Patterson-UTI Energy Inc (PTEN) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Patterson-UTI Energy fourth quarter earnings conference call.

[Operator Instructions].

As a reminder, this conference is being recorded today, Thursday, February 17, 2005. I would now like to turn the conference over to Geoff Lloyd on behalf of Patterson-UTI Energy. Please go ahead, sir.

Thank you very much. Good morning. On behalf of Patterson-UTI Energy, I would like to welcome you to today's conference call to discuss the results of the 3 and 12 months ended December 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 Wilmer, Senior Vice President, Corporate Development.

Just a brief remainder that the statements made in this call, which state the companies or management's intentions, beliefs, expectation, or predictions for the future are forward-looking statements. It is 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 the demand for the company's services and the associated effect on day rates, rig utilization, plan capital expenditures, adverse industry conditions, difficulty in integrating in 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 SEC filings. Copies of these filings may be obtained by contacting the company or the SEC. Now, I would like to turn the call over to Mark Siegel for some opening marks to be followed by a question and answer session. Mark?

Thank you, Geoff. Good morning and thank you for joining us today.

I hope that by now all of you 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 am pleased to report that this has been a very successful year for Patterson-UTI Energy and its shareholders. During 2004, we achieved a number of company milestones. We achieved a new company record for annual revenue and crossed the $1 billion level. We obtained a five-year $200 million unsecured revolving credit facility. We completed the acquisition of Timber Shop Drilling (ph) and entered an acquisition agreement with Key Energy Services for the purchase of 35 land drilling rigs, which acquisition was completed in January 2005. With these acquisitions, our fleet has grown to 396 rigs.

Additionally during 2004, we initiated a quarterly cash dividend and split the stock on a two for one basis. Today, we announced an increase of the quarterly cash dividend on common stock to $0.4 per share from $0.02 per share. The next cash dividend is to be paid to holders of record on February 28, 2005, and paid on March 4, 2005.

Cash increased in 2004, as we ended the year with $112 million in cash and cash equivalence and $244 million in working capital. The strength of our balance sheet supplemented by our new $200 million revolving credit facility allows us to continue to pursue opportunistic acquisitions as well as activate idle rigs and pay cash dividends to our shareholders.

Before looking forward, I would like to highlight some key points in our current financial results. Net income for the three months ended December 31, 2004, increased by 88% to $38.5 million on a 38%increase in revenue. Net income for the year ended December 31, 2004, increased by 93% to $108.7 million on a 29% increase in revenue. Our results continue to demonstrate the considerable earnings leverage we are able to achieve as demand for our services increases.

Our contract drilling operations this past quarter continue to reflect the long-term upward trend in demand, which started in second quarter of 2002. During the fourth quarter 2004, we averaged 229 rigs operating, including 216 in the US and 13 in Canada, compared to an average of 216 rigs operating, including 208 in the US and 8 in Canada for the third quarter.

In the fourth quarter, we also achieved sequential quarterly increases in our average revenue per operating day to $11,200 from $10,400 and our average margin per operating day increased to $3,890 from $3,320. I believe that we at Patterson were among the first to characterize the upswing that started in 2002 as a slow and steady up trend that we expected to continue for a long period.

Last quarter, Cloyce who has more than 40 years of experience in the oil and gas business stated, "I have not seen the business fundamentals this strong since the 1970s. In light of the existing shortage of natural gas production in the US and apparent capacity risk constraints on crude oil in the world, I expect demand for our services will continue and gain strength going forward." That prediction proved correct for the most recent fourth quarter and looks to be an accurate prediction of where the market is currently heading.

Now although it is early in 2005, based on what we see currently, we believe that the rig market has taken a dramatic step to the next level. In early January, as our customers started to implement their budgets for 2005, the shortage of available rigs in the market has become apparent. With the increase in demand, we expect to see average revenue per day move to $12,000 or more per day in the first quarter.

