Patterson-UTI Energy Inc (PTEN) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Patterson-UTI Energy third-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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday October 27, 2005.

I would now like to the conference over to Mr. Jeff Lloyd on behalf of Patterson-UTI Energy. Please go ahead, sir.

Thank you. 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 three and nine months ended September 30, 2005. Participating in the call will be Mark Siegel, Chairman; Cloyce Talbott, Chief Executive Officer; Glenn Patterson, President and Chief Operating Officer; Jody Nelson, Chief Financial Officer; and John Vollmer, Senior Vice President of Corporate Development.

Just a brief reminder that statements made in this conference call which state the Company's or management's intentions, beliefs, expectations or predictions for the future are forward-looking statements. It 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 affect 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.

Now it is my pleasure to turn the call over to Mark Siegel for some opening remarks to be followed by questions and answers. Mark?

Thank you, Jeff. Good morning and thank you for joining us today. We hope that by now you have all had an opportunity to read our earnings release which was issued earlier this morning. Before taking your questions, we would like to take a couple of minutes to review briefly some of the highlights from the release and to add some context to the results.

Simply stated it was a record quarter for the Company. 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. These results reflect the positive industry conditions and our ability to take advantage of these positive trends.

Since last October's conference call, we have been saying that the business fundamentals in our industry have not been this strong since the 1970s. The ongoing shortage of natural gas production in the U.S. and the apparent capacity constraints on crude oil in the world have had a positive impact on demand for our services and we expect these industry conditions to continue. In response to the shortage of natural gas and the constraints on crude oil, our customers have been continually increasing their E&P activities and as a result there is an acute scarcity of available onshore drilling rigs.

Our results for the third quarter of 2005 reflect the impact of these industry conditions in three significant ways. First, we are continuing to put more rigs into the field. Our rig count increased sequentially from the second quarter with rig utilization increasing to 71% compared to 67% for the previous quarter. During the recently completed quarter, we had an average of 283 rigs operating including 269 in the U.S. and 14 in Canada compared to an average of 265 rigs operating including 259 in the U.S. and six in Canada for the second quarter of 2005.

Second point. This shortage of available drilling rigs has caused a continued upward movement in pricing. Our average revenue per operating day for the recently completed quarter increased by $1720 or 13% to $15,410 and more importantly, our average margin per operating day increased by $1400 or 23% to $7610 compared to the second quarter of 2005.

Most significantly our third point, compared to the second quarter of 2005 earnings were up by 42% on a 20% increase in revenue. Moreover, compared to the third quarter of 2004, earnings were up by 268% on an 81% increase in revenues. Once again demonstrating the earnings leverage we are able to achieve at high levels of rig utilization.

During 2005 we have seen a continuous increase in demand for rigs. Looking ahead we see continuing strong demand in all areas in which we operate. As we reported in our previous conference call, we continue to 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 customer's greatest concern continues to center on the availability of rigs so they can be assured of having rigs to meet their drilling program needs. Accordingly, many customers are seeking assurances about rig availability in 2006 and beyond.

Consistent with this, we are still seeing increasing customer interest in long-term contracts. However at this time more than 90% of our rigs are priced at spot market rates which have been consistently increasing. While we expect to enter into more long-term contracts, we expect the majority of our rigs will continue to be contracted on the spot market for the foreseeable future.

We continue to remain on target to activate approximately 30 drilling rigs during 2005 including 22 that have been activated so far this year. Based upon customer inquiries for rigs in 2006 and our expectations of rig demand, we plan to continue to activate rigs at a similar pace next year.

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 shareholder's returns. As for current activity, we estimate that our rig count will increase to an average of 288 rigs operating in October including 271 in the U.S. and 17 in Canada. In the fourth quarter we anticipate that our operate rig count will average approximately 290 rigs.

For fourth quarter, we anticipate that average revenue per day will increase $1000 or more. We also anticipate that average margin per day will increase at a similar pace. We are continuing to maintain a strong balance sheet and ended the quarter with approximately $131 million in cash and cash equivalents, $321 million in working capital and no long-term debt. The Company also declared a quarterly cash dividend on its common stock of $0.04 per share to be paid on December 1, 2005, to holders of record as of November 15, 2005.

Before opening the call to questions, I'd like to thank our employees and shareholders for their dedication to our Company.

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

(OPERATOR INSTRUCTIONS) James Wicklund with Banc of America.

Good morning, guys. Good quarter. Mark, a couple of the other land drilling contractors have come out and said that they are building new as well as refurbishing because of two reasons. One, if a downturn ever occurs, they think new equipment will have a higher utilization and also that their customers would prefer to have a new Chevy rather than a redone Chevy. Has there been any consideration to doing a mix of new builds versus refurbishments or do you have so many rigs that are in good enough condition and you believe you can get them to a good enough refurbished reactivated condition that that is really not a concern for the foreseeable future?

