Patterson-UTI Energy Inc (PTEN) 2005 Q2 法說會逐字稿

Good morning ladies and gentleman and welcome to the Patterson-UTI Energy second quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Mr. Geoff Lloyd on behalf of Patterson-UTI Energy. Please go ahead sir.

Thank you. Good morning and on behalf of Patterson-UTI Energy I would like to welcome you to today's conference call to discuss the results of the three and six months ended June 30,2005. Participating in the call will be Mark Seigel Chairman, Cloyce Talbott, Chief Executive Officer; Glenn Patterson, President Chief Operating Officer; Jody Nelson, Chief Financial Officer; and John Vomer, Senior Vice President, Corporate Development.

Again just a brief reminder that statements made in this conference call, which state the Company's or management's intentions, beliefs, expectations or predictions for the future are forward-looking statements. It 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 demand for the company's services and their associated effect on day rates, regularization, and planned capital expenditures, adverse industry conditions, difficulty in integrating acquisitions, demand for oil and natural gas, and ability to retain management and field personnel.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's SEC filings. Copies of these filings may be obtained by contacting the company or the SEC.

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

Thank you Geoff. Good morning and thank you for joining us today. We hope that by now you've all 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 October 2004 quarterly earnings conference call we said that the business fundamentals have not been this strong since the 1970's. 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 expect that demand for our services would continue and gain strength going forward.

Furthermore, in our February 2005 quarterly conference call, we stated that as our customers implemented their 2005 ENP programs, the land rig market had taken a dramatic step to the next level as the scarcity of available land rigs became ever more apparent.

Our results for the second quarter of 2005 demonstrate the continuing accuracy of these assessments in three significant ways. Number one, our average rigs operating in the second quarter increased sequentially with the drilling activity in the U.S. more than sufficient to compensate for the decline in drilling activity in Canada due to annual spring breakup. In the U.S., we operated 259 rigs in the quarter as compared to 248 in the prior quarter.

Second, as a result of the continuing severe scarcity of available rigs, average revenue per day increased to $13,690, a change of $1,200, or 10%, as compared to the preceding first quarter of 2005. More importantly, average margin per day increased to $6,210, an increase of $1,240, or 22% as compared to the preceding quarter.

And number three, most significantly, our earnings quadrupled in the second quarter on a 66% increase in revenue, again demonstrating our premier operating leverage position. Moreover, for the quarter, we achieved record revenues, record net income and record net income per diluted share. And with respect to our contract drilling segment, we achieved record average revenue per operating day, record average margin per operating day and record average rigs operating.

During 2005, we have seen demand for rigs in the U.S. increase in each month. Looking ahead, we see customer demand for rigs continuing to increase in all the areas in which we operate. Of interest, we see this demand coming in two ways, from large customers with Patterson rigs seeking additional rigs, and with smaller customers seeking to re-enter the market by gaining access to one or more rigs.

In fact, our customers' greatest concern centers on the availability of rigs so that they can be assured of having rigs to meet their drilling program needs. With the extremely tight market for active rigs and the customer's recognition that there are few rigs that can be brought to market from inactive rig inventories and other sources, our customers are seeking assurances about rig availability in 2006 and beyond.

The desire of our customers to secure rigs so far in advance is unprecedented for Patterson-UTI. Consistent with this, we're seeing increasing customer interest in long-term contracts at higher day rates and during the quarter we entered into term contracts generally for a one-year term covering less than 5% of our active fleet. 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 interests of both our customers and us. We remain on target to activate approximately 30 drilling rigs during 2005, including 16 that have been activated so far this year.

Furthermore, consistent with our expectations for rig demand and our customers' inquiries for rigs in 2006, we can expect to continue our rig activation program at a similar pace next year. 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, this program enables us to increase our market share by putting out more rigs quickly and to do so at a lesser capital cost, thereby maximizing shareholders' returns. As for current activity, we estimate that our operating rig count will increase to an average of 278 rigs in July, including 264 in the U.S. and 14 in Canada. In the third quarter, allowing for typical Canadian rain days, we expect that our operating rig count will average approximately 275 to 280 rigs.

For the third quarter, we anticipate that average revenue per day will increase to approximately $15,000. We anticipate that average margin per day will increase to approximately $7,100. We are continuing to maintain a strong balance sheet and enter the quarter with $70 million in cash and cash equivalents, $298 million in working capital and no long-term debt.

