Patterson-UTI Energy Inc

NASDAQ:PTEN

Earnings Call Analysis

Stable Performance and Q4 Expectations

In a recent earnings call, the company reported just over $1 billion in revenue, with a small net income of essentially breakeven per share, after considering $70 million in merger expenses. Adjusted net income was $55 million, or $0.20 per share, and adjusted EBITDA reached $277 million. The company intends to return at least 50% of its free cash flow to shareholders, already surpassing 100% in Q3 through dividends and repurchases. Drilling services revenue was $489 million, with a strong outlook on frac fundamentals. For Q4, anticipated revenues are $950 million in Completion Services with a $200 million gross margin and $90 million in Drilling Products with a $30 million gross margin ($40 million if excluding non-cash costs). The company expects steady activity and international market focus on Ulterra's expansion in the Middle East and South America.

Anticipating Tailwinds and Optimism in Oil and Gas Markets

Despite a recent slowdown in frac activity, which is expected to spur industry attrition, there is an overall positive outlook for both drilling and completion markets. This optimism is buoyed by commodity prices and forecasts for a modest uptick in U.S. shale oil and natural gas production over the coming years. Investment in new equipment has been subdued, suggesting a slower transition from diesel to natural gas-powered fleets—two-thirds of the current fleet can run on natural gas. The company is considering continued investment to progressively upgrade its NexTier completion segment fleet, particularly if strong returns persist.

Financial Discipline and Shareholder Returns Remain Priority

The company underscored its commitment to capital discipline and shareholder returns, showing restraint in international business ventures unless they yield compelling and accretive returns for their differentiated products and services. No such opportunities have yet been identified, so international expansion efforts will largely concentrate on existing plans in the Middle East and South America through Ulterra. Financially, the company reported modest net income equivalent to breakeven per share due to merger and integration expenses and recognition of deferred revenue. Adjusted net income was marked at $55 million, or $0.20 per share, and adjusted EBITDA was $277 million for Q3.

Substantial Capital Returned to Shareholders Amid Restructuring

Dovetailing with its capital discipline, the firm has returned $191 million to investors through share repurchases and dividends out of a commitment to return at least 50% of free cash flow annually to shareholders—surpassing this by returning over 100% thus far. The share repurchase program remains active, with share repurchases anticipated in Q4 due to current stock prices. Additionally, the company's restructuring includes the resegmentation of its reporting structure to better align with its business management, resulting in a new Drilling Services segment among others.

Prospective Revenue and Margins Indicate Stable Q4

Expectations for Q4 are set, with Completion Services projected to generate $950 million in revenue with an adjusted gross margin of $200 million. The recently acquired Ulterra Drilling Technologies, despite some noncash operating costs due to GAAP adjustments, is expected to deliver $90 million in revenue with an adjusted gross margin of $30 million. Other revenues are slated to remain stable compared to the previous quarter. Overall, selling, general and administrative expenses are forecasted to rise in Q4 to $65 million but are expected to decrease throughout the next year as the company realizes synergies from its merger with NexTier.

Predicted Capital Expenditures and Operational Costs

The fourth quarter's capital expenditures are expected to reach $190 million, distributed across various segments including Drilling Services and Completion Services. Q3's total capital expenditure stood at $160 million. Noncash direct operating costs, particularly those associated with Ulterra's step-up in value, add an extra $10 million in expenses. The company plans to continue reflecting the replacement costs of fluid ends as operating costs rather than capital expenditures.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson-UTI Energy Third Quarter 2023 Earnings Conference Call.

Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mike Sabella, Vice President of Investor Relations. Please go ahead.

[Michael Sabella, executive]

Thank you, Audra. Good morning, and welcome to Patterson-UTI's earnings conference call to discuss our third quarter 2023 results.

With me today are Andy Hendricks, President and Chief Executive Officer; Andy Smith, Chief Financial Officer; Mike Holcomb, Chief Business Officer; and Matt Gillard, President of NexTier Completion Solutions.

As a reminder, statements that are made in this conference call that refer to the company's or management's plans, intentions, targets, beliefs, expectations or predictions of the future are considered 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 takes no obligation to publicly update or revise any forward-looking statements. 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.

I will now turn the call over to Andy Hendricks, Patterson-UTI's Chief Executive Officer.

[William Hendricks, executive]

Thank you, Mike. Good morning, and welcome to Patterson-UTI's third quarter conference call.

Our third quarter was a monumental as we closed on 2 transactions that reshaped our company. Today, we are positioned as one of the market leaders across multiple U.S. onshore service lines with a diverse suite of products and services and a strong presence across the entire U.S. land drilling and completions value chain.

We believe these transactions create a long-term competitive advantage for our company, and our wide-reaching digital strategy will help us maximize the value potential for all stakeholders. We will look to use our integrated offering to deepen the partnerships with our customers and further differentiate ourselves on service quality and efficiency. It's becoming increasingly difficult to replicate the success of the larger oilfield services providers, and the market should continue to become more bifurcated going forward than it has been historically.

We are looking for ways to help keep U.S. shale oil and natural gas competitive on a global basis, and a competitive U.S. shale is important to the success of our company. Helping our customers reach their goals is critical to allowing us to reach our own goals for a strong return on capital and to return a significant amount of capital back to our shareholders through the cycle.

