Patterson-UTI Energy Inc (PTEN) 2004 Q1 法說會逐字稿

Good morning, Ladies and Gentlemen. Welcome to the Patterson-UTI Energy First 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 anybody needs any assistant at any time during today's conference, please press the star followed by the zero on your push button phone. As a reminder, this conference is being recorded today, Thursday, April 29, 2004. I'd now like to turn the conference over to Mr. Jeff Lloyd on behalf of Patterson-UTI Energy. Please go ahead, sir.

Thank you become on behalf of Patterson-UTI Energy I would like to welcome you to today's conference call to discuss the results of the three-months ended March 31, 2004. Participating in the call will be Mark Siegel, Chairman, Cloyce Talbot, 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, statements made in the 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 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, regulation, planned capital expenditures, adverse industry conditions, difficulty in integrating acquisition, demand for oil and natural gas and ability to retain management and field personnel. Additional information to concern factors to actually differ materially from those in the forward looking statements is contained from time to time in the company's SEC filings. Copies may be obtained by contacting the company or the SEC.

Now I'll turn the call over to Mark Siegel for opening remarks, to be followed by questions and answers, Mark?

Thank you Jeff.

Good morning and thank you for joining us today. I hope that by now, all of you is have had an opportunity to read our earnings release. Before taking your questions, I would like to take just a couple of minutes to review, briefly, some of the highlights from the release and to add some context to the results. I'd like to start with our first quarter's results.

As you can see, we have completed a very successful quarter and once again our results demonstrate the considerable earnings leverage that we were able to achieve as revenues increased in daily margins improve. Revenues for the quarter were up 32% and net income increased by 214%.

Looking at the results specifically, net income for the three-months ended March 31, 2004, total $20.7 million, or 25 cents per share, compared to $6.6 million or 8 cents per share for the first quarter 2003. Revenues for the quarter $218.8 million compared to revenues $165.2 million for the same quarter last year.

I would like to call your attention to four key points from our news release this morning. First, the long-term upward trend in drilling activity, which we saw developing in the second quarter of 2002, has continued in 2004. During the first quarter 2004, we averaged 197 rigs operating as compared to an average of 191 rigs operating in the fourth quarter. Looking ahead, we estimate that our rig count will average approximately 200 rigs operating in Canada, including 196 in the U.S. and four in Canada. If we exclude Canada, with it's seasonality and look only at Patterson U.S. rig count, the trend is even more apparent. 183 rigs, average rigs, operating in the first quarter 2004, increasing to 196 rigs in April.

I should add we were especially pleased with the utilization of what we achieved in the first quarter because of the unusually inclimate weather that affected most of our regions.

Our customer inquiries remain strong reflecting the impact of high natural gas prices and the expectations that such prices will continue. And for this reason, we now expect that our rig count will continue to increase throughout the year.

Second, in addition to the strong performance achieved by our drilling business, our results in the quarter also reflect strong performances from each of our three smaller business units: Pressure pumping, drilling fluids and EMP.

Third, looking at our company as a whole, we continue to have strong economic fundamentals. We ended the first quarter with approximately $92 million in cash and catch equivalent, $192 in working capital and no long-term debt after having completing the acquisition of Timbersharp Drilling during the quarter. We believe the first quarter, again, demonstrates that our strategy, growth through selective acquisitions, continues to benefit our customers and reward our shareholders.

Lastly, as we announced this morning, our Board of Directors has approved quarterly cash dividend on our common stock and declared two-for-one stock split in the form of a stock dividend. The stock dividend would be affective June 30, 2004, for holders of record on the close of business, on June 14, 2004. The cash dividends will aggregate 16 cents per share, or 8 cents per share on a post-split basis with the first dividend in the amount of 4 cents per share, two cents on a post-split basis to be paid to holders of record and May 17 and paid on June 2, 2004.

Our confidence in the long-term strength of the company and its earnings leverage and the industry's trend is underscored by the action of our board to initiate a quarterly cash dividend and declare a two for one stock split. Moreover we believe the successful operating results and the prospects for the industry will enable us to generate sufficient cash flow to fund our current needs and our expectations for further growth, while allowing us to return some of our earnings to shareholders. At this point, I would 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 1 on your push-button phone. If you would like to decline from the polling process, please press the star followed by the 2. You will hear a 3-tone prompt acknowledging your selection and your questions will be polled in the order they're received. If you're using speaker equipment, we do ask that you lift the handset before pressing the numbers. One moment for the first question. First question comes from Jim Wickland with Banc of America Securities. Please go ahead.

Good morning, guys.

Hey, Wick.

Mark, usually when people talk about a dividend, they say, okay, we're going to make it material. If I'm figuring right, 16 cents on a $37 sock is like a half of 1% dividend? It just doesn't seem terrible material.

