Patterson-UTI Energy Inc (PTEN) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Patterson-UTI Energy, Inc., Fourth Quarter 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 "*" followed by the “0”. As a reminder, this conference is being recorded today, Thursday, January 29, 2004. I would like to turn the conference call over to Mr. Jeff Lloyd on behalf of Patterson-UTI Energy. Please go ahead, sir.

Thank you, good morning and on behalf of Patterson-UTI Energy, I would like to you welcome to today’s conference call to discuss the results of the three and twelve-months ended December 31, 2003. Participating in today's 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 Vollmer, Senior Vice President, Corporate Development.

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 the company’s services and their associated effect on day rates, rig utilization, 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.

And now, I would like to turn the call over to Mark Siegel and Cloyce Talbott for some opening remarks, to be followed by questions and answers. Mark?

Thank you, Jeffrey. Good morning and thank you for joining us today. I hope that by now all of you have had an opportunity to see our earnings release. Before taking your questions, Cloyce and I would like to take a couple of minutes to review briefly some of the highlights from the release and to add some context to the results.

Our results for the quarter continue to demonstrate the earnings leverage that we are able to achieve as revenues increase and daily margins improve. Net income increased ten fold on a 48% increase in revenues. For the three months ended December 31, 2003, net income totaled $20.4m or 25 cents per share, compared to net income of $1.8m or 2 cents per share for the fourth quarter of last year. Revenues were $208.3m versus a $140.9m for the fourth quarter of 2002. Net income in 2003 increased to $55.3m or 68 cents per share, compared to $2.2m or 3 cents per share for 2002, revenues for the year increased by 47% to $776.2m versus $528m in 2002. These financial results reflect the steady improvements that we have achieved in our contract drilling business. Despite relatively stable demand for drilling rigs during the last half of 2003, our average revenues and margin per drilling day continued to increase in the fourth quarter. Average revenue per drilling day increased by $180 to $9,760 and the average margin per drilling day increased by $240 to $2,840 compared to third quarter of 2003.

In addition to our contract drilling business, we are also very pleased with the performance of our pressure pumping services, and oil and natural gas exploration and production business segments. The performance of our drilling and completion fluids business segment was hindered by continued weakness in the Gulf of Mexico. Our balance sheet continues to be strong; we ended the year with $100m in cash and cash equivalents, $200m in working capital, and no long-term debt. Finally, before turning the call over to Cloyce for some additional comments, I want to say just a brief word on the status of our pending acquisition of TMBR/Sharp Drilling. As previously announced the meeting date for TMBR/Sharp shareholders to vote on the proposed merger has been set for February 11, 2004. Because we are still in registration, we will not comment further about this transaction.

And now, I would like to turn the call over to Cloyce for some comments on our drilling operations during the quarter, and a look forward into 2004.

During the fourth quarter, we had an average of 191 rigs operating including 12 in Canada, compared to 192 in the previous quarter including 11 in Canada. We estimate that our rig count will average 186 rigs operating in January, including 15 in Canada. Our January activity levels have been impacted by a slow post holiday startup caused by holiday shutdowns for both Christmas and New Years. About the time our rig count started to increase in early January, we experienced heavy rains in Texas, Oklahoma, and Louisiana causing weather delays. We are now seeing a steady increase in activity at the end of January. We currently have 191 rigs operating, and have approximately 200 rigs under contract that are in various stages of waiting on location of our customers to start operation. Investing with our sales force, our customer inquires are increasing as the 2004 drilling programs commence. We expect our rig count will continue to increase as the first quarter progresses. At this point, we would like to open the call for questions.

Thank you sir. Ladies and gentlemen, at this time we will begin the Q&A session. If you have a question, please press "*" followed by the "1" on your pushbutton phone. If you would like to decline from the polling process Please press "*" followed by the "2". 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. One moment please for our first question. Our first comes from Erin Xavior (ph.). Please state your company name followed by your question.

Credit Suisse first Boston, good morning gentlemen.

Good morning.

A quick question in terms of pressure pumping, you guys had a record quarter there, what are your thoughts in terms of expanding pressure pumping outside of Appalachia or throwing some additional capital in that unit, in that market?

