Patterson-UTI Energy Inc (PTEN) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Patterson-UTI Energy's 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 anyone needs assistance at anytime during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, Thursday, April the 28th of 2005.

I would now like it turn the call over to Geoff Lloyd on behalf of Patterson-UTI Energy. Please go ahead.

Thank you. Good morning. On behalf of Patterson-UTI Energy I would like to welcome all of you to today's conference call to discuss the results for the three months ended March 31, 2005.

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 that statements made in this call which state the Company's or managements 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 impact 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 for some opening remarks and then some questions and answers. Mark?

Geoffrey, thank you. Good morning and thank you all for joining us today. We hope that by now all of you have had an opportunity to read our earnings release.

Before taking your questions, we 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.

In our late October 2004 quarterly earnings conference call, we said that the business fundamentals have not been this strong since the 1970s. We added that in light of the existing shortage of natural gas production in the U.S., and the apparent capacity constraints on crude oil in the world, we expected demand for our services would continue and gain strength going forward.

Furthermore, on our last quarterly conference call, we stated that as our customers implemented their 2005 E&P programs, the land rig market had taken a dramatic step to the next level as the scarcity of available land rigs became apparent. The results for the first quarter demonstrate the continuing accuracy of these assessments in three most significant ways.

First, our average rigs operating in the first quarter increased by approximately 15%, augmented in part by the Key acquisition which was completed in mid January. In the U.S., we operated 248 rigs in the quarter as compared to 216 in the prior quarter.

Second, as the scarcity of available rigs became severe and ever more apparent, average revenue per day increased to $12,490, a change of $1,290, or 12% as compared to the preceding fourth quarter 2004. More importantly, average margin per day increased to 5,070, an increase of 1,180, or 30% as compared to the preceding quarter.

And third, most significantly, our earnings tripled in the first quarter on a 60% increase in revenue, again, demonstrating our premier operating leverage position.

As 2005 has unfolded, we have seen demands increase in each month. Looking ahead, we see demand for rigs increasing in all of the areas in which we operate.

In fact, our customers' greatest concern centers on the availability of rigs so that they can be assured of having rigs available to meet their drilling program needs.

Currently, we are seeing increasing customer interest in long-term contracts at higher day rates. At this time, virtually all of our rigs are contracted based on the spot market which has been moving up at an accelerated pace and is expected to continue.

We are, of course, willing to consider such long-term contracts when they are in the best interest of both our customers and us. We do know that entering into such contracts causes immediate day rate increases, but often limits upside during future quarters, and especially so in periods of heightened demand.

Further, in an effort to meet this heightened demand, we have accelerated our measured rig activization program and now expect to activate a total of 30 rigs in 2005, of which seven were activated in the first quarter. For our customers, we believe that our rig refurbishment program offers rigs that have the same drilling and mobilization capabilities as new rigs, but are available far sooner.

Moreover, from competitive standpoint, this program enables us to increase our market share by putting out more rigs quickly and to do so at a lesser capital cost.

As for current activity, we estimate that our operating rig count in the U.S. will increase to an average of 256 rigs in April and that our average Canadian count will decrease to four rigs reflecting the effect of the spring breakup. In the second quarter, our total rigs will remain essentially similar to the first quarter with the seasonal decrease in Canada being offset by an increase in U.S. land rigs.

As is usual, we expect that the Canadian activity will pick up again in mid June with the advent of summer.

For the second quarter, despite the slow down in Canadian activity, we anticipate that average revenue per day will increase to slightly more than $13,000. We also anticipate that average margin per day will increase to approximately $5,900.

We are continuing to maintain a strong balance sheet and ended the quarter with 68 million in cash and cash equivalents, 202 million in working capital, and no long- term debt after having completed the acquisition of the drilling assets of Key Energy Services.

The Company also declared a quarterly cash dividend on its common stock of $0.04 per share for holders of record on May 16, 2005 and to be paid on June 1, 2005.

At this point I'd like to open the call to questions. Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator instructions] Our first question comes from James Wicklund with Banc of America securities. Please go ahead.

Good morning, guys. Good quarter.

Thanks, Jim.

