Patterson-UTI Energy, Inc. (PTEN) Q4 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Energy Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] Thank you. It is now my pleasure to turn today’s call over to Mr. Mike Drickamer, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Brent. Good morning. And on behalf of Patterson-UTI Energy, I’d like to welcome you to today’s conference call to discuss the results for the 3 months and year ended December 31. Participating in today’s call will be Andy Hendricks, Chief Executive Officer; and Andy Smith, Chief Financial Officer. 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. These forward-looking statements are subject to risks and uncertainties as disclosed in the company’s SEC filings, which could cause the company’s actual results to differ materially. The company undertakes no obligation to publicly update or revise any forward-looking statement. Statements made in this conference call include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website, patenergy.com and in the company’s press release issued prior to this conference call. And now, it’s my pleasure to turn the call over to Andy Hendricks for some opening remarks. Andy?

Thanks Mike. Good morning and welcome to Patterson-UTI’s fourth quarter conference call. Thanks for joining us today. This is an exciting time for Patterson-UTI and the industry in general. We expect increasing margins throughout the year due to strong pricing momentum as the availability of premium equipment has become tight. I believe it is fair to say that it’s been a long time since the outlook for oilfield service pricing was this strong. Leading edge day rates for our Tier 1 drilling rigs are increasing. For the base rig, we are now in the mid-20s for day rates and that is where the discussions begin. And further to that, in some cases, our total revenue per day is at or above $30,000 a day when you include the revenue from technologies and ancillary services in our contract drilling business. In pressure pumping, we see further pricing improvement for both dual fuel and conventional spreads due to the lack of readily available premium equipment in the market. With increasing activity in pricing, we expect to generate more than $450 million of adjusted EBITDA in 2022, which exceeds our CapEx forecast by more than $100 million. The majority of this CapEx is for activity related to maintenance and reactivation CapEx with growth CapEx focused on high return, quick payback opportunities that we expect to be margin accretive. Andy Smith will provide more detail on our CapEx forecast. With the improved outlook for cash flow, I am pleased to announce that we are increasing our quarterly dividend to $0.04 per share. Turning now to my review of operations, first, I am proud of the way each of our businesses were able to achieve higher activity levels in the fourth quarter despite a tight labor market that was exacerbated by the recent surge in COVID cases and continue providing a high level of service quality for our customers. In contract drilling, our U.S. rig count in the fourth quarter increased by 26 rigs quarter-on-quarter, including 13 rigs that were part of the Pioneer acquisition. For perspective, the 13 rig organic growth in our rig count was more than the prior two quarters combined. This organic growth in our rig count was achieved despite a tight labor market and while integrating the acquisition of Pioneer. With the growth in activity across the industry, the market for Tier 1 drilling rigs is tight and premium rigs are receiving a higher day rate. The market is much tighter than what is apparent by just looking at the market for super-spec rigs. Operators’ preferences have continued to evolve, while the definition of a super-spec rig hasn’t changed since 2016. We see more operators increasing their requirements to include more clearance underneath the rig floor and a third mud pump for additional hydraulic horsepower and redundancy. The extra room underneath the rig floor allows the rig to walk over wellheads and around existing production equipment on the pad and the older style rigs that have limited clearance under the rig floor because the drawworks are on the ground are generally less desirable to operators. Across the industry, we believe there are less than 400 rigs in the U.S. that meet the capabilities of what we are referring to as a Tier 1 super-spec rig. Within our rig fleet, we have 107 of these rigs in the U.S., of which 102 are currently contracted for 95% utilization. Furthermore, all of our Tier 1 super-spec rigs in the Permian Basin are currently contracted. We believe that in the industry, approximately 300 rigs in the U.S. can be upgraded to Tier 1 super-spec. However, over half of these rigs are of an older style where the drawworks is located on the ground, limiting the clearance under the rig floor. We believe the extensive upgrades these rigs will require to become Tier 1 rigs is economically prohibitive in the current market and higher day rates will be needed to justify these upgrades. With our rig fleet, we believe we have a clear operational and financial advantage when it comes to potential upgrades to Tier 1 super-spec as we already have a large number of rig structures with the drawworks up, design and walking systems. For example, we have 34 rigs within our fleet that can be upgraded Tier 1 super-spec capabilities for approximately $2 million each. In addition to the Tier 1 capabilities of our fleet, we expect our ESG and sustainability capabilities also help differentiate our rig fleet. Within our fleet, we have more than 70 rigs that are today equipped to operate with alternative power sources such as highline power from the electric grid, dual fuel or natural gas-powered engines or our proprietary EcoCell lithium battery hybrid energy management system. EcoCell, which uses stored energy to provide power to the rig when needed, has demonstrated the capability to reduce fuel consumption by more than 20%, thereby reducing both fuel costs and emissions. We continue to see strong demand from customers who are willing to pay a higher day rate for environmentally-friendly sustainability solutions that help to reduce fuel costs and emissions and we plan to continue investing in our fleet during 2022 to increase our sustainability solutions. For instance, we ended 2021, with 6 EcoCell units deployed. And driven by strong customer demand, we plan to continue adding EcoCell units in our fleet throughout 2022. In pressure pumping, our spread count recovered to pre-pandemic levels during the fourth quarter, while overall industry activity levels have not yet fully recovered. More importantly, due to increased efficiency and the streamlining of our operations, our pressure pumping profitability has significantly improved. During the fourth quarter, we reactivated our 11th spread, a dual fuel spread and we expect to reactivate our 12th spread, a Tier 4 dual fuel spread, late in the first quarter. When we reactivate this spread, 7 of our 12 active spreads will be dual fuel capable, which is important as customers are willing to pay up for sustainability solutions that reduce fuel costs and emissions. Pressure pumping pricing has improved at the leading edge. And in 2022, we are focused on maximizing overall profitability of our 12 spreads. We do not have any plans to activate additional spreads after the 12th spread. Moving to new technology, during the first quarter, we expect to complete field trials and start commercialization of our new engine idle management system, EcoStart. EcoStart differs from other systems, because it is integrated into our pump control systems, which allows it to monitor our pumping operations and start and stop engines in between stages, eliminating approximately 70% of the engine idle time of conventional operations, resulting in reduced fuel consumption and emissions. In directional drilling, during the fourth quarter, we benefited from increased activity and higher pricing. In 2021, we continued with the rollout of our new impact mud motors and Mpower MWD Systems, which helped to increase service quality, resulting also in better market share. With that, I will now turn the call over to Andy Smith, who will review the financial results for the third quarter – for the fourth quarter.

