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Edited Transcript of PTEN earnings conference call or presentation 26-Jul-18 2:00pm GMT

Q2 2018 Patterson-UTI Energy Inc Earnings Call

HOUSTON Jul 31, 2018 (Thomson StreetEvents) -- Edited Transcript of Patterson-UTI Energy Inc earnings conference call or presentation Thursday, July 26, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* C. Andrew Smith

Patterson-UTI Energy, Inc. - Executive VP & CFO

* James Michael Drickamer

Patterson-UTI Energy, Inc. - VP of IR

* Mark Steven Siegel

Patterson-UTI Energy, Inc. - Executive Chairman

* William Andrew Hendricks

Patterson-UTI Energy, Inc. - President, CEO & Director

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Conference Call Participants

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* George Michael O'Leary

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Executive Director of Oil Service Research

* 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

* 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

* Scott Andrew Gruber

Citigroup Inc, Research Division - Director and Senior Analyst

* Sean Christopher Meakim

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

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Dan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Energy Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Thank you.

I would now like to turn the conference over to Mr. Mike Drickamer, Vice President, Investor Relations. Please go ahead.

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

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Thank you, Dan. Good morning, and on behalf of Patterson-UTI Energy, I'd like to welcome you to today's conference call to discuss the results of the 3 and 6 months ended June 30, 2018. Participating in today's call will be Mark Siegel, Chairman; Andy Hendricks, Chief Executive Officer; and Andy Smith, Chief Financial Officer.

A quick reminder that statements made in this conference call that state the company's or management's plans, intentions, beliefs, expectations or projections 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 Steven 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 Second Quarter of 2018. We are pleased that you can join us today. This morning, I will turn the call over to Andy Smith, who will review the financial results for the quarter ended June 30. He will then turn 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 will provide some closing remarks before turning the call over to questions.

Andy?

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C. Andrew Smith, Patterson-UTI Energy, Inc. - Executive VP & CFO [4]

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Thanks, Mark, and good morning. As set forth in our earnings press release issued this morning, for the second quarter, we reported a net loss of $10.7 million or $0.05 per share on revenues of $854 million. Adjusted EBITDA for the second quarter of 2018 increased 8% sequentially to $204 million.

During the second quarter, we returned $42.4 million to shareholders, including dividends of $8.8 million and share repurchases of $33.6 million. At June 30, our net debt to capital stood at 18.5%. Our projected capital expenditures for 2018 remain unchanged at approximately $675 million.

As discussed in our press release, subsequent to the quarter, we entered into agreements to provide 4 upgraded rigs under long-term contracts. These contracts each have a duration of 4 years, and we expect to recover the incremental capital required for these upgrades within the term of the contracts. As such, we have increased our drilling CapEx budget, but have reduced other CapEx primarily from pressure pumping by a corresponding amount. The reduction in the pressure pumping CapEx is primarily the result of lower expected spend on maintenance CapEx due to improved performance and, to a lesser extent, less maintenance and the reactivation CapEx due to a softening market.

Depreciation expense for the third quarter is expected to be approximately $215 million. SG&A for the third quarter is expected to be $36 million. Our effective tax rate for the third quarter is expected to be approximately 15%. However, as pretax results approach breakeven, permanent differences between book and tax accounting have an outsized impact on our effective tax rate, making it difficult to predict.

With that, I will now turn the call over to Andy Hendricks.

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

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Thanks, Andy. In contract drilling, during the second quarter, our average rig count increased by 7 rigs to 176 as demand for super-spec rigs remained strong. Our results in contract drilling exceeded our expectations, with average rig margin per day during the second quarter was $8,270, a sequential increase of $700, which resulted from a $330 per day increase in average rig revenue per day and a larger-than-expected decrease in average rig operating cost per day. The increase in average rig revenue per day was better than we expected due to the continued strength in rates for super-spec rigs.

On the cost side, in addition to the expected decrease in labor costs associated with payroll taxes in the second quarter, we also benefited from some transitory items that positively impacted second quarter expenses.

At June 30, we had term contracts for drilling rigs providing for approximately $680 million of future dayrate drilling revenue and increasing our backlog from approximately $600 million at March 31.