Demand for rigs, which stepped up in January, has further increased in February. To meet this demand, we expect to activate approximately five rigs per quarter in 2005 and we in fact, activated five rigs in the fourth quarter of 2004. This measured approach allows us time to prepare rigs properly for activation and to train crews, which permits us to maintain efficiency for our customers. We also expect our market share to increase, as we own a large portion of the remaining stacked drilling rigs.

Finally, I would like to point out that our earnings capacity has grown significantly over the last several years. We have acquired 121 drilling rigs from January 2001 through January 2005, an increase of 44% and we currently have 396 rigs, including the 35 rigs recently acquired from Key. Of interest, we reached annual revenues of $1 billion on an average rig utilization of only 59%, thereby allowing substantial further growth.

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.

[Operator Instructions].

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

Good morning, guys. Fabulous quarter.

Thanks, Jim.

The difference between your increase in revenues and increase in margins, is that third party or increased costs? Can you tell us what the actual day rate improvement was and what your cost increase was?

John, you want to handle that?

Sure, I think that it is in the tables, Jim, but --

I'm sorry, I'm in San Francisco today. I came to listen to Marshall talk. I'm going to try to give religion.

$800 a day round numbers increase in revenue per day and about a $200 increase in cost per day --

What was that cost that increased cost?

A combination of factors. As you know from the monthly rig reports, we experienced a fair amount of rain in the quarter, which means that you have crews sitting waiting to move. It was, as I recall, about nine rigs in November and several rigs in October. So that would be one factor and another is some labor costs are going up and terms of the way we schedule people to have enough people to work the increased rigs. That would be the primary thing.

Moving your mobilization costs on rigs from $60,000 to $120,000, will that help offset some of that going forward or if the weather was the same or can you talk about those price increases and what impact that is having, where that falls on your income statement?

I am not -- could you give the beginning of the question again, I am not sure --

Yes, -- before you used to charge $60,000 for a mob and it is a $120,000 for a move?

It depends on how far it is moving, Jim. We didn't just go up and double the price on the same move, did we?

Yes, pretty much, but then you raised your day rate from 10 to 12 - like I said, good quarter guys.

I am just curious I know where the day rate part goes. I'm just curious as to where in your revenues or how your business is doing, I guess, Cloyce, from the trucking side --?

Trucking is doing well and we need more trucks. Because of the shortage of trucks, we have rigs waiting on trucks in all areas all the time and we are trying to help that problem by adding additional trucks, but it takes time and a lot of money. And that is the reason that we have to go up on the day rates that we charge on moving because on new tandems by the time you get in the field it over $200,000 and you got to pay for that stuff.

Don't get me wrong. We took the rig. So the prices are going through.

Jim, your question on location, trucking is part of average revenue per day. That's the -- that's the day rate you are charging your contract and then the average revenue per day reported. In effect, disconnect there relates to trucking and any other items that are reimbursable for the customer and that difference is primarily mobilization cost.

That helps knowing those margins are at least, you know, probably keeping pace.

One of your competitors announced on their conference call that in the first quarter, they have payroll taxes and property taxes and they would expect that their day rate would still increase significantly, but the costs may go up $150 to $200 a day just for the first quarter. Do you guys see that in your business?

We estimate the impact from FICA that occurs at the beginning of the year to be more like $50 or $60. There's no other first quarter piece that I'm aware of that would have that kind of impact on us. On the other hand, I think a few costs per day will go down quarter to quarter from the fourth. So I think our guess is costs per day will be very similar to the fourth quarter and if there were any additional increases it would likely relate to field payroll, which if that occur, we think we could pass that along through higher day rates. So, in effect, I guess Mark's comment about the average revenues per day going on to the $12,000 or more, we would think that increase in effect would all drop to the bottom as to increased margin.

Okay gentlemen, I appreciate it. I will let other people ask.

Thank you. Our next question comes from Kurt Halleed RBC, please go ahead.

Good morning.

Hi, Kurt.

The selection has finally arrived?

We think so.

Did I hear you correctly say the bulk of the $800 a day rate increase in the first quarter may drop to the bottom line?

That would be our guess.

