Good morning, ladies and gentlemen, and welcome to the Q3, 2017 Patterson-UTI Energy Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode.[Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the conference over to your host, Mike Drickamer, Vice President of Investor Relations. You may begin.

Thank you, James. 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 and nine months ended September 30, 2017. Participating in today's call will be Mark Siegel, Chairman; Andy Hendricks, Chief Executive Officer; Andy Smith, Chief Financial Officer; and John Volmer, Executive Vice President. A quick reminder that statements made in the conference call that state 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 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 third quarter of 2017. We are pleased you are able to join us today. We are happy to be joining you today from Oklahoma City, in the offices that were formally Seventy Seven's. As is customary, I will start by briefly reviewing the financial results for the quarter ended September 30, before turning the call over to Andy Hendricks, who will share some comments on our operational highlights as well as our outlook. After Andy's comments, I will provide some closing remarks before turning the call over to questions. For the third quarter, as set forth in our earnings press release issued this morning, we reported a net loss of $33.8 million or $0.16 per share on revenues of $685 million. The financial results for the third quarter include pretax merger and integration expenses totaling $9.4 million or $0.03 per share after taxes. We recently closed the acquisition of MS Energy Services, our third acquisition in a little over a year. We have taken advantage of market opportunities to strategically grow our company and expand our service lines. This growth, combined with improvement in drilling and completion activity, was apparent in our third quarter results. Total revenues of $685 million for the third quarter were up 230% year-over-year and 18% sequentially. Adjusted EBITDA for the third quarter of $159 million was up nearly 300% year-over-year, and when including merger and integration expenses, adjusted EBITDA was up 29% sequentially. While closing three acquisitions, we maintained our very strong balance sheet. In addition to growing the company, broadening our service lines beyond drilling and pressure pumping has changed the identity of our company. We have long been considered a land driller that did a little pressure pumping. Five years ago, contract drilling accounted for 67% of revenues, while pressure pumping was just 30%. With the acquisition of Seventy Seven Energy, our third quarter percentages were 53% of total revenues for pressure pumping and 44% for drilling. The land drilling tag does not seem to fit any longer, yet given our considerable land drilling exposure, the pressure pumping tag does not appear appropriate either. Now that we have added directional drilling, I believe that the description that fits best is that of a multiservices company. I believe that our multiservices oilfield -- oilfield services offering, our leadership positions and our scale, we should have -- we should receive a valuation in line with other multiservice companies that have scale. With that, I'll turn the call over to Andy.

Thanks, Mark. Turning now to contract drilling. Our rig count was stable during the third quarter. While there has been some decline in the overall industry rig count, our rig count has been relatively stable due to the high quality of our rig fleet. For the third quarter, our average rig count was 161 rigs compared to 146 during the second quarter. While the second quarter rig count did not include the full quarter contribution from the rigs acquired as part of the acquisition of Seventy Seven Energy. Average rig margin per day for the third quarter increased by $1,010 sequentially to $7,730. This improvement was due primarily to a $960 per day decrease in average rig operating cost to $12,600. Additionally, average rig revenue per day increased $50 sequentially to $20,320 for the third quarter. We estimate that approximately half of the decrease in average rig operating cost per day was related to fewer rig reactivations in the third quarter and the relative stability in our rig count, both of which helped to reduce costs for repairs and maintenance, supplies and labor. The remainder of the decrease is believed to be largely transitory in nature as lower-than-expected costs for rig repairs and maintenance during the third quarter is not expected to be sustainable. At September 30, we had term contracts for drilling rigs providing for approximately $470 million of future day rate drilling revenue. Based on contracts currently in place, we expect an average of 87 rigs operating under term contracts during the fourth quarter and an average of 53 rigs operating under term contracts during the 12 month period ending September 30, 2018. Turning now to our outlook. For the month of October, we expect our rig count will average 158 rigs and for the fourth quarter, 160…

Thanks, Andy. I would like to welcome the employees of MS Energy to Patterson-UTI. As Andy mentioned, we are very excited about the acquisition and pleased to have the highly skilled people from MS joining our team. I would also like to take this opportunity to welcome Andy Smith to Patterson-UTI as our new CFO. Andy joined us a little over a month ago and his accounting experience and dynamic leadership style are already proving to be -- to complement our executive and finance teams. As I welcome Andy Smith to the team, it is with great emotion that I wish John Volmer farewell. John Volmer has been with Patterson-UTI for 20 years, but he and I have actually worked together for closer to 30 years. More than just a professional colleague, I consider John to be a friend. I would like to thank him for his contribution to Patterson-UTI, which has been significant. His financial skills, business acumen and personal leadership have contributed tremendously to Patterson-UTI's success. I know that it is an often used analogy, but John truly does leave behind big shoes to fill. John, we wish you all the best. With that, I would like to commend and thank the hard-working men and women who make up this company. We appreciate your continuing efforts. Also, I'm pleased today to announce the company declared a quarterly cash dividend on its common stock of $0.02 per share to be paid on December 21, 2017 to holders of record as of December 7, 2017. Before closing, I would like to add that I am very excited about our company's prospects. Operator, James, I would now like to open the call for questions.

[Operator Instructions] Your first question comes from the line of Marshall Adkins from Raymond James. Go ahead please. Your line is open.