Jim, it's our thought that the beginning of a return of cash from the shareholders signals from our company the fact that we understand that it's ultimately the shareholders' money and when we have excess capital on our balance sleet we'll give it back, still keeping ourselves positioned to take advantage of opportunities as they present themselves.

Well, you guys have always been fabulous on, you know, maximizing shareholder return, [INAUDIBLE], but you're second point, that you, you know, you're still going to be keeping the powder dry to make acquisitions, I mean, to me, it would -- or to investors, they're either going to think there's not much left to buy, which is why you're instituting a dividend, or, if you're instituting a small dividend, then you're not, you know, making much away from the acquisition. It's kind of a kiss your sister. I guess my question, this won't slow down the acquisition strategy, will it?

We don't think it will slow down our acquisition strategy, Jim, but it also reflects the strong balance sheet that we're able to achieve. You know, if people thought that after we finished the Timbersharp acquisition, our cash would be down significantly, the fact that the cash has remained steady has caused the directors to think that there's an opportunity here to increase the attractiveness of the stock to those stock investors that only want to invest in dividend-paying stocks. So we've had an opportunity to broaden our base, at the same time, indicate to the shareholders, when there is excess cash, it will be given back to the shareholders, and at the same time, keep enough powder dry to do opportune acquisitions. We think it's the best of all possible worlds.

Okay. The other thing it would also seem to imply, which is continued confidence in the business, we are on the verge of, you know, setting new land drilling records in the U.S., you know, 16, 17, 18-year records, yet, sequentially, your margins didn't move. Does it bother you, here we are at, you know, almost record-land rig count? And, you know, this is kind of not as good as it gets, but on the way to it. And margins don't move sequentially?

Jim, it's our feeling that margins have started to move as we sort of exited the third -- pardon me, as we exited the first quarter and moved into the second quarter, that's going to be slightly difficult to see in the second quarter because of the slowdown in Canadian activity, but overall, we think the business is very healthy. We think the uptick in activity is apparent and part of a longer-term trend. We think that as some of our competitors become more focused on margin, and less on utilization, it will be greater opportunity to push for higher day rates and, in turn, greater margins.

Okay. Last point, going into the first quarter, there was talk there was like $500 day rates, you know, in January and February, versus the end of the year. Are you guys willing to give us a forecast, and if you did, I apologize, of what margins might move up by in the second quarter?

Let me turn that over to John.

Yeah, Jim. Our guess at this point, as you know, we have Canadian presence in addition to our U.S. presence.

You can break it down for us, if you want to.

Yeah. The, you know, Canadian presence guess would be, historically, in the second quarter, you know, we average somewhere between 4 to 6 rigs running, versus, you know, 14 rigs that ran during the first quarter. So, currently, the Canadian margins are ahead of the U.S., so you're going to lose a bit of margin on that side. On the U.S. side, we would expect that margins would continue to increase and that, you know, blended margin would be somewhere in the 3150-type range in the second quarter, when you weigh the two together.

Okay, guys. Thank you.

Thank you our next question comes from Erin Jarron with CSFB, please go ahead.

Good morning. Cloyce, I was wondering if you could provide color regarding the E&P segments, the results were a little bit better than what we had modeled in. Maybe if you had the quarterly production in the utilizations for the quarter?

We don't have the quarterly productions here with us, but, basically, it's a -- a lot of it is pricing in the quarter, as it has got and little bit better for crude oil and we're 50/50 crude oil and natural gas, and then Timbersharp had a small E&P segment and if you roll the number in for a month and a half of quarter. You might have missed that because of the production.

Cloyce, any gauge where you're at, currently, in terms of production? It is somewhat of a material number now.

I have to get that number for you, I don't have it with me.

Secondly, gentlemen, saw that the Capex number and pressure pumping was up little bit. Are you making any new investments in that segment in Appalachia or outside?

In Appalachia, we're adding nuts and crack crews there and we intend to spend more this year. We're growing in the Appalachian Basin as that market expands in that area.

And any, you know, percent or gauge of how much additional capacity you have in that market?

Well, I would, over the last couple of year, I would say we've increased it somewhere 40 to 50%. If you go first quarter to first quarter, you know, '03 versus '04 we were up 50% on jobs.

Thanks, Jeff. The last question, sequentially, operating costs were up, I think, $200 a day. Can you just talk about that increase?

Well, when you say "operating costs were up $200 a day" are you talking the drilling?

Yeah.

Sequentially?

Yep.