The NexTier and Ulterra transactions will help maximize our company's potential. We'd like to welcome the NexTier and Ulterra employees to the Patterson-UTI team. In the short time, we've all been together, we've been impressed by the talent at all levels of both organizations and excited about our shared future. We're working to ensure that we put our people in the right places to succeed. Our employees have worked tirelessly to make the integration a success and have remained dedicated to our company through what has certainly been a stressful period.

We believe we have made Patterson-UTI an employer of choice in the oilfield, which is already helping us attract and retain top talent and further driving our operational advantage. Operationally, we've already seen several successes by extending the NexTier wellsite integration footprint. We now have NexTier power solutions natural gas fueling system working on a legacy universal dual-fuel fleet. On another universal fleet, we've added NexTier's wireline and last mile logistics. We are confident completions wellsite integration will lead to improved wellsite efficiency, lower cost and a safer environment for our employees, which will benefit both our company and our customers.

It's been just 2 months since we closed the transaction, and we are already starting to see operational synergies. There are many other areas we see potential to create additional value through the merger for both Patterson-UTI and our customers. From an exterior transaction alone, we have line of sight with at least $200 million in annualized synergies by the first quarter of 2025, and we are increasingly confident in our ability to meet or even exceed that target. We brought together 2 of the industry's leading well completion companies and strong collaboration is already underway.

On the Ulterra side, we also see opportunities for revenue synergies between our Drilling Services and Ulterra products. As you heard us say before, we cannot ignore the benefit of size and scale that comes with these transactions. This is true not only from an operational perspective, but also as we navigate capital markets that are starting to take another look at our sector.

The larger market cap and market trading liquidity has expanded the universe of potential investors that can make or grow an investment in Patterson-UTI. We think this is a positive for all of our stakeholders. While our company is much bigger, our commitment to capital discipline is unchanged. Our capital allocation strategy is a major reason why we are excited to be considered by a broader group of investors.

We like our strategy, and we think the message is being well received. For those who followed Patterson-UTI previously, our capital allocation strategy is largely unchanged. The foundation starts with a strong balance sheet as well as organic investing strategy that helps us offer our customers differentiated products, technologies and services.

On the balance sheet, we have an investment-grade credit rating at all 3 major rating agencies, a testament to the low leverage and significant free cash flow generating potential of the new company. We will use our strong capital structure to be opportunistic at all points in the cycle. On CapEx, we will always be disciplined in our investments and only look to put capital to work where we see opportunities to build or expand our differentiated technologies and services for our customers.

We've already seen bifurcation in service quality amongst the peer group, and our CapEx strategy will look for ways to further advance our core competencies. This should mean a more repeatable return and free cash flow profile for our company through the cycle with a focus on both short-term and long-term free cash flow generation.

To reiterate, we are committed to return at least 50% of our free cash flow to shareholders annually, and we have returned more than $1.2 billion to our shareholders over the past 10-plus years. We remain committed to our dividend, and we have $281 million remaining on our share repurchase authorization. We believe this is an attractive capital allocation strategy that will allow us to invest in the future of Patterson-UTI to grow our competitive advantage while also offering our investors a shareholder return program with both income through the dividend and accretion through any buyback.

Now moving on to the macro. We are extremely excited about the outlook, and we think the behavior we have seen from our competitors and customers this year is yet another sign that we are operating in a more stable U.S. shale industry. Our customers are obviously still sensitive to commodity prices, but they are looking through volatility more than they have in the past. This allows us to better prepare and relative to prior cycle to create a far more predictable outlook for our operations, and we think a more investable sector.

For the third quarter, Patterson-UTI's U.S. drilling activity was in line with expectations with an average of 120 rigs, including 1 rig that earned 44 standby days after the customer changed its drilling schedule. We ended the quarter with 117 active rigs in the U.S. and have seen our rig count improved to 118 today. We expect to exit the year with 120 rigs and average 118 for the fourth quarter.

Positive momentum should continue into 2024. Our revenue per day is still in the mid- to low 30s, an acknowledgment from our customers that they see value in our premium assets and high-quality services. Super-spec rig utilization remains very high with activity for this class of rig outperforming the overall rig count. We think super-spec rig activity recovers before the idle lower-spec rigs, which should position Patterson-UTI to outperform the expected recovery over the next several quarters, even as we outperformed the market when the rig count moved lower this past year.

On the frac side, there was slightly more white space in Q3 than we were anticipating as we saw one-off disruptions from several customers. We continue to mostly see pricing discipline in the frac market, particularly among the dedicated natural gas-powered portion of our fleet, where we have the highest returns.

As we have said previously, out of our fleet of 3.3 million horsepower, we are choosing to stack some equipment before working at pricing that does not meet our threshold, and we continue to believe that is the right thing for our company. We're using any downtime to maintain our equipment where appropriate and prepare for an increase in activity in 2024. This should put us at an advantage as we enter 2024 with a fleet that is more readily available for deployment relative to our peers.

The long-term outlook remains positive in our view, even more so considering the delay in activity recovery we have so far seen for our customers. Oil prices have risen on the back of OPEC supply cuts. But importantly, absent a major macro event, we believe the global balance will need U.S. shale production to grow modestly over the next several years and U.S. shale activity likely need to stabilize just to keep production flat.