Thanks, Andy. For the fourth quarter, we reported a net loss of $362 million or $1.68 per share, which includes pre-tax charges totaling $286 million. These charges include $267 million of non-cash impairment charges, $10 million of acquisition-related expenses, a $4.6 million loss on the sale of assets and a $4 million non-cash write-off of directional drilling inventory. The $267 million of non-cash charges includes $220 million for the retirement of drilling rigs and other drilling equipment, $32.2 million for the retirement of approximately 200,000 frac horsepower, $13.9 million for the retirement of directional drilling assets, and $1.3 million of impairments in our E&P business. The rig retirements included all of our SCR-powered rigs in the U.S., leaving us with 184 AC-powered rigs in our U.S. rig fleet. All of our rigs in the U.S. are now APEX class rigs, including 171 super-spec rigs, of which 107 are Tier 1 super-spec rigs, having added clearance under the rig floor and a third mud pump. In pressure pumping, our fleet now consists of approximately 1.1 million frac horsepower. As Andy mentioned, we are encouraged by our outlook for drilling and completion activity and pricing and expect total adjusted EBITDA for 2022 of more than $450 million to exceed our CapEx forecast of approximately $350 million by more than $100 million. I will provide more detail on our CapEx forecast as I go through each of our segments. In contract drilling, higher activity, better pricing and the contribution from Pioneer Energy resulted in a 46% increase in total contract drilling revenue and a 26% increase in adjusted gross margin. In the U.S., on a per day basis, the average rig margin per day during the fourth quarter decreased as we expected to $5,450 per day due primarily to an increase in labor and rig reactivation costs. At December 31, 2021, Patterson had term contracts for drilling rigs in the U.S. providing for approximately $325 million of future day rate drilling revenue. Based on contracts currently in place in the U.S., we expect an average of 51 rigs operating under term contracts during the first quarter and an average of 39 rigs operating under term contracts during 2022. For the first quarter in the U.S., we expect another strong quarter of activity growth with our average rig count increasing by 10 rigs to 116 rigs. Average rig revenue per day in the U.S. is expected to increase by approximately $800 in the first quarter and average rig cost per day is expected to decrease approximately $200 per day, leading to a $1,000 increase in average rig margin per day. In Colombia, we expect to generate approximately $16 million of revenue in the first quarter, with approximately $3.5 million of adjusted gross margin. In contract drilling, we expect approximately $215 million of CapEx spend in 2022. The majority of this CapEx is directly tied to activity levels with maintenance and reactivation CapEx expected to collectively total $120 million. The remaining $95 million of CapEx is for items that increase incremental revenue opportunities from our existing rig fleet. This amount includes approximately $55 million for market upgrades, $25 million for high-demand sustainability solutions such as EcoCell and natural gas engines, and $15 million for the purchase of specialty drill pipe that we rent for an additional charge to our customers. We evaluate each of our upgrade opportunities for appropriate contract terms and economics. The majority of the CapEx for market upgrades is intended to meet strong customer demand for Tier 1 super-spec rigs. We expect to upgrade approximately 20 rigs to Tier 1 status this year. Premium rigs are receiving higher day rates and so we expect all of these upgrades to be margin accretive with quick paybacks. CapEx to be spent on our sustainability solutions includes 12 EcoCell units and additional dual fuel and natural gas engines. With strong demand from customers who are willing to pay a higher day rate for eco-friendly cost-saving alternatives, we expect these upgrades will be margin accretive with paybacks ranging from 1 to 3 years. In pressure pumping, during the fourth quarter, we effectively managed third-party delivery challenges and maintained a high level of efficiency while achieving better pricing. Pressure pumping financial results for the fourth quarter exceeded our expectations as adjusted gross margin improved by $3 million quarter-on-quarter to $20.9 million on $183 million of revenues. For the first quarter, we have already experienced some of the weather-related delays that are typical for the first quarter. Even when considering these delays, due to better pricing and the full quarter impact of the spread activated in the fourth quarter, we expect first quarter pressure pumping revenue to increase to approximately $200 million with an adjusted gross margin of approximately $27 million. Pressure pumping CapEx is expected to be approximately $100 million for 2022, of which more than three quarters is directly tied to activity levels for maintenance and reactivation CapEx. We do not expect any additional reactivation CapEx beyond that necessary for the 12th spread we are reactivating in the first quarter. The remaining CapEx is sustainability related and includes some Tier 4 dual fuel upgrade to the engines for our 12th spread as well as some additional engine upgrades to dual fuel to supplement our existing dual fuel spreads. Dual fuel equipment continues to garner higher pricing in the current market. Turning now to directional drilling, adjusted gross margin for the fourth quarter of $1 million included a $4 million non-cash write-off of inventory. This inventory is no longer useful as we transition to our next-generation of in-house engineered MWD tools. These tools improve the quality of subsurface data acquisition and the overall reliability of our tools. Excluding this write-off, fourth quarter adjusted gross margin exceeded our expectations. For the first quarter, we expect revenues to increase to approximately $39 million with an adjusted gross margin of approximately $5.5 million. For 2022, we expect to invest approximately $15 million of CapEx in directional drilling. The majority of which is for the retooling of our fleet to next-generation mud motors and MWD systems. Turning now to our other operations, which includes our rental, technology and E&P businesses. Revenues for the fourth quarter improved to $17.1 million and adjusted gross margin improved to $7.3 million. For the first quarter, we expect both revenues and adjusted gross margin to be similar to fourth quarter levels. During 2022, we expect to invest approximately $17.5 million in our other operations segment, which is primarily related to maintenance CapEx. On a consolidated basis, we expect total depreciation, depletion, amortization and impairment expense of approximately $121 million for the first quarter. Selling, general and administrative expense is expected to be approximately $24.5 million for the first quarter. We expect both our effective tax rate and cash tax rate to be close to zero for 2022. Turning now to our balance sheet, during the fourth quarter, we repaid the $50 million balance on our term loan, leaving us with approximately $741 million of net debt outstanding at December 31 with no principal payments due until 2028. With our expectation that 2022 adjusted EBITDA will exceed $450 million, we expect to be at approximately 1.5x net debt to trailing EBITDA by the end of 2022. With that, I’ll now turn the call back to Andy Hendricks.