We are continuing to try to expand the operation both in the Appalachia and we are looking in some other areas and we have started to put more capital into that business. Actually the year prior to the merger of Patterson-UTI, we started putting capital in that company and each year since the merger we are adding additional capital and our -- I believe our numbers this year is -- this past year was about $10m or $11m, that we put in there, and I would expect the number to be similar to that this year.

Okay. Second question guys, is if you look at the rig count for the private kind of rig owners, they are within you know 25, 30 rigs of their 2001 peak. If we were to assume that the rig count went up by 100 rigs from here; how many of those rigs would you think would be Patterson's rigs?

We feel that the additional capacity really, is principally in the hands of ourselves and our largest competitor neighbors and we think that the two of us -- the two companies would absorb the vast majority of that incremental 100 rigs that you spoke about hypothetically.

That’s all I got. Thanks.

Thank you.

Our next question comes from Justin Kentor. Please take your company name followed by your question.

Simmons & Company. Good morning guys.

Good morning.

Can you quantify the increase in customer inquiries that leads you to expect rig count will increase throughout Q1 and throughout fiscal year '04?

It's difficult to quantify. All I can tell you is that and speaking with our salesmen in different areas, -- in all areas the inquires have increased since the first of the year and are continuing to increase even this week. I don’t know what the percent increase is but we just kind of got a feel in talking to our customers and our salesmen that you know when they are talking to customers that we are getting far more inquires than were say 30 days ago.

Okay. And you don’t have sense of where inquiry levels were say at the beginning of Q1 last year versus today -- are they higher today than they were when your rig count really began to pickup?

You know, I really don’t know that they would be higher -- we had a lot of inquiries then but we were starting at a very low base at that time too. So I would -- I just know relative to what it was a quarter ago that inquiries are greater today than they were a quarter ago. I don't know in relationship to the first of the year.

Okay. And it looks like your operating cost per day declined a little bit sequentially. Can you talk a little bit about that?

John you want to take that question.

Yeah, that's -- I don't think that reflects you know a big decrease in cost per day that we may see as we run more rigs and we get up to running 220-30- or 40 rigs. That's I think really just a result of running a fairly stable number of rigs over a period of time, and we got a little bit of efficiency out of it. As we can run more rigs we should see the cost further decline.

Okay. And final question, do you expect to see, I guess, an increase in cost with respect to drill pipe or labor cost going forward?

We are not expecting to be ordering drill pipe in the immediate future so we are not expecting to see that increase in cost that you spoke to just hypothetically. And in regard to labor costs, no, we see labor costs as being relatively flat at this point.

Okay, thank you guys.

Our next question comes from James Wicklund. Please state your company name followed by your question.

Banc of America Securities. Gentlemen, the question for you guys and the question we all have to answer is how high do day rates go and how high does utilization go through the year? We got your average for the year, Mark, what were the leading edge day rates, what are your bidding contracts now relative to your average for the quarter?

Jim, I think that may be an easier way to look at it is that we are experiencing at this point day rates trending upward; that's a very distinct trend that we are seeing. We are not experiencing downward pressure in those day rates. We expect to see in first quarter -- continued improvement both in average revenue per day and average margin per day. The question I think that lurks in your comment is how high do we -- how fast do we ramp up in terms of activity both in pricing? And that's one of those questions that I think turns on a macro call about the industry that we have been looking at our crystal ball trying to get a good view of it, and we think that it's probably better for each of the analysts to take their own crystal ball and make their own judgments about the macro. We definitely see this trend -- we think the trend is going to continue. Last year we saw a definite uptick in the first and second quarters and then relatively flat for the balance of the year. And we are seeing -- we have an expectation based on what we are hearing from our customers at this point – of an increase in first and second quarters that's about as far our as we can really see.

Well, I am a second derivative freak and I look at the rate of change and from the June quarter to the September quarter your margins were up 17%, but the September quarter to the December quarter your margins were up only 9%. While they can still move up, if they continue to decline at the rate then that could set us up for a disappointment. Right?