The delayed activity response so far should mean activity will have to catch up with deferred activity, which should be a tailwind in 2024. On the natural gas side, we believe the shape of the forward strip is telling us that there needs to be more activity in the gas basins just to meet current natural gas demand. And as we get closer to completion of new LNG export capacity later next year and into 2025, we will likely need to see natural gas activity rise again.

In short, we remain optimistic for both the drilling and completion of the markets, given current commodity prices and the view that we will need a modest increase in U.S. shale oil and natural gas production over the next several years. Meanwhile, the recent slowdown of frac activity is likely to accelerate attrition beyond what service providers were otherwise preparing for this year across the industry.

Additionally, we believe the slowdown has deferred some investments in new equipment. Roughly 2/3 of the industry fleet operating in the U.S. today can be powered by natural gas and the slowing pace of investment by service providers likely means there's a longer runway to fully replacing the diesel portion of the industry asset base.

For our NexTier completion segment, if we continue to see strong returns, we will still plan to continue to invest to upgrade our fleet at a measured pace. And any new capacity we bring into the market would likely be 100% natural gas powered and would be replacement horsepower for equipment that is reaching the end of its useful life. More broadly, the industry likely needs to see around 1.5 million horsepower of newbuilds per year just to keep horsepower flat and has been considerably below that over the past several years combined. In short, the frac fundamentals appear to be positioned to remain very strong over the next several years.

Regarding international opportunities, I want to be clear that our priorities remain continued capital discipline and returning cash to shareholders. Within our drilling and completions businesses, we occasionally participate in discussions for opportunities in international markets as we have for years. But for us to deploy capital, we would need to see a compelling opportunity that has a strong probability of acceptable and accretive returns for our differentiated products and services.

And to date, we have not found an opportunity that makes sense for our company and for our shareholders. Therefore, our current pace of international expansion will be primarily focused on Ulterra's previously announced plans in the Middle East and South America as we believe that is in the best interest of our shareholders.

I'll now turn it over to Andy Smith, who will review our financial results for the third quarter.

[C. Smith, executive]

Thanks, Andy. The reported financial results for the third quarter include 48 days from Ulterra after that acquisition closed on August 14 and 30 days of NexTier after that merger closed on September 1. Total reported revenue for the quarter was just over $1 billion. We reported a small net income attributable to common shareholders, which was essentially breakeven on a per share basis. This included $70 million in merger and integration expenses, partially offset by the recognition of $29 million of previously deferred revenue, which became recognizable after the customer changed its drilling schedule.

Our adjusted net income attributable to common shareholders was $55 million or $0.20 per share. This excludes the merger and integration expenses, included the previously deferred revenue and assumes a 21% federal statutory tax rate. Adjusted EBITDA totaled $277 million, which also excludes the previously mentioned merger and integration expenses and includes the previously deferred revenue.

Our weighted average share count was 280 million shares during Q3, and we exited the quarter with 417 million shares outstanding. Through the third quarter, we have returned $191 million to shareholders through a combination of share repurchases and dividends. Our Board has approved an $0.08 per share dividend for Q4, and we have $281 million remaining on our share repurchase authorization. We intend to return at least 50% of our free cash flow to shareholders annually, consistent with our previous capital allocation strategy.

Through the third quarter, we have returned more than 100% of our free cash flow to shareholders. And given where the share price is today, we will likely repurchase shares in the fourth quarter. As a reminder, we resegmented our reporting this quarter to better reflect the way we manage our business. Our new Drilling Services segment includes the legacy Contract Drilling and Directional Drilling segments. It also includes our Current Power, Electrical and Automation Equipment and Warrior Drilling Rig Equipment businesses, both of which were previously reported as Other operations.

During the third quarter, Drilling Services revenue was $489 million, which includes the recognition of $29 million in previously deferred revenue. Drilling Services gross margin totaled $209 million during the quarter. Direct operating costs included $9 million associated with insurance reserve adjustments and inventory write-downs.

In U.S. Contract Drilling, we totaled 11,009 operating days, including 1 rig that earned 44 days on standby after the customer changed its drilling schedule. Average rig revenue per day increased to $38,110 with the previously deferred revenue item positively impacting reported revenue per day by $2,630. Average rig operating cost per day were $19,870, including $790 per day in costs associated with the previously mentioned insurance reserve adjustments and inventory write-downs. The average adjusted rig margin per day was $18,240, a $1,330 per day increase from the previous quarter.

At September 30, we had term contracts for drilling rigs in the U.S., providing for approximately $760 million of future dayrate drilling revenue. Based on contracts currently in place, we expect an average of 74 rigs operating under term contracts during the fourth quarter of 2023 and an average of 52 rigs operating under term contracts over the 4 quarters ending September 30, 2024.

In our other Drilling Services businesses, which is mostly International Contract Drilling and Directional Drilling, third quarter revenue was $69 million with an adjusted gross margin of $8 million. For the fourth quarter, in U.S. Contract Drilling, we expect to average 118 active rigs and exit the quarter with 120 rigs operating. We expect an adjusted gross margin of $16,100 per day with revenue per day expected to average $35,400 and rig operating cost per day expected to average $19,300. Other Drilling Services revenue is expected to be $65 million with an adjusted gross margin of $10 million.

