Houston-based Patterson-UTI Energy Inc., one of the largest drilling contractors in North America, has responded quickly to the rapid downturn in the onshore by closing facilities, reducing crews and cutting spending, but it still expects to come out on the other side in relatively better shape than most.

CEO Andy Hendricks shared a microphone on Thursday to discuss the first quarter’s results with Executive Chairman Mark S. Siegel and CFO Andy Smith.

The company, which provides contract drilling, pressure pumping and directional drilling services across the United States and Canada, was quick on the draw in beginning cutbacks. As a drilling contractor with a myriad of exploration and production (E&P) customers that range from the Big Energy operators to small privates, the phone is ringing early as operators adjust their activity plans, Hendricks said.

“Historically, we’ve always gotten the first call whenever an operator wants to change plans,” he said. “We have relative visibility on what’s going to happen, given more color, and we also can manage our other businesses in the portfolio because of the market visibility.”

Each E&P has a “slightly different playbook…Some have hedges in place, some longer than others,” while others “work strictly on cash flow… Some customers are shutting all their production in, some are shutting in half. It depends on the economics of the E&P, what its financial structure is, its philosophy of how the business is run.”

With that insight, the company began to take drastic action because the outlook through the rest of the year looks uneven and down. At the end of March Patterson-UTI had around 97 rigs now at work, all in the United States, mostly in the Permian Basin, at 43, with 19 in Appalachia and nine in South Texas.

“For the first quarter, in contract drilling, our rig count averaged 123 rigs, unchanged from the fourth quarter and in line with our expectation,” Hendricks said. “Our rig count started to decline late in the first quarter and has accelerated since the end of the first quarter. We expect our average rig count for the second quarter will decrease by approximately one-third from the first quarter average.”

At the end of March, the company had term contracts for drilling rigs providing for around $440 million of future dayrate drilling revenue.

“Based on contracts currently in place, we expect an average of 71 rigs operating under term contracts during the second quarter and an average of 50 rigs operating under term contracts” through 1Q2021.

Profits for the contract drilling segment “exceeded our expectation” in the first quarter,” with the average cost to run a rig/day falling $990 from 4Q2019 to $14,550. Average contract rig revenue/operating day was $23,800, with rig margins for each operating day higher at $9,250.

The forecast for spot rig contracts this year is low.
“We will do some spot work within breaks, but that’s a low probability,” said the CEO. “When we were doing our projections, we were not counting on high levels…The calendar has white space in it,” and the company has adjusted its support costs at the same time.

Already three of four facilities that serve the Permian have been closed in Midland, TX, and two support facilities are shuttered in the Northeast.

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“While the circumstances leading to this downturn may be different than prior downturns, our response will be guided by the same principles that have guided us through prior downturns,” Hendricks said. “In addition to lowering our direct field level costs as activity slows, we have taken steps to structurally reduce our indirect support costs by what we estimate will be approximately $100 million annually, of which approximately two-thirds relates to our pressure pumping segment.”

Visibility for the pressure pumping business is hazy at best, with drilled but uncompleted wells, aka DUCs, likely to continue to expand through the coming year. Once E&Ps come out of the slump, they likely will turn to completing wells before drilling new ones, Hendricks said.

“We made significant progress over the last year to reduce our pressure pumping cost structure, but our cost structure was still too high at the end of 2019,” he told investors. Even before the slowdown in activity, the company began “major structural changes” to further streamline operations and improve efficiencies.

“This lower cost structure, combined with continued, strong operational performance, will make us more competitive in what will likely continue to be a challenged pressure pumping market.”

The company averaged 10 active fracture spreads within the pressure pumping segment during the first quarter, in line with expectations. It now is running five spreads, but one more is to be canceled, with four active spreads expected to the end of the year.

Directional drilling had begun the year on a positive note, Hendricks said, as an “uptake for technology in the field was really growing…until things changed.” Technology was moving forward, and he expected the segment “was going to see nice growth in 2020 and gain market share because of that.

“Now things have shifted,” and directional drilling is slowing down along with the overall rig count. However, all is not lost. Because of the many types of E&Ps that work with the company, the new technology steps should emerge unscathed and “help sustain us and help us do more remote operations because of the higher service quality…

“We will do more with remote and are making that adjustment in the downturn,” said the CEO. “We were moving that way anyway, but the downturn allows you to move some initiatives faster than others. This is one of them.”

During 1Q2020, directional drilling revenues were $34.5 million with gross profit of $2.2 million. Gross margin as a percentage of revenue decreased sequentially to 6.3%, “as we front-loaded development costs associated with new technologies,” Hendricks noted. “Going forward, development costs will subside in the current market, and we are centralizing repair and maintenance activities and other support infrastructure, which we estimate will generate approximately $10 million of annual support costs savings.”

Siegel, who has guided the company for more than two decades, including the 2001 merger that combined Patterson Energy and UTI Energy, was on his final conference call Thursday. He officially announced his retirement earlier this month, a decision that he said has been on his mind since last year. He said he regretted that he was stepping down when the company was coping with a downturn. While he will be involved in advising the company, Siegel will relinquish his board seat and title at the annual meeting June 4.

Hendricks noted the loss was personal, beyond the role Siegel has played in mentoring. Many analysts on the call heralded Siegel for his stewardship through the good times and the downturns.

When Siegel first began to work for UTI in 1995, the company’s total enterprise value was only $16 million, Hendricks noted.

“Under his visionary leadership, a small, regional drilling company, through both mergers and organic growth, has become a leading oilfield services company and a primary player in the U.S. unconventional shale revolution,” Hendricks noted.

“Although our industry is facing challenges on multiple fronts with the significant fall in oil prices and U.S. drilling and completion activity, I have no doubt that the supremely talented management team in place will continue to manage the company in a superb manner and enable Patterson-UTI to emerge a stronger company after these challenges and remain a leader in this industry,” Siegel said. “My decision is unrelated to the current industry circumstances; it is simply time for me to let others take charge.”

Patterson-UTI has “weathered many downturns, and I believe that we have emerged from each of them stronger,” he said. “Our focus throughout the remainder of 2020 will be on further cost reductions and cash preservation as we weather this period of significant uncertainty and volatility.”

Patterson-UTI early this month reduced capital expenditures by 60% from 2019 and halted share buybacks. In addition, the board has reduced by half the quarterly dividend to 2 cents/share.

“These initiatives to reduce our cash outlay will preserve our financial flexibility, which when combined with our strong balance sheet, positions Patterson-UTI well to endure this downturn,” Siegel said.

The company reported a net loss of $434.7 million (minus $2.28) in 1Q2020, compared with a year-ago loss of $28.6 million (minus 14 cents). Revenue fell to $446 million from $704 million. One-time charges in 1Q2020 totaled $406 million, including a $395 million impairment for the remaining goodwill on the balance sheet and a $10.6 million impairment charge related to some of the E&P assets.