Okay. The -- we think -- we can't get a perfect gauge on that. I know that competitors have talked about FICA and unemployment and that certainly affects all of us, as the year starts out. We don't think the primary part of it, in our case, you know, may well be, you know, close to $100 a day. But we think that rain was a very big factor in the quarter. You know, I, having lived in Texas for more than 20-years, I've never seen anything when we have rain from mid-January through mid-March and I'm going to let Cloyce or Glenn speak to what that means to drilling rigs. From a financial side, if you can't move them as fast, you're paying the same cost. When you're moving, you're getting paid a mobilization rate, not a day rate, and that in effect has the impact of increasing your costs per day. I'll just turn it over to Glenn.

Yeah, you know, I've lived out here quite a bit longer than John has in west Texas. I've been living there since 1958 and I've never seen the rain that we had in this timeframe. Normally, this time of year, you know, you might get a couple of inches or three inches of rain during that timeframe which would be average, and it usually all falls at one time. This rain, every week, to give you an idea, in our Sonora area, we've been shut down from moving rigs three times this year already. Normally you're never shutout in that part of the area, so rocky in that part of the country but we've had so much rain. It's really affected the business the first quarter. Probably most of it I've ever seen since we've been in business.

Okay. Thanks, guys.

Thank you our next question comes from Mark Furnas from Merrill Lynch, please go ahead.

Good morning. First of all, I want to commend you to be the first land driller I'm aware of to have enough confidence in the outlook to give some cash back to the shareholder in part of the dividend, as far as I tell it's 10% of your free cash, which is not a big use of cash. Could you walk us through, Mark, the thought process behind the stock split?

Sure. Thank you first for the compliment. You know, I thought about Jim Wickland's comment, the small dividend is like kissing your sister, and it occurs to me the response back is a little bit like this, stock buy-backs are like dating, where as dividends are like marriage. So we think it's pretty important commitment and we're really very happy that Mark, you notice, didn't see it that way.

In terms of the stock split we have noticed that our ownership has been upward of 80+%, institutional, and we are hoping that by a lower stock price, we may be able to open to more retail investors and make it more attractive for those investors.

Thank you. I had a couple of questions for Cloyce. Cloyce, it seems like it's the larger independents primarily that have been driving the rig count up recently and that the mom and pops that supported the rig count so well last year, particularly, in the late summer, aren't as active as they had been. Can you comment on that?

I think they're still really active. You're right, the increase in rig count is primarily from the large publicly traded independents. We're certainly seeing some activity from what we call the checkbook operators. But you got to realize that lot of them wait until later in the year to spend their money, because of the tax consequences. But the one thing we're hearing this year, from several of our customers, that if they didn't spend enough money and have to pay a lot of taxes, come April 15th, and I think they're very conscious of that and it would not surprise me to say the checkbook operators start earlier this year in spending than they normally do. Normally, they start after July 4, and a lot of times after September. It would not surprise me to see that pick up quite dramatically before the end of the year.

The other question relates to drill pipe. Could you comment on drill pipe prices and what you've done to get your inventory up?

Well, our -- you know, we was still have a lot of inventory that we bought in 2001 and '02. We took all of our drill pipe, you know, we had a million feet of drill pipe and we are using that up, and at some point we'll have to go back into the food chain of drill pipe and start ordering drill pipe. Prices are up, as you know, steel is up, and we still have, you know, 5-600,000 feet of the drill pipe we bought before. We're not in any bind whatsoever and, and I would think we have enough drill pipe to go another year or so without really buying a lot of drill pipe. I think we'll start buying some, prior to that, just to be on the cautious side.

Thank you.

Thank you. Our next question, Scott Gill from Simmons and Company, please go ahead.

Good morning. Getting back to the marriage to the dividend, when you were in discussions with the board, did you consider or give thought to variable dividend, when cash flows are greater, the dividends go up?

We've certainly talked about the opportunity to change our dividend in the future, if that's a step that seems justified by the economic results. But we didn't think that it would be useful to try to set it at this point, given the volatility of the industry. We think setting a dividend that we feel comfortable we can live with for the long term with the decision we wanted to take and to the extent to which the business performs even better, we'll obviously have the opportunity to increase it in the future, if that becomes apparent.

Okay. Very good. I guess for Cloyce or Glenn, want to talk a little bit about the demand for new equipment. One of your competitors has built several, what they call, highly-mobile rigs, I'm sure you know which ones I'm talking about there. But also a major supplier is now offering a new-build, again, highly-mobile rig at a very, what looks like a very attractive price, under $7 million for the new rig. What do you see is the demand for new-build rigs in this market?

