Patterson-UTI Energy Inc (PTEN) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Patterson-UTI Energy, Incorporated second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to hand the conference over to Mike Drickamer, Director Investor Relations.

Thank you, Karen. Good morning.

On behalf of Patterson-UTI Energy, I would like to welcome to you today's conference call to discuss the results of the three months and six months ended June 30, 2015. Participating in today's call will be Mark Siegel, Chairman; Andy Hendricks, Chief Executive Officer; and John Vollmer, Chief Financial Officer.

As a remainder, 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 US Private Securities Litigation Reform Act of 1955, the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties as disclosed in the Company's annual report on Form 10-K and other filings with the SEC. These risks and uncertainties could cause the Company's actual results to differ materially from those suggested in such forward-looking statements or what the Company expects.

The Company undertakes no obligation to publicly update or revise any forward-looking 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 reconciliation to GAAP financial measures are included on our website, www.patenergy.com and the Company's press release issued prior to this conference call.

And now it is my pleasure to turn the call over to Mark Siegel for some opening remarks. Mark?

Thanks, Mike. Good morning, and welcome to Patterson-UTI's conference call for the second quarter of 2015. We are pleased you are able to join us today.

As is customary, I will start by briefly reviewing the financial results for the quarter ended June 30 and then I will turn the call over to Andy Hendricks, who will share some detailed comments on each segment's operational highlights as well as our outlook. After Andy's comments, I will provide some closing remarks before turning the call over for questions.

Turning now to the second quarter. As set forth in our earnings press release issued this morning, we reported a net loss of $19 million, or $0.13 per share on revenues of $473 million. EBITDA during the second quarter was a positive $157 million.

The financial results for the second quarter include a pretax non-cash charge of $4.1 million related to the impairment of certain oil and natural gas properties. Excluding this charge, EPS would have been a net loss of $0.11 per share. Our second quarter results reflect good execution in the face of a bad market.

Turning to our marketing commentary, the rig count and pressure pumping activity appear to be stabilizing. Some operators have begun reactivating a few rigs while others continue with plans to release rigs, which collectively is leading to a flattening of the rig count. However, with recent oil price declines and reduced near-term optimism for the natural gas market, further reductions in the industry rig count are not out of the question.

Due to the uncertainty in commodity prices, we currently have no visibility into the timing, shape, and magnitude of a recover. There seems to be a litany of exogenous factors affecting oil prices right now, creating increased levels of volatility.

In the near term, patience may be required as some of these factors are worked out and E&P companies gain greater confidence in commodity prices going forward. I am, however, optimistic on the long-term prospects for both our drilling and pressure pumping businesses.

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

Thanks, Mark. In contract drilling, our rig count averaged 122 rigs during the second quarter in the US and two rigs Canada, down from 165 rigs in the US and 9 rigs Canada during the first quarter. Our rig count in the US at the end of June was 110 rigs, in line with our prior expectation.

As Mark mentioned, the rig count appears to be stabilizing and we expect our rig count in the US during July will be consistent with our June exit rate. In Canada we are experiencing a soft seasonal recovery in activity, thus we expect our July rig count will average three rigs.

During the second quarter, total contract drilling revenues were $288 million including $15.6 million of revenues from early contract terminations. The early contract terminations positively impacted our average rig revenue per day of $25,720 by $1,390. Excluding early termination revenues, average rig revenue per day during the second quarter would have been $24,330 compared to $24,850 per day in the first quarter.

Total average rig operating cost per day of $13,720 were essential flat with the first quarter. As such, excluding the positive impact from early termination revenues, total average rig margin per day was $10,600 compared to $11,140 during the first quarter.

At June 30 we had term contracts for drilling rigs providing for approximately $1 billion of future day rate drilling revenue. Based on contracts currently in place, we expect an average of 85 rigs operating under term contracts during the third quarter and an average of 77 rigs operating under term contracts during the second half of 2015.

In Canada, our first new-build APEX XK rig in this market began operations earlier this month drilling on a multi-well pad. I am very pleased with the performance this rig has demonstrated. We believe this to be the most advanced rig technology drilling in the Montney Shale resource play today, and we are excited about the long-term opportunities for APEX rigs in Canadian unconventional resource plays.

Looking forward within the US, we expect our average rig count in the third quarter to be approximately 107 rigs. In Canada, we expect our Canadian rig count to average four rigs with a soft seasonal recovery.

We expect total average rig margin per day to be approximately $9,100 in the third quarter, excluding the positive impact of early termination revenues. The decrease in rig margin is largely driven by lower average rig revenue per day.

Turning to our APEX new-build program we completed 7 new APEX rigs during the second quarter, bringing our total APEX rig fleet at the end of the second quarter to 158 rigs. We plan to complete three additional APEX rigs in the second half of 2015, all of which are under contract. We currently do not have plans for new-build APEX rigs in 2016. We do plan, however, to maintain our new-build manufacturing capability and competencies during this downturn.

