Patterson-UTI Energy Inc (PTEN) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Patterson-UTI Energy second quarter 2003 earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, Wednesday, July 23, 2003. On behalf of Patterson-UTI Energy I would like to turn the conference over to Mr. Jeff Lloyd. Please go ahead, sir.

Thank you. Good morning. On behalf of Patterson-UTI Energy I would like to welcome all of you to today's conference call to discuss the results of the three and six months ended June 30, 2003. Participating in the call will be Mark Siegel, Chairman, Cloyce Talbott, Chief Executive Officer, Glenn Patterson, President and Chief Operating Officer, Jody Nelson, Chief Financial Officer, and John Volmer III, Senior Vice President - Corporate Development.

Again, just a brief reminder that statements made in this conference call which state the company's or management's intentions, beliefs, expectations or predictions for the future are forward-looking statements. It's important to note that actual results could differ materially from those discussed in such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to, declines in oil and natural gas prices that could adversely affect demand for company services and their associated affect on day rates, regularization and planned capital expenditures, adverse industry conditions, difficulty in integrating acquisitions, demand for oil and natural gas and ability to retain management and field personnel. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's SEC filings. Copies of these filings may be obtained by contacting the company or the SEC.

Now, it's my pleasure to turn the call over to Mark Siegel for some opening remarks to be followed by questions and answers. Mark.

Good morning and thank you for joining us today. I assume that by now you have all seen and read our earnings release. I would like to take just a couple of minutes to review the highlights of the quarter and the six month period and to add some context to the results.

First, in the first part of the year we were able to respond quickly to our customer's needs for additional rigs because we had maintained our rigs in a first-class manor and had retained our experienced personnel. In the most recent period we have seen our competitors catch up to our activity levels as we concentrated our focus on improving margins and overall efficiency. We are committed to providing superior service to our customers at attractive prices. By focusing upon efficiency in drilling and rig moves, we believe we can offer superior service to our customers as well as in generating enhanced returns for our shareholders.

This morning we reported 109 percent sequential increase in earnings for the quarter to 12.1m, or 15 cents per share, compared to 5.8m, or 7 cents a share, for the prior quarter. I should point out that 109 percent increase in earnings was on an 18 percent increase in revenues demonstrating the leverage that we are able to achieve as regularization increases and margins improve. These results also reflect the significant improvement that we've been able to achieve in our margins during the quarter. Our average margin per drilling day increased by 400 to 2230 during the second quarter, compared to 1830 in the first quarter. Average revenue per drilling day increased 700 as demand for land drilling services increased. Average cost per drilling day increased by a net 300, taking into consideration the reversal of the 10 percent wage cuts that we implemented during the first quarter of 2002, partially offset by cost savings from improved efficiency as the result of increased drilling activities.

Our average rig count increased sequentially from the first quarter where our drilling activity in the U.S. is more than sufficient to compensate for the decline in drilling activity in Canada due to spring breakup. We had an average of 195 rigs operating in the quarter, including five in Canada, compared to 176 rigs, including 15 in Canada, for the prior quarter. Thus far in the third quarter we've averaged 194 rigs operating, including 11 rigs in Canada.

Currently, we see our activity level to be stable, if you will, on a plateau. Looking ahead, we expect further increases in regularization later in the year as our customers attempt to overcome natural gas production declines and meet the demand for natural gas during the winter withdrawal season.

As we noted above, we believe the industry has reached a higher utilization rate, approximately 60 percent, as our competitors pursued utilization. We now expect that the industry will focus on margin as and when rate count does, in fact, increase. We believe the continued overall strong commodity prices will provide our customers with a cash flow for increased investment in land drilling activities. By the way, you can, of course, track our utilization as we put out monthly numbers.

At this point, I'd like to open the call for questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed by the one on your push button phone. If you would like to withdraw your question, please press the star following by the two. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers.

Our first question comes from James Wicklund with Banc of America Securities. Please go ahead.

Good morning, guys. Mark, you looked great for being so early on TV this morning. So the rig count is going to flatten out and not go up for a while until this winter, is that the outlook?

Jim, that's what we're basically seeing. We are expecting pretty flat numbers right now for the quarter, but we leave it to the fundamental analysts like yourself to really get a good judge of the industry.

