Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Energy Third Quarter 2023 Earnings Conference Call. Today's conference is being recorded. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Mike Sibella, Vice President of Investor Relations. Please go ahead.

Thank you, Audra. Good morning, and welcome to Patterson-UTI's earnings conference call to discuss our third quarter 2023 results. With me today are Andy Hendricks, President and Chief Executive Officer; Andy Smith, Chief Financial Officer; Mike Holcomb, Chief Business Officer; and Matt Gillard, President of NexTier Completion Solutions. 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 of 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 takes 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, patenergy.com and in the company's press release issued prior to this conference call. I will now turn the call over to Andy Hendricks, Patterson-UTI's Chief Executive Officer.

Thank you, Mike. Good morning, and welcome to Patterson-UTI's third quarter conference call. Our third quarter was a monumental as we closed on 2 transactions that reshaped our company. Today, we are positioned as one of the market leaders across multiple U.S. onshore service lines with a diverse suite of products and services and a strong presence across the entire U.S. land drilling and completions value chain. We believe these transactions create a long-term competitive advantage for our company, and our wide-reaching digital strategy will help us maximize the value potential for all stakeholders. We will look to use our integrated offering to deepen the partnerships with our customers and further differentiate ourselves on service quality and efficiency. It's becoming increasingly difficult to replicate the success of the larger oilfield services providers and the market should continue to become more bifurcated going forward than it has been historically. We are looking for ways to help keep U.S. shale oil and natural gas competitive on a global basis, and a competitive U.S. shale is important to the success of our company. Helping our customers reach their goals is critical to allowing us to reach our own goals for a strong return on capital and to return a significant amount of capital back to our shareholders through the cycle. The NexTier and Ulterra transactions will help maximize our company's potential. We'd like to welcome the NexTier and Ulterra employees to the Patterson-UTI team. In the short time we've all been together, we've been impressed by the talent at all levels of both organizations and excited about our shared future. We're working to ensure that we put our people in the right places to succeed. Our employees have worked tirelessly to make the integration a success and have remained dedicated to our company…

Thanks, Andy. The reported financial results for the third quarter include 48 days from Ulterra after that acquisition closed on August 14 and 30 days of NexTier after that merger closed on September 1. Total reported revenue for the quarter was just over $1 billion. We reported a small net income attributable to common shareholders, which was essentially breakeven on a per share basis. This included $70 million in merger and integration expenses, partially offset by the recognition of $29 million of previously deferred revenue, which became recognizable after the customer changed its drilling schedule. Our adjusted net income attributable to common shareholders was $55 million or $0.20 per share. This excludes the merger and integration expenses, included the previously deferred revenue and assumes a 21% federal statutory tax rate. Adjusted EBITDA totaled $277 million, which also excludes the previously mentioned merger and integration expenses and includes the previously deferred revenue. Our weighted average share count was 280 million shares during Q3, and we exited the quarter with 417 million shares outstanding. Through the third quarter, we have returned $191 million to shareholders through a combination of share repurchases and dividends. Our Board has approved an $0.08 per share dividend for Q4, and we have $281 million remaining on our share repurchase authorization. We intend to return at least 50% of our free cash flow to shareholders annually, consistent with our previous capital allocation strategy. Through the third quarter, we have returned more than 100% of our free cash flow to shareholders. And given where the share price is today, we will likely repurchase shares in the fourth quarter. As a reminder, we resegmented our reporting this quarter to better reflect the way we manage our business. Our new Drilling Services segment includes the legacy Contract Drilling and Directional Drilling…