Thanks, Andy. First, I would like to thank our team at Patterson-UTI and all the parties involved for the highly efficient work that was done to acquire Pioneer Energy Services divest the production business and effectively integrate the drilling business. This was a huge amount of work and was all successfully accomplished within the fourth quarter. A couple of weeks ago, I had the honor of being one of the keynote speakers at the World Oil 2022 Forecast where I gave some of my thoughts on the industry’s macro environment outlook. . If you thought I was upbeat on the third quarter call, I’m even more upbeat now. It’s been a long time since as an industry, we have had the alignment of various economic factors that have the potential to lead to a multiyear scenario stability. On the demand side, global oil demand is projected to surpass pre-pandemic levels this year, and it will become increasingly difficult for either OPEC+ or the U.S. to easily fill the gap. And with U.S. E&Ps now focused on returning cash to shareholders and less free cash going towards protection growth, all this leads to an interesting situation where OPEC+ may now have more control over global oil supply and pricing than they have had over the last decade, which could lead to more pricing stability over the next few years, geopolitical risks aside. For those of us in the contract drilling and oilfield services sectors where premium equipment is tight, this potential commodity price stability has been making of a multiyear up cycle with higher activity for a longer period than we have seen over the last decade. As a result, at Patterson-UTI, we are projecting strong EBITDA growth year-on-year. And with a higher activity, we will increase maintenance and reactivation CapEx, which is the majority of our CapEx spend. But in addition, we are planning some CapEx in the areas of technology to improve our position and earnings in the market, but we are careful to ensure that CapEx investments have a quick payback and a high return. Overall, with our higher levels of activity, improved pricing and stronger free cash flow, I am very upbeat for the prospects of Patterson-UTI to be able to provide stronger returns to shareholders as we progress through what looks like a multiyear up cycle. We have a long history of returning cash to shareholders, over $1 billion over the past decade. We are pleased to be able to raise the dividend at this time and if cash flow continues to improve, we will evaluate all reasonable options to improve our cash returns and provide further value to shareholders. Again, it’s an exciting time for Patterson-UTI, and we are looking forward to the continuing financial growth. With that, we’d like to thank all of our employees for their hard work, efforts and successes to drill and complete wells better each day. Brent, we’d now like to open the call for questions.

