Patterson-UTI Energy, Inc. (PTEN) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2015 Patterson-UTI Energy, Inc. Earnings Conference Call. My name is Tia, and I'll be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. [Operator Instructions] I would now turn the call over to your host for today, Mike Drickamer, Director of Investor Relations. Please proceed.

Thank you, Tia. Good morning. And on behalf of Patterson-UTI Energy I’d like to welcome you to today’s conference call to discuss the results of the three months ended March 31st, 2015. Participating in today's call will be Mark Siegel, Chairman; Andy Hendricks, Chief Executive Officer; and John Vollmer, Chief Financial Officer. Again, just a quick reminder that 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 U.S. Private Securities Litigation Reform Act of 1995, 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 through 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 reconciliations to GAAP financial measures are included on our website, www.patenergy.com, and in the company's press release issued prior to this conference call. And now it's 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 first 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 March 31st, 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’ll provide some closing remarks before turning the call over for questions. Turning now to the first quarter. As set forth in our earnings press release issued this morning, we reported net income of $9.1 million, or $0.06 per share. The financial result for the three months ended March 31, 2015 include a pre-tax non-cash charge of $3.4 million related to the impairment of certain oil and natural gas properties. And a $12.3 million charge which is included in selling, general and administrative expenses and is related to our settlement with the EOC. Collectively these charges negatively impacted diluted earnings per share by $0.06 for the three months ended March 31, 2015. We also had $15.8 million of revenues from the early termination of drilling contracts that increased diluted earnings per share by $0.06 for the three months ended March 31, 2015. Taken together the charges and the early termination revenues reduced net income by less than $100,000 and diluted earnings per share remains $0.06 for the three months ended March 31, 2015 when the charges and early termination are excluded from the calculation. Now turning to our market commentary, the industry is still adjusting to the current lower commodity price environment. The industry rig count has been cut in half and we saw a significant reduction in opportunities for profitable pressure pumping work in the latter half of the first quarter. On our last call we discussed having limited visibility given how quickly market conditions were changing. And while the pace of the rig count decline has slowed. We believe it is not yet at the bottom. I am pleased with how our rig count has performed on a relative basis thus far during the downturn. We have not been immune to the reduction in rig count but we have gained market share as our rig count has held up better than that of the general industry. We attribute this relative out-performers to our term contract coverage, we are at the peak of the market, we had a large percentage of our rigs under term contract. Off course ultimately the reasons we hedged so large percentage of our rigs operating under term contract was the high demand for our APEX rigs. And our quality people in operations. With that I’ll turn the call over to Andy.