Jim, let me just kind of respond to how that occurs. As you know, rates change, when they do on a given day, and then it works itself through a group of contracts and a group of rigs. We saw rates begin to move in the early end of the first quarter last year, mostly the second quarter, and as that worked itself through the rig base, and then there were some smaller increases after that, those percentages started to decline, and we found ourselves in a very stable rig market. You know, I think what we are seeing today is again -- rates seem to be beginning to move. Our -- we can only look out so far as you know we are on very short-term contracts. So, our sense is in the first quarter that average revenue per day will see the benefit of some of that, but it does take a while to run through a couple of hundred rigs. And, as you know, we'll probably see revenue per day somewhere in the $10,000 range with margins around 3,000. And then we would think that you get some carryover from that into the second quarter from where rates are today.

Okay, guys. Thanks.

Our next question comes from Jim Rollyson. Please state your company name followed by your question.

Good morning guys -- from Raymond James. If you look around the different regions that you guys work in, are you seeing any specific regional markets that are tightening up for this seems to be -- usually that’s the first sign of things, kind of, getting more towards rate improvements? Are you seeing any either regions or for that matter specific rig types that the industry is kind of running short of?

I think that probably the industry is running more short of in the 1,000-1200 horsepower rigs. Jim, this is Cloyce, and they -- the South Texas region is the one that we are seeing more pickup and -- but then you move to our East Texas region, we have contracts for every rig that we're marketing there in that area, we have two rigs that we are not marketing right now in that area, but we have contracts for every rig that we have in that area, so it's a real busy area. Oklahoma has improved; in the utilization in Oklahoma we are marking in the 20 rig range there, and they basically have jobs for all of those rigs. So if we --and I would even say that the weak area, I just said, we have so many rigs in that area, it's in the Permian, West Texas, but we are getting more inquiries there also. So we just have more rigs to supply in that area.

Jim if I could just add one further thought to what Cloyce has said, to kind of give it a little bit of different emphasis in visiting with our salespeople basically we are hearing in a number of different areas that they believe that all of the rigs that we have are going to be committed -- are committed now or will be committed shortly. And so the reason for our enthusiasm is very simply -- may be even bullishness if that's the word, is that we see that -- we believe that the excess capacity that's been in the marketplace is really been soaked up by customers and expect that that will continue.

Sure if you look I guess last quarter you guys were kind of thinking that you might get out of the holiday season towards the end of January and be something at around 205-210 rigs working. Obviously you ran into some weather issues in January. At this point, with your crystal ball being what it is, what do you think your exit rate on the first quarter will be?

I think in terms of exit rate on the quarter, we think it's probably somewhere in the 210. And you bring up a good point, let's take a minute to talk about the rig counts and may be give you just a little more color. Rigs counts are somewhat volatile on a day-to-day basis driven by a variety of factors. If you go back to our December release, in early December we saw rig counts averaging 200 and a little under -- and some days that were over 200 when we began to see the increase that we had anticipated might occur at that time. It seems in retrospect with the holidays falling the way they did, but frankly a lot of our customers elected not to work through Christmas. They had a great year and may be they felt it was time to take a little rest and get ready for a big 2004 with good commodity prices. We don't know but that seems to be what the rig count told us.

In early January we again, kind of, as expected saw that rig count to begin to move and got us back up again around 200 rigs; it was moving upwards and a lot of rain hit. You live here in the Southwest; I think you are probably aware of that. And when you combine the effect of people in effect rigs that shut down temporarily like for the holidays, and they don't move to the next location, they sit there. Those -- and the catch-up on those moves for us and all the other drillers; and then you throw some rain in there, which further stresses the moving resources and the trucks. That we believe had a pretty meaningful impact on our rig counts for January. And then now we're seeing it begin to move again and just to reiterate Mark's point -- I think as Cloyce has indicated and the sales force feel very good. Is it fair Cloyce?

That's a very fair statement. You never know the exact effects, Jim, of how much rain shuts you down. One day we had 200 rigs working and – had 13 of them shut down because of the weather; had a 187 working that day. And then you don’t know how many locations were not built because of weather, but I think that we are through that now and we just had to -- well I think in January we had something over a 100, about 100 rain days, you know, so that kind of tells you where it is, and that is just what we know, we were shutdown, not counting locations somebody could not build because it was muddy.

