Yahoo Finance Patterson-UTI Energy, Inc. (NASDAQ:PTEN) Q1 2024 Earnings Call Transcript
Patterson-UTI Energy, Inc. (NASDAQ:PTEN) Q1 2024 Earnings Call Transcript May 2, 2024
Patterson-UTI Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, welcome to the Patterson UTI First Quarter 2024 conference call. [Operator Instructions]. As a reminder, today's call is being recorded. I will now hand today's call over to Mike Sabella, Vice President of Investor Relations. Please go ahead, sir.
Mike Sabella: Thank you, operator. Good morning and welcome to Patterson-UTI earnings conference call to discuss our first quarter 2024 results with me today are Andy Hendricks, President and Chief Executive Officer; and Andy Smith, Chief Financial Officer. As a reminder, statements that are made in this conference call that refer to the Company's or management's plans, intentions, targets, beliefs, expectations or predictions for the future are considered forward looking statements. These forward looking statements are subject to risks and uncertainties as disclosed in the company's SEC filings, which could cause the Company's actual results to differ materially. The Company take no obligation to publicly update or revise any forward-looking statements.
Statements made in this conference call include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website, PAT. energy.com and in the Company's press release issued prior to this conference call. I will now turn the call over to Andy Hendricks, President, Patterson-UTI as Chief Executive Officer.
Andy Hendricks: Thank you, Mike, and welcome to Patterson Thiago First Quarter Conference Call. First quarter unfolded, largely as we anticipated with another quarter of strong free cash flow. The steady environment continued in the oil basins with activity and production relatively consistent with late last year and natural gas basins. Our customers are being impacted by weak natural gas prices, and they are responding by reducing activity as we expected. Against this backdrop, Patterson UTI delivered strong results during the quarter, and we met our guidance in each of our operating segments. The results in the first quarter demonstrate the free cash flow generating capabilities of the Company, even as we invest to maintain our position as a long-term winner in the U.S. shale drilling and completion.
And we expect to continue returning a significant amount of cash to shareholders bifurcation amongst oilfield product and service providers is presenting an opportunity for high-quality companies to generate strong free cash flow even in a slightly softening market. We are investing in technologies that enhance the efficiency of the U.S. shale model, and this should improve the returns and free cash flow profile of our company. Over the long term, our customers are recognizing and rewarding providers that have a differentiated service offering and Patterson-UTI stands amongst the leaders across multiple product and service lines. Differentiation has defined this cycle, and we believe that if we invest in the right technologies and deliver consistent and repeatable top-quality product for our customers.
We will be rewarded with higher activity and utilization, and our results are the best evidence. We delivered another strong quarter in Q1, and both our drilling and completions businesses again outperformed. We expect this outperformance will continue over the long term. On the macro outlook in all basins, activity has remained steady, supported by high oil prices in the near term, customer consolidation is meeting the market's response to strong oil prices that should resolve over time. And at current oil prices, we anticipate some modest demand upside in all basins starting later this year. Weak natural gas prices are impacting industry activity in the near term so far, activity in natural gas basins has held up better than we'd anticipated, particularly in the Northeast, but we are seeing more natural gas activity reductions continuing in Q2, and we expect natural gas activity is likely to then remain steady with second quarter levels through the rest of the year.
Nevertheless, our long-term positive view on natural gas is unchanged. New LNG exports and growing demand for power in the US will require increased production with natural gas remain a part of the industry growth narrative for 2025 and beyond. In our Drilling segment services in our Drilling Services segment, we had another strong quarter with our rig count, again outperforming the industry. Average pricing on recent term contracts remained stable and margins have been resilient. In the U.S., we started the second quarter operating 118 rigs, and we are currently operating 116 rigs, although we have line of sight for a couple of more rig drops as our customers respond to natural gas prices and as customer consolidation creates some potential reduction in near term activity.