Thanks. I don't know if I have any other questions. Looks like the market has finally come around for you. In terms of the use of cash, you raised your dividend here again after instituting one last year. Dividend versus share repurchase, how do you guys about that decision?

Kurt, we actively consider that on a regular quarterly basis with our board. As you know, we have a buyback in place. The buyback was instituted to be more opportunistic than to be a structured reduction in capital, but that is certainly under discussion at our board and something, which we will consider as the year progresses.

Then as we move forward into the second quarter with the drop off in the Canadian rig activity, I would image that has some impact on the pressure on margins sequentially. Do you think the US market is strong enough now to offset completely the seasonal drop in Canada or would you expect margins to come down sequentially in the second quarter versus the first?

I think we would expect them to necessarily go down, but the rate of increase, we would expect to drop. Canada contributes about $200 a day on our overall margin, and when you get to the second quarter, it in effect becomes kind of a non-player because there are so few rigs running. So if you were otherwise thinking of, you know, first to second quarter, if you are expecting a $500 a day increase in the US then the Canadian impact would kind to mute it pull it back to $300 and of course when you get into the third quarter and Canadian rig activity goes up, you get a lot of that back. So, in effect, I guess, we would think that margin would go up first to second quarter just less than it would have been on the US.

Understood. And then, in terms of you said you are going to activate five rigs a quarter as long as demand warrants. Did I understand that correctly?

You did.

How are your market shares going up vis-à-vis, say, Neighbors when Neighbors is activating rigs about the same pace? How does that work?

We think that the only two players really that have significant capacity and ability to do that are ourselves and we understand Neighbors. But we know that we can do it. We don't know that anybody else and you know we can do it and we understand Neighbors can do it as well, but those are the two players.

Then in that context, what is your CapEx for the year?

CapEx for the year, you know it is clearly dependent on demand of our customers, you know, we look that every quarter. We have not looked up the first quarter at this point and the thought for first quarter is with bringing out five additional rigs with the total including the other businesses, EMP, pressure pumping, etc., would be about $50 million.

$50 million, just like a $200 million run rate for the year?

I guess that would depend on further demand could increase it.

Lastly, stock option expense. Could you give us an update on what's going to happen with that with you guys for the second half of the year?

Yes, we have looked at what is out there so far and accountants seem to be focussed on other matters right now, but our estimate of how it impacts us is $0.02 per share for the current year. That obviously will occur in the back half of the year. You know calculations driven by options as they vest and the board really, back in 2003 and again in 2004 and even larger scale effect moved from stock options to restricted stock and when you see our kind of quarterly G&A numbers, they have been higher in that time period driven partly by the impact of the expense from restricted stock. Therefore, we have very little overhang at this point related employee stock options. Looking at 2006, I would guess for the year, it would again be about $0.02 per share.

Okay and then lastly, the re-activization cost for these rigs bring it out -- cost per rig, what kind of cost per rig you are looking at?

About $3 million including drill strength.

Is that continuing to increase or fairly steady state?

It has been pretty steady versus last year with drill strength, etc.

How much more drill pipe do you need?

We will get back in the food chain and we will call the food chain a drill pipe and we are going to be ordering about 2,000 joints a month.

That is for our activation of our rigs and replacement of our real strength that we are wearing out with the number of rigs we have running.

Excellent. Thanks a lot, guys.

Thank you Kurt.

Thank you and our next question comes from Henrion Jerome with Credit Suisse First Boston. Please go ahead.

Good morning. Cloyce, I was wondering if you could give us some insight to what you are seeing in the Permian, the Rockies in south Texas in terms of activity and rates?

What we are seeing everywhere is a tremendous demand for our equipment. It does not matter, which area you pick and as I said, last year, it is continuing to increase and at this point, I have never seen the demand like it is. It is the day and I think it has a lot to do with a lot of the areas changing from the major oil companies to the larger independent oil companies where they are buying this, you know, buying production with development opportunities and it's not only in the Permian, but it is if the Rockies and Oklahoma. It is everywhere. I have never seen the demand for the equipment as it exists today and I think it has a lot to do with the higher commodity prices.