Sure, and I presume that 210 figure excludes that transaction that your, -- you can’t speak about?

It does.

All the numbers that we have been giving are really Patterson-UTI only information; we have not been counting in anything for the pending TMBR/Sharp acquisition.

Sure.

In terms of numbers that we have been talking about.

So, that can actually kick in some rigs for about half the quarter maybe.

Yes.

Lastly just what's your CAPEX outlook for '04?

I think, as you know, we have said to people before in our business with the CAPEX, you know, we generally match the depreciation in over a reasonable period of time. If activity continues to crank-up during the year, we would tend to spend a bit higher than that because as you know over the 12 months we began to invest money in balancing our rigs to the demand. We have moved some rigs up into the Rockies, etc. those kind of moves are expenses incurred but if you have to winterize there is little bit money there, if you are reactivating a rig out of the cold stack group, there is a little bit of money there so you could spent some more in those ways, but overall we think it's generally tracks as depreciation.

All right. Thanks guys.

Our next question comes from Kevin Simpson, please state your company followed by your question.

Miller Tabak, good morning guys.

Good morning.

Couple of questions. The first is about your people capacity, I was wondering maybe Cloyce, where you would be right now, you know in terms of your ability to field equipment, are you staffed to do a 210 exit rate or are you are going to have to be doing hiring and in fact are you doing some hiring now?

Well, we are constantly hiring Kevin but the bottom-line is that we probably have crews for 210 rigs right now, we figure. And we are -- when you work as steady as we have worked for as many months as we’ve worked, you really train a lot of employees to be able to expand more easily than we have in the past, and when you ramp up real rapidly, you know, it’s kind of difficult and you get less efficient. I think we are going to go into this next expansion and be far more efficient with the labor force that we have today than we have in the past.

And do you think that you can get paid in rate for the incremental cost you are going to be taking on or before, you know kind of before as opposed to after?

What incremental cost?

No, the incremental cost of fielding, your fixed cost of adding more people.

I don’t understand the fixed cost of adding more people to put more rigs up.

Well presumably you are not going to hire people, in two or three weeks and then fire them in a month or two, if activity hasn’t gotten to where you thought it was going to be?

We pretty much hire the employees when our rigs go to work. We take some employees from other rigs in different areas and they’ve been training for quite for some time but that’s -- we pretty much hire the employees when we need them, we don’t hire ahead of time thinking we are going to get work.

Kevin. I think you are correct when we hit funny spots in the rig count when it bounces up, 200 and pulls back at Christmas that does have some expense effect to us, but to the extent we run a number of rigs overtime, we don’t carry a lot of extra crews.

Glenn, you kind of mentioned the Rockies didn’t really Cloyce I guess mentioned it in the specific region-by-region, it’s not yet area for you. Are you going to moving more equipment into that market this year?

Our plans are to add additional capacity in the Rockies. I think that work is going to expand in that area, and we are prepared to move rigs to where the workload is. And I don’t know, how many we will add there, but it could be a substantial number.

And, but does it makes sense, that comes from the Permian, with the other areas sounding pretty tight?

Primarily Permian and we have some rigs stacked in Oklahoma that we are looking at moving into that area.

Okay. So the -- you're kind of, but while you have 20 marketed, you'll have some spare capacity there.

Yes, we have probably got, and I don’t exact number but I do know, we have 5 particular rigs stacked that fit that area real well, and we are in the process of refurbishing some of them to move into that area – out of the Oklahoma market.

Sure. And lastly do you think, this would be as much for Mark or for Cloyce, do you think that, there are still opportunities to add to the fleet in a financially attractive way, and you know, is that an expectation we should have for '04?

Our answer to that question, Kevin is definitely, you know, we are pleased with the growth we were able to achieve last year. We obviously have 20 rigs -- about 18 rigs pursuant to the TMBR/Sharp transaction that we are expecting to close on in the next 30 days. So there is that, obviously built in, but in addition, I think, we believe that there is a significant number of transactions, that we will be able to take advantage of over the next 12 months to add to our plate.

