Detailed Narrative
Market Inflection and Outlook
The commodity outlook has shifted materially since the start of the year, with oil prices now significantly above mid-December levels, which were assumed in many customers' 2026 budgets. This change is expected to drive an increase in U.S. shale activity starting later in Q2 FY26 and continuing into the second half of the year. While public E&Ps are slower to adjust, private customers are moving faster, and the industry anticipates higher activity into 2027, especially with WTI strip exiting 2027 at approximately $70. Natural gas activity is also expected to improve in 2027 due to newly commissioned LNG facilities.
Drilling Services Performance and Strategy
The Drilling Services segment performed well in Q1 FY26, with steady pricing and benefits from cost control programs. The average operating rig count was 92 rigs, totaling 8,301 operating days. The company expects its rig count to average around 90 rigs in Q2 FY26 and exit the quarter at 92-95 rigs. Management is focused on capital-efficient upgrades for high-capability rigs to support deeper and longer laterals, with leading-edge day rates for upgraded rigs expected to exceed $40,000 per day by year-end FY26 or early FY27.
Completion Services Fleet High-Grading
Completion Services delivered solid results despite a $9 million EBITDA impact from a winter storm. The company's frac operations ran near capacity, with natural gas-powered assets near fully utilized. Demand is improving, particularly in H2 FY26, and discussions are underway for higher pricing. Patterson-UTI is prioritizing investment in newer natural gas-powered technologies, such as the Emerald fleet, and expects nameplate horsepower to decline this year as older diesel equipment is not reactivated due to high costs (over $10 million per fleet) and uncertain long-term returns.
Drilling Products Challenges and Mitigation
The Drilling Products segment faced headwinds from the Middle East conflict, which contributes 10-15% of segment revenue, primarily from Saudi Arabia. This led to increased logistics and personnel costs, and tungsten prices are significantly higher. Despite these challenges, adjusted gross profit only modestly declined versus Q4 FY25. The company is actively pursuing mitigation strategies, including potentially shifting to steel body bits to reduce tungsten exposure and passing through cost increases in the current market.
Capital Allocation and Shareholder Returns
Patterson-UTI maintains a disciplined approach to capital allocation, prioritizing investments with the highest return potential. The company ended Q1 FY26 with $337 million cash on hand and no draws on its $500 million revolving credit facility. The Board approved a quarterly dividend of $0.10 per share. Management expects to deliver another solid year of free cash flow in 2026, with working capital becoming a tailwind in the second half, reinforcing its commitment to consistent returns of capital to shareholders.
International Expansion and Opportunities
The company shipped two drilling rigs to Argentina, anticipating continued rig count growth in the region over the next 1-2 years. While discussions are ongoing, the rig specifications for Argentina are similar to those used in the U.S. In Venezuela, there is interest in increasing production, particularly in the Orinoco belt for heavy oil, which could utilize 1,500-horsepower rigs from the U.S. However, management expects this process to be slow.