Good morning, guys. Andy, glad to have you on board and John, I tell you, we will miss you for sure. You've been a huge help to all of us over the many years, so I appreciate that. I have a sneaking suspicion that you will be calling, bugging Siegel all the time with advice that he may not want anyway. So good luck with that. Good luck with that, Mark. Let's jump into MS. You gave us a pretty clear guidance I guess in Q4. Can you give us some kind of sense on that business just for modeling purposes going forward. Is there -- I would suspect there is a lot of seasonality there, but just double checking. And secondly, I think we all have a pretty good handle on the drilling and pressure pumping business of where we think demand and growth is going. But I don't think I really have the same handle on MS. So give us some frame of reference on where we should see growth and pricing and stuff in that market.

All right, Marshall. So we're really excited as a board, as I mentioned, it's only 81 days into the quarter. So we're just getting started to get our arms around exactly what their future projections are going to look like going forward past this. In general, MS is going to follow the high-spec rig count. And so in terms of any seasonality in fourth quarter, it's going to be less like some of the other services and more like services that are tied to drilling rigs and especially high-spec drilling rigs. So for modeling purposes, I think people should look more in that direction. We're not giving a lot of information on the company in terms of activity and things like that because one of the challenges we have is we have a very strong prominent directional drilling company in the U.S. onshore industry, and if we give too much information, it puts us at a competitive disadvantage. So I think before we give more information than what we're giving now and maybe over the next few quarters or year, we'll probably going to have to understand what that impact is and how much information we can actually share so that we don't disadvantage MS in that area.

All right. So sounds like we're going to wing it for now. The -- in terms of market share there, that is if I recall that you guys -- MS has a big share of that directional drilling market outside of the big guys. Is that -- can you help, is that accurate?

Well, what we do know in terms of market share is based on reports from third-party companies that have MS at number 2 in the U.S. onshore industry. And that puts us square in the middle of the very large global players in directional drilling in the U.S. onshore market. And so that's why I want to be a little bit cautious as about how much information that we produce.

All right, that makes more sense. Okay.

Marshall, that's a Spears report that we're making reference to and ranks us number 2 in that marketplace. I will say that we expect to invest in MS. We're going to be adding capital in the fourth quarter within the $580 million CapEx that we said we'll hold steady for a total. We do expect growth into 2018 as well.

Well, that was going to be my follow-up question is you clearly you're going in this new direction with MS. You also have Warrior, you've got the rental tool business. You got a lot of hands that are going to be asking for capital, and I know the pressure pumping guys will be doing the same thing, you're building some new rigs. So help me understand, I guess, number one, the direction. Is MS the last acquisition you make to expand in this multiservice product line? Number one. Number two, is there a prioritization of capital allocation that you guys have thought through yet?

So let me kind of start following up your question there. So in terms of capital allocation, yes, we have a number of businesses that we have to make sure that we do the right allocation for capital. But what's important to us right now is also to maintain capital discipline, and so that's why total CapEx is still $580 million. We've made some adjustments within that total CapEx across the businesses. We're now making room for some CapEx for MS. We're putting some CapEx into Great Plains Rentals as well. We like the growth prospects and the margins that we're getting from that business, too. So these are all businesses that we think are good and we need to fund at different levels. But we do want to maintain capital discipline, and that's why we are holding steady at the $580 million. That's important to us. In terms of new build, you did call out that we're building new rigs, but that's only two this year and those were kind of one-offs. We're really not in a new build program, but we are in an upgrade program. So we are still producing some high-spec rigs. In terms of acquisitions, we'll continue to look at the market. We have a strong balance sheet. If the right opportunity comes along, we're certainly going to be interested. But we also have a lot to digest at the same time. We're still trying to wrap up the integration of Seventy Seven Energy and the various companies there. And now with MS, we've got to make sure we get that as right as we can as well.

So it sounds like you're interested in possibly expanding into more arenas, but you're going to take it slow, digest what you have and then go from there. Is that a good characterization?

Directional drilling wasn't a new thought, that's been part of strategic plan for a long time, even Mark can talk about that, pre my arrival to the company as well.

Marshall, we've had that in our sights for a very, very long time. What we were looking for is the right opportunity. MS provided us with the -- what we thought was just about the perfect opportunity with a management team that was very excited to join with us. An attractive price and an attractive position in the marketplace. So that was extremely -- and we could do it in a way that did not in any way hurt our balance sheet, and that's really part and parcel of it. We also don't expect that it will be a business that will require substantial capital going forward. And so we think that we have an opportunity to get growth with reasonable capital expenditures.

Your next question comes from the line of Chase Mulvehill from Wolfe Research.

Hey, good morning. I guess if we kind of think about strategic acquisitions, I mean there's a lot of commentary out there in the prepared remarks. Could you talk about strategically kind of where you see the company going over the next few years? And what services that you currently don't own that might be an advantage of you owning over the medium to longer-term?