Well, this is Cloyce. I'll answer the question. You know, we have seen it. We heard about the $7 million rig, but we don't know what it includes and the all-in cost would be by the time you got it rigged up and in the field, whether it has a top drive on it or whether it has a drill pipe, whether or not, we don't know. My guess is, all in, in the field you're going to be approaching $10 million and it really doesn't change the economics much from whether 10 or $12 million and you talk about years of high margins to justify that type of expenditure. So we still, even with the $7 million rig, we don't see there's been a factor in the near term, as far as we're concerned.

And, Cloyce, along those lines, are you, in any of the markets that have to compete against one of the newer assets, do you have to discount your rig, any, to keep utilization? Or is it just not a factor?

Do you want to answer that?

Go ahead.

You know, I don't -- I -- in most of the places that we work, the customer wants the well drilled as economic as they can get it drilled. And what I have noticed over the years, if all of the rigs are working, these type of rigs you're talking about, might get a little bit more margin than what -- or little bit more day rate than what we do. But in most cases, the day rates are going to be very close together, because customers aren't going to pay a lot more. They can't drill wells any faster than we drill wells. Once you get rigged up and drilling, in most cases, we drill them about the same time. There's been comparisons, run, we've heard about them before, and you might check with the companies to see what the comparisons are in drilling wells between the conventional rig and the high-end rigs you're talking about.

Okay. Well, that is data and it's, you know, subject to some bias, I guess. One final question here on rig moves. How many rigs were moved in the first quarter and what are you anticipating for rig moves during the second quarter?

When you say "rig moves" do you mean from market to market?

Yes. Thanks, John.

We're certainly anticipating moving some rigs to different markets, the Rockies is one and very active. We're in the process to moving rigs to Rockies. We now have 17 rigs in the Rockies and I would guess, at the end of the year, we'll have somewhere between 20 and 30 in the Rockies. There's a demand in Oklahoma and east Texas and we're moving rigs into those areas. We're going to be shuffling some of our rigs around to different areas, to where the demand is.

How much does that impact your operating cost, as you mobilize the rigs from one market to another?

It costs about, roughly, $200,000 to move a rig, from one market to the other. And time you amortize and it depend on long you amortize it over and we expense it though, is what we do, how fast we move them. We move 10 rigs, talking about a couple million dollars scattered over the year, something like that, 10 or 15.

Scott, in some cases the moves are paid bit operator, and in some cases they aren't. It's kind of a mixed bag how it affects the operating results.

Some cases the operator pays part of it and we pay part of it.

Okay. Thank you gentlemen.

Thank you. Your next question comes from Grant Borbridge with Prudential Equity Group. Please go ahead.

Thank you. Getting back to the acquisitions, there probably isn't a lot of incremental benefit that can be added, but can be gained by adding more rigs to the fleet, given the number that you have in your yards. But, would you, as a result, lean more toward purchasing some more companies as you did with Timbersharp where you not only get the equipment but you also get the contracts and relationships with clients, when you add those people?

Well, there's a couple of things that happen when you buy companies, you not only get the market share that they do have, you get their field people, too. And that's very, very important right now, because labor is an issue for all of us. And as we grow bigger and get more rigs out in the field, it takes, you know, far more labor than we've had in the past. So that's a factor, also. And just you know, depends on the area, too. We're looking to buy equipment in the area, in different areas than where we are right now -- well, we're in the areas, but maybe increase our presence in some of the areas, likes the Rockies, for example.

Specifically, with respect to the Rocky Mountain region, you're talking about moving rigs into the region. Are there decent acquisition opportunities that you're looking at in the Rockies area?

There's some acquisition. We missed some up there; some we don't want to pay what other people paid for. We're constantly looking.

Okay. Thank you.

Thank you our next question comes from Poe Fratt with A.G. Edwards. Please go ahead.

Good morning. You talked about the cost, early-year cost a little bit, about 100 bucks in the first quarter a day. Could you talk about labor costs, more importantly, whether you've actually implemented a wage increase or whether you plan to in the second quarter?

There was some wage increases in Canada that occurred, I believe it was at the beginning of the year, late fourth quarter. But in the U.S., there have not been wage increases in our company. Correct?

Yeah. Same as -- yeah, we did the cut in drilling in early 2002, which was reversed at the end of the first quarter of '03. Other than that, the U.S. wages have been stable for our company.

Great. And, then, if you could break down capitol spending plans for this year, and if you either can give the total number or the total by division, that would be helpful?

Poe, I think the thinking that we're talking about now is, approximately, $100 million to be spent in drilling Capex. And, approximately, $25 million, additionally, of the second $25 million, rather the $25 million I just spoke to, a little more than half of that will be going into E&P spending, which is consistent with what the company has always practiced, which is that in effect, we put back into the ground about which -- about the same amount we take out, and that's been the plan for quite a while, in terms of Capex, for our drilling business.

