Good afternoon. Thank you for joining us. I'd like to introduce our next speaker, Mr. Andy Hendricks, President and CEO of Patterson-UTI Energy. Andy's been President and CEO since October of 2012. Patterson is well known for its land drilling, it's a bit more diversified than some of its peers with its pressure pumping and directional drilling businesses. Andy joined Patterson in 2012, serving shortly as COO before being appointed CEO. Previously, he was president of Schlumberger Drilling & Measurements and had worked at Schlumberger in various positions since 1988. Andy, thank you very much for joining us this afternoon.
Hey, Dave. Good afternoon. Good to be here with you.
Thank you very much. I believe you have a presentation you're going to roll through for a little bit here, and then I'll do some Q&A with you at the end. Please, whenever you're ready.
Yeah, I'll go ahead and move into that. We posted a number of slides this morning, but I'm only gonna go through a handful of those. We can discuss any of them that are in the deck. We'll get started. You should see the first slide for Patterson-UTI Energy on your screen. I'll move to the next slide, which is, as everybody knows, forward-looking statements. The next slide, just to give a summary of Patterson-UTI Energy. I think everybody knows our primary business is contract drilling. We're a leading provider of super-spec drilling rigs with a presence across all the major U.S. drilling markets. Our next largest segment is our pressure pumping business, which we've been in since 1980. We're a full-service pressure pumping business, not just frack, but we do cement, acidizing, nitrogen services as well.
We're focusing now mostly on Texas and Appalachia after also working in the Mid-Con as well over the last couple of years. With the shift in the market, we've decided to focus on Texas and Appalachia. Our next largest segment is directional drilling, and in this, we have both MS Directional and Superior QC. MS Directional offers a comprehensive suite of directional drilling services. In the first quarter, we launched some new technology in terms of our measurement-while-drilling and also our drilling motors, and the uptake has been really strong in the market for these. We're excited about how this is doing. At Superior QC, Superior QC does data analytics to improve wellbore placement and reduce the uncertainty when you're steering a well, and they've recently come out with something that's called HiFi Nav, which is the next generation in data analytics for well placement.
We'll talk a little bit about that. Just to give you a market outlook, the good news after the second quarter, which was, as we all know, the worst decline in the history of the industry, is that for us at Patterson-UTI, the rig count has stabilized. We see that relative to commodity prices, and of course, for the last couple of months, commodity prices have been trading in the low 40s, and so we've seen that stabilization with our rig count there where we were at. In terms of pressure pumping, what we said was that in the third quarter, we would average four spreads with a 10% increase in activity. This morning, we updated that in the presentation, and we said we'll now average five spreads in the third quarter. We are actually a little bit excited about the improvement in activity and pressure pumping.
The near-term visibility, however, is still a little bit of a challenge. We have some visibility on what's happening in Q3, likely what's happening in early Q4. As for the rest of the year, I think there's still a lack of complete visibility into how the market's going to play out for the rest of the year. Where oil prices are trading, rig count likely remains relatively stable. In the natural gas plays, with natural gas trading in the mid-twos, we might see some more uptick in the Northeast. That could materialize towards the end of the year. In terms of pressure pumping, we've seen activity go back to the existing pads to frack the current inventory of wells that were left with the shutdown in the second quarter.
We think this continues into the fourth quarter, but not sure how far into the fourth quarter this continues. Into fourth quarter could be soft for pressure pumping. I think it's still kind of a wait and see on how that plays out. As the market continues, and as we eventually get into a recovery, which I do think we will, it's hard to predict when, but as global economies open up, certainly demand for energy will increase, and we will get a recovery. When we do, and the rig count starts to increase again, and pressure pumping activity starts to increase, we'll certainly be pushing, as we have been for the last couple of years, to differentiate ourselves in the contract terms where we want to share in the success of our customers.