Since the end of the quarter, we have signed 17 contracts providing for more than $200 million of future dayrate drilling revenue. Based on contracts currently in place, we expect an average of 119 rigs operating under term contracts during the third quarter and an average of 81 rigs operating under term contracts during the 12 months ending June 30, 2019.

As Andy noted earlier, since the end of the second quarter, we had signed contracts for 4 additional rigs with major upgrades for the Permian Basin, 2 of which are expected to be delivered in late 2018 and 2 in early 2019 and each with a 4-year term. These newly contracted rigs will be state-of-the-art APEX-XK and APEX PK rigs and will have an average upgrade cost of approximately $15 million each. The increased upgrade spend, as compared to previous major upgrades, is due to fewer components on hand and also, as we go deeper into our fleet, more work is required. It is important to note that with the favorable dayrates in the 4-year term, all 4 of these rigs are expected to pay back the capital investment for the upgrade within the terms of the contracts. We believe these are compelling economics. Since the beginning of this year, we have delivered 9 rigs with major upgrades, and we have customer contracts to deliver 5 more this year and 2 in early 2019.

Turning now to our contract drilling outlook. We estimate there are approximately 600 super-spec rigs in the U.S., of which Patterson-UTI is one of the market leaders with 142 super-spec rigs in our fleet. Across the industry, many of the easy upgrades were performed in 2016 and 2017. As the extend of the upgrade necessary for rigs to reach super-spec capability has increased, the pace at 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.

We've spent a significant amount of time to understand the plans of our customer base, which is one of the broadest in the contract drilling industry. We recognize that 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. We will continue to derisk to the extent possible any additional upgrade capital through attractive rates and contract terms.

For the third quarter, we expect our rig count will continue to grow to an average of 180 rigs. Average rig revenue per day is expected to increase approximately $250 per day during the third quarter, and average rig cost per day is expected to increase $200 per day. 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 rolloff of older higher rate contracts. We still have 6 high dayrate legacy contracts, of which 5 are scheduled to expire in the third quarter and the last one in the fourth quarter.

Further to this and looking forward towards the end of the year, we expect a continued increase in our super-spec rig count. We still have customers that intend to add super-spec rigs into early 2019.

Turning now to pressure pumping. Our results fell short of expectations for the quarter, with revenues of $425 million and gross profit of $82.4 million. The shortfall was due primarily to unexpectedly high idle time late 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, coil tubing and even mechanical issues in 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. We are making good progress in the initiatives taken to improve our financial performance in pressure pumping, and we are disappointed that the softening of the market and lower utilization at the end of the quarter masked this progress. One area of improvement is in fluid ends, where our team has increased fluid end life through various technologies and initiatives. We believe that we have reduced the number of fluid ends used per spread each year by 1/3 through the use of improved materials, new designs and the ability to rebuild certain designs.

During the second quarter, we activated 2 frac spreads and ended the quarter with 25 active spreads. Our 24th spread was activated early in the second quarter and contributed revenue during most of the quarter. Our 25th spread was reactivated late in the quarter and therefore, did not significantly contribute to second quarter revenues.

Given near-term market conditions, we do not plan to reactivate additional frac spreads at this time.

For the third quarter, we expect pressure pumping revenue to decrease 5% and gross profit to decrease approximately 7.5%. However, over the long term, it is worth noting that the continued strength in the super-spec rig counts, which we have discussed, bodes well for pressure pumping demand.

Turning now to directional drilling. Activity increased during the second quarter, and as such, revenues improved to $52.7 million from $48.6 million during the first quarter. However, margins continue to be negatively impacted by third-party rental expenses incurred due to ongoing vendor delays in the delivery of various key component for our proprietary downhole motors and MWD tools.

For the third quarter, we expect revenues to be similar to the second quarter with a gross profit margin of approximately 20%. We expect to see cost relief from these third-party rental expenses and consequently margin improvement late in the year.

Turning now to our other operations, which includes Great Plains Oilfield Rentals, Warrior rig Technologies and our E&P business. Revenues during the second quarter increased slightly to $26.5 million and the gross margin as a percentage of revenues increased to 33.9%. For the third quarter, we expect similar results to the second quarter.

With that, I will now turn the call back to Mark for his concluding remarks.

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Mark Steven Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [6]

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Thanks, Andy. Demand for super-spec rigs remains strong. In contract drilling, which accounted for approximately 2/3 of our EBITDA during the second quarter, we expect further improvement in both our rig counts and average dayrates. I believe it is worth reiterating that just this month we signed 17 contracts, which includes 4 rigs with a 4-year term that we will expect will provide for the full payback of the capital investment under the contract term.

