Ulterra Drilling Technologies, L.P. (PTEN) Earnings Call Transcript & Summary

Good morning. My name is Rob, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Energy Conference Call to discuss the agreement to acquire Ulterra Drilling Technologies. [Operator Instructions] Mike Drickamer, Vice President, Investor Relations. You may begin your conference.

Thank you, Rob. Good morning. And on behalf of Patterson-UTI Energy, I'd like to welcome you to today's conference call to discuss the acquisition of Ulterra Drilling Technologies. Participating in today's call will be Andy Hendricks, Chief Executive Officer; Andy Smith, Chief Financial Officer; and Mike Holcomb, Chief Operating Officer. Our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we described in our press release announcing this transaction and our SEC filings. We disclaim any obligation to update these forward-looking statements. And now it's my pleasure to turn the call over to Andy Hendricks for some opening remarks. Andy?

Thanks, Mike. Good morning, and thank you for joining us today to discuss our acquisition of Ulterra Drilling Technologies, a leading provider of specialized drill bit solutions. Mike Holcomb and I will discuss some of the key highlights for this acquisition, and then Andy Smith will discuss the terms of the transaction in a bit more detail. Let me just start by saying how excited we are to announce this acquisition. Ulterra is a high-quality company that we know well, and we've had our eyes on it for years. Ulterra designs, manufactures, sells and rents polycrystalline diamond compact drill bits, also known as PDC drill bits. They are the market leader for PDC Bits in North America and have a global footprint with a strong potential for growth in the Middle East and other international markets. Their experienced engineering and manufacturing teams, along with their customer focus have made them a leader in Drill Bit Technology Innovation. The addition of Ulterra to our drilling offering and our recent announcement to merge with NexTier Oilfield Solutions advances our strategy to enhance our positions in both drilling and completions. Areas where Patterson-UTI has a strong 45-year history of operations and innovation. For Patterson-UTI, this transaction strengthens our position as a leading provider of drilling services in the U.S. It also broadens our geographic footprint, providing strong relationships with key international customers, especially in the Middle East. And it expands our data portfolio, providing what we believe to be the broadest set of drilling and completions data across the entire U.S. With that, I'll now turn the call over to Mike Holcomb.

Thanks, Andy. First, I'd like to say how excited we are for the great team at Ulterra to be joining our team at Patterson-UTI. In North America, Ulterra is the leading provider of PDC drill bits in both the U.S. and Canada. A recent market report from Kimberlite, names Ulterra as the market leader in PDC bits in both the U.S. with the best overall value and the highest customer loyalty. Ulterra designs and manufacture its drill bits and then rents them directly to E&P companies to drill wells. After the bits are used, they are returned to Ulterra to be refurbished before being sent out to the next well. This new product line for us is complementary to both contract drilling and our directional drilling businesses and increases our ability to serve our customers. We believe that the addition of the leading provider of PDC drill bits in the U.S. enhances our market-leading positions in contract drilling and directional drilling. And what will be a market-leading position in pressure pumping once we complete our planned merger with NexTier. Internationally, Ulterra's global footprint and strong relationships with key customers improves our opportunities for international growth and diversification. Ulterra has levered their reputation for innovation and service quality to grow throughout the Middle East, Latin America and Asia, and their global footprint now covers more than 30 countries. Ulterra's international revenue outside of North America represents a significant growth opportunity. For example, in Saudi Arabia, they continue to improve their competitive positions with increased Saudization targets and are in the process of completing a new state-of-the-art manufacturing facility at the King Salman Energy Park is planned to open in 2025. The final key aspect of this transaction is data. Data is becoming increasingly valuable all around us and the oilfield is no exception. As a market leader, Ulterra's bit sales engineers collect data on bit runs from the vast majority of rigs in the U.S. With this transaction, we will be able to add Ulterra's bit data through our real-time drilling and completion data, giving us what we believe to be the broadest set of drilling and completions data in the U.S. Ulterra utilizes their proprietary bid hub data analysis platform to help manage their supply chain and inventory. And they've done a great job leveraging their drill bit data to constantly innovate their bid designs to help customers choose which drill bit design can help optimize performance in their application. Ulterra's bit hub platform is complementary to our PTEN plus platform and the addition of Drill bit data to our real-time drilling and completions data will drive further insights to performance. And in the near future, we will be able to perform analytics across this data to help improve our customers' operational efficiency and well productivity. For full year 2023, we expect Ulterra to generate between $160 million and $180 million of EBITDA. We also expect to begin generating revenue synergies within the first year with acquisition. With that, I will now turn the call over to Andy Smith, who will review the terms of the transaction in more detail.

