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Edited Transcript of PTEN earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Patterson-UTI Energy Inc Earnings Call

HOUSTON Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Patterson-UTI Energy Inc earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Michael Drickamer

Patterson-UTI Energy, Inc. - Director of IR

* John E. Vollmer

Patterson-UTI Energy, Inc. - CFO, SVP of Corporate Development and Treasurer

* Mark S. Siegel

Patterson-UTI Energy, Inc. - Executive Chairman

* William Andrew Hendricks

Patterson-UTI Energy, Inc. - CEO and President

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Conference Call Participants

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* Alexander D. Nuta

Evercore ISI, Research Division - Research Analyst

* Bradley Philip Handler

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Brandon Chase Mulvehill

Wolfe Research, LLC - Oil Services Analyst

* James Knowlton Wicklund

Crédit Suisse AG, Research Division - MD

* James Marshall Adkins

Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research

* John Matthew Daniel

Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service

* Kenneth Irvin Sill

SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst

* Marc Gregory Bianchi

Cowen and Company, LLC, Research Division - MD

* Michael K. LaMotte

Guggenheim Securities, LLC, Research Division - Analyst

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Patterson-UTI Energy First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to your host for today's conference, Mr. Mike Drickamer, Vice President, Investor Relations. Sir, you may begin.

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James Michael Drickamer, Patterson-UTI Energy, Inc. - Director of IR [2]

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Thank you, Bridget. Good morning, and on behalf of Patterson-UTI Energy, I'd like to welcome you to today's conference call to discuss the results for the 3 months ended March 31, 2017. Participating in today's call will be Mark Siegel, Chairman; Andy Hendricks, Chief Executive Officer; and John Vollmer, Chief Financial Officer. As a reminder, statements made in this conference call that state the company's or management's plans, intentions, beliefs, expectations or predictions for the future are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties as disclosed in the company's annual report on Form 10-K and other filings with the SEC. These risks and uncertainties could cause the company's actual results to differ materially from those suggested in such forward-looking statements or what the company expects. The company undertakes no obligation to publicly update or revise any forward-looking statements. The company's SEC filings may be obtained by contacting the company or the SEC and are available through the company's website and through the SEC's EDGAR system. Statements made in this conference call include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website, www.patenergy.com, and in the company's press release issued prior to this conference call. And now it's my pleasure to turn the call over to Mark Siegel for some opening remarks. Mark?

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [3]

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Thanks, Mike. Good morning, and welcome to Patterson-UTI's conference call for the first quarter of 2017. We are pleased that you're able to join us today. As is customary, I will start by briefly reviewing the financial results for the quarter ended March 31, before turning the call over to Andy Hendricks, who will share some comments on our operational highlights as well as our outlook.

After Andy's comments, I'll provide some closing remarks before turning the call over to questions. I'd like to start by saying how pleased I am with the recent completion of the merger with Seventy Seven Energy. I welcome all of the Seventy Seven employees and shareholders to Patterson-UTI. As we turn to the financial results for the first quarter, I want to remind you that because the merger just closed last week, all reported financial results for the first quarter are for Patterson-UTI on a stand-alone basis.

As set forth in our earnings press release issued this morning, for the first quarter, we reported a net loss of $63.5 million or $0.40 per share on revenues of $305 million. Total adjusted EBITDA during the first quarter was $63.6 million. I would like to note the financial results for the first quarter include a pretax gain of $11.2 million or $0.04 per share after-tax related to a real estate sale and transaction expenses related to the merger with Seventy Seven Energy of $5.2 million pretax or $0.02 per share after-tax.

Turning now to the merger with Seventy Seven Energy. For Patterson-UTI, the merger with Seventy Seven Energy was the most significant transaction since the merger of Patterson and UTI in 2001. Strategically, this merger strengthens our position in both U.S. onshore drilling and pressure pumping. In drilling, with a combined rig fleet of approximately 200 high-spec rigs, this transaction has further solidified our position as a leader in this industry. The Seventy Seven rig fleet is very complementary to our own and the combination of our rig fleets expands our ability to meet the strong demand for super-spec rigs. We believe a lot of U.S. onshore drilling activity would not have been economic 3 years ago at current commodity prices. But in this market, we believe that drilling economics are positively affected by the efficiencies offered by super-spec rigs.

In Pressure Pumping, the Seventy Seven Energy merger increased our frac fleet by approximately 0.5 million horsepower to approximately 1.5 million horsepower and expanded our geographic footprint to the Mid-Continent region.

With the efficiencies necessary to make wells economic under current commodity prices, well costs on a per unit of production basis are being reduced in part by the increased production that may result from higher intensity completions with greater volumes of sand being pumped. For Pressure Pumping companies, the greater volumes of sand are creating operational and logistical challenges and straining supply chains. Our increased scale following this merger provides us with even greater efficiencies in procuring items such as sand, chemicals and maintenance spares. Additionally, our increased size should help address the challenges of transporting increased volumes of sand by rail and truck to the well.

The Seventy Seven merger also provides us with a new business line through the addition of Great Plains Oilfield Rentals. We will be able to leverage the Patterson-UTI footprint and infrastructure to expand their operations. We're excited about this opportunity as we believe this business has tremendous room for growth.