Turning now to pressure pumping. Pressure pumping revenues were negatively impacted by lower activity and pricing levels. Pressure pumping revenues decreased 29% sequentially to $177 million. However, based on our efforts to lower input costs, EBITDA fell less than expected to $29.5 million, as our EBITDA margin as a percentage of revenues expanded to 16.7% from 12.8% in the first quarter.

We focused on cost-cutting efforts across the business. We closed and consolidated districts, reduced headcount, and continued to work with our vendors to reduce input costs. We have been able to reduce our per unit cost for sand by 25% to 35%, for sand haul trucks by 25% to 35%, for pump parts by 15% to 20%, and for chemical costs by as much as 40%. Most of the reductions took effect during the second quarter, and so the second quarter did not reflect the full benefit of these cost savings.

Given market conditions, approximately one-third of our 1 million frac horsepower is currently stacked. Looking forward, we expect total pressure pumping revenues for the third quarter to be essential flat with the second quarter. Somewhat weaker pricing as compared to the second quarter is expected to negatively impact gross margin, which is forecast to be 17% of revenues in the third quarter.

Before I turn the call back to Mark for his concluding remarks, let me provide an update on a couple of other corporate financial matters. Our total CapEx for 2015 is projected to be $710 million. This breaks down to $520 million for drilling, $165 million for pressure pumping, and $25 million for E&P and other.

Depreciation expense during the third quarter is expected to be $181 million. SG&A during the third quarter is expected to be $20 million. We are currently projecting our effective tax rate to be approximately 39% in 2015.

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

Thanks, Andy. On prior calls we have said that our playbook for the downturn was to promptly scale the Company in line with levels of activity. I am very pleased with how effectively this playbook has been executed. We quickly responded to the downturn in our industry, and the effort put forth across our organization to reduce the cost structure has been significant as we've been able to reduce costs meaningfully in both drilling and pressure pumping.

Visibility into our recovery is being obscured by the many geopolitical issues that have recently been making headlines and affecting commodity prices including OPEC production, US oil production, and political and economic issues surrounding Greece, Iran, Libya, and China. Additionally there are concerns respecting some operators as to their hedging programs, borrowing base redeterminations, and capital availability.

In this environment, a few operators are seizing upon the opportunity to pick up high-spec rigs that were not readily available at the peak of the market. Still others are continuing to execute plans to release rigs. Accordingly, we will remain vigilant in ensuring that our cost structure and business are appropriately scaled. Furthermore, we believe we are well positioned, both operationally and financially, to take advantage of these opportunities.

With that, I am pleased to announce today the Company declared a quarterly cash dividend on its common stock of $0.10 per share to be paid on September 24, 2015, to holders of record as of September 10, 2015.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of Marshall Adkins from Raymond James.

Good morning, guys. I never thought I would start out a Patterson call asking about pressure pumping, but you guys absolutely crushed it there, at least relative to what we're hearing elsewhere in the market. So I just want to drill down a little bit on that side and try to understand. You gave us some good detail on the cost reductions for sand and trucks and chemicals and that kind of stuff, but is it -- margins declined only 17%. It's still huge relative to the rest of the industry and it sounds like you're telling us you can kind of stabilize in that high teens area? Is that fair?

Marshall, good morning. So, so far this is a story of superior execution. Our Management Teams in pressure pumping are doing a good job. We're running a quality business. We have good customers out there. There's been a definite slowdown in activity. We have one-third of the pressure pumping equipment that's stacked right now. But we've scaled the business and adjusted the cost structure to be in line as best we can.

And so we have forecasted going into Q3 that the gross margin, per our projections, is around 17%. So relatively flat. But it's still a challenging and competitive environment. We still see that pricing will come down a bit more in the third quarter. But our guys are doing a great job out there right now.

Are you sensing equipment attrition elsewhere in the industry, just from private guys or just a word on the street? What are you seeing on the equipment attrition, and how long -- let's just say the rig count stays flat, like you are seeing so far. How long before the attrition kind of catches up with you in the pressure pumping side?

Like you, we hear anecdotal stories. We do have a little visibility on some jobs that happen in the basins that we work in. We think there is some attrition taking place. We think that there probably are some operators out there, operators in terms of pressure pumping operating businesses, that are maintaining their equipment to the same level that we are, and to the same level that some of the other quality players are in our business. But it's really kind of hard to say what the future impact of that is, or really the magnitude.

I know this is a wild guess for you, but do you think Q3's the pricing bottom in pressure pumping?

I think we just don't know right now. I think there's too many variables out there.

Right, that's fair. Great, guys. Thank you all. Thanks for all the detail.

Thanks.

Thank you. Our next question comes from the line of Chase Mulvehill from SunTrust.

Real quick, did I miss the drilling guide? Did you give any guidance on drilling for third quarter?

Yes, we said that looking forward in the third quarter that we expect our rig count to be at 107 in the US with 4 rigs in Canada.

Okay. Did you give any color on the day-rate for the gross margin per day?

Yes, we said that the margin per day would be approximately $9,100 per day.

Okay.

And that's excluding any early termination.

Okay. And so I guess I will turn to pumping real fast. Real nice job on cost cutting there. The top line held in fairly well. So if we think about kind of -- if we look at the fracturing job count for you guys, how do you define this? And is it basically the number of wells fracked?