Your margins didn't, weren't as high sequentially as a couple of your competitors and in our model we had modeled that because of the Key rigs. You had said it would take you a little while that the Key rigs were in better shape than you had expected and it wouldn't take very long for you to get them to your levels. Is that what we saw and is that the expectation through the second quarter?

Jim, I think that we have been in the process of getting those Key rigs up to the same day rate levels as we've gotten for other rigs in our fleet. So I think we've been making good progress on that point. It did have some impact on us in the quarter, obviously.

I think that one of the things that has impacted us in terms of the rate of acceleration is the amount of long-term contracts that we [dived] on as compared to the number of long-term contracts some of our competitors have done. Now, obviously the long-term contracts, when you enter them, help to bump up your rates but limit your upside.

Okay. And you say you're willing to do long-term contracts if it's the best interest of you and your clients. Can you give us an idea with the current view of the market what percentage that might be for you guys at some point in the future?

Jim, I think it's really a situation where we're in discussions with this number of rigs running 256 plus the Canadian rigs on top of it, where we're running, there's a lot of conversation going on with a lot of customers simultaneously. I'd be reluctant to say how much per rig because it's obviously is an issue in every market, but we're very conscious of the kind of growth in margins that we saw in the first quarter plus the kinds of growth in margins that we've already told you we're looking towards for the second quarter. In effect the longer the contract, the more it has to take into account all of that.

Believe me with y'alls financial discipline we trust you to do what's in the best interest for everybody, that's not an issue. The 30 rigs that you're refurbishing this year, the seven you did in the first quarter, can you talk to us a little bit about the range of what it costs to do that, what the capability of the rigs will be when you're through, and how difficult it is to get components to do that these days?

Jim, I think we gave in our prior conference call a number of approximately $3 million a rig. And we said that in effect there would be some which would be more than that and some which would be less than that, you know, kind of in the aggregate, yet it works out. In terms of the rigs, I mean, they go from in this first quarter 1500-horsepower rigs to 700-horsepower rigs, electrics to mechanicals, it was a very --

The whole spectrum.

Yeah, pretty much the spectrum across our fleet. So it's a wide variation. I think they were refurbished all across our business in various different places. So they'd be hard pressed to give a lot of detail. But we're obviously sensitive to the substantial demand there is for rigs and in trying to help our customers by producing those rigs and help ourselves simultaneously.

Believe me, the range helps. Last question. Have you started to see or have you seen any dichotomy in rates for SCRs versus mechanical rigs with the same depth capability?

Cloyce, do you want to--

I think they're just about the same rates with what the SCR [are] mechanicals is what we're seeing. I mean we're not seeing a superior rate for an SCR. If it is, it's very little.

Okay. That's what we thought. Thank you, gentlemen.

Next question.

Your next question comes from Jim Rollyson with Raymond James. Please go ahead.

Good morning, guys. Going back to the long-term contract issue, Cloyce, I think your historical thought process was that long-term contracts never held up when things, should things get, rollover and get worse. Are you, now that you're starting to see more contracts being placed in various operators here and longer terms than what we've seen historically, are you starting to think that that might be something you look at and are we getting to pricing that maybe suggests that you would more seriously consider long-term contracts?

The first part of your question is I think that people that are signing long-term contracts today expect to live to the long-term contract. That did not used to be the case several years ago.

And to answer the second part of your question, the day rates are getting to the level that we would certainly consider it if it fit, you know, if our customers and us both agree on that. And I've never seen the demand for long-term contracts that we're getting right now.

So I think that in the industry it's changing a little bit and as Mark said in his opening remarks, a lot of people are real concerned about the availability of rigs over a period of years. Regardless if you get the new build rates, and it takes a long time to build rigs just like it takes us a long time to refurbish rigs. And then you see a huge waiting time building up for parts. And we all are waiting on the same parts so the more you try to build new or rebuild the longer the wait is. There's several months wait on several different kinds of parts.

Right. You're, obviously things are getting better, you're projecting now your best margins ever, if I recall for the second quarter. You're obviously going to be building a lot of cash here and aside from your rig refurbishment program, what do you plan to do as you look out over the next year or two with all the cash?

