Q&A: Patterson’s OFS Perspective on the Shale Boom, Pandemic and Current Upswing

Managing Partner and Co-Founder of Marauder Capital Roe Patterson spoke with Hart Energy’s editorial director, Jordan Blum, about the current state of oilfield services and dealmaking.

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Patterson started out his career with his father's company Patterson Drilling Co. before branching out on his own during the merger with UTI Energy that created Patterson-UTI Energy.

He joined Basic Energy Services in 2006 and rose to CEO as the company rapidly grew and acquired during the advent and early boom years of the shale revolution. He left at the end of 2019 amid financial struggles just before the pandemic.

Now with what he calls "the benefit of 20/20 hindsight," Patterson details the lessons learned from being caught "flatfooted." 

This interview was edited for clarity and length.

JB: I wanted to go into a bit of a history lesson. Going back to your Basic and Patterson days, what’s your take on the evolution of the services industry and the highs and lows? Your Basic experience essentially covers the beginning of the shale boom to the pandemic. Before that, you grew up in Patterson with your father having co-founded it, and then you literally wrote the book on him.

RP: Starting with Patterson, when the drilling contractors in the early 1990s became public, there was a lot of fragmentation in that drilling onshore, contract drilling market. Patterson and Nabors [Industries] and UTI were probably the bigger three, and H&P (Helmerich & Payne) to some extent, even though they did a lot of organic growth. But those were the powerhouse companies that were out there doing a mass consolidation effort. I learned a ton during that period working with my dad and with [co-founder] Cloyce Talbott on how to integrate companies, how to buy, how to treat acquired employees when they came on board, the ethics, the dos and don’ts of M&A. I learned a lot there about how to transact with allcash deals, all-stock deals, and then how to integrate and be a successful integrator.

When UTI and Patterson were coming together, that’s when I said to my dad, “Hey, I want to go out on my own and cut my own path and do my own thing. It might be pretty hard to be a Patterson here after the merger.” They were really a merger of equals, almost had the exact same rig counts. The board was going to change configuration massively, even though Cloyce and dad were going to run the company. So, I spent the next five years building and flipping some oilfield service companies, and I learned a lot more at that point. I learned a whole lot about leverage, a lot about personal guarantees and how not to get in debt, and then how to get your ass out of debt when you get covered in it. I did some really good things, and I made a lot of mistakes, but it was a super learning curve for me running my own businesses.

I sold out of everything that I had in late 2005, and I had a little bit to show for it, but not much. But I had a lot of learning, a lot of scars and some pretty good wins and pelts on the wall. I probably didn’t realize at that time how much I had learned net until Ken Huseman, who was running Basic and was about to IPO Basic, came to me. One thing led to another. I came in helping with corporate development there in 2006 right after their IPO. We were right on the cusp of the shale boom.

There was a similar mindset at Basic to roll up the well-servicing and production services segments. The treadmill was how big you could get. At that time, the market was very concerned with growth, and not as concerned with capital returns. Three times debt-to-EBITDA was not a bad place to be. It was very comfortable for most companies. Public debt in the form of bonds was readily available. That’s where a lot of that capital came from to do that growth, both in the IPO proceeds and the bonds. And so, we did it. We fed the beast. The market wanted to see growth and scale and critical mass. So, we played that game. We did 60 or 70 transactions in a very short seven-to-eight-year window after 2005. I can remember buying multiple companies per month and rolling them in and doing integrations, and it was definitely drinking from a fire hose. But, again, I learned a ton and used a lot of what I learned at Patterson and on my own to be a buyer of choice, to be the kind of assimilator and integrator of these companies that buyers liked.

And we were pretty damn good at it, but we were on the razor’s edge when it came to that debt exposure. When I took over the company in 2013, we had about $1 billion of liabilities. We were still in that three times threshold of debt-to-EBITDA, but we were heavily levered. And that’s not a problem until it is. What happened in late 2014 was the Saudis decided to fight over market share, crashed the crude prices on Thanksgiving Day. The curve ball was massive because our first set of bonds, which was about $400 million, was callable in the spring of 2015. When we went to market on that, the worst possible scenario happened. We had great EBITDA in 2014. We had great growth. We had a sizable amount of cash, but we had a lot of debt and we were unable to replace it, so we couldn’t get a new bond.

