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Patterson-UTI Energy Inc (NASDAQ:PTEN)
Q3 2020 Earnings Call
Oct 22, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Patterson-UTI Energy Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the call over to Mike Drickamer, Vice President, Investor Relations. Please go ahead.

Mike Drickamer -- Vice President, Investor Relations

Thank you, Denise. Good morning. And on behalf Patterson-UTI Energy, I'd like to welcome you to today's conference call to discuss the results of the three and nine months ended September 30, 2020. Participating in today's call will be Andy Hendricks, Chief Executive Officer, and Andy Smith, Chief Financial Officer.

A quick reminder that statements made on this conference call that state the company's or management's plans, intentions, beliefs, expectations or predictions for the future are forward-looking statements within the meaning of the US 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 the 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 include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website, www.patenergy.com, and in the company's press release issued prior to this conference call.

And now it's my pleasure to turn the call over to Andy Hendricks for some opening remarks. Andy?

William A. Hendricks -- President and Chief Executive Officer

Thanks, Mike. Good morning and welcome to Patterson UTI's third quarter conference call. We are pleased that you can join us today. Our financial results during the third quarter exceeded consensus estimates as our contract drilling business continues to prove its resilience in a downturn and our pressure pumping and directional drilling businesses showed improvement in the third quarter.

Based on our customer engagement, we expect activity will continue to improve through at least the first quarter of 2021. Assuming commodity prices remain around current levels, we expect our profitability will be at or near an inflection point in the fourth quarter and be higher in early 2021. I will now turn the call over to Andy Smith, who will review the financial results for the quarter ended September 30. I'll then comment on our operational highlights as well as our outlook before opening the call to Q&A. Andy?

C. Andrew Smith -- Executive Vice President and Chief Financial Officer

Thanks, Andy. As set forth on our earnings press release issued this morning for the third quarter, we reported net loss of $112 million or $0.60 per share. Adjusted EBITDA was $43.3 million, which significantly exceeded capital expenditures of $13.4 million. Our operating results, combined with a further working capital lease, led to a $57 million increase in our cash balance. Our cash balance at the end of the third quarter was $304 million.

Activity levels have recently improved across all of our business segments. With the increased activity levels, our drilling capex forecast, which was expected to be $100 million in 2020 is now expected to be $110 million. All other capex expectations remain the same, bringing our total capex expectation to $150 million for 2020. Of the $110 million of drilling capex, $49 million were spent in the first quarter before the downturn began.

Before I turn the call back to Andy, for the fourth quarter, we expect SG&A of approximately $22 million, with depletion, amortization and impairment expense to be flat quarter-over-quarter at $157 million and an effective tax rate of approximately 13%.

Lastly, we will be paying our quarterly cash dividend of $0.02 per share on December 17, 2020 to holders of record as of December 3, 2020.

With that, I will now turn the call back over to Andy Hendricks.

William A. Hendricks -- President and Chief Executive Officer

Thanks, Andy. While the second quarter for our industry saw historic decline in activity, I was pleased to see the US rig count stabilize in the third quarter and completion activity increased from the low at the end of the second quarter. For Patterson-UTI even though our activities declined significantly from the beginning of the year, I'm also pleased with the operational performance of each of our business segments and our continuing rollout of new technologies.

In contract drilling, our average rig count for the third quarter was 60 rigs, including 17 rigs that were idle but contracted. The proportion of rigs that were idle but contracted increased to 28% in the third quarter from 20% in the second quarter. This is dilutive to both average revenue per day and average cost per day during the third quarter as idle but contracted rigs generally receive a reduced day rate, but also carry minimal associated costs.

Average rig revenue per day during the third quarter was $20,920 down from $22,970 in the second quarter. In addition to the dilution from the higher proportion of rigs receiving reduce rates, revenue per day was also impacted by less lump sum early termination revenue during the third quarter.

Average rig cost per day during the third quarter was $10,750 down from $11,690 per day in the second quarter. In addition to the dilution from the higher proportion of rigs on standby at minimal costs, operating costs benefited from a credit for sales and use tax during the quarter.

Average rig margin per day of $10,170 in the third quarter benefited from unexpected lump sum early termination revenue and the credit to operating costs for sales and use tax. Excluding both of these benefits, average rig margin per day would have been approximately $9,000, which exceeded our expectations.