Our new Completion Services segment results include a full quarter of the company's legacy Pressure Pumping segment as well as 30 days of results from NexTier Oilfield Solutions beginning on September 1, 2023 and continuing through the end of the quarter. Additionally, effective September 1, 2023, we began recording the cost to replace fluid ends as a direct operating cost rather than as a capital expenditure.

Reported revenue in our Completion Services segment totaled $460 million, with an adjusted gross margin of $91 million. During the quarter, segment revenue was impacted by lower customer activity and slightly lower pricing on certain products and services with demand and pricing moving lower towards the end of the quarter before stabilizing thus far in Q4. We think activity and pricing is likely to stay relatively steady at current levels through the rest of the year, aside from typical seasonality. For the fourth quarter, we expect Completion Services revenue of $950 million with an adjusted gross margin of $200 million.

Our Drilling Products segment results include 48 days from the recently acquired Ulterra Drilling Technologies beginning on August 14, 2023 and continuing through the end of the quarter. Additionally, upon closing the Ulterra transaction in accordance with U.S. GAAP, we recorded certain assets and liabilities of Ulterra at fair value, which resulted in the step-up in value of the drill bits that Ulterra held at the time the transaction was closed. This accounting adjustment will continue to impact the reported results for Ulterra until we have fully consumed the impacted assets.

Third quarter Drilling Products revenue totaled $47 million with an adjusted gross margin of $14 million. During the quarter, the step-up in value increased the reported segment direct operating costs by $6 million and increased reported segment depreciation and amortization by $7 million, all of which was noncash in nature. Given the declines in industry activity, we are pleased with the stability of the Drilling Products segment. For the fourth quarter, we expect Drilling Products revenue of $90 million with an adjusted gross margin of $30 million. We expect $10 million in noncash direct operating costs associated with the step up in value at Ulterra, without which the segment adjusted gross margin expectation would be $40 million.

Other revenue totaled $17 million with $6 million in adjusted gross margin. We expect fourth quarter Other revenue and adjusted gross margin to be flat with the third quarter. Reported selling, general and administrative expenses were $45 million in Q3, which includes partial periods for Ulterra and NexTier. For Q4, we expect SG&A expenses of $65 million. We expect SG&A to decline over the next year as we realize synergies from the merger with NexTier.

On a consolidated basis for the third quarter, total depreciation, depletion, amortization and impairment expense totaled $198 million. For the fourth quarter, we expect total depreciation, depletion, amortization and impairment expense of approximately $260 million. We expect fourth quarter cash taxes to be around $5 million.

During Q3, total CapEx was $160 million, including $89 million in Drilling Services, $56 million in Completion Services, $8 million in Drilling Products and $7 million in Other and Corporate. Our CapEx in Q4 is expected to be $190 million, comprised of $65 million for Drilling Services, $105 million for Completion Services, $15 million for Drilling Products and $5 million for Other and Corporate.

The CapEx includes maintenance spending as well as some investments in NexTier's Power Solutions natural gas fueling business and other upgrades on both the completions and drilling fleets. To date, we have delivered annualized synergies totaling almost $60 million from the NexTier transaction with synergies only slightly impacting our Q3 results as the transaction closed late in the quarter.

By the end of Q4, we anticipate reaching an annualized synergy run rate of more than $100 million, which will mostly be back-end weighted and will be more impactful to Q1 results. We are increasingly confident that we can meet or exceed our goal for $200 million in annual synergies associated with the NexTier merger by the first quarter of 2025.

During the quarter, we successfully completed a 10-year $400 million senior notes offering. We closed Q3 with nothing drawn on our $600 million revolving credit facility as well as $67 million in cash on hand. Subsequent to the close of the NexTier transaction and concur with our recent notes offering, we now have investment-grade credit ratings from all 3 major credit rating agencies. Maintaining an investment-grade capital structure is core to our capital allocation strategy, and we intend to continue to run our business in a way that allows us to maintain our investment-grade capital structure.

I'll now turn it back to Andy for closing remarks.

[William Hendricks, executive]

Thanks, Andy. With both the NexTier and Ulterra transactions now closed, our top priority is successful integration as we work to fully realize the value from these transactions. Our conviction on the rationale for these deals is stronger today than it's ever been, and we remain on track to achieve or even exceed the $200 million in annual synergies from the NexTier transaction by the first quarter of 2025.

Looking at the overall market, the macro setup is strong, and the outlook is improving. We've already seen our rig activity inflect higher, and we expect this positive momentum will continue in 2024. Customers are optimistic at recent commodity prices, but are proceeding cautiously, which we think is a sign of a more stable U.S. shale industry, and our belief that cycles will be shallower in the future.

Nonetheless, as these events play out, we think convention in the cycle will improve. And over the long term, activity and production will need to increase to meet demand based on various long-term forecasts, including the IEA. And finally, while the macro setup gives us confidence in our future earnings power, our priorities will remain sustaining a high return on capital and free cash flow.

