Pioneer Energy Services Corp. (PTEN) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Patterson-UTI conference call to discuss the agreement to acquire Pioneer Energy Services. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mike Drickamer, VP of Investor Relations. Please go ahead.

Thank you, Pasha. Good morning. And on behalf of Patterson-UTI Energy, I'd like to welcome you to today's conference call to discuss the company's agreement to acquire Pioneer Energy Services. 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 call that state the company's permanent 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 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 may include non-GAAP financial measures, and any required reconciliations to GAAP financial measures are included on our website, www.patenergy.com. In addition, you will find important information for stockholders and cautionary statements included at the end of 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 conference call to discuss the agreement to acquire Pioneer Energy Services. We are pleased that you can join us today. After some brief comments, I will turn the call over to Andy Smith to discuss transaction terms and timing. I will then discuss some of the transaction highlights and strategic rationale. First, as a leading provider of contract drilling in the United States, let me say that we are proud to announce this transaction. We hold the people at Pioneer Energy Services in high regard and are very familiar with their great equipment. Pioneer's high-quality fleet of 17 drilling rigs in the United States, of which 16 are super-spec, will be a valuable addition to our business. Additionally, many of these rigs are capable of substituting cleaner-burning natural gas for diesel, a technology that is becoming increasingly important to operators for reduced emissions. Also, this transaction opens a new avenue of growth for us with the movement into the international markets through Pioneer's well-established operations and 8 rigs in Colombia. I will now turn the call over to Andy Smith to review the transaction terms and expected timing. Andy?

Thanks, Andy. This morning, we announced an agreement to acquire Pioneer Energy Services for aggregate consideration of up to 26.275 million shares of Patterson-UTI common stock and $30 million of cash. Based on Patterson-UTI's latest closing price of $10.14 per share, this agreement values Pioneer at approximately $295 million, including the retirement of all Pioneer Energy Services debt. The number of Patterson-UTI shares to be delivered is subject to a downward adjustment if the volume-weighted average price of Patterson-UTI shares for the 10 days prior to closing exceeds $11 per share, in which case, the shares to be delivered will be reduced by 50% of the value exceeding $11 per share. Pioneer's convertible notes will convert into shares of Pioneer common stock in accordance with their terms in connection with the closing of this transaction and received Patterson-UTI shares on the same basis as if the notes have been converted prior to closing. The transaction has been unanimously approved by the Board of Directors of both Patterson-UTI and Pioneer Energy Services. We expect this transaction will close in the fourth quarter subject to regulatory approvals, customary closing conditions and the approval of Pioneer Energy Services stockholders. To that end, we have entered into agreements with holders of Pioneer Energy Services, who collectively represent approximately 88% of the outstanding voting power of Pioneer to vote in favor of this transaction. We expect this transaction to be accretive to both cash flow per share and adjusted EBITDA per share and generate annual synergies of than $15 million. With that, I'll now turn the call back to Andy Hendricks.