Great, thank--

Most of the rest of the $25 million would go to the pressure pumping, which we're continuing to expand, internally.

And, then, Mark, you talked about the using the marriage analogy as far as the dividend being, hopefully, a little more permanent, was there any consideration to doing the stock buybacks at this point and starting to date first?

Absolutely. You know, I've been asked this question and Cloyce has been asked this question, kind of every meeting with every investor we've had for, probably, the last three years, which goes, you have zero debt on the balance sheet and significant amounts of cash, what are you going to do with the extra cash? And in affect, will you promise the shareholders that you won't spend the cash stupidly, and I said, and Cloyce said in every one of the meetings, we'd consider a dividend, or buy-back, or both. We thought the most powerful message we could send to the street about our confidence in the company and the industry was the dividend, because of its permanence. But we by no means ruled out a stock buy-back, and to the extent to which there's excess cash, and we think that it's a good use for shareholders, money will buy back stock.

Okay.

And the promise, by the way, not to use the money stupidly, remains outstanding for both Cloyce and me.

As far as -- I heard your answer to the larger independents driving the early pick-up and the rig count. And my sense was that some of the smaller companies are coming back and, can you give us a flavor for the incremental rigs that, you know, you're looking at for April and, then, you know, last week's number, at 204, you have the, roughly, 20-25 rig pick-up that you've seen. Has it been proportionally more weighted toward the smaller companies or the larger companies continue to expand?

You know. I think it's -- and, you know, you have a variety of what we call larger publicly traded independents that we work for ,most all of them, and they're the ones that have added the most of the rigs, so far, rather than the, what we call the checkbook operators. But I still believe that the checkbook operators are going to start drilling quicker this year. We still have a lot of them drilling by the way, I think we're going to pick up the pace earlier in the year than they have in the past. And we're seeing the publicly-traded independents are certainly increasing their rig counts.

The sense we have of it is it's about a 50/50.

Okay, great.

We really don't see it weighted in one direction or the other.

Poe, I think before that question, you asked a little bit about rig count? You know, Canada being the smaller piece for us, it's a little bit hard to guess in the second quarter simply because of how quickly they start up in late May and June in terms of the average for the quarter. But historically, we'll average 4 to 8 in Canada and we'll call that fixed and we'll all know later in the quarter how that worked out.

U.S.-wise, you know, we think that the rig count in the first quarter was masked by rain. We put our monthly rig counts out, which would have averaged about three rigs lost to rain, based on what we could identify. Our guess is that the real impact is somewhere between 1 1/2 and 3 times that number, simply because people don't build locations until the rig is moving, et cetera, et cetera. We think the rain has hit where the rig count would otherwise gone and more normalized weather we'd expect the rig count to increase from here. And including the Canadian rigs, you know, we would think we'd average somewhere around 215 in the second quarter, with, you know, about six of that being Canada. You know, to get there, the U.S. rig count -- our U.S. rig count needs to get you will somewhere 210 or so in May for an average and find itself in June, you know, something closer to 215 or so. And to -- Glenn may want to speak to this, but our sense is there is demand out there and we'll start to see the rig counts, soon.

I certainly think that, you know, you kind of get a gut feel for the demand, or just listen to the people talk and we're seeing that in almost all areas, there's -- we're getting more calls and more requests for rigs all of the time. I think you're going to see rig count, not only ours, other people's go up as the year progresses.

And what about the -- Cloyce, could you talk to the fear about the second half or the first half somewhat front end-loaded by the larger independents oil and gas companies?

You hear that, but from what I'm hearing from the larger, non-public people, they weren't able to spend their money last year and had to pay a lot of taxes and they'd like to drill more this year, earlier, and I think if you look at -- commodity prices are higher today than this time last year and they're going to have the same problem. And carry into 2004, assuming the commodity prices pay anywhere close to where they are now. And I don't think that -- I guess I don't see that fear. I think that you have a chance of it being a lot greater in the second half than you do the first half, depending on the commodity price.

Great. Thanks for your help.

Thank you. Next question comes from Kurt Hallead with RBC Capital Markets.

Good morning.

Hi, Kurt.

Hi, Kurt.

Question for you, you got 204 exit rate in terms of rate running in the U.S. here at the end of April, as per the press release. You gave some good information regarding what the potential expectations are for second quarter average. Can you give us one of your competitors gave us their view of what they saw, in in terms of margin, exit run rate for the year, and I was wondering if you could also give us your sense on what kind of incremental margin we can expect, beyond the second quarter?