Thanks Mark. Adding to Mark’s discussion of a downturn since the peak and rig count that discount the total US land rig count is down approximately 50%. We have not been immune to this down this downturn but we have gained market share in our contract drilling business as we have fared better than the industry on a relative basis with our US land rig count down 40% from the peak. During the first quarter our rig count averaged 165 rigs in the US and eight rigs in Canada. With the sequential decrease in our rig count during the first quarter the proportion of our rig count comprised of APEX rigs increased, positively impacting our average daily rig revenue. Similarly there was an increase in the proportion of rigs under term contract versus the spot market which also positively impacted average daily rig revenue. Excluding the positive impact of $15.8 million of revenues from early contract terminations in the first quarter average daily revenue increased $410 during the first quarter to $24,815. In addition to the increase in average daily revenue we remain focused on cutting costs during the first quarter we were able to reduce our average daily rig operating cost by $300 per day. As you can see in our financial result, we took action in a timely manner to scale our drilling business in terms of CapEx, other spending, headcount and overhead. Accordingly excluding the positive impact of early termination revenues in the first quarter, total average rig margin per day increased $710 to $11,140. At March 31st, we had term contracts for drilling rigs providing for approximately $1.2 million of future day rig drilling revenue. Based on contracts currently in place we expect and average of 101 rigs operating under term contracts during the second quarter and an average of 83 rigs operating under term contracts during the last three quarters of 2015. This expectation for rigs under term contract is net of the effect of 12 rigs that are expected to be early terminated during the second quarter, half of which have already gone idle. We also expect approximately $19 million of early termination revenues during the second quarter. Focussing on the second quarter we expect our total average rig count will be 120 rigs, including two rigs in Canada. To provide a little more colour on our rig count expectation that we normally do, we expect to have approximately 110 rigs active in the US at the end of the second quarter. Let me just repeat that we expect to have approximately 110 rigs active in the US at the end of the second quarter. Excluding the positive impact of early termination revenues in both the first and second quarters, total average rig margin per day is expected to decrease almost $600 per day. We will continue to focus on reducing costs to partially offset the impact of lower spot rates going forward. Turning to our APEX new build program, we completed six new APEX rigs during the first quarter bringing our total APEX rig fleet at the end of the first quarter to 151 rigs. We plan to complete 10 additional APEX rigs this year, all of which are under contract. Included among these are remaining new build APEX rigs under term contract is our first APEX rig that would be delivered to work in Canada. APEX rigs have gained the reputation of being highly efficient and fast moving rigs in the US and have caught the attention of Canadian operators as well. We are excited about this new opportunity for APEX rigs, as the Canadian market continue to transition to more multi-well pad drilling in field such as the Duvernay and the Montney. Turning now to pressure pumping, during the latter half of the first quarter we experienced a dramatic decrease in activity due in part to the sharp reduction in the rig count which began late in the fourth quarter. Additionally as pricing came under pressure during the first quarter, we were unwilling to pursue work that what we consider extremely low margins. Accordingly we were generally in line with our gross profit margin expectation, however pressure pumping revenues declined during the first quarter to $250 million. Looking forward we will stay close to our customers and continue to focus on the things that we have the ability to control. We have been successful in lowering cost for raw materials such as sand and chemicals, sand hauling and for capital items such as fluid ends. We will continue to focus on reducing cost and finding work at acceptable pricing, but to the extent that we were unable to do so, we will continue stacking equipment. To date we have stacked approximately one-third of our horsepower. With the downturn in the industry the scope of work for which we intended to activate a new spread with Tier 4 engines in the second quarter has changed. Our customers decided at this time to shift our work from the environmentally sensitive area that required the technical aspects of this fleet to other traditional pad for we will use existing equipment. As such we do not expect to use this fleet during the second quarter. Turning to the second quarter our activity and utilization continue to decline and we currently forecast second quarter pressure pumping revenues to decrease approximately one-third sequentially. Pricing pressure in this segment is increasing with the decrease in industry utilization. And although we’re achieving significant cost savings with our suppliers, and continue to scale our business, we expect gross profit as a percentage of revenues to decrease to approximately 8%. 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 has been further reduced by $40 million, and is now projected to be $710 million. This breaks down to $525 million for drilling, $165 million for pressure-pumping, and $25 million for E&P and other. Depreciation expense during the second quarter is expected to be $175 million. SG&A during the second quarter is expected to be $20 million. We are currently projecting our effective tax rate to be approximately 42% in 2015. And with that I will now turn the call back to Mark for his concluding remarks.

Thanks Andy. Last quarter I discussed that our playbook for downturns, was to scale the company as quickly as possible to align with lower levels of activity. This playbook seems simple in concept, but the key is executing this plan effectively and efficiently. In what is a challenging market, I am pleased in how we executed this plan during the first quarter, and am proud of what our team has been able to achieve in terms of cutting costs. Operationally, we properly scaled our cost structure and capital expenditures to the lower levels of activity, as evidence by the decreases in our average rig operating cost per day, as well as our ability to meet our pressure-pumping margin expectation, despite a significant slowdown in activity. Financially, we completed two debt financings in the first quarter, including a $200 million term debt facility that refinanced the - that were outstanding under our revolving line of credit. We now have full availability under our $500 million revolving line of credit, which increased our liquidity and has enhanced our ability to take advantage of future opportunities this downturn may create. With that, I am pleased to announce the state of the company - quarterly cash dividend on its common stock of $0.10 per share, to be paid on June 24, 2015, to holders of record, as of June 10, 2015. Operator, we would now like to open the call for questions.

[Operators instructions] The first question comes from the line of Robin Shoemaker with KeyBanc, please proceed.

Wanted to ask you about - so you all have additional early termination payments and do you currently also have rigs that are stacked, but on rate or on some kind of standby rate within your active rig count?

We have a few that are like that, we actually haven’t called up that number, it’s not a big number that really impacts the revenue or margins that we’re reporting, but there are a few like that.