Thanks, Andy. With both the NexTier and Ulterra transactions now closed, our top priority is successful integration as we work to fully realize the value of these transactions. Our conviction on the rationale for these deals is stronger today than it's ever been, and we remain on track to achieve or even exceed the $200 million in annual synergies from the NexTier transaction by the first quarter of 2025. Looking at the overall market, the macro setup is strong and the outlook is improving. We've already seen our rig activity inflect higher, and we expect this positive momentum will continue in 2024. Customers are optimistic at recent commodity prices, but are proceeding cautiously, which we think is a sign of a more stable U.S. shale industry, and our belief that cycles will be shallower in the future. Nonetheless, as these events play out, we think convention in the cycle will improve. And over the long term, activity and production will need to increase to meet demand based on various long-term forecasts, including the IEA. And finally, while the macro setup gives us confidence in our future earnings power, our priorities will remain sustaining a high return on capital and free cash flow. We remain capital disciplined with our CapEx, and we will look to invest in areas where we see opportunities to differentiate ourselves to our customers versus simply investing to grow capacity. This should help us to deliver strong returns and free cash flow through the cycle. We remain committed to return at least 50% of our free cash flow to investors through a combination of dividends and buybacks. This is the right strategy for our company and our industry. Before we go to Q&A, I want to again acknowledge all of our employees who have continued to provide great service quality while working tirelessly to make these transactions successful. Many of our employees have gone above and beyond their day-to-day roles to help make Patterson-UTI an employer of choice and we would not be here today without you. So thank you. With that, I'd like to now open the lines for Q&A.

[Operator Instructions] We'll take our first question from Scott Gruber at Citigroup.

I want to start on the Completions segment. How many fleets do you have active today? And thinking about the recovery in that count, just given your strategy, do you think E&Ps will be ready to pay more reasonable rates for your equipment in early '21, such that you can kind of see a steady improvement in count following the improvement in rig count we're starting to see? Or is there some risk that we get off to a slow start next year?

So I'll start with the horsepower. So we have 3.3 million horsepower. We're not calling out the fleets just because there's such a range of size in the fleets that we operate. We could be on a smaller fleet in the Midland Basin or we could be doing a simul frac in the Delaware or it could be a big fleet over in the Haynesville. So calling out the number of fleets doesn't really help people out from that standpoint because they just vary in size and they can actually fluctuate within a month or within a quarter. So we do have 3.3 million total horsepower. We did park some of that horsepower as things slowed down with the white space in the calendar. And like I mentioned earlier, we're using that period just to do some maintenance to be ready for the inflection because we can already see the inflection in our own rig count at Patterson-UTI. And I realize we've been outperforming the market in general with our drilling rig count. But based on how commodity prices have been trading, especially the forward strip on natural gas, I think you'll see an inflection in the overall rig count. Now we're going to see the traditional lag between the drilling rigs picking up and the frac operations just because there's really no DUCs out there right now. We've got frac spreads bumping into drilling rigs and drilling rig activity does need to pick up so the frac activity can pick up. So as we see those increases in early '24 -- we're already seeing the inflection now. But as we see the increases in early '24 on the drilling side, there's going to be a bit of a lag on the completion, but then you're going to see completion activity pick up following drilling activity.

Got it. I want to turn to CapEx next year. I know you guys haven't set the budget, but just kind of want to get your thoughts on the moving pieces based upon the resegmentation. I have Drilling Services somewhere north of 300 for this year, maybe 320. So I want to see if that is a good number for next year, if that's down? And then will the Completion services CapEx for next year kind of be in a high single-digit range? NexTier, you just talked about 8%, 9% of revenues. So that's maybe kind of mid-300s. And then if I add in 65 for Ulterra, maybe 25 for other, I kind of get pretty close to consensus. Is it kind of one of your early thoughts on the pieces and what it could total?

Yes. Scott, this is Andy. Again, we haven't gone through a full budgeting process. But I think if you look at where our fourth quarter is coming in, not necessarily looking at the bucketing of it, but if you look at the total number, the sort of $190 million guide, I would think that on a quarter-to-quarter basis in 2024, we're pretty comfortable in the $190 million to $200 million range on a quarterly basis.

We'll move next to Jim Rollyson at Raymond James.