Thanks, Andy. First, I would like to thank the Board of Directors of Pioneer Energy Services for all the work they put into this process. It is not always appreciated how much effort goes into a process like this or the time that it takes. We are excited about this transaction for a number of reasons. First is that the U.S. land drilling market has seen a shift in demand over the past several years towards what are commonly referred to as super-spec rigs. These rigs are undoubtedly in the highest demand right now and will continue to be into next year as they contain the components necessary to most efficiently drill unconventional wells. The acquisition of Pioneer's high-quality fleet of 17 drilling rigs in the U.S., of which 16 are super-spec, will be a valuable addition to our fleet. As I've said previously, we have been in discussions to put up rigs in the second half of this year and even in discussions to activate some rigs early next year. So having 16 more super-spec rigs at Patterson-UTI is a positive for us and our shareholders. As well, more recently, we have seen increasing interest from our customers in rigs that are capable of using alternative power sources, such as high-line electric power or the ability to substitute diesel with cleaner-burning natural gas. Rigs with this capability have the potential to reduce both fuel costs and emissions. 9 of the pioneer rigs are capable of substituting diesel with natural gas. And following this acquisition, Patterson-UTI will have a total of 166 super-spec drilling rigs in the U.S., of which nearly half are equipped and capable of using alternative power sources. The premium nature of Pioneer's U.S. drilling rig fleet is apparent when looking at the utilization of their fleet, which is high relative to the rest of the market. Pioneer currently has 12 of their 17 U.S. drilling rigs working, with another 2 rigs contracted to return to work in the third quarter. Within the U.S., Pioneer's geographic footprint for drilling rigs is complementary to our own with operations in the Permian, Northeast and Rockies. Internationally, Pioneer owns 8 1,500-horsepower pad-capable, international spec drilling rigs in Colombia, of which 5 are currently contracted. We are very excited about the experience and quality of the operations team in Colombia, where Pioneer has operated for approximately 14 years. This transaction serves as our entry in the Latin American drilling market, and we are very excited about the available opportunities. Pioneer's business also includes a well-run and high-quality well service rig business consisting of 123 well servicing rigs with a leadership position in the Gulf Coast region. We believe this business would be better served as part of a larger well service rig business or as a focused stand-alone business. Accordingly, we expect that this well service rig business would be divested following the closing of the transaction. Lastly, I would like to thank the hard-working dedicated employees of both Patterson-UTI and Pioneer. Until the acquisition closes, which we expect to occur in the fourth quarter, the operations of Patterson-UTI and Pioneer Energy Services will continue to operate independently. In the meantime, the top priority of our employees must be, as always, delivering safe and efficient services for our customers. Pasha, we would now like to open the call to questions.

[Operator Instructions] And your first question is from the line of Ian MacPherson with Piper Sandler.

Congratulations. I'm sorry I missed it when you said what the current contracted status was on the U.S. fleet. I wanted to -- sorry to ask for a repeat on that. And then maybe if you could touch on -- any color on the profitability per rig in the Pioneer fleet relative to Patterson's and what you think the scope is for convergence there, if there needs to be any?

So Pioneer currently has 12 of their 17 U.S. drilling rigs working, and another 2 are contracted to return to work in the third quarter. In terms of relative profitability, I would say, it's similar. We're very excited about the quality of this equipment. We've completed and followed their equipment for a long time now. We understand it really well, and we think it's a great addition to our own fleet.

Okay. Okay. And then in Colombia, are the margins comparable to the U.S. there? Or are they significantly different?

I would say that the Colombia operations and management team has been very focused on providing good margin and positive cash flow out of that operation, and they've got a long history of doing that. And we'll get into more of what that looks like later, but that team has a great track record.

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

Congratulations on the deal. So if I understand the strategic value of you guys have been trying to expand internationally, then this deal definitely helps. But just to -- as a follow-up on Ian's question, what I was trying to hope and understand is Colombia rigs, if you can help us think about where the margins are today and where could they go to or where they were maybe in 2013, 2014 or 2018, 2019, that would be a good starting point.

Yes. I think this morning, we're not prepared to talk about the margins of Pioneer. Pioneer still has to operate as an independent company until we get to closing. So we're not going to speak to that today. But I will say we see this as very interesting strategically for us. While there are 8 rigs down there today in that market, we also see it as an opportunity and potential to move some of our AC high-spec rigs into that market as well and improve their competitive position and improve returns out of that market. But that team does a great job down there, and they've been focused on generating good margins and cash flow for years.

And maybe if you can help us just think about the value add the U.S. business provides? And where I'm coming from is you have quantity rigs, right, and they are, call it, half of them working. So why add more rigs?

For us, this is a really good opportunity to buy high-quality equipment at what we consider a fair value. When we look at this deal and we work through the numbers, if you look at it from an asset standpoint in the U.S. rigs and you look where our rigs trade in the market, we feel like that we're buying high-quality rigs at a slight discount through the valuation of our own rigs, and these rigs have good utilization. And when you look forward into what we think the market is going to do over the next year or so, these types of rigs will be the strongest in demand in the market.