Thanks, Mike. Under the terms of the transaction, we plan to acquire Ulterra for $370 million of cash and 34.9 million shares of Patterson-UTI common stock. The cash consideration paid for the seller will be primarily used to repay the outstanding debt at Ulterra, and as such, we will not assume any debt of Ulterra. We plan to fund the cash consideration for this transaction using a combination of our cash on hand, our revolving line of credit. We expect this transaction will close in the third quarter, subject to customary closing conditions and receipt of required regulatory approvals, including the expiration or termination of the waiting period under the Hart-Scott-Rodino. With that, I'll now turn the call back to Andy Hendricks.

Thanks, Andy. To summarize, this transaction is complementary to our contract drilling and directional drilling businesses. We believe adding the leading provider of PDC drill bits in the U.S. improves our ability to help our customers optimize their drilling efficiency and productivity while creating long-term value for our shareholders. Ulterra's international growth through increasing market penetration provides strong relationships with key international customers, supporting our own opportunities for international growth and diversification. We believe the enhanced ability to serve our customers through this transaction will create significant value for our shareholders and that our enhanced drilling portfolio will make Patterson-UTI and even more attractive investment platform. Lastly, I would like to thank the hard-working dedicated employees in both Patterson-UTI and Ulterra, and I would like to recognize the employees of Ulterra for creating such an attractive company that is respected for their focus on innovation and customer service. I look forward to welcoming the Ulterra employees to the Patterson-UTI family. Rob, we'd like to now open the call for questions.

[Operator Instructions] And your first question comes from the line of Jim Rollyson from Raymond James.

Continuing the firework from last night, I see. Andy, this kind of is interesting, like on Slide 13, you guys referenced, obviously, the data collection and usage from both Patterson, NexTier and now Ulterra. I'm curious how you think about the evolution of that? Like how easy is it to integrate these 3 databases you have and continue to collect the data. And I guess more importantly, how long of a time frame can we think about when using that to become a revenue generator to maybe enhance well designs, et cetera, based on all the data you now collect -- that's kind of an interesting angle for this.

Yes. I'll first start by saying I'm not a data scientist. We do have data scientists on our team, and they can probably answer this question better than me. But in the data world today, you don't necessarily have to fully integrate databases and data systems to be able to use data out of all those systems. We do it today. We have data analytics systems that can pull data from various databases without having to integrate the databases. So I don't necessarily see an integration of database as the hurdle and we are excited about the potential for what we can do with all this data, how we can use this data. Our machines produce a lot of data at the well sites when we're running operations. And we can use this data across the full spectrum now to help our customers improve their efficiencies and eventually well productivity.

Okay. And then just as a follow-up, when I think about the -- you mentioned a couple of different spots. The EBITDA for this year is $160 million to $180 million. I think in one of the early slides it mentioned, it's been up 30% over the past 4 years as we think just about Ulterra to start with and kind of the growth rate trajectory over the next few years, it sounds like the Saudi facility that opens in 2025 is going to be a pretty big deal, but maybe help frame up how you think about the growth trajectory for the next 2, 3 years, whatever, for Ulterra and then how the combination of Patterson and Ulterra might actually enhance that?

Ulterra has got a great history of growth, not just over the last few years, but long term and what they've done to become the leader in both U.S. and Canada is really incredible. We think that working with our teams together between our team and the Ulterra team, we can even enhance our position a little bit more in the U.S markets but really excited about their potential for growth, international and not just onshore, but offshore as well. And those are areas where they've started to make inroads. But as we put out in some of the data, that's only about 20% of their business today. And so that for us, we still see as a significant upside. And they have the teams in place to be able to manage that and to be able to attack those growth markets. Mentioning the Saudi facility, it's plan to be complete in '25, but they're already working in Saudi and selling drill bits there. This will just enhance their position in Saudi with Aramco. Mike, do you want to add anything on that?

No, I think they've been very innovative with their designs. I agree with Andy. I think the international opportunity is probably where you'll see the majority of the growth come from.

And is there any rig opportunities that tie into this longer term, given the relationships that they have in Saudi, for example?

Well, we have some relationships in Saudi as well, but there's no question that this will further enhance our relationships in various markets where we don't work today, and we'll see how that works out going forward.

Your next question comes from the line of Keith MacKey from RBC Capital Markets.

Please talk a little bit about potential revenue synergies between Ulterra and Patterson. Can you just detail a little bit more about what those are? And any potential numbers you could give around that would be helpful as well.

So I don't want to go into any particular numbers, but I will say that we do see some revenue synergy potential in the U.S. While they are the leading provider of drill bits already, there are a few basins where they may be able to do a little bit more. And we've got some good strong customer relationships in some of those places as well with our broad customer base. And I think that working together, we can enhance some of that. So that's really kind of the focus for the U.S. market. But like Mike said earlier, the majority of the growth is really going to be on the international side.

