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Edited Transcript of PTEN earnings conference call or presentation 25-Jul-19 2:00pm GMT

Q2 2019 Patterson-UTI Energy Inc Earnings Call

HOUSTON Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Patterson-UTI Energy Inc earnings conference call or presentation Thursday, July 25, 2019 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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* Bradley Philip Handler

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

* Christopher F. Voie

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* John H. Watson

Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service

* Praveen Narra

Raymond James & Associates, Inc., Research Division - Analyst

* Sasha Sanwal

UBS Investment Bank, Research Division - Director & Equity Research Analyst

* Sean Christopher Meakim

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

* Taylor Zurcher

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

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

* Vaibhav D. Vaishnav

Scotia Howard Weil, Research Division - Analyst

* Waqar Mustafa Syed

AltaCorp Capital Inc., Research Division - MD of Equity Research & Energy Services and Head of US Institutional Research

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Presentation

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Operator [1]

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Good morning. My name is Bonita, and I will be your conference operator today. At this time, I will like to welcome everyone to the Patterson-UTI Energy Second Quarter 2019 Earnings Call. (Operator Instructions) I will now like to turn the call over to Mike Drickamer. Sir, please continue.

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

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Thank you, Bonita. 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, 2019. 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 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 and 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 adjusted to such forward-looking statements for what the company expects. The company undertakes no obligation to publicly update or revise any forward-looking statement. 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 2019. 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. As set forth in our earnings press release issued this morning, for the second quarter, we reported a net loss of $49.4 million or $0.24 per share, which includes certain charges totaling $16.3 million pretax or $13.5 million after-tax. Excluding these charges, the net loss for the quarter would have been $35.9 million or $0.17 per share. Included in these charges is $3.6 million of bad debt expense, first time we've recognized bad debt expense since 2012 and a charge of $12.7 million to reduce the carrying value of deposit placed in 2017 on future sand purchases. As you may remember, in 2017, the sand market was much tighter than it is today as pressure pumping activity was increasing, and the industry was moving to finer mesh sizes. In order to increase our access to these finer mesh sizes, we placed the deposit as part of the sand capacity reservation contract. We have been amortizing this deposit based on discounts received on sand purchases. However, with the substantial decrease in sand prices, it makes good economic sense to purchase lower-cost sand outside of this capacity reservation portion of the contract, and thus, we have revalued the deposit at its expected realizable value. Excluding these noncash charges, adjusted EBITDA for the second quarter would have been $177 million, which was used in part to repurchase $75 million or 6.3 million shares of our stock. Through the first half of 2019, we have repurchased $150 million of our stock representing 5.5% of our shares outstanding at the beginning of the year. Subsequent to the end of the second quarter, our Board of Directors increased the share repurchase authorization to $250 million. In addition to the share repurchases, we have also paid dividends of $8.3 million in the quarter. Our balance sheet remains strong. Even after more than $165 million of combined share repurchases and dividends in the first half of 2019, our cash balance at June 30 improved to $256 million, an increase of just over $10 million from the $245 million at the end of last year. Additionally, our $600 million revolver remains undrawn, and we remained modestly levered with a net debt-to-capital ratio of 20.9%. Cash capital expenditures for the second quarter totaled $96.9 million, down from $118 million in the first quarter. We now expect to spend $400 million in 2019, a decrease from our previous forecast of $465 million. This new forecast breaks down as follows: $235 million for contract drilling, including $115 million for maintenance capital; $110 million for pressure pumping, which is primarily maintenance related; $15 million for directional drilling; $30 million for our oilfield, rental, technology and E&P businesses and $10 million for general corporate purposes. While we are not prepared to give specific guidance for 2020 CapEx, we expect that 2020 capital spending would be lower if drilling and completion activity remains around current level. For the third quarter, depreciation expense is expected to be approximately $212 million, SG&A is expected to be $32 million and our effective tax rate is expected to be approximately 20%. With that I'll 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. Before we get into our second quarter results, I wanted to give everyone an overview of what we're seeing in the market. The second quarter began with a sense of cautious optimism as oil prices rose throughout the first quarter and started the second quarter in the mid-$60 range. Unfortunately, this optimism faded as concerns about trade, inventory levels and overall demand pushed oil prices into the low $50 range. With the commodity price volatility and the increased focus on spending within budget, E&P companies are being extra vigilant in monitoring their spending. Historically, E&P companies