You know, Kurt, I think what we have found is our visibility for one quarter is decent, it's not perfect, but it's decent. As we go out more quarters we really don't have a lot of visibility and it's a very foggy crystal ball. On the other hand, to say that, you know, margins could increase $300 a quarter, possibly more, if we see a quarter of, you know, 30 or 20 rigs increase in the U.S., that that could certainly happen. And, you know, to date, early on as you know, in early 2003, our rig count moved up at a pace that was way beyond that of our competitors. You know, we believe that's because we have some pretty exceptional operations and able to get rigs out sufficiently. People have had to catch up with that.

Some of those competitors continue to bring rigs into the area, charging 500 or a thousand dollars a day less than anyone in the market. I assume, pursuing utilization. That one the one hand makes it difficult for rates to move as quickly as they night. On the other hand, we've been successful, quarter after quarter, and getting increases, you know, for performing well.

I guess back to your question, to assume, you know, 300 a quarter, you know, that would seem to be in the range of something that would be reasonable and it could well-be better than that. To the original point, we really don't have a lot of visibility.

Okay. In terms of the pace of incremental activity, once again the outlook on the view point for the second quarter, expect activity based on inquiry levels to continue to pick up through the year? Once, again, one of the competitors said that they expect to capture the bulk of the incremental activity from this point forward, you know-- How does somebody like me handicap that?

I guess, Kurt, what I've heard and I've been in other activities so I did not hear, I think I know who you're talking about, I heard that that competitor said 40% of the increase from here. Given, all of the rigs, pretty much, lie in the hands of two companies. Patterson and that other company, if they expect 40%, I would assume that we're another 40% and the 20 is everybody else. Because I believe that the incremental rigs are pretty much in two hands, at least the ones that match the drilling that's going on and the U.S. today.

Okay. All right. Now, the other commentary that I've heard over last few days is that there -- a couple of companies that are in the process of aggressively activating rigs. Where do you guys stand on that process?

Well, we're certainly activating some right now. We're putting rigs together and we got, actually, five going together right now and we're just addressing what we think is going to be the demand, going forward, toward the end of the year. And we intend to put some more rigs into the Rockies. Our goal is to, you heard me speak to already, is, you know, have somewhere between the 17 and 30 between the end of the year. And we're going to add more rigs in the Rockies and some rigs in other areas, where the demand is there.

What's the average cost of each the rig activation?

I guess -- and I don't have the exact number, Kurt -- I'm going to guess a million and a half on the rig on the ones that we're doing right now. There're actually some diesel-electric rigs we bought earlier and had not reactivated and we're working on those right now. One of them is a mechanical, four are diesel-electric. Four are diesel-electric, one is a mechanical. They are a thousand to 2,000 horsepower rigs and we have several other, you know, in the thousand, 750-1000 horsepower range that will not cost thatch to reactivate to go to the areas like the Rockies. The ones right now are probably a million and a half a piece.

Um -- okay. And the last thing, on pressure pumping, you typically see a seasonal decline in the second quarter. Can you address that? As it pertains to this year? And, then, can you also address the fact that pressure pumping prices have been going up, by a number of your competitors, are you going to raise price? Have you raised price? And what's been your experience so far, year-to-date, in terms of net realization?

I think -- you know, we're in Appalachia and I think most of the people listening are probably familiar with this, but, their work year, they kind of have an operating cycle that begins sometime the second quarter and ends the first calendar quarter of the year. So where we tend to see the pricing increases is really in bidding for that activity that's going to occur in the late second quarter, going into 2005. And, yeah, they've been achieving price increases, you know, similar to pressure pumping companies in other parts of the country.

In terms of second quarter seasonal decline, we think that it's going to be less dramatic this year than it is in some years. To date, weather has been helpful, the demand up there has been strong. And, you know, the thought that we could, you know, have somewhere in the 1500 jobs-range in the second quarter, you know, 14-1500, would make some sense to us. It is -- it's very early in the quarter to know, so far, things look good. Do you have anything to add?

No. I think you're exactly right. We're going to be stronger than the second quarter last year, for sure. And I -- and, again, it depends, just depends on the weather. We're actually pretty much booked on our fracking up there right now. You know, so, there's -- it looks really strong, Kurt, and, again, it kind of depends on the weather. The weather is really kind of getting dried up in some areas where we're going back to work already.

Okay. One final follow-up. You know, regarding the dividends, and I know it's an issue you guys have been debating for quite some time. The question I have regarding the dividend is, sometimes when companies institute a dividend, they basically signal to the market that they have -- really don't have any good re-investment opportunities in their own core business. Did you address that?

Kurt, I've heard all of these questions and I'm a little confused, they're all coming from analysts that have models that show the kind of cash we'll generate this year. I guess I've been a little confused about the concern. When, you know, our management and directors were looking at this, we're sitting here with nearly $100 million in cash and we're going to generate a lot nor over the next 12 months.