As of September 30, 2020 we had term contracts for drilling rigs providing for approximately $305 million of future dayrate drilling revenue. Based on contracts currently in place, we expect an average of 43 rigs operating under term contracts during the fourth quarter and an average of 35 rigs operating under term contracts during the four quarters ending September 30, 2021.

Drilling activity stabilized during the third quarter and started to improve late in the quarter. Our rig count has improved to 61 rigs today from a low of 57 rigs in late August. We are optimistic about the outlook for drilling activity in the fourth quarter and expect to see an increase in activity later in the quarter. We expect to average 61 rigs for the fourth quarter with the proportion of rigs idled but contracted in the mid teens. By the end of the fourth quarter, we expect to be at 63 rigs, of which approximately 10% will be idle but contracted.

Average revenue per day in the fourth quarter is expected to decline by approximately 2% to 3% due primarily to the expected absence of lump sum early termination revenue in the fourth quarter. Average cost per day in the fourth quarter is expected to be negatively impacted by having a lower proportion of idle but contracted rigs. Additionally, our expected fourth quarter rig operating costs include approximately $500 per day of rig reactivation expenses.

In total, average rig margin per day is expected to be approximately $7,500 per day in the fourth quarter. Going forward, our focus is shifting from stacking to reactivating rigs in the fourth quarter and the first quarter of 2021. We are in a great position to do so, given our broad customer base and our fleet of super-spec walking rigs, such as our advanced APEX-XK that we expect to be in demand is operators return to work.

Across the US contract drilling industry, we believe that while pricing will be competitive as the industry emerges from the rig count bottom, we expect the financial hurdle of rig reactivation expenses should promote pricing discipline as we move into next year.

Looking ahead, our expectation for the contract drilling industries at pricing discipline will be similar to what we saw in 2016 and '17. As the rig count moved up from the bottom of the cycle, drilling rig day rates also increased. And in this cycle, we expect to see more performance-based contracts which create a better balanced economic win-win with operators.

Turning now to pressure pumping. We averaged five active spreads during the third quarter, up from four active spreads in the second quarter. Pressure pumping revenue for the third quarter increased to $72 million, $59 million in the second quarter and pressure pumping adjusted EBITDA improved to $6.2 million.

Our active spreads were more highly utilized during the third quarter, which, when combined with further improvement efficiency, led to a more than 30% increase in average stages per spread in the third quarter. This efficiency improves our competitive position within the pressure pumping landscape. For the fourth quarter, we expect to average six active spreads and pressure pumping revenue is expected to improve by approximately 10% sequentially. However, with lower utilization during the fourth quarter due to expected slowdowns around the holidays, adjusted EBITDA is expected to decrease to approximately $4 million.

We are encouraged by the attrition occurring throughout the pressure pumping industry through mergers, bankruptcies and consumption, moving the industry directionally and closer to a supply and demand balance.

Turning now to directional drilling, revenues were $10.3 million and the gross margin was approximately $0.5 million. We were able to increase activity and gain market share in what was essentially a flat rig market during the third quarter. Our market share increase was a result of the enhanced performance of our new technology, the Mercury Measurement While Drilling system and the new impact directional drilling motor sizes, which were introduced in the first quarter of the year.

We also continue to make great progress in the area of remote measurement while drilling operation, whereby we are able to take an MWD technician off the rig and perform the job from our real-time PTEN+ performance center here in Houston. During the third quarter, we performed remote MWD operations on 28 wells, which equated to 109 MWD runs and 328,000 feet of wellbore footage drilled. For the fourth quarter, we expect directional drilling revenue of approximately $14 million and we expect gross margin of approximately $1.5 million.

Turning now to our other operations, which includes our rental, technology and E&P businesses. Revenues improved during the third quarter to $9.8 million from $8 million in the second quarter. Gross profit during the third quarter was $1.2 million. For the fourth quarter, we expect revenues and gross profit to be similar to the third quarter.

Before we open up the call for questions, I'd like to give you an update on our technology and ESG progress. Technology and performance will be an increasing differentiator as we move into a recovery and we continue to move forward with remote operations capabilities for reduced costs and automation technologies for improved performance, wellbore quality and repeatability. These improvements are enabled by the digitization of the high frequency data and metadata originating from the wellsite operations, as well as by digitalizing our processes and workflow. These technology investments are capital-light and operate in a cloud data environment, where, for example, in contract drilling and directional drilling, they can be added to our existing high performance super-spec rigs, such as our popular APEX-XK.