would slow activity in the fourth quarter if they had reached the point of budget exhaustion. But this year, operators seemed to be slowing the spending run rate much sooner so as to avoid reaching the point of budget exhaustion, which would put them at risk of exceeding their budget. This slowing of the spending run rate is expected to lead this to lower levels of drilling and completion activity in the third quarter. In contract drilling, our rig count during the second quarter averaged 158 rigs, down from 175 rigs in the first quarter. Average rig revenue per day increased to $24,200 and average rig margin per day increased to $10,170, both of which include $280 per day of benefit related to $4 million of early termination revenue we received in the second quarter. At June 30, we had term contracts for drilling rigs providing for approximately $720 million of future dayrate drilling revenue, an increase from $650 million at the end of the first quarter due to long-term contract extensions on several rigs with a major E&P. Based on contracts currently in place, we expect an average of 92 rigs operating under term contracts during the third quarter and an average of 58 rigs operating under term contracts during the 12 months ending June 30, 2020. Turning now to our contract drilling outlook. We expect our rig count to average 142 rigs for the third quarter. Our super-spec rigs continue to have high utilization. However, within our fleet, our non-APEX rigs are the most likely to be released and by the end of the third quarter, we expect that our active fleet in the U.S. will be comprised solely of APEX rigs. Average rig revenue per operating day is expected to be approximately $23,700, including early termination revenues similar to the second quarter level of $4 million. The decrease in average rig revenue per operating day is primarily a function of an increase in the number of rigs on standby whereby the rig receives a lower dayrate but also has minimal operating cost. Average rig direct cost per operating day is expected to be approximately $13,900, which reflects lower costs for the rigs on standby, partially offset by lower fixed cost absorption and cost associated with stacking rigs. Turning now to pressure pumping. As expected, our financial results for the second quarter were similar to the first quarter. Despite 2.5 fewer spreads on average during the second quarter, pressure pumping gross margin of $44.9 million was unchanged from the first quarter level while revenues increased to $251 million from $248 million in the first quarter. We averaged 15.2 active spreads in the second quarter and ended the quarter with 15 active spreads, the same level we had at the time of our last conference call in April. Our EBITDA per spread represented an 18% increase over the first quarter level. Since many of you adjust our reported EBITDA per spread for the capitalization of fluid ends, through the first half of this year, we spent approximately $15 million in total on fluid ends placed into service. On an annual basis, we expect to spend between $1.5 million and $2 million per active spread for fluid ends placed in service. We have made significant progress extending the operating life of our fluid ends, thus contributing to our lower pressure pumping CapEx forecast. Before reviewing our outlook, I would like to take a minute to commend the crew of frac spread 113 in the Permian Basin. We receive honors from our customers on a regular basis and don't ordinarily mention them, but we are especially proud that this crew was recognized for operational excellence during the second quarter by the customer, a major oil company, and received an award for being its best contractor in the Permian. This is quite a distinction for Universal Pressure Pumping. I would also like to recognize the crew of frac spread 108, which recently, safely and successfully completed the well with the longest known lateral in the Permian Basin. With a lateral length of 17,935 feet, this well was completed with 52 frac stages, using 2,200 pounds of proppant per lateral foot. Turning now to our third quarter outlook. We expect that lower drilling activity will negatively impact completion activity across the industry. Within our own fleet, we expect to maintain 15 active spreads throughout the third quarter though we expect a mix shift to more single-well pads. Additionally, pricing continues to be challenging. Accordingly, we expect third quarter pressure pumping revenues of $225 million with a gross margin of approximately $35 million. Turning now to directional drilling. Gross margin for the second quarter improved to $8.1 million from $7.4 million as continued focus on margins and efficiency offset lower revenues due to decreased horizontal drilling activity during the second quarter. For the third quarter, we expect directional drilling revenues of $49 million with gross profit margin similar to the second quarter level. Turning now to our other operations, which includes our rental, technology and E&P businesses. Revenues during the second quarter were $26.4 million compared to $31.2 million in the first quarter. Gross margin, as a percentage of revenues, was 33% during the second quarter compared to 30% in the prior quarter. The lower revenue was largely a function of the seasonal decrease in demand for certain rental fleet items. For the third quarter, we expect financial results in our other operations to be similar 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. Like many of you, we had expected drilling and completion activity to have reached the bottom by now, but that doesn't appear to be the case. Lower activity is affecting the entire industry, but one way in which we are differentiating ourselves from other energy companies and the entire market for that matter, is in terms of cash flow generation. Through the first half of 2019, we have generated adjusted EBITDA, excluding noncash charges of a total of $368 million, which exceeded our CapEx by $153 million. When looking at our cash flow conversion relative to either EBITDA or revenues, we believe that we are a leader in the energy sector.