I wasn't concerned about the dividends, I was just kind of questioning, sometimes people -- companies institute dividends they signal to the market the re-investment in their own core business aren't all that attractive.

Actually, Kurt, why think the opportunities are possibly getting better at this point. We're very, very optimistic about that. I mean, the kind of push and pull, you know, in our Board was, do we want to give back some money to the shareholders? And, at the same time, do we want to leave enough dry powder for the possible acquisitions that we think are out there. And we thought that in effect, we managed to do both with the plan we put forward to give back money in the form of a dividend, and at the same time, pave the way for continued acquisitions. You know, as you know, the company, at this point, has gone from 300 to 360 rigs. And we've put a lot of money into our subsidiary business, pressure pumping, all over the last couple of years and and we think those are opportunities and made acquisitions as well. We think there's plenty of opportunities and we think the plan that was put forward by the management with the Board's obvious support gives us the opportunity to do both.

And gives you an opportunity to pitch your stock to income investors, as well. I do applaud you on the effort.

Thank you. Kurt, you know, we said to people before, you know, we look for opportunities to buy rigs, and if we can't buy other people's rigs, we look at buying our own rigs and you do that through stock buy-backs. Putting this dividend in place doesn't preclude that opportunity, too. While we believe we're going to build a lot of cash over the next several quarters, you know, for either possibility. Those are all, we think, good use of cash for the shareholders. Great, thanks, appreciate it.

Our next question from Waqar Syed with at the time Petrie Parkman, please go ahead.

Gentlemen, could you comment on the business with what you see in terms of activity levels and margins.

Which businesses?

The drilling fluids business?

We're seeing an improvement in the drilling fluids business, both in the south Texas onshore and offshore. And we are cautiously optimistic going forward that that's going to improve, particularly the offshore market. And we think we'll have a better year going forward than we did, even the first quarter, if everything pans out like we think it is going to.

And, also, some of your competitors are moving some rigs into Mexico, are you considering -- do you think that market -- will you attempt to go into that market, as well?

We have been bidding in Mexico, and we've not been successful, the people we're bidding with is not successful, and we're continuing to watch the market and it's a real positive, for the industries, regardless of who takes the rigs out of the U.S. market and into Mexico. We are still bidding down there and with we think it's going to be over the next few years, probably going to be a real marketplace for the rigs out of the U.S.

And besides Canada and Mexico, any other international market that you may -- may consider in the future?

Well, right now, we're not considering any of them. We pretty much got to drive to where we're looking at right now, and we're not planning on going across the water to go anywhere. That doesn't mean we wouldn't do it some day. We've looked at some opportunities and we just felt like the price was too high and put too much risk for the shareholders and we think we got a lot to do in North America as far as being beneficial for our shareholders. Thank you very much.

Thank you. Our next question comes from Marshal Adkins with Raymond James. Please go ahead.

What a novel thought, giving money back to the shareholders! Cloyce, quick question for you. I'm kind of reading between the lines on this lack of margin growth, and it seems you geared up or crewed up for a half dozen rigs or so and the rain whacked you and you had to spread the cost over a fewer number of rigs. Am I reading that right? Is that kind of what happened here?

I think it's part of it, Marshall. You know, rain certainly hurt news the first quarter as much as I've seen it in the quarter since I've been in the business. You know, whether you listen to all of the call or not, that raining every week, once a week, it really, really hurts. Because it doesn't let -- about the time it's dried out to go to the location and start to move the rigs, it rains again. We've been affected by that for three months and we've actually had a little bit this month. We just had a big rain this last weekend and pretty much all of our market areas and we've had rain days going on here in April. So it's really hurt as much as I have ever seen since we've been in business.

I know that's right. I haven't got my pee wee games in yet!

Mark, quick one for you. You know, we talked about the new national oil rig, probably cost, when you outfit it, more than $7 million a copy. Let's say it's 9 or 10 million, just to pick a number. Today your margins are around $3,000 a day. What kind of margins would you want to see before you start to committing money to buying those kind of rigs?

It seems, Marshall you need $8-10,000 a day margin before it makes economic sense. Because if you take, say, if you make it $10,000 for 300 days it's $3 million. You would be looking at assuming a $10 million rig and assuming no taxes and assuming no interest, you'd be talking about another three, plus, year payback. $8,000 a day and $2.4 million, you'd talking about a four-year payback without, you know, interest and taxes, under better conditions than anybody has ever seen in the land drilling industry for four consecutive years. So, you know, strikes me that even with the announcement of the lower priced new rig, it still seems to me that it -- the new build economics are not with us, and if we get to new-build economics we'll be generating such significant income per share, that it will be an interesting conversation.