Quite frankly, Chase, seems to me that just gives an advantage to our competitors, doesn't do much to help us. What we try to do is to build the company kind of brick-by-brick. Years and years ago, as I mentioned, our pressure pumping business was a small part of our overall business. We built that up step-by-step in a very organized way. We built up our drilling business with quite a fleet of the most technologically advanced super-spec rigs. We saw an opportunity now to move into the directional drilling business. But it would've not helped us had we been telling it to the world that we were looking at that multi -- directional drilling. So we have things that we are looking at that are in our briefcase, but that's about as much I'd like to say about it at this point. I think that, in effect, the marketplace is yet to sort of realize the breadth of the services, the depth of the services, the scale of the company. All of those things are the things that I was trying to point out. And I think those things are already extant and where we go from here will just add to that.

Chase, we have a lot of competencies in performing mechanical and chemical activities in and around wells in an onshore environment. And we have management team that's managed various services, services that we have today and services that we don't have. So I think it's certainly within the realm of possibility to continue down that path, but we're going to be very selective about how we do this. We're excited about MS Energy because of their position in the market, the fact that they control their own destiny in terms of technology, they manufacture the tools that they use to run, they don't rely on buying complete sets of equipment from a third party. So this may have been very interesting to us. And so we'll continue to be selective as we look forward.

And I'll just add one last thought, which is that I think that the MS acquisition demonstrates another important fact, which is that a number of management teams would prefer to be aligned with Patterson, and that gives us an advantage as we think about potential acquisitions.

And as you kind of build this out, do you still see the -- are rigs still strategic to own over the medium to longer-term?

There's no question, rigs are strategic. Absolutely.

Incredibly strategic.

We have a leading position in drilling -- contract drilling, and we're very good at it. It's absolutely a part of what we do.

Okay. All right. And I guess on the guidance for pressure pumping, $390 million sounded a little bit conservative to me. So when did those two spreads come in, in 3Q? And when do you expect the first spread or that next spread in 4Q to come in?

So the first two came in at various points, August and September. And then the next one comes in towards the end of the fourth quarter.

Okay. And then further reactivations after this last spread in the fourth quarter, and I guess how many total fleets do you have cold stacked right now?

One more point on the fourth quarter is we have seasonality that we have to take care of as well in terms of projection and the forecast. In terms of other activations, we haven't called out anything past the 23 spreads. We're very focused on trying to push our margin up. We're very focused on raising pricing where we can. We're also very focused in pressure pumping on high grading customers where we can. There is two ways we can move the margin needle right now, and that's either raise the pricing per stage or get more stages per day per month. And so we're very focused on doing that. So I think we still have opportunities where we can take pressure pumping spreads that are currently working for lesser performing operators and move those to higher-performing operators and improve our own margin. And we want to do that before we look at activating more equipment.

And going forward, do you see more or less when we think about the number of stages per fleet per month that you can do?

Well, I think on average it would continue to increase slightly as we work with more efficient customers for us. I think in terms of the industry, there's probably still a little bit of upside in efficiency as the industry can improve all its operations.

Your next question comes from the line of Jim Wicklund from Credit Suisse. Go ahead please. Your line is open.

Andy, Mark, excellent presentation. John, I'll see you around town, buy you a beer. It's been fun.

Sounds good.

A question. There's only two of you guys, you guys in pump, who capitalize fluid ends instead of expense them. If we're trying to get an idea of apples-to-apples, can you give us an idea of about what your capitalization of fluid ends is in annual basis, however you want to do it, so we can get everybody on an apple-to-apple basis?

Frankly, Jim, I don't have those numbers here with me, but let me describe what we do. A number of years ago, fluid ends had a longer life than we've experienced recently. We believe that we could lengthen the life of those fluid ends as the technology improves. So we've continued to capitalize them; they have a very, very short life. And anytime one comes off a pump, gets evaluated and if it can't be brought back into service, it's written off immediately. So the impact on your EBIT is frankly the same. It's just ours is getting there through CapEx and then fast depreciation where appropriate. I'll let Andy speak to the progress we've made in terms of fluid and life and whatnot.

Yes, we continue to evaluate various designs and also various materials including different type of stainless steel, to try to push the life of fluid ends, and we think that we're making good progress. And we continue to work with the various suppliers and machine shops who have to run these through the foundries and the machining process to make sure that we have sufficient supply as well. But we do think we continue to make progress.

Okay, that's helpful. I appreciate it. And back to a little bit of Marshall's question, I understand telling us who you'd like to go buy is foolish. But just curious, we've seen disaggregation in chemicals and in sand from pressure pumping over the last couple of years. Is there any temptation by Patterson to become more vertically integrated and be more involved in sand or, frankly, in chemicals?

To protect our business, we continually have these discussions as to how much we need to vertically integrate in different parts of the business. A good example of vertical integration is MS, where they manufacture their own MWD tools, they manufacture their own drilling motors and they're known for the reliability of that equipment. In terms of pressure pumping and in terms of sand, we just don't see a tight sand market. And we don't see in our view, longer term, that we have any challenge with access to sand or the volumes of sand that we need to do the work. So therefore, it just doesn't seem to us to be the right investment to vertically integrate in a sand mine. And sand is a resource play, more like an E&P, a little bit more out of what we do. But we do manage the logistics, we manage the storage, we've invested in staffing and we've invested in technology to build out a 24x7 logistics center centralized in Houston to manage all the basins and that's worked very well for us. We're very pleased with that investment and what we're getting from that because we don't have crews that are waiting on sand because of any challenge that we have internally with logistics.