Jim, we think we have rather special position based on the availability of rigs we have that weekend refurb and bring to the market. As I said in the prepared remarks, we think that this refurb program offers kind of two advantages or several advantages. One of the advantages that the rig is available we think far sooner than the new build rig would be available at a significantly lesser cost. And we think it has virtually all of the same capabilities as a new rig in terms of drilling abilities and moving abilities.

Frankly we don't believe that the utilization rates going forward will be any different from the refurbed rigs that we're putting out as contrasted with the new rigs. So we just don't see that distinction. And we think we have this particularly strong competitive advantage with respect to cost and speed.

Okay. The component type parts that you are getting for the refurbishment upgrade, I assume all those are new and so that is one reason -- if they take an old mass but put everything else new and refurbished on there, it is basically a new rig? And you doing all the refurbishments yourself?

I will lead Cloyce answer that.

Jim, we are doing all the refurbishments ourselves -- or the majority of that we do have some outside help machine shops and things like that. And yes as we go forward, we are buying more new parts to put on our rigs just like everyone else is too -- you know mud pumps and pits and that type of stuff. But certainly with the modifications that we've done to rigs and what we're doing in the last couple three years -- I certainly don't see that there is that much difference in what we're doing and a new build rig. (multiple speakers) There's a few more bells and whistles on a new one but I think when you really compare the drilling time and the time to move, that nobody's going to be -- we might not be better than everybody else but everybody else is not going to be better than we are either.

Okay. I may have missed this and I apologize. But the average cost to upgrade the rigs, the 30 rigs that you are planning on -- did you mention that?

We've said, Jim, the 30 rigs this year -- the ones we've done so far through third quarter have been approximately $3.3 million. Our expectation for the fourth quarter is to be in about that same kind of range, slightly above it.

I'm sorry I missed that. Last question with the heat on Appalachia, who would have thought, what are you doing in terms of CapEx with your pressure pumping business?

We're expecting next year to spend approximately $25 million in CapEx and pressure pumping. We have been ramping up our pressure pumping CapEx over the last couple of years as I'm sure you know. And that has put us in a very good position with that business demonstrating very, very good growth. I think the one thing that I would want to just sort of quickly add to the prepared remarks is that all of our business units performed very, very well in the prior quarter and did it very, very good. And we're extremely grateful to all of our employees for the work they did, particularly some of those who are in tough conditions.

Okay, guys. God quarter. Thank you very much.

Neal Beaman with M.S. Howell (ph).

Good morning, gentlemen. Just a couple of questions real quick. I'm wondering on some of your drill pipe orders and more of the supply side -- two questions on it. Are you stepping up the orders as far as what you are looking to add? Or more or less keeping that constant? What kind of lead time do you have to have on that?

We have our drill pipe ordered through 2006 and we take so much drill pipe per month. We're going to end up '06 with adequate supply of drill pipe to run the number of rigs that we think we will be running at the end of '06 and we'll get back in the food chain again at the end of '06. But we do not have a drill pipe problem.

Okay. Then obviously your incremental margins just continue to look more and more impressive. I'm wondering in this type of environment how good or how much can they grow? Let's look at just the near and next quarter to continue with the growth that we've seen in the last quarter or two?

I think that our thought on that is pretty much expressed in the remarks that we just started out with which is to say that we think pretty good visibility looking out to this next quarter and there we are seeing revenue increasing by 1000 or more with comparable increases in margins. Looking out further, we continue to believe that prices will continue to go up for drilling rigs but we don't think we have as good a visibility and we've been hesitant to call and make predictions out past the next quarter.

Sure, sure. As far as the capacity constraint that you all are seeing out there, would you say more constraint is seen on the rig side or the crew side?

Well, certainly we've been able to find crews for all of the rigs that we have available to work. And I think history will show you that whoever is putting rigs out, he generally find crews to work them. So I'd say the capacity constraint is on the number of rigs more so than it is on crews.

Okay. And then the very less question. Just wondering, you had mentioned about the 71% utilization and about bringing out maybe the same amount of rigs next year. Just wondering is it because of the time commitment of bringing these rigs out of -- if you have let's say slightly over 100 rigs remaining while you all at these type of prices would just bring out 30 as opposed to trying to bring out 40, 50, 60 type rigs next year?

Our experience has been that we tend to we think rig our rigs up better internally and we are operating at capacity internally and bringing them out as fast as we can bring them out. And we think that we have a more competitive product when we do it ourselves internally as far as moving -- particularly moving the rigs. We're going to continue to operate at capacity and bring them out of our fleet.

Okay, thanks a lot, gentlemen. I appreciate it.

Jim Rollyson with Raymond James.

Good morning, everyone. Mark, you said at the beginning that basically right now it is an issue of everybody being out of rigs and your customers wanting to secure rigs and even trying to go long-term (technical difficulty)

Are you there, Jim? Did we lose the call?

No.

Did we lose the whole call?

We are still there. Hello.

Operator?

Just one moment please. Kurt Hallead with RBC Capital Markets.