And maybe if I can sneak in one last question. I think I missed a little bit of what -- when you were talking. But I think like you spoke about divesting the well servicing and the wireline units. Pardon me if you don't -- if you didn't. But if you talked about divesting, can you help us just think about how should we think on a per-rig basis or how much would that be?

Yes. What we said was that this is a really good business at Pioneer. It's made up of 123 well servicing rigs and they have a strong position, especially in the Gulf of Mexico region, very experienced management team who does a great job. We just think that this business is better suited to be a part of a larger business or as a standalone. And so after closing, we expect to run a process to divest this. Now that being said, we're not going to get into numbers of what we think it's worth. But this is a high-quality business, and we think it will get an attractive cash price.

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

Congrats on the deal. I want to touch on the synergies. $15 million of synergies, it appears somewhat modest in light of Pioneer reporting almost $10 million of G&A in 1Q. So can you just walk us through the pieces behind the $15 million potential upside? And is that 1Q figure from Pioneer, is that a clean figure or not? So just some additional thoughts on the synergies for you.

Yes. So as we look at it, we're really just focused primarily on the corporate side of it with the number that we've provided. And if you think about the businesses outside of drilling and certainly in Colombia, those are businesses that have sort of their own SG&A infrastructure that will probably be hard for us to find a lot of synergy in those areas, especially if you think about the well service business, which is in the business that we have, a complementary business for right now. So again, you can characterize however you like, but we felt really comfortable with the number that we provided as something that should be relatively easy to attain.

Got it. And then just turning to the international side, Andy, it sounds like, ultimately, you'll use Colombia as something as a springboard to expand further in Latin America. Correct me if I'm wrong, but how do you think about the cadence of expanding internationally and putting some of the idle super-spec rigs in the U.S. to work abroad? Is that something that can happen in the next 3 years? Is it going to be kind of more of a one-off here and there in the next few years? Is it something that can happen in a meaningful way in the next, call it, 3 years? How do you think about this piece?

I think it's hard to say right now what's going to happen over the next 3 years. But I will say that I'm pleased that Colombia is part of this deal because when you look at Latin America and you look at the relative stability, especially in terms of oilfield markets, Colombia looks like now one of the more stable countries with economic structures that allow you to move capital in and out of the market, where other countries have challenges. So Colombia by itself is a good market. I mean we're excited that this is part of the deal. And there are some opportunities for us to put some U.S.-style high-spec rigs in that market, we believe. But when you look globally, internationally, it becomes more challenging just to move U.S. spec rigs into other markets. The U.S. has grown over the last 10 years to have a very custom bespoke rig structure for what we do in U.S. unconventionals. It's just a few other countries in the world, but I wouldn't say it's broad. But just getting back to Colombia, it's a very stable market relative to others in Latin America and has favorable economic structures. So we are excited that that's part of the deal.

Maybe if I could squeeze one more in. The 12 rigs that are working and contracted in the U.S. today, is the contract roll on those rigs similar to Patterson? Is it longer or is it shorter? How should we think about the cadence in contract roll for those years?

I would say it's a variety of contract term lengths in those contracts and various rigs are going to roll at various times. And there's upside in that because I believe as the rig count goes up later this year and into next year, that pricing continues to improve in the super-spec markets. And as some of these rigs that we're going to be acquiring when their contracts flow, I think there's opportunity for day rates to move up. So we're very upbeat about this.

The next question is from the line of John Daniel with Daniel Energy Partners.

Big congrats on the deal. Hopefully, there'll be others to follow. I've got a few questions here, Andy. The first one is on Colombia. Just as you've conducted the initial diligence, thoughts on outlook with Colombia in terms of the rate of change in Colombian EP capital spending versus what you might expect for the U.S. next year? Do you have a chance to assess that at all?