[Operator Instructions] Your first question comes from the line of Chase Mulvehill with Bank of America. Your line is open.

Hey, good morning. Hope you guys are doing well today.

Good morning.

Hi, Andy. Hi, Andy. So I guess first question is really around the guidance for 2022. You gave some really strong EBITDA guidance. You said greater than $450 million. So if I could kind of peel back the onion a little bit and ask you kind of some macro assumptions to get to that guidance of greater than $450 million, where does the rig count need to go to this year? Basically, where does the horizontal rig count or total rig count, where do we need to exit the year to be able to hit that $450 million mark?

Yes, I’ll start with that. So we said at the last earnings call that we think the rig count in 2022 goes somewhere between 650 to 700 for the industry and we haven’t really changed that in our thesis in the way we look at our budget. But we do see that pricing is improving, and we’ve continued to become more profitable in each of the businesses throughout the year. Andy?

Yes. I don’t have a lot to add to that. I would say that as we look across our rig fleet, even with what we’ve given you in terms of that EBITDA projection, we’re going to be pretty. I think we will be pretty constructive as we look to put new rigs to work. And it won’t be – that will just – our projection isn’t really based on a ton of rigs going back to work. We are showing an increase, but we’re not really showing an increase that gets anywhere near the rigs that we would have available.

Yes. And this is – when we’re giving you this EBITDA, it’s really based on our view that profitability continues to improve each quarter.

Okay. Alright. And would you care to give us some color on kind of where you think daily gross margins can go to throughout the year? Are we going to be – how much higher can we be in the five and half thousand a day that you reported in the fourth quarter?

At the leading edge, as I mentioned earlier, we’ve got some rigs that are earning in terms of revenue per day with technology and ancillary equipment at 30,000 or over 30,000 a day. And my expectation is that some of our lesser earning rigs that were contracted last year sometime start to move up closer to that level. So that’s why we see margin improvement and expansion quarter-on-quarter.

Yes. I mean we’ve held off, and you’ve seen it in our term contract backlog, but we’ve held off sort of in this period of lower pricing, signing a lot of longer-term deals. And so now that pricing has come back and it’s come back pretty rapidly. You’ll start to see our portfolio re-rate at those higher levels.

We said the leading-edge base day rate on the previous earnings call for the third quarter was in the low 20s. And now here we are in February of 2022, and we’re telling you the base rig rate is in the mid-20s. And so it’s moved up quick. I don’t think there is been an appreciation for how tight the market is for the type of rigs that people want.

Okay. Perfect. So unrelated follow-up, and I know Mike is there, and I don’t know if Michael was to comment on this or if going to come in on it. I know he’s probably done the work. But I noted that there is 300 Tier 1 super-spec rigs. And if I recall, I think you guys have talked about 700 total super-spec rigs out there. So it’s obviously, Tier 1 and what I’ll call Tier 2. So that means that you got 400 that can be upgraded. I mean, we just heard the 20 a year would be upgraded to Tier 1 and just less than $3 million a rig. When we think about that 400, that could be upgraded from Tire 2 to Tier 1 super-spec rigs. And what do you think those costs will be – I mean, obviously it’s about $3 million for you guys, but when we look out there across the industry, you talked about it being expensive and not making a ton for most people in today’s day rates, but what’s the cost structure look like to upgrade those 400 rigs?