Congrats on getting everything put together. Andy, when we think about the rig market, obviously, you're talking about your bottoms in and starting to improve. So your average rate this last quarter average revenue per day ex the 1 customer situation was kind of in the mid-30s, and your -- you've talked about low to mid-30s is kind of where the market is right now. Just trying to think through as we roll through next year, your rig count presumably gradually improves. When do margins bottom if you kind of look at where you're pricing rigs today versus what contracts are falling off? How do you think about that?

So first, I want to congratulate the drilling team. They've done a great job through 2023, managing the rig count. This is really a testament to the service quality to the continued rollout of technology that we are doing on our drilling rigs and the partnerships we have with various customers out there that want to keep using us even when things are getting a bit soft in the market. So that's going really well. In terms of leading-edge rates, they were higher earlier in the year. They've softened a little bit, but they really haven't come down that much. I'd say it is mid- to low 30s because it's more in the mid than it is in the low. So that's kind of how I characterize it. And I do expect that, that will start to move up early next year as the rig count starts to push up as well past this inflection that we're seeing. So given that, I think margins are likely to bottom around Q1, maybe Q2, but we'll also have some extra costs in Q1 that we have on an annual basis. So that's likely to kind of put that inflection on the margins around Q1.

Yes, that makes perfect sense. And as you put rigs back to work, last year until we got into late last year, you were putting things out and relatively short terms. And then I think around the late third quarter, you started terming up a few things, which proved to be pretty fortuitous. But curious, as you're having conversations and putting rigs back to work right now, maybe the kind of tenor of the contracts that these guys are looking for?

Yes. We're definitely weighing them to the shorter side because we do think we have upside in '24 just based on the macro outlook going into '25. So we're starting with some shorter contracts or some agreements that allow us to move that up next year.

And next, we'll move to Stephen Gengaro at Stifel.

I guess two for me. The first, just your current take on sort of supply-demand fundamentals on the Pressure Pumping side. But maybe talk a little bit about the, if you can, any material bifurcation you're seeing between the lower emission assets and sort of traditional assets and kind of -- and where your fleet stands right now?

So let me start off by saying I want to thank everybody in our well completions business at Patterson-UTI for all the hard work they've been doing. We closed on this merger on September 1, about a month earlier than we had originally planned. And all -- there was just so much work that was done by the teams to get ready for day 1, and day 1 for us was on a Friday before a Labor Day weekend. And that weekend, we didn't miss any sand, we didn't miss any work, trucks moved equipment, pumps kept pumping, everything just works like it was supposed to on day 1. And so hats off to the team on all the planning that was done through this integration process, which started right after we announced the Ulterra transaction and we jumped into the integration work. So integration is going very smoothly. We're already talking about synergies. We have a high level of confidence in hitting the synergy number there. And so I got to start with that and just say thanks to everybody and our well completions team for everything they've done so far to get us where we are really excited about how this is going. The market is another thing. So we've had a softening in the market just really kind of tied to the overall rig count in the industry. And like I mentioned earlier, we've had frac spreads that are bumping up against drilling rigs with the softening in the market. And so it's going to take an increase in drilling activity to really move that. Now when it comes to the pumps and the equipment and the fleet that remain stickier in the softer market, it certainly is weighted to the primarily natural gas fuel systems, whether it's dual fuel or other. And so that certainly caused a bifurcation in the market. When you look at our well completions equipment, roughly 2/3 of that is primarily natural gas powered. And so we're in a really good position, and it's why we've seen a softening in the market, but certainly not any more than that. So really excited about how our teams have done through this period, even with the white space that we've seen in the third quarter, that's going to adjust itself. If you look forward, we are going to see maybe a little bit of slowdown towards the end of Q4 based on the holiday period, maybe a little bit of winter baked into some of those projections just in case we get some cold weather. So we'll see how some of that plays out. But I'm very upbeat for what 2024 can hold going forward there and excited for what we can offer to the customers.

I know it's been -- well, it's been 2 months now, I guess, since the deal closed. But has there been anything that has really stood out as you've kind of looked at the NexTier way of doing business on the completion side that surprised you, it's materially different? Like anything that's really jumped out since the merger closed that has been an upside or downside surprise for you?