Okay, and that's good, I'm glad to hear that. The slowdown that you had the interruption that you had in the quarter due to other people not delivering, can you -- I won't ask you who that was or what job it was, but what was the -- what wasn't delivered on time that slowed you down? Where was the bottleneck? What product lines?

So we have a multiwell pad as you well know, we're just one of the service providers in that chain during the operation where the operator is going to line up to have the water delivered, we're going to be there with our pumping systems. We're going to provide sand and other chemicals. But then you have other service providers that are contracted directly by the operator, which are services such as wireline for perforating or setting plugs and you have coiled tubing for drilling out plugs and you have various other services that are in there as well, maintaining systems. So in terms of some of our holdups, it was related around wireline and coiled tubing from third-party suppliers directly contracted to operators in primarily in West Texas.

Okay. And then last, if I could sneak one. And Mark you talked about how you're a multiservice company now and you are. A lot of the bigger guys that you would like to comp your valuation to are involved in international activity, not just U.S. So can you talk about the temptation or idea of going foreign [Technical Difficulty] about more full-line service company?

Well, Jim, we've talked about the possibility of looking at international for a number of years. Frankly, our view about that is that it may well make some sense for us at some time in the future. Quite frankly, right this moment, it seems to me that we're actually advantaged as against some of the other multiservice providers in that we don't have a significant -- we don't have exposure to offshore. We have limited exposure to international, I guess if Canada counts as some exposure to international, but not significant exposure. We actually think that should provide to investors actually an advantage as a pure play on North America and for all the advantages that North America seems to be providing right now. So we think we've got multiservices and multiservices in North America. So yes, we do look at international. There may be opportunities for us in the future, but right now, we think that the company's positioning is pretty darn good for investors.

Your next question comes on the line of Ken Sill from SunTrust. Go ahead please. Your line is open.

Yes. Thanks for working me in. And I've never met an operating guy that didn't think they could run a business like coiled tubing or wireline better than anybody else. So good luck talking to your operating guys out of buying those assets. I mean, do you guys have an opinion on that as something that would be tangentially easy to integrate or possible to integrate into your businesses?

You know, these types of services are similar to what we do in some respect because you're talking about other mechanical activities and wells. However, we're just not in that today. And our focus is on contract drilling, pressure pumping and now directional drilling, along with our rentals business and our drilling technology company up in Canada. And so we're just very excited about the portfolio of businesses and services that we offer within that oilfield services offering today.

Ken, if you'll allow me one kind of just having been around for quite a long while comment. It used to be that people thought that the Drilling business was a regional business and could never be consolidated nationally because the differences in each region made it impossible for there to be a national company that was in drilling. I think that we and others have proven that, that's not a correct view. So I would just say that whatever people's views of the difficulties of management, they exist. I'm not trying to underestimate it, we think managing a business, such as our business is a challenge. But I would just argue that, in effect, historical trends don't necessarily indicate future possibilities.

No, I appreciate that. And I do have a question that raises an issue. One of your competitors basically said that scale matters on a regional basis. Do you think the scale in pressure pumping and directional drilling, obviously in drilling it helps, matters on a U.S. basis and perhaps eventually on a more global basis?

I think that scale matters. I think it's a big deal, it's huge. It matters on a regional basis, it matters on a national basis and we're pleased with the scale that we have. If you look at the basins that we operate, it improves our ability to run services and to run quality operations, it improves our efficiency, it improves our cost base, it improves our ability to negotiate with suppliers and for purchasing products and sands, things like that, and pressure pumping. So yes, we think scale is a big deal and we're pleased with the scale that we have in the various basins.

In this case, size does really matter.

Yes, it would seem to me and I wish we could get more consolidation in the pressure pumping business, but it sounds like that's not going to be y'all's cup of tea. That's a backwards question.

Well, I think you need -- we have a history of acquisition and merger in pressure pumping as well.

Well, that's interesting. And Mark, it's been a lot of good years. Enjoy your retirement. I'm sure you'll keep busy, but thanks for all the help. I'll turn it over to somebody else.

Just for clarification, it's John who is retiring.

All right, I was up late for that Astros game. But my apologies, John.

Your next question comes from the line of Kurt Hallead from RBC. Go ahead please. Your line is open.

Hey, great. And again, John, congrats. Great career. Fellow Spartan. So hopefully, I'll get a chance to stay in touch going forward.

Thanks, Kurt.

Got it. Andy, Mark, what's the general sense that you're getting right now in discussions with the E&P customer base? Any feel on visibility out into 2018and potentially out beyond first quarter? And I know that E&P's haven't really gone out and completed all their budgeting process. But I'm sure they're out there inquiring about equipment and kicking tires and seeing what's available and what kind of price points they can get. And in those types of discussions, what kind of feel are you getting about '18 versus '17 on the U.S. land and U.S. frac markets?