We remain capital disciplined with our CapEx, and we will look to invest in areas where we see opportunities to differentiate ourselves to our customers versus simply investing to grow capacity. This should help us to deliver strong returns and free cash flow through the cycle. We remain committed to return at least 50% of our free cash flow to investors through a combination of dividends and buybacks. This is the right strategy for our company and our industry.

Before we go to Q&A, I want to again acknowledge all of our employees who have continued to provide great service quality while working tirelessly to make these transactions successful. Many of our employees have gone above and beyond their day-to-day roles to help make Patterson-UTI an employer of choice, and we would not be here today without you. So thank you.

With that, I'd like to now open the lines for Q&A.

[Operator]

[Operator Instructions] We'll take our first question from Scott Gruber at Citigroup.

[Scott Gruber, analyst]

I want to start on the completion segment. How many fleets do you have active today? And thinking about the recovery in that count, just given your strategy, do you think E&Ps will be ready to pay more reasonable rates for your equipment in early '21, such that you can kind of see a steady improvement in count following the improvement in rig count we're starting to see? Or is there some risk that when we get off to a slow start next year?

[William Hendricks, executive]

So I'll start with the horsepower. So we have 3.3 million horsepower. We're not calling out the fleets just because there's such a range of size in the fleets that we operate. We could be on a smaller fleet in the Midland Basin, or we could be doing a simul frac in the Delaware, or it could be a big fleet over in the Haynesville. So calling out the number of fleets doesn't really help people out from that standpoint because they just vary in size and they can actually fluctuate within a month or within a quarter.

So we do have 3.3 million total horsepower. We did park some of that horsepower as things slowed down with the white space in the calendar. And like I mentioned earlier, we're using that period just to do some maintenance to be ready for the inflection because we can already see the inflection in our own rig count at Patterson-UTI. And I realize we've been outperforming the market in general with our drilling rig count. But based on how commodity prices have been trading, especially the forward strip on natural gas, I think you'll see an inflection in the overall rig count.

Now we're going to see the traditional lag between the drilling rigs picking up and the frac operations just because there's really no DUCs out there right now. We've got frac spreads bumping into drilling rigs and drilling rig activity does need to pick up so the frac activity can pick up. So as we see those increases in early '24 -- we're already seeing the inflection now. But as we see the increases in early '24 on the drilling side, there's going to be a bit of a lag on the completion, but then you're going to see completion activity pick up following drilling activity.

[Scott Gruber, analyst]

Got it. Then I want to turn to CapEx next year. I know you guys haven't set the budget, but just kind of want to get your thoughts on the moving pieces based upon the resegmentation. I have Drilling Services somewhere north of 300 for this year, maybe 320. So I want to see if that is a good number for [ NexTier ], if that's down? And then will the Completion Services CapEx for next year kind of be in a high single-digit range? [ NexTier ], you just talked about 8%, 9% of revenues. So that's maybe kind of mid-300s. And then if I add in 65 for Ulterra, maybe 25 for Other, I kind of get pretty close to consensus. Is it kind of one of your early thoughts on the pieces and what it could total?

[C. Smith, executive]

Yes. Scott, this is Andy. Again, we haven't gone through a full budgeting process. But I think if you look at where our fourth quarter is coming in, not necessarily looking at the bucketing of it, but if you look at the total number, the sort of $190 million guide, I would think that on a quarter-to-quarter basis in 2024, we're pretty comfortable in the $190 million to $200 million range on a quarterly basis.

[Operator]

We'll move next to Jim Rollyson at Raymond James.

[James Rollyson, analyst]

Congrats on getting everything put together. Andy, when we think about the rig market, obviously, you're talking about your bottoms in and starting to improve. So your average rate this last quarter average revenue per day ex the 1 customer situation was kind of in the mid-30s, and your -- you've talked about low to mid-30s is kind of where the market is right now. Just trying to think through as we roll through next year, your rig count presumably gradually improves. When do margins bottom if you kind of look at where you're pricing rigs today versus what contracts are falling off? How do you think about that?

[William Hendricks, executive]

So first, I want to congratulate the drilling team. They've done a great job through 2023, managing the rig count. This is really a testament to the service quality to the continued rollout of technology that we are doing on our drilling rigs and the partnerships we have with various customers out there that want to keep using us even when things are getting a bit soft in the market. So that's going really well.

In terms of leading-edge rates, they were higher earlier in the year. They've softened a little bit, but they really haven't come down that much. I'd say it is mid- to low 30s because it's more in the mid than it is in the low. So that's kind of how I characterize it. And I do expect that, that will start to move up early next year as the rig count starts to push up as well past this inflection that we're seeing. So given that, I think margins are likely to bottom around Q1, maybe Q2, but we'll also have some extra costs in Q1 that we have on an annual basis. So that's likely to kind of put that inflection on the margins around Q1.

[James Rollyson, analyst]

Yes, that makes perfect sense. And as you put rigs back to work, last year until we got into late last year, you were putting things out and relatively short terms. And then I think around the late third quarter, you started terming up a few things, which proved to be pretty fortuitous. But curious, as you're having conversations and putting rigs back to work right now, maybe the kind of tenor of the contracts that these guys are looking for.