When you look at our cash flow relative to our market cap, we have among the highest cash flow yield in not only the energy sector but also in the broader market in general. And we are not just sitting on the cash. We have been investing the cash we are generating in our stock and have bought back more than $300 million worth of stock in the past 18 months or 9.5% of our shares outstanding at the end of 2017. Through the first half of this year, we have already repurchased $150 million of stock or 5.5% of the shares outstanding at the beginning of the year. We have also paid more than $16 million of dividends this year bringing the total amount of cash returned to shareholders through the first half of the year to more than $166 million. One reason we have been able to dedicate our cash flow to buybacks and dividends is the strength of our balance sheet. Whereas some companies with higher debt loads are being forced to restrain CapEx to generate cash in order to survive, we are able to fund the maintenance of our equipment thereby preserving our future earnings power, while also being disciplined enough to take advantage of our public market equity valuation, which we believe does not adequately reflect the value of the underlying assets. We fully understand the concerns that have made energy stocks uninvestable for many people, but therein lies the opportunity. We're not willing to settle for being the best house in a bad neighborhood and, therefore, we are doing our best to restrain spending, generate cash and buy back stock. Going forward, we expect our focus -- we expect to focus our cash flow on buying back our stock while also prudently repaying some debt. Our cash balance at the end of the second quarter was $256 million, which is more cash than we need to maintain our daily operations given our $600 million line of credit and expected strong cash flow. Therefore, we intend to use a portion of the cash through to some of the outstanding -- of our outstanding debt with a primary focus on the $300 million of private placement notes that we have that are coming due in October 2020. I'm 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 19, 2019 to holders of record as of September 5, 2019. With that I'd like to both commend and thank the hardworking men and women who make up this company. We appreciate your continuing efforts. Bonita, we would like to now turn the call over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Sasha Sanwal with UBS.

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Sasha Sanwal, UBS Investment Bank, Research Division - Director & Equity Research Analyst [2]

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So maybe to start just on drilling, as we think about the Q3 rig count guidance, can we get some color on what you're seeing from different types of customers? You saw the contract extension with a major. And maybe what indications are customers giving you about the rig requirements for 2020, if any, as rigs are being released?

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

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So you can look at the different types of customers that we have across the U.S., North American landscape. As we look at the major international oil companies that operate in the U.S, they seemed to be in a hold, just kind of holding steady in their operations. And therefore, we were able to recontract a number of the rigs with one of the majors. When you look at the public independents, whether large or small, they seemed to be exerting a lot of discipline in their budgets right now and trying to manage how that's going to look for the rest of the year. Thus -- that's why we're guiding down on the rig count the way we are. With some of the private players, you've still got some sitting on the sideline waiting to see what's going to happen with pricing volatility. So we're seeing a shift in the rig count where it's going to continue to move downward, but also you have to remember that we operate both super-spec AC rigs along with SCR rigs, and we're seeing a shift in that mix. But one thing I'd like to point out is that in terms of our market share, which we don't chase market share, we're very focused on margins, but just looking at the numbers and what we believe is happening in the market, in terms of super-spec rigs, we believe that we're holding share and that's what's important in the market. And that's what generates free cash flow for us.

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Sasha Sanwal, UBS Investment Bank, Research Division - Director & Equity Research Analyst [4]

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Okay, great. That's helpful. And then maybe just also touching dayrates, can I get your views on where leading edge eventually gave way to super-spec rigs today, and have you seen any diversions in rates for term and spot work in the last few weeks?

