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Patterson-UTI Reports First Quarter 2020 Results; Warns of 60% Decline in Activity

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   |    Thursday,April 23,2020

Patterson-UTI Energy Inc. reported its Q1 2020 results. Below are the highlights from its conference call and report.

Call Highlights

Patterson's execs are planning to drop active frac fleets down to 4 (for comparison, Schlumberger is at 12-15 active): "Based on current conversations with customers, we expect to average approximately four active spreads in the second quarter." This is down from 10 in Q1.

"Turning now to pressure pumping. We averaged 10 active spreads during the first quarter, in line with our expectation. Pressure pumping revenue for the first quarter was $125 million with a margin of $10.3 million, which exceeded our expectation."

Patterson-UTI warns of a 60% decline in activity this year, as it expects four frack fleets to run in Q2 vs. an estimate of ~10 earlier this year.

The company also says it expects to exit the current quarter with ~70 rigs in operation, down from an average of 123 rigs at the end of Q1, which was 30% lower than the year-ago period: "I think the term 'frack holiday' may be overstating what's going on," Patterson-UTI CEO Andy Hendricks said during today's earnings conference call. "I don't see completions making a bounce back, certainly not in [Q3]."

Patterson also says it adopted a limited duration shareholder rights agreement "to protect shareholder interests and preserve shareholders' investment."

Company execs noted in their call that Q2 will be the biggest challenge: "And as I've mentioned, Q2 is probably the biggest challenge to try to model everything because things are still coming down quickly in Q2, and the cost reductions are right behind the activity.

"Yeah. I think the term frac holiday maybe overstating what's going on. I think that completion activity continues to come down. We've got visibility on what our rigs are going to do. And with what we see as overall activity there coming down in the range of 60% or more. I don't see how completion makes a bounce back, certainly not in the third quarter and fourth quarter is still a ways off. But I would say that, your completion activity is still going to be coming down as well."

Q1 Report, Financials

The Company reported a net loss of $435 million, or $2.28 per share, for the first quarter of 2020, compared to a net loss of $28.6 million, or $0.14 per share, for the first quarter of 2019.  Revenues for the first quarter of 2020 were $446 million, compared to $704 million for the first quarter of 2019.

Financial results for the three months ended March 31, 2020 include pre-tax, non-cash charges totaling $406 million ($349 million after-tax or $1.83 per share).  These charges include a $395 million impairment charge for the remaining goodwill on the Company's balance sheet and a $10.6 million impairment charge related to certain of the Company's E&P assets.

Exec Commentary

Andy Hendricks, Patterson-UTI's Chief Executive Officer, stated, "In response to the rapid decline in commodity prices, E&P companies acted swiftly to reduce drilling and completion activity starting late in the first quarter.  While the circumstances leading to this downturn may be different than prior downturns, our response will be guided by the same principles that have guided us through prior downturns.  We have taken decisive action to quickly scale down our expenses.  In addition to lowering our direct field level costs as activity slows, we have taken steps to structurally reduce our indirect support costs by what we estimate will be approximately $100 million annually, of which approximately two-thirds relates to our pressure pumping segment.  We expect to record a total of approximately $50 million of charges during the second quarter associated with these savings.

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

"Profitability in contract drilling exceeded our expectation for the first quarter, as both revenues and direct operating costs were better than expected.  Average rig operating cost per day of $14,550 decreased $990 sequentially, as costs associated with higher than normal fluctuations in activity in the fourth quarter did not repeat in the first quarter.  Additionally, costs in the first quarter decreased due in part to initiatives to reduce rig repairs and maintenance expense.  Average rig revenue per operating day was $23,800, and the average rig margin per operating day increased to $9,250.         

"As of March 31, 2020, we had term contracts for drilling rigs providing for approximately $440 million of future dayrate drilling revenue.  Based on contracts currently in place, we expect an average of 71 rigs operating under term contracts during the second quarter and an average of 50 rigs operating under term contracts during the four quarters ending March 31, 2021.   

"In pressure pumping, gross margin exceeded our expectation at $10.3 million, on revenue of $125 million.  We averaged 10 active spreads during the first quarter, in line with our expectation.     

"We made significant progress over the last year to reduce our pressure pumping cost structure, but our cost-structure was still too high at the end of 2019.  Accordingly, even before the recent slowdown in industry activity, we started implementing major structural changes to further streamline our operations, improve our efficiencies, and reduce our overall cost structure, while maintaining excellent customer service levels.  With these changes, we estimate the indirect support cost savings in our pressure pumping segment will be approximately $65 million annually.  This lower cost structure, combined with continued, strong operational performance, will make us more competitive in what will likely continue to be a challenged pressure pumping market.  

"In directional drilling, financial results were in line with our expectation, with revenues of $34.5 million and a gross profit of $2.2 million.  Gross margin as a percentage of revenues decreased sequentially to 6.3%, as we front-loaded development costs associated with new technologies.  Going forward, development costs will subside in the current market, and we are centralizing repair and maintenance activities and other support infrastructure, which we estimate will generate approximately $10 million of annual support costs savings," he concluded.     

Mark S. Siegel, Chairman of Patterson-UTI, stated, "Our industry is facing challenges on multiple fronts with the significant fall in oil prices and U.S. drilling and completion activity.  We have weathered many downturns, and I believe that we have emerged from each of them stronger.  As with prior cycles, we are scaling the business for lower activity levels, thereby appropriately sizing the cost structure and preserving financial flexibility.  At March 31, 2020, we had total liquidity of $752 million, including $152 million of cash and availability under our undrawn revolver of $600 million.

"Our focus throughout the remainder of 2020 will be on further cost reductions and cash preservation as we weather this period of significant uncertainty and volatility.  We halted our share buybacks in the first quarter after repurchasing $20 million of our common stock, and we do not plan for additional share buybacks at this time.  Additionally, the board of directors has made the decision to reduce our regular quarterly dividend to $0.02 per share.  The decision to reduce the dividend reflects a balance between managing our liquidity and continuing a cash distribution to our shareholders.  These initiatives to reduce our cash outlay will preserve our financial flexibility, which when combined with our strong balance sheet, positions Patterson-UTI well to endure this downturn," he concluded. 

The Company declared a quarterly dividend on its common stock of $0.02 per share, payable on June 18, 2020, to holders of record as of June 4, 2020.