So, we think it’s about 300 rigs in the U.S. that can be upgraded to Tier 1 super-spec. You have got a large number of rigs out there, maybe over half that have drawworks down design. And so that’s a significant capital spend to be able to make that conversion to get the drawworks up. In our particular case, we’ve got 34 rigs that don’t require that conversion. And so it’s about $2 million each for those 34 to bring that up to Tier 1 super-spec. So – we just – we find ourselves in an interesting situation where we think we have an operational and financial advantage in that area to get to Tier 1 super-spec these days because we’ve been building that drawworks up design since 2012.

That makes sense. I mean one of your competitors having to spend $6.5 million, $7.5 million to get to Tier 1. So nice to see that you can do that at half the price. With that, I’ll turn it over. Thanks, Andy.

Thanks.

Thanks.

Your next question comes from the line of Ian Macpherson with Piper Sandler. Your line is open.

Thanks, good morning, gentlemen.

Good morning.

I was curious, are the term contracts this quarter into the second quarter? I know they are way below leading edge but are they neutral or accretive or dilutive to your expected realized day rates and margins in the first quarter. I’m just trying to think about what contract roll means for you this year as you reprice?

Yes, everything is rolling up. So nothing is dilutive.

Yes. If I understand your question, right, certainly, pricing within the term contract backlog has gone up.

This – in Q1, are the rigs that are under term contract going to earn a higher rate or above or below average rate relative to your total fee guidance? That’s the question.

We don’t have a lot of those older legacy contracts that would be rolling down. The majority of everything we have is going to continue to push up.

Right.

Okay. Okay. Got it. And then if I’m working backwards from the paybacks that you described on your $2 million upgrade to Tier 1 super-specs. Would I be right in deriving about $2 million or maybe $2,500 – $2,000 to $2,500 a day rate premium that you would expect between a Tier 1 super-spec and a Tier 2 super-spec based on today’s market pricing. Is that about right?

I think it might be even a little higher than that.

Okay. Okay. Really – I mean, I think just following up on Chase’s question, we want to understand we don’t want to take your best data point with $30,000 all in revenue per day as your highest point and extrapolate that too quickly and too broadly. But if you’re repricing almost your entire fleet within the next 12 months and you’re upgrading most of your fleet to be a Tier 1 super-spec next year, it’s not a crazy extrapolation if the market doesn’t change for today’s spot rates to be reflective of next year’s average rates. Is it?

You could certainly get there, but that’s why we wanted to call out what we think the EBITDA is going to be this year and help clarify that so that your extrapolation could fall in line with what we think we’re going to do. We don’t normally call out EBITDA. But this has been such a big ramp in pricing in all our businesses, not just drilling that we thought it was material and important to explain what we think is going to happen in 2022. .

Okay, thanks. Then last one for me if there is another higher windfall revision, would we expect that to be just methodically allocated towards another dividend bump? Or how are you thinking about incremental free cash flow from here forward?

I’m not sure...

Yes. In terms of free cash flow, could it be a dividend bump is the question. So I think we’re going to look at all options. Yes, there could be some upside on what we’re talking about in 2022 just because of when we went through our budget process. But getting back to what we’re going to do with free cash and the use of free cash, we’re raising the dividend as of yesterday’s Board meeting. And we’re going to look at all options going forward, whether that’s further increase in the dividend, potential special dividend, share buyback anything is on the table. We’re highly focused on returning cash to shareholders as we continue to produce free cash flow.

Understood. Thank you, Andy.

Thanks.

Your next question comes from the line of Scott Gruber with Citigroup. Your line is open.

Yes. Good morning.

Hi, Scott.

Good morning.

Good morning. I wanted to start the pumping kind of similar line of question. You guys forecast about 13.5% gross margin in 1Q. Where do you think that trends over the course of the year? It seems like you’re likely embedding kind of high teens in the second half. Is that fair?

I think that’s fair.

Yes. So we see a continued progression in gross margin in that business throughout the year quarter-on-quarter up into the high teens.

Got it. And then as you think about – you obviously said no incremental reactivations planned from here. But if there were another reactivation, what level profitability would you need to see on that incremental spread? And what type of spare capacity do you have in the business today? Do you have a dual fuel on the sideline or would you likely have to upgrade equipment to bring it back into the market?