I think people are getting more comfortable with the high commodity prices and they believe they are going to stay there and probably the sensitivity that they are running on the economics is getting a little higher, so that makes us more, you know, more prospects are viable to drill with higher budgets, so we see tremendous demand in every area.

For the 20 years old rigs, you plan on reactivating this year, is there a particular market that you think that you will move the rigs to or it is just a kind of across the board everywhere?

I think what our salesmen say they are having to fight internally for the rigs because every area wants the rigs, both East Texas, South Texas and the Rockies, particularly the Pan Oklahoma and Texas are needing rigs, but we have them pretty much split up. We will move some in to the Rocky Mountains, some in to East Texas and a couple I think, I don't have that list, -- we have an area projected for them all right now, but it certainly could change as the year goes by depending on where the greatest demand is.

Okay. Second question, pressure pumping. There is a larger at least than at least I expected seasonal decline in both jobs and margins. Now you are generating over a 30% return on capital so not all is bad, but I was wondering if what you are seeing in that side of the business?

Well, we are sort of seeing the decline that you are seeing, but a couple of things that we attributed to is part of the demand is still there. We have had a kind of a warm winter and when you get muddy roads in Pennsylvania, it is truly difficult to move and West Virginia. Another thing that we saw a couple of years ago that when the price of gas go high, nobody wanted to stop for anything, hunting season or holidays, I think people are more accustomed to the higher prices. They think they are going to be there for a while, so we are probably back to normal activity in the Appalachian Basin where they shutdown for hunting season and holidays and we didn't do that for a couple of years. But it is going back to more normal activity.

Okay, last question. CapEx plans for 2005, any indication there?

No, just what we said earlier. We look at it kind of quarter by quarter. Things can change in our business, demand could go up, and the guess for the first quarter would be about $50 million for all businesses including the reactivation of five rigs and then we will readdress that in April.

Okay, thanks guys. I appreciate it.

Thanks Henrion.

Our next question come from Jim Rollyson with Raymond James. Please go ahead.

Good morning, guys. Nice quarter. Just a couple of questions, you talked about the rig reactivation program. What your usual running about 265 rigs right now and you are planning up putting out five a quarter, how may rigs, Cloyce or Mark, you think you guys you have that are stacked and that will fall into that $3 million a rig category and beyond that what do you do with the rest of the rigs?

Jim, we think we can continue to do this kind of measured approach for several years of bringing out this kind of 20 rigs and we think they could be the next 20 rigs a very high quality, significant horsepower rigs. I'm not going to get into too many specifics for competitive reasons but they are really first-class rigs that are perfectly situated and perfectly suitable to the activity level in the market and in fact, we can see doing that for two years or more without any hesitancy whatsoever and maybe even at an accelerated rate depending of course on what the market offers for us. So the assurance we do it that we can see ourselves going -- you said 260, I feel more like we are running close to 280 rigs at this point because at any given point you are seeing account of 260 or 270 you are not seeing the rigs that are down for repairs, for weather, for all of those kinds of things that are really hard to in effect measure. So, 280 plus, in effect, 20 additional this year, 20 additional the following year, put us kind of at the 320 or more level. There are more rigs that we could then bring to the market, but we have not really gone out and looked past that, say, next 40. The one thing I would observe, Jim, and this kind of the way the world works, is that in a tight rig market customers find themselves accepting a rig that they might have said to us before they wouldn't have accepted. They will take an 800 horsepower where the year before they said they only could do the job with a 1000 horsepower. So the real interesting thing about is it is a moving target on, in effect, what number of rigs the market will absorb at any given point.

Highly confident in effect about the next, say, 40.

All right. In this business nobody has talked about, drilling and completion fluids, obviously offshore activity, globe lease, certainly strengthening in deep water activity strengthening. Your business seems to be strengthening, what is your outlook for that business in 2005?

Internally we are really just assuming it continues at the run rate of the third and fourth quarter.