You know quietly we have added 20% basically when the TMBR/Sharp transaction closes to our rig fleets, since the time of the Patterson-UTI merger.

Without -- and in an environment where rates haven’t been particularly favorable, you have added -- you've done that and substantially improved the balance sheet at the same time.

Precisely.

I guess the only, Canada has kind of stayed static, your focus has been in the US, I mean, and I know Canada is beginning to look a little peaky in near terms. Do you think that it's more likely that you keep on adding in the US or should -- might we see some thing in Canada this year?

I wouldn’t rule Canada in or out -- I think we've consistently taken the view that says that we will look for attractive opportunities. Canada is a place we would like to see our business expand in, so that opportunities in Canada would get front burner attention from our management team. But I don’t want to say that’s our target because then in effect once I do so all I have done is increase the prices of the things we are going to look at.

Sure I understand, but if you look back I mean it's really been US where the adds have been, so it's telling, it says that the opportunities have really been more attractive here?

But don’t forget Kevin we did move two rigs into Canada, and so there is the opportunity to take additional rig capacity from the US and move it into Canada, to the extent to which the opportunities there justify it. The concern always has been that typically, when Canada has seen rates increase that the US has very often caught up and then surpassed it, and so the thing we don’t want to do is take our rigs from the US, chase up to Canada and then see in effect the US rates actually go ahead of the Canadian rates.

Sure that makes sense. Okay that’s it from me, thank you.

Thank you.

Our next question comes from Mark Urness. Please state you company name followed by your question.

Yes good morning Merrill Lynch, most of the questions have been addressed, but Mark I wondered if you could just talk a little bit philosophically about use of cash. You have, you know $100m on the balance sheet, you maybe will spend about that amount in CAPEX but you are going to generate a lot of free cash in '04, and to the extent that you can't find attractive acquisitions, what else would you consider doing with that cash?

We have talked before about the possibility of using cash for other purposes besides acquisitions and CAPEX. Obviously, having said that we think our CAPEX will approximate our depreciation and in effect that would be self funded. So please into account if you will, Mark, the fact that we are going to use about $50m of cash in the TMBR/Sharp transaction. And so we have about 50 additional -- we've spoken about the possibilities of buybacks and other possibilities. We consider that on a regular basis that I think is about as far as I can go considering where we are in the process.

Okay and then one other question related to you know other areas that you might consider operating, and ultimately you have been a North American based company for, you know for a long time and not really done anything outside the US and Canada, would you consider, or have you considered other geographic regions?

The answer to that question is we try to a take look at any opportunity and every opportunity that is related to or in the drilling business, all our services I should quickly add. And we do look at those transactions. Our view consistently is that the proper way to evaluate international opportunities is to take into account in effect the expected -- return on investment but then discounted by the amount of management and other risk that's inherent in such transactions. And so given that view, if we can find a transaction internationally that meets our return hurdles, we would do it. We are not the sort of company, however, that's just going go international just for travel opportunities; we don't need that and don't want it and don't think it does any good for the shareholders. The opportunity has got to be compelling discounted by the risks inherent to it.

Thank you.

Our next question comes from Waqar Syed. Please state your company name followed by your question.

Waqar Syed from Petrie Parkman. I have a couple of questions - most of my other questions have been answered. But could you quantify the change on improvement in leading edge areas during the last 1 month in the lower 48 states?

It's really the last 30 days probably really the last couple of weeks that rates seem to be begun to move and we believe that's probably -- what's began is probably somewhere around 500 hours a day. To the extent that adds up being correct, that will roll in over a period of time, so it doesn't have that much impact on the current period because you have to get to that contract that well and that's where we get our thought that for the first quarter we'd see average day rates or I am sorry average revenue per day of about 10,000 with margin of about 3,000 and the rest would roll in the second quarter.

And in terms of improvement, are you seeing it in all regions or is it more specific to some certain regions?

It's pretty much across the board in all regions.

Okay. Secondly, you had a $240 per day margin improvement sequentially in the fourth quarter. If you strip out Canada from the operations, what was the underlying improvement in the lower 48 states?