We did call out at the earnings call that in July, 30% of our drilling rig contracts have non-traditional day rate terms. In other words, they have some form of performance-based metric or even some commodity indexing or a combination of the two. Next, I'm showing you the APEX- XK drilling rig, and this is an exciting rig for us because as we get into recovery, this rig will be the early mover in the recovery, along with our APEX XC and our APEX PK type rigs. The reason these types of rigs are gonna be the early movers, it's the drawworks up design. The drawworks sits up on the rig floor and gives more clearance. Yes, we talk about super-spec rigs.
We have operators that are getting into the details about, okay, tell me about the clearance in the substructure so I can get back on my existing pads where I've got wellheads in place and I've had to leave and I've got to go back. What does your rig have in terms of clearance? If you have a drawworks substructure, which we have on the APEX- XK, the APEX PK, and the APEX XC, then we can get back on those pads, and we can make moves, what we call horseshoe-type move, where we go in, we walk out, we walk over, we walk back in and get over the various wellheads. Of course, the APEX- XK lends itself to advanced technology such as our Cortex Operating System. Just moving on to rig automation. We still continue our push on technology.
We're excited about where this is going, and we have all the elements in place and the expertise to be able to move this forward. We continue down the path of rig automation with our APEX rigs, Cortex Operating System, our PTEN+ data analytics, and also Current Power, which is our electrical control system division. In terms of remote operations with MS Directional, we continue to push and do more in terms of remote operation. I was touring with our systems the other day and our teams, and we're down-manning some of the jobs today where we're running less people at the well site when we're doing combined directional and rigs. Superior QC is providing advanced data analytics to help move that forward. It all leads to further directional drilling automation through Superior QC, MS Directional, and our PTEN+ data systems.
Speaking of Superior QC, we recently introduced what we call HiFi Nav, and this is the industry's newest wellbore placement algorithms. I realize there's a lot going on here on this slide, and feel free to call us later if you'd like to discuss the details. With HiFi Nav, we're doing analytics, and we're interpolating on the stations between the surveys when we're drilling a well, and it gives us a more refined and precise location of where we are, when we're drilling, and the projections being done on how we need to get to the target. This is the first step into the next step of the type of calculation we need to do to actually automate the directional process. We're excited about HiFi Nav.
We have a number of customers that are using it today, not just in the U.S. onshore, but it's going to have some uptake offshore as well. Just switching gears a little bit. What we've determined is that we believe that we are the leaders in alternative fuel usage in oil field services today in drilling rigs and in pressure pumping as we look forward and combined. Patterson-UTI has a leadership position. Today, we are running natural gas as the primary power on drilling rigs out in West Texas, where it's 100% natural gas engines. We've done this before in the past. We have a lot of experience in this area, and we own the Waukesha engines from General Electric to do this, but this has historically been up in the Northeast, but we're seeing this shift to operators wanting to burn the natural gas out in the Permian.
We are operating a rig out in the Permian on natural gas today. Exciting shift in the technology from basin to basin. Next up is our EcoCell, which is a lithium hybrid power system that we have operating on a rig today as well. This is a proprietary system that we've engineered in-house at Patterson-UTI Energy. It has a bank of lithium batteries, it has electrical control systems, and it takes the place of an extra generator on location so that we can power the rig, we can improve the emissions, we can lower the fuel usage. We have one operating today, and we see that as we get into recovery mode, we're going to have a large uptake of this type of system. Next up is High Line Electricity.
Just before the downturn, we had two rigs operating on High Line electric power with zero drilling rig emissions at the well site. Strong fuel savings for the operator and the locations. We had one of these working in MidCon. We had one of these working in West Texas, and we were set up to connect some more rigs in the process until the downturn happened. This is an in-house solution because we have Current Power control systems. We have our own electrical engineers. We have our own technicians. We do our own installations. This is something that we can provide the operators. Again, before the downturn, it was a strong uptake on this, and I expect in a recovery, our phone's going to be ringing with more of these requests to do High Line-type power on the drilling rigs.