The company has also declared a quarterly cash dividend on its common stock of 4 cents per share for holders of record on August 16, 2005, and to be paid on September 1, 2005. Before opening the call to questions, I'd like to thank our employees and our shareholders for their dedication to our company.

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

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Arun Jayram with Credit Suisse. Please go ahead.

Good morning gentleman, nice quarter.

Thank you

Mark, quick question. You highlighted that -- it looks like less than 5% of your operating base is under term contracts. What kind of premium are you seeing relative to the spot market for those term contracts? Could you quantify that?

Approximately between 15% and 25% over current.

Okay. And we've seen Gray Wolf talked about moving to over 50 rigs on term contracts. Do you like the current mix of less than 5% or do you see that getting larger as the year progresses?

I think that it's - I would expect it would get larger. We really started the process in third quarter. We set it in our prior conference call that we're getting more and more inquiries about it and as our customers have made more and more inquiries about it and as the rates have increased and as our customers have shown a greater willingness to accept higher prices in term contracts, we have become more willing to do it.

The second question, Mark, with the land rig count approaching 1,300 rigs, what is your sense of demand or excess demand at this point relative to what you see out there, call it a 1,300 rig market today?

We see reports that analysts put out somewhere shortages of 150 to 250 rigs. It's the claim that I've seen made about the rigs market. I really do not feel that I can add much more than just pass on that comment, but we're seeing customers, and I think that was the point in the remarks that I made, both large customers that have multiple rigs looking for incremental rigs and for assurances of incremental rigs being available, and smaller customers some of whom are active, some of whom have exited at one point and now seek to re-enter the market, and basically coming from all levels of our customer base, people being very very anxious to secure a rig.

Okay last question, Mark. You kind of indicated perhaps reactivating 30 additional rigs in 2006. What do you estimate the average cost of those re-activations will be? And secondly, do plan to move additional capacity to Canada?

Let's take the Canada answer first and then come back to the cost of the U.S. ones. We have basically cobbled together an additional rig in Canada out of Canadian parts and so our rig count in Canada has increased by one, and if you looked at the end of our press release you will see one incremental rig from that.

We also acquired a rig in the quarter so those are the two incremental rigs that were the changes. In terms of our refurbishment program and our costs, we have said it before, that we expected those costs to be approximately $3 million per rig in terms of our refurbishment costs and that is in fact what we are achieving so far. We are slightly less than that, but that is a very good number, we think, for what we expect it to cost in 2005. Frankly at this point we're working on budgets for '06 but would expect that the number would be in that same area.

Okay, thanks a lot.

Thank you. Our next question comes from Jim Wicklund from Banc of America Securities. Please go ahead. Jim?

He must have stepped away from the phone. We will go to the next question. Marshall Adkins with Raymond James. Please go ahead.

I guess that is why you should not log on too early. It looks like you got a pretty good pull through on your margins versus in which your day rates were up, in another words, it does not seem like you are seeing the cost pressure that others have seen. Walk me through what you're seeing on the labor front and what we ought to expect on the cost side going forward.

Marshall this is John. We saw in the Gray Wolf press release they mentioned the wage increase effective June 1. Frankly we also had one of effective June 1. So it's about $550 a day in our case and about one-third of that came through the quarter. It passes through so effectively that is part of the revenue increase than part of cost increase. Looking forward to the third quarter, we would -- the rest of that would come through and we would expect our cost to increase to about $7,900. That is allowing for somewhere $350 to $370 of rest of the wage increase plus $50 or so for just other cost increases.

Right, so other than labor you are not seeing any other costs? I assume this one $500 plus wage increase is probably it for a while? Is that fair?

That is the way we're looking at it.

I would say Marshall that we experienced some higher costs that have been reflected in prior quarters from, for example, our cost of fuel for our trucks as we run from rig to rig and so on and so forth, but those costs are not -- we do not see them changing in effect, second to the third quarter.

Marshall, one other comment on the revenue increase and the margin increase. We have a Canadian presence, and in the second quarter, that is an area that is less active and so there is in effect a little margin pressure there during the second quarter. When you look at it on a U.S. basis, our average revenue per day increased $1,400 for the quarter and margins were up about $1,300.

Thanks, so still a really good pullthrough.

Yes.