Yes. So, right now, when we activate spread 12, that’s it in our plan. We don’t have any plan to spin the reactivation CapEx to activate another spread. And our focus is going to be on improving profitability throughout the year and pushing the pricing where we can on some of the spreads that we have agreements on that were signed maybe 6 months or 9 months ago. And so that’s really going to be our focus, and our team’s focus on the pressure pumping business is just improving the profitability. When you look at our CapEx spend, roughly three quarters of that is maintenance and then a quarter has to do with the growth to add the dual fuel. And that’s really all I’m interested in doing this year in terms of pressure pumping. This – the team has done a fantastic job improving the profitability of this business becoming more efficient, not just at the well site, but in the actual operation of this business, repair and maintenance costs, etcetera. They are doing a great job. And I think this is a year of just continued improvement of profitability. We don’t need to increase market share. We’re not chasing market share. We’re really trying to improve the margin and profitability and cash flow for the company in that business. In terms of excess capacity, we still have around five spreads, we could activate. I’d say, around five spreads because it depends are they going to deep high pressure, are they going to simul frac, but it’s around five spreads that we could continue to activate. But right now, we just don’t have plans to do so. Based on what we think pricing is going to do for the rest of the year, I’m happy where we’re at. And we will just continue to move pricing on some of the spreads that we signed agreements on last year.

And embedded in the expectations that the margins go from low teens to high teens, is there – does that reflect incremental pricing from here or just repricing that’s already been secured and getting the dual fuel kind of upgrade appropriately priced in the marketplace?

I think the market is tight. I think the market is short of high-quality equipment that’s easily available and easily activated. And I think that leading edge pushes up from here still some throughout the rest of the year. But there is also a lot of re-pricing that we can do with, like I said, agreement signed six months, nine months ago.

Understood. Thanks for the color Andy.

Thanks.

Your question comes from the line of Taylor Zurcher with Tudor, Pickering, Holt. Your line is open.

Hi Andy and Andy. Thanks for taking my question. I just wanted to circle back on the topic of Tier 1 super-spec rigs that you talked about. And you kind of called out the differentiating capital equipment items on the rigs. And I guess I am just curious, I mean are there well designs or pad designs that are making these rigs more in vogue such that the demand for these rigs is more basin-specific? Are you seeing broad-based sort of premium demand for this sort of equipment across the various basins and plays in the U.S.?

What we are seeing is that the operators enjoy the flexibility of being able to lay out their pads and production equipment however they want and have a rig that’s capable of maneuvering around all that equipment with the drawworks up. And certainly, you can engineer a pad with the drawworks down and you can dig the sellers deeper and recess the wellheads and things like that, but then you are designing the pad around the rig. And the industry has moved on and operators enjoy the flexibility of just having a rig that can move around their design versus designing a pad around the rig.

Got it. A follow-up on labor, it seems like you are going to have more success passing through some of the labor inflationary costs as we get into Q1 and Q2. Still labor an issue, I imagine staff and equipment is not the easiest thing in the world to do today. And so just curious if you could give us an update on all things labor specific to contract drilling, given that’s where likely the most of your reactivations will be in 2022?

Yes, labor is definitely tight. It means we have to work harder to recruit new people into the industry as we continue to grow. But we did some significant compensation increases in the field last year. And so that was already baked into the Q4 numbers into the results. And in 2022, we are still going to increase activity. But looking forward right now, I don’t think we have any kind of compensation challenges in the field that we need to address. I think we have already taken care of that. There may be some small things here and there, but nothing major in terms of the compensation for the individuals in the field. I think we did a good job addressing that last year. There are going to be some inflation items in there, consumables, various materials overall, but we have got that what we consider to be baked into the numbers.

Understood. And I will squeeze one last one. Directional drilling, smaller segment for you guys, but the growth in 2021 has been super impressive. So, I know you have got some newer higher-end tools and products that you are rolling out. And just curious if you could frame for us the different dynamics that play in that business for 2022 as we think about potential top line growth and margin trajectory in that business? Thank you.

Yes. The team over there at directional has done a fantastic job over the last few years. I can’t say enough good things about them. It was a few years ago that we launched some technology efforts to improve some things in our – in the tools that we run in the wells to navigate and steer. And so we have improved reliability, improved service quality over the last 1.5 years, and you saw that in all the numbers in each quarter for 2021. And our market share has increased to the point where depending on which report you look at, we are probably number three in directional drilling in the U.S. onshore these days. And so we have a very strong position. We are not looking to increase market share at this point. And so our directional business will track with overall U.S. rig activity. But we do think there are some opportunities to improve profitability, and we will be rolling out some more technology this year as well. So, really excited about how that business is doing.

Got it. Thanks a lot.

Your next question comes from the line of Keith Mackey with RBC Capital Markets. Your line is open.

Hi. Good morning and thanks for taking my questions. Just wanted to start off maybe in pressure pumping and certainly appreciate your focus on growing the margins and profitability in that business and sticking with the 12 fleets. But the question is to add an incremental fleet beyond that 12, what would you need to see in terms of EBITDA per fleet kind of profitability to get another spread back into the field?