Frankly, I don't have that with me. Off the top of my head I believe that frankly the majority of that was U.S. and a little bit in Canada. As you know we only have --

Right.

16 rigs out there.

I understand.

So, this was no big impact.

Okay. And the improved bidding activity that you are seeing. Is that across all of your customer base or are you seeing more in the mom and pop Companies and invest independents or it's across everybody?

I think it's across all the customers. When you start to see -- the budget-driven customers like the large publicly traded independents -- you start to see them do more budgets and then they have days they are going to start their budgets, but we are seeing inquires from all our customers.

Right. Thank you very much.

Our next question comes from Bo McKenzie. Please state your company name followed by your question.

Hi, it’s Bo McKenzie from Sterne, Agee & Leach. Congratulations guys on a good quarter. Is there anything you can characterize specifically that's different from last quarter or last year in terms of what the clients are looking for, in terms of deeper -more directional, more exploratory, more -- just anything that would show a trend from kind of medium depth development work that we saw a lot of last year?

I think it's more driven by price and you might be getting some deeper wells drilled. And the deep wells -- say deeper than 15,000-18000 feet are so expensive that these customers have got to have a great deal of confidence that the gas prices are going to stay relatively high for a long period of time. So they can then justify drilling them. But I can't tell you from what – from the people I talk to that it’s any different as much as it has been all these years, it just more of them it’s like adding additional rigs to the same areas.

Fine. Do you think that if that’s the case that we don't see a substantial pickup in deep, that the capacity that was added by HP specifically and more than likely by neighbors reactivating stuff in the last cycle, where there does appear to be an awful lot of big horse power rigs that aren't really needed, but that's going to hold pressure on rates as people start to put those to work in, I don't know, shallower than necessary kind of jobs, or no?

Yeah, I don't know that that matters if you have right tools for the job, because I think the way the E&P companies look at is, they have a got a well to get drilled and it prices out to some amount to drill it, and it becomes the service company's problem to be able to charge for that - in a way that works for the customers. So if somebody puts a 20,000 foot capable rig or a 10,000 foot capable hole and --they aren’t going to make money. And the guy who put the correct rig on that well is going to do quite well and is going to enhance their margins. So I don't think that is an issue the way you stated it.

I will also add one more thing, Bo, to your thought. Which is that, in effect, you have to decide where the additional capacity is – that remains. I think you’ll quickly conclude that really the incremental capacity that exists in the industry is in the hands of --

Just a very few people.

Yes. And in effect some of the players that you have mentioned have in effect, been operating at a higher utilization, because in effect that’s their operating philosophy. And as you know we try to draw a balance between both activity levels and margins, and so we feel like the right thing is to -- in terms of looking at how well we are doing is how well we are maximizing both those two things, and that's really the thing that, I think, drives our company.

On a related question everybody [inaudible] just moving rigs around here and there. It sounds like there is a fair amount of rigs coming out of specifically South Texas going to various other places. Could you characterize what you guys are able to see out in the market in terms of things that are tightening on the supply side where people have new equipment -- I think HP announced they moved of a couple of rigs out of South Texas to the Rockies -- it sounds like Grey Wolf is moving a couple to Phoenix (ph), [inaudible] moving here and there, where do you see the market, the supply side coming or may be the next round of pricing leverage might be a little bit more dramatic?

I think everybody has always moved rigs around Bo and we are doing the same thing; I mean we’ve moved some rigs to the Rockies and intend to move some more there, because the demand is there. But as far as us moving the rigs out of South Texas, I don’t think that we might have slid South, over in the east a little bit, but we have actually moved some rigs from West Texas to East Texas because we have so many stacked rigs in West Texas and they have demand –for them in East Texas. I see the South Texas business picking up pretty dramatically from talking to our people. So I think that possibly you won't see as much moving around.

Okay. Thanks guys.

Our next question comes from Ken Sill. Please take your company name followed by your question.

Yes Ken Sill with CSFB. Guys just wanted to ask -- last time we went through this process when things started getting good you saw some term contracts. This time the ramp seems to be relatively slow and steady. Do you see any customers coming to you, looking to lock up a package of rigs on an indexed rate or is everything still pretty much staying well-to-well and you expect it to stay that way?