We'd like to take a moment to commend Seventy Seven Energy for their significant accomplishments in emerging from Chesapeake and expanding their customer base. We look forward to continuing to work for these customers. In both drilling and pressure pumping, we see get opportunities to leverage the larger scale customer base and geographic footprint of the combined company. With the acquisition of Seventy Seven Energy, we issued approximately 47.5 million shares of common stock. Concurrent with the closing of the merger, we repaid all the outstanding debt of Seventy Seven Energy, which totaled $472 million on a gross basis or $403 million net of cash received from Seventy Seven Energy.

Our balance sheet remain strong. After this transaction, we estimate our debt-to-capitalization -- to total capitalization at approximately 15%, which affords ample flexibility. We have recently increased our revolving credit facility to $632 million through September of 2017 and to $490 million through March of 2019. With our financial strength and increased scale, I'm excited about how Patterson-UTI is positioned in the current market. As a leader in both high-spec drilling and pressure pumping, we are uniquely positioned to benefit from increasing demand for drilling and completing oil and gas wells. With that, I'll turn the call over to Andy.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [4]

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Thanks, Mark. In Contract Drilling, rig demand was strong during the first quarter, driving a 23% increase in our U.S. rig count to an average of 81 rigs for the first quarter from 66 rigs in the fourth quarter. Rig demand remain robust, and as such we expect to average 96 rigs in the U.S. for the month of April, excluding the contribution to the rig count from Seventy Seven Energy. From the Seventy Seven rig fleet, 58 rigs are currently operating and therefore including the contribution from these rigs post-merger, we expect our rig count in U.S. to average 115 rigs in April.

In Canada, our rig count averaged 2 rigs for the first quarter, unchanged from the fourth quarter. Both of these rigs have been engaged in pad drilling operations, which allow them to stay active after the onset of the breakup period in Canada. Accordingly, we expect to average 2 rigs in Canada for the month of April. The growth in our rig count and contract explorations during the first quarter reduced the proportion of our rigs under higher dayrate-term contracts, causing total average rig revenue per day for the first quarter to decrease [$440] to $21,200.

Total average rig operating cost for the first quarter increased to $14,450 from $13,770 for the first quarter as a result of a lower proportion of rigs on standby and an increase in rig reactivation expenses. Total average rig margin per day decreased to $6,750 for the first quarter from $7,870 for the fourth quarter. At March 31, we had term contracts for drilling rigs providing for approximately $385 million of future dayrate drilling revenue. Based on contracts currently in place and including the post-merger contribution from the Seventy Seven rig fleet, we expect an average of 84 rigs operating under term contracts during the second quarter, and an average of 61 rigs operating under term contracts during the 12-month period ending March 31, 2018.

Turning now to our outlook for the second quarter. As a reminder, by virtue of the merger of the Seventy Seven Energy, many operational aspects are not easily comparable to actual first quarter results. The proportion of rigs on higher dayrate- term contracts, the mix between different rig classes and the proportion of rigs on standby are some of the factors that affect average revenue and cost per day.

Additionally, the Seventy Seven Energy rig fleet is currently operating at lower revenue and margins per day. And the great opportunities with this merger is to leverage Patterson-UTI's greater geographic footprint, customer base and support efficiencies to improve the margin contribution. In terms of rig activity, we expect our rig count will continue to increase during the second quarter. Including post-merger contribution from the Seventy Seven rig fleet, we expect our rig count in U.S. will average 143 rigs and our rig count in Canada will average 1 rig. Average rig revenue per day is expected to be $19,900 during the second quarter and average margin per day is expected to be $6,000.

Turning to our rig fleet. We completed construction of the previously announced APEX-XK earlier this month, bringing our APEX-XK rig fleet to 57 rigs and our total APEX fleet before the merger with Seventy Seven to 162 rigs.

We're still in the process of completing the construction of the previously announced APEX-XC, the first of this new APEX rig class. This new design is the next step in the evolution of our original APEX [300] series walking rig and is complementary to our fast-moving APEX-XK. The APEX-XC offers a pad optimal design with greater clearance for walking over and around wellheads on a pad, larger drill racking capacity for efficiently drilling longer laterals and it will feature a higher-torque top drive from Warrior, a rig technology company. This new APEX-XC is expected to be delivered in the second half of this year. As part of the integration of Seventy Seven Energy in the Patterson-UTI, we consider 36 of their rigs to be APEX class rigs. These rigs are very complementary to our APEX rigs, as most of the components of these rigs are similar to the components used across the APEX rig fleet. Including the rigs from Seventy Seven Energy fleet, our APEX class rig fleet currently totals 198 rigs.

Going forward, we now have 100 super-spec rigs in our fleet, which makes us a leader in this market where demand for highly efficient rigs has proven to be the strongest. All the 3 of our super-spec rigs are currently contracted with 2 idle rigs located at Appalachia and one in the Bakken. Across the industry, we estimate the total supply of super-spec rigs is approximately 425 in the entire U.S., with utilization for this class of rig exceeding 90%. Where justified, we will continue to upgrade rigs in our fleet to meet customer demand for super-spec rigs.

Turning now to Pressure Pumping. Pressure Pumping revenues increased a stronger-than-expected 34% sequentially to $141 million in the first quarter from $106 million in the fourth quarter. Pressure Pumping gross margin as a percentage of revenues increased to 15.7% for the first quarter from 5.3% in the fourth quarter due to higher pricing and greater fixed cost coverage due to the increased activity from reactivated spreads.