No. Job count's basically when we go out to do a job, it's a legacy measurement that the Company has had in place for a long time. And you can have a variety of number of stages within a job count as well.

Okay. So I guess you probably track stage count, too. What was your stage count down?

We don't announce what the stage count is.

Okay. Do you think that the industry stage count is declining a lot less than the rig count?

It's possible in our particular case. We're working in two basins, major basins. We're working in the northeast. We're working in Texas.

With the customer mix we have, we've held up relatively well. But you still see a significant amount of equipment that's parked on the side. So if you look at some of the anecdotal stories that we're hearing in terms of overall utilization in the industry for pressure pumping, it's come down at really the relatively the same rate as the drilling rig count.

Okay. All righty. That's all I have. Thank you.

Thank you. Our next question comes from the line of John Meakin from JPMorgan.

Hey, good morning, guys.

Good morning.

So just sticking with pressure pumping, could you give us a little bit of some color around bidding activity? Are you seeing fewer bidders today on jobs with all the equipment stacking that we've seen?

I would say it's still a very competitive environment. In general, there's still a number of companies out there. The number of pressure pumping companies around the US is still around 40. So it's still a highly competitive environment out there.

So then as we think towards eventually we see some form of a recovery, activities has to move in the right direction. Unless it's a V-shaped direction, do you think that the amount of stacked equipment that we have on the sidelines puts some kind of cap on, meaning a structural cap on, pricing for a period of time? Maybe something above where we are today but normalized at a fairly low level?

Certainly overall equipment utilization in the industry is going to drive the pricing competitiveness in pressure pumping. More so, for instance, than in high-spec drilling rigs because of the number of companies that are out there. But we're also in a situation where unfortunately we've had to scale the business, just like everybody else has in the industry. And our employee headcount is not what it was. And as we start to pick up equipment again, we have to bring back employees. We recruit nationally. We're a high-quality operation. We're not going to have any trouble getting employees back, but the employee market will probably tighten up a little bit before the equipment market does.

Yes, I think that's fair. The last thing, then, would be in terms of any help to the oversupply of equipment. Is there any -- compared to where we were, say, a quarter ago, any shift in the dynamics as far as bid-asks out there for equipment? Is there still any potential for consolidation, or we're still kind of too early in the downturn here to see anything really happen there?

I think it's still too early. You've got to remember, we're running a high-quality pressure pumping business. Not all the equipment that's out there is the same. Not all the equipment that's out there for sale is something that we would want to have in our fleet.

Of course.

There is some differentials out there.

All right. Fair enough. Thank you, guys.

Thank you. Our next question comes from the line of Byron Pope from Tudor Pickering and Holt.

Good morning, guys. Andy, I think I heard you say that there are no plans at this point for APEX -- [real] new-build APEX rigs in 2016, but just given the success you guys have had with your APEX XK-1500s, what's the decision criteria for maybe changing that decision, especially given that you are keeping your infrastructure in place?

That's a good question, but it's also very forward-looking. It's hard to know exactly what's going to happen in the market. We want a certain return on new APEX rigs. We're not going to put a new APEX rig out without a term contract. We want some kind of acceptable margin that gives us a certain payback.

If you look at the rigs that we've built in 2015 with contracts signed in 2014, the average payback, and we've said this before on these rigs, was around 4.2 years. We don't expect, with the pricing movement in the market that we're under discussions next year for new rigs, that the payback would be in that 4-plus range. But we would certainly want an acceptable payback at the same time. And so I think it's a wait and see on that market.

The one thing I will say is that as we eventually come out of this cycle, which we always do, the market is really going to be about 1,500-horsepower, multi-pad capable rigs with a certain specifications. If you look at the total number of rigs that are stacked on the sidelines, not all the rigs meet those specifications. And you will likely see a scenario where we could find ourselves building new rigs next year before all of the what's considered high-spec rigs today go back to work.

And then just a quick question on the pressure pumping side. Just given your revenue guidance for Q3, it seems like pricing [leads] lower, which implies that activity maybe gets a little bit better. Just thinking about your northeast and southeast region, would you expect to see activity better sequentially in both those regions, or more skewed toward the southwest, and here I'm thinking there specifically I'm thinking the Permian.

We don't really break out the activity levels in the regions. I think the best thing to do is kind of keep an eye on how the rig counts move in those regions.

Okay. Thanks.

Thank you. Our next question comes from the line of Angie Sedita from UBS.

Andy, so you could talk a little bit about -- first you said that your average revenue per day will decline in Q3, and is that driven by term contracts rolling off or the signing of new contracts at lower rates?

So we do have some term contracts rolling off and we have some rigs that are repricing. So, yes, the net result that leads to a little bit lower revenue per day on average.

Okay. So then following on that, could you talk about what you are seeing in day rates for the high-spec rigs generally, and is there any reason to believe that pricing for the high-spec rigs could bottom similar to levels as what we saw in 2009, or potentially higher or lower, based on what you are seeing in the market today?