In pressure pumping, we began seeing industry softness late in the second quarter due to an oversupply in the market and because some E&P companies activity and capital spend are ahead of budget. It is disappointing to hear of peers continuing to plan to add additional horsepower to this market in the near future. We believe that given these headwinds in the market, the building of new frac spreads, reactivating idle spreads and chasing market share, given the current oversupply, will lead to worsening returns on capital for the entire industry.

We continue to see great value in our company, in our equipment, people and operations. During the first half of the year, we repurchased more than $50 million of a stock, including more than $33 million in the second quarter. In addition, our Board upped our share repurchase authorization, so that it currently stands at $250 million.

In times of uncertainty, it is important to maintain a long-term perspective. We will continue to balance CapEx opportunities with returning capital to shareholders in order to seek the best term, best long-term returns for our shareholders.

I'm also pleased to announce today the company declared a quarterly cash dividend on its common stock of $0.04 per share to be paid on September 20, 2018, to holders of record as of September 6, 2018.

With that, I would like to both commend and thank the hard-working men and women who make up this company. We appreciate your continuing efforts.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today 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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So I noted in your prepared comments, a lot of positive momentum in the Drilling business and 3Q looks like it's set up pretty well. So given there is plenty of upgradable rigs still in inventory and there's this growing appetite for the significant term, is there any reason that you'd think dayrates need to move above the mid-20s, just given how solid the economics are for upgrades and -- or perhaps do we just see the market shift towards greater mix of longer-term contracts?

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

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Yes, I think it's both the combination of the 2, because I think that and we've been saying this for several years coming out of the downturn in 2016, at this rig count and especially the high spec, super-spec rig count continues to go up the dayrates and especially with leading-edge and more people are contracting for these rigs continues to move up as well. And when you look at the economics for us to upgrade some of these rigs, it's going to take some higher dayrates, but I think the market is moving in that direction.

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Mark Steven Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [4]

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Sean, I just would add that our customers get tremendous value from these highly technical, highly sophisticated rigs, and they recognize that and are willing to pay for that.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [5]

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I appreciate those comments. And then thinking about beyond the third quarter, it seems like increasingly the third quarter is becoming the best quarter of the year given the way E&Ps are sticking to their more -- a real focus on calendar year budgets. So do you see seasonality in the rig count and maybe completions activity in the fourth quarter in line with what we saw last year in terms of seasonality? Could it be better or could it be worse? Just leaving aside the obvious unknown with weather impact.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [6]

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I think, in terms of contract drilling, we see that the super-spec rig for us continues to go up and that our rigs that aren't super-spec will be roughly flat going forward. So therefore, our rig count is actually moving up. And I think that the seasonality doesn't affect that much. We can have a little bit more seasonality in completions, but I think it's too early to know at this point what that's going to look like.

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Operator [7]

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Your next question comes from the line of Jim Wicklund with Credit Suisse.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [8]

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Congratulations on the 4 rigs for 4 years, that's a milestone in the business and the whole recovery. So good job. The other 13 rigs that you've got contracts for, what's the average term on that tranche of rigs, what's the follow-up market look like?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [9]

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The average term on those rigs is in the range of a couple of years, it just depends on when we signed those contracts.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [10]

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So we're away from this 6-month deals being called contracts by the end of this year, I mean, we're moving past 6 months or 1 year to a large extent at this point?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [11]

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We're still signing a mix of contracts. I think the important part is that we signed 17 term contracts since the 1st of July. That's been big for us. It just shows you the market in general.