Last but not least, in alternative fuels, in terms of pressure pumping and frack, we've been one of the most active with dual fuel, natural gas-powered frack spreads. We've been doing this since 2012. We've got over 12,000 stages that we've pumped with dual fuel natural gas, and we've saved over 10 million gallons of diesel in the process. Not just diesel, but trucks moving diesel on the roads to the pressure pumping locations. That's really an overview of what I wanted to go through. Of course, everybody, I hope, knows that we have a very strong balance sheet. There's some supporting slides in the index that talk about that. Our net debt to cap's 25% right now with our long-term tranches of debt not due till 2028 and 2029. That really sums things up, and I'll hand it back to you, and we can go through any Q&A.
Thank you very much, Andy. Appreciate the overview. I definitely want to touch on those alternative fuels. Those are pretty interesting things. Before we get to that, let's get the rig stuff out of the way. Let's get the core stuff which we need to know about. We've obviously gone through this big downturn in terms of the rigs, around 250 rigs today. We're talking about these E&Ps hitting these maintenance levels, of trying to get to this level of where they're trying to keep production flat. Looks like they all overshot on both pressure pumping and on rigs. Where do you think we level off here? I mean, is that how to think about it? Are we going to hit this sort of plateau on the rig count end of this year, end of next year?
How do you think about where the rig count goes from here at the maintenance level of what the E&Ps are talking about?
You do hear a number of E&Ps talking about getting to a maintenance level. I think there's a variety of estimates as to what that means, certainly, it's more rigs than what we're working today. I think for some operators, that's going to drive an increase in rig count, likely early next year. I think other operators are going to be watching WTI and their cash flow to try to determine how many rigs they can actually afford in this environment. When you look at where oil was trading up until today in the low 40s, our rig count was fairly stable. I'm not sure that today's dip in WTI actually changes much for us because we've got rigs working under contract and rigs on standby under contract, I don't expect a big change given WTI.
I think you really need to get WTI up into the mid-40s to drive some increasing activity in the Permian, and I think that'd be really positive for the market to start to move things in the right direction.
You have a pressure pumping arm, obviously. They don't necessarily overlap in terms of geographical location, but I'm just curious that what we've been hearing about is E&P's talking about working down DUCs. Like they built up a DUC inventory and are working them down, then maybe they add rigs a little bit later. Are you seeing that phenomenon in your pressure pumping business? Are you seeing an increase of I mean, you just said you're adding another crew today, obviously you are starting to see that. Maybe just kind of talk about how the dynamics are working between the two of all of the DUCs versus the rigs.
Yeah. I would say, the majority of our activity today is really tied around what's going on with the DUC inventory.
Okay.
I say the majority activity, the majority of the increase in activity is tied to the DUC inventory, because as operators shut down the second quarter, the easiest thing to shut down, and for them, the best financial solution was to shut down the frac. It left a large number of wells sitting on pads, where we're going back to the existing pads and then just finishing off the wells that have already been drilled and are essentially in the DUC inventory. I think that keeps us relatively busy in the third quarter and into the fourth quarter. It's just a real question mark out there as to what that inventory looks like and when the industry starts to complete that frac of that inventory that exists. Past that, we really need the drilling rig count to increase, to drive inventory to actually sustain increased frac activity.
Let's talk about the contracting structure on land rig side. What is typically the duration of contracts that you think operators are willing to engage in? It's one of the few areas where we actually still see contracts. You don't really see it on pressure pumping too much. I'd love to understand, what do typically E&Ps want? Then I am very curious about what they want in terms of performance-based contracts. You've been talking about 30% of your contracts, and have some type of performance or alternative type of contract. Just love to understand how the contracting structure is changing or how it could change, let's say, over the next 12, 18.
As we went into the downturn, we had a large number of contracts that were really in the one to two-year range in terms of the term length. We had, in July, 30% of our contracts, which were non-traditional day rate contracts. Now, I don't think in the current market there's going to be much change, and we're certainly not in any discussion on contracts with customers today, in today's environment. We are excited about how our teams in drilling have been able to move the needle and get more terms that are what I consider more favorable to us in terms of gain share. We know that the operator's done well in terms of efficiencies, and in some years they're doing well in terms of commodity.
We'd like to share in that gain as well, and we've had a number of operators willing to work with us on that. Like I said, about 30% of those contracts are non-traditional day rate. They have a large day rate component, but they also have a gain share component as well, based on either performance or commodity indexing or maybe a combination of the two.