As well we believe that we have a leadership position in the technologies that enable the use of alternative fuels for cost savings and for reducing emissions. We are seeing increased interest through more operator focus on ESG and carbon emissions in a number of our technology solutions. For example, in contract drilling, we have the largest fleet of 100% natural gas engines available in the US. We are the first contractor to operate rig with lithium battery hybrid hardware and energy management software, and automated energy transfer systems that can replace a complete generator using energy storage.

Our electrical engineering and technology division Current Power, we offer a solution and have experience tying directly into high-line utility power for an emissions-free drilling operation at the wellsite. And our Pressure Pumping division, Universal is one of the most experienced frac companies operating natural gas dual fuel engines. All this combines the Patterson-UTI a technology leadership position in the increasing importance of ESG in our industry, and with an eye on the future energy transition.

We can continue these capital-light and technology-focused investments with a long-term perspective because at Patterson-UTI, we have a strong balance sheet, produce positive cash flow and have highly effective operational teams.

With that, we'd like to thank the hardworking men and women who make up this company as they have worked diligently and effectively through a very challenging time, both in our industry, and in general, and we appreciate your continuing efforts. Denise, with that, I'd like you to open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions]. Your first question comes from Sean Meakim with JP Morgan. Your line is open.

Sean Meakim -- JP Morgan -- Analyst

Thanks. Hey, good morning.

Mike Drickamer -- Vice President, Investor Relations

Good morning, Sean.

Sean Meakim -- JP Morgan -- Analyst

So as we think about the first part of '21, you've indicated that you'd expect to see continued activity in that time that seems consistent with what we've heard. You're moving up your spread count in the fourth quarter in anticipation of that. And so there will be a little bit of a low around the holidays. Can we just talk about confidence level in terms of being able to drive improving profitability for pressure pumping in the first quarter? And then look beyond that, as -- assuming that the frac crew count for the lower 48 moves toward a maintenance level, which is substantially higher than where it is today, Andy, I'd love just to get your thoughts around how the industry will progress from being able to currently reactivate fleet at minimal cost versus requiring some form of remuneration from your customers or to reactivate crews that have a higher threshold to bring them back to market.

William A. Hendricks -- President and Chief Executive Officer

Hey, good morning, Sean. So I'll try to circle back on all that. So in pressure pumping, first off, our philosophy is, if we're looking at activating a spread, we need this to be cash flow accretive to the business. And when you look at the activations that we've made, we've been improving the margin in the business. And so the increase in activity and the other spread that will activate where we'll average up to six in the fourth quarter is not so much for looking forward to 2021, but it's because of the work that we have in the fourth quarter. Now, certainly we'll go forward into '21 as well, I believe, just because of the increasing activity in general and increasing rig count that we're seeing. But we're activating another spread going into the fourth quarter, because we believe it's going to be cash flow accretive to that business.

In terms of 2021, we have some visibility going into the fourth quarter and we don't normally call out projections that far, but we thought because we have visibility, we would go ahead and discuss today. I think though in terms of pressure pumping margin, as we continue to activate spreads and it's accretive to cash flow, it also improves the margin and we have more fixed cost coverage in that business as well in terms of the G&A for that business. So, I think that helps. And I'm certainly positive and upbeat on how our teams and Universal pressure pumping is performing these days.

Sean Meakim -- JP Morgan -- Analyst

Okay, fair enough. I appreciate that context. And then so on the drilling side, we'll see improving activity, not the same magnitude maybe as completions early on and you indicated that you think these will be similar to the last cycle in which directionally as activity improves, you will see a commensurate improvement in rates. As we think about how that flows through the model where you've got a mix of near-term idle rigs going back and there aren't rates going back to work, but eventually we'd be adding new rigs, presumably at lower dayrates than the average, there is often that point but where your average rate may actually come down for a period before it reverts higher. Just love to hear how you see those competing forces unfolding in the first half of next year.

William A. Hendricks -- President and Chief Executive Officer

Yeah. There is certainly a number of moving parts as we come off the bottom and go into more recovery mode with our rig count increasing in the fourth quarter and in the first quarter. As you mentioned, we've got the rigs that are idle but contracted, those will go back to work. Costs are roughly neutral. As activity in our drilling business moves up, we get better fixed cost coverage. So that's positive for the margins.