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Mark Steven Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [12]

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I'd say this, Jim. When we're -- if we're going to have to spend significant money, the contract is going to have some term to it, that's really what I think you're hearing from us. When we get excited about the rates, we'll sign for longer periods.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [13]

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Got you. Well, that's the way it's supposed to work, that's why I'm excited about the 4 years, so okay. Okay and my follow-up if I could -- go ahead, Andy, I'm sorry.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [14]

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I was just going to say, we recognize the concerns in the market right now. And for us to sign contracts that made sense to do some major upgrades that we are going to have to do on these 4 rigs to get them up to that full APEX PK level, we had to derisk that, and I think we were successful in doing that. So very, very pleased with the position on those rig upgrades.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [15]

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Between that and giving money back to shareholders you're doing all the right things. If I could transition to pressure pumping for my follow-up. We all know that the Marcellus has been a little bit weak. You guys have been talking about moving a couple of spreads out of this SCOOP, STACK. Can you just hit a couple of geographies and tell me which is best, which is worse, which is going to weather this Permian takeaway storm best outside of the Permian? Can you do me a little regional jump around on pressure pumping?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [16]

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In pressure pumping, we've called out that we saw towards the end of the second quarter that in our view, the market is becoming oversupplied. And that's actually in multiple regions, including the Permian. We believe that a large number of companies have pushed equipment into the market in the Permian, and we're just seeing that even as well a bit oversupplied at this point.

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James Knowlton Wicklund, Crédit Suisse AG, Research Division - MD [17]

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Okay. So it's not just the Permian that's oversupplied and it's not just the Marcellus, so it's kind of endemic. Okay.

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Operator [18]

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Your next question comes from the line of 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 [19]

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Would you help reconcile, you seem very upbeat on the rig side. Things are looking up there. You're putting more rigs to work. And at the same time, we are seeing the deterioration in pressure pumping. Last I checked, pressure pumping business or frac crews follow the rigs by 3 to 6 months. So I think I know the answer to this, but just give us more color on the difference between a bullish rig outlook and a fairly pessimistic pressure pumping outlook?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [20]

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Well, the super-spec rig market is very tight. The number of rigs that are available for upgrade is relatively small relative to the total number of rigs that are out there and then you got the capital requirements along with that, and so that market is staying very tight. Pressure pumping, we're seeing signs of oversupply at the end of the second quarter and going into the third quarter for various reasons, including, as Mark pointed out, we have some E&Ps that are running ahead of their schedule on their budget. So we could see a reset in the budgets for some of these E&Ps at the beginning of 2019 as well. So you've got this one side where the super-spec rig count continues to go up and with the efficiencies of super-spec rigs, you're driving a high number of wells being drilled and put into the market and then you have this potential budget reset early in 2019 for some customers that may be ahead of their spending or ahead of their efficiencies on completions right now. And so I think we just have to work through this through the rest of 2018.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [21]

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Okay. Shifting gears over to the directional drilling side. I know you kind of have been targeting getting back up to eventually 30% margins, and we've been tracking a little bit below that here recently. What's the trajectory going forward? And are you still thinking getting back to that 30% margin level and when?

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

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Well, we've certainly been trying to get it back to the 30% level when we first talked about the business. We've had this overhang from having the rental equipment based on various third-party suppliers that we've been waiting on products for. And some of that we've start to get relief on, you can see the margins improving a little bit in the third quarter. And we see that we should be past a good course of this third-party rental later in this year. I think that's the best color I can give you at this point right now.

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Operator [23]

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Your next question comes from the line of Tommy Moll with Stephens.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [24]

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So for the 4 upgrades that you mentioned at about $15 million each on a 4-year term, as you get deeper into the fleet with respect to what's eligible for upgrade, is that the new framework you think we ought to keep in mind going forward? And can you give us a little context on which class of rigs you're pulling from to upgrade here? And what some of the component parts are to get to that $15 million? And then about how many more do you think you've got eligible?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [25]

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Yes. And we have a mix of rigs that can be upgraded. Some of our rigs only need maybe $2 million to $3 million or maybe $5 million, but those rigs are actually working right now for customers that don't need the upgrade. So they're still what we would consider some rigs out there that are high spec that don't need what we are calling a major upgrade of $15 million. What we're doing in that major upgrade, $15 million is we're taking a rig that was built 2006 to 2008 at 1,000 horsepower drawworks rating for the Marcellus and the Barnett. And these rigs just aren't as interesting anymore for customers drilling the deeper wells and the longer laterals in the various basins. The customers, the operators want 1,500 horsepower minimum, they want a larger rack-back capacity on the substructure. So when we're doing these major upgrades, we are actually changing the substructure, the derrick, the drawworks, some of the electricals, the power and all this and so that's what we consider the major upgrade. The entire intersection of rigs that's changed out. And as we work into the fleet and we work into some of the rigs that we're doing these major upgrades on and the refurbs on some of the backyard component start to cost this more and that's why you're seeing the increased cost as well along with the fact that we have less components that just or an inventory leftover from the downturn and so we're buying a few more new components as well.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [26]