Jim, the answer to that question I think remains the same which is, we have instituted a cash dividend. We doubled the dividend as you realize just recently, a quarter ago. Right now we're spending a fair amount of cash as you understand on the refurbishment program, but we expect we will cash in the second half of the year.

In my mind, and I think it's the view of all of us as a management team as well as our board, that if we don't find opportune acquisitions during the course of the year, we'll give it back to the shareholders in either a special large dividend, a buy back, or some other program by which that money comes back to the shareholders. We're not planning on going off in any other non-related businesses.

Great. Thank you, guys. Nice work.

Thank you.

Thank you. Our next question comes from Scott Gill with Simmons & Company. Please go ahead.

Hey, Mark, this is Scott.

Hey, Scott. Can you give us some indication as to how much better the cash margins were for your Canadian operations versus the lower 48 operations? I can give John that chance.

Scott, they were, to the blended margin they contributed around $140 a day in effect. U.S. margins were just under $5000 and the Canadian margins were over $7000. That's part of the explanation.

Mark's comments starting out of the margin increase in the second quarter will have very little running in Canada so even though we're thinking U.S. margins will go up closer to $1000, the lack of Canadian activity bumps that down 100 or so dollars a day.

That's what I was thinking. Thanks for the clarity there. The other question, not related to the rig side of the business but looking at your Drilling and Completion Fluids, nice revenue uptick here in the first quarter. What is now the outlook for that business going forward? Is this kind of a sustainable revenue level and do you expect that to continue growing?

As the offshore market improves and if it continues to improve, we would expect it to go up. It's not a real big contributor for our business so internally we look at it at maintaining this level for the rest of the year but three's a lot of things written out there that indicate offshore should improve during the year, and if it does, we would expect our Fluid's business to benefit from that.

John, if I could just have a follow-up with that, and maybe directed to you, Mark, because you're talking about strategic acquisitions and use of cash going forward. It used to be that this Drilling and Completions Fluid business wasn't really considered a core business of the Company. Are you rethinking that now that the contributions are a little more significant even though they're not a big piece of the Patterson story?

I think the sense we have of our businesses are that the Drilling business is obviously the driving force, the 800-pound gorilla, and that's where most of our capital has gone. The second business to which capital was allocated, obviously, was our Pressure Pumping business. Third, E&P, and fourth in effect the Fluids business.

We're gratified with the performance in the first quarter of the Fluids business, and we are gratified that the outlook for that business is far more optimistic than it's been. Nonetheless, I wouldn't expect that we would be putting capital into that business at this time and I think our position of, vis-a-vis the business remains we think we acquired those assets at a very, under very opportune circumstances such that we'll have good return on equity for our ownership of those assets and how it fits into our other business and how it complements our other businesses something which we're still thinking being.

Thank you and good quarter.

Thank you.

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

Thanks very much. Mark, you addressed the costs of refurbishing, it sounded as if the cost had not materially increased when you kind of adjust for the different mix, but I was wondering if the time it's taking you to refurbish a rig it changed materially?

I don't think so, Geoff. I'll say this. I think that in 2004, we were frankly surprised both ways by time and dollars. And I think when we got to 2005 having learned those lessons in '04, we were more prepared to give answers that I think that have turned out to be correct, so to speak. And the answers we gave in effect last quarter I feel comfortable with going forward this quarter. So the answer is, no, not really.

I mean we had predicted five, we put seven out. Some of that came about because there's increased demand for rigs of a certain kind that we have and are available that don't take a lot of time in incremental effort.

We think that that original prediction given in the first quarter feels good to us at this point. We're also aware that there's this huge demand for rigs and so the extent to which we can, in fact, put out more rigs that's good for our customers, good for our industry, and good for us.

Second question's maybe better directed at Cloyce, but what are you hearing from your customers? You mentioned that they're getting more focused on the access to capacity and if anything the time horizon over which they're concerned about it is increasing. Are they, nobody ever willingly accepts price increases but have you seen a change in their demeanor, let's say, in regards to the price increases?