So, same kind of margin and everything?

Yes, same kind of revenue.

It is clear Jim though as does the gulf goes, so does our business.

Last two, just housekeeping questions. SG& A for 2005 with the fourth quarter kicking up and obviously Key, whatever increments you get from Key's rigs in the first quarter, what kind of run rate do you think G&A is?

I guess, it would be similar to the fourth quarter and first around $9 million and then as we mentioned earlier, we moved to restricted stock, which has an impact on the G&A number and second and third quarter, maybe those two bump up each to $9.5 million and then fourth quarter somewhere around $10 million. So our guess for the year will be somewhere around the$38 million mark.

All right and finally tax rate assumption for 2005?

We would use 37% as we saw this year and actually the prior year, it came in just a little below that and that may occur again in 2005, but the purposes of modeling our price 37% (indiscernible).

Great. Thanks guys.

Thank you.

Our next question from Geoff Kieburtz with Smith Barney. Please go ahead.

Thanks very much. Just to clarify on the comment made before on the 280 rigs Mark, is that the number of actual individual units that have been active in the past quarter?

To give you an example Geoff, the daily rig counts could be volatile due to moves, weather, and all the things Mark mentioned. You know, over the last, even in this current month, we are seeing rig counts on any individual day in the 270 to 275 range and I don't think we ever have a day where they are all running. So our guess would be right now, there are about 280 that are active, give or take two.

Okay, so we know what the average rig count was during the quarter or any given month but there's actually something on the order right now of 280 units that are worked over the recent past?

Yes, last few weeks.

We have 280 rigs that have crews.

That's exactly what I was looking for. Okay. Coming back to the revenue per day projection, I just wanted to understand, John, you talked about the second quarter about a $500 increase in the US being off set by $200 missing in Canada. Just want to make sure I wasn't misinterpreting that comment. Are you expecting the rate of the US day rate increase to moderate as you get into the second quarter?

Actually, that was intended to be an example. As with the past, we really try to look out one quarter and we feel like we have decent visibility that far out and leave it to the analysts to draw their conclusions about quarters beyond that. So the example was if you were assuming $500 in the US because the Canadian utilization drops off that would in effect offset some of the benefit and bring you back to $300. In that case, if you think that rates would move up $1,000 in the US in the second quarter then what we think we would ultimately put would $800 because of the Canadian impact. But I wasn't meaning to suggest a margin for that quarter.

That's why I wanted to ask the question. But let me take off from that. We have seen the revenue per day up $800 in this fourth quarter. You are giving a projection of $800 in the current quarter. With what Cloyce has said, I'm hard-pressed to think of any reason why that would slow down?

I don't think it's going to slow down. Certainly from what we are seeing and the demand that we are getting for our equipment, I would certainly would anticipate that as the day rate increases it will lend into our fleet it should show some increase because you know they don't just all go up the same day and they go job to job and at this point we have no time contracts, so it is a moving target.

Geoff, the other factor of course you know we are cost at 20% of the market, so there 80% of the market that is controlled by our competition and in any given day, our day rates are affected by what they do as well. So we can tell what you we see in terms of demand, but can't necessarily be too clear about the pricing.

Yes, I understand, but as you pointed out before, there's nobody else with any spare capacity or really one other major party with significant capacity, I think that's really all I had.

Thanks Geoff.

Thank you. Our next question comes from Ian McPherson with Simmons and Company. Please go ahead.

Good morning. Can you walk us through what amount of your reported active rigs in January and February to date reflect, the 25 active rigs from the Key acquisition?

Yes.

I mean are all 25 of them included or is there only a partial contribution from those at this point?

Well, certainly we own them all and they are all marketed. I didn't look in February to see how many on average the Key rigs were running. On any given day, it is somewhere around 20 to 24 of them. I know in January that the Patterson-UTI growth in US rigs was from 220 to 230 and that the Key contributed I believe was 11 or 12 to that. I did not, frankly looked at that for February. I only did for January because they are not all our rigs, marketed by our people, working at our contract rates under our methods, so it is not relevant to any more so for the month, we did happen to look at it, for the month of January, so we could help with that.