We continue to see very high demand for our Tier one drilling assets, and we believe our rig fleet is positioned to outperform the market with upside, even if the overall market is flat, customer consolidation will create a period of churn, which we are starting to see in the second quarter, but this should be followed by a high-grading process. And that transition is when Patterson GTI. should see the most benefit. We are excited about the way the market is taking shape over the long term. On the technology front, we're seeing great results from the investments we've made to add automation systems to the drilling rig controls over half of our rigs today are running our Cortex operating system and our Cortex key edge devices. Demand is high, and we have allocated a portion of our CapEx to continue adding these systems.
The growing presence of these products on our rigs is enhancing the value of our service offering. We are also advancing the way we power our rigs by beginning to integrate our grid assist package with our E. T cell lithium battery technology, often high-line power accessible, but not an adequate quantities to fully power the rig by itself, our grid assist package can complement the grid grid power to fully power the rig, even when the utility is only providing a fraction of the electricity grid assist has shown the ability to substantially decrease the cost of powering a rig and slash emissions by up to 90% compared to rigs that are still using diesel generators. Our technologies differentiate Patterson-UTI Drilling business and should give our rigs a sustainable advantage over many peers in the industry.
In completion services, we had another strong quarter. The operational integration with next year is largely complete, marking a significant milestone for the Company. The team's dedication and expertise has been exceptional. The leadership within the group mission skill and commitment through this process, and we extend our sincerest gratitude for everyone's outstanding efforts. Looking ahead, we remain focused on identifying additional synergies to further enhance our position as well as completion leader benefits so far have been obvious with relatively steady financial performance compared to the pre-merger entities. Even as the market has slowed, this is evidence that the merger is creating value. We have achieved our $200 million annualized synergy target faster than we initially expected.
During this integration process, the team has continued to advance our transition to natural gas powered frac equipment in a capital efficient manner. We deployed our latest round of Emerald electric frac equipment throughout the month of April, with the fleet integrated with our power solutions and going to work in West Texas for a large established customer so far, the results have been fantastic with the equipment averaging over 21 hours per day since it started up a great achievement for a new fleet. We remain on track to grow our electric frac horsepower to 140,000 by the middle of the year. And upon delivery, we still expect that almost 80% of our fleets will be able to be powered by natural gas. We are also field testing other 100% natural gas powered frac technologies, and the flexibility is one of the biggest benefits of not overly relying on one solution.
We think our full suite of natural gas-powered frac assets, including our dual-fuel equipment, is as competitive as any company in the industry. Overall, we expect our nameplate horsepower will continue to decline as we retire older diesel assets. We suspect others are taking a similar approach to retiring older assets is the industry is getting more disciplined with capital deployment. We are also excited by what we have seen from our cementing business following the integration of legacy Patterson ETI. next year. Operations, we are seeing strong market penetration. And as our customers are extending laterals, they are asking for higher quality, cementing equipment leading to bifurcation in this market. Similar to what we are seeing in frac, we believe our cementing business is well-positioned to continue to improve results regarding our customer base, we believe much of the churn has already occurred for this year, and we think the rest of the year should be relatively steady with a steady customer book and a likelihood that frac activity will improve somewhat in Q3.
We think Q2 is likely the low point for our Company this year in terms of frac activity, we've had some customer-specific gaps that opened up on our calendar during Q2, and those customers should resume normal activity. Why two three our Drilling Products segment continues to perform exceptionally well. Ultera reached a new company record for revenue generated per industry rig in the U.S., highlighting the strength of our offerings in the domestic market. Internationally, we saw strong growth with revenue abroad of more than 15% compared to the first quarter a year ago. These results highlight the effectiveness of our drilling products and meeting the evolving needs of our global customer base. We remain optimistic about the growth prospects of the Drilling Products segment, even in a flattish U.S. onshore market and Alterra's international business is expected to achieve high 10s revenue growth this year, primarily driven by strong performance in the Middle East, while Terra also had its first successful run in the North Sea which is a market where the Company has not historically participated.
Early results in that region have been great and we have been awarded other sections of the project. This is a great example of an expansion into a new market. The strategic investments we are making will set us up for profitable growth even in a relatively flat market at the same time we are delivering strong free cash flow and returning a significant amount of cash back to our investors. We consider this balanced capital allocation strategy critical for enhancing shareholder value over the long term, and we are optimistic that we can continue delivering on this approach. I'll now turn it over to Andy Smith, who will review the financial results for the first four group.