Since mid-December, we have reactivated 4 spreads, including 2 spreads that were reactivated earlier this month and therefore did not generate any revenues in the first quarter. We expect further opportunities to reactivate additional horsepower in the back half of 2017. As a result of the merger with Seventy Seven Energy, our fleet has grown to approximately 1.5 million frac horsepower, of which approximately 70% is currently active. Over 9% of our frac revenues are generated from spreads from 24-hour operations. We also have approximately 86,000 horsepower used for cement, acid or nitrogen services.

The merger with Seventy Seven Energy expand our geographic footprint in Pressure Pumping to include the Mid-Continent. Currently, we have approximately 850,000 frac horsepower in Texas, 350,000 frac horsepower in Appalachia and 300,000 frac horsepower in Mid-Continent. With approximately 1.5 million horsepower in only 3 regions, we maintain considerable local scale for strong regional efficiencies.

In hydraulic fracturing, procurement and logistics of sand and chemicals and the ability to be efficient in control cost are some of the keys to being successful. In addition, the Seventy Seven Energy adds more sand terminals to our overall pressure pumping business. We have worked with various sand producers to improve our contract position, where we have access to higher volumes of the more popular sand mesh sizes. We expect that sand supply for the finer mesh sizes will be tight for the industry until incremental production is brought online later this year and in 2018. We are comfortable with our own contracted position for sand supplies in terms of our pricing and access to sand, as we've contracts covering the majority of our expected sand demand.

As well, and in a separate, but related logistics optimization initiative, in mid-2016, we began the planning process to transition from regional pressure pumping logistics to a centralized logistics center in Houston that combines 24/7 dispatch personnel, central scheduling and tracking software and smartphone apps in the field. We went live with the first frac spread back in November. And by the end of the first quarter 2017, the central logistics team was supporting all of our active frac spreads in Texas.

We intend to utilize the new 24/7 central logistics center to support all of our pressure pumping operations in order to improve our logistical efficiency and better manage our transportation and demurrage costs.

Looking forward, including the post-merger contribution from Seventy Seven Energy, we expect Pressure Pumping revenues during the second quarter of approximately $275 million as activity and pricing continues to improve. Gross margin as a percentage of our revenues is expected to be similar to the first quarter. Gross margin percentage on Patterson-UTI's premerger asset base is expected to improve, but this margin growth is expected to be largely offset by lower margin in Seventy Seven Energy. Similar to drilling, we expect to garner better margins going forward by leveraging our larger scale, our geographic footprint and our combined diverse customer base.

Before I turn the call back to Mark for his concluding remarks, let me provide an update on several other financial matters. Our other operations include our E&P business, Warrior and now Great Plains Oilfield Rentals. For the second quarter, we expect other operations to generate revenues of approximately $18 million with the gross margin as a percentage of revenues in the mid-20s. Subject to final purchase accounting adjustments, depreciation expense for the second quarter is expected to be approximately $190 million, including the post-merger contribution from Seventy Seven Energy. Similarly, including the post-merger contribution from Seventy Seven Energy, SG&A for the second quarter is expected to be $28 million. We're currently projecting our effective tax rate to be approximately 36% for the second quarter. Including the post-merger capital needs for the Seventy Seven Energy business, CapEx for the full year 2017 is now expected to be $450 million, consisting of approximately $60 million of carryover spend. Excluding this carryover spend, CapEx includes $145 million for rig upgrades and new builds, $115 million for rig activation and maintenance, $105 million for pressure pumping fleet activations and maintenance and $25 million for E&P, Warrior, Great Plains and other general corporate CapEx. With that, I will now turn the call back to Mark for his concluding remarks.

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [5]

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Thanks, Andy. The completion of the Seventy Seven Energy merger further solidifies our position as the leader in both land drilling and pressure pumping in the U.S., the 2 primary services needed for drilling and completing unconventional oil and gas wells. Our increased scale and market capitalization, along with our strong balance sheet position us better than ever before to succeed in the expanding Energy Services market. I'd like to take a minute and welcome the people from Seventy Seven Energy into the Patterson-UTI family. We, as always, held the highly skilled employees at Seventy Seven Energy in high regard. They share devotion to the same core values of safety and customer service that are cornerstones to the Patterson-UTI culture. The merger integration process has begun and I am pleased with the integration plan that we and Seventy Seven Energy has developed. We believe this collaborative plan will help maximize the value of the combined entity.

With the closing of this merger, I'm excited about the opportunities ahead. We believe that many of the plans for future drilling and Pressure Pumping activity have already made and E&P companies have hedged future production. Absent an event that causes crude oil prices to fall to the low 40s, we expect pricing and activity will continue to improve. With that, I'd like to both commend and thank the hard-working men and women who make up this company. We appreciate your continuing efforts. Also I'm pleased to announce today that the company declared a quarterly cash dividend on its common stock of $0.02 per share to be paid on June 22, 2017, to holders of record as of June 8, 2017.