Okay. And just in terms of the APEX construction program which you delivered to ten rigs. How important is it to you to maintain that capability as you get to the end of this - you deliver the tenth rig. And presumably at that point there’s really not a market for additional APEX rigs, since we have quite a few high-end AC drive rigs available currently. Just appreciate your comments on how you maintain that capability for a future business cycle, at the point after you deliver this tenth rig?

So that’s a good question, appreciate that. Certainly as everybody can see in the numbers, that there will be a significant number of AC rigs as we work our way out of this down cycle. And we are still building rigs in our manufacturing process. We do feel strongly that we will hold on to our core capabilities in manufacturing, so we will be well-positioned to manufacture when it’s time to build new rigs when we can put new rigs out under term contract again. We’ll also have some of the minimum inventory items required to do that, but we certainly plan to hold onto that core capacity that we have there to build or manufacture in the future.

And if I may just ask about the - it’s a little hard to see what kind of pricing pressures are occurring on AC drive, like your high-end APEX rigs, because it’s not reflected in the average rig rate you report. Because that reflects more term and less spot rates, but could you describe what kind of pricing pressures are, if you have an idle APEX rig, kind of where that level of competition has brought rates compared to where we were a year ago. I mean just in a rough percentage basis?

Yeah first off, there’s just no real demand for rigs. If you look at the numbers that we’ve said going into Q2, the rig count continues to come down for us. We think it continues to come down for the industry, and there’s just not real demand out there for AC rigs, we’re not really having those kind of discussions. Certainly we’ll be under pricing pressure as we work our way into this down cycle, and there’ll be some pricing challenges as we start to come out of this into some kind of recovery. But I think that will certainly improve after the first wave of rigs goes back to work in the recovery, which will eventually come because it always does.

Our next question comes from the line of Jeffrey Campbell with the Tuohy Brothers Investment Research, please go ahead.

Referring to the press release, can you give us some idea, perhaps, on a percentage basis of the level of pressure pumping price reduction or request of operators that were unacceptable to Patterson.

Well let me frame it up this way. We’re really focused on margin as a company, we’re not chasing share. Our target is to stay EBITDA positive, but also including maintenance capital that is required to run this business. So we want to stay positive cash flow in the pressure-pumping business. It’s unfortunate that we’ve had to stack, already, a third of the equipment, but I think that’s just really a sign of where the industry’s going in terms of overall utilization. And that is putting a significant amount of pricing pressure in that sector.

Well as another data point from this morning, a large services - are going to stack half of their pressure-pumping fleet four years over, so it sounds pretty good. If I could ask one other question. I thought it was noteworthy that in the first quarter, your - revenue increased even without benefit of the early termination fees. Could you just give us a little colour on how you managed those revenue gains? What they signify maybe about the fleet quality?

Sure, I mean it really shows you the quality of the fleet, the quality of operations, the quality of the people that we have in the company. And that’s reflected in the term contracts that we were holding as we entered this down cycle. And the majority of those were APEX rigs, which are at a higher day rate than the other electrics and mechanicals that we have in the fleet. And as our rigs that were on spa to well-to-well were released as we moved into the down cycle, then the mix shifted to the higher day rate rigs that were under term contract. And so therefore the revenue per day, and margin per day came up in Q1.

And if I could just sneak one last one in. I’m kind of referring back to Robin’s earlier question about the APEX new building, but maybe from another angle. You are still building the number of rigs in the new building program have been declining, but they’re still there. And I was wondering if you could just sort of characterize the customers who continue to support your new building program?

Well these are long-term customers that we have. And these are customers that have technical requirements in looking for some specific technical capabilities on the rigs. And so we’ve got a very exciting rig in our APEX XK, and we’re able to do some modifications for some specific customers. And that’s what we continue to build this year.

Okay, great, thanks.

The next question comes from the line of James West with Evercore, please proceed.

In your conversations with customers and now, and immediately understood there’s no kind of, not a lot of incremental rig demand. But are you starting to get - see the early signs of customers seeking to upgrade their rig fleets as their going to have going forward. I think as the dust kind of settles out here, my expectation at least, is most of the AC rigs and some of your rigs would go back to work. Are you seeing that trend, at least the start to evolve?