And also on the refurb costs, you are still well below what we're seeing other rigs and other refurbs come out for. Is that because a different rig type or is it just that maybe the rigs you have stacked are in better shape or can you explain that to me?

I think I can offer you a couple of different points of explanation for that Marshall. For one, we're doing an enormous amount of rig refurbishments in our own yards with our own people and with our own talented staff. As you know, because you have been to site of Texas, we have for example, a very very large engine shop there. We have other kinds of facilities that we have spent money on many years ago and built up, and we have those kinds of facilities in multiple places throughout the country. We think that gives us a huge advantage in terms of this refurbishment program.

The second point that you mentioned is the existing quality of the rigs. We have typically not robbed Peter to pay Paul. So we have in fact, when we have needed to do so, did not, in effect, take parts off of rigs so we have a good quality rig in most cases that we're starting with and I think that helps us a lot.

The third point really for me would be the point that was at the end of our prepared remarks, which was a large thank you to our employees. Because I think that each refurbishment of each rig is really a serious construction project, and it is the dedication and talent of those people who -- that really helps us to save some real money.

That is very helpful. Great job, guys. Thanks.

Thank you. Your next question comes from James Wicklund of Banc of America Securities.

Now can you hear me? But Marshall asked a good question now. I got to think of something else to ask. Nice beat on the quarter, guys. In terms of cost, you talked, John about labor costs -- I assume labor is about 60% of your operating cost?

No, it would be more like 40% to 45%.

Okay, 40 to 45% What other costs can go up that you cannot pass along to your client?

Cost of fuel. We have a lot of pickup trucks running around. We pay for that fuel just like everybody else pays for their fuel, and that cost went up. That came up --

I'm not asking about normal operations. I am just asking what it was, that's all. Okay. New capacity. Have you guys bid -- put in bids to any of these oil companies that are building new rigs? Have you all bid on any of those projects?

Typically I would say that when these opportunities come along, and I am guessing because it is hard to know for sure, I would guess that easily plus 80% of those opportunities are offered to us at the same time they're offered to other people and so we often look at them, I guess our --

Have you officially bid on any yet?

Officially bid! I do not what that means, I mean they come and discuss it with us and if the terms were attractive enough, we might be willing to do it. So far we have not found the terms sufficiently attractive to want to do it.

Some of our activations, Jim, are people looking for additional rigs. We can get them rigs faster by refurbishing it.

: And one that will do the same job as a new one will, I understand.

And then we have a -- one of our arrangements is for rigs that a big company want it and we're going to be able to provide them out of our fleet.

I understand the economics of you refurbishing to supply to people, more than going building new ones for them. I was wondering if that was a part of the business in addition to refurbishing rigs that you are being aggressive on. The answer I guess is no.

It is one of those situations, in my mind, Jim, where from our perspective, it is a review at each point in time of the economics of the opportunity and a decision as to whether the opportunity is sufficiently attractive to compel us to do it.

And it obviously has not made your hurdle rate yet.

One of the things that we think is interesting in the marketplace right now is that the supply of equipment at all stages from all players is relatively limited -- in fact extremely limited. There just are not a lot of incremental yards. There aren't a lot of incremental facilities. There aren't a lot of incremental engines, and so on and so forth.

We're bringing swivels in from Norway, I know.

And the bottom line and with that supply chain as tight as it is, and you have to pick your spots, we think that we're picking our most advantageous spots, especially from the perspective of shareholder return.

Okay. Cloyce, what are your biggest, longest, lead-time front components and which component? Not all of them, just a couple of your extreme examples.

For pumps the longest that is six to nine months and the engines now are over five months.

Okay gentleman. Thank you very much. And Marshall, good question.

Thank you. Our next question comes from Kevin Pollard from JP Morgan.

Good morning guys. I want to sort of follow-up with you on your guidance with regard to costs and margin. I think last quarter you said you expected the downturn in Canada to shave of roughly $200 off of what your margin would be without that downturn. Is that still kind of how it worked out?

Kevin, I have not done the calculation. I think that's probably about right.

Okay. Well if we just kind of assume that that's a ballpark number and then we're talking about costs going to $7,900, which I understand you have the labor component that you talked about. But it seems like you would get a little bit of margin benefits as Canada began. Are you guys just being conservative here on your outlook, or am I missing something here?

