Patterson-UTI buys small driller Pioneer Energy Services for $295 million

US land driller Patterson-UTI has agreed to buy oil services provider Pioneer Energy Services for $295 million — a purchase that gives the acquirer a new Colombia footprint and generally bulks it up in an improving global market, Patterson's top executive said July 6.

A major impetus for the transaction — a mostly stock deal that also offers $30 million in cash — is the nature of Pioneer Energy's drilling rigs, 16 of 17 of which fall into the "super-spec," or premium, category, Patterson-UTI's CEO Andy Hendricks said during a conference call to discuss the deal.

"The US land drilling market has seen a shift in demand over the past several years towards ... super-spec rigs [which are] undoubtedly in the highest demand right now and will continue to be into next year as they contain the components necessary to most efficiently drill unconventional wells," Hendricks said.

"More recently we have seen increasing interest from our customers in rigs ... capable of using alternative power sources such as high-line electric power or the ability to substitute diesel with cleaner-burning natural gas," he said.

Following this acquisition, Patterson-UTI will have a total of 166 super-spec drilling rigs in the US, of which nearly half are equipped and capable of using alternative power sources, Hendricks added.

The transaction is expected to close in the fourth quarter.

Pioneer Energy Services also gives Patterson a bigger international footprint owing to its eight Colombia rigs, of which five are currently contracted, Hendricks said.

Pioneer provides premium equipment, good margins and cash flow, and a handful of rigs in Colombia, a country and operating environment the CEO called "stable," "attractive" and has upside in the form of still-to-come recovery from the coronavirus pandemic than the US.

"This transaction serves as our entry into the Latin American drilling market," he said.

Pioneer has operated in Colombia for about 14 years and because that country "will have a slight delay in [its post-pandemic] ramp-up ... there's still growth and upside in Colombia as more people are vaccinated."

Opportunities in Colombia

"Internationally, it's hard to move US rigs into other markets, to what we do in US unconventional [plays]," he added. But in Colombia, "there are some opportunities to put US rigs" to work.

Pioneer's geographic spread is complementary to Patterson's. Both operate in the Permian, the US Northeast, and the Rocky Mountains. Moreover, nine, or more than half, of the Pioneer rigs are capable of substituting diesel with natural gas, Hendricks said.

Also, 12, or more than 70%, of Pioneer's 17 rigs are working, with another two contracted to work in Q3.

The deal represents "a rational consolidation play that advances Patterson-UTI's strong Number 2 US market position with one of the more attractive smaller players outside of the top-four land drillers," Ian Macpherson, an analyst with Piper Sandler Research, said in a July 6 investor note.

So far in July, Patterson has 71 rigs operating, up from an average 67 in Q2 and 60 in Q1, according to Tudor Pickering Holt's latest weekly Rig Roundup. That is a fairly swift keel, and about even with its two giant competitors, Helmerich & Payne and Nabors Drilling.

H&P has 119 rigs operating so far in July, versus 117 in Q2 and 102 in Q1, while for Nabors it's 60 so far in July, 59 in Q2, and 48 in Q1.

A smaller driller, Canada-based Precision Drilling, has 37 rigs operating in July, the same as it had in Q2, and averaged 32 rigs in Q1.

In addition, Pioneer has a 123 well-service rig business along the US Gulf Coast. Patterson believes that segment would be better off as part of a larger well service rig business or as a stand-alone company.

As such, "we expect [that] business would be divested following the close of the transaction," Hendricks said.

Under the deal, Pioneer shareholders would receive 26.275 million shares of Patterson-UTI stock, based on the latter's latest closing price of $10.14/share, and $30 million of cash. The $295 million transaction price includes retiring Pioneer's debt.