We're certainly seeing pricing on high-spec rigs come down. No question it's a competitive market out there. But I think that the companies that run high-spec rigs have shown good discipline. And for us, it's really going to be about protecting the pricing on APEX rigs. So without going into specifics on numbers, we're very focused on how we're marketing these rigs and very focused on protecting the pricing, even though we're in a competitive environment.

So to have coming down far less than what we saw in 2009, and seemingly being more resilient than would you think, given the market environment?

Today. And I think we will just to have wait and see how the market plays out.

Okay. And then to follow up on your other remark that you just made on 2016 and potentially building APEX rigs. In a market that we could be clearly a very sluggish recovery in 2016, and if we are at whatever it is, 1,000, 1,100 rigs working, there's only so many, not just AC rigs, but walking rigs, and truly high-specification rigs. So in that market, would it be fair to believe that you could get to the point where you're actually sold out of the best rigs and you had could see day-rates start to recover towards the end of 2016 to justify this new construction?

I think it terms on what the shape of the recovery is and the magnitude, Angie. I think that certainly that could occur in 2016, but I'm not -- I don't think any of us has enough visibility at this point to really call what the nature of that recovery will be.

Okay. And then finally -- that's helpful, regardless. How many rigs do you still expect to have, based on what you know today, under term contract for 2016?

We haven't called that out. We called out that we would have 85 rigs in the third quarter and 77 rigs under term contract for the second half of 2015, but we haven't called out 2016. But further to your question on what could happen with rigs in 2016, like I mentioned before, we really think the market is going to be around the 1,500-horsepower rig with walking systems for multi-well pads. And we think that the 1,000-horsepower rigs will be more challenged to go back to work. And that's why there is that possibility that we could be building a new rig before some of these 1,000-horsepowers that are on the side go back to work.

Perfect. Thanks. That's helpful. Thanks, Andy.

Thank you. Our next question comes from the line of Dave Wilson from Howard Weil.

Good morning, gentlemen. Thanks for taking my questions. Andy, you seemed to touch on one of mine already a couple times with the 1,500-horsepower versus the 1,000-horsepower AC rigs. So I won't ask that one again. But another one on the drilling side regarding early termination of contracts. The pace of that seems to have slowed, or at least looks like it has. But is this going to be a persistent issue with rigs coming into the last phase of the contracts where operators are opting to cancel out the last few months to save some money and just wait and to recontract again at lower prices? Or do you get the sense that the early termination is kind of done for awhile?

In our particular case, early terminations in the third quarter could be similar to second quarter. We just don't know yet. We just don't have enough visibility on what our customers want to do. The tone with the customers has changed since oil was at $60 now that oil is around $50. We recognize that, that tone has changed. And I think it really just depends on what happens going forward.

Okay, great. Thanks for that. I'll turn the call back over.

Thank you. Our next question comes from the line of James West from Evercore ISI.

Hey, good morning, gentlemen.

Good morning.

So Andy, as I see it, you've got high grading that's starting for the rig fleets. You have pricing discipline from your competitors and from yourself. You have only a handful of companies that dominate the high-spec rig fleet. If you look out over the last two months or so, and admittedly oil prices have been all over the place so things could change very rapidly, but seems like we've seen some relative stability in pricing for high-spec land rigs. Is that a fair statement over the last, call it, month or two? I know you are not going to give me a number on where the pricing is. But is that a fair statement, or is it still trending lower?

It's still a competitive environment out there. Like I mentioned earlier, we're very focused in our marketing efforts in protecting the pricing on APEX rigs. We're still working 10 non-APEX electrics as well. And it just kind of shows you that there's room in the market for some other rigs right now too. It's still a competitive environment in the market. But we're very pleased with the overall utilization of our APEX, even in a tough market.

Absolutely. You definitely should be. And maybe back on the pumping side, more of an M&A question. I know you highlighted earlier that it may be a little bit too early and some of the equipment that's up for grabs is not of the quality that would you go after. But I've got a pretty healthy list of companies that have shut their doors and that are about to shut their doors. We can talk offline about those. But there's a lot of horsepower that's out there.

Some of these are new companies that unfortunately came into the business in the last few years and have quality equipment. At what point do you think we will get to a point, if these guys are trying to sell equipment for $0.40, $0.50 on the $1? At would point do you start to step up and start to buy assets? Patterson over its history has been known to do this.

That's a good question. One of the challenges we have, though, is just trying to put a valuation on a piece of equipment that we don't know when it's going to go back to work. If it sits for whatever it is, a year or two years, then how do you value that piece of equipment? And especially if it doesn't have maybe the similar transmission or similar engine type that you are used to using, it's a different trailer configuration on the pump. So we look at all these things in great detail.

Okay. That's helpful. Thanks, Andy.

Thank you. Our next question comes from the line of Jason Wrangler from Wunderlich.

Hey, good morning, guys. Just had one on the pressure pumping side. It sounds like the amount of stacked equipment has stayed pretty stable since the first quarter. Are you seeing that the activity similar to the rig counts kind of stabilizing, and do you expect -- obviously a [lot of] couple of weeks have been ugly, but do you expect where you're at with the fleet out there working is going to be pretty consistent with pricing being the only real bigger variable?