Operator, we'd now like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Sean Meakim with JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [2]

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Maybe starting with Pressure Pumping. Maybe I was just curious to think about -- you talked about the potential to reactivate more spreads in the second half. How do you think about the levers and timing that will guide those decisions? And then, I was thinking about as part of that calculus. Are you getting net margin improvement beyond cost for coming to that state or how does that factor into those decisions?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [3]

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Yes I guess, to start with, let me just talk about the margin. I think certainly part of the margin expansion you saw in our first quarter results, including net pricing increases that we were able to get towards the end of the quarter, and we see the potential for this to continue as well. In terms of reactivation, we have about 30% of our total 1.5 million horsepower that's stacked right now. And we see opportunity to activate that equipment in the second half, at various points in the second half, starting with one crew early in the third quarter. Outside of that, we're going to move basically with the market demand on activity.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [4]

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Got it. Okay. And then just, drilling side, I was just curious if you could give us a sense of the magnitude of how much of a dayrate premium you're able to get for an upgraded super-spec rig compared to the highest-spec AC rig that's in the market? Or even a newer -- roughly newer well- equipped SCR rig, just trying to get a sense of that -- the delta between those 2 in the market?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [5]

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Well, in some ways they're not exactly related. Because the high-spec rig market is just moving in different pace, and that's where we're seeing the majority of the demand. And we see pricing continue to move up on high-spec, super-spec rigs through the first quarter. And as rig count continues to go up, pricing on those rigs continues to goes up. We do see that over time, that because the high-spec, super-spec category pricing is moving up, that it moves the SCR pricing at the same time.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [6]

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Okay. So your expectation will be that as the high-spec rigs go, SCR kind of has to go where there is some kind of -- at some point there is (inaudible) substitution effect. So you need to see movement on the SCR rigs as well? Is that the right way to think about it?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [7]

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No, it's not a substitution, these are different markets, but the high-spec rig market lifts the SCR market.

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Operator [8]

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Our next question comes from Marshall Adkins with Raymond James.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [9]

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It sounds like your -- the Seventy Seven, both rig and Pressure Pumping fleets are being priced lower, and it sounds like you've confidence you can get them up. So to drill down on that issue, were they being priced lower because they're lower in quality or were they just trying to maintain a higher utilization and to do that, they needed to price lower? Help me understand why you're confident you're going to get pricing margins from that side of the business up?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [10]

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First off, let's clarify. Seventy Seven Energy has a great team with great assets and they run great quality operations. When Seventy Seven had a special challenge and that they had to expand their market based from a single customer base to multiple customers and we applaud what they've done. We think they've done a tremendous job. But that had some challenges at the same time. And the timing of us merging the 2 companies together is just the net difference in the results of the margins that you see today. But both the market and then -- the improvements in the market and then the combination of the merger with Patterson-UTI and Seventy Seven together improves our overall geographic footprint and improves our overall combined customer base. And so we see good potential there.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [11]

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Okay. Some of your competitors, as they've reactivated equipment both on the rig and the pressure pumping side, have not evolved on [daytime] margins. So far, you guys seem your margins have ramped up really nicely with activity. It seems like you're passing on more of the sand and logistics costs than may be some others are. So help me walk through going forward as you reactivate more of this equipment, should we worry about maybe delayed margin improvement as you reactivate them? Or do you think you can stay ahead of that? And same question on last-mile logistics passthroughs.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [12]

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So in terms of the products, whether it's sand or chemicals, I think that our supply chain team has done a good job in managing the contracts that we have with our various suppliers across the U.S. And we have a number of different contracts in place that are layered, that expired at different points during the year. And what you saw between Q4 and Q1, the net result is very little movement in our average sand cost. And any movement that we had, we were able to pass that through combined with some net pricing improvements towards the end of Q1 gave us the margin expansion that we saw in Pressure Pumping. We do think that the market is tight on some of the finer mesh sizes, but we do also think that we're -- we're very comfortable with our contract position. And even though we might see some single-digit price increases on average going from Q1 to Q2, we have that factored into the projected margins as well. In terms of reactivation costs for Pressure Pumping spreads, the earlier fleets that we reactivated were costing us on average about $2 million per spread. We see this average going forward to be about $3 million to $4 million per spread, and that's really a cash cost that includes the labor. So as you know for 24-hour operations, it's at least 100 people that are coming on in a 60- to 90-day period before we even generate revenue. So we will see those costs in front of the revenue stream from each of those frac spreads as we continue to reactivate spreads going forward in 2017.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [13]

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Okay. All right, great. So the margin, kind of guidance is flattish with improving activity. You mentioned because you're really in the lower margin Seventy Seven stuff, is part of that lower margin guidance, that your reactivation cost is going to go up? Or is it just more of the Seventy Seven stuff rolling in and then over time that gets back up to where you are?

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [14]

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It's a combination. I wouldn't say that it's reactivation cost going up necessarily, but more reactivation cost is included in that future cost base as we reactivate spreads.

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Operator [15]

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Our next question comes from the line of James West with Evercore ICI (sic)[ISI].

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Alexander D. Nuta, Evercore ISI, Research Division - Research Analyst [16]

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This is Alex on for James. My first question is on the Seventy Seven drilling assets. During the merger call, you didn't really highlight the SCR rigs. The 58 rigs operating would seem to indicate they received pretty good traction in the interim. Have you guys been surprised by those and where do you see that segment fitting into your broader fleet?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [17]

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So we haven't been surprised on our side in terms of their utilization on their SCR fleet. You got to remember that Seventy Seven Energy has some of the newest SCR rigs that are out there in the market today, and these are very competitive rigs. So in some cases, their SCR rigs are going to have some of the same performance in some basins as some of the high-spec rigs that are out there as well, just because they're relatively new SCR rigs. So we're certainly pleased with the performance of their rig count overall. And we expect SCR utilization to continue and improve the rig count overall, but it's also customer specific. You got certain customers that are out there and all they want to see is a high-spec or super spec rig, but we do have customer that are out there using SCR rigs and very pleased with the utilization that Seventy Seven had in the SCR fleet.