Do you see a significant sort of divergence in cash margins in terms of the way those rigs influence your overall cash margins in Q1 and then as you sort to progress into your own negotiated projects in Q2, how that might change or do you see that is not significant to overall cash margins?

I think it will be significant as we move them up to our what we call the Patterson standard. Certainly we had to finish some contracts that Key had made that were a little less than what we normally would charge in certain areas and I think you will see those switch over to our, you know, be equal to what we are charging the other customers in that area.

And that is ahead of us quickly, right?

Certainly it will start happening at the end of this first quarter and should be basically over what would be in the second quarter, be just like our rigs.

Ian, there is going to be some impact in the first quarter where in effect, our average will be muted somewhat by existing contracts we took over and completed. But we don't think that muting will continue into the second quarter.

Got you and then finally, the 10 remaining rigs that are not included in your active count from Key, are those, do you include those in that sort of pool of 40 that you are talking about that are reactivatable for around $3 million?

It is the pool. They are in the 396 total rigs of the rigs that we have identified to activate. None of them happened to be those 10. When those 10 might be reactivated, I don't know as mark indicated earlier, we look at that based on the demand of the market at the time we activate rigs. That makes sense.

Yes, in this part rigs and our people are just getting their hands around and handle along what they have got to do to the rigs, to put them out and none of the rigs that we have projected to come out this year are, none of them are the 10 that are Key stacked rigs.

Okay that is all I have. Thank you, guys.

Geoff, any other questions?

Yes, our next question is Pierre Conner with Hibernia South Coast Capital. Please go ahead.

Good morning everybody. I'm clearly with you on the demand exceeding the supply here for the rest of the year. My question then a little bit more on the supply side response, and you all discussed your availability to bring out competitors. Just your perspective on any other supply other than the spare capacity out of your or Neighbors stacked rigs, timing and/or economics. I would kind of get your thoughts on Cloyce if that you or the best person to address that.

I will be happy to talk a little bit about it. Certainly we don't see any economics to build a new rig at this point. Maybe some day, it will be. But itis certainly not on your radar screen yet, anywhere close, but as long as we can bring out rigs in the $3million range and new ones cost $10 million to $12 million when you get them in to the field, I don't think that would be a competitive thing to do in the foreseeable future. Certainly that could change. As far as other rigs coming out of the marketplace, certainly there will be a few scattered rigs, but it will be an insignificant number in comparison with the overall number of rigs working in the US today.

Okay. Cloyce, this is maybe more of a gut feel question, but from - you mentioned about where your customers see the price and the commodity and their opportunities. Do you sense a mix change in the risk profile of what they are drilling, i.e., is there more a shift away from development more into exploration or same mix?

I think there is a mix -- in fact I would think it would be more development drilling than it is exploration drilling, if you believe the commodity prices or going to continue to stay high. I know I see rigs running in the oil fields that I have seen rigs running in there years. And I think it has to do with they know oil is in place and you can drill them down smaller spacing and if you get $45 a barrel for your oil it becomes economics. So I see a lot of that going on particularly in West Texas and I just think that you are going to still need more development -- it unbelievable what becomes economic to drill when you have higher than $5 gas and higher than $40 will.

Got that. And the last one is around efficiency. Throughout this period, maybe the slower response has been efficiency gains with efficiencies, mod improvements, rig efficiencies, moving, etc. What do you see looking in the crystal ball on efficiency?

I think we are getting more efficient in all categories, rigs and I now think that the way that not only the MP Companies, but the drilling contractors have responded to this, long continuous up turn that started in March of 2002. It has allowed us to continue to be far more efficient than we were in the last upturns and you mentioned big technology and it is changing and it allows us to drill in areas where there's going to be thousands of wells drilled and the faster we can drill them for our customers the more economics -- the less barrels it takes to pay for it with the higher commodity prices.

Got, creating more opportunity.