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Got it. And then just as a follow-up. With your relatively optimistic outlook on the drilling side versus the more muted outlook on the pressure pumping side, is it fair to take away that what you're hearing from customers is they may be building some DUCs here over the next quarter or 2? Or is there some other dynamic?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [27]

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I think it's hard for us to know. I think there's just some oversupply in the pressure pumping market. But as we said, the super-spec rig market remains very tight and that's a very interesting business and that generates approximately 2/3 of our EBITDA, especially in the second quarter.

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Operator [28]

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Your next question comes from the line of George O'Leary with TPH & Co.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Executive Director of Oil Service Research [29]

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I thought the color on the 4 contracts for 4 years and the discussions so far is really interesting. But you guys put together an impressive overall incremental set of contracts between the last time we spoke with you on a conference call. I guess, just generally on average for those incremental contracts signed quarter-on-quarter, could you talk a little bit about the delta in average term versus what you saw in the last quarter, how much is that increasing? And maybe, obviously, not providing the exact rate, but any color on how much rates migrated up for contracts signed quarter-on-quarter would be helpful.

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

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Yes, I don't want to get into the details on -- from the values of the contracts. But as we stated, our average revenue per day is going to move up in the third quarter. We're seeing dayrates that were signed on these contracts moving up. And as I mentioned, the upward move on these dayrates and what we're generating in terms of revenue per day is just being masked by some older contracts signed back in 2014 at a very high dayrate that are rolling off. But dayrates in the forward contracts are still moving up.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Executive Director of Oil Service Research [31]

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And any color on term, duration?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [32]

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Well, signed lease at 4 years. And so that's certainly out there in terms of term. We'll just have to wait and see what others look like.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Executive Director of Oil Service Research [33]

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Okay. That's helpful. And then, I guess, if you could parse out what you believe the drivers of the oversupply are on the pressure pumping side. Obviously, you talked a little bit about budget exhaustion and potential for folks to slow their well programs. But if you had to break it down between the demand side of the equation versus the supply side of the equation, and then how much of that demand erosion you believe is maybe driven by this Permian constraint issue versus just that budgeting exhaustion? Anymore color on what's driving the oversupply would be super helpful in addition to how you framed it so far?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [34]

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Yes, I'll try to describe it as best I can from the way we see it. And so we're seeing some oversupply. It really came to life towards the end of the second quarter. And our belief that it's really basically the number of spreads that have been pushed into the market in the second quarter relative to the demand. I don't believe that we've seen any shift in the demand. I'm not saying the demand side won't change, but I'm saying that we haven't seen change in the demand side and especially in the Permian. But we are seeing in the Permian, for example, a number of spreads that just are not filling their schedules. So you got a number of spreads that are out there that across the industry that have idle time. And so we see this in terms of oversupply. It made it difficult for us to fill white space at our calendar into the second quarter when we have delays from third parties. Normally, we'd be able to shift some spreads, go do some fracs for some other companies, but there was just oversupply in the market that didn't allow us to do that.

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Operator [35]

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(Operator Instructions) Your next question comes from the line of Ken Sill with SunTrust Robinson.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [36]

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I wanted to ask one more question about pressure pumping because you could never ask too many. Is the issue with the revenue more utilization? Or has the pricing actually started eroding, too?

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

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I wouldn't say pricing has started eroding, but it's really more about utilization for us and white space in the calendar. We had white space at the end of the second quarter and that's carrying forward into the third quarter as well. It also poses some upside on the projections that we gave you on pressure pumping if we're able to fill some of this white space, but we're doing our best to give you the projection the way we see it today.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [38]

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And that was down 4%, right, sequentially?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [39]

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Pressure pumping revenue down 5% and gross margin down 7.5%, gross profit down 7.5%.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [40]

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And so there hasn't really been much pricing, it's we're just not getting work for the spreads. Could you talk a little bit, has there been any difference in behavior by customers in the spot market versus guys you have -- that have dedicated fleets?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [41]

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I wouldn't say there's any difference in behavior. I think that just given the number of spreads that are available on the market today, you just have a large number of pressure pumping companies all going after the work that happens to come up.