The debt markets were closed, and it was the first time in Basic’s history that had ever happened. There was no debt, no capacity, no buyers. Now you’re in this distressed debt world where your bonds start to trade down. We went from record revenue, record EBITDA to record-low EBITDA in 2015, 2016, and that was just a massive tailspin. The bondholders start to change their configuration pretty quickly. You go from pretty constructive bondholders when your bonds are trading around par to some very non-traditional, distressed debt guys who are really doing a takeout and takeover kind of strategy when the bonds start trading below 50 cents.

Then the elbows get super sharp. When you talk about high highs and low lows, the high high was 2014 when things were just as good as they could get. And 2015 and 2016 were just a wrecking ball. We played this game of trying to preserve any value at all for the old equity holders, and then we were trying to just save jobs at the end of the process and keep a company afloat and get it recapitalized. If you do make it to the other side, now it’s the entire process of a new board, a new set of shareholders, a completely different dynamic of strategies that they want to go do.

Frankly, that usually is, at least it was in my case, really a subset of bad ideas. They’re just wanting to do big roll-ups of the sector and not understanding all the dynamics of making that happen, how hard it is to do integration. It looks good on paper, and on a spreadsheet, I’m sure it looks wonderful. The reality of making it all happen is really tough to do. I spent the next two years trying to convince my stakeholders, who were these large bondholders and now equity holders, and my board the right path that I thought Basic needed to be on. Probably by the middle of that second year, I knew I wasn’t going to teach these guys anything. They weren’t listening. They had their own initiatives, and it was going to be better for them to find a CEO who wanted to do what they wanted to do.

I guess I could sit here and say, “I told you so,” because they wrecked the thing and put it right in the damn ditch, but that’d be a waste of breath. So, the rest is history, right? They got hit, they went and did a deal, spent a lot of cash, got a lot of high debt to go do a big combination. They bought C&J [Well Services in March 2020]. And then COVID came along. You get caught flatfooted when bull prices trade negative and all kinds of crazy things happen. The business didn’t make it. I left before all of that. I think my path was the right one, but I have the benefit of 20/20 hindsight.

JB: That’s 2020 in more ways than one.

RP: Yeah. I didn’t have a peer that wasn’t in my position. Not one single peer that I had in 2014 made it. Every single one of them went through restructuring. Everybody got whacked. Everybody went through Chapter 11 or some sort of restructuring, and so everybody was caught flatfooted.

The lesson now is that you rarely see leverage ratios on services go more than about two times. They’re probably more in the one and 1.5 range, which I still think is high, by the way. That’s how much my mindset has changed in 10, 11 years. I like one times or less on debt-to-EBITDA. I’m a firm believer in the cyclicality of our industry and how fast things can shut off. Whether it be the Saudis’ plan for market share or COVID-19, you don’t want to get caught in a big crash—even if it’s a short one—with a bunch of debt because it’ll probably cost you your company.

The lenders don’t want to be there either, right? That’s why there’s no capital. In 2015, 2016, you saw Wells Fargo and Bank of America and Credit Suisse write off some massive oil and gas lending that they had done. Everyone took a thumping together. You can’t blame those commercial lenders for being very hesitant to get back in a robust way. The appetite for debt has dramatically changed across the sector. The appetite to conserve cash, make distributions, be a capital returner rather than a capital consumer, it is magnified so many times because of what everyone learned during 2015 and during COVID.

We’re a healthy industry today. I guess you’re never completely healthy when you’re dealing with commodity-based businesses, but we’re probably as healthy as we ever have been, both on the E&P side and the service side. There’s a lot of resiliency in the businesses today. It’s funny, but history tends to repeat itself in our business.

If we ever look up again and guys are getting three times levered, or they’re starting to build a Ferrari dealership in Midland, Texas, we all need to run for the hills. It’s going to get ugly.