[William Hendricks, executive]

Yes. We're definitely weighing them to the shorter side because we do think we have upside in '24 just based on the macro outlook going into '25. So we're starting with some shorter contracts or some agreements that allow us to move that up next year.

[Operator]

And next, we'll move to Stephen Gengaro at Stifel.

[Stephen Gengaro, analyst]

I guess 2 for me. The first, just your current take on sort of supply-demand fundamentals on the Pressure Pumping side. But maybe talk a little bit about the, if you can, any material bifurcation you're seeing between the lower emission assets and sort of traditional assets and kind of -- and where your fleet stands right now?

[William Hendricks, executive]

So let me start off by saying I want to thank everybody in our well completions business at Patterson-UTI for all the hard work they've been doing. We closed on this merger on September 1, about a month earlier than we had originally planned. And all -- there was just so much work that was done by the teams to get ready for day 1, and day 1 for us was on a Friday before a Labor Day weekend. And that weekend, we didn't miss any sand, we didn't miss any work, trucks moved equipment, pumps kept pumping, everything just worked like it was supposed to on day 1.

And so hats off to the team on all the planning that was done through this integration process, which started right after we announced the Ulterra transaction, and we jumped into the integration work. So integration is going very smoothly. We're already talking about synergies. We have a high level of confidence in hitting the synergy number there. And so I got to start with that and just say thanks to everybody and our well completions team for everything they've done so far to get us where we are really excited about how this is going.

The market is another thing. So we've had a softening in the market just really kind of tied to the overall rig count in the industry. And like I mentioned earlier, we've had frac spreads that are bumping up against drilling rigs with the softening in the market. And so it's going to take an increase in drilling activity to really move that. Now when it comes to the pumps and the equipment and the fleets that remain stickier in the softer market, it certainly is weighted to the primarily natural gas fuel systems, whether it's dual fuel or other.

And so that certainly caused a bifurcation in the market. When you look at our well completions equipment, roughly 2/3 of that is primarily natural gas powered. And so we're in a really good position, and it's why we've seen a softening in the market, but certainly not any more than that. So really excited about how our teams have done through this period, even with the white space that we've seen in the third quarter, that's going to adjust itself.

If you look forward, we are going to see maybe a little bit of slowdown towards the end of Q4 based on the holiday period, maybe a little bit of winter baked into some of those projections just in case we get some cold weather. So we'll see how some of that plays out. But I'm very upbeat for what 2024 can hold going forward there and excited for what we can offer to the customers.

[Stephen Gengaro, analyst]

I know it's been -- well, it's been 2 months now, I guess, since the deal closed. But has there been anything that has really stood out as you've kind of looked at the NexTier way of doing business on the completion side that surprised you, it's materially different? Like anything that's really jumped out since the merger closed that has been an upside or downside surprise for you?

[William Hendricks, executive]

I'm going to start with the people. The people are great. We're excited to have them as part of the team. And they've got a lot of energy. There's a lot of excitement in trying to pull everything together, and everybody is just doing a fantastic job, a lot of high-quality individuals. And so that's where it starts and really excited about that. We were already familiar with the equipment. We understood what NexTier was doing in terms of integrating services, whether it's wireline, last mile logistics, the power solutions with the natural gas, CNG and blending at the well site. All these things have made NexTier successful, and we've watched that over the years.

At Patterson-UTI, years ago, pre-COVID, we actually looked at adding wireline to our frac spread because we understand and we get it. You don't want $50 million worth of frac waiting on $1 million of wireline at the wellsite. And so that integration is important to efficiencies and just continuity of service and to keep pumps pumping. And so the ability to pull all this together and then bring those integration pieces into frac spreads that didn't have it previously is powerful for this business, so excited about that.

[Operator]

We'll take our next question from Derek Podhaizer at Barclays.

[Derek Podhaizer, analyst]

[indiscernible] to ask about the synergies. I know the guide sounds like you reached over $100 million by the end of the year. It seems ahead of schedule. Maybe can you break that down to the different categories you discussed? But now I believe there was SG&A on the cost side, you have the revenue synergies and then you had some nonpayroll spend. Maybe just an update there and to help just expand on that synergy number.

[C. Smith, executive]

Yes. So I would say that as we go through the fourth quarter, we are looking at right now on the synergy side. The SG&A synergies are probably about, again, 1/3 of kind of the run rate that we'll see and then probably about half of it is probably coming out of procurement at this point in time, and then the rest is in the integrated revenue opportunities.

[Derek Podhaizer, analyst]

Got it. That's helpful. And then on the merger expense side, I believe it was $80 million, and I know you just posted $70 million. I thought there might have been a split between the expense side and the CapEx side. Can you just update us there? Clearly, there's a benefit to closing earlier, you're able to capture a lot of those onetime costs already. Should those all be fully recognized within this year? Or will there be any leak over into 2024?

[C. Smith, executive]

I'm sorry, you were asking -- I got confused you were asking about expenses and CapEx?

[Derek Podhaizer, analyst]

Yes. I think the original $80 million onetime expenses, I thought that was split between some OpEx and CapEx, but you're seeing that $70 million number this quarter. Will that $80 million fully be recognized in 2023, maybe just some updates on if it's OpEx, CapEx? I thought it was 65:15 split for the OpEx, CapEx.