We have some customers that want to tie up some rigs for a longer period of time. But in most of the cases, and I don't know if the case is not this way, we will limit it to how long we will work for a fixed price and it's usually 3-6 months depending on the area we are in, and what we are furnishing. But in most cases its well-to-well.

And you haven't really seen any change in the market in the last couple of years?

I think some people have asked for that but it's just not been – we’ve never -- it's never worked well for us. I will put it way to have term contracts.

And is that gain sharing turning in pain sharing?

Sometimes, it's correct.

Okay. Thank you.

I would say, I don’t think we are seeing a pronounced increase in requests at this point for that. I mean it's not -- the industry had its experience and it's not necessarily one that they are in a hurry to go back to [inaudible].

Thanks.

Our next question comes from James Wicklund. Please state your company name followed by your question.

I have a follow-up guys, first of all, Mark, I think there are some little drilling contract you have got in Capo San Lucas that needs to be looked at. What is your tax rate going to be going forward John?

37% we think for the current year.

And the favorable tax treatment this quarter was caused by what?

Really just truing everything up for the year and going through all the detail and you know the amount of money we made; it was a lot of little things nothing noteworthy.

Okay, back to Bo's questions a little bit we have noticed in some of the reports that deep drilling seems to be picking up this month, Cloyce is that just a continuation of the trend, are you all seeing it, do you participate?

Well, we are seeing some increase in the deeper work and I think and this is just a guess on my part Jim but I think it's the confidence that natural gas prices are going to stay at a higher level what that number is I don't really know but at least above $4 and maybe that’s not -- that’s certainly a guess, you know as much about that as anybody does. So, -- but I think people are getting more confidence all the time that there is a shortage in the natural gas in this country and the way we are going to supply it is by drilling some higher reserve wells and the way this company done is -- it will have confidence that the gas prices are going to stay higher, and we are actually seeing some of that in the Permian right now where we are drilling some deeper wells and quite a few inquiries about that.

Okay, gentlemen thank you.

Our next question comes from Allan Brooks. Please state your company name, followed by your question.

CIBC, most of my questions have been answered but one that comes to mind is the DOT rules on truck drivers, is that having any impact on rig moving?

Really, it hadn’t change that much from what it was, the DOT regulations from the past certainly had an impact on it because of number of hours we could work, we got to shutdown and give them hours all, but I don’t think the new rules did impact it that much.

Cloyce Talbot Well Glenn said it is one hour there is a difference in the impact so it's not a meaningful thing so far that we see from the DOT.

Okay, thank you.

Our next question comes from Jud Bailey. Please state your company name, followed by your question.

Jeffries & Company. Couple of quick questions; first one on Canada, obviously, your drilling activity is pretty strong right now, do you have any sense, have you heard from your customers of how the springs, maybe obviously it’s going to be weaker, but any indication that they may be a little stronger than normal?

I think that -- the indication it should be stronger than what we normally expect there but who knows what that number is. It is -- we -- usually work 3-5 rigs through break up, this year it might be 5-7. It won’t be -- you know it probably won’t be a significant count in our overall rig count, but even if they went to 8-10 this just doesn’t affect us a great deal.

Okay. And also on your fluids business, your revenue and your margin was a little below our expectations for the quarter. What’s your outlook for that business over the next 3-6 months?

You know in December I think along with some other people we experienced jobs getting deferred around the holidays, which had a negative impact on the fluids business. Yeah, we think if the Gulf improves, you know in the coming year you know that we will improve along with that in 2004. But, the expected improvement in results does not occur, goodwill of approximately 10m, could become impaired [inaudible].

Okay. Great, thank you.

Our next question comes from Will Sanchez. Please state your company name, followed by your question.

Howard Weil. Just a quick question; follow-up on Canada. The 210 total that you are expecting to exit the first quarter, Cloyce, can you give us an idea of what Canada will be of that total?

I think it’ll probably be around 15.

Okay, so it’ll stay at 15, you won’t see the real break up impact until probably in April?

Yes.