I'm going to start with the people. The people are great. We're excited to have them as part of the team. And they've got a lot of energy. There's a lot of excitement in trying to pull everything together and everybody is just doing a fantastic job, a lot of high-quality individuals. And so that's where it starts and really excited about that. We were already familiar with the equipment. We understood what NexTier was doing in terms of integrating services, whether it's wireline, last mile logistics, the power solutions with the natural gas, CNG and blending at the well site. All these things have made next year successful, and we've watched that over the years. At Patterson-UTI years ago, pre-COVID, we actually looked at adding wireline to our frac spread because we understand and we get it. You don't want $50 million worth of frac waiting on $1 million of wireline at the well site. And so that integration is important to efficiencies and just continuity of service and to keep pumps pumping. And so the ability to pull all this together and then bring those integration pieces into frac spreads that didn't have it previously is powerful for this business, so excited about that.

We'll take our next question from Derek Podhaizer at Barclays.

[Indiscernible] to ask about the synergies. I know the guide sounds like you reached over $100 million by the end of the year. It seems ahead of schedule. Maybe can you break that down to the different categories you discussed? But now I believe there was SG&A on the cost side, you have the revenue synergies and then you had some nonpayroll spend. Maybe just an update there and to help just expand on that synergy number?

Yes. So I would say that as we go through the fourth quarter, we are looking at right now on the synergy side. The SG&A synergies are probably about, again, 1/3 of kind of the run rate that we'll see and then probably about half of it is probably coming out of procurement at this point in time, and then the rest is in the integrated revenue opportunities.

Got it. That's helpful. And then on the merger expense side, I believe it was $80 million, and I know you just posted $70 million. I thought there might have been a split between the expense side and the CapEx side. Can you just update us there? Clearly, there's a benefit to closing earlier, you're able to capture a lot of those onetime costs already. Should those all be fully recognized within this year? Or will there be any leak over into 2024?

I'm sorry, you were asking -- I got confused you were asking about expenses and CapEx?

Yes. I think the original $80 million onetime expenses, I thought that was split between some OpEx and CapEx, but you're seeing that $70 million number this quarter. Will that $80 million fully recognized in 2023, maybe just some updates on if it's OpEx, CapEx? I thought it was 65:15 split for the OpEx, CapEx.

Yes. I mean so a lot of it -- so some of it will be -- will leak into 2024. And the reason for that is, again, as you go through some things, until you have defined plans on what you're going to do around certain items, you're not really allowed to sort of recognize those expenses. So they will slip a little beyond 2023 and into 2024 as well.

Got it. And then just a quick follow-up on the drilling side. You're obviously coming off the bottom, but it seems slight activity has been a little bit more lethargic than people originally thought it was going to be. Can you maybe expand on the privates, the publics, maybe the different basins, what surprised to the downside? I know you guys are constructive on '24, you went over that. But why is the thing that we've been limping into year-end? Just maybe some more color around that?

That's a great question. I think we've been having those discussions ourselves, but there's not any one particular area that you can call it out. It's a mixture of publics and mixture of privates that are both being cautious and inflecting at the same time. So even our rig count adds that we're looking at going into year-end or a mixture of publics and privates. So it's really kind of across the board. I think in the natural gas plays, we're still seeing a little bit of hesitation to pick up drilling rigs, and I can understand that. But I think that -- when you look at the forward strip, that's going to work itself out. So maybe a little bit later than we initially thought. But again, when we're talking about our rig count at 218 now and then possibly exiting the fourth quarter at 220, this is an inflection in our rig count. And I think that you'll see the overall rig count kind of move higher a little bit later as well. I think a lot is going to depend on how the overall commodity outlook is. And also, I think you've got a lot of publics that are really kind of waiting for some signals from their own investors to say, "Hey, are you going to take advantage of these higher commodity prices, especially on gas and the forward strip?" So I think those discussions are probably happening for our customers with their investors. And -- but I'm still optimistic about '24. When we talk about natural gas and increases in activity in '24, I've said this before, I still think it holds true. It's really kind of a two-step function. You're going to see an initial step-up just kind of based on the forward strip, be some moderate growth there. You'll see another step up towards the end of '24 getting ready for '25 and LNG takeaway.