That's kind of where my numbers come out. I just wanted to hear from you. Last question, John, obviously, the visibility once you get out to Q3 and Q4 diminishes dramatically, ballpark, we're kind of plugging in another 10 rigs a quarter after Q2 for you guys, is that out of the ballpark? Do you think that's -- makes some sense?

We think that makes some sense.

Good. See you guys, thanks.

Next question?

Thank you. Our next question in Matt Comlin with Weadon and Company. Please go ahead.

Hey, guys. Wanted to check on the integration of Timbersharp. You acquired half-way through the quarter, adding an average of what, 9 marketed rigs to your quarter, the incremental increase in rig count for the U.S. was -- only went up by four. Is that all rain or was there any, you know, push back either from crews or customers about the continued consolidation in west Texas?

Just to clarify the facts.

Sure. I think the impact of Timber on our rig count for the quarter was six rigs. Marketed rigs, I think it adds 13. Okay.

The actual average fig count impacts for Q1 for us was six rigs.

Okay.

To answer your question, integration has gone really well and we haven't had any problems at all. Glenn's folded Timbersharp in with people at Timbersharp and we've had no problems whatsoever with that part of it the equation. Don't think that there's been much change. I believe we had -- I'm trying to think how many of the Timbersharp rigs we had working. I think when we merged together there was 10. I think there's 11 Jody is it telling me, and I think we have nine right now and we're actually repairing a couple derricks that have jobs to go back to work and the same 11 will be working. And weather has impacted them, some, too.

Okay. Great. Great to hear. Also, looking at the -- at the drilling operating income, it went up sequentially, about a million and a half dollars from the fourth quarter to the first quarter. The DD&A went up by about $3 million from quarter to quarter. I understand the fourth quarter was a little low and maybe we have Timbersharp production incorporated into the first quarter number. Is there anything else going on there with the sequential increase and DD&A?

No. I think you should look -- when you -- and your comment is relative to total DD&A or drilling?

Total. I didn't see the breakout of drilling DD&A.

In the case of Timbersharp and the E&P, that's certainly going to add to the DD&A we see in the company. So as I recall, yeah -- okay. Timber was half a million impact for the quarter. Which, obviously, wasn't there in prior quarters. You know, we get a little bit of creeping up of Universal because we continue to invest additional capital there. And of course there was the Timbersharp rigs that were in the company for half a quarter.

Okay. So the half million was that you first said was for just the production?

Yes.

Okay. Okay, great, thanks.

Thank you, sir. Ladies and Gentlemen, if you have an additional question, please press the star followed by the 1. Our next question comes from Brandon Elliott with Breeze Associates. Please go ahead.

Good morning, gentlemen.

Good morning, Brendan.

Could you guys, on the margin, do you have a dollar figure as to what -- or an estimate on to what the weather cost you? And maybe give us a little better idea of what the cash margin looked like as you came out of the quarter?

You know, Brandon, unfortunately, on the weather, you know, it's just an impossible for us to come up with a good number and give you a little flavor for some things that we found. We, you know, when it hit in January, February, the accountants were scratching their heads and saying what does this do? We tried to quantify it but we didn't feel we came up with an accurate number.

But we found, you know, many situations, like, you know, a rig that would normally move from a day and a half, spent five days moving. And, you know, we thought our information was bad. So we called the appropriate people that knew the facts, and they'd explain that, you know, raining over the time period and they're trying to move the rig. You know, it's slippery, you know, hard to run the equipment. You know, to stay safe and do what they need to do, it just takes longer. Including potentially just shutting down the move in the middle of it.

You know, could that be, you know, $100, $200 a day in costs? It could be. We don't really know, to tell you the truth. We know our costs went up for the quarter.

And you know you get a little impact from FICA and Unemployment and other things the people talked about. As you run more rigs we still believe that our costs will begin to decrease. So, like I said, maybe $100 or $200 a day, but we really don't know.

How about Timbersharp, much affect on the day with those rigs coming in?

Wouldn't think so, at all.

Okay. Great, thanks, guys.

Thank you. Next question from Lee Shellsinger with Hibernia Southcoast. Please go ahead.

Brandon just answered my questions and I just wanted to congratulate you guys on the dividend. I think it's great to give it back to the shareholders. My questions were answered, thank you.

Thank you.

Thank you.

Thank you, sir. Gentlemen, at this time, we have no further questions.

Thank you everybody for the participation in the call and we look forward to speaking with you at the end of the next quarter.

Ladies and Gentlemen, this concludes the Patterson-UTI Energy First Quarter Earnings Conference Call. If you would like to listen to the replay of today's conference, please dial 303-590-3000 and you'll need to enter the passcode of 576236 followed by the pound sign. Once again, thank you for participating in today's conference. You may now disconnect.