand for super-spec rigs will remain strong as evidenced by the number of contracts we signed since the end of the quarter.”

For the third quarter, PTEN expects its rig count to average 180 rigs, with per-day revenue increasing on average by around $250 and the average rig cost to be about $200 higher.

“We are actually seeing more significant increases in dayrates in the current market than what is suggested by our expectation for the third quarter, but the full extent of these increases is being masked in the back half of 2018 by the roll-off of older higher rate contracts,” Hendricks said.

“We still have six high dayrate legacy contracts of which five are scheduled to expire in the third quarter and the last one in the fourth quarter.”

Still, “we have customers who intend to add super-spec rigs into early 2019.”

The pressure pumping business got hit from all sides during the quarter, he explained. While revenue increased sequentially to $424 million from $407 million, gross profit declined to $82.4 million from $85.8 million.

The shortfall primarily was attributed to “unexpectedly high idle time rate in the quarter as a result of operational delays at multiple well sites unrelated to our pumping operations. Our pressure pumping operations were held at numerous times for challenges with third-party wireline, coal tubing, even mechanical issues on customers’ wells.

“The market for pressure pumping was also softer late in the quarter due to what we believe is a result of some oversupply versus the current demand, which impacted our ability to find short-term work to fill the unexpected holes in our schedule.”

PTEN has made progress to improve its pressure pumping business, but “we are disappointed that the softening of the market and lower utilization at the end of the quarter masked this progress.”

Two fracture spreads were activated in the quarter, but based on current market conditions, management does not plan to reactivate any more for now.

Calgary-based CalFrac Well Services Ltd., which has one of the largest fracturing businesses in the world, said in 2Q2018 results that it had reactivated reactivated 72,000 hp since the end of June 2017. U.S.-focused Superior Energy Services Inc. also activated more hydraulic horsepower and proppant sand volumes in the second quarter.

Siegel expressed his concerns about the overall pressure pumping business.

“It is disappointing to hear of peers continuing to plan to add additional horsepower to this market in the near future,” he said. “We believe that given these headwinds in the market, the building of new fracture spreads, reactivating idle spreads and chasing market share given a current oversupply will lead to worsening returns on capital for the entire industry.”

In the directional drilling unit, revenues climbed sequentially to $52.7 million from $48.6 million, but gross margin as a percentage of revenues fell to 17.1% from 22.5%.

“Activity improved in the second quarter, but margins continue to be negatively impacted by third party rental expense resulting from ongoing delays in the delivery of various components,” Hendricks said.

Capital expenditures (capex) for this year remain unchanged at $675 million, but there is going to be a shift in where the money is spent.

“With compelling economics for super-spec rigs, we are allocating additional capital to contract drilling,” Hendricks said. “At the same time, in pressure pumping, improvements in our fleet maintenance operations have allowed us to reduce our capex.”

Net losses came down year/year to $10.7 million (minus 5 cents/share) from a loss of $92.2 million (minus 46 cents). Revenues increased year/year to $854 million from $579 million.

During the quarter, the PTEN repurchased 1.7 million shares for $33.6 million. The board has authorized up to $250 million more in share repurchases.