Is that something that the customers want as well? Do they see the advantage on both sides of it? I'm just kind of curious how they view it.
Certainly, in an environment where we're working over 100 rigs, those are easier discussions. When we're in a trough market like we're in today, where we've got 58 rigs on the website, those are tougher discussions with operators. I have no doubt that once we get into more of a recovery mode and the rig count's moving up, we'll have more of those discussions, and you'll see us move the needle more on those type of contracts.
If we think about the rig of the future and going forward, I want to touch on your digital side, maybe I first want to touch on the alternative fuels that you had talked about. You talked about natural gas, you talked the EcoCell and then the High Line electric powered solution. These are all very different solutions. Is the idea to come up with a number of different alternatives on the fuel side, and then customers can pick and choose? Or is this being pulled from, is this something that customers are asking you to provide, or is this something that you're kind of saying, "Hey, this is something they're gonna want soon, therefore, we need to come up with these solutions.
Some of these things aren't new. They've been in the industry for a long time, but I think what we've done is made them easier for the customer to access. For instance, we worked with GE on the Waukesha engine years ago. We brought them into the field. They were being used up in the Northeast for years. We didn't have operators that were interested after a while, especially with some of the changes in the market we've seen since 2014. What we're seeing now with the natural gas is a shift towards the Permian, where operators are producing a lot of natural gas. The value of it for them is if they can use it as a fuel, then there's a lot of economic savings for them.
We're seeing this shift, and so we've brought a number of these engines down to the Permian Basin. Today we're running one drilling rig on natural gas, maybe going to two. That's just one of the examples of where this technology's been around, but now it's finding a new home in the Permian Basin. In terms of the EcoCell hybrid power unit, it's something that our teams worked on internally, came up with an engineered solution. This is a proprietary solution from Patterson-UTI that we're offering today. We've been gaining some recent experience on that shows that we can save fuel and save a lot of maintenance costs and things like that on a genset, on location, on a drilling rig. Plus you get the ESG emissions benefit, when you're burning less diesel.
In an increasing rig count environment, I suspect we're going to need a large number of these because I think the demand will be high. In terms of High Line Power, it's more specific to the operator, their location, where they're drilling, their access to the utilities. In some cases, there's a match. We certainly saw that in the MidCon and also recently in the Permian, where you've got some operators that are more focused on that. The interesting thing for us is because we have Current Power, which is an electrical engineering control systems company, we can provide an in-house solution. It's one-stop shopping to get a solution and get this done.
I guess, you're taking that into account, and you talked about the digital and all the different Superior QC and the HiFi Nav, all that. These are all ways to differentiate, aren't they? If we're looking at a rig market that's kind of 250, there's obviously excess capacity out there. Good news is, it's a fairly consolidated market, really between three of you. Is this sort of how you're trying to differentiate between the alternative fuels and the digital and just try to have a different offering? Because I would imagine in terms of the capabilities, although you did mention that your new APEX, I think you said the APEX-XK, has a higher floor. Is that really kind of where you think this rig market is going, that the differentiation has to be on the technology rather than on the fuel side?
Yeah, it's going to start to get into the details as we get into recovery mode. There's a lot of rigs that are available out there, so the operator's gonna come and take a close look at things. The reason I put up the APEX- XK rig is because things start with the rig structure. When you're trying to get it back on the existing pad, you've got to have a lot of clearance underneath. The drawworks up design, which we have on not just the APEX-XK, but also our APEX PK and APEX XC design, makes it easy for that rig to get back on the existing location. That's kind of the first step.
After that, we can layer on the Cortex Operating System, some of the apps that we've written, we're working to tie that directly to the directional drilling to better automate the process between the rig and the directional drilling and improve the overall efficiency and potentially have less people at the well site at the same time to reduce some of the costs. We think that differentiates us. We gain market share in this downturn. I think we have a really good chance of hanging on to that market share, even in a recovery, because of the differentiation that we have in alternative fuels and the remote operations and automation technologies we're working on.