Yes. Like we said, we have one-third of our equipment stacked. It's the same number we gave on the last call for the Q1 results. We see that pricing is still a challenge as we go into Q3. We don't have a lot of visibility on what's going to happen with pricing in Q4. I will remind that you Q4, we still have some seasonal effects every year. We will just have to wait and see how that plays out.

Great. I will turn it back. Thank you.

Thank you. Our next question comes from the line of Jeffrey Campbell from the Tuohy Brothers.

Good morning. First question I wanted to ask was, do you have a sense of possible early termination revenues in the next quarter?

For third quarter what we said is we could see similar early terminations as we did in the second quarter. We just don't have full visibility on what the customers are going to do yet.

That's helpful. You gave some nice detail on various aspect of the pressure pumping cost reduction. I just wondered, does this also include some delayed inventory restocking? And if so, how long could this be delayed?

No, we don't have any challenges around delayed inventory or restocking.

Okay. And my last question, I guess, is kind of a think-a-roo. But you are on both sides, so I wanted to ask you about this. Many E&Ps are saying that they're drilling more wells in less time, which I assume you participate with on the rig side. Has this yet positively affected your pressure pumping demand with any of your specific customers? And if not, do you see evidence of more uncompleted well inventory building?

So that's an interesting question. It gets a lot of discussion in various circles in the industry. I would say that certainly some of our good customers have shown good improvement in their drilling efficiencies. Overall across the US, you don't see the same improvements as efficiency as you see from some of the better operators out there. And with regards to the drilling but uncompleted wells out there, the inventory has increased this year a bit, but not to the magnitude that we really think it affects the business one way or the other.

Great. Thanks. That was very helpful.

Thank you. Our next question comes from the line of Michael LaMotte from Guggenheim.

Thanks. Good morning, guys. Andy, I would like to follow up on your comments about building rigs in 2016 and the 1,500-horsepower walking system, et cetera. I'm curious as to what role automation might play in the next build cycle, and what your take on that is and how Patterson is approaching potential automation.

Well, we're excited from the standpoint that the APEX rig is designed with the latest in AC-control technology and software, and even sensors for feedback in the system. And that rig is a platform for some operators and some service companies who come out and actually plug into our rig and use some of their automated systems on our rigs. We've done this in the past.

We expect when we do eventually get out of this cycle and people have capital to invest that there could be potentially some more investment in automation as well. But we think we have a great platform in the APEX rig for people who want to come in and participate in automation. We're not doing necessarily automation engineering and research ourselves, but we do think that we're building the right drilling rig platform for automation.

Automation compatible rigs.

Automation -- that's a great way to think about it. Thanks, Mark.

Thank you. Our next question comes from the line of Marc Bianchi from Cowen and Company.

Hi. I wanted to ask first on the pressure pumping cost structure. How do you feel like you are positioned right now if there is an uptick in the back half of the year? Are you going to be adding costs? I know some of the larger players have discussed keeping a higher cost structure because they are anticipating a little bit of a recovery. How are you thinking about that strategically?

I think what we've seen is, and what we've prided ourselves over for many, many years, is the ability to scale our business both upward and downward. And the reason for that kind of flexibility is that we've always tried to build that into the Company. And the result is that while we have, in effect (technical difficulties) operations in pressure pumping and closed down some of our offices and facilities, we have the ability to reopen those as demand increases.

So I feel very much like as the elevator can come down, it can also go back up. And we retain that flexibility. That's one of the kind of key attributes that we really want to build into the Company at all points. Andy, you want to add anything?

Yes, I second that, Mark. We have scaled the business to meet the needs of the market today, but we can easily scale it in the other direction for when activity picks up.

Got it. Okay. Then on a related point, you've had some really impressive cost reductions on the supply chain side. Do you feel like there's much more to be done there? I know you'll you get some catch-up from that, just from the lagged effect in third quarter, but in terms of leading-edge incremental reductions, do you really see much more object that front?

We're in continuous discussion with our suppliers, and it really depends on how the market plays out in terms of activity levels overall going forward as to how much more cost savings are out there. We have some good suppliers that are very trustworthy, and we're in solid negotiations with these companies. And so we're confident in our ability to supply materials. But it's also a tough market and we've had to do some -- make some difficult discussions with these suppliers at the same time. We'll just to have wait and see how that plays out.

Great. Thanks. I will turn it back.

Thank you. Our next question comes from the line of Ken Sill from Seaport Global.

Good morning, guys. Congratulations on great execution in a bad market. Another question on pressure pumping. Let's keep this horse. I know you guys don't reveal stages completed, but could you talk about, from your good customers, has there been a trend in the number of stages per well, and has that differed in the northeast versus Texas?

Without getting into overall stage discussion, I think it is safe to say we have seen increasing intensity from operators in the various plays, whether it's Texas or the northeast. And that's a possible trend this year. I think it's still a little bit early and it is a tough down cycle, but we have seen some increasing intensities.