Got it. Makes sense. And how should we be thinking about Patterson's total capital spend for 2023 now? You've got a $5 million, $10 million guidance out there. Should we be modeling something much different from that given this will close in the third quarter you think?

Yes. Keith, this is Andy Smith. We'll give more guidance certainly as we kind of progress through to closing. But you can imagine sort of on there. If you look at sort of that number for the full year of 2023 being a $160 million to $180 million of EBITDA. They're probably not associated with the CapEx requirement for them. And remember that they sort of -- they rent these drill bits. So there's a kind of a constant maintenance capital requirement here. That sort of equates to about a $60 million to $80 million type capital number. So if that gives you any kind of an indication kind of go forward based on when you expect us to close what our additional capital would look like.

And your next question comes from the line of Stephen Gengaro from Stifel.

Can you talk about the -- kind of what the balance sheet ultimately looks like pro forma for this deal and next? And how you think about leverage and the ability to return capital?

Yes. So if you look at where we stood at the end of the first quarter, we had a number of the $150 million or so of cash on the balance sheet -- $600 million untapped revolver. We will use cash, both on the balance sheet as well as some revolver capacity on this deal, probably looking at net debt kind of in the $200 million to $225 million range. And then net debt coming over for the NexTier deal, probably somewhere also in that $200 million range. So you're looking at probably adding between those 2 deals, somewhere in the neighborhood of $400 million to $450 million of debt to the balance sheet. And how we look at that long term, we will -- as we close these transactions, we'll look at our options in terms of financing that maybe on something more of a long-term basis rather than just using the ability to do it under the revolver.

Okay. That helps. And then just one other quick one for me. The -- just remind us -- the main buyers of the drill bits and how that sort of plays into sort of the customers who are buying drill bits? And any concern over people buying drill bits from you guys given your rig ownership?

No, I think the customers are very much -- there's some overlap there. Obviously, Ulterra has a very broad customer base. They basically work for everyone that's drilling in the U.S. and Canada and then obviously, you're gaining market share internationally. And so I'd say their customer base is probably broader than what we would see at Patterson. I think there's some potential opportunities. I think both companies are very strong when it comes to managing customer relationships. So I think potentially drilling -- our directional drilling company and Ulterra could benefit from some of those relationships. I don't have any concerns with customers having concerns that we have other businesses along with bits.

Your next question comes from the line of Derek Podhaizer from Barclays.

Can you maybe go into some of the details around what we can expect as far as like a margin profile from Ulterra margins, capital intensity, their free cash flow pro, just a little more detail around what they're generating right now where you think margins can go over the next few years?

Yes. So kind of on a -- if you look at it kind of on an EBITDA margin they're running about, call it, again, because it's kind of a rental model. They run somewhere in the neighborhood of sort of 55% to 60% at that level. And again, like I talked about the CapEx earlier, it's pretty high CapEx requirement in this business because you're constantly reloading your rental fleet. But again, if you look at that sort of $160 million to $180 million, again, that kind of equates to something in the $350 million to $400 million type revenue number with a capital requirement of sort of that $60 million to $80 million annually.

Got it. Okay. That's helpful. And just a follow-up. So I know there's some open litigation going on as far as the leaching process from NOV with the PDC Drill Bits. Just curious where Ulterra stands with that if they're paying the royalty, if that provides any sort of uplift to your free cash flow profile over the next couple of years? Just any updates around that you can provide us that you've got from Ulterra.

Yes. First off, we're fully aware of that. And I've been around drill bits for a long time and remember when the leaching process first started. We went into these negotiations, fully understanding where it is and we took that into account in our valuation and in the process. But I think it's best right now if we don't comment on any of that.

And your next question comes from the line of Saurabh Pant from Bank of America.

Andy, maybe I think you and Mike both talked about the growth opportunity over the next few years perhaps coming more from international than North America because Ulterra is already the leader in North America, like you said, right? But can you compare and contrast the 2 markets, North America and international from a service perspective? And like you said, the North America market is primarily a rental model. But if I'm not mistaken, the international market is more of an outright sale model. So if you can compare and contrast the 2 markets and just help us think about the potential growth runway.

Well, I think that the U.S. market is going to stay strong as it is today. And so we're certainly excited about the amount of business that they're doing. And like as we talked about earlier, we think there's potential for us with the 2 teams working together to even enhance their position in a few of the basins in the U.S. But the international has more growth. We're still going to see rig count growth in Middle East. We're going to see rig count growth offshore. And I think Ulterra is going to have a lot of opportunities whether it's on land international or offshore international as those markets continue to grow over the next few years.

Okay. Okay. And Andy, can you clarify for that -- for me, whether am I right in assuming that the international market is primarily an outright sale market versus the rental market?