Well, I think the best way to describe it, is we're talking to the customers as we always talk to our customers to understand what their plans are. So we are in some discussions about what could possibly happen in 2018. I think the picture is not entirely clear yet, because most customers, most E&P companies are in the middle of their budget process and they really haven't finalized much and probably won't until later in the year and some early next year. But all that being said, I'll go back to some of the commentary that we've made all year long is there's definitely a bias in the trend in the rig count when you're around $50 a barrel. And when WTI is around $50 a barrel, we see rig count flat to slightly up. And if oil is trading a little bit above $50 a barrel, there's more of that up than flat. And so -- and I'm talking in terms of high-spec rigs. And so that's kind of the way we see this. We don't have a lot of clarity on 2018 just because of this budget process that the E&Ps are in. But we're comfortable with where WTI is trading right now and feeling positive about next year. I'd also like to add, since we're on the topic of 2018, our primary objective in 2018 is to be free cash flow positive. That's really important to us. And I talked earlier about capital discipline in 2017, and that's really something that we're going to carry forward into 2018 as well. We are going to be very careful about how we're managing our capital expenditures, our activity levels are going to be higher year-on-year, our margins are going to be higher on businesses year-on-year because pricing is up. But our objective for the next year is to be free cash flow positive.

Well, that's a great color on the land market, Andy. And maybe some similar context or color around the frac in the DUCs and whether or not these E&P companies are really going to focus on spending within cash flow and how that might impact the frac calendar going out, any thoughts on that?

We continue to see improvements and efficiency in drilling, and a lot of it is driven by the percentage of the rigs that are operating being high-spec, super-spec rigs that are out there and that is improving the overall activity in pressure pumping, and that's what's driving the increasing activity in pressure pumping. Our activity is going up towards the end of the year and into next year. We still have the ability to raise pricing a bit, upgrade in terms of operators who can get us more stages per day or more stages per month. And so that's still very positive for pressure pumping.

Okay. Great. And Mark, just real quick on your end, whose multiple do you want?

The highest possible.

If anybody can pull it together and make it happen, it's going to be your team. So good luck.

Your next question comes from the line of Timna Tanners from Bank of America Merrill Lynch.

Hi, good morning, gentlemen. I was just hoping for an update on the rig side in particular in the last two quarters, you've guided for margins lower and beat pretty handily. So just wondering if you can help us understand this last quarter's beat and why the conservatism or caution into the fourth quarter?

Well, in terms of what we've been trying to project, we've also been integrating the businesses between Seventy Seven and Patterson-UTI and trying to understand the cost structures in that, so I think we've have some moving pieces in there. We've also had a real focus on trying to keep costs down with the rig count leveling out. And so we really -- I give the team in drilling a lot of credit for their focus on the cost side and they've worked it pretty hard in the third quarter. I didn't want to over promise what they can deliver in the fourth quarter, but we'll just have to wait and see.

Okay. And you mentioned some of those costs were transitory, can you explain that a little bit?

Yes. I think in terms of transitory, part of it is just that I think the drilling team did a great job on controlling costs in the third quarter. We may have some of that come back in the fourth quarter, which is why we projected the numbers that we did in the fourth quarter.

Got you. And then I was hoping if you could give us an update on the integration of Seventy Seven. I know you talked in the past about up-selling those rigs and expanding customer base, so if you can give us some updated thoughts there. And also updated thoughts on signing any longer-term agreements given this kind of sideways rig count move?

Well, the integration is going really well. We're here in Oklahoma City today. We've been spending time with the teams here, we've been out at the facilities in El Reno, we're very excited about how things are progressing on that front. We said that we would achieve in the range of $50 million in synergies by the end of the year, and I still believe that we're on track to do that. The organization structures for all the various businesses have been put in place where we've merged organizations. And like I said, I'm just very pleased with how all that's going in terms of the integration of the company. In terms of what we're doing with the various businesses, and this is both with drilling and with pressure pumping, we've really worked hard on the marketing side with the shared knowledge from the teams, from both companies' legacy, through this integration process to understand where we are and where we have upside, make the introductions that we need to make, et cetera. And so we've been able to push pricing both in rigs and in pressure pumping. And we've moved rigs around, we've moved pressure pumping spreads around to make sure that we could maximize the profitability and we're continuing to do so.

What inning do you think we are in, in terms of achieving some of those goals that you've enumerated in the past?

I think we're midway through that game. So we're probably in fourth or fifth inning in terms of that. I think we've done a great job this year. We still have work to do next year. The integration is complete in terms of people. There's more work that has to be done in terms of making sure we can maximize pricing, reduce or control costs and then make sure we're working for the operators on the pressure pumping side that can maximize our stages per month.

The one thing I would just want -- Timna, the one thing I just want to add was that there's been a huge benefit. Seventy Seven had some customers that we didn't have. Obviously, we had some that they didn't have. So the advantage here is that the Seventy Seven people are really trying to help the Patterson team achieve an even better penetration among customers and relationships and so on and so forth. And so there's been a huge benefit in terms of marketing from both organizations working together.

Your next question comes from the line of Brad Handler from Jefferies. Go ahead please. Your line is open.

Thanks guys, good morning. I guess, maybe a few questions on the pumping side for me today. I'm not sure how to ask the first one exactly, but I appreciate the guidance you've given us around fourth quarter is very helpful, points to a 50% sequential incremental margin, so that's certainly in line with getting pricing and overcoming the issues in 3Q. It sounded if you're not in control of those issues in 3Q, I guess you're -- maybe can you give us a little bit more sense of how you think those third-party issues won't recur or how you can or can you help so that they don't recur?