And then when you talk about intense, what we're hearing out of the E&P guys is people are using more proppant per stage, more proppant per well, more stages per well. I think that's early stages maybe in Texas, but could you comment, is that intensity on both the volumes being pumped as well as the number of stages being pumped?

It depends on the customer and the basin, and we see a mix of all the above.

Is that putting any meaningful additional strain on the equipment that might wear it out faster? Or is it really just too early to call?

I wouldn't say it's additional strain on the equipment because we do a good job of maintaining our equipment. But there could be times when we had a little bit more horsepower on location because of the increased intensity depending on the customer, depending on the basin.

All right. Thank you. That's all.

Thank you. And our next question comes from the line of Brad Handler from Jefferies.

Thanks. Good morning, guys. Could you please speak to -- let's go to the drilling side. Your operating costs have held in very steady. There are presumably some costs involved with mobilizing rigs as they've come off contract and putting them in secure locations and the like. And I guess in a sense, if you can speak a little bit to what efforts you've been able to make to offset those additional costs, that might be helpful for us to understand.

So we've been talking a lot about pressure pumping and the cost control we've had in that part of the business. We've had similar cost control in drilling and our drilling teams around the US and Canada have done a great job there. When we've demooved rigs off operations they're basically stored in our yards, which are from a distant standpoint not that far. They're within the basin, so the rigs haven't moved that far.

We've gone through a preservation process on the rigs to prepare for when they work again. But we've been very conscious on not spending any more than we need to spend at this time. So it's been a great effort on cost control overall with the drilling teams.

Right. So does there reach a breaking point? Is there some point where there is some overheads as they're allocated, and that, we just need to see the operating costs push up, say north of $14,000 a day at some level of utilization?

I think we just don't know at this time. Moves and demoves are paid by the customers as well. So that's part of the revenue stream. But in terms of what the future looks like and when the recovery happens and how these adjustments come out, we just don't know yet.

Okay. In a similar vein, and maybe this will help us understand a little bit more what you mean about maintaining your capacity to build rigs, there's -- if we roll into 2016 and you're not building rigs for a period but you maintain the ability to, is there, again, a cost that has to bleed into your daily -- that we'll wind up seeing in your daily operating cost, just because you do push everything onto the rigs ultimately, and -- I think as you allocate costs?

This is John. A couple of things. The cost to maintaining the building capacity is not an extremely large number. It's a couple million dollars or so. You just have to maintain the capable people that can do it. And their daily efforts can be directed to other areas that benefit the Company. And those costs, to the extent we're not building rigs, they're not being capitalized. So it has no further impact as I see it on our operating costs.

Okay. Fair enough. Thanks, guys.

Thank you. Our next question comes from the line of John Daniel from Simmons and Company.

Hey, guys. Thanks for getting me in. Andy, I know you guys really don't like to provide any guidance beyond the current quarter, but just given the drop in cash margins in Q3 coupled with what appears to be a roll-off of 15 to 20 rings in Q4, as well as the industry pricing pressures that are out there. Should we expect a similar decline in Q4 versus Q3, given all that as a backdrop?

We would like to be able to give you more information on a projection for Q4, but not only would we not normally do that, but as Mark said earlier, we just don't have a lot of visibility on what's happening past Q3. The customers' tone has changed in the last six weeks since oil has moved from $60 to $50. Don't really know what the commodity prices hold going forward. So there's still some uncertainty and some lack of visibility. Then you combine that, that we are going to have some seasonality in Q4 as well. And with the softness in the market, that could be a bit compounded.

John, I would add when oil prices were above $60 and it appeared as if there was some increment of some of our E&Ps that wanted to put rigs back to work, and that, that looked like that was going to be the case. As oil prices again retreated, that optimism sort of fell apart, and we're kind of braced for both possibilities at this point. So when you ask about fourth quarter, the big issue is what's the commodity price going to look like for the rest of the third quarter.

Fair point. Look, if we were to make the assumption that we're flat from here, low $50, whatever, I'm trying to do the math exercise here, if you will. Steady-state activity, maybe slightly higher. But that's fine. I'll let you avoid this one.

I'll move on to pressure pumping. In the prepared remarks you guys noted that you didn't have the full-quarter impact of vendor savings in Q2. But gross margins are guided lower in Q3, while revenues guided effectively flat. I'm just curious why margins would decline if all that is the case?

That's correct. And it's really a pricing effect. We're still going to see more pricing competitiveness in third quarter. It's just the net result of overall utilization in the industry.

Okay. But then that would imply utilization is up for you guys in Q3 versus Q2?

A little bit, but it's small. (Multiple speakers) pricing effect there.

All right. Just a real minor one knit picking here. Looking at US cash margins versus Canada, can you give us some [vision] thoughts on what happens in Q3? And just as I look at the numbers here, the real negative number in terms of margin per day in Canada, I know it's breakup season, but even when you compare it to the last year, I fully recognize it's a small number, but just curious if there's anything unusual in Canada?