Yes. I just don’t even want to get into that discussion. It’s just not in our plan. It’s not on our radar. Like I have said, we have the potential to activate another five spreads, but I just don’t think that we need to do it. I don’t think the market needs it. I think the market is tight. And I think we need to get back profitability in this sector, not just us, but everybody. And so we are happy to work on profitability in ‘22 in pressure pumping and not try to bring more equipment into the market.

Yes. Fair enough. Got it. Okay. And just on the on the rig side now, so certainly, Tier 1 super-spec capacity getting tight and regular super-spec capacity or Tier 2 super-spec capacity also generally tight, and we are certainly seeing the pricing come as part of that. So, when it – if at all, do you think the conversation starts to happen on new builds, or are we still not even close to that?

That’s not even a discussion, not even on the table. We have – there is rigs that are out there, and I don’t think the overall rig count is going to require newbuilds. I just don’t see that happening. Don’t have any visibility on that at all. We are happy with where we are at. We have got a number of rigs that we can continue to upgrade over 30 that don’t cost us very much. And so we are in a good position, and I don’t think you are going to see newbuilds. That’s just not in the works, not in the discussion.

Got it. Very good. And just finally on the pad design requiring higher rigs clearance. Are there any particular customers or trends in the customer groups, whether it tends to happen, or is it just more specific or one-off?

It’s across the board. I mean you have seen publics, you have seen privates change the layout of their pads. And they – you just see less operators that want to engineer the pad for the rig and more – they want the flexibility of having a rig that can maneuver around all the equipment. So, it’s just – it’s across the board.

Perfect. Alright. Thanks so much.

Thanks.

Your next question is from the line of Waqar Syed with ATB Capital. Your line is open.

Thank you for taking the question. Andy, how many rigs were active in Colombia in Q4? And what’s the prospects for this year?

Yes. So we had five rigs working in Q4. We expect likely the majority of this year, maybe going to six. So, it’s basically steady from a rig count standpoint and then the rigs work at varying number of days per month depending on the programs they are on.

Are there any prospects of price increases in the Colombian market as well?

We are looking at it. We are still new to that market and still new to get and to know these customers. But I think for us that’s still a wait and see. But we are very happy with the profitability that we are doing in Colombia and the programs that we are on with the customers we are on right now.

Okay. And then you talked about the rig clearance, that being an issue. What is the optimal rig clearance? What height do you need for these Tier 1 rigs?

It’s – when you put the drawworks up on the rig floor and it’s 21 feet to 23 feet up. So, that’s the optimum rig design, and we have been building that design since 2012.

And then just last question. You mentioned that there are about 39 – on average 39 rig contracts for 2022. What’s the number for 2023?

Yes, I don’t have that…?

I don’t have that handy.

Okay. That’s all I had. Thank you very much.

Thanks.

Your next question is from the line of Vebs Vaishnav with Coker Palmer. Your line is open.

Hey, good morning and thank you for taking my questions. I guess, first, touching on the land drilling side. So, we talked about $30,000 revenues per day and around $25,000 day rate. So, maybe like that $5,000 in services. Is it a way you can say on how many rigs you run – you actually provide those services?

So, we provide rental drill pipe, ancillary services and different levels of technology on a large number of the rigs. And it just so happens as we are looking back at what we were doing in the fourth quarter that we have got a number of rigs that when you add everything up, revenue per day in total is at or above $30,000. And so real pleased with how that’s going. But we are a very large supplier of rental pipe in the market for premium connections as well.

Got it. And maybe then switching to daily operating costs, like is there a way you can help us think about what – how do you guys think about normalized daily cost, either excluding or including those services?

Yes. I mean it’s – that gets back to what we were saying we are going to do, in general, are about 16 to 16.5 in cost per day.

Got it. Okay .And maybe just last one on pressure pumping, if I can squeeze in. So, first quarter, I guess like at least the way I back into it is like around $8 million EBITDA per fleet. And if you want to get to high-teens assuming the 12 fleets, probably we are talking low or mid-teens EBITDA. So, that’s a big jump. If you can help us just understand like how much of that is already in the books that will just – all the other fleets were rolled up to that, or how much more needs to be acquired to get to those levels in terms of pricing?

So, I am just looking at some numbers. So, we are already – in terms of gross profit percent, we are already near the mid-teens in what we think we are going to do in the first quarter. And we see that steadily progress into the upper teens towards the end of the year. So, I haven’t backed into what adjusted EBITDA per spread is, but gross margin continues to improve.

Alright. Thank you so much.

Your next question is from the line of Dan Kutz with Morgan Stanley. Your line is open.