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Alexander D. Nuta, Evercore ISI, Research Division - Research Analyst [18]

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Understood. And then my second question kind of similar to Marshall. I guess, how much -- in the second quarter Pressure Pumping guidance, how much of that is net pricing increases versus the dilution? And I guess, my question becomes -- it sounds like 2Q becomes transitory and then we see some of the benefits in 3Q. Is that fair?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [19]

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I think it's fair to say that you got a combination of several things happening. You have the combination of the merger of the 2 companies and the net margin result there. You've also got activation costs for further frac spreads from a labor component, where you have labor onboarding before we generate revenue. And there's just various moving parts in there, and that's kind of what's happening in the second quarter. We're also -- even though we might see some increases in the sand costs in the single-digit percentile for the finer meshes, we believe we have that covered in the margin as well.

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Operator [20]

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Our next question is from the line of Jim Wicklund with Crédit Suisse.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [21]

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I think your pressure pumping business was nothing short of amazing. The number of jobs was down 14% and the average margin per job blew away our expectations. And I realize that may just be our problem with expectations. But can you talk about how -- I mean, was it -- I understand price to the end of the quarter, but this is for the whole quarter -- can you talk to me about how you did such a good job, I guess, is what I'm asking?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [22]

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We'll have to give the credit to the teams in the field. I mean, our teams are really good at solid execution, running lean operations, but still delivering high-service quality at the same time. And because of that, we were able to cut some pricing during the quarter and get some net pricing adds and continue to deliver service quality and improve operational efficiency and improve stages per day with some customers. So I have to give credit to the teams.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [23]

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Well, margin per job of 58,000 versus 16,000 in Q4, that looks like a pull up more than price. And I appreciate it's all execution, you'll had the best margins longer coming into the down cycle than anybody else. That was just surprising to me, so. Okay. And going forward, you talk about how you've got your sand contracted. Do you make money on sand? And how much of your revenues in pressure pumping was the pass through of sand?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [24]

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So we do have a small margin on sand. The interesting thing is the smaller margin than the service. So if we're pumping more sand in a given month or given quarter, then it becomes diluted to the margin, right. And it does vary from month-to-month and quarter-to-quarter. But we do make a small margin on sand. What I believe is, as activity continues to increase during 2017 following the macro on increasing rig count, then these net pricings, the increases that you've seen on services also move into the small margin that we get on the products as well over time.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [25]

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Okay. And last if I could, congratulations on Seventy Seven. I think that's an excellent acquisition. You've got a 15% debt-to-cap, are you through?

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [26]

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Jim, we're never through. We're always looking for good opportunities, Jim.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [27]

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Okay. But it took you a long time to do this one. So do we have to wait this long to do the next one?

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [28]

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Jim, my crystal ball is a little fuzzy on how long it takes for the next deal.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [29]

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Okay. I mean, you don't want the market to run away from you before you have the chance though, right?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [30]

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Well, I think the interesting thing in this market is, I don't think you have to rush, and I think the market can still have opportunities over the next couple of years.

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Operator [31]

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And our next question comes from Chase Mulvehill with Wolfe Research.

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Brandon Chase Mulvehill, Wolfe Research, LLC - Oil Services Analyst [32]

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So I guess, let's talk about your guidance. It was trying to put the pieces together. Can you just confirm that your guidance implies about $100 million of EBITDA in 2Q?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [33]

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I don't have that in front of me for the overall combined EBITDA for all the different companies.

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Brandon Chase Mulvehill, Wolfe Research, LLC - Oil Services Analyst [34]

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Okay. All right. I'll just follow up after the call just to make sure we have all the moving pieces right. I guess, I also wanted to chat about the contracts for SSE on the pumping side and on the land rig side with Chesapeake. So could you talk to that, when those roll off on the rig side and on the pumping side?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [35]

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Well I think, the best way to describe it is with the combined businesses with Patterson-UTI plus Seventy Seven Energy on the drilling side, we don't have any situation of contracts that produces a headwind other than ongoing long-term contracts. What's happening in the margins in the drilling business and I'm talking about the combined new business, is the rigs that are moving out, we see improving margins. We have some contracts that we had for a while, as those roll off, those are going to roll closer to a spot at a lower margin. So we have several moving pieces there. And then combining the 2 entities together, you get the net result of the margin projection that we gave you for the second quarter. In Pressure Pumping, in terms of contracts, what we see is it's really about 2/3 of our active fleets have the ability to move the pricing with the market.

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Brandon Chase Mulvehill, Wolfe Research, LLC - Oil Services Analyst [36]

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Okay. Right. And so we can have the right run rate as we get into 3Q. Could you just help us with what the underlying rig count assumption is for SSE in 2Q, because we don't have a full quarter there? And then the same for the revenue side on Pressure Pumping?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [37]

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It really gets back to the averages that we gave you. We expected the rig count to continue to increase during the second quarter. And including both Seventy Seven's fleets and Patterson-UTI's fleet, we expect the rig count in the U.S. will average 143 in the second quarter.