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

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I think it's hard to call out if there's been any diversions in term and spot over the last few weeks. With rig count coming down, there is pressure on pricing, but also remember on super-spec rigs, utilization is still relatively high. So while there is some pressure, utilization is still relatively high.

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Operator [6]

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Your next 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 [7]

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So Andy, the E&P behavior seems to indicate that they are more concerned around the impact of dropping rigs than dropping frac crews, at least last year and into this year. Frac crews seemed to be more, how they are managing their budgets. So as some of them operates in both those markets, does that give you any confidence going into the fourth quarter in terms of your rig fleet, particularly once you're only running on APEX rigs? And I guess, just on the pumping side, in that same time period, what -- assuming you always get more challenged in the year-end, how do you think about decision making around stacking more fleets, the parameters that could lead you to making those types of decisions?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [8]

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You know I think it's hard to have a visibility on what's happening in Q4 at this time. We're still working through what Q3 looks like. But the way it seems the E&Ps are trying to manage their budgets right now. They are ahead of just the normal Q4 challenge. In other words, where budget exhaustion might happen later in the year. It seems that they're trying to get ahead of that managing it earlier. So I think there's a chance that rig count may level out, may not drop as much as previously anticipated or activity in general may not drop as much as it normally does in the fourth quarter relative to third quarter, but there's still not a lot of visibility yet on what's going to happen in the fourth quarter. I think in terms of frac activity, across the industry frac activity will decrease just based on the rig count. And I think that our rig count is one of the proxies on overall activity in North America. So I think there is a bit of a slowdown. We're going to see it in our schedule, but it doesn't warrant us dropping a frac crew at this point. So for the third quarter, we expect to maintain the same level of crews at roughly 15 throughout the quarter. But our frac spreads are generating positive free cash flow for us after CapEx, and so this is still a good business for us even though it seems like a challenging market.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [9]

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Understood. I appreciate that feedback. So if you have much visibility on 4Q, why not talk about 2020. So you talked about what -- the move in the CapEx budget down to $400 million, and Andy also outlined the breakdown of the split, how you expect to spend it. So based on prior commentary, it sounded like your maintenance capital which, obviously, is going to have activity estimates for somewhat that number looks like, but something south of $300 million seems where you play is going to be maintenance level, maybe even something like $275 million. So as we think about the 2020 budget, could you maybe just help us set a baseline of where you think the spending could start? And then from there you make decisions around incremental deployment into technology and/or rigs versus frac?

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

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Yes. So in terms of what could happen in 2020, of course, I think we don't have a lot of visibility. But any assumptions you make on 2020 in terms of our cash flow and what we would spend on CapEx, the CapEx in terms of maintenance is going to be relative to activity. So let's say activity were to stay relatively flat at the exit of Q3 through Q4 and going into 2020. With activity down year-on-year in 2020, you could see maintenance CapEx down. And as Andy called out, in our Drilling business, we had $235 million total for contract drilling, $115 million of which was maintenance. So it's possible that we don't do as many projects outside of maintenance. These projects are good for our business, and it's worth the investment for this year, but maybe we're not doing as many in 2020. So certainly, CapEx could continue to come down, we'd still be generating very good free cash flow as well.

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Operator [11]

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Your next question is from the line of Vebs Vaishnav with Howard Weil.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [12]

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I guess you kind of mentioned, but just on the leading edge dayrates, like the implied dayrates is declining, and I guess you kind of mentioned that it's somewhat impacted by the standby rigs, but could you just help on talking about what you are seeing in terms of leading-edge dayrates, and what you see going forward?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [13]

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Yes. So just to clarify, we're saying that the average rig revenue per operating day is expected to be approximately $23,700, that also includes similar levels of early termination that we had in the second quarter. And it's an increase -- there is moving parts within this number and part of it is an increase in the number of rigs on standby. So I wouldn't say that there is a big dayrate element of that. Now as I mentioned earlier, certainly dayrates are under some pressure with the rig count coming down. But as our fleet by the end of the third quarter is expected to be almost exclusively APEX rigs and super-spec rigs are still at relatively high utilization, it's not clear how much the pressure will affect us on the pricing yet in terms of dayrates.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [14]

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Got it. Okay. And just I guess piggybacking on Sean's question, just if we think about 2020, and think about where you guys are in terms of basin presence for pressure pumping, any thoughts around like if all the basins that you guys are currently in make sense, we need to rationalize, if you can comment on that, that would be grateful.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [15]

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You know the basins that we work in today, which are primarily Permian, South Texas, Mid-Continent and Northeast, in no particular order, they make sense for us today. We don't see any need today to rationalize or move any of the current spreads that we're working today. We've already done that on a number of cases over the past 1 year, 1.5 years, where we've have moved spreads out of the MidCon, we've moved spreads between South Texas and West Texas back and forth. But today I don't see any change right now for the rest of the year.