Hi. Thanks. Good morning. So, I just wanted to ask, with the retirements that you did from the rigs and the pressure pumping horsepower, I appreciate that you guys have kind of given us a lot of detail on maintenance CapEx, we could probably come back into an estimate here. But I am just wondering if there would be any opportunities to kind of pull some parts off of that equipment to reduce your maintenance cost for your active capacity in those segments?

Yes. So, when we talk about retiring a rig as an example, the way that those assets get carried are we sort of carry them as components. So, not necessarily every component on that rig was retired, but the majority of that rig was retired, and it’s no longer a marketable piece of kit. That doesn’t mean that every component that would have been on that rig is necessarily not useful. But those weren’t included in necessarily the charge, right. So, those assets are still on our books, and they will be useful going forward.

Got it. That’s helpful. And I just wanted to ask – I just wanted to ask about you guys did the service rig and invested from your Pioneer assets. I wanted to ask kind of, a, is there anything else that you guys might be looking to the best or any other opportunities to bring some cash in there? And then, I guess, on the other side of the coin, would you guys be open to any kind of bolt-on acquisitions or anything maybe for from a technology perspective or sustainability? Just wondering if you guys would be open to opportunities there. Thanks.

Yes. I will take the first part on Pioneer. After the sale of the production services business, what we are left with is what we wanted when we acquired Pioneer. So, there is nothing left that we would want to get rid off. On the bolt-on acquisition side, I will let Andy address that.

Yes. In terms of acquisition for any improved sustainability, right now, we are really happy with our organic engineering projects and products and services that are coming out. We continue to do things on software for engine management control. We refined the output of the EcoCell and the lithium battery loads and the way that power management works to be able to maximize fuel savings and reduce emissions. So, I would say right now, we are just focused on our organic processes, and that’s going real well.

Great. Thanks a lot guys. I appreciate the color.

[Operator Instructions] Your next question comes from the line of John Daniel with Daniel Energy Partners. Your line is open.

Hi guys. Good morning. I know you don’t want to bring more of the frac capacity back this year. But I am curious hypothetical scenario, a customer comes to you and says, “Hey, Andy, we really want you to evaluate providing us an electric solution.” What do you do?

I am not interested in electric solution. I just don’t think it. So, you want me to – everybody says electric, it’s natural gas. Let’s just call it what it is. And you have got to have a natural gas source, you have got to have some kind of turbine generator or engine producing electricity, you got to have VFD house, you got to have cables, you got to have wiring. It’s not something that I want to do. And trust me, we know how to do it. We have an electrical engineering division. We own thousands of electric motors in our rig business with VFD control. So, we are very familiar. But I just – I don’t see the return on electric.

Fair enough. Let me put it – try this. If – let’s assume you want to do more Tier 4 dual fuel upgrades. Are you better off just buying brand new trailers from the packager, or do you take one of those five fleets that’s parked against the fence like what’s the advantage of doing one versus the other and retrofitting it?

We have just done a write-down of equipment, and we are really happy with the high quality of the equipment that we have in the fleet as of today. In a hypothetical, it would make more sense for us to do a core swap and just do new engines coming out with a dual fuel package on it if we were going to go down that path. But I will go back to what I said earlier, which is we are at number 12 coming up, and that’s it.

No, I get that. I am just trying to understand a couple of things.

But economically for us – everybody is different. But economically for us, it would make more sense to do a core swap and just put a new engine on an existing trailer.

Okay. And I am curious if you can answer this. As you look – I know you mentioned you are going to do some sort of engine swaps, if you will, this year, and it’s in the budget. What is the lead time today on that Tier 4 engine, if you called out one of the major OEMs right now?

I think – so some of the things we are going to do is just do more dual fuel kits on – not a full engine swap, and we are going to do some engine swaps to round out the spread number 12, that’s going out. But I would think on all that equipment, you are in the range of six months to nine months is I think where we are at.

Alright. And then I am going to ask one more on since I am towards the end of the call here. The EcoCell that concept, can you – what’s the application to the frac business, if any, at this point?

So, the only application that I would see is if we took the blenders and turn them to electric and then you could minimize power requirements by helping with the EcoCell there. But it would take – just because of the horsepower difference in a frac spread, a frac spread is the equivalent of five to six drilling rigs in terms of total horsepower and power consumption. And so you would be talking about a large number of EcoCell and a very large number of lithium batteries to do that on some kind of an electric system.

Okay, fair enough. I appreciate the time.

Thanks.

There are no further questions at this time. I will now turn the call back over to Mr. Andy Hendricks.

I would just like to thank everybody once again for dialing in today and thank our team at Patterson-UTI. Appreciate it.

Ladies and gentlemen, thank you for your participation. This concludes today’s conference call. You may now disconnect.