That's scary. Your rig count is now below where your rig count was a month or two ago. If you have fewer rigs working and the overall outlook is plateau for a while, how do you raise day rates? How do you raise margins?

Jim, the expectation is that margins increase in the quarter owing to the effect of lower contracts running off in some of the higher ones and becoming more prevalent. The answer is it is, in effect, that it is the impact of pricing changes sequentially following through in the quarter. We expect, as we look immediately at the third quarter right now, it is looking relatively flat in terms of utilization with slight increases in margin.

OK. You guys haven't given any explicit guidance for the current quarter, but that would imply that the number of the consensus is 17 cents, that that's probably not too low a number? I'm not asking you to tell us what the number is, unless you want to, but if we're just going to have the lower day rates fall off and the higher day rate rigs roll up then there would seem there wouldn't be a whole lot of up side to that number?

That's probably correct, Jim. The exit rate margin for the quarter was somewhere around the 2400 range, we estimate, in the last month. That gives you some idea. We expect the margin to move up a little bit in the third quarter, as Mark indicated, maybe 200 or 300 as a result of that.

OK. Gentlemen, thanks.

Our next question comes from Scott Gill with Simmons Company. Please go ahead with your question.

Good morning, gentlemen. I was just wondering if you could walk us through April, May, June, kind of the progression of date rates? We went from an average of 85.40 in Q1, up 700. Did you get most of that gain in April, May or has it been a steady progression through the quarter?

I don't have the monthly numbers here in front of me, Scott, but I would say that with undoing the wage reduction from 2002 that it's a bit front-ended but then there was a progression over the months, also. I estimate the exit rate of margin was somewhere about 2400 like I indicated.

OK. Great. In the quarter capital spending looks like it was 32m, kind of 52m year-to-date. Can you talk to us a little bit about what the capital spending has been targeted on and what your estimate for year is going to be for capital?

Scott, the expectation is that the run rate in the second half would be approximately the same as the run rate in the first half. The capital went across all of our business units proportional to their size, basically, with, probably, a slight difference on a pro rate basis in favor of pressure pumping, but it's slight and it's reflective, in effect, of our seeing that business as being able to continue to grow naturally through internal development. We spent money on bringing rigs into the field. We spent money on vehicles. We spent money on mud pits. We spent money on traditional repair and maintenance Capex. So the answer is really across all of our lines. I can't think of any Capex number. I'm looking around the room to see if anybody has anything that would sort of stand out and I don't think any of us have any stand out number.

Just one thing of clarification here, if the run rate is going to be 52m in the back half of the year, but no more rigs are put to work or it is modestly increased, what, then, is the capital being spent for? Some of it was spent in the first half for bringing rigs back into service.

As we said, we expect that there will be additional rigs going to work. We're saying that we expect that to happen more in fourth quarter than in third quarter. The view is that we want to be prepared to meet the demand when our customers really demonstrate it. One of things we think has been a historic strong point for Patterson has been that money is spent to keep rigs in really good working order and to make sure that the rig fleet is in a top notch capability. That allows us to quickly put rigs into the field and to meet customer needs. We think we're able to potentially generate superior value for our customer even if we potentially get a higher price because of having equipment that is absolutely top notch.

One final question for you, Mark. Strategically, your most recent acquisitions have been U.S.-based drilling rigs as opposed to Canada or elsewhere around the world. Can you just talk a little bit about your strategy going forward in terms of future growth? Are you going to continue to make U.S. acquisitions or are you going to start looking at other markets?

I think it's fair, Scott, to say that we've always looked at all markets. We've hardly ever ruled out anything specific. The truth is that the problem that we think about is that it's extremely efficient to acquire additional rigs for the U.S. where the incremental operating costs are very negligible, whereas, if we were, for example, to acquire rigs in, for example, South America or some other place where we don't have any operations and no operational background, it's all expensive as we, in effect, go through the learning curve and the expenses of getting up to speed. The price of the rigs and the potential profit would have to justify the step out. We would be very disposed of adding to our capabilities in Canada. If the opportunities arise, we'll be very closely looking for them.

OK. Thank you.