We'll go next to Kurt Hallead at Benchmark.

Thanks for all the color and info and insight on how you guys pull this thing together. A lot of hard work in short period of time, for sure. So I'm kind of curious, as you look at the drilling products business, Andy, what kind of baseline growth should we be thinking about for that business, right? The vast majority of the business is U.S. directed so we can kind of kind of map that out to rig count, right? And it sounds like you got some growth opportunities international. So question, net-net, is really kind of geared toward outside of North America, what kind of growth you expect in Drilling Products for 2024?

Yes. Thanks, Kurt. So their growth is really going to be tied to the overall rig count growth as we go forward into '24. Roughly about 70% of their activity is tied to the U.S. rig count onshore. And so it's really going to follow that trend. We're really excited about their performance. They're doing really well. Even with the softness in the market, the slowdown in the rig count, when you look at it on a revenue per rig basis, they're still holding up well. And so the team is doing a great job. The market is what it is, but we are optimistic about the rig count in '24. And so you're going to see growth from their business tied to that U.S. rig count growth in '24. On the international front, roughly 30% is tied to international growth, and we're excited about that potential there. There's countries outside of North America that they've been in, and they're still increasing their footprint. And so that 30% could grow to be a bigger percentage of that slice of the pie through '24 and into 2025. And we're excited to see how that's going to play out.

Great. Really appreciate that. And so it sounds like you reiterated a lot of your few points that you had back in early September about an improvement in U.S. land drilling related activity. I think back then, you kind of gave an indication that you thought the U.S. land rig count would get back above 700 sometime in the latter part of 2024. Given how slow things have been progressing through the end of this year, do you still have a lot of conviction in the rig count getting back to 700? Or is it recent activity levels kind of pulling that back a little bit?

Yes, it has been a little bit slower on the uptick than I thought it was going to be for the end of this year. I think a lot of that has to do with budgets and our customers trying to work out exactly what their plans are, but I'm going to stick with that. I think that if you look at the forward strip on natural gas and the way oil has behaved in general across '23, we've had a couple of dips. But in general, oil commodity prices have been at a healthy level. And I think that trend is going to continue. So yes, let's go with that. I think it's -- we're going to be close to 700 towards the end of '24 as an industry rig count.

We'll move next to Keith MacKey at Calgary.

Can we just first talk about the potential, I guess, cross-selling revenue synergies between drilling and pumping? Certainly, that's been a potential benefit of the recent transactions. But Andy, how is that playing out relative to your expectations? Are there any notable wins or activities you could point to on that front as yet?

Yes, that's a great question. We've been in both businesses for a long time now in decades. I wouldn't characterize it as cross-selling per se. But what I do characterize is strengthening the partnerships that we have with our customers. And when we announced these transactions, we received nothing but positive feedback from customers. We had long time partners who have been our customers for decades, who called me up and said, look, a stronger Patterson-UTI is good for us. And so having the strength to be able to address their needs across all these services has allowed us to have those conversations. And I wouldn't necessarily, as I said, characterize it as cross-selling. But when you have those strong partnerships at a high level and now you have more capacity to service their needs, that's the bonus.

I see. Maybe just a follow-up on your comments in the prepared remarks around it was when you're talking about capital allocation strategy using a strong balance sheet to be opportunistic at all points through the cycle. Certainly, you've have been so lately. But can you just expand on that comment a little bit more in terms of how you're thinking about being opportunistic through the cycle at all points?

When we're talking about being opportunistic over cycles, we're talking about over the next 5 to 10 years. Right now, we're focused on integration of the businesses. We still have some work to do, and we're focused on realizing these synergies of $200 million or greater million dollars on the synergy with the NexTier deal and integrating the operations and working on supply chain pieces as well. So that's our primary focus. But historically, we have been opportunistic through the cycles. There's been a number of times when we've gone through dips in the cycle, and we've seen softening that we've had opportunities to do things with our balance sheet. But I would say right now, we're just focused on integration.