I think typically when the demand is so strong that, and you're right, no one ever wants a price increase, none of us do on anything. But the reality of it is, when there's a shortage of whatever the industry you're in, whether there's a shortage of something the price goes up. And my story is that I'm sticking to it is that E&P companies take rates up and we take them down. And it's pretty much it's always been that that way and we bet against each other on a down market, the drilling contractors, the E&P companies bet against each other for rigs in the up market and we're certainly in an up market right now.

The fundamentals look so strong, it looks like it could be there for awhile and I think that's what we're seeing and hearing from our customers, we'd like to, we would certainly like them to be assured we're going to have rigs and, yes, I think that they would love to know they're going to have a fixed rate for a period of time because I think it helps them where they can, if they want to hedge their position on their gas prices they do that or their oil prices and in our case mostly it's gas.

So I think that, you know, the customers are accepting the increases and they know we're not going to give them a long-term contract at today's day rate. It's just not good for us, it's not good for our shareholders, and we would never do that. So we're trying to hit happy medium with them where we think day rates are going to go and if we do a term contract, that's the price it will bid.

With the pace of improvement that you both showed in the quarter and you're talking about seeing in the next quarter, you're going to be back at the day rates and margins that we saw peaked in 2001. It doesn't sound like you see any reason that that's going to automatically stop when you get there. Do you have any sense as to where that balance point is in terms of margins?

Actually, let me say this, Geoff. This is Mark Siegel. We've been asked this question and then we have the slide as you know that shows in our presentation that shows in effect the impact of margin and we've always talked about higher highs and higher lows. And we've been asked a number of times, did you expect to ever get back to that level that you achieved in the third quarter of 2001. I think Cloyce and I have each said separately and together, yes, we think we'll get passed it and obviously if the quarter that we're currently in materializes in the way we expect, we will.

In my mind, the thing which is the driving force here is the price of the commodity. Natural gas prices are so strong that from our customer's perspective they're making so much money on these new wells they're drilling that the incremental costs that we're charging them on a day rate basis is not turning into anything that has anything to do with their economics.

I mean, the one thing that's very different this time from 2001 is that we, and I think our competitors there as well, have maintained our efficiency so that a 20-day well is a 20-day well. In fact, it may even be a 19 or an 18-day well now as we've gotten better bits and greater efficiency in lots of other areas. And so that efficiency is helping to make it possible for these high rates to be accepted as well as the high commodity prices.

Fundamentally, I don't see this uptrend ending unless the price of the commodity changes and that's really the big difference between now and 2001.

But would you be willing to throw out a number in terms of where, I mean, is it 8000? 9000, 10,000 that margins can get to?

I don't see what makes for any particular arbitrary point. It strikes me that with a we're seeing is that higher natural gas prices and smaller, in effect, wells that are generated have led to the E&P as a whole having to drill more and more wells each year just to maintain the 23 TCF level of production.

Given that more and more wells with a relatively finite number of drilling rigs, in effect, I can see prices continuing to rise. I don't see that there's a natural cutoff point at any given point.

Yes, as prices reach higher and higher levels, at some point if there's economics for building of incremental rigs. In my mind that's a ways off from now. But at some point I wouldn't be surprised if we get there on this upswing.

And last question. In terms of Pressure Pumping you mentioned that is the, kind of the number two business I took it as being in terms of capital focus, capital investment. What are you doing there at the Pressure Pumping business? What was your reaction to the performance in the quarter?

Two different answers. We have put capital into that business and have seen substantial increases both in the physical area the business covers, the revenue it's generated, and the historical EBITDA and operating income which that business has contributed. It had not, its performance in the first quarter was a little bit disappointing from our perspective, but we think that's weather related and there was very unusual weather across the whole country this year, I guess I don't need to tell anybody that, and we're pretty optimistic about that business on a going forward basis for the rest of the year.

Rates increased on April 1. So we're just starting to see the impact of those new rates and think that the business is very strong.

Great. Thank you.

Your next question comes from Arun Jayaram with Credit Suisse First Boston. Please go ahead.

Good morning. Mark, for the 23 incremental rigs you're bringing out this year, are you bringing those out on a speculative basis? Are there some contracts underpinning those 23 rigs?