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Operator [16]

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Your next question is from the line of Praveen Narra with Raymond James.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [17]

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I guess we can keep on the pressure pumping theme just in terms of the idea of stacking fleets versus the inefficiencies you guys are expecting in the second half, can you walk through kind of the idea of choosing to keep those fleets active despite those inefficiencies and obviously, given the CapEx reduction for the second half? You're going to be free cash flow positive. But how do we think about that? Is it a basin scale issue? Or how do we think about the active fleet count?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [18]

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So when we think of the slowdown in activity, we think of the reduction in number of stages that we're going to pump in the third quarter versus the second quarter. And some of that's driven by a mix shift in the type of work we're doing, where some of our crews are going to be moving from multi-well zipper frac pads to single-well pads. So when you do that, it doesn't give you the option to reduce the number of frac spreads because you still have to have the equipment available, but that mix shift does negatively impact you on activity and efficiencies. And so we're seeing that shift, but because we still need to cover the work, I expect we're going to run the same number of spreads.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [19]

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Okay. Understood. And then on the rig side, if I guess, we can think about it in terms of the activity and the reduction that you've already seen or the customers have laid out to you, how do you kind of think of the cadence of rig decline as we go through the quarter? Do you think in terms of an exit rate and the rigs by -- on standby rate, we could see kind of most of the reduction to happen at the beginning part or does it kind of happen linearly throughout?

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

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Well, even if I give you a calendar of what that would look like, I could tell you it would change. We have customers that delay their programs, delay their decisions or different things happen. So I think we're giving you the best-case scenario of what we think the average looks like in the third quarter based on all that movement.

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Operator [21]

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Your next question comes from the line of Taylor Zurcher with Tudor, Pickering & Holt.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [22]

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Andy, I just wanted to follow up on your response to the prior question on the mix shift you're seeing in pressure pumping. Is that the -- in the mix shift towards more single-well pads in Q3, is that primarily a function, I assume, of changing customer mix? Or is it a function of the geographies that we're working in today? Any detail there would be helpful.

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [23]

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So it's -- well, in one particular case, it's the same customer where it's just a different part of their program that we have. And so their program would have multi-well pads with zipper fracs for a period of time, then it goes over to single wells, then it may eventually go back to zipper fracs, so it's just a shift in the customer's internal program and in another case, it's a frac spread moving from one customer to another customer. So it varies and it depends. I wouldn't say it's any kind of industry trend and wouldn't surprise me to see a shift back in the future as well. It just happens to be what our mix looks like in the third quarter.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [24]

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Okay. Okay. Got it. And on the rig side -- I know there's a lot of moving pieces at the cost line as it relates to lower fixed cost absorption from standby rigs, et cetera, but is there any way to frame the order of magnitude for the -- in terms of the cost impact to idle some of these rigs and stack them as they roll off contract? Just to kind of calibrate a baseline OpEx per day that we should use moving forward.

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

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It's really a minimal cost and doesn't work into much. And when you look at our $13,900 a day in operating costs, 2/3 of that is roughly labor. So I wouldn't say there's any real cost on the stacking to call out, it's fairly minimal.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [26]

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Okay, I'll try to squeeze one more in. In terms of some of these rigs coming off contract, it sounds a lot of them are SCR legacy type rig, non-APEX class rigs, what's the -- what's your view or outlook as these sorts of rigs roll off contract as it relates to eventually finding follow-on work from probably out in 2020, but I guess long-winded way of saying it, is there any chance that some of these rigs actually find their way back into the marketability stacks at some point moving forward?