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Brandon Chase Mulvehill, Wolfe Research, LLC - Oil Services Analyst [38]

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Okay. So what is that assumed -- so if we think of legacy PTEN, how much is that assumed to be up in 2Q that'll help us?

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [39]

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20%.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [40]

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Yes, we're moving on to combined companies numbers now.

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Brandon Chase Mulvehill, Wolfe Research, LLC - Oil Services Analyst [41]

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Well, I know, but you only -- the thing is -- so let me ask you, so 143 is that a pro forma for 90 days for SSE? Or is that a pro forma for 70 days?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [42]

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That assumption will be disclosed on April 28.

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Brandon Chase Mulvehill, Wolfe Research, LLC - Oil Services Analyst [43]

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Right. I can follow up afterwards. But basically I'm trying to understand -- I want to give -- I want to understand what SSE's run rate going into 3Q. We just don't have a full quarter. I'll follow up after that -- after the call.

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Operator [44]

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Our next question is from Brad Handler with Jefferies.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [45]

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If my question is redundant, I apologize I had to pop off for just a couple of minutes. But -- can we talk first about drilling operating expenses. So obviously, you've given us the margin guidance on the second quarter, so it's $13,900 a day, that I get. But can you -- obviously, there was some volatility, some fluctuation as standby rigs came off, and then you also had a little bit of sort of the reactivation costs bringing the rigs back into service, I guess. How can we think about that maybe in 3Q? Where should we think about operating expenses a little bit longer-term just settling out for you, please?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [46]

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Without going into the details of 3Q, I think it's safe to say that we're getting closer to the bottom in the margins, but we still, as I mentioned earlier -- and it's no problem to repeat. As I mentioned earlier, we have some moving pieces here. Because we have a mix of contracts that we've had for a while now that are rolling off and moving closer to spot. We have rigs going out that are increasing in margin as they go out. And then we have the combination of the merger. We also have rig reactivations, where we have labor costs in front of the revenue of the rigs. So there's moving pieces in there, but we're getting close to the bottom in the margins.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [47]

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Okay. That's certainly good to hear. And I guess, I was just trying to parse it on operating expenses per se. And so if I remove the rig reactivation element of that, maybe it's a combined -- so it's a combined fleet question, of course, but where do think daily OpEx sort of settles out?

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John E. Vollmer, Patterson-UTI Energy, Inc. - CFO, SVP of Corporate Development and Treasurer [48]

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We think it's similar on per day basis. We don't really pull the reactivation costs out of that. (inaudible)

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Bradley Philip Handler, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [49]

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So it'll wind up staying similar to where you're talking about for Q2?

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John E. Vollmer, Patterson-UTI Energy, Inc. - CFO, SVP of Corporate Development and Treasurer [50]

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Correct.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [51]

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Is that what you mean to suggest -- okay.

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John E. Vollmer, Patterson-UTI Energy, Inc. - CFO, SVP of Corporate Development and Treasurer [52]

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Yes.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [53]

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Got it. Okay. And then, I guess, maybe just a quick follow up for me just on that last answer to one of Chase's questions. So in other words, did you have contract commitments and therefore fixed pricing on roughly 1/3 of the pro forma pressure pumping fleet. Is that -- just want to make sure I'm interpreting what you said correctly?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [54]

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Yes. Let me say this way. So 2/3 of our active fleet has the ability to move with pricing and the 1/3 that's under either some kind of contract or pricing agreement doesn't extend very long through the year. I would say that the majority of that rolls off before the end of 2017. Does that help?

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Bradley Philip Handler, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [55]

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It does, it does.

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Operator [56]

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And our next question is from the line of (inaudible) Capital.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [57]

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Next call.

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Operator [58]

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Our next question is going to be from Michael LaMotte with Guggenheim.

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Michael K. LaMotte, Guggenheim Securities, LLC, Research Division - Analyst [59]

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Andy, I know there's a lot of moving pieces, and I want to sort of get back to the structural cost differences between Patterson and Seventy Seven. And maybe if we look at first quarter as the baseline and you look at the difference in margin in the 2 businesses, how much of that difference would you say is contract and pricing related versus cost structure? I mean, is that 30-70 split, 50-50?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [60]

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No, I think there's a mix of both without getting into the detail. Patterson-UTI is a larger enterprise than Seventy Seven was in the first quarter, so we had a little bit more efficiency in the supporting cost side. There's also an element of pricing on the Seventy Seven side as they expanded their customer base and did a great job doing that. But it's really about the go-forward. And we feel like we're in a good position for the combined entities moving forward through the year.

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Michael K. LaMotte, Guggenheim Securities, LLC, Research Division - Analyst [61]

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Well, that's actually what I was trying to get out is, sort of thinking about the speed with which sort of normalized margins -- you could begin to normalize those Seventy Seven margins for -- to the Patterson level and what the frictional elements are to that? I mean, you mentioned on Marshall's question -- answer to Marshall's question that moving from single to multiple customers is sort of frictional. But is there anything other than that dynamic that slows this margin progression down or uplift -- slows it down?