Historically, Bill, though through March, unless there is a really early thaw , we are running, you know, all 16 rigs, and I guess, that gets us an average of about, you know, 15-15.5, if gas price stays good, and the weather works with us also we could run a good number up there, until probably, mid April and if there is an early break up, you know, it would be somewhere maybe March 15, but that’s been the historical range we wouldn’t expect it to be any different.

Okay, and John can you give us an idea, of what's your cash margins were in Canada in the fourth quarter, versus what you expect it to be in the first quarter?

We really aren’t breaking that out separate for people, what the Canada margins are, given the impact it has on us, it is fairly small. The margins up there are good, first quarter versus fourth, it should be a bit better, but they were really, you know, pretty good in the fourth and really throughout 2003.

Okay. Fair enough. Thanks.

Our next question comes from Joe Agular. Please state your company name, followed by your question.

Thanks, Joe Agular with Johnson Rice. I've this question on depreciation, real quick, it's gone down in the last couple of quarters, what's going on there, I guess and also going forward with the acquisition; could you give us some guidance of where you expect it to go throughout '04?

Help me out with depreciation been going down, I mean.

Well, it’s just slightly, I mean, its 25-24.7, 24.3.

Okay.

It's just -- is that --?

I see, I think of it by business segment. Yes, I think in the fourth quarter, the only -- it was in the oil and gas, that was --

Right.

Truing up depletion numbers, etc. There was a little bit of a benefit there. If you look at drilling and pressure pumping I think that they -- go up slightly overtime as we’ve added rigs etc.

Any help with ‘04 --

In terms of depreciation?

Yes.

If we don’t -- ignoring TMBR/Sharp as we indicated earlier and we don’t acquire any rigs during the year. I would think somewhere in the $105m range.

Right Thanks very much.

Our next question comes from Matthew Cowman (ph.). Please state your company name followed by your question.

It’s Matt Conley (ph.) from Weednet (ph.) Co. And most of my questions have been diligently asked. I just want to follow-up on the fluids business, you mentioned that goodwill is $10m, could be impaired and that’s if business doesn’t pick up in what timeframe?

It's a little bit of a tricky question, Matt, because there is no specific answer to that. I think the point here is that we had a great year in 2001 in fluids and the Gulf of Mexico was good in 2001. In 2002 and 2003 the Gulf has not been good, which drives the results in that business. So if that continues for, you know, some period of time then I cannot -- that kind of crystal ball I don’t have. At some point you start to question whether you can recover the goodwill.

Okay do you have an annual date when you access the value of your goodwill?

That’s an ongoing thing.

Okay, great well thank you very much.

Our next question comes from Jack Cowins (ph.). Please state your company name followed by your question.

Yeah the company is AG Edwards. I had a quick question, any comment that you guys have on some of the reallocation of budgets that are going on from Canada down to the U.S. I know Burlington has made an announcement. Have you guys any of your other customers talked about that and mentioned that and what kind of impact could that have on you all this year?

Any increase in budget in the lower 48 helps us because that's where the most of our rigs are. So really we haven't talked to any of our customers about any reallocation of budgets.

But I do think we are seeing in terms of the customer inquiries and a sense from the sales force across the board of it renewed and increased the interest.

Thank you.

Our next question comes from Neil McKetie (ph.). Please take your company name followed by your question.

Hi, Morgan Keegan. Good morning guys. On Canada is there enough revenue -- you paid in U.S. dollars where you might have gotten a little bit benefit from the dollar, Canadian dollar being strong?

Yeah we would get a benefit.

There was a small benefit.

And where was that -- will that show up just in other line -- under other income?

No actually the dollars -- they come across to the income statement.

Are At a converted rate [inaudible] any impact of exchange rates just go straight there.

Straight to the balance sheet, okay. And we'll get that when the Q comes out?

K.

I mean the K -- yeah, alright. Thanks.

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We would like to take this opportunity to thank everyone for joining us on our conference call. I appreciate everybody's time and diligence. Thank you very much.

Thank you sir. Ladies and gentlemen this concludes today's Patterson-UTI Energy Fourth Quarter Earnings Conference. If you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by the access number 566685. Once again if you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by access number 566685. We thank you for participating. You may now disconnect.