We also have all the ancillary charges that we have on the rigs as well. And so there is a number of things happening. Sure, leading edge dayrates are going to get more competitive for a period, but like we saw in '16 and '17, as we came off the bottom there, that happens for a period of time. But then as the rig count moves up, we see those dayrates move up as well.

We said that we're basically going to get to an inflection point in the fourth quarter and profitability moves up in the first quarter next year, primarily driven by the drilling business because of its relative size within our organization.

Sean Meakim -- JP Morgan -- Analyst

Got it. Great. Thanks, Andy.

Operator

Your next question comes from Chris Voie with Wells Fargo. Your line is open.

Chris Voie -- Wells Fargo Securities -- Analyst

Thanks. Good morning.

William A. Hendricks -- President and Chief Executive Officer

Good morning.

Chris Voie -- Wells Fargo Securities -- Analyst

So on rigs, I guess, I wonder if you can comment on the nature of dayrate discussions currently. It sounds like you have visibility for an increase in the fourth quarter and the first quarter. Are we still talking mostly direct negotiations? Or are there any competitively bid kind of rigs coming to market at this point?

William A. Hendricks -- President and Chief Executive Officer

So just to clarify, we have visibility that activity is moving up in the fourth quarter and the first quarter. I think that because we are at essentially a bottom in US rig count activity as an industry, there is still going to be some competitive pricing out there. But with the activity improvements we're seeing, that's why we see an inflection in the profitability in the fourth quarter and moving up in the first quarter. But there will be some competitive dayrates out there that are bid, but remember, we also have our ancillary services that we provide on top of those dayrates. So we see that as a positive.

Chris Voie -- Wells Fargo Securities -- Analyst

Sure. And then when I think about the last cycle and the tailwind to rates, I think the upgrade piece of that was a pretty big driver. They need to create more super-spec rigs. Just curious, is there any more of that on the horizon for you guys as more rigs go back to work? Or are there new technologies that anything along the lines of ESG or other stuff that operators are going to want to put onto rigs that might be a tailwind for rates going forward?

William A. Hendricks -- President and Chief Executive Officer

I certainly don't see it as a tailwind for, well -- it's certainly positive for rates. Let me clarify that. Anything that customers want us to do in the area of ESG and technology is a positive for those dayrates, whether it's adding 100% natural gas engines or it's adding our Eco-Cell lithium battery hybrid energy storage solution, that's positive for the day rates. And I think we'll have to wait and see how much interest it moves into in '21, but there is certainly interest today and we're in those types of discussions. And we're operating some of that equipment today.

I think that the ancillary equipment that we provide, not just the new technology, but the ancillary equipment that we've been providing for years has still been very supportive. And that's why for the fourth quarter, we're seeing average revenue per day still above $20,000.

Chris Voie -- Wells Fargo Securities -- Analyst

Great, thank you.

Operator

Your next question comes from Taylor Zurcher with Tudor Pickering. Your line is open.

Taylor Zurcher -- Tudor Pickering & Co. -- Analyst

Hey, thanks, and good morning. First question is on some of this -- or the wave of upstream consolidation we've seen over the past few months. On the one hand, it's creating fewer customers for you, which is not going to be a good thing. On the other hand, you've got larger well-capitalized or better-capitalized players that probably are more interested in the higher technology and efficiency improvement, the service offering that you have. And so as you blend that altogether, I'm just curious how you think this wave of upstream consolidation is going to impact your business over the next 12 to 24-months?

William A. Hendricks -- President and Chief Executive Officer

Well, we're very fortunate at Patterson-UTI, our teams have done a great job, where we have a very broad customer base, from the largest oil and gas companies that you buy gasoline from at the corner down to private companies that you may have never heard of. And this broad customer base has always been a positive for us. It was a positive in the downturn until rig count stabilized in the third quarter and it's going to be a positive force in the recovery. Sure, some consolidation creates some near-term challenges, but we still have a very large number of customers that we work for. And I think while that does create some near-term challenges with consolidation, it probably creates some long-term stability in the market as well. So I think it's neutral for us to have the consolidation that we're seeing when I look at our customer base. So I don't see a big concern there for us.

Taylor Zurcher -- Tudor Pickering & Co. -- Analyst

Okay, thanks. And my follow-ups on free cash flow over the past really several quarters that you've been generating some pretty healthy free cash flow, growing the cash balance, and a lot of that's been chewing through some legacy contract drilling backlog and working capital benefits. Moving forward, both of those benefits are likely to turn the other way and so I was hoping you could help us think about free cash flow expectations over the next six to 12 months and whether you think you can stay positive from a free cash flow perspective in that time frame?