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [62]

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Michael, I just would observe that we've been -- that we closed the merger exactly 1 week ago, and at this point, we're still getting our arms around all the details of their operations. And so giving an exact prediction as to when their margins increase and get to the same level as the Patterson margins, pretty difficult for us to give a good fix on that at this moment or a week later.

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Michael K. LaMotte, Guggenheim Securities, LLC, Research Division - Analyst [63]

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Fair enough. I'll follow up with you next week.

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [64]

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Thanks for that.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [65]

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I'll reiterate that second quarter margins are nearing the bottom for us.

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Michael K. LaMotte, Guggenheim Securities, LLC, Research Division - Analyst [66]

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Okay. And then, Andy on the 90% utilization for super-specs. As we start reactivating rigs that are further in the stack, are they geographically in the right markets? Are we within a quarter or 2 going to start to see rigs needing to move?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [67]

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I think in some cases, we'll have some rigs move. I think that when we do move rigs, we get support in the contracts from customers to help offset the cost to move those rigs. And in our particular case, we have the opportunity to continue to do some upgrade. I went through the list of items in the total CapEx. Well, one of the pieces that's interesting there, if you go back to what we said on the last call in terms of rig upgrades and new builds at the last call, we said we earmarked $115 million in the CapEx budget. Now we're at $145 million in the CapEx budget. And we're certainly happy with the pricing levels we're getting on the projections for what those -- the payback is on those upgrades.

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Michael K. LaMotte, Guggenheim Securities, LLC, Research Division - Analyst [68]

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Yes, still looking at less than a year?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [69]

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I wouldn't say it's less than a year, but it's in that 2-to 3-year range on that rig component.

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Michael K. LaMotte, Guggenheim Securities, LLC, Research Division - Analyst [70]

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Okay. And then last one for me. In light of the one stem joint venture now having 2 competitors with roughly 3 million in capacity. Does it change the thinking on scale in the frac business. Not that long ago we thought 1 million was sufficient scale, and now you guys 1.5 million and scale just seem to be moving. How do you think about it?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [71]

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In general, I think that scales still matters in this business, especially because of everything happens before you even get to the well side. But I think it's important to -- when you look at Patterson-UTI and now the combined merger of Patterson-UTI and Seventy Seven Energy in our footprint, we're 1.5 million horsepower, so we're not as big as the 2 that you mentioned, but we're not on in all the basin that they're neither. So our focus is with the prime -- the primary aspect of our horsepower, 850,000 horsepower is in Texas. And we're also in Mid-Continent, we're also in Appalachia. So if you look at our concentration in the regions that we're working, we think we're in great shape.

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Operator [72]

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Our next question is from the line of Ken Sill with SunTrust Robinson Humphrey.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [73]

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So one of the questions, you were talking about the cost for reactivating frac fleet and saying that you're hiring an average of 100 people per crew. I'm assuming that's for 24-hour operations. That just seemed a little bit high. I mean, how many people do you guys run in an average group?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [74]

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The average Pressure Pumping crew that's working 24-hour operations for us has 100 to 110 people on it. And we generate over 90% of our revenues of our total active fleets from 24-hour operations. So when we do these reactivations, we're going to have labor cost as we bring on people before we start generating revenue from a particular frac spread and that labor cost can start 90 days before we generate revenue and that labor cost grows over that 90-day period before we generate that revenue.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [75]

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I was just surprised by the headcount. So that kind of leads to the second question, which is, are you guys seeing an evolution of size the average frac spread you're putting out? What's the average spread, particularly in Texas, in terms of hydraulic horsepower today versus what would it have been a couple of years ago?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [76]

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Yes. We're seeing somewhat growth in the amount of horsepower that we put out. Someone has to deal with these changes in the operating pressures and where we're fracking these days versus where we may have fraced historically. So we previously might have looked at the frac spread at a 40,000 to 45,000 horsepower. And today, depending on when it is in the U.S., it might be 45,000 to 50,000 horsepower.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [77]

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And final question. Just trying to figure out what capacity can be out there. I mean, what you can do with the fleet, given you got longer laterals and higher sand loadings, you're solving that issue with more horsepower. Does it take more time to pump a bigger sand load? Or can you -- or is that a function of a -- I mean, this a lot of moving pieces, but just on average, does it take more time to pump a bigger sand loading per stage?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [78]

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Certainly, when you compare a horizontal well today versus what we were drilling 2 years ago on average, in Texas with longer laterals and higher volumes, we are pumping more time. But what that means with industry in general if you look at the total number of wells that have to be completed during the year, it takes more time to pump on that aggregate number of wells, which means more frac operating than historically in the past for the same number of wells.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [79]

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Yes. And actually that leads to another question, and I'll stop. With the rigs getting more efficient, is the ratio of rigs needed for running to keep a frac crew busy, is that changing?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [80]

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That's gone down a little bit. So it's moved down a small percentage, but yes, with the efficiency improvements in operating time for the rigs and again on aggregate over the last 2 years, that certainly has changed a little bit. But I think it's also important to note when you get into a discussion on rig efficiency, rig efficiency is now is looking relatively flat over the last year after having come -- after having improved over the last 2. And a lot of that is not just -- you're getting a lot of complications talking about what it means in terms of rig efficiency and what drives that. But the thing you have to remember is our rig is still as efficient as they were yesterday, but you have so many more operators working now than you did in 2016, and not all the operators are as efficient. Some of the smaller operators that are now working at some of the states that have shorter programs are just not as efficient as some of the bigger program drillers. So there is a change in that drilling efficiency equation when you look across aggregated numbers across the U.S.