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

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Yes. History has shown us that lower-spec rigs like these are very dependent on commodity price. And if commodity price moves higher, you'll see these rigs go back to work. So I wouldn't make any kind of premature call that it's the end of this class of rigs. I think it's really dependent on commodity price. Just in the market we're in today, with the volatility we had in WTI, the challenge the operators are having, making decisions whether to work a rig or not work a rig and the publically traded operators that are under a lot of pressure to stay within budget, this is just where we're landing. But again, the super-spec rigs which generate the majority of the cash flow for the Drilling business, utilization is still relatively high.

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Operator [28]

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Your next question is from the line of Brad Handler with Jefferies.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [29]

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If I could ask you, please, first to speak to I guess, the competitive landscape in the pumping side. There is evidence we're hearing from other of your public peers, around shutting in frac fleets, some even at a quicker pace than, I think, that the market's expecting. Can you comment on that, sort of the competitiveness of bidding? Are you seeing -- I don't know if -- in some of the transfers, if you're still seeing active bidding or if it's a lot more negotiated because of dedicated relationships, but any commentary on kind of that competitive landscape would be interesting to hear.

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

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So the majority of our frac spreads work under dedicated agreement. So it's only the minority of our frac spreads where we might be into competitive bidding. But that being said, I think we've become more competitive in our bidding. Our teams have done a very good job in improving our efficiency. There is still opportunity to do so, and that reduces our OpEx cost. We also called out $110 million of planned CapEx for pressure pumping. Our fluid-end spend, which is the first time we've ever really given anybody clarity on this on an annualized basis is only $1.5 million to $2 million per spread, which is probably much lower than most people model for us. And so we thought it was important to call that out as well because our teams have done a really good job of getting control of these costs, doing a lot of technical work to improve efficiencies, improve the life of fluid ends and it makes us competitive in our bidding processes. And so our 15 spreads that we're planning to work in the third quarter generate free cash flow after CapEx. So we think, we're very competitive in that respect.

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Bradley Philip Handler, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [31]

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Understood. And yes, you're right, certainly it's lower than we were modeling for your fluid end expense. So at least one affirmation there. The -- okay, so I think I understand that point. But maybe the other half of the question was going to be anyway and it sounds like you've half answered it. The -- what are you seeing with pricing in the sphere where it is competitively bid, I think in general pricing sounds like it was flattish in 2Q but are you seeing things get that much more competitive, again, as the work -- as the volume of work whittles down?

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

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I think there is pressure underpricing and pressure pumping. I think in some of the cases where we do have to bid, pricing comes down a little bit in the third quarter, but again, I think our teams are doing a great job controlling the cost side of that equation right now as well. Now we have the challenge of the mix shift in the third quarter going from multi-well zippers to single-well pads for some of our crews and that's going to reduce the overall activity and efficiency in terms of stages per quarter. But I think our team is doing a good job on the cost side right now. But there is pressure on pricing for the spreads that we have to go out and bid.

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Operator [33]

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Your next question is from the line of Chris Voie with Wells Fargo.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [34]

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Just question on dayrate and margins per day. If I've done the math correctly on your guidance and the impact of the terminations, I get to about $9,500 a day, somewhere in that range in the next quarter on an adjusted basis. Just curious if you were to roll current leading-edge rates where you see them being bid over the last few weeks through, would force you likely to -- excuse me, be likely to trend lower than that $9,500 range?

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

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I think it's too early to know what the average margin per day is going to be on the rigs in the fourth quarter because a lot of it will depend on the mix of rigs on standby as well.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [36]

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Okay. And you didn't call out the number of rigs that you have on standby, did you?

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

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No.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [38]

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Okay. Is that standby rate dilutive or accretive to the overall margin for drilling on average?

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

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It's roughly neutral, but it depends on the mix at the same time.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [40]

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Okay. And then just one on pressure pumping, if I could. I'm curious, when -- if you have dedicated customers that are switching to wealth well operation, does your contract kind of account for that lack of efficiency that you're going to get when you switch to that and raise the price per stage? Or is it something where you have to kind of carry the extra cost of that switch in efficiency when you go to that kind of operation?

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

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Every pricing agreement is a little bit different. Every pricing agreement is based on what we anticipate and what's communicated to us is the potential scope of work. And so in some cases we may be doing a multiyear agreement that would also include taking to account these shifts and they may happen from month-to-month or quarter-to-quarter. So -- and some may include that already.