[C. Smith, executive]

Yes. I mean so a lot of it -- so some of it will be -- will leak into 2024. And the reason for that is, again, as you go through some things, until you have defined plans on what you're going to do around certain items, you're not really allowed to sort of recognize those expenses. So they will slip a little beyond 2023 and into 2024 as well.

[Derek Podhaizer, analyst]

Got it. And then just a quick follow-up on the drilling side. You're obviously coming off the bottom, but it seems slight activity has been a little bit more lethargic than people originally thought it was going to be. Can you maybe expand on the privates, the publics, maybe the different basins, what surprised to the downside? I know you guys are constructive on '24, you went over that. But why is the thing that we've been limping into year-end? Just maybe some more color around that.

[William Hendricks, executive]

That's a great question. I think we've been having those discussions ourselves, but there's not any one particular area that you can call it out. It's a mixture of publics and mixture of privates that are both being cautious and inflecting at the same time. So even our rig count adds that we're looking at going into year-end are a mixture of publics and privates. So it's really kind of across the board. I think in the natural gas plays, we're still seeing a little bit of hesitation to pick up drilling rigs, and I can understand that.

But I think that -- when you look at the forward strip, that's going to work itself out. So maybe a little bit later than we initially thought. But again, when we're talking about our rig count at 218 now and then possibly exiting the fourth quarter at 220, this is an inflection in our rig count. And I think that you'll see the overall rig count kind of move higher a little bit later as well. I think a lot is going to depend on how the overall commodity outlook is. And also, I think you've got a lot of publics that are really kind of waiting for some signals from their own investors to say, "Hey, are you going to take advantage of these higher commodity prices, especially on gas and the forward strip?"

So I think those discussions are probably happening for our customers with their investors. And -- but I'm still optimistic about '24. When we talk about natural gas and increases in activity in '24, I've said this before, I still think it holds true. It's really kind of a two-step function. You're going to see an initial step-up just kind of based on the forward strip. There will be some moderate growth there. You'll see another step up towards the end of '24 getting ready for '25 and LNG takeaway.

[Operator]

We'll go next to Kurt Hallead at Benchmark.

[Kurt Hallead, analyst]

Thanks for all the color and info and insight on how you guys pull this thing together. A lot of hard work in short period of time, for sure. So I'm kind of curious, as you look at the Drilling Products business, Andy, what kind of baseline growth should we be thinking about for that business, right? The vast majority of the business is U.S. directed so we can kind of kind of map that out to rig count, right? And it sounds like you got some growth opportunities international. So [indiscernible] question, net-net, is really kind of geared toward outside of North America, what kind of growth do you expect in Drilling Products for 2024?

[William Hendricks, executive]

Yes. Thanks, Kurt. So their growth is really going to be tied to the overall rig count growth as we go forward into '24. Roughly about 70% of their activity is tied to the U.S. rig count onshore. And so it's really going to follow that trend. We're really excited about their performance. They're doing really well. Even with the softness in the market, the slowdown in the rig count, when you look at it on a revenue per rig basis, they're still holding up well. And so the team is doing a great job. The market is what it is, but we are optimistic about the rig count in '24. And so you're going to see growth from their business tied to that U.S. rig count growth in '24.

On the international front, roughly 30% is tied to international growth, and we're excited about that potential there. There's countries outside of North America that they've been in, and they're still increasing their footprint. And so that 30% could grow to be a bigger percentage of that slice of the pie through '24 and into 2025. And we're excited to see how that's going to play out.

[Kurt Hallead, analyst]

Great. Really appreciate that. And so it sounds like you reiterated a lot of your viewpoints that you had back in early September about an improvement in U.S. land drilling related activity. I think back then, you kind of gave an indication that you thought the U.S. land rig count would get back above 700 sometime in the latter part of 2024. Given how slow things have been progressing through the end of this year, do you still have a lot of conviction in the rig count getting back to 700? Or is it recent activity levels kind of pulling that back a little bit?

[William Hendricks, executive]

Yes, it has been a little bit slower on the uptick than I thought it was going to be for the end of this year. I think a lot of that has to do with budgets and our customers trying to work out exactly what their plans are, but I'm going to stick with that. I think that if you look at the forward strip on natural gas and the way oil has behaved in general across '23, we've had a couple of dips. But in general, oil commodity prices have been at a healthy level. And I think that trend is going to continue. So yes, let's go with that. I think it's -- we're going to be close to 700 towards the end of '24 as an industry rig count.

[Operator]

We'll move next to Keith Mackey at Calgary.

[Keith MacKey, analyst]

Can we just first talk about the potential, I guess, cross-selling revenue synergies between drilling and pumping? Certainly, that's been a potential benefit of the recent transactions. But Andy, how is that playing out relative to your expectations? Are there any notable wins or activities you could point to on that front as yet?

[William Hendricks, executive]

Yes, that's a great question. We've been in both businesses for a long time now in decades. I wouldn't characterize it as cross-selling per se. But what I do characterize is strengthening the partnerships that we have with our customers. And when we announced these transactions, we received nothing, but positive feedback from customers. We had long time partners who have been our customers for decades, who called me up and said, look, a stronger Patterson-UTI is good for us.