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Operator [81]

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Our next question comes from the line of Marc Bianchi with Cowen and Company.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [82]

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On the Pressure Pumping guidance, I wanted to confirm that, that includes the addition of one crew from here in the third quarter that was mentioned in this press release. Is that correct?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [83]

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That's correct. Yes, we're taking into the account the labor that we're bringing on to crew up that frac spread that starts in early third quarter.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [84]

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Okay. Sorry, my phone cut out there for the last part of your comment, Andy, but I think I got it. And as it relates to additional crews that could be added in the second quarter. Is it such that the lead time is just so long that really you couldn't get any of them -- any additional crews to work in the second quarter to meaningfully increase the revenue, it's more of a third quarter benefit at this point?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [85]

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I think it's the way we look at the market. And I've heard various announcements by other companies. But the way we look at it is we're still very focused on margins. We want to get good returns for frac spreads. We're also very focused on ensuring that we continue to deliver high-service quality as we increase the number of frac spreads that are working. So our approach may be a little bit more measured, but we're going to protect the margins and do our best to continue deliver high margins in this business.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [86]

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Right. Okay. And on the rig side, you mentioned 198 APEX class rigs now with the combined company. How many of those, or maybe it's all of those, would you consider to be upgradable to super-spec?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [87]

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I would consider all of them upgradable to super-spec. We mentioned that we have 100 super-spec rigs today, and I also mentioned that we've actually increased our CapEx projection to what we'll be spending on (inaudible), where we said it's going to be $115 million at the last call, we've raised that to $145 million for this call.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [88]

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Got it. Okay. And then last one. Mark, I appreciate the comment on having just closed the merger, but it does seem to -- the guidance for G&A seems to just be the combined G&A for the 2 companies. One, is that true; and two, kind of, how quickly do you think we'll start to see the benefit of the synergies you talked about?

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John E. Vollmer, Patterson-UTI Energy, Inc. - CFO, SVP of Corporate Development and Treasurer [89]

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This is John Vollmer. Yes, it, for the quarter, reflects full G&A plus about $3 million for the 71-day period. And we assume we get additional savings for the third and fourth quarter. And I believe, Andy's intention is that we will have the synergies accomplished by the end of the year as previously indicated.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [90]

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Okay. And that number is still $50 million?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [91]

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We believe that's still a good number, that's the number that we gave when we announced the merger. And you'll remember at the same time activity continues to increase and the headcount for the combined companies is going to be greater at the end of the year than it is today.

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John E. Vollmer, Patterson-UTI Energy, Inc. - CFO, SVP of Corporate Development and Treasurer [92]

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One other point on the synergies or the cost-saving opportunities, those aren't all G&A. Of course, that relates to operating costs and drilling at Pressure Pumping given our increased scale, buying power, et cetera.

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Operator [93]

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And our last question comes from John Daniel with Simmons & Company.

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John Matthew Daniel, Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service [94]

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Just sort of a big picture question here. Now that we're sufficiently deep into earning season, it feels as if everyone, including you guys are managing their businesses assuming we migrate from, call it, $50 oil to $60 oil. Given that we're now back again $50. What's OpEx going to do? At what point do you think Patterson maybe starts to manage $50 oil and what would that entail?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [95]

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Well, John, it's an interesting question, but I don't think we've ever really said that we're managing for $50 oil. The way we look at it is in -- over the last period of time since summer of 2016, with oil trading in the $50 to $55 range, rig count goes up. And when we see this pullback into $47, $48 range, we haven't seen customers who've made plans change those plan. And so while there may be some customers that take a pause at $47, $48, it appears to us that if customers operators already have these plans in place, they continue on with these plans.

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John Matthew Daniel, Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service [96]

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Okay. Fair enough. Just one final one and I know it's early into the Seventy Seven deal. But I'm curious if you can say whether or not the Great Plains business will be [according to you] guys or if this is something that could -- you might part ways with. And the reason I ask is I recall you guys having sold other noncore product lines for another deals and I'm thinking specifically about wireline after you bought the Key deal?

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [97]

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I'll answer the question by saying, at this point, we like the business, we like the opportunities that we think we see in the business and so we have no current intention whatsoever to part with the business at this point. We're operating this to expand it.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [98]

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Yes, we see potential to expand this business with the Patterson-UTI footprint. Great Plains Oilfield Rentals has a footprint based on the company that it was a part of and the string of customer it was servicing historically. They've done a good job expanding their customer base. And now we offer more facilities and a larger geographic footprint for them to expand into well along with a great balance sheet

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [99]

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John, one additional thought. We basically like rental businesses is the first point. And second point is, fundamentally, is that the first exposure I ever had to the oil patch was (inaudible) Oilfield Rental to business. So quite honestly, I'm feeling very comfortable about this one.

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Operator [100]

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I'm not showing any further questions. So I'll now turn the call back over to Mr. Siegel for closing remarks.

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Mark S. Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [101]

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I'd like to thank all the people who participated in our call and thank you for being interested in our companies. So join us again at the end of the next quarter.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - CEO and President [102]

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Thanks.

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Operator [103]

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Ladies and gentlemen, this does conclude the program, and you may now disconnect. Everyone, have a great day.