Each one of those rigs, Arun, has got a customer's name for when the rig first comes out and then customers lined up behind it, in effect, looking to take that rig such that it's, we pretty much know where it's going to work for the next year. That being said, it's not subjected to long-term contracts so that in effect we know where it's going on the spot market because of customers trying to, in effect, get it, but we haven't priced it at this point and we haven't committed it in under a legal document.

Okay. Is there a level, Mark, when your rig count gets up to where you and Cloyce would just sit on your hands a little bit in terms of getting the reactivations up?

I think as long as the demand's there and the prices are continuing to go up, I don't know why in the world we wouldn't bring rigs out.

Mark, can you give us what the new capital expenditure budget is for '05?

I think the expectation is that the second quarter will look pretty similar to the first quarter at about $70 million. And that's pretty much as far as we've decided to look forward. But that run rate that you've seen in the first two quarters could well be the run rate for the rest the year.

Okay. And last housekeeping item, is in corporate other you had about 5.2 million in capital. What was that for?

We upgraded the Company's airplane by trading in an old one and buying a newer one.

Thanks a lot.

Our next question comes from Mike Tricomer with Morgan Keegan. Please go ahead.

Good morning, guys. Quick question for you. Are you doing this, all of this reactivation work in-house or farming any of it out?

We're doing it all in-house up until this point as the cost to doing it outside we figured it was going to cost us somewhere between 1.5 and $2 million a rig extra. That doesn't mean at some point if the demand gets great enough and the price high enough that we wouldn't go ahead and hire some outside people to do that. Right now our plan is to continue to do them in-house and we're doing about five or six at a time. It takes about 90 days overall on average to do a rig.

Okay. If you're doing five or six at a time right now, is that your capacity or do you think your capacity is higher than that?

That's pretty much our capacity internally.

Okay. Do you think you would go outside then if you do see demand exceeding that?

We certainly would consider it and we've talked just recently about accelerating refurbishing our rigs and going outside and literally, in the last two weeks, we've started talking about it so we're not far enough in our discussions with vendors to even really talk to you intelligently about it.

Okay. Let me follow-up with that. You know, now you're looking to reactivate about 30 rigs a year. Your comment earlier was that now some of your customers are being worried about rig availability going out further out into the future. How long do you think you can keep up this pace of, I guess, seven rigs a quarter?

Well, our plan is the rest of this year and we're looking into 2006 right as we're making this call. I mean right now, we've a number by every rig, we're reactivating, we have a customer for it. And I would say within the next 60, 90 days we'll have an idea of how many rigs we're planning on reactivating in '06. Hopefully at the next quarterly conference call we can maybe give you a more definite number than we know right today.

Okay. John or Mark, DD&A came in a little bit lower than I was expecting. Can you give me any guidance for that?

One comment about rig reactivation's just, you know, during the first quarter we worked on somewhere around 20 rigs at one level or another, some of which were brought into service and some which will come in future quarters. Some of the rigs take more or less work and probably most importantly, as you look at the 30 for this year and what we might do next year, Cloyce and his people can speed that up or slow that down based on demand. So when we look into 2006, we don't know if we're going to bring out 30 more or if we're going to bring out ten more, it's really demand and pricing driven.

In terms of DD&A for the year, and I think it's consistent with what we talked about in the first quarter call. We think it's somewhere around 150 million. First quarter would be bit lower and building a kind of a couple of million dollars a quarter in the second, third, and fourth.

That's all for me. Thank you.

Your next question comes from Pierre Connor with Hibernia Southcoast Capital. Please go ahead.

Good morning, everybody. First for Cloyce. Are we in an equilibrium state amongst the various regions now in terms of pricing power or do you see a little bit of disparity? If so, which are the areas that might be, and they're all good, but which are better than others?

We get asked that question a lot, and relatively speaking, they're all about the same. And we'll just take for example a 1000-horsepower rig where there's a great demand for it in other areas, for example, we have a lot of rigs in West Texas and if the rates don't go up in that area and we can move the rigs into the other areas, for example, the Rockies. We spend 3 or $400,000 winterizing the rig and we have it in the Rockies making maybe a little higher rate and maybe the Rockies might be a little, the demand might be greater there. But overall, I mean, it's pretty much relative in every area the rates are going up.