Our next question comes from Jim Rollyson with Raymond James and Associates. Please go ahead with your question.

Good morning, guys. Mark, if you go back to the rig count flattening concept you brought up, at least in the short-term, what do you think is driving that? Is that something that your customers, maybe your budget adjustments are driving or is it your customers concerned about the recent fall a little bit in commodity prices, the weather we've had with rains, are you guys holding out rigs, I guess, to get pricing up before you bring out more rigs? What do you think is driving the plateau that you mentioned?

Jim, I kind of think it's almost all the factors that you just described. We see a lot of our customers increasing their budgets for the second half of the year and, seemingly, being a little reticent to spend the money. We understand that. There's always the question of if we're going to get to fill storage and if we get to fill storage are natural gas prices going to precipitously drop and so on. We don't think that the natural gas story is close to coming to an end. We think that the problems in the supply side and production side are still there. We fully well expect that we'll achieve higher utilization rates than the ones that we're currently experiencing. We just think that, in effect, the industry is taking a little bit of a pause before the next step up to the next plateau. That's really what we were trying to indicate in the call, which is simply that right now, as we see it, we're at a plateau. We don't really see it and one of the comments of before was do we see it stepping back. We don't really see it stepping down. We just see at kind of a plateau and kind of expect to stay on this plateau for a little bit of time and then to see a step up. We're expecting that step up to occur, principally, in the fourth quarter, but it could happen before.

Sure. On the day rate trends, in our call last quarter you talked about spot rates generally being up in the range of 300, 400, 500 a day and, obviously, your numbers proved out that you guys got about 700 a day increased, which is, by historical standards, seems pretty instantaneous that shows up in your numbers. What have been the trends through the quarter on where rates have gone? Have they gone up further or what are you seeing in the spot market situation right now?

As we indicated before, we saw a progression throughout the quarter, most of it, front-ended and, of course, timed with the reversal of the wage cut from 2002. Exit margin, we estimate, was about 2500 for the quarter. We think there was a little bit more increase that would roll into the third quarter as a result of rate increases that have already occurred. Quarter-to-quarter, going from somewhere around the $22, $30 range up 200, 300 dollars from that average.

Have they changed at all recently or are they pretty much holding flat with rig activity?

I think pretty much holding flat.

Then, on the cost side, you obviously got the one-time boost from the wage reversal. Costs, you expect to pretty much hold flat, particularly, I guess, if you assume that the rig counts are relatively flat?

I think that would make sense to us. We saw a little bit of efficiency this quarter. We had a 300 increase in costs per day and the roll through the payroll was a little bit higher than that. As we have in the past, this rate activity is at higher levels and we're seeing a little more efficiency on the cost per day. But as you indicated, you don't roll more rigs out, you aren't spreading the fixed component over more days so, therefore, we would expect costs to be relatively stable quarter-to-quarter.

Sure. Lastly, even though it's not that big a sector of your overall business, the pressure pumping group posted, it looks like, the best second quarter ever. Your jobs were up and they're normally down. Your margins were actually still in the low 40 percent range when they're usually in the low 30 percent range. What's going on there? What do you see going forward?

Jim, I think it's important to note that we think that the pressure pumping business and our drilling business are both seeing the impact of that Capex that we've spent. Really, what we're seeing is that we've added, in effect, in the pressure pumping business additional capacity through that expenditure of capital. Additionally, we think what we're doing is being able to provide to our customers - - this was really the point of some of the lead-in remarks that we started the conference call with - - by saying we think we're offering to our customers a very, very attractive value proposition as we're able to do the work in a very, very efficient manor. The customer is willing to pay, potentially, a slightly higher day rate if they think that the drilling can get accomplished slightly more efficiently in slightly fewer days. That's really the value proposition that we're trying to offer to our customers through maintaining and providing superior equipment.

Fantastic. Great quarter.

Our next question comes from Kurt Hallead with RBC Capital Markets.

Good morning. Nice quarter. I guess my question relates to - - I got a pretty good feel, I think, over the last couple of days on the direction of the market. It looks like things are going to flatten out for at least a quarter and then we'll see what happens heading into the fourth quarter. It has some positive momentum going on in the cash margin front moving into third quarter. My question for you is how are you guys doing in terms of drill pipe? Is there any need to make any additional purchases before the end of the year? Are you guys pretty well stocked up heading into 2004?