Exactly.

Very good. All the rest of them have been answered. I appreciate it and I will turn it back guys.

Thank you.

Our next question comes from Judd Bailey (ph) with Jefferies & Company, Please go ahead.

Thank you. Good morning. Pretty much everything has been asked. Just one quick modeling question. What about a run rate or D&A on a quarterly basis?

For depreciation? First quarter, I would guess somewhere around $34 million and then factor in CapEx estimate for the year would take it up some as the year progresses, I would guess the additional rigs being activated. For the year, somewhere maybe in the $150 million range.

Great. Thanks.

Thank you. Our next question comes from Miles Lich with Peters & Company. Please go ahead.

Good morning, guys.

Good morning.

Just a quick question for you. Looking at where your average margins hit back in 2001, you were closer to about $4,600. What do you see? Do you see getting back to those levels in 2005? Do you see that in 2006 or do you exceed those numbers? Where is your head at on those?

Again, we tend to have not to look out beyond the current quarter. But based upon what we have said so far about the first quarter that would put us somewhere $4,700 a day or more. The peak margin one last time I had was about $5,700 or $5,800. We are dramatically off that, so if demand continues and pricing continues to move, we could eclipse that this year. But I don't think that we have a view on whether that will happen at this point in time.

So, things look pretty strong, I guess, in the US. Do you look on the Canadian side things have been running extremely strong for a year and a half or two years, we are obviously at a peak level right now. Do you look at further expansion in Canada or do you keep your fleet where is at?

I think we will always be considering the opportunities to have incremental rigs in Canada frankly. The issue for us is always which day rate we think will give us a superior return for our shareholders. Obviously we appreciate the fact that the Canadian day rates and margins are at this point ahead of US ones, but you have to of course take a slight discount for the fact that there's a seasonality to the Canadian operation that is not true for the US in terms of the break-up period. So, we are always making that evaluation and considering whether moving incremental rigs in Canada. As you know we put an additional rig there last year and we would certainly consider. That is about as much as I would like to say on this subject.

I guess another issue that crept up is as the rig count starts to push 1,300, 1,400in the US, people issues. The Rockies is a tough area to get people. Where do you hit the wall? I guess you have 20 rigs coming out. So looking at your staffing levels now, where do you see hitting the barrier?

Well, you know, I don't think we will hit a barrier. I just think it takes time to train and I think that is what has been so different about this up turn is the slow methodology way - rig counts, this is a three-year up turn and looks like it may go -- our visibility is not too far out, but it wouldn't surprise me if it goes several more years and it gives us time to train people and a lot of our people are young guys and you are exactly right, the Rockies is a difficult place, but I think that industry in the Rocky Mountains was decimated in the 1980s and now it is building back. It just takes time and I think we are doing it the correct way and it a very slow methodical trend and putting rigs out and that's what we are going to do.

So you don't see a hurdle there. It basically you have the rigs planned to come out and staffing just follows suit?

If you count, look at it the way we look, we went from 130 rigs to 280 rigs, the big hurdles were in effect the doubling of our business at this point the incremental in effect under 10% increase of rigs is much, much easier to accomplish than what we have already been through.

I have been really pleased, as we have grown our fleet this time the overall efficiency of the fleet. We are drilling in some areas more faster today than we were when we started two years ago. So I think we have done real well in maintaining efficiency and I know it is difficult in a lot of places but I have been in the service business for 40 years and labor has always been the biggest single problem and it is a hard problem when you are slow and a hard problem when you have a lot of rigs. We just always have to work them. I don't think it is a big issue.

Okay, great guys. Thanks. Appreciate.

Our next question is a follow-up question from Kurt Hallead. Please go ahead. Mr. holly, are you there? Looks like he may have stepped away from his phone, we will go to the next question and it is a follow-up question from Geoff Kieburtz. Please.

Cloyce, I wanted to come back on visibility. You mentioned that you don't have great visibility right now, but I just wondered if you could characterize your conversation with customers. Have you started to have conversations about the potential work out a greater time horizon than say three or six months ago?