Certainly we should get some margin benefit -- in effect if you go back to first quarter, Canada would have contributed a positive margin in effect over the U.S. of $120, whereas for the current quarter, it was a slight decrement of about $25.

But, the other side of that is that Canadian and U.S. margins are basically I think in line at this point or I think that is what we will see in the third and fourth quarter. As it did back into 2000-2001, the Canadian margins led, the U.S. margins then caught up and in fact overtook them. I don't know what will happen this time over the next couple quarters, but I do believe that the U.S. is caught up at this point. So, in effect there is less to say about Canada having an impact, they are just in line.

Okay, okay that helps. Thanks. And then second, I'd like to see if you guys could comment on sort of where your mobilization and stand by rates are relative to the full day rates and maybe how that compares with a quarter ago?

It's improved, Kevin, from a quarter ago. I think most of our mobilization rates are at least 80% of our operating day rates and we have some that are at operating day rates.

Okay that's it from me guys, thanks.

I did not hear that.

That was it from me. Thank you.

Okay, thank you.

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

Yes, good morning. Just a kind to follow along from the prior questioning with respect to the capacity additions, and of course I think you're talking about some of your supplies been rather tight. Could you actually reactivate more rigs than 30 per year? Do you have the capability to do that?

I think that we're operating pretty much full out at what we can do. And yes, we actually have in the pipeline right now 35 rigs, but we think that to get those all 35 out this year would be pushing the envelope, and we're saying we're going to get 30 of them out.

So, going forward next year, I think where we'll be hampered most of all is our ability to get parts next year because a lot of the rigs that we're rebuilding, we're going to have to buy additional parts or have parts made.

The machine shops are a real bottleneck for us, where we are having to construct parts for like a drawworks or a mud pump and I think that will be as much a bottleneck for us as anything and I think that we pretty much see our capacity at about 30 rigs a year with all the yards that we have. We've gone from Tyler, Texas all the way to Casper, Wyoming, rebuilding rigs right now, including,. I guess, we have about six yards that we are building in right now.

I guess with that in mind that you yourself are pretty constrained with how many rigs you can place in the market. Mark, do you give any consideration to buying new-built rigs at this juncture or is that still premature to be thinking about that?

We talk about that Scott, as management, kind of at least monthly if not more often. So, it's a subject that we're very comfortable as a topic that we need to explore and keep in mind. Our conclusion to date has been that this advantage we think there is in our ability to refurbish in effect 30 rigs a year, for this year '05, an additional 30 in '06 as we see it, and out even into '07 seems to us to be so cost advantageous as against new builds that we don't yet see the economics.

I mean, there was a question that was asked before in the call that "would you bid on these situations?" I mean we have situations literally today in which major customers have come to us and said, would you construct a rig for us against a several year contract that would give us a pretty substantial payout.

Do we think about that? Of course we do. I mean that is what in fact I think the company pays us to think about, but so far the economics haven't seemed to us to be more compelling than doing what we are doing, if that makes any sense.

That does make sense. Thank you. And I guess my last question, I know it has been asked in prior conference calls but we are three months further along in the cycle, and on one hand you have got demand outstripping supply, which bodes very well for further day rate and cash margin expansion. On the other hand, you've got your own traditional customers building assets for their own account. You get some foreign sources of equipment and labor that is trying to enter the market so you kind of have two opposing forces here with respect to future day rates.

I guess Cloyce, Glenn, you've been doing this for many years, what's your seasoned opinion today as far as how high these cash margins can go in the lower 48?

Scott I'm not sure how high the cash margins can go, but I've never, in all my career, I have never seen the demand as it exists today. I told you that a quarter ago and it's even more pronounced today. And what we're seeing is customers concerned all the way into 2006 and 2007 wanting to know if for sure they are going to have rigs, and I think that that comes more from the belief that commodity prices are going to be strong for quite some time. And we're in the second, third year of pretty high commodity prices and after a while, people start saying that they're going to stay there, and still I do not think companies are running their economics on $60 oil and $7, $8 gas.

As they move those numbers up more, there's more things that becomes more viable to drill and certainly the unconventional players we're seeing today are going to take more rigs and I just don't see us -- creating a surplus of drilling rigs in the near future now. That being said, I think day rates are going to go up and I'll say this once more, I've said it many times, we do not take day rates up, E&P companies take day rates up, we take day rates down in the down market and we are getting pretty strong bids for our equipment right now almost everywhere, and it is moving from one area to the other.