We're stocked up.

So you don't see any incremental need for buying there?

No.

OK. Other than that, I don't have any questions. Thanks.

Our next question comes from Ken Richardson with Fidelity Investment Management. Please go ahead with your question.

Just a detailed question on the Timbersharp drilling merger. At this point, what is the timing on that in terms of when you actually expect to close the deal?

The expectation is to file the S-4 registration statement for that merger sometime this week and for a closing to occur before year-end.

Thank you.

Our next question comes from Kevin Simpson with Miller Taback. Please go ahead with your question.

Good morning. We've heard some patter on the conference calls about a migration to deeper work. I'm wondering whether you guys are seeing that in your customer base and whether, to some extent, that might be having an impact on your own rig utilization?

No. Actually, Kevin, the answer is we're seeing most activity centered right kind of in the sweet spot of intermediate depth drilling. That's where the activity level is predominant. I'm looking right now at Cloyce and Glenn to see if they have anything they want to add to that, but I think that right down the middle - -

The softer market is the deeper rigs right now.

That'll add to the confusion a little bit but you guys are out there on the front lines. The only concern that I would have, and I'd like to see how you respond to this, is that your customer base has been faster to respond, maybe more cash flow driven than - - or at least part of the customer base - - the larger companies, are you seeing any evidence that this pull back in price has affected that kind of customer in terms of their programs?

Kevin, I really think that our customer base is still predominately the, what I continue to call, no-name independents. I can't see much difference in that. Maybe our little pull back that we see, I think a couple of reasons, is that they're more responsive to trends and commodity prices, which we saw a down trend in the gas price, particularly, even though it's still near 5.00, which is a great commodity price. Another thing that factors in when you work for the smaller customers, they also are more responsive to vacation times and holidays because they don't have extra people to do the work. I think that we might be seeing a little bit of that and we'll follow that through to mid-August when school starts back in this part of the country.

People take vacations even if gas prices are this high.

They sure do.

We have to strike while the iron is hot. One other, I think I was confused in terms of your outlook for the balance of the year. It sounds like it's not going to be until the winter until activity picks up, but more before queue phenomenon. Is that coming from your customers or is that your read in the market based on your prior experiences?

Kevin, just using recent times, if we go to last year and you think about how the rig count ramped up, I think that what we're suggesting isn't dissimilar. In 2002 we got to mid-August, we saw increased inquiries, if you go back to your notes from prior quarters, and as we moved into September we saw it begin to start in our rig count. Frankly, by late October, our U.S. rig count was up dramatically at that time. Some rain in the fourth quarter, ultimately, muted the increase quarter-to-quarter. As people are moving to the withdrawal season, that's when the gas needs to be produced. That's a part of our thinking that the increased rig count increase would occur around that timeframe. Then from a margin perspective, we've kind of suggested that somewhere, 2500 or there about for the quarter, just based on increases from the second quarter pulling on through, would make some sense to us, but that you need a tighter market, more rigs running, a big movement from there. So, as you move to fourth quarter, the rig availability gets tighter, we would think that pricing would move, too.

Kevin, our customer base, again, is the smaller independents and a lot of them react to taxes near the end of the year. I think you'll see that reaction. They've made a lot of money this year, commodity prices have been, basically, high all year. I think you'll see a spurt of tax drilling towards the end of the year. Historically, that's the way it is with the independent.

One other question, but, Cloyce, do you have a sense on what the trigger point is price-wise for when the no-name independents begin to really pull in their horns.

I've always said that 3.50 to 5.00 was a great place for gas prices to range and that way it wouldn't destroy demand. I think most people now have expectations of the gas price being 4.00 or better and I don't see that that's any deterrent to people drilling. Of course there's more prospects economic at 5.00 than there is at 4.00 and there's more at 6.00 than there is at 5.00, also. You just have to have a feel and I think it's more perception at where the price is going to be as to what a lot of the independents do.

OK. I guess a 4.00 trigger is what I've been hearing. You wouldn't necessarily disagree with that, but wouldn't endorse it either?