Yes, let me try to give you a little bit more color on that. So these are third-party services, which are contracted by our customers, the E&P companies. And so we have to wait on those services at the well site. If those services are having challenges or issues, then we're still incurring costs for labor and other things at the well site. Diesel fuel, things like that, but yet we're not generating revenue because we're not pumping the stage. But the important part is that we do take this into account every month, every quarter in terms of projection, it always happens. There's always going to be some issue with various things that happen in the field in operations that are out of our control but impact us and we do take those into account in our projections. But what we saw in the third quarter was higher than normal, so what I would consider transitory.

So it's not about doing something to prevent them. Did you -- were you able to adjust pricing with the same customer so that you are at least -- there's more cushion to allow for that? Or is there something else you've done or you're just saying it should go back to a little more normal rate of such delays?

It's really about this going back to a more normal rate. I mean, we do have these kind of operational delays where we have to wait on things from time to time that we don't contract in pressure pumping. And we just saw higher than normal in third quarter.

Sure, okay.

I would also add -- Brad, I would also add that third quarter also included a hurricane. And that hurricane caused certain things not to occur within the normal. So there's some challenges there.

Oh, sure. Sure. But it looks like even if you add back that impact, the margin growth was about 100 bps, so it was probably still lower than your expectation, I suspect.

That's correct. But I'm saying that the transitory supply chain issues that others -- that happened may have been slightly greater owing to other party's activities.

Oh, I see. Understand. That makes sense, okay. Maybe a couple --.

Let me just add here. Every operator has these types of delays in their operations. Every operator works to minimize this by the services that they contract from the companies they work with. Every service company to some extent has some kind of delay from time to time and we have to take that into account in our activity projections. So it's not -- I don't want to point out anybody in particular over this, it just happened to be that in the Permian for us, we experienced more than normal in the third quarter.

Sure. Okay. That's very helpful, I'm glad I came back to it. A couple of questions related to your fleet, please. I believe that gross frac horsepower once you bought Seventy Seven Energy was 1.5 million. And so your comments around -- you have several spreads, maybe another 5 or so that you're sitting on. Can you -- maybe I missed it from part of the call, but can you just -- with that in mind, what's your focus on bringing those to work? How do you make that determination to do so?

Yes. So by the end of the year, we'll have 23 active spreads, it's about 1.25 million horsepower out of a total of 1.5 million hydraulic fracturing horsepower for us. The way we look at this is we still have opportunities to raise pricing on existing spreads that are operating. We have opportunities to move spreads to operators that can gain us more efficiencies in terms of stages per day or stages per month, and that's really our priority right now in terms of improving the margin of this business. We'll continue to look at opportunities to activate spreads. And if it makes economic sense, we will certainly continue to do that as well. But where we have those opportunities to go to work for higher efficiency operators, we may choose to just take spreads away from lesser-performing operators and move those to higher-performing operators right now to improve our margins without having to have any OpEx or CapEx investment to do that.

I see. Okay. But they -- I guess to clarify, they are recoverable for a reasonable cost, I don't know if you're in a position to tell us what ...

All of the remaining 250,000 horsepower can go back to work. It's really an economic decision and an operational decision and a decision that we might make to align with certain customers before choosing to put all that back to work. But our focus is on margin. I don't think at the end of the day our investors will really judge us on what our overall utilization is or market share. In this particular sector, I think it's really going to be more about the margins that we produce and as a contribution to free cash flow in 2018.

Okay. I appreciate that. One more for me, you're being good with your answers. Your average fleet size is -- sounds like about 54,000 frac horsepower per spread, which is meaningfully higher than many of the other participants in the industry. And there presumably is an opportunity for you to pull basically trucks across your fleet and develop by -- without -- actually at 1.25 million, you could have more spreads working. How does that factor in? Is that something that we might hear you do over the course of the next few quarters?

So I think there's probably different types of reporting on what horsepower looks like for different companies. We're giving you the high-level numbers so that you can get a really good picture of what we have out there working. There's some particular jobs for particular customers that we do that are higher in intensity would require more pumps on location, some require less. We're also giving you these high-level numbers because we have to have pumps and equipment that's in rotation back to maintenance facilities and then back to the field. And we do this in various basins and we have to manage it in different ways and in different basins. So you -- we're giving you the high level, but it includes all of that equipment that rotates from the field back to the maintenance centers and then back to the field in 24x7 operations. Full frac spreads don't come back to maintenance centers as they used to when you're running everything at 24x7. And the majority of our equipment has always been at 24x7. So it gives you a little bit of color on what we have in the full cycle between field and maintenance.

Your next question comes from the line of Marc Bianchi from Cowen. Go ahead please. Your line is open.

Thank you. I guess, going back to the cash flow generation commentary that you provided before. As we look to 2018, assuming the outlook is pretty flat from here, you've got MS now as part of your business, what should a reasonable range for CapEx look like without any growth or maybe you want to include some growth in there?