In terms of the second quarter, just a very, very low rig count. They were also at the same time training people to prepare to put the APEX rig out there. So that was one kind of unusual item. As you look to Q3, I would think the Canadian margins would be lower than they have traditionally been within the mix numbers that Andy gave you earlier, simply because the average rig count of 4 in Canada is not very large. And of course, operating in a separate country, they have back office and other things, and you spread over those rig days. And there just aren't a lot of rig days.

Thanks, guys. Good quarter.

Thank you. Our next question comes from the line of Kurt Hallead from RBC Capital Markets.

Good morning. How's everybody?

Good. How are you?

Great. I just wanted to -- seems like everybody kind of focused on all the foreign, North American, US questions. So I'm (inaudible) wondering if you can you give us an update now on the international expansion? You guys have an office already set up in the Middle East. So I would assume that means that you guys are going to be moving forwardly respective. So, just timing? What's your sense of the market dynamics? And you guys know that I'm a little bit more cynical about expanding in the international when you have a pretty great franchise in the US. So any thoughts on international would be helpful.

We're still working on it. We've still got the team that's working at various efforts. It's still around legal entities, banking, some infrastructure, working with customers over there through pre-qualification process. I would say it's still a ways off.

Okay. (Technical difficulties) [Returning to] the process of thinking about the capital allocation of international versus US. My understanding is international rig will probably run you about $40 million a pop, depending on the need. But $20 million for US. The term profile seems to be a lot better in the US than international. When you go down this path, how do you guys going to assess the capital allocation process? Any initial thoughts on that?

We'll look at the capital allocation there just like we would in the US, just like we look at it in Canada, and similar decision to how we ended up with a new APEX XK up in Canada this summer. I don't see it necessarily as any different. It's not in the budget today, but we'll look at it as we get closer.

Kurt, I would just say the following. In regard to the Company, Management's always, I think, been disciplined about spending capital dollars. And we wouldn't expect to treat international any differently than we've treated domestic spending, i.e., we have to foresee a good return on our capital. And to your point, which is that many people have gone internationally and haven't necessarily made the same kind of capital returns they've made in the US and they've done it so that they can have a broader company, we're not going to do it for that reason. We're only going to go international and put capital internationally because we think we can make good returns internationally.

Good. All right. Hey, guys, that's great color. Appreciate it.

Thank you. And our next question comes from the line of Jim Wicklund from Credit Suisse.

Good morning, guys.

Hey, Jim.

It is too early to start buying equipment. You noted that. You don't know the type of equipment, the condition of equipment, et cetera. James has a list now that we would all like to see. But if it's too early for that to happen and you are cash positive in pressure pumping, do you take this opportunity to gain market share by going to work, either for your existing customers in other basins or trying to get good customers in other basins, and use this downturn and your free cash flow generation to expand your reach and wait for opportunities in pressure pumping for later?

So those are really a few different questions all blended in there. So with utilization where it is and pressure pumping overall across the industry, I think it is difficult to get any market share gain right now. We're still very focused on margin. And that has to be our focus in this type of cycle where we are today.

But in terms of cash and overall usage, the balance sheet is still healthy. We're running a cash positive business. And there is the potential there could be some future opportunities. We'll have to wait and see.

I figure will you'll definitely -- Mark has already said that he plans to be the consolidator because I made the mistake of saying it could be somebody else. So I know that was at least at one point the plan. It was just more of what do you do while you wait for that opportunity.

And the last question, the question before mine had to do with international. And I'm still curious, because you guys have said that the future of the business is international. You have opened an international office.

And the good part is you don't have a legacy business that you have to BS us on, on what's going on. How do you see the evolution of the international rig market over the next year or two, considering you guys have probably been doing a lot more strategy and studying than you have bidding?

So let me try to respond to a couple of things that you said, Jim, in no particular order. First, as to Patterson being the consolidator in the pressure pumping market, I think what I have said in the past and what I would continue to say now is that we look for opportunities. And where there are opportunities, we will take advantage of them. We were a consolidator in the drilling business from the period of approximately 1995 to approximately 2005. So we've done that, have some sense of that and understand that. But whether that will be the opportunity set that we will choose to pursue at this time is unknown. So that's point one.

Point two. In regard to the international, I think your observation that we don't have legacy equipment is a correct one and one which we understand and appreciate. We do believe that a number of the people who are in the international market have substantial legacy fleets. And we think that potentially gives us an opportunity, and kind of goes to the answer that was given to the prior question about why we think that it might be an interesting opportunity for us, because we might be able to put into the international market rigs that are of different set of qualities and a different set of specs, perhaps the high-spec kinds of rigs that we've seen in the US, and in those markets gets very good returns. And that would be the basis on which we would want to do. So with that way, I'd turn it back to Andy to see if he has anything else he wants to add.

I will just add one point. Our plans to have operations and run a business outside of North America is not a call on North America. We still think North America is going to be strong as we come out of this cycle as well.

Okay. And I understand on point one, Mark, you had said that you had never seen as many potential opportunities that you saw now, and this is probably about six, eight months ago at a dinner. And so I assumed that those opportunities were in both. And you did consolidate the land-rig market. And it would appear that with the shortage of Tier 1 rig opportunities, the most obvious consolidation would be in your other segment, which was the reason for my question. I assume that will continue.