And so having the strength to be able to address their needs across all these services has allowed us to have those conversations. And I wouldn't necessarily, as I said, characterize it as cross-selling. But when you have those strong partnerships at a high level and now you have more capacity to service their needs, that's the bonus.

[Keith MacKey, analyst]

I see. Maybe just a follow-up on your comments in the prepared remarks around -- it was when you're talking about capital allocation strategy using a strong balance sheet to be opportunistic at all points through the cycle, certainly, has been so lately. But can you just expand on that comment a little bit more in terms of how you're thinking about being opportunistic through the cycle at all points?

[William Hendricks, executive]

When we're talking about being opportunistic over cycles, we're talking about over the next 5 to 10 years. Right now, we're focused on integration of the businesses. We still have some work to do, and we're focused on realizing these synergies of $200 million or greater million dollars on the synergy with the NexTier deal and integrating the operations and working on supply chain pieces as well. So that's our primary focus.

But historically, we have been opportunistic through the cycles. There's been a number of times when we've gone through dips in the cycle, and we've seen softening that we've had opportunities to do things with our balance sheet. But I would say right now, we're just focused on integration.

[Operator]

We'll take our next question from Sean Mitchell at Daniel Energy Partners.

[Sean Mitchell, analyst]

Kind of as we see a lot around M&A over the last several weeks, as you see the E&P space consolidate, it would seem logical that the kind of consolidators here want to work with suppliers who have scale. First, I would say, do you agree with this assessment? And then secondly, if so, do you think that pushes more consolidation in the service sector?

[William Hendricks, executive]

Well, the first part of your question, I think you answered yourself, and we believe that as you see some of these large E&Ps take on even large E&Ps and become even larger in the space, we believe they are going to work with companies that have the scale to be able to service their needs, and we fit right into that. So we're excited about that potential. We do see when these transactions on the E&P side happen, you get a pause in activity, but then things start to pick up again. So we think those are good possibilities. But in terms of further M&A in the service space, I think it's possible. I don't want to speculate because we're focused on integration right now. So -- but I do think there's probably some opportunity out there.

[Sean Mitchell, analyst]

Maybe one more. Can you just address the labor market today, Andy and specifically how you and the consolidated companies have managed labor this year as activity has moderated and maybe provide us your thoughts on finding people today and the ability for the industry to scale up again, should that be necessary?

[William Hendricks, executive]

Even over the last few years with the massive ramp-up in activity that we've had, we were able to cover all the work. And we had to invest in the systems and the people for recruiting and onboarding and training to be able to do that. And it definitely was tougher over the last few years than it had been in previous upturns, given the strength in the economy over the last few years. But that investment that we've made allows us to get the people that we need to cover the work that's out there.

And so we didn't miss any work for lack of people. This has only been a softening in the market, and we're expecting as we pass this inflection to increase activity in 2024. And so with the moderated growth we're expecting in 2024 versus the softening we had this year, I don't anticipate we're going to have trouble adding staff back to do the work.

[Operator]

And our next question comes from Don Crist at Johnson Rice.

[Donald Crist, analyst]

Andy, your previous comment about Pressure Pumping kind of bumping up against rigs, how do you think that plays out? I mean it appears to us looking from the outside that the efficiencies on the Pressure Pumping side have kind of outpaced efficiencies on the rig side. Do you think that kind of results in a smaller Pressure Pumping fleet industry-wide going forward? Or how do you -- can you talk to that just a little bit?

[William Hendricks, executive]

Well, I think there's a couple of pieces to that question that I can touch on. So I appreciate it. One is, yes, we are bumping up against the rigs. And so we do need an increase in rig activity. There's just really no DUCs out there at this point in the cycle and where we are from the softening. So we do need the rig activity to pick up. But in terms of frac efficiency, it's just been amazing what the teams across the industry have accomplished over the last few years in terms of frac efficiency for the top tier players. There's lots of anecdotes of pumping well over 20 hours a day.

Now that being said, I'm not sure we have a lot of room to grow efficiency. So I don't think we're going to need less frac out there. I mean we're not going to pump 25 hours a day. So we're already at some pretty high levels of pump hours on a number of our fleets that are out there working, and they're just doing a great job. So you've seen that increasing efficiency over the last few years.

But it's -- I think efficiency will kind of slow at this point in terms of what we're going to see across the industry. As well, I do think that as we come out of this softening in the market and we increase activity, you're going to see a tighter frac market. And we are going to have to add some equipment to replace older equipment that's going to drive capital discipline across the sector. It's also going to cause as you get into later '24 and '25 with natural gas demand, with increasing activity that's going to cause pricing to move up at that point as well. And so we're going to see tightness in the market from an equipment standpoint as we start to get past the inflection point and activity moving up in '24.

[Operator]

And at this time, there are no further questions. I would like to turn the conference over to Andy Hendricks for closing remarks.

[William Hendricks, executive]

Thank you. I just want to thank everybody for tuning in this morning. Once again, I want to thank the employees of Patterson-UTI. You all are doing an amazing job as we work through everything we're working through these integrations over the last few months, and it's just been impressive to watch such high-caliber people work through all these. So thanks for what you're doing. Appreciate it.

[Operator]

And this concludes today's conference call. Thank you for your participation. You may now disconnect.