We're pulling rigs from one area to go to other areas because of the higher demand and they are willing to pay more money. So we just got to try to take care of our business and take care of our customers too, but we've got to do it in a way that it's best for shareholders too.

Thank you.

Thank you. Our next question comes from Mike Drickamer with Morgan Keegan. Please go ahead sir.

Good morning guys. You all asked earlier about would you consider new builds at this point. How about further consolidation within the rig market? How about buying active rigs right now that you could bring on at a -- much quicker than a new build or one of your own refurbishments?

Mike, we've been adherent for the longest time about the consolidation in the industry. We continue to buy rigs in the market when they become available. We think that's an area in which we have been able to add substantial incremental value for the shareholders. I would observe, and I think that this point is not focused on often enough by our shareholders and the analyst community, that since the merger of Patterson and UTI, we've added 100 rigs.

In effect, the company is 33% bigger than it was just a couple years ago when we did that transaction, by these transactions. We think those opportunities remain a very, very strong opportunity for the company and a very, very good use of our cash and the cash that we can generate going forward. And so that's the primary area that I think really, really makes the most sense.

Having said that, it also seems appropriate to say that we're always hearing rumors about our acquiring one or another of the larger public companies. And we just can't see that the economics of those transactions work for our shareholders so we don't see that that makes a lot of sense but the consolidation play among the smaller drillers seems to us to continue to make sense and one which we would be anxious to continue to pursue.

Right. Well, absent the acquisition, you put $70 million on the balance sheet What else would you be looking to do with this cash you've built up?

In my mind we recognize that our shareholders do not want us to have incremental excess cash on our balance sheet. We instituted a dividend a couple of years ago as a way of saying to our shareholders that we would give back excess cash. We have used cash as you know this year and anticipate doing so in 2006 for these rig refurbishments. People were kind enough to call to mention the fact that we have done it in an economically sound way and to the extent to which we can continue to generate excess cash over and above regular refurbishments and over and above acquisitions that will give the money back to shareholders in the form of either a buyback or dividend or some other kind of special dividend.

We understand that obligation on the part of management. We accept it and we think it is a good thing. If we can't deploy the cash in our business in a smart way, we will give it back.

Okay, let me change the questions a little bit. You had a good increase on the total jobs pressure pumping up to 2,300 plus jobs. What's your capacity on the quarter? How many jobs could you actually do in the quarter in pressure pumping?

Capacity in terms of jobs -- I do not have the answer. The problem is we have smaller jobs, we have bigger jobs. Bigger jobs take more time and we end up with less jobs. We continue to add capacity there. I would guess that in the third quarter type environment that we can further increase the revenue today from some combination of a little higher utilization.

The second quarter is weather impacted in Appalachia, which is where we operate. The other thing we should say is that we have spent, as everybody I think well knows, significant amounts of capital in that business over the last several years, adding capacity.

As that capacity comes on again to sort of reiterate something that was said before, there have been supply chains of that kind of capacity as another industrial service capacity is itself constricted so it is not coming along quite as fast as we would have liked, but we're building capacity in that business as well.

Discuss consolidation there in the rig market. How about in either the drilling fluids or the pressure pumping? Are you looking for acquisitions in either one of those business segments?

The short answer is particularly in the pressure pumping industry, if we could see opportunities to grow that business through acquisitions, we'd be very, very mindful of it. In the fluids business, it is a very big business and we're relatively a small part of it so it is harder to see exactly how that would take place but it is not something which we would rule out.

All right. That's all from me, guys. Thanks a lot.

Our next question comes from Pierre Conner from Hibernia South Coast Capital. Please go ahead.

Hey, Pierre.

Hey guys. Actually I got all my questions answered, thanks.

Thank you. Our next question comes from Bill Sanchez with Howard Will. Please go ahead.

Good morning.

Hey Bill.

Just want to follow back up on the sequential cost improvements and Johnny talked about the $550 a day I believe he said with number of wage inflation effective June 1. Realized about one-third of that in the quarter. The costs were only up to $60 sequentially so just curious if we actually we saw cost elsewhere come down, could you just walk us through that a little bit?

Clearly some other costs did. I think that is just really nothing bigger specific and I do not know about the third-party expense. If we pay fuel for an operator for example, and then add the revenue and add the cost, and we get $1,500 fluctuation quarter to quarter on that type of thing.