C. Andrew Smith -- Executive Vice President and Chief Financial Officer

Yeah, I mean, look, near term, I certainly think that our results should outperform our capex. On the working capital side as activity trends up, we will invest a little bit more in working capital. But I don't suspect that it will be enough to overwhelm sort of the spread between what are our sort of operating results in our capex. So I would expect to remain free cash flow positive.

Taylor Zurcher -- Tudor Pickering & Co. -- Analyst

Got it. Thanks, guys.

C. Andrew Smith -- Executive Vice President and Chief Financial Officer

Yep.

Operator

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

Scott Gruber -- Citi Research -- Analyst

Yes, good morning.

William A. Hendricks -- President and Chief Executive Officer

Good morning.

Scott Gruber -- Citi Research -- Analyst

I want to come back to the rate inflation comments during the upcoming cycle. Andy, you touched on the technology and ancillary service benefits. But do you think that quality companies such as Patterson will also need to be more demanding in terms of pushing for improved pricing at a certain point in the recovery, and I know we're not there today, but at a certain point, do you think you'll need to be more demanding? Do you think -- or do you think that pricing power could swing back your way without demanding price increases? So I'm just wondering whether you really need to show a willingness that you're willing to lose share, obviously, the first request for any type of price increase will invariably be denied. But do you think that you and other quality peers just need to at a certain point sit back and say, we're just not going to work for these rates any longer and show a real willingness to lose share?

William A. Hendricks -- President and Chief Executive Officer

So, I think it's interesting because we've never been a company that focused on market share. We've always focused on the margin. In doing so that we ended up gaining share in the downturn in all of our product lines, but we're always focused on the margin. So, yeah, there will be times during 2021 that we actually lose out, because we are pushing pricing. And our teams are always doing the best they can to push pricing to where it makes sense. And so I think that we're going to keep that same focus to stay focused on the margins.

Scott Gruber -- Citi Research -- Analyst

Yeah, I'm just wondering whether there is a point where you kind of put a little more emphasis on the pricing side and say, hey, we need more. We can go to work -- put our fleet back to work at a positive cash margin here, but it's just not giving us the returns that we're really looking for on a long-term basis. So is there an inflection point, maybe you get to a certain rig count and just say, enough is enough, we need to step up in pricing to move beyond this level and what that level could be?

William A. Hendricks -- President and Chief Executive Officer

It will happen in 2021, I think similar to how it happened in 2016 and '17, when we're coming off the bottom, there is always that competitive nature. Everybody wants to get their rigs back to work. But once you start putting rigs out, then discussions start to change and I think pricing will move up in 2021.

Scott Gruber -- Citi Research -- Analyst

Got you. And then just in terms of the cadence of recovery, I guess, one, do you think there is going to be an inflection in the cadence upon a budget refresh in 1Q? And secondly, I think the current forward strip for oil and gas, when do you think we can get back to those maintenance levels of activity possible in the first half of '21 or is it more second half or too uncertain to --

William A. Hendricks -- President and Chief Executive Officer

It appears that the first half of '21 and the activity increases that we're seeing are really about a mixture of different philosophies at different customers. You've got some customers that just need to go back and drill some wells and maintain some production. You got some customers that feel like they're profitably economic at this point on some of their fields and some of the pads that we're going to go back and drill. So it's two different mindsets. So I think that drives the first half of 2021. I think that the second half of '21 is really going to be more about the macro, what our global economy is doing, are we finally starting to open up and move past all this mess that we've all been dealing with. And I'm hopeful there. I think we're all tired of it, but I'm hopeful that as we get into the second half of '21, the economies are more open and that's going to drive energy demand.

Scott Gruber -- Citi Research -- Analyst

We're all hoping. Thanks for the color, Andy. I appreciate it.

William A. Hendricks -- President and Chief Executive Officer

Thanks.

Operator

Your next question comes from Kurt Hallead with RBC. Your line is open.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hey, good morning.

William A. Hendricks -- President and Chief Executive Officer

Good morning, Kurt.