I don't think it's cast in stone that you've got to be above 4.00. We were sitting here two years ago, or a year and a half ago, and 2.00 was a great price. As long as it stayed above 2.00 - - I use to go make presentations - - as long as gas stayed above 2.00, we're going to be OK. It's hard to believe that now it’s 4.00. We're not going to drill to stop 4.00.

The refining costs have gotten up to about 2.00.

That's true. If refining costs are 2.00, you sell it for 4.00, that's a pretty good markup.

That's true. OK. Thank you.

Our next question comes from Marshall Adkins with Raymond James. Please go ahead with your question.

Kevin asked all my questions. Just kidding. A couple points of clarification here. When you say you expect the rig count to be flat I assume that you're talking about the broader rig count as well as yours, not just yours. Is that fair for third quarter?

Yes.

Capex - -

Marshall, just one further follow-up. Last year our increase was from 119 to 127 rigs in the quarter, kind of ending numbers, second and third, about something like 5 or 6 percent, 7 percent. Even last year the industry was ramping up. Remember, from second quarter last year to second quarter this year, we've gone up 64 percent in terms of rigs. I'm just saying that the second to third quarter, even last year, was a very modest step. We're just saying, right now, we're seeing that as being flat. That's not, in any way, to sort of step back from an overall long-term trend.

Sure. That's fair. I just want to make sure that we're talking about apples and apples here. Capex, Scott asked about, obviously, it's gone up dramatically, what kind of run rate should we model there going forward?

We had previously guided to approximately 80m that we're now guiding to 100m for the year. It is up, but it's in line with activity levels.

Right, that makes sense. Drilling flood base is a little better than we thought. Any thoughts there?

Flat.

What's hurt us on the drilling side is not much of a ramp up in the gov and that's where we've concentrated quite a bit. I've been kind of pleased that we are staying kind of flat in the drilling flood business and hope that if we see an increase in the off-shore markets that it will do better there.

OK. So just watch the off-shore side there? Last one, Canada, I know you don't have a whole bunch of rigs up there, but what are you guys up there saying about the rest of the year? It looks pretty good?

Strong.

That's it, just strong?

Very strong. Quite strong.

OK. Thanks.

Our next question comes from Jack Collins with A. G. Edwards. Please go ahead with your question.

Good morning, guys. A quick question, just a point of clarification, on the margin guidance that you guys gave, basically, up 200 to 300. In Canada you went from about five on an avg. to 11 running now in the third quarter. Is any of that improvement attributable to the higher margins in Canada and, if so, can you quantify that at all?

No. It is not really Canadian driven. It's U.S. driven.

OK. Thank you.

Our next question comes from Bill Sanchez with Howard, Weil, Labouisse, Freidrichs. Please go ahead with your question.

Actually, all my questions were answered. Thank you.

Our next question comes from Allen Greenburg with CIBC.

I'm just interested to know what the delay was in filing the S-4. Was there a reason? I know that you got HSR a while back and is there anything else that needs to be done to complete the transaction?

I think Mark had already spoken to that. We planned to file an S-4 later this week and under the terms of the agreement that we close by December 31st. We have no further comment at this time.

Our next question comes from Angeline Sedita with Lehman Brothers. Please go ahead with your question.

It looks like all the good questions have been asked, so I'm good. Thanks.

Our next question comes from Matt Conlin with (inaudible)Company. Please go ahead with your question.

Good morning. Just a quick housekeeping question. In a lot of onesy, twosy acquisitions you've made with the current fleet of 340 rigs, how many of those rigs are in the stacked inventory, not marketable at this point?

Of the rigs recently acquired?

No. In total. Just of the 340.

It's right about 300 that are effectively ready to run.

OK. Great. That's it. All the good questions were taken.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press the star followed by the one at this time. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. Mr. Siegel, at this time, there are no further questions. Do you have any other further comments?

I'd just like to thank everybody for their participation in this morning's conference call.

Ladies and gentlemen, this concludes the Patterson-UTI Energy second quarter earnings conference call. If you would like to listen to a replay of today's teleconference, please dial 1-800-405-2236 and enter the access number of 544216. Again, that number is 1-800-405-2236 and enter the access number of 544216. We appreciate your participation on today's teleconference. You may now disconnect.