James that’s a great question, I would really like to say that we’re seeing that but I just don’t think we’re quite there in the cycle. I think we’re still going to see our rig count come down and that’s what we explained in the numbers we gave you earlier. And I think we will see that kin of upgrading happen but I think it’s just still little bit early in this cycle.

Okay, understandable. And then other question from your follow-up for me, this unrelated given that you don’t have bond deals or done increased some liquidity here. I know Mark talked about in case opportunities arise. What’s the appetite for M&A at this point, especially at this point in kind of the evolution of Patterson where you now have a - with the APEX rig fleet are much more standardized fleet. Any kind of M&A might take away that standardization, is it still as strong as its been in prior cycles and Patterson was one of the industry or is that changed?

I think that we are a company that’s historically looked at opportunities when they arise. And it’s kind of early in this cycle as I see it to be pre-judging what the types of opportunities will be James. I do think that you’re making a good point in your question when you say that we have evolved to a very high quality fleet both on the drilling side and the pressure pumping side. And for that reason we don’t wish to see a dilution on either the side on the rig side or we’re on the pressure pumping side by buying in affect equipments that’s less good than the equipment that we already have in terms of quality. So we’d be a careful buyer. And we want to be a smart buyer and if things come up that are - then we’ll be interested but I don’t feel that there’s any great urgency on our part to do anything right now.

Sure fair enough. Okay, thanks guys.

The next comes from the line of Dave Wilson with Howard Weil. Please proceed.

Andy, understanding it is very - and if any incremental demand right now. But have you seen any of your competitors, the guys with smaller less competitive rigs start to offer up any kind of turnkey work. Or is that something that could happen as demand returns, that such a less competitor, less competitive rigs will stick around well in the market using turnkey as an option?

That’s a good question about turnkey we were in that business at one time, but frankly we just haven’t had any discussions with any customers regarding turnkey for ourselves. And we’re just not hearing any discussions of turnkey either. It’s quite possible there could be some small contractors out there doing that maybe West Texas. Maybe - but we’re non-evolved in those discussions.

And then Andy just kind of following up on a previous question on the pressure pumping and not pursuing work at extremely low margins, can you tell us what region that was in. And maybe quantify the amount of work that was passed up on that?

Yeah the challenge is huge but it’s basically probably, it’s in all the regions and you’ve got the utilization has come down so quickly in that sector even though you see rig count holding up in the northeast and that’s bodes well for completion activity in the northeast. You’ve got operators up there that are working in several different plays and so they are working hard to renegotiate terms everywhere.

The next question comes from the line of Byron Pope with Tudor, Pickering, Holt. Please proceed.

Andy, Mark curious as to, you’ve touched on the fact that you’ve gotten a contract for your first APEX rig to go to work in, non-conventional up in Canada and I know you guys have been working toward hitting the infrastructure, resources in place to eventually be able to approach the international markets. Realize you guys have an organic thought process to entering the international markets but given that we’re looking at a downturn for the international and rig market as well. I’m just curious as to whether or not this down accelerates from a timing perspective, how you think about organically entering the international rig market?

Our plans for international outside of US, outside of Canada are long-term plans. And so there may be some countries that are in doing some pullback on the rig activity but that doesn’t really affect our plans and what we’re trying to do organically in setting up the structure to be able to work internationally. So I think there’s no real change in that, there are some countries that are going to hold steady in their activity at the same time as well. And back to Canada we are very excited that we have an APEX rig heading up there. That’s a really positive thing for us, we have really good operations in Canada. And the story there is over the years in the US it was just always the better return on the rigs in the US. And opportunity in Canada came up. And to give the kind of returns and the days that we were looking for in the contract. And we’re just very excited about that.

And then just the question in the pressure pumping business, given that you guys manage your business to have scale in the regions were you operate either southwest, in the northeast, when you referred to your ability to having gotten some cost reductions on sand and chemicals and transport cost. I’m assuming that has been in both Europe, your key geographic regions. Is that fair?

That’s a fair assessment. We’ve been able to get these cost and price concessions from the suppliers across all of our regions. And I can give you a little bit of colour on what some of that - in terms of sand. We’ve seen anywhere from 15% to 35% improvement in the pricing in sand for sand trucking. The cost of the trucking has come down around 35%, when you look at components to repair pumps and fluid ends, it’s in the range of 15% to 20% savings on those as well.