We'll take our next question from Sean Mitchell at Daniel Energy Partners.

Kind of as we see a lot around M&A over the last several weeks, as you see the E&P space consolidate, it would seem logical that the kind of consolidators here want to work with suppliers who have scale. First, I would say, do you agree with this assessment? And then secondly, if so, do you think that pushes more consolidation in the service sector?

Well, the first part of your question, I think you answered yourself, and we believe that as you see some of these large E&Ps take on even large E&Ps and become even larger in the space, we believe they are going to work with companies that have the scale to be able to service their needs and we fit right into that. So we're excited about that potential. We do see when these transactions on the E&P side happen, you get a pause in activity, but then things start to pick up again. So we think those are good possibilities. But in terms of further M&A in the service space, I think it's possible. I don't want to speculate because we're focused on integration right now. So -- but I do think there's probably some opportunity out there.

Maybe one more. Can you just address the labor market today, Andy and specifically how you and the consolidated companies have managed labor this year as activity has moderated and maybe provide us your thoughts on finding people today and the ability for the industry to scale up again, should that be necessary?

Even over the last few years with the massive ramp-up in activity that we've had, we were able to cover all the work. And we had to invest in the systems and the people for recruiting and onboarding and training to be able to do that. And it definitely was tougher over the last few years than it had been in previous upturns, given the strength in the economy over the last few years. But that investment that we've made allows us to get the people that we need to cover the work that's out there. And so we didn't miss any work for lack of people. This has only been a softening in the market. And we're expecting, as we pass this inflection to increase activity in 2024. And so with the moderated growth we're expecting in 2024 versus the softening we had this year, I don't anticipate we're going to have trouble adding staff back to do the work.

And our next question comes from Don Crist at Johnson Rice.

Andy, your previous comment about Pressure Pumping kind of bumping up against rigs, how do you think that plays out? I mean it appears to us looking from the outside that the efficiencies on the Pressure Pumping side have kind of outpaced efficiencies on the rig side. Do you think that kind of results in a smaller Pressure Pumping fleet industry-wide going forward? Or how do you -- can you talk to that just a little bit?

Well, I think there's a couple of pieces to that question that I can touch on. So I appreciate it. One is, yes, we are bumping up against the rigs. And so we do need an increase in rig activity. There's just really no DUCs out there at this point in the cycle and where we are from the softening. So we do need the rig activity to pick up. But in terms of frac efficiency, it's just been amazing what the teams across the industry have accomplished over the last few years in terms of frac efficiency for the top tier players. There's lots of anecdotes of pumping well over 20 hours a day. Now that being said, I'm not sure we have a lot of room to grow efficiency. So I don't think we're going to need less frac out there. I mean we're not going to pump 25 hours a day. So we're already at some pretty high levels of pump hours on a number of our fleets that are out there working and they're just doing a great job. So you've seen that increasing efficiency over the last few years. But it's -- I think efficiency will kind of slow at this point in terms of what we're going to see across the industry. As well, I do think that as we come out of this softening in the market and we increase activity, you're going to see a tighter frac market. And we are going to have to add some equipment to replace older equipment that's going to drive capital discipline across the sector. It's also going to cause as you get into later '24 and '25 with natural gas demand, with increasing activity that's going to cause pricing to move up at that point as well. And so we're going to see tightness in the market from an equipment standpoint as we start to get past the inflection point and activity moving up in '24.

And at this time, there are no further questions. I would like to turn the conference over to Andy Hendricks for closing remarks.

Thank you. I just want to thank everybody for tuning in this morning. Once again, I want to thank the employees of Patterson-UTI. You all are doing an amazing job as we work through everything we're working through these integrations over the last few months, and it's just been impressive to watch such high-caliber people work through all these. Thanks for what you're doing. Appreciate it.

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