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Patterson expects rig count to bottom in Q4'19 then recover slightly in 2020

Patterson-UTI Energy Inc. expects its drilling rig utilization will bottom in the fourth quarter following a third quarter that saw the fastest decline thus far in 2019.

"With WTI in the low to mid-$50s [per barrel], operator activity continues to be motivated by staying within budget," CEO William Hendricks said during an Oct. 24 earnings call. Operators outspent their budgets in the first half of the year and are slowing activity in the back half, the CEO said.

"Both drilling and pressure pumping activity are expected to decline further in the fourth quarter, but recent customer conversations suggested our drilling rig activity will bottom in the fourth quarter and then a modest increase [is expected] in late December and early January," Hendricks said.

In contract drilling, the rig count during the third quarter averaged 142 rigs, in line with the company's expectations. The average rig revenue per day for the third quarter increased to $24,240 from $24,200 in the second quarter.

For the fourth quarter, the contract rig count is expected to fall to an average 126 rigs. However, some increase in activity is expected in the first quarter of 2020 as operators reset budgets. The average rig revenue per day for the fourth quarter is expected to be $23,500, with approximately $280 per day of the decrease related to an assumed decrease in the early termination revenues, Hendricks said.

"With the expectation of rigs going back to work, we are going to have to carry some additional labor expense in the fourth quarter as we have employees ready to go to work when these rigs are reactivated," the CEO said. Despite the higher labor cost, fourth-quarter average rig operating costs are expected to decrease approximately $200 per day.

Pressure pumping activity continued to decrease in the third quarter as the company reduced its active spread count and ended the quarter with 14 active spreads.

Lower activity levels are negatively impacting pricing, and the pricing for spot work is "unsustainably low," Hendricks said. Patterson continues to reduce operating locations in order to scale the business for current market conditions. "We're seeing an increase in the number of operators looking for frac spreads in early 2020, but it is unclear whether this work materializes and if the pricing on the work will be economic," the CEO said.

Hendricks said the company will continue to evaluate the economics of working versus idling spreads on a spread-by-spread basis.

The pressure pumping market has been oversupplied since 2017 and improvements in completion efficiency have exacerbated the problem, the CEO said. Patterson will remain capital disciplined and focused on aspects of its business it can control.

In the third quarter, the company retired 300,000 horsepower of pressure pumping equipment after evaluating economic opportunities for its fleet. Hendricks said, "you won't see that back."

The company on Oct. 24 reported a net loss of $261.7 million, or a loss of $1.31 per share, for the third quarter, down from a net loss of $75.0 million, or a loss of 34 cents per share, a year ago.