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Kenneth Irvin Sill, SunTrust Robinson Humphrey, Inc., Research Division - MD and Senior Oilfield Services Analyst [42]

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That's never good. Now to change direction, just one quick question. How are you guys set for a drill pipe inventory? And are you guys seeing, as you're -- as we do more of these laterals and these rigs get better, what's going on with the pace of requirements for replacing drill pipe?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [43]

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We do have drill pipe in our maintenance capital budget for a drilling company also in what I would call the growth capital budget because when we do the major upgrades, we're going to buy some pipe as well. But in general, we're only buying specialty pipe where we need to and when we buy the specialty pipe, we're able to rent that to the customers at a separate rate.

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Operator [44]

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Your next question comes from the line of Scott Gruber with Citigroup.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [45]

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Andy, what's the remaining useful life on the upgrades after the upgrade is complete?

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

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These upgrades have a full useful life of the new rig. I mean, when we spend $15 million on these next 4, you've got a rig that has a 20-year life at that point. And so very excited about the position of that asset. It's taking an asset that, as I mentioned built for the Barnett and the Marcellus with a lighter load capacity, is basically stranded in the market right now and then it brings it up to a full super-spec and essentially it will work like a new rig.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [47]

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Got it. And broadly speaking, I'm not asking for the specific rates on the latest contracts, but from a high level, can you just comment on the shape of the rate curve given that we have 6 months in the mix and now 3, 4-year in the mix. So the 3- to 4-year contracts being signed around the 6-month level? Are they above? Below?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [48]

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Dayrates in general are up into the right. Dayrates are moving up and the super-spec rig count moves up. And you're seeing the higher dayrates in the forward contract. And that bodes well for that business going forward.

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Operator [49]

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(Operator Instructions) Your next question comes from the line of Marc Bianchi with Cowen.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [50]

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If I could just ask on the pressure pumping guidance to be down 5%. Can you talk to what that would look like from the current run rate or maybe the June level? Just curious if there's additional deterioration assumed in there or if it's steady or any other color you have.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [51]

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It's a function of the white space that we ended up within our calendars at the end of the quarter, call it, June, that carries over into the third quarter and then we see some opportunities to work through that towards the end of the quarter. That's probably the best color I can give you on that. As I mentioned, it still offer some upside in our results for pressure pumping in the third quarter if we're able to fill some more of that white space.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [52]

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Okay. And on these $15 million upgrades, how much would an equivalent newbuild cost?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [53]

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An equivalent newbuild, and this is specific to us at Patterson-UTI, we have a specific style rig that we like, it's APEX-XK, the PK and our newest rig that's working in the industry, the APEX-XC. These rigs are built to last 20 years. And very pleased with the assets, pleased with the way with these trade in the market. And so we invest a little bit extra in these rigs because these are rigs that we're going to own for a long term. So we tend to spend in the range for a newbuild, if we had to take a guess looking forward in that $25 million range plus or minus. That's about where that would be. You can build a rig for less, but it's not a rig we want to own for 20 years.

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Mark Steven Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [54]

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And that also includes all the collateral aspects of the rig as well.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [55]

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That includes BOPs, drill pipe, your first mobilization to location and when we capitalize that, we put everything in.

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Mark Steven Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [56]

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So some people give you a number that's lower, but they don't also include those aspects.

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

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And the other thing that's changed from 2014, when we were last building rigs in '14 and '15, is it just the amount of equipment and the level of equipment, the demand is higher now. The specification, the load rate. The efficiency that these rigs produce is even higher than what we were doing before.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [58]

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And just one last one on those candidates for the $15 million upgrade, can you say how many more you have? And I guess, it seems like all of those would be idle rigs at this point, none of them are working, is that a fair assumption?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [59]

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Yes, that's a fair assumption. I mean, it's not hard for you to go through our list and just look and see, you're basically taking high spec to super-spec from currently idle rigs built at the 1,000 horsepower capacity.

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Operator [60]

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And we have no further questions in the telephone queue at this time. I will now turn the call back over to the presenters.

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Mark Steven Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [61]

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I'd like to thank everybody for joining us on our second quarter conference call. Look forward to speaking with you when we report numbers for the third quarter. Thanks, everybody.

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Operator [62]

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Thank you to everyone for attending today. This will conclude today's call, and you may now disconnect.