The next question comes from the line of Angie Sedita with UBS. Please proceed.

So Andy if you think about, how do you think this will all play out in frac, I mean if you think about these companies here today had essentially breakeven to lost margins and obviously it’s not 2009 v-shaped recovery. How long do you think that it can last before you’re going to have start pulling back or consolidating or just shut down their operation, it is a very different cycle and clearly many of these companies aren’t making money.

Well it’s a good question and I think it’s a mix of exactly what you just described. I think that some of them will be tied on cash, some of them may have to close up. We’ve seen a little bit but are already fortunately for us our balance sheet’s very healthy. And we’re doing what we can to protect the margins going forward.

So do you think the greater pain is there until late this year or 2016 based on what you know today?

I think it’s just hard to know right now, it’s hard to predict what the recovery looks like in completion, just because if you look at the rig count we just don’t think we’re quite at the bottom on the rig count yet. So we see challenges in trying to forecast what that end of the cycle looks like in drilling and then completion it is likely to lag that a little bit as well.

And then for your - pressing pumping, do you think the bottom end margin is Q2 or more like the Q3?

Hard to know at this point.

And then finally just a kind of going back to the M&A question, obviously you’re building this APEX fronts that have been incredibly well received and there’s no reason to consolidate there or look for opportunities there. In the past you’ve focused on frac. I would assume, is it fair to believe that if prices become more reasonable but you may be interested in frac again. or not necessarily and are there any other business segments that you are also considering?

Angie I don’t think there’s much I can really add to the concept that I think you know well from having covered the company for a number of years, as we’ve always try to be opportunistic. Often times during down cycles and especially as we come out of down cycles there have been interesting opportunities. Thus far I think that the management team and the board really share is that we have a very good of flip of on the drilling side and the fracing side of high quality equipment. And we wouldn’t wish to expand just to how greater numbers of rigs or greater amount of horsepower. It’s simply for that sake if we would only be interested in acquisitions which would give us greater presence at the same or higher quality. And that’s really where we see it, so if those opportunities would arise then frankly as I said in the answer before. I think it’s really early right now. I don’t think this is the time we wish these opportunities are most likely to be presented. But we’re open to take a look at whatever comes along.

The next question comes from the line of [indiscernible] Wells Fargo. Please proceed.

Question I know understanding the difficult environment to try to, to make protections and I appreciate the guidance you guys had given but the 110 rigs you sited as your exit rate for the second quarter. Based on your conversations with your customers do you think at this point that’s where your rig count can stabilize, do you see downside risk from there. Or do you think that’s where original trough maybe for your rig count?

I am very likely to say that we’re going to trough at 110 but I think it’s just too early to know that, I think we’re going to have to get a little bit further into the second quarter to see how comfortable the ENP’s getting with commodity prices where they are. And also see what commodity prices do going into the summer, I think there’s still some uncertainty. So it’s hard to know what would happen coming out of the second quarter right now.

And then if you think about your cost structure, are you - you’ve been scaling down pretty aggressively, its showing in your margins. Are you comfortable with where you are if that 110 level is in fact the bottom, are you comfortable what your cost structure is, if that 110 level is in fact the bottom, are you comfortable what your cost structure is, if that is in fact kind of what we bottom. And on the other side as aggressively as you’ve cut back if next year, late this year or whenever if things start to actually improve, how quickly can you scale back up and react to increasing demand based on where your headcount is today?

Well even from where we are today unfortunately if we were to have two week, it certainly continue to scale the company to make sure that we’re sized correctly for any changes in the activity. If we were to continue to decline and I think you’ve seen historically from the company that we’ve been able to scale up coming out of these cycles as well. And we’ll be able to put the people back to work, we’d be able to put our training programs back into effect. We have inventory to start building some new rigs if that’s the case but I’m not worried about us being able to scale coming out.

Do you think even if it’s a, say a prolonged downturn, does that delay your build, you scale back up? If it’s not a quick recovery even if it stays depressed for a few quarters do that impact that at all?