Andy Smith: Thank you, Andy. Total reported revenue for the quarter was $1.510 billion. We reported net income attributable to common shareholders of $51 million or $0.13 per share in the first quarter. This included $12 million in merger and integration expenses. Our adjusted net income attributable to common shareholders, excluding the merger and integration expenses was $61 million or $0.15 per share and assumes a 21% federal statutory tax rate on those charges. Adjusted EBITDA for the quarter totaled $375 million, which also excludes the previously mentioned merger and integration expenses. Our weighted average share count was 408 million shares during Q1, and we exited the quarter with 404 million shares outstanding. Our free cash flow for the first quarter was $139 million.
During the first quarter, we returned $130 million to shareholders, including an $0.08 per share dividend, $98 million used to repurchase 9 million shares. Annualize the amount we returned to shareholders totaled to more than 10% of the market cap at the end of the first quarter. During the first quarter, we generated significant free cash flow and we opportunistically accelerated our share repurchase program given the dislocation between the share price and our view on the intrinsic value of the share of Patterson UTI stock. In just two quarters since we've closed the next term merger and Alterra acquisition, we have repurchased 4% of the post-deal shares outstanding. Our Board has declared an $0.08 per share dividend for Q2. For 2024, we still expect to use at least $400 million to pay dividends and repurchase shares, which would exceed our targeted return of more than 50% of free cash flow to shareholders.
In addition to the cash returned to shareholders in the first quarter, we used more than $30 million to pay down capital leases and retired debt as we look to maintain our low leverage and strong capital structure. In our Drilling Services segment, first quarter revenue was $458 million. Drilling Services adjusted gross profit totaled $186 million during the quarter. In US Contract Drilling, we totaled 11,024 operating days. Average rig revenue per day was $35,680, with average rig operating cost per day of $19,510. The average adjusted rig gross profit per day was $16,170, a decrease of less than $200 from the prior quarter. At March 31st, we had term contracts for drilling rigs in the US, providing for approximately $527 million of future dayrate drilling revenue.
Based on contracts currently in place, we expect an average of 70 rigs operating under term contracts during the second quarter of 2024 at an average of 41 rigs operating under term contracts over the four quarters ending March 31, 2025. In our other drilling services businesses other than U.S. contract drilling, which is mostly international Contract Drilling and directional drilling, first quarter revenue was $64 million with an adjusted gross profit of $8 million. For the second quarter, in US Contract Drilling, we expect to average 114 active rigs compared to 121 active rigs in the first quarter with adjusted gross profit per day expected to be down roughly $300 from the first quarter. Aside from US Contract Drilling, we expect other drilling services adjusted gross profit to be down slightly compared to the first quarter.
Reported revenue for the first quarter on our Completion Services segment totaled $945 million with an adjusted gross profit of $199 million. Most of the sequential change in revenue was a function of lower activity and the mix shift away from higher at higher revenue jobs in the Haynesville, with some limited impact from changes in pricing relative to the fourth quarter. We are pleased with our results in Appalachia where activity was rental relatively steady. As expected, the Haynesville was the largest declining Basin during the quarter. Our natural gas-powered equipment continued to be sold out with high demand and a widening operating cost savings compared to diesel equipment. Our completion activity has declined slightly to start the second quarter, mostly in natural gas basins where customers continue to slow activity in response to low natural gas prices.
Additionally, we have a few dedicated fleets that are operating with planned gaps in the schedule. For the second quarter, we expect completion services revenue of approximately $860 million with an adjusted gross profit of around $170 million. We see an improvement in activity in the third quarter as our dedicated and long term customers resumed completion activity after the pads are drilled. First quarter drilling products revenue totaled $90 million, which was up 2% sequentially. Adjusted gross profit was $41 million. In the US , drilling product market share hit a record for the Company in the first quarter and the segment again saw an improvement in revenue per US industry rate as Ulterra continues to perform very well. Internationally, revenue improved sequentially with gains largely coming from our operations in the Middle East.