Well, we're certainly still a few weeks off from our own internal budget process for 2018. But if you look at 2017 versus 2018 year-on-year, you'll see some things that you could take into account. First, we always have some carryover on our CapEx number from 2017 to 2018. Maintenance capital is going to be higher in 2018 versus 2017. We have higher drilling activity. We have higher pressure pumping activity year-on-year. In drilling, we are not likely to be doing as many upgrades as we did in 2017. So our upgrade CapEx would be lower, assuming WTI stays trading in a range relative to where it is right now. And then we'll fund CapEx to MS, we'll fund CapEx to Great Plains and some to E&P at the same time. But also on the other side of the equation in the P&L, our activities higher year-on-year, pricing is going to be higher year-on-year. And so we think this all gets us to heading in the direction of our objective to generate positive free cash flow in 2018.

Certainly. Yes, that seems like a very doable aspiration at this level of activity. Is there a way you can tell us kind of how much growth CapEx and how much maintenance CapEx there was in 2017 just to give us a basis for thinking about '18?

I don't think we've got that information easily at hand. I think we'd really be kind of pretty much guessing at it here.

Yes, I can take you back to one of our previous calls, I don't have the breakdown in front of me right now, but we did give breakdown on that $580 million on a previous earnings call. The only delta now is we've moved some funds around within that $580 million so that we could add some CapEx to MS and a little bit more CapEx to Great Plains Rentals.

Your next question comes from the line of Michael LaMotte from Guggenheim. Go ahead please. Your line is open.

Thanks guys. I appreciate just squeezing me in. Andy or Mark, if I could follow up on the free cash flow comment for next year. Any thoughts on use of that cash and in particular cash return or repurchases?

No thoughts at this particular moment. One of the things is just keeping that objective squarely in mind, there's lots of opportunities. We wouldn't mind reducing our debt on our revolver. We could use it for increased dividends. We can use it for stock buybacks. All those would be possible that our board would have to consider. Frankly, we've got in December, we do our budgets, that's what we've always done for many, many years. We're going to do it again this year. And after we do that, as we talk to you folks in February, I think we'll have a much better sense of this.

Okay. And then, Andy, if I could follow-up on MS real quick and the comment about adding some capital. Are we at full utilization of their current fleet? In other words, is growth requiring capital investment?

So it's a mixture of maintenance capital and growth capital that we're adding to MS. MS still has potential to grow. Very excited about the possibilities there.

Okay. So not -- growth is not dependent on CapEx is the interpretation there?

Well, there is growth CapEx going to MS.

Right, right. Okay. And then in terms of adding tools on the growth side, you've got to add people, I presume, along with that. What's the market for DD's like today?

I would say the market for DD is tight just like it is in other sectors of the business right now. But MS has done a really good job over the years at growing these positions internally. So we don't necessarily -- I say we, that's MS. We don't necessarily go out to the market to look for these positions. We continue to grow and promote internally. And that's one of the things, along with the technology, that differentiates MS.

Your next question comes from Sean Meakim with JPMorgan. Please go ahead.

Thank you. Good morning. So Andy, just one other thing to talk about on the pumping side for the quarter, some of the shifts we saw in terms of jobs versus revenue per job, it looks like big uplift in revenue per job, pumping job count was pretty flat. Can you maybe give a sense of kind of what drove that shift in terms of customer demand at different types of jobs and how that it's influencing what you've laid out for the fourth quarter?

I think, overall, our team in pressure pumping has done a really good job at moving up pricing. We've moved up pricing with a number of customers in the third quarter. Some of that you're seeing the impact in the third quarter. You'll see more of that in the fourth quarter. And then also as I've mentioned, we've moved frac spreads from operators that are less efficient to operators that are more efficient where we can get more stages per day and more stages per month. So all those combined have helped that.

Okay. So you're not seeing anything that was -- was not different mix of job types or anything, it's really, it's just those positive catalysts that you laid out.

Yes, I wouldn't say we've seen any big shift in the job mix other than what we called out in terms of some of the challenges that we have in the third quarter, whether it was Hurricane Harvey that hit operations in South Texas, but also had some cost impact in West Texas, and then some of the delays that we had with third-party services in West Texas. That -- and there's some movement that would drive mix there, but other than that, I don't see any operator trend towards any change in mix for us.

Got it. That's very helpful. And then just 1 last one on pumping, as we're working the fleets harder given the shift in intensity, are you seeing any change in maintenance required to maintain the fleet? Anything longer term you see a shift in -- a shift upward in terms of the amount of cash to keep the fleets working? How do you see that changing over time given higher intensity levels?

Well, I think there is an impact there. I don't think it's just us. I think it's across the industry. I think everybody is probably seeing more hours pumped during a month than what we have historically. And so there is going to be an impact at the OpEx level and the CapEx level for maintenance. But I don't think that's just related to our company. I think the industry is moving in that direction with the intensity of the wells.

And your next question comes from Jud Bailey with Wells Fargo. Please go ahead.

Thanks, good morning. And let me also say, John, congratulations and enjoyed working with you over the years. And wish you all the best.

Thanks, Jud.

My first question is just trying to think -- looking at profitability on a per fleet or per horsepower basis, some of your competitors are starting to put up numbers that are a little above what they did in 2014. And I wanted to ask, you guys are now much bigger in pressure pumping, you've highlighted you're enhanced logistics, your logistics center. As I think about Patterson and I think about it on ability per fleet or horsepower, is there a reason why your profitability shouldn't be greater at some point or higher than it was in 2014?