Kurt Hallead -- RBC Capital Markets -- Analyst

So, Andy, you made a reference earlier on about increased performance related fee-based drilling contracting and revenue streams and so on and so forth. So I just wonder if you give us an update on that. I think you referenced some percentage, I think, in the last quarter. I want to see how that was progressing here in the third quarter and then maybe how you see that evolving as you get into 2021?

William A. Hendricks -- President and Chief Executive Officer

So this quarter we have about the same percentage of non-traditional dayrate contracts as we had last quarter, which is about 30%. I think that will be similar in the fourth quarter. It will be more into 2021 as rig count improves a little bit more that I think we'll have that kind of opportunity. I think that in the discussions we're having with customers today, they are intently focused on the dayrates and trying to get the best deal they can. But I think that'll shift in 2021 as more rigs go back to work and I see that we're going to have more opportunity to have more of these non-traditional dayrate contracts, which I think are more of a win-win, not just for us but drilling contractors, in general. And so I can see that happening as we get further into 2021.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay, great. That's great. And you made a reference both in your prepared commentary and in the press release about the lithium battery-powered, an energy storage dynamic. I think that relates to drilling rigs itself, right. So what -- where it has always been a fairly slow evolution for the industry to adopt new ways of doing things, right, and it took what a full almost 10-year period for the E&P industry to fully embrace the AC rate dynamic and they've got the rig of choice for virtually every player. So I don't know, if you put this lithium battery-powered dynamic into context for us, in historic context for us, and give us some sense of how quickly maybe this go-around, if there's going to be an acceleration in that adoption and when that acceleration might start to occur?

William A. Hendricks -- President and Chief Executive Officer

So some of these changes don't happen very fast at the bottom of these cycles, but since we have visibility that we're coming off of the bottom, I think we're going to see some nice uptake in a number of these technologies. The Eco-Cell lithium battery hybrid storage system that we have, it also comes with energy transfer automation system that moves the energy between the engines and the lithium battery storage system. And this can be put on any of our APEX rigs. And the good news is this is all relatively capital-light investments as compared to the investments that we've made in past years. And so that technology as well as others which are even lighter on the capital side are exciting for us because we can improve the performance of the operation. We can save an operator money on cost. We can reduce emissions in a number of these technology cases. And I think these are all be pluses for us. It makes us very competitive out there. And it allows us to push rates in places as well.

Kurt Hallead -- RBC Capital Markets -- Analyst

Thanks, Andy for that. As a follow-up, are you seeing that the oil and gas operators are now starting to require lower emission standards from their frac and drilling contractors?

William A. Hendricks -- President and Chief Executive Officer

I think it depends on the operator. I think you see some operators moving in that direction. I think that wave will continue. But I think it's still very early days and so there is still upside there for years.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay, thank you.

Operator

Your next question comes from Jacob Lundberg with Credit Suisse. Your line is open.

Jacob Lundberg -- Credit Suisse -- Analyst

Hey, good morning, guys. Thanks for taking my question. I wanted to start off by just kind of following up on the performance-based contracts. Could you remind us how you structure your performance-based contracts starts? And then secondly, any color in terms of how daily margin on those contracts looks relative to traditional would be helpful?

William A. Hendricks -- President and Chief Executive Officer

Yeah, in terms of structure, what I've said before is we do various things and it really depends on the operator and what their focus is. In some cases, these are indexed to commodity. In some cases, they might be about footage per day, how many wells per month in that kind of term. In other cases, it might be tied to reduced downtime, reduced non-productive time at the well site. So it really depends on the focus of the operator and what they're trying to accomplish and what they're trying to improve. And I'd certainly wouldn't want to give a discussion about what it can do for our margins, but we wouldn't do it if it weren't accretive to margins.

Jacob Lundberg -- Credit Suisse -- Analyst

Okay, fair enough. I guess, second unrelated question then. Curious what you're seeing in terms of appetite to add rigs kind of bucketed by customer type. So is there a particular type of customer where you're seeing more or less willingness or aggressiveness in their plans to kind of add rigs over the next couple of months?

William A. Hendricks -- President and Chief Executive Officer

Well, I think this is similar to previous downturns where your largest E&P companies out there have very, I'll say, large budgeting processes to go with their size. And so they take some time to make some decisions and react. And it's going to be your more nimble private companies and your more nimble publicly mid-tier companies that are going to move quicker off the bottom. And I think that's what we're going to see and I think you'll see that in the rig count data as things become more public. But over time, then you start to see the larger companies kick into gear as well. So we were fortunate in the broad base of customers that we have today. And like I said before, hats off to our marketing and operations teams who've put that customer base in place in all of our businesses.