Okay. I am assuming in the guidance in terms of the $15,000 revenue a day, that is assuming the full realization of the $550 a day increase hitting in the third quarter, or is it some of that also come through in the month of June?

The rate increase relate the way to increases should be locked up each other same day in effect. In effect when the costs went up in June, the revenue went up with it immediately. So one-third of it ran through the quarter, another 2/3 will run through in the third.

That is it from me. Thank you.

Thank you. Our next question comes from Catherine Hughes with RBC Capital Markets.

My question was related to - this is Kurt Hallard, by the way.

You did not sound like Catherine Hughes!

The question I have is that you guys got some great business momentum here obviously in the US land. It seems to me like pricing has continued to accelerate yet on an incremental basis on the cash margins, they're not accelerating to the same extent. The clear reasons for that with respect to costs. But it is still puzzling to me, given demand outstripping supply, and your customers now begging for equipment and accessibility into '06 and '07. I don't understand why margins would not continue to expand. Could you guys try to shed some light on that for me?

John, do want to answer that?

We have a difficult time, Kurt, to look beyond the quarter. We've been fairly hesitant to do it. First quarter I think we talked about $800 a day increases close to $1,200. We did the same thing in this in the second and it turned out closer to $1,200. For the coming quarter, we indicated we think we will see $900. Could it be better than that? Possibly. I do not know of a reason that the rates or margins would start increasing at a lesser level, but on the other hand I do not think we have visibility of it either and that is why we have been generally hesitant to go out more than one quarter.

The other thing, Kurt, I would say is that we captured in margin virtually all of the increase in day rate. So, I mean, I feel like we're doing a real good job of in effect managing our costs and in effect capturing it. If you're asking me, could the rate of increase on day rates be even faster given the supply shortages of rigs, the answer is sure. By the same token, this is a business in which there is a relatively limited number of customers. People need to be able to work together, taking in effect these kinds of rate increases every quarter is a pretty significant thing in a marketplace.

They jam it to you on the downside, you guys don't jam it on the upside, but they can afford it now, anyway.

I do not think I will speak to that last comment.

To want to hire another salesman? I will come in there, no problem.

Kurt, you do a fabulous job, I know that.

In any event, great job. I will follow-up with you.

Thank you.

Next question is from Waqar Syed from Petrie Parkman. Please go ahead.

Great quarter gentlemen, just a couple of questions on the pressure pumping side could you quantify in maybe horse power how much capacity you may be adding over the next 12 months or so and then if you could shed some light on your outlook for the fluids business and finally any guidance on DD&A for the coming quarters?

With regard to pressure pumping, I don't have those numbers here with me. I would be guessing it probably it would be inaccurate in doing it. We do continue to expand the business based on the increased demand in Appalachia. We do keep increasing our footprint up there. That's how we have grown the company over the last, more than five years or grown that part of the company.

With regard to pressure pumping, we have a little bit of CapEx there that relates more to existing operations. I mean in fluids. That relates more to maintaining our existing activities place we make money there, I think you know is more on the offshore side than the onshore side. And with the offshore activity going up this year, we have had pretty decent results over the third quarter. With hurricanes, etc., aI do not know if it will stay at those levels it really just depends on weather over the quarter.

The fluid business is now one we've been trying to expand or really trying to continue to operate it well and get good earnings contributions there while we can. On the DD&A side, back in April we talked about depreciation for the year somewhere around $150 million. Our CapEx has been a little higher than we talked about so I would expect that DD&A would be a little higher, maybe it will $150 to $155 million at the high end based on the CapEx rate today.

Thank you very much.

Our next question comes from Mark Burnett with Merrill Lynch please go ahead.

That's good morning. Mark, most of my questions have been answered, but I just wanted to ask, Cloyce, you talked about rigs moving from one region into the other, could you talk about where it appears the greatest demand is and which markets look adequately supplied, or are there shortages everywhere?

There are shortages everywhere. The greatest demand that we have are in the Bonet Shell basin and in the Rockies, that would be the top two that are requesting more rigs but that being said, all areas are wanting more rigs.