I think we have that opportunity. I think the profitability and margin is our focus. It's not around utilization or market share, and that's why we continue to push pricing. And I think the market will accept that movement in pricing upward and why we continue to have this push to work for the most efficient operators that can give us the most stages per day and most stages per month. So we want to continue to push that and we want to continue to improve margin.

Okay, great. And then my follow-up is, you highlighted that the guidance for MS for the fourth quarter, I think, you said gross profit margin in the low 30s. Is there a way to get a point of reference of what their margins were back in 2014 or how that relates to 2014 levels?

No, we're not providing any numbers there. As a public company that has audited financials, we just don't have that ability with rolling in a private.

And your next question comes from John Daniel with Simmons & Company. Please go ahead.

Hi, thanks for getting me in. Andy, there are several companies who have ordered engines and installed them onto trailers in order to stay within the Tier 2 framework and this move will allow them to build fleets in 2018. Have you or are you pursuing a similar strategy?

So we are not pursuing, at this time, any purchasing of any new equipment to add to our fleet size. So we still have equipment that we can still run. We can still turn around cores from Tier 2 on existing trailers. But we're not expanding or we're not actively pursuing expansion of our fleet size right now. We still have equipment we can activate.

All right. So you would activate all of that 250 before ordering new?

I would see that we would certainly -- to say that we won't order new before activating all the 250 wouldn't be completely correct, but we'd want to have line of sight that we're going to be out because of the lead times. And so there might be a point if we are continuing to activate equipment that we may make a decision to start a purchase process because we see the lead times for new equipment at 8 to 9 months.

Okay. At this point you got -- how many fleets do you operate that are entirely or, just -- that have Tier 4 engines? And assuming you do, can you just speak to the engine performance? Specifically, the maintenance costs relative to what you see with Tier 2 engines?

So we operate one complete fleet with Tier 4 and we have some other Tier 4s in the mix. There's a little bit higher maintenance costs, but I wouldn't say that it's significant. So that's kind of where we are at right now in Tier 4.

Okay. I guess, just the last one for me. In a world if nothing else's changing, if 23 fleets by year-end and oil prices stay where they are, are you inclined to raise prices for pressure pumping in Q1?

I think pricing still has room to move in Q1. If you look at the overall utilization in the pressure pumping sector, we're already at 70% pushing higher. And by the time we get to Q1, the industry is probably at 80% sometime in Q1. And so I believe that we and others have the ability to push pricing in 2018.

And your next question comes from Daniel Boyd with AMP Capital Markets. Please go ahead.

Thanks. Mark, I just wanted to follow up a little bit on the multiple argument and something we've talked about in the past. But I think it's not just the international versus U.S. mix but it comes down to capital intensity. So some of the companies that trade at higher multiples might spend 10% of revenue on CapEx a year or even less. Do you think there is a path as your business mix shifts to sustainably lower that CapEx, so that the free cash flow through will be higher?

I'll let Andy also speak to this point. But I think his emphasis that he's put forward over this conference call about the fact that 2018 is a year in which the company is determined to generate significant free cash is a real statement that that's our direction. We understand that. And we know that that's one of the things that investors are looking for. Whether we can get to a point where we're a low CapEx business as contrasted with the high CapEx business is a question that still needs to be demonstrated by us. But we think there's certainly some initiatives that we're pursuing that, if successful, would allow us to be a lower CapEx business with better, even better results.

Okay, great. And so CapEx, because it's sort of a little unclear, is CapEx likely to be flattish with this year or higher given the acquisitions and higher maintenance CapEx?

I'll answer that, but first let me just also weigh in on our historical and the capital intensity of our business. One of the things that certainly has happened at Patterson-UTI and has been purposeful is to rebuild the rig fleet. Starting in 2006, we started a very ambitious and successful retooling of the drilling company, and that's just worked out great for us. Very excited about our APEX line of rigs, whether it's the APEX-XK and now the APEX PK that we brought in with the Seventy Seven merger and now we have the APEX-XC that's going out. But the company since '06 has gone through a huge retooling of the Drilling business, which began to tail off in 2015. We're spending CapEx on upgrades this year. We have the 2 new builds, they're kind of one offs because of some specific contracts, but we're not in a new build environment right now. We may find ourselves in a future new build environment if the economics get there, but we're very pleased with the status of our rig fleet right now and I don't see us having to retool that in the future. So I think historically for Patterson-UTI, the weighting on the CapEx will shift. And then with the addition of companies like MS, which are much lower intensity on capital and Great Plains, that will work into that weighting as well. If we look at CapEx into 2018, certainly, maintenance CapEx in 2018 is going to be higher than it was in 2017 because our activity levels are higher year-on-year just because of the increasing rig count, the increasing number of pressure pumping spreads that we're working. So maintenance CapEx by itself would be higher year-on-year. We wouldn't have the capital expenditure in 2018 necessarily that we had in 2017 on rig upgrades. We may do a few, but maybe not as many as we did in 2017. So overall CapEx might be a bit higher, but it's the other side of the equation with activity higher, pricing higher, that we're very focused on getting to that objective of positive free cash flow.

And there are no further questions at this time. I now turn the call back over to Mr. Mark Siegel.

Everybody who participated, we'd like to thank you for your participation and look forward to talking with you in February as we report our fourth quarter. Thanks, everyone.

This concludes today's conference call. You may now disconnect.