Jacob Lundberg -- Credit Suisse -- Analyst

All right. Thanks. I'll turn it back. Thanks.

Operator

Your next question comes from Blake Gendron with Wolfe Research. Your line is open.

Blake Gendron -- Wolfe Research -- Analyst

Yeah, thanks. Good morning. So my question is kind of on the same lines as a lot of other questions that have been asked, but the exercise in the last cycle or maybe last several cycles was this is what a Tier 1 rig is, this is what demand is, and so we kind of back into utilization. If we were to appreciate the fact that Tier 1 and those goalposts have shifted even from cycle to cycle and now you're starting to layer on these digital and ESG type consideration, I know that these are capital-light add-ons, but I would imagine you've been doing this a long time and not all of these digital and ESG offerings are really the same. If you were to designate sort of a, call it, smart rig contingent, have you tried to itemize or tried to figure out how many of these rigs are actually in the market being marketed today, just so we could maybe try to back into a utilization level needed to start seeing some bifurcation in the pricing?

William A. Hendricks -- President and Chief Executive Officer

Yeah, I think it's still early and I think it's probably difficult to get visibility on especially across the industry what's out there and what's happening. I will say this. I think that the rig -- the rig discussions today begin with the structure of the rig. And you guys know, I keep calling out the APEX-XK, we also have our XC and PK. But it really starts with the discussion on what the rig structure looks like and what's the clearance under the floor, can we get back on the pads that we were on previously, can we walk over and across various wellheads and production equipment on a pad, and what sort of flexibility there. And that's why our APEX-XK has been so popular in the market, because you have a [Indecipherable] design, you have a lot of clearance underneath, and you can move around the pad. And that's really the base of where all these discussions start. And after that, you start to get into what can you do to reduce fuel cost, what can you do to improve emissions and help the operator on their ESG score. And then what does remote operations do to reduce costs and what does automation do to improve performance efficiency and repeatability and drill better quality wellbores. And so every operator has a different take on what's important for them right now. And so it's hard to itemize or bucket technologies for those various reasons and you're going to see rigs that are out there working with various levels of technology depending on the operator.

Blake Gendron -- Wolfe Research -- Analyst

So just following on that answer there, with the emergence of simul-frac, however nascent, crew sizes are getting bigger on the frac side. Are the wellheads and the production stacks, are they getting bigger as well where clearance becomes an even bigger issue here in the coming quarters and years?

William A. Hendricks -- President and Chief Executive Officer

I think clearance is a bigger issue this year because you've left pads that you want to get back on. You've done things on those pads. You've gone back and fracked wells. Maybe you haven't completed all the drilling on those wells, and so now you've got to give back around wellheads and trees and production equipment. And so that's why I think a lot of these discussions really start with, let's talk about the clearance and how you can walk around these various systems on a pad and have that mobility in place. And then the discussion is around layering around technology.

Blake Gendron -- Wolfe Research -- Analyst

Understood. One more quick follow-up if I can. Just on the directional drilling side, we've seen obviously rotary steerable has become a more in vogue technology, but in the lower 48. It seems like motors are becoming increasingly capable to do the same things. You have a bundled solution. Some of your drilling peers have a bundled solution. How can the third-party directional drilling companies really compete in this lower activity environment? And what are you seeing competitively that would suggest that they'll hang around or that we could see some attrition on that side of the market?

William A. Hendricks -- President and Chief Executive Officer

Well, I think the most compelling data right now is that we've been gaining share. And we've been gaining share in a flat rig environment. The new technology has proven to be very reliable. And when other companies are having challenges and we get a phone call, we replace them and we keep that rig and we keep that operation. And so that team has been performing great. And I'm still very optimistic about their growth potential even -- even though our drilling activity is moving up in the fourth quarter and the first quarter, I think our directional drilling business can grow at a faster rate than the rig count. And again that's still a capital-light business. So, I think with what we're doing there in terms of performance on the technology we introduced this year, combined with the technologies at remote operations and automation that will tie directional closer to the rig, I think it will be tougher for smaller directional companies to compete in the US market.

Blake Gendron -- Wolfe Research -- Analyst

Got it. Thanks.

