North American onshore drilling contractor Patterson-UTI Energy Inc. (PTEN) has seen an uptick "in all segments" but steep declines in hydraulic fracturing and cementing services in North American operations, coupled with reduced pricing for services, sent BJ Services Co. earnings into a spiral in fiscal 1Q2010.
"With the upward direction in the U.S. rig count, there appears to be a definite renewal of optimism among our customers in the drilling and pressure pumping industries," PTEN Chairman Mark Siegel said in a conference call with analysts. "Drilling activity has continued to climb at a steep rate so far in 2010."
PTEN had an average of 103 rigs operating in the last three months of 2009; currently there are 145 rigs in operation. Most encouraging, said Siegel, is the increased activity in the Marcellus Shale, especially in Pennsylvania. 2010 should see a "rapid" expansion that market, he said.
PTEN posted a net loss in 4Q2009 of $18.2 million (minus 12 cents/share), compared with net income of $79.5 million (52 cents) in the year-ago period. Earnings in the latest quarter were impacted by a charge of $10.2 million related to the retirement of some drilling assets, which included 21 rigs from the rig fleet. Excluding one-time items, the company posted a loss of 6 cents/share.
"This write-off is part of an ongoing process of evaluating our entire rig fleet, rig by rig, taking into account industry demand and the expected cost to put rigs back to work," Siegel told analysts. "In each case, the rig being written off is one which we do not expect to put back into work given the size, rig moveability, nature of the rig...and likely industry demand for rigs of this type."
What the onshore market is looking for now is sturdy horizontal drilling equipment to break into gas and oil shales, which PTEN is building.
At the end of 4Q2009 PTEN "the company had an average of 103 drilling rigs operating, including 95 in the U.S. and eight rigs in Canada," said CEO Doug Wall. "This is a 30-rig increase over the average activity level we experienced in the third quarter...Average revenues per operating day during the fourth quarter were $16,770, compared to $16,800 in the third quarter. This slight decrease is primarily a result of more rigs on the spot market going back to work at lower overall rates."
Rig activity improved "throughout January, as witnessed by our latest monthly rig count for January of 122 rigs in the U.S., a further improvement of 14 rigs," said Wall. "The Canadian market increased to 14 rigs, an improvement of four rigs in January."
The number of drilling jobs declined sequentially in the final quarter by 15%, but the reason was a shift toward "higher service-intensive jobs," which include more hydraulic fracture (frac) work, said Wall. "In addition, for the first time in quite some time, our traditional business in the Appalachian showed some improvement with improved utilization of our traditional frac and cement crews.
"But, no question, the overall biggest growth we are witnessing is in the Marcellus," he said. "The number of horizontal fraction we completed in the Marcellus improved in excess of 33% as activity levels ramped up and we were able to achieve higher utilization of our frac crews."
To give some perspective, Wall said Pennsylvania recorded 1,640 traditional Appalachian wells in 2009, versus more than 4,100 in 2008. "On the other hand, 764 Marcellus shale wells were drilled in '09, up from 74 in 2008, a ten-fold increase. Although data is not readily available for the other states in the Appalachians, it should be noted that lion's share of this activity does come from Pennsylvania."
Because of the rapid transition to drilling multiple well pads, PTEN management thinks "there's a pretty good backlog of Marcellus Shale wells behind pipe that are waiting for stimulation and other completion work," said Wall. "We expect this trend to continue and to translate into first improved demand for our services in the coming quarters."
Meanwhile, BJ Services reported an operating loss in fiscal 1Q2010 of $10.8 million, versus income of $221.3 million in fiscal 1Q2009. The net loss from continuing operations was $8.4 million (minus 3 cents/share), compared with net income of 51 cents in the year-ago period. Revenue in the quarter ending Dec. 31, 2009 was $931.5 million, or about one-third lower than the $1.4 billion in revenues reported in 1Q2009.
The 1Q2010 results included costs of $3.1 million related to the pending merger with Baker Hughes Inc. (see NGI, Sept. 7, 2009).
"Natural gas drilling was 7% higher sequentially, and North America natural gas prices have improved somewhat as supply and demand are beginning to get more in balance," said BJ Services CEO Bill Stewart. "Our Canadian operations improved significantly from the previous quarter, primarily reflecting increased activity in the Montney and Horn River gas plays and the Bakken and other emerging oil plays..."
BJ Services "experienced increased service activity and a generally stable to slightly improved pressure pumping pricing environment in the U.S. and Canada markets during the quarter, as capacity utilization improved," said Stewart. "We continue to focus on our customers and meeting their needs, as we draw closer to the completion of the merger with Baker Hughes, expected to occur in March."
In its U.S./Mexico pressure pumping services unit, BJ Services reported that average active drilling rigs in 1Q2010 increased 12% sequentially, but were down 42% from the period a year earlier.
"Sequentially, revenue improved most notably in the Permian Basin, South Texas, East Texas and Midcontinent," said the company. In BJ Services' Canada pressure pumping unit, average drilling rig activity in 1Q2010 rose by half (49%) sequentially "primarily reflecting increases in fracturing and cementing activity." However, year/year rig activity fell by one-third (32%).
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