That's fair. And Cloyce, what about Canada, you were interested potentially to grow there. Is the strength in the lower 48 got us focused there more so or are you still looking at opportunities in Canada?

We always looking at opportunities in Canada and we're actually trying to cobble another rig together in Canada out of parts that we have and purchase some new items at the end of this, when we go back into the next winter we should have our 18th rig in Canada working. We have 17 there now.

When Mark and them bought the Company they bought five or six years ago, they had 14 rigs. So we're in the process of growing that. We've looked at acquisitions up there, we've just never been successful. And we're continuing to look.

Okay, that's good. Mark, not to risk at getting into some second derivative question but, what was the character of the rate increases during the quarter? My sense we had counter seasonal strength in the rig count so did you see some urgency as we progressed later or just consistent as rigs rolled off wells?

You know, Pierre, we really felt that what we said in that little lead in was absolutely the case that, you know, kind of month by month we found the demand getting stronger, and month by month consistent with Cloyce's view that the customers in effect did up the rates. We found that experience occurring. So the short answer is that, yeah, ordinarily you would expect as you kind of get into the [shoulder] and the gas season that you get some decline in activity and some decline in demand to the contrary, we had just the opposite.

Okay. Well, you'll be glad to know that David Trice at Newfield this morning said that he hadn't seen the pricing power and the drilling contractors this strong in the last 25 years, but it wasn't going to slow him down.

It's good to hear and it's consistent with what Cloyce said two calls ago, in which in his 30 years he hasn't seen it like this.

And then, I'm sorry, maybe I didn't hear the numbers correctly, so just permit me on the revenue per day and the margin, as I look at it, I thought I heard you say the margins were going to increase more than the revenues. Is that right? Or did I miss the number?

Yeah, I think that's right. We're expecting a little bit of decrease in the cost per day.

Okay. Well then that might be a lead in, John. Is there, there were just obviously some costs that you're able to take care of that come out of the first, will come out of the first quarter, what other cost pressures, or have we gotten most of that in right now?

I think that there is some pressure on labor costs but in all of our contracts we have the ability to pass that through as you know. But we're seeing a little bit of pressure on labor right now, probably the most we've seen in awhile but we've already absorbed some of that. I don't think it's going to be a significant thing going forward, but I would think we're seeing more pressure there than we are anyplace else as far as cost increase are.

Sure. No, understand. Okay, guys, thanks very much for the information.

Our next question is a follow-up from Scott Gill. Please go ahead.

Thank you. Mark, I think in your conversation with Geoff Kieburtz you talked about a price increase for the Pressure Pumping side of your business. Can you quantify what that price increase was effective April 1?

We bid that work on an annual basis with our customers up there and I don't know what the price increase was across the board. It was not just a general price increase.

Okay. Would it be fair to assume that it's very similar to what we've heard from the larger pressure pumpers, you know, something double-digit-type increase for the year?

I just don't know.

Okay. That's all I had. Thank you.

Thank you. Our next question comes from Alessandra Zortia with Knott Partners. Please go ahead.

Thank you, good morning. I have just a couple of follow-ups on the possibility that we might start seeing some long-term contracts and I understand some of these questions are going to be more of an academic exercise than anything else. The first question is, in your conversations with customers, what kind of time frame are being discussed for long-term contracts?

Generally speaking one year.

One year. Okay.

I mean there are some that are six months and some that are two years, but the great majority are one year.

Okay. The second question relates to again, going back to kind of when my choosing it's time to go actually lock in these contracts and obviously you've talked about the fact that you expect rates to continue to go up so that's some opportunity costs that you have to keep in mind. But on the other hand, I presume that in your mind, as you're putting out more rigs, there's got to be some return on capital considerations that you're applying in terms of deciding, okay, this is the point where we want to actually put in these contracts. So I guess my question to you is, internally other than the opportunity cost of rates, you know, continuing to go up, what's kind of the point where it becomes more important for you to make sure you've got visibility as to where rates are going to be?