Yeah you watched a lot of these cycles and I think as you know we scaled down like this, which is what we need to do, scaling back up, we are very capable of doing it. But it does create a restraint on rig supply which has a tendency to speed the recovery help pricing things like that. Over a period of months and quarters we can scale the rig count back up to where we’ve been in the past.

The question comes from the line of Chuck Minervino with Susquehanna. Please proceed.

Just wanted to talk Andy a little bit about the costs the daily operating cost on the US rigs, looks like you brought it down in 1Q and I think you made some comments that you think you can bring it down again 2Q. I know you guys probably, one that pretty lean but is there more that you could potentially take down harder on that cost per day that can help you with maybe some of the downward pressure on the day rates?

Well just to kind of clarify what I was saying earlier when we were talking about scaling we were really talking about more than macro the business in terms of headcount and overhead, support structure things like that. And also working with suppliers, in terms of the daily cost, there could be some opportunity but I think we’re getting close, two-thirds of our cost in drilling is related to the personal cost. And we haven’t rolled back peoples wages at the positions that they are working in. And we’ve chosen not to do that, we want to know that we’re in some kind of extended downturn before we make that type of decision for the people that work in our company. And so with two-thirds of that being personal and one-third having to do with spare parts, maintenance, things like that. There could be some more we could do with suppliers if it’s an extended downturn or if we see some further declines but when we talk about scaling more on the macro when you get into the cost per day, there’s about a third of that, that we have to work with there right now.

And then just the second question, as we get towards the end of the year and say because commodity prices have come up a little bit more than these ENP’s have budgeted for and services costs of kind of come in, below what they had budgeted for. And they do have a little bit of excess cash. I mean your best guess from your experience in this space. Do you think that if they do put that access cash back to work. Do you think they choose to do it more on the pressure pumping side by completing maybe some of these uncompleted wells that you see them putting it back maybe more and trying to grab some of these higher quality rigs that might be at lower prices, then they would have implicated before?

I actually think it’s both. I don’t think it’s necessarily one or the other, I mean certainly there’s some drilled but uncompleted wells out there, and there’s some inventory. And that bodes well for pressure pumping, if we get into that situation. But we also have customers that are going to be looking for rigs, if we see commodity prices move upwards, or if we see that if an ENP has extra cash towards the end of the year, there are those types of plans but that being said, we still see our rig count going down in Q2, right now. And I’m not sure exactly where that’s going to bottom out yet.

The next question comes from the line [indiscernible] with Simmons, please proceed.

So there’s been some growing chatter here recently about the re-frac opportunity. At this point, do you guys track internally, whether your re-frac work is tied to new well completions versus the re-frac opportunities, and then if so, could you possibly share with us the trend there. And then maybe as a follow-on to that, what’s your longer term view of that re-frac opportunity, and is there any reason to believe that maybe the re-fracs will or possibly create a risk to the land drilling business?

So there’s been a lot of discussion about re-fracs, there’s been various notes that are out there that we’ve seen, and people talking about potential for re-fracs. We’ve done re-fracs, it’s something that fits within our technical capabilities, we have a fibre diverter technology that we use that is similar to what some of the big guys have. And so we’re certainly in that market, and we have done that. But it’s still relatively small, and it’s, for us, it’s still hard to really understand what that potential market looks like. Just to give you an example, there was a recent technical paper that was out, The Petroleum Engineering World that was referencing the performance of some of the re-fracs. And they were looking at a pool of wells in the study, the pool of wells was only eight wells. And off that pool, after the re-fracs, seven of them actually went down in net value with the cost of the re-frac. So there’s still some risks, they’re still trying to understand the well choice for your re-frac, which are your best candidates for re-frac. So there’s still some work that has to be done, technically, and understanding that on the technical side. And then back to the potential market, because of the technical challenges that are still out there, and the risks, and understanding which wells are you going to re-frac and which ones you’re not, which ones you’re going to get value out of. It’s really kind of hard right now to understand what that overall market looks like. But back to what I said earlier, we have the technology to build, do re-fracs, we’ve done re-fracs. So if there’s an increase, then I expect that our teams would be part of that as well.

And in terms of those re-fracs, is there the same level of service intensity associated with them?

It is a very similar level of service intensity, along with understanding, not just the diverted technology with how to pump the diverted technology, how to back circulate the diverter technology and how to do the flow backs. So there is the chemical component and there’s the technical operational component, but it’s relatively the same horsepower in intensity.