Operator

Your next question comes from Gill Merchant [Phonetic] with Max Columbus [Phonetic]. Your line is open.

Gill Merchant -- Max Columbus -- Analyst

Hi. Thanks for accepting my question. Just was wondering with the bonds trading at a somewhat stressed level, if you are contemplating using some of your cash to do some balance sheet optimization?

C. Andrew Smith -- Executive Vice President and Chief Financial Officer

Yeah. Hi, Gill. Obviously, earlier in the year with the sort of severe downturn, we sort of made a concerted effort to focus on liquidity throughout the year. And look, as the outlook has brightened and we've got a little bit more visibility, we've entered into a sort of a time where we look at our liquidity and say, OK, maybe we've got plenty. I don't want to set any expectations on this call, but know that we're thinking about a number of different things. But just not ready to sort of publicly set an expectation for what we'll do.

Gill Merchant -- Max Columbus -- Analyst

Thanks. That's fair. And then one stupid question. I just peeked at the release. The debt seemed like it was at the same level as last year, but your interest expense was -- it seemed like it was cut in half. What's behind that or am I reading that wrong?

C. Andrew Smith -- Executive Vice President and Chief Financial Officer

Again, [Indecipherable] we did some things. We've probably had some early retirement sort of [Indecipherable] in our interest expense last year.

Gill Merchant -- Max Columbus -- Analyst

Okay. Thank you.

C. Andrew Smith -- Executive Vice President and Chief Financial Officer

Yep.

Operator

[Operator Instructions]. Your next question comes from Chris Voie with Wells Fargo. Your line is open.

Chris Voie -- Wells Fargo Securities -- Analyst

Thanks for letting me back in. Just to expand on earlier line of thought. There has been discussion of pricing moving up, but not really from what level. I don't know if you can comment on where you think these bid rigs will be, is that going to be like mid-single digit thousand per day? And if not, maybe if we could get some color on the 43 rigs that are in term in the fourth quarter versus the 7,500 margin per day, like how many of those rigs pre-date 2Q20 if there is some kind of pieces you can give us there.

William A. Hendricks -- President and Chief Executive Officer

Yeah. The dayrates will be competitive at the leading edge as we come off the bottom, just like they have in the past cycles. I don't want to go and really discuss what levels I think those are at, because they are competitive. And we want to stay competitive. We also want to try to push pricing where we can too. But remember, we also have all those ancillary services as well, which really boost the revenue per day. And that's why I said I expect our average revenue per day in the fourth quarter to still be over $20,000 per day. I don't have in front of me those -- the numbers that would help you understand what those rigs would look like on the contracts. But so I can't help you here.

Chris Voie -- Wells Fargo Securities -- Analyst

Okay. Yeah. That's fair. And then, this one is a bit of kind of like a crystal ball kind of question. But you have visibility for activity going up, I wonder if you have any thoughts on the kind of range that the rig count for you guys might be at exiting the first quarter. I understand that it's guesswork, but do you think it could be 10%, 20% growth or any way to bucket what the opportunity is?

William A. Hendricks -- President and Chief Executive Officer

I think right now it's still early for us to call what the overall first quarter looks like outside of just the visibility we have there, rig counts going up and that happens for us earlier in the first quarter. So I really can't speak to what happens later in the first quarter yet.

Chris Voie -- Wells Fargo Securities -- Analyst

Okay, fair enough. Thank you.

William A. Hendricks -- President and Chief Executive Officer

I appreciate it.

Operator

There are no further questions queued up at this time. I'll turn call back over to Mr. Hendricks for closing remarks.

William A. Hendricks -- President and Chief Executive Officer

Well, I'd like to thank everybody for joining in today. Denise, thanks for managing our call. And on behalf of Patterson-UTI Energy and all the people that are working hard every day to do the great things they do, we appreciate your time. Thanks.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Mike Drickamer -- Vice President, Investor Relations

William A. Hendricks -- President and Chief Executive Officer

C. Andrew Smith -- Executive Vice President and Chief Financial Officer

Sean Meakim -- JP Morgan -- Analyst

Chris Voie -- Wells Fargo Securities -- Analyst

Taylor Zurcher -- Tudor Pickering & Co. -- Analyst

Scott Gruber -- Citi Research -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

Jacob Lundberg -- Credit Suisse -- Analyst

Blake Gendron -- Wolfe Research -- Analyst

Gill Merchant -- Max Columbus -- Analyst

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