Yes. We spent some time down there. We spent some time with the management team discussing the market and what could potentially happen. And one thing at a high level, the country is behind, for instance, the U.S. in terms of opening up economically relative to what we've all been experiencing with COVID. So you've got that natural delay in their economy opening following the U.S., which will also have a slight delay in the ramp-up in their oilfield relative to the U.S. So we think that that's positive for us in terms of post-closing, there's still upside and there's still growth in Colombia just because of the natural delay as people become more vaccinated in that country following the quick vaccinations that we had in our country.

Okay. Next one for me is on wireline. I think Vebs tried to get the same, but I assume wireline is getting rolled into the Universal business. Is that fair?

So Pioneer has a good-quality wireline business that goes all the way from the Gulf Coast up to North Dakota. And we're still evaluating what we'll do with that, it could roll into the universal business, but we've still got a little bit of work to do there.

Fair enough. And then the last one for me on the well servicing. I know you mentioned you run a process. But as I'm sure you know that market well, there are some guys that are good but private. Are you able to -- would you be willing to take stock in a private business? Or does it have to be a cash transaction?

I think our preference would be cash. And I think -- and the market will be, I think, favorable in that regard just based on activity and where we think activity is going to go over the course of the next year.

Your next question is from the line of Connor Lynagh with Morgan Stanley.

I was wondering if you could speak to the compatibility of the rig equipment and the rig operating system that you're getting with Pioneer relative to your existing asset base? And just any initial upfront expenditures or just initially elevated OpEx to get that onto your system?

Look, I'll start by saying these are -- this is great equipment. These are really high-quality rigs. They run an operating system that we already run, so it just folds right into what we do already. So we have technicians that already know how to work on these systems. The rig structures themselves are somewhat similar to what we operate and in terms of swing-up substructure and 750,000 pound load capacities. So these rigs do look very similar to what we have in our own fleet, and we would term them as APEX rigs in our own terminology. And so that's why we're excited. And we don't feel like these rigs need anything other than maintenance CapEx at this point. So we don't anticipate injecting any capital into the U.S. rig because they're already good rigs.

Got it. Within the APEX categorization, what -- do you have a sense of what they'd be closest to in terms of your different tiers of branding?

Yes, they'd be similar to an APEX-XK.

Okay. Got it. And then apologies if you addressed it, but just in terms of the synergy targets, is that a day 1 synergy? Or is that realized over the first year?

That's over the first year. It might be a little bit quicker than that, but it's going to take us some time to get through some things once we get to closing.

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

Congrats, Andy, on the deal. So would you be needing regulatory approvals from authorities in Colombia?

We don't believe we do. We believe that this transaction can go through without any government approvals in Colombia.

Okay. Great. And then secondly, what was the size of international G&A in Q1 or right now? Or any -- what do you think the future holds?

I don't have that number handy. But that team that works in Colombia, of course, they have their local DNA. And they've been very self-sustaining with good margins and positive cash flow and have done a good job for years down there.

And then just last question. If you were to organically build your international business, would Colombia be the first country that you would have set up your operations in?

Look, like I said before, Colombia, when you look at Latin America, is one of the most stable countries to operate in, with good economic fiscal policies that favor doing business there and moving capital in and out. And so it makes it attractive from that standpoint.

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

I've got a few questions. A lot of everything has kind of been answered. But just divesting the wireline and the well service business, how quickly do you get this done after the close? I mean are we thinking is it 12 months after? Or do you think it's going to take a couple of years? Just trying to think about how quickly you'll be able to divest the business.

Look, we'll start the process to divest the well service rig business shortly after close. I don't think it's something that takes a couple of years, by any means, but I'd hate to put a time line on it. We do want to go through a thoughtful process because this is a high-quality business. We just think it's better suited to either be part of a larger organization or as a stand-alone. But it's certainly not a 2-year process.

Okay. All right. And then it sounds like that you're still out there looking for M&A. I guess can you confirm that? And if so, is it still kind of more consolidation in the U.S.? Or now that you're going to have a little bit more international presence, are you focused a little bit more on the international side?

I think right now, we're going to be focused on integration and maximizing the value for the shareholders on this particular transaction.