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Operator [42]

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Your next question comes from the line of John Watson with Simmons Energy.

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [43]

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Andy, I apologize if I missed this, did you call out where you expect the rig count to bottom in 3Q? And if not, would you mind sharing that with us?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [44]

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No, we're certainly not calling a bottom in the third quarter. I think it's too early to know exactly what's going to happen in the fourth quarter. Rig count could stay level, it could drop a little bit more. I think what we are trying to explain is that instead of E&Ps just pushing their operational activity steady through the end of the year and then a big roll-off in the fourth quarter, this year we're seeing E&Ps get ahead of that where they're slowing down earlier in the year. But yes, it's hard to know exactly what that means for the fourth quarter.

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [45]

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Got it. And on the pumping side, we talked about electric fleets on the prior call, and it seems like that wasn't of interest for Patterson today. What about dual fuel Tier 4 fleets? Are those something -- those type of upgrade something that you've contemplated? Excuse me, I know you have a couple of dual-fuel Tier 2 fleets, but any interest in dual-fuel Tier 4?

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

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So we have more than a couple dual fuel spreads. Every spread that we operate in the Northeast has the ability to operate with dual fuel. I believe on any given week, we probably operate as many or more bi-fuel frac spreads as anybody in the industry. In terms of Tier 4, we have the ability to do Tier 4 bi-fuel. We don't operate Tier 4 bi-fuel today, just because it's not required by a particular customer. But we certainly have the capability to move in that direction. We've been adding more Tier 4 engines for a particular customer this year. They could easily be upgraded through an OEM upgrade to bi-fuel as well if we need to. It's not a big capital cost.

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [47]

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Okay. I'll try one more on drilling pricing. You are not focused on share, you are focused on returns, which is admirable. Have you seen any type of shift from your competitors who are becoming maybe more focused on share than Patterson is?

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

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I wouldn't say we've seen any particular shift. I think our competitors, in general, behavior has been steady with what they've historically done. Relative discipline in the market especially since super-spec rig utilization remains relatively on.

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Operator [49]

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(Operator Instructions) This question is from the line of Waqar Syed with AltaCorp Capital.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of Equity Research & Energy Services and Head of US Institutional Research [50]

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Andy, just a clarification question on your comments regarding pressure on rig dayrates. Is that the comment for super-spec rigs also? Or is that for low-spec rigs?

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

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I think it's a general comment. With the rig count coming down, even super-spec rig count is coming down a bit too, and it does put pressure on pricing. I don't think we could ignore that, and we just have to wait and see how that really plays out. A lot of these rigs are working under contracts right now. And there is relative discipline in the market. So I think it's too early to say how much that's going to affect pricing on super-spec rigs, but we do acknowledge there is pressure.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of Equity Research & Energy Services and Head of US Institutional Research [52]

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But have you seen rigs come off as yet in any of the contract renewals for super-spec?

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

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We've seen a little bit of movement, but it's too early to know what the impact is on our average rig revenue per day. If you look at third quarter, most of that's impacted by the mix of rigs going on standby.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of Equity Research & Energy Services and Head of US Institutional Research [54]

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Now in terms of the industry rig count, you mentioned the dual rates would be down, but does it imply that industry rig count could be down maybe about 40, 50 rigs from here in the third quarter?

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

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Well, I do think that our rig count like other large contract drillers is a proxy for what's happening in North America. And I think that while our total rig count may be moving down a little bit faster than others, our super-spec rig count is probably moving down at the same rate. So it's -- you can take that and interpolate it to what the overall number is, but I do think the industry rig count is coming down.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of Equity Research & Energy Services and Head of US Institutional Research [56]

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And what will you say the super-spec rig utilization is currently?

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

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It's very close to 90%, but it's relatively high still today.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of Equity Research & Energy Services and Head of US Institutional Research [58]

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Now your comments on weakness -- upcoming weakness in pressure pumping as well as in drilling, is that a comment in all basins? Or is it -- you're seeing particularly more severe pressure in some regions versus others?