Yes, I think that's a fair statement that we are discussing that. There are some term contracts that are being made. We have not made term contracts yet. I'm certainly not saying we are not going to. But we are being asked more and more for term contracts. I guess what I said about visibility, I have never seen a downturn in (indiscernible) led with a commodity price downturns and if we believe that the commodity prices are going to stay oil between $40 and $50 a barrel and gas between $4.5 and $6 or $7, I think that we are going to see a long trend continue, but the visibility is about as far as you can see the commodity prices are going to do and that is anybody's guess. Right now, it is pretty apparent we might have crossed the supply-demand curve for crude oil in the world and if that's the case not only is it good from the crude oil perspective, but it is also good for the natural gas perspective in North America because at some point, they are going to crack the crude oil prices and natural gas. We had a decoupling in 2001 of natural gas prices that kind of went away of being valued at six to one ratio in crude oil. I think we are seeing that return to the industry. And if crude oil is short in the world and my guess is that we are reaching close to capacity of what we are able to produce just like we did in natural gas in the US in 1995. So if that's the case and we don't know that yet, I think that you could see a long, long trend of high commodity prices.

Could you discuss a little bit how you think about term? I mean, with rates going up as there are seems to be little or no incentive for you to start locking in, but how do you think about that? What would the condition be that you would start to consider going into term commitments?

Before we get to that answer, I just want to make one other, just clarifying comment. I think when Cloyce was speaking about the two commodities being recoupled, he wasn't necessarily saying it would be the same six to one ratio that we used to have. So we are not trying to suggest a specific coupled ratio, but that they may come back to being coupled. That is just a clarification. Second, going back to your term contract question, our thoughts on that subject are that if we can get to a point with our customers where we think that we can achieve a contract from both perspectives, which gives both of us kind of the proper upsides and returns, we will consider it. The other factor, of course, that we consider too is what our competition is doing because you can't operate any business in a competitive vacuum. You have to look at the competitive marketplace and make a judgment. Right now, we have not seen term contracts yet offered to us that are at levels that we think would be appropriate for us to take the contract putting aside all the questions about enforceability and so on.

Right. Is it too simplistic to think about it in terms of a margin per rig day or you know, I guess margin per rig day threshold that that starts to become interesting?

I think it is a more complicated question. Let me just give you a couple of particulars. What days do you get paid for. Who bears the responsibility for delays? Who bears responsibility for what kinds of delays? How do you play with weather? How do you play with repairs? There's a whole series of -- it looks kind of like binomial problem, but it is actually a larger problem than just Binomial.

Last question, really kind of - education, where are you getting people from that you are adding to your staff?

They come out of the workforce. We are trying people and it has always been that way and one thing that has happened in this upturn for our industry is the increase in the unemployment in the US. If you remember in 2001 the unemployment was the lowest in 40 years in the US and now it is back up to more normal, 5%, 6% and we just draw from that lower end for a lot of our employees. So, a lot of them are looking for work. And wages have gone up. In 2001, we had a 40% wage increase and at least we became competitive with Wal-Mart and McDonald, we used to not be competitive with them. We kept our wages so low so low so long that we could not compete in that market place. And years ago kids could come out of high school and work in the summer on drilling rigs and could make enough money to go to college for a year. Now we are back to that. They make more money working on a drilling rig than they can anywhere else for unskilled laborers. So, we draw from that market place. It no different than it has been for the last 40 years. The only thing is we have our wages up high enough now we can compete.

Thanks very much.

Do you have any further questions?

[Operator Instructions].

Gentlemen at this time, I show no further questions. I would like to turn the conference back over for any concluding comments.

Thank you everyone for joining us. We appreciate your support. Take care.

Ladies and gentlemen, this concludes the Patterson-UTI Energy fourth quarter earnings conference call. If you would like to listen to the replay of today's conference, please dial 303-590-3000 and enter the access code 11021632 followed by the pound sign. Once again, thank you for participating in today's conference. At this time, you may now disconnect.