Would that be kind of more geared towards the larger E&P or the major oil company who might be looking for more of those savings rather than kind of smaller E&Ps or privates? Is that part of the rationale?
I can tell you it's all the above. We've got some major E&Ps that want access to this technology, but we've got some publicly traded independents that can move quickly and make decisions and work with us and help us evaluate and shake out some of these technical challenges at the same time as we work through these engineered solutions.
Right. I want to shift gears over to your pressure pumping operations. Obviously we just saw an acquisition take place last week with Schlumberger and Liberty. We saw BJ Services has essentially went to auction. What's your assessment of that market going forward? There's still a lot of excess capacity. It looks like it's going to be a bit of a grind for the foreseeable future anyways in that business. How do you think about that business compared to your land rig business, and where do you want to kind of focus more? Is that an area where you need to invest still in the pressure pumping side? Or is that an area where you probably maybe think to get a little bit smaller?
A couple things about our pressure pumping business. In 2019, we weren't entirely happy with the performance that we had. At the beginning of 2019, I said I wanted us to be in the top quartile in terms of EBITDA per spread, which seemed to be an accepted metric to measure all the different companies. We were in the third quartile at the time, by mid-2019, we had worked our way up to the second quartile, not quite the first quartile. As activity continued to decline in 2019, by the end of the year, we still had a lot of fixed costs that we hadn't taken out and not quite the performance that we wanted. In January, our teams started working hard to restructure that business, take some of the middle layers of support management out of that, and then kind of collapse that pyramid.
They were doing a good job, and that was all even pre-COVID. Well, COVID came along, and we had to collapse it even further.
Yeah.
Our team has done a fantastic job getting that cost structure in line, and we posted some good numbers in the second quarter. Our run rate for the second half of the year shows us to be not just EBITDA positive, but slightly cash positive in that business as well. Structurally, we've changed the costs in that business for ourselves, and I think we're very competitive. In terms of the market, I think it's been making a nice shift over the last year. It started with Keane and C&J getting together, forming NexTier Oilfield Solutions Inc. They retired some old equipment, took one of our competitors out of the mix. That was positive.
As you mentioned, we had BJ that had gone through a Chapter 11, which looks more like liquidation and where you had more than 25 spreads working there, now it probably is only four, with a private equity firm is what we're hearing. Much smaller business than it used to be. Now with the Schlumberger assets passing to Liberty, what they've called out is over 2 million horsepower leaving the market. If you look back over the last years, a significant amount of horsepower leaving the market, which helped shape that market. Sure, it's still oversupplied, but there's less horsepower and there's less competitors in that market. It is improving.
Yeah. Definitely is improving. I just want to touch base on your cost out initiative. You talked about on the pressure pumping side. You've had a $100 million cost saving initiative overall. How much is that on the pressure pumping side? How much is that on the rest of the organization? Maybe just give us an update as to kind of where you stand today on that.
It's a mix between all of our businesses, whether it's contract drilling, pressure pumping, directional drilling, even our rentals business with Great Plains Oilfield Rental. All the teams have done a really good job. We got the majority, I would say 90% of those costs out of the system in the second quarter. We heard some of the bigger companies are still taking out costs in the third quarter, but we think we got the majority out in the second quarter. Our third quarter numbers, when we release earnings, will show really the full effect of getting the cost out in those third quarter numbers. We think we got most of that out.
That's great. Great to hear. Looking forward to seeing the numbers and looking forward to seeing how this all shapes up in the second half of the year. That's one of the big things we're trying to struggle with, what we're really struggling with is just what does this run rate look like in the back part of the year? It's not just an eye on the business afterwards, but it's kind of the here and now as well. We're trying to look at both these sides. Andy, thank you very much for going through both of those for us today. Very interested in the alternative fuels part. It's something you have to be thinking about going forward, I think it's very smart to be going after that because clearly your customers are gonna be looking to go the ESG route as well.
Anyways, thank you very much for your time today, Andy. We think we got through all the questions. Thank you.
Yeah, thanks for having us at the conference. Appreciate it.
As always, good to see you. Bye-bye.