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

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I think it's a comment across all basins because the pressure is equal on all these publicly traded E&Ps that work across the U.S. to stay within their budget. Now every E&P has varying levels of their own internal cash flow that affects their budgets, but -- because that pressure is equal across all those public E&Ps in all the basins.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of Equity Research & Energy Services and Head of US Institutional Research [60]

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Fair enough. And then just one final question, I mean if you -- it's up to you if you would choose to address that, but there was a Reuters' article sometimes back about possible asset sales that you may be considering, do you want to comment on that?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [61]

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We didn't think too much of that article. And we still remain focused on improving our own internal efficiencies and still providing free cash flow after CapEx in our pressure pumping business.

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Operator [62]

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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 [63]

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Wanted to double back on electric frac. How much inbound have you had from customers asking you about it? It's something that it seems that E&Ps, particularly the integrator are interested in and presumably asking for -- asking about. There's a tension there given the capital discipline across most of the oilfield services landscape at this point, but I'm just curious for -- from the customer's perspective, they'll ask you about it anyway if they want to, and have you had many inbounds on the topic?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [64]

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I think there certainly is questions from operators on electric frac, what does it mean and how does it work and what are the benefits and what are the challenges as well. And we certainly know electric frac very well. On the technology side of our business, our division Current Power has done the electrical systems for several electric frac spreads. And so we certainly understand the technology. We understand what it takes to deploy it, et cetera. We just don't think for us that it makes economic sense. We don't see ourselves adding capacity. We're very focused on generating free cash flow in this business and adding electric frac spreads and the costs around that for us just don't make sense.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [65]

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Okay. Shifting gears to the land drilling side, I want to talk about automation. You've got superior QC and I wonder if you can give us any insight into the pipeline to the extent one exists for any drilling automation software that you might introduce at some point, and maybe just more generally with any of the technology value add that you can sell around the rig? How do you envision going to market outside the dayrate structure potentially?

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William Andrew Hendricks, Patterson-UTI Energy, Inc. - President, CEO & Director [66]

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So we certainly have a pipeline of technology that we're working on. We're probably a little quieter than others on exactly what we're doing. On some of the previous calls, I've talked about our Cortex operating system that we layered on top of the rig AC control system and this allows us to also plug in various apps to help improve the efficiency and controls on the rigs. We're in the early days of field testing some of these apps. We're also writing other apps.

They do a variety of different things on the rig. And we'll get into more of that probably later when we're ready to talk more about that pipeline. When it comes to getting the value, we want to make sure we get the value for what we're putting into this. Now it's software development. It's software development, very little on the hardware side. So we've got some engineering costs there, but it's not a big CapEx deployment to put this out on a rig and that's a positive. And -- but the rig can improve its overall efficiency.

So we'll look at various models outside of the dayrate for when we do add on technology, because it's certainly our intent to get our value for our investment when we do improve performance and efficiency on the rig.

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Operator [67]

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This question comes from the line of Chris Voie with Wells Fargo.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [68]

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Just one more. A bit of a clarification on the commentary you put out on the fluid ends, I think you said $1.5 million to $2 million per spread in the first half of the year. The spread count has come down a bit. It -- since that's just what you're purchasing in that period, is that a sustainable level? Or is that in part benefiting from the fact that you're stacking some fleets, and the purchase rate might be a little bit lower?

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

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Well, first of just to clarify that wasn't the first half of the year. The $1.5 million to $2 million was an annualized estimate, so I'll hand it over to Andy Smith.

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C. Andrew Smith, Patterson-UTI Energy, Inc. - Executive VP & CFO [70]

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Yes. We spent $15 million in the first half of the year and if I'm remembering your question correctly. We think the kind of the run rate on sort of a per spread basis for the first half is good for the second half as well. So as Andy said, it's $1.5 million to $2 million per spread on an annualized basis.

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

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We've done a lot of work in that area to try to get those costs down and certainly most estimates out there are running higher. We wanted to call that out.

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Operator [72]

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That was our last question. I would now like to turn it back over to Mark Siegel.

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Mark Steven Siegel, Patterson-UTI Energy, Inc. - Executive Chairman [73]

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Everybody, we appreciate you participating in our conference call with respect to second quarter earnings. We look forward to speaking with you as we announce third quarter. Thanks, everybody.

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Operator [74]

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And this concludes today's conference call. Thank you for your participation. You may now disconnect.