I appreciate the colour on that. If I could squeeze one more in, I wanted to circle back to the sand pricing concessions. Andy, would it be possible to get some colour on the timing of the 15% to 30%, 35% that you had mentioned?

We were in those negotiations in the first quarter. And if you remember early in the first quarter, even the first couple of weeks of January, I don’t think that the sand suppliers fully appreciated the magnitude of the downturn that we were entering. And so we were completing those negotiations with the sand suppliers towards the end of Q1, if that helps you understand the timing?

The next question comes from the line of Brad Handler with Jefferies, please proceed.

Could you - I guess I’m trying to noodle on something, you can probably help me. If you’ve decided not to pursue certain work because it doesn’t make money, if we’re in an environment where that persists for 12 months, for example, it just takes a while for the supply demand balance to change. You’re obviously pursuing cost reductions in sand, and it sounds like you’ve made some progress on the repair side. I did miss part of the call, so perhaps forgive me in advance, maybe there’s some other things you’ve addressed. But can you - what’s your optimization level about lowering the cost structure enough and maybe preferentially lowering it because of scale or anything else you can do? So that you can see yourself putting fleets back to work and retaking some market share, trying to put that back to work in what is otherwise this depressed market?

Yeah, the challenging market, activity levels continue to decline overall industry utilization will decline further going into the second quarter. We’re still a very scalable company, and we’ll be able to manage that - what we’re attempting to do is maintain positive cash, so in other words positive EBITDA, plus cash-to-cover, maintenance CapEx etcetera, and the risk in running the operations, and that’s our objective. We decided to stack fleets as opposed to taking margins that we consider extremely low, if we get into an extended downturn, as you mentioned, then we might have to adjust what we consider is extremely low. But we’re going to do our best to stay cash flow positive in that business. In terms of share, we stacked a third of our fleets. But I don’t have the impression yet that we’re actually losing any share or that we would have to work to regain any, because I think overall utilization in the industry’s coming down, certainly into Q2.

Fair enough. Part of the question, do you think you have - are there some other elements, perhaps, within the mechanical side or on the repair maintenance side or something, that you can anticipate lowering your cost structure perhaps further. And then again relative to a lot of smaller providers that don’t have that experience?

Certainly we have the benefit of scale, and with our size almost a million horsepower and track horsepower in total. And only in Texas, and only in the northeast, it gives us that negotiating scale with the suppliers, whether it’s sand, or trucking, or chemicals, or pump parts, or fluid ends. And I think if we get into an extended downturn, we’ll likely see some further concessions from these suppliers as well, plus we’ll do other things to scale the structure of the business, if that’s what we have to do.

The next question comes from the line of Jim Wicklund with Credit Suisse, please proceed.

I may missed a little bit of this. A while back you guys said that your greatest growth potential could very well be international. You’ve got an office in Dubai, the - deal is going down, can you tell us about what your five year growth plan is for international?

I think our view about this matter is that we like to do this carefully and appropriately. Obviously at the time when we announced the plan, was not the time at which oil prices were diminished as to the extent to which they have. We’re kind of keenly aware of the current state of the industry, and we’re considering how fast and how quickly to go forward. We haven’t changed our mind about the fact that an international expansion for the company makes sense. But we’re still going to do so in the sort of careful measured that Patterson has done what it does.

Mark, I have no doubt whatsoever you’ll do it careful and all. But I’m just wondering what do you think, five years, long enough that we can all be wrong. Where do you anticipate being in five years? But you’ve gone carefully and -

I’d appreciate the opportunity, Jim, to make a five year prediction, but I think I’m going to decline to do so.

Okay, second question. What is the spot market rate, today, for a tier 1 rig?

Jim, that’s a good question, and there’s really not a spot market out there. We’re still seeing our rig counter come down in Q2, we think the industry rig count continues to come down in Q2. And there’s just not a spot market that you can judge, it’s not a trade right now out there.

That means you can’t put a rig to work at any price?

Our rig count continues to come down in Q2.

Okay, I’m just trying to ask in a different way.

There are no further questions in queue at this time.

Okay, thank you everyone for your participation, we look forward to speaking with you as we report our second quarter. Thanks everybody.