Let me say it this way. We think that having the strongest, or one of the strongest balance sheets in the business gives us the flexibility to, in effect, seek out the best returns for our shareholders. And if you go back and look, I think this is true. I haven't obviously calculated it after this first quarter. But historically, Patterson-UTI has had the best returns on assets, returns on capital on both a one-year and five-year basis against any of our competitors by following the strategy of, in effect, pricing our rigs on a short-term basis on kind of a well by well basis.

What's happening now is that our customers are so concerned about the guarantee of the rig, that they're warranting to move into this long-term contract environment. We're saying to ourselves, okay, if we have to give up some future upside, which we'll do in exchange from some current upside, against where we are today, what's the right price at which to do it? And we spend time with our customers discussing that exact issue.

I mean, what I'm saying to you is exactly the conversation we're having with them, they're very smart people, they understand all of what we're saying. But we've been able to achieve great returns in effect by spot pricing. We have in effect the financial flexibility to do it. So I don't think we should make that decision on that basis.

The question is, if you enter into one of these contracts, will you earn more income for your shareholders than you would have made had you not done so? When we get it to the point at which we're comfortable, the answer to that is yes, and our customer also wants the deal, then it's a win-win.

One other comment on the refurbishments we've done today. We've indicated they're costing about $3 million on average and it's a wider range, but 3 million's average cost.

At the margin that we've suggested for second quarter, 5900 a day, the pay back on a $3 million investment is 1.4 rig years. So making that investment it's just a current, you know, expected margin. You only need a little over a year of visibility to get all your money back.

Okay. Thank you.

Your next question comes from Kevin Simpson with Miller Tabak. Please go ahead.

I guess it's still morning there.

Hey, Kevin.

I never thought I'd ask you guys this kind of question but is it new build of possibility or there is a kind of rig at this point that you can't do by refurbing or do think you still have deep enough bench in terms of parts and substructures and whatever that you can get to either a refurb in a few years and new builds just a concept and no more than that?

I think for us, Kevin, we have this, in effect, superb supply of rigs that we have acquired over the numbers of years such that we have a lot of the parts, in effect, to put together these rigs and the point is that we can put the parts together and produce a rig which is, I think, every bit as good as a new rig in terms of its drilling capability or its ability to be moved.

So for the foreseeable future, we think we can continue to cobble together these rigs using, if effect, parts that we acquire, the components that we acquired in the past.

That being said, can I envision a scenario in which margins get to be so good and the demand is so high that we put, we buy more new parts and that, you know, use some of our components and it becomes more new and less old and so on and so forth over a time, yeah, sure, but that's a ways away.

I have made the comment, which I'm sure you've heard, saying I don't see the economics for new builds at under $10,000 of margin per day. We're talking about $5900 of margins so there's a ways to go.

Is it reasonable to, I guess, my guess based on what I'm hearing is that for a long-term contract you'd probably want a payout of no more than a year for a new refurb. Is that a good guesstimate?

I don't see it that way. I think that we see these refurbs as a project we're doing to put the rig into the marketplace believing that there's a long-term trend here to drilling more than 20,000 new wells per year and so on and so forth in the U.S. and that's where that rig is going ultimately to fill that need.

The contracts purely, in my mind, an arrangement between our customer and us by which we fix the price or fix the price subject to adjustment and guarantee them the rig, and in effect, deal with the various questions that are open in terms of the arrangement between a land-based contractor and an E&P company.

So something more customer driven to give them, some of your better customers better comfort essentially?

I think that's a good answer.

All right, that's great. Great quarter. Thank you.

Thank you. Ladies and gentlemen, if there are additional questions, please press star-one at this time. And just as a reminder, if you are on speaker phone please lift the handset before pressing the numbers. Gentlemen, I'm showing we do not have any audio questions. I'm going to turn it back over to you for any closing statements you may have.

Just want to thank everybody for joining us for our first quarter 2005 earnings conference call. Thank you very much.

Ladies and gentlemen, that concludes the Patterson-UTI Energy's first quarter earnings conference call. If you will like to listen to replay today of today's conference, you may dial in at 303-590-3000, and then followed by the access code of 11028913 and then followed by the pound sign. Once again that number is 303-590-3000 and followed by the access code of 11028913 and then followed by the pound sign. Thank you for participating in today's conference. You may now disconnect.