The Texas panhandle, which we could operate out of our Oklahoma area, needs more rigs and there's some more unconventional place being tested in West Texas, you've probably heard about that through some of the E&P companies and if they were to work out, certainly there's going to be a huge demand for rigs in that area. There is probably 1 million acres leased out there that have very few wells drilled, so you could see a repeat of the Barnett Shell, where there is more than 100 rigs running now and if that does happen, then you're going to see a tremendous demand for drilling equipment in the West Texas area. Right now though its Pioxx Basin and other areas in the Rockies as well as the Barnett Shell.

Okay, then second question, earlier you were asked about where there may be delivery delays on equipment and you mentioned mud pumps and engines, but you didn't mention drill pipe and last quarter you said it was time to get back in the drill pipe food chain. I'm wondering if you have and if there are deliberate delays there and if the prices are going up.

Certainly prices have gone up some. But we have 00 I think our price is locked in through the end of the year, there's a fixed price, I don't know exactly what that their price is. But we spent, to give you an idea, in the first quarter we spent nearly $7 million on drill pipe. The second quarter we spent a little under $6 million. And the last two quarters we budgeted $22 million for drill pipe and we're taking delivery and delivery is on time, $22 million each quarter, by the way

That's it, thank you.

Thank you. Our next question comes Ole Slorer from Morgan Stanley, please go ahead.

Thank you very much. Mark and Cloye, you are both very large shareholders and one another thing that I find most difficult when I try to analyze Patterson right now is that looking two years out and this looks to be a long cycle. You're going to have almost 30% to 40% net cash to market cap and it is -- you mentioned there are special dividends which intrigued me a little bit, but further question about where the companies actually get paid for special dividends. I just thought of putting in place a little bit more visible formula around how to structure that?

Ole, we've looked at lots of articles, including pieces by Morgan Stanley, on variable dividends and so on and so forth. And so yes, we've looked at it and read the materials pretty carefully and tried to be very thoughtful about it. I think I indicated that we think the best use of cash currently is this rig refurbishing program.

And then, secondly would be the continuation of our acquisition program of these private companies where we see the opportunities but that -- to the extent to which that cash is not used to those two things, we feel that we have an obligation to give that cash back to the shareholders in one form or the next.

We have not ruled out or ruled in any particular way of giving it back to the shareholders. I think that's exactly the problem that we as a company and our board has considered. And the indication of the dividend in the start was to the point of it, was to the extent to which there was excess cash, we would do something and we consider that to be one of our foremost obligations as the management team.

And I think we would all greatly appreciate that you are reinvesting with the fantastic returns you can get now, but I wasn't thinking about any kind of particular incorporation or anything, but just some sort of a policy that you could outline at any event that you have excess cash or how to define that or how much of this can expected to be paid because, certainly on my numbers, you should be able to pay or something more close to $3 even with fairly aggressive both maintenance and expansion CAPEX and another 6 yo 7% yield implied on that gives you a $40 or $50 stock.

We have done the arithmetics. I understand what you just now said. We believe that we have been good shepherds for the resources of the company. Everybody has always been concerned that we are going to see cash build way up. We've done, in the key acquisitions in the timber shop acquisition too, we think exceedingly accruitive transactions for the shareholders -- I've said when asked, I think those are two among the best deals that Patterson-UTI ever did. They were good for the sellers, they were good for us. They've really added a lot of value.

I don't want to say anything more today, than look, we understand that carrying around a substantial amount of cash is not in the best interests of the shareholders. But by the same token, being in a position to quickly close on those two transactions that I just mentioned was a huge advantage, and people seeing the cashflows available to do them had a huge impact on our sellers' willingness to complete the transactions.

And I think that is applaudable and you should certainly not reduce your financial flexibility. All I'm talking about is sort of excess. But anyway, I'm glad to hear that you are addressing the subject. I think it would be in order for you to put in place a sort of policy, that of course you could amend but that could give us some visibility. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). At this time I show no further questions. I would like to turn the conference back over for any concluding comments.

On behalf of the entire management team, we would just like to thank our shareholders, the analysts who cover us and who have asked some really good questions today, as always, and our employees for their dedication and contributions. Thanks everybody.

Thank you, and ladies and gentleman this concludes the Patterson-UTI Energy second quarter conference call. If you'd like to listen to the replay of today's conference, you may dial 303-590-3000 and you will need to enter access code of 11033997 followed by the pound sign. Once again, that number is 11033997 followed by the pound sign.

Thank you for participating in today's conference. And at this time you may now disconnect.