Okay. All right. So then I misunderstood that you're not still out there looking for other M&A opportunities at this point?

This has taken a lot of time on our side and the other team's side. And it's been a lot of work to get to where we are today. And we want to make sure that we get a good, solid integration out of this.

Understood. Understood. Right. And then on the customer mix, I haven't looked up rig data to see kind of current customers or anything [indiscernible] concentration, customer concentration, or new customers that you haven't worked for, I mean, obviously Colombia but in the U.S.

Yes. I would say we've categorized this as complementary from a customer standpoint. The customers that they work for, for the most part, we've worked for them as well. And so I think it's just -- it becomes complementary. It fits in and dovetails really well with what we currently do.

Okay. Last one. Looking at the rig data, and Mike and I go back and forth about this. I'm not sure I trust the data all the time. You said the 16 super-spec rigs, it looks like they're mostly 200-horsepower and they all have 750,000 hook-load capacity. Or can you confirm that those data from rig data are roughly about right, there's -- most of them are 750,000 hook-load capacity?

Correct. Yes. When we say 16 super-spec drilling rigs, we're talking about 750,000 pound load capacity, pad-capable, self-moving, high-pressure pump systems, everything you would expect in what people are calling super-spec rigs. So we're really excited about the quality of the equipment, along with the people.

Your next question is from the line of Chuck Minervino with Susquehanna.

Just a couple of questions. I guess the first one, I'm not sure if this is a day 1 initiative or not, but I know you guys have other services. I just wanted to hear your thoughts on the opportunity to maybe cross-sell your services on to some of those Pioneer rigs once they -- as they're working as well. Is that something you see as an opportunity? Or is that something that's maybe a little bit farther off?

I don't see it as far off. We continue to increase, for instance, our directional drilling footprint with MS on our own drilling rigs. And it's one of the reasons that MS Directional is growing faster than the market. And certainly, with the addition of these rigs in our fleet, MS has the potential to grow even further. So yes, absolutely, our marketing teams will be looking at opportunities to cross-sell.

And then on just the incremental CapEx associated with bringing in the new company and the new rigs. Should we be thinking about this similar to your annual kind of maintenance CapEx per rig? Or is there any reason to think it would be something greater or less than that?

No, it would be very similar to our current maintenance CapEx.

And does that include like the Colombia rigs? I mean are the international rigs kind of similar in that regard?

Yes, they're pretty similar.

And your final question comes from the line of Scott Levine with Bloomberg Intelligence.

So I think you said you've been working on this for a while. Could you tell us a little bit more about the history? And how far back does this process originate? And is the timing really just opportunistic? Or is there anything more to read into that?

This goes back 4 months or so. It just takes a long time to get to where we are in this type of process. I think today is not the day to discuss the history of how it all transpired. But these processes take time. There's interest on both sides of the table that have to be met. And it just takes time to work all this out.

Got it. And one follow-up actually on capital allocation. So does this deal signal more of a growth-oriented mindset from you guys? And can you update your thoughts maybe on capital returns and where that kind of fits into your thought process? And is that kind of off the table until the balance sheet gets to a certain point? Or just any elaborative thoughts on that topic in general would be great.

Well, first, let's start with our balance sheet. Our balance sheet is in good shape. We don't have any concerns there. We've been growing our cash position. And so we think that this grows EBITDA for us, grows cash flow and puts us in a better position to return cash to shareholders going forward. Without getting into a discussion of what that looks like, we certainly have a strong history of returning cash to shareholders, whether it's been through the dividend or share buyback. And this improves the potential and possibility to be able to do that in the future.

Ladies and gentlemen, there are no further questions. I would now like to turn the call back over for closing remarks.

I just want to thank everybody, both Patterson-UTI and Pioneer Energy Services, for what you do. And these are 2 great companies. And we look forward to this acquisition, and we look forward to getting to closing in the fourth quarter. And thanks to everybody for your time on the call this morning. Appreciate it.

Thank you, ladies and gentlemen. This concludes today's conference call. We thank you for participating and ask that you now disconnect your lines.