And on two, I understand the discussion. But I was thinking more along the lines of location. I understand there's a lot of old legacy rigs out there that probably need to be replaced. But are you particularly excited about any particular region, geography, type of customer, other than just the broad comments of potential?

Jim, I don't think I really want to get into that kind of detail. It seems to me that there's some competitive advantages to where we're looking and what circumstances we think are most attractive. I would rather us pursue them and then tell you what we've accomplished than tell you where we're hunting.

Okay. Appreciate it, guys.

Thank you. And our next question comes from the line of Sandeep Sama from Goldman Sachs.

This is going to be Waqar. My question relates to deferred taxes. As you slow down your reconstruction next year or completely halt that, how would your cash taxes be versus your effective taxes -- tax rate for 2016? And also with the second half, any guidance on cash taxes?

Yes, Waqar, this is John. Can you tell me what tax laws are going to be in effect?

I have no idea. But you probably know.

I don't, but joking aside. As you might recall, they reinstituted bonus depreciation at the end of 2014, which had the result of we had paid in $80 million of taxes in 2014 that we got back in February 2015. Bonus depreciation is not in effect today for tax. And I think off the top of my head we've paid probably $15 million so far, thereabouts. And if bonus depreciation isn't reinstituted, we would pay about a total of $30 million this year. So you may have read in the press that now the Congress is looking a tax extenders, which should be bonus depreciation. So I may again find myself where I paid taxes that I'll be collecting back from the government in early 2016. (Inaudible).

Relative, I think, to your bigger picture question about construction and not construction. With bonus depreciation in place and given the fact that we do make cash on our rig, that's certainly helpful to reducing the cash taxes. Have not done estimates for next year, simply because we need to have visibility on the -- a little more on the market. We haven't done our budgeting for next year. But just big picture, I would say we would not expect the deferred tax number to turn quickly. Hopefully that was enough detail, given so much uncertainty.

No, that's very helpful. And Andy, you mentioned that when oil price was around $60 a barrel there was -- you were seeing some interest from E&P companies about picking up rigs. Could you give us some indication of what the magnitude of that interest was and what basins were you seeing that?

It was really around levels of discussion, and I would say it was a variety of basins. As we come out of this cycle, we still think that Permian and Mid-Continent oil plays really kind of lead us out of this cycle, and even some in and around the Rockies. But there was a distinct difference in the level of interest that our customers and E&Ps in general had when oil was $60, $62 versus moving towards $50.

Do you feel that the current level of rig demand is reflective of $50 or is it now currently reflective of $60? And do you see it going down from here? I know you have answered it many ways that you don't have visibility, but does it feel to you as more reflective of $50 today, and so it's already incorporated into the current decline?

Even given where commodity prices are today, we've said that we think that the overall rig count in the US is reaching a level of stabilization versus what we've been seeing for the last couple of quarters. In our own rig count where we exited -- we finished last month at 110. Our quarter for the third quarter, we're still going to average around 107, very likely. So that's how we see the rig count playing out. There is stabilization. We're not seeing near the magnitudes of movement, but there's still going to be some movement in the rig count.

Thank you very much.

Thank you. And our next question comes from the line of Chase Mulvehill from SunTrust.

Thanks for letting me back in. Real quick, I was kind of surprised by the drilling gross margin guidance. Can you talk us through this, kind of the moving parts? One of your large competitors mentioned that they were giving price concessions on their term contracts. Can you talk to that a little bit?

Well, what we've said is in the third quarter we expect margin, and this is excluding any impact on early termination, to be $9,100 a day on average. We're working on cost control. And you've got to remember that one-third of our daily cost in drilling is really around compensation. And we haven't rolled back any of the wages at the positions on the rigs. Unfortunately, many of our people have had to take positions at a level down as we've had to shrink the rig count and scale the business. But we do think it's important to hold the wages where they are.

We're running a quality operation out there and we've got a lot of good people that are with us out there. So we do have approximately two-thirds is labor and compensation in that daily margin, one-third has to do with maintenance, spare parts, things like that, that aren't capitalized. And we do have some flexibility to try to control those costs. And so that's what we're very focused on.

In terms of what some of our competitors are doing, can't really speak to that. Don't have a lot of detail on that. It's still a competitive market out there. I would say that the term contracts are what they are. It depends on a customer's situation, the number of rigs they might be operating, the number of term contracts. But in general, the term contracts hold up for us.

Okay. So can -- it seems like that the daily operating cost per day is going to be up significantly in the US in the third quarter?

I don't think we've said that.

Yes, I don't think we've said that at all.

All right. I'm just trying to understand the moving parts. Okay. All righty. That's all I have. Thank you.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Management for any closing comment.

just like to thank everybody for their participation in our second-quarter 2015 earnings conference call and tell everybody that we look forward to speaking with them at our third-quarter conference call. Thanks, everybody.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. (Technical difficulties) program, and you may now disconnect. Everyone have a good day.