Direct operating costs included a non-cash charge of $2 million associated with the step-up in asset value of the drill bits that were on the books at the time of the Ulterra trends at the time the Ulterra transaction closed. The same purchase price accounting adjustment, increased reported segment depreciation and amortization by $6 million during the quarter. We expect the impact of these non-cash charges will reduce as we move through 2024 and will likely be negligible thereafter. For the second quarter, we expect Drilling Products results to be roughly in line compared to the first quarter, we see growth internationally, largely offsetting typical seasonality in Canada with the spring breakup. Other revenue totaled $18 million for the quarter with $7 million in adjusted gross profit.
We expect other second quarter revenue and adjusted gross profit to be flat with the first quarter. Reported selling, general and administrative expense in the first quarter was $65 million. For Q2, we expect SG&A expense of $65 million. On a consolidated basis for the first quarter, total depreciation, depletion, amortization and impairment expense of $275 million. For the second quarter, we expect total depreciation, depletion, amortization and impairment expense of approximately $265 million. During Q1, total CapEx was $227 million, including $83 million in drilling services, $123 million in completion services, $16 million in drilling products, and $5 million in other and corporate. For the second quarter, we expect total CapEx of roughly $180 million with most of the sequential reduction coming from a decline in CapEx in the Completion Services segment.
We expect our annual CapEx spend will be $740 million or less. Our focus remains on maintaining flexibility to adapt to market conditions as needed. While we continue to expect to convert at least 40% of our adjusted EBITDA to free cash flow in 2024. We closed Q1 with nothing drawn on our revolving credit facility as well as $170 million of cash on hand. We do not have any senior note maturities until 2028. We expect to generate another quarter of strong free cash flow in the second quarter, although likely slightly below what we saw in the first quarter. We have a long track record of returning substantial cash to our investors since the start of 2022, we have returned more than 80% of our free cash flow to our investors. Over that same time, we have seen a steady improvement in our free cash flow conversion.
Simply put, we are returning more of our adjusted EBITDA to free cash flow than in the past, and we are committed to giving a significant amount of that free cash flow back to shareholders in the eight months since the merger between next year and Patterson ETI. was finalized, our integration efforts have exceeded our most optimistic expectation. The team's achievements during this relatively short time frame are evident and the Completion Services segment has remained resilient despite challenging market conditions. The operational integration is largely complete, and we have now achieved our goal to realize more than the $200 million in annualized synergies, which we announced at the time of the transaction. We remain committed to identifying additional cost synergies and revenue opportunities.
There's still ample room for improvement in our completions business, and we are actively pursuing strategies to enhance its performance. We are confident in our ability to deliver additional value to our shareholders through these efforts. I'll now turn the call back over to Andy Hendricks for closing remarks.
Andy Hendricks: Thanks, Andy. As we discuss the results from the first quarter of 2024 were strong, and I'm still very constructive on our industry for all of 2024. With Patterson UTI positioned to continue to generate strong free cash flow. Oil prices have shown relative stability. And there is no visibility on any substantial or additional supplies of crude entering the market that will change the current commodity price dynamic. The oil basins in the US drive the vast majority of our activity. There continues to be strong demand for technology in today's market, including more drilling rig control automation, natural gas-fueled frac technology using electric pumps well placement analytics and new drill bit design as well.
The last year in our industry has demonstrated how the service market in the US has become more disciplined, where although we have seen some softness in the gas markets. Overall activity and pricing has held up better than in similar historical years. We believe all of this translates to a better operational environment for our company and a more investable sector for the market. I'd like to thank all of our teams across Patterson, UTI for all their hard work to successfully integrate the companies over the last eight months and achieve the targeted synergies of over $200 million. Patterson UTI remains in a strong position. We continue to focus on high returns, capital-efficient ways to grow our profitability and to return cash to shareholders through our regular dividend and share buybacks.
We still expect that we will return at least $400 million this year through dividends and share repurchases, which in a flat market should mean further growth in our earnings per share and also return on capital through a steady reduction in share count. Finally, I'd like to thank all the hard-working women and men at Patterson-UTI for what they do to responsibly provide energy to the world. With that, I'd like to hand it back to Mika, and we'll open the lines for Q&A.
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