I guess something happened on the other one there. My general question here is on more kind of housekeeping type stuff. I don't want to beat the market conditions to death here. But what is your overall CapEx plan again for 2006?

Kurt, our thought is that our CapEx in '06 will be approximately at the same run rate as you had in the third quarter, approximately $100 million a quarter, possibly sloping up a little bit assuming that the trends in the industry continue to be as bullish as they are currently.

On the personnel front, there's always all kinds of rumors when you get to this kind of stage about hiring ex-convicts and people with drug issues and efficiency and safety problems. Can you address that in a little bit more detail? And then also address whether or not that has had any impact on your insurance?

Currently we think we're improving. I've been pleasantly surprised in this upturn how we fought that battle. It is certainly a battle. We are not seeing an increase in our insurance rates because of the people we are hiring. And I think that our safety department is doing an outstanding job as well as our building superintendents and tool pushers as far as maintaining safety on the rigs. It's just not a problem for us. Well, let me restate that. It's always a problem but it's not any more severe problem than it normally is.

The thing I think which has been a big help and we've said this a number of times, and so it is really not news, but the fact that the upturn has been a long-term continuous movement over several years allowed us to train a lot of people. And we put in a lot of staffed people to help us with this expected growth. And that is really I think what is helping us at this point generate really, really great results for our Company.

You mentioned your drill pipe purchases. Can you give us some idea of the price per foot that you have paid for that going into '06 and how that may have compared with what you paid for your drill pipe for '05?

Jim, I don't remember what we paid -- I mean Kurt. I'm still on the caller. Kurt, I don't remember exactly what we paid in '05. These are in the $45 range is what we are paying now.

And then one last broad question here. What do you think the potential impact on activity, customer spending or at the margin activity may be say if gas prices were to go from current levels in the 13 to 14 say back into the $7.00, $8.00, $9.00 range?

I certainly don't think it would affect us at all. I don't think anybody is running their sensitivities even probably at the $6.00, $7.00 or $8.00 range. I think it is probably even less than that. So I don't think anybody is doing anything right now that wouldn't pass a sensitivity test of less than that myself, Kurt. I don't know that for sure, but I've not heard anybody in the industry say that they are using those kind of sensitivity numbers.

I appreciate it. And you guys never cease to amaze in up cycles, let me tell you that.

Jim Rollyson with Raymond James.

Let's try that again. The question I was going to ask is if right now you basically have unlimited demand by your customers and you can't get rigs out at a very fast pace. And you don't have many of your rigs on long-term contracts, is there any reason to think that day rates and/or margins won't continue to go up at similar levels to the past two or three quarters beyond the fourth quarter?

I think, Jim, what we just said in response to that kind of basic thing is we have talked -- we have good visibility to the next quarter and try to give that on these conference calls. Beyond that, we don't see anything changing, I mean we see this strong demand but we don't typically want to go out any further than in effect of this next quarter because it is making an industry call that we have no basis on. We have nothing more that you have and everybody else has. So we prefer to let you and the other analyst community make this call but we don't see anything that is changing our view.

Okay. If things look at least the way we think they do, you guys are going to generate a substantial amount of free cash next year. What is your take on what do you plan to do with all the free cash?

I think that this answer is pretty much consistent with what we've said on every other conference call so let me give it to you. We think that the strategy that the COMPANY has employed by which it has grown by acquiring rigs that are in the private market hands has been a very, very successful strategy for the Company and one which we will continue to follow.

As it happens, we acquired five rigs during third quarter at very attractive prices. We think that is going to add to our business. We continue to pursue attractive opportunities currently and will continue to do so for the foreseeable future.

Obviously about 1.5 years ago, we started a dividend; nine months ago, we doubled a dividend; we will look to our dividend again. And we declared a dividend obviously for this quarter and in 2006, I expect we're going to re-examine that dividend again and consider whether we should make a change in it.

And finally, we consistently look at the possibility of buybacks as another alternative but we understand that our shareholders expect us to use that cash wisely and we will not do something with that cash that doesn't pass that test.

Fantastic, thank you.

Scott Gill with Simmons & Company.

I think it is me, Scott Gill. I just have a question -- just kind of tack on to Jim Wicklund's question about the Appalachian region. You used to have drilling rigs in that part of the country and kind of given what we are seeing with favorable cast prices there, the heightened interest among E&P companies, in particular a very large independent making a recent acquisition that traditionally this Company puts a lot more rigs to work. Any thought to reentering that market from a drilling rig standpoint?

In my mind the answer to that question, Scott, is we have moved rigs into Appalachia in the past when the conditions were attractive. We will consider that again. We're always looking at new areas where we can deploy rigs attractively. I think it is kind of a competitive point about where we are looking to go and in which is the area that is the most attractive to us at any given point. But we are always kind of considering that. And in fact since Patterson-UTI has been the merged company, we have moved rigs into Appalachia when the opportunities were unavailable.

How would that opportunity look today, Mark? Is it attractive to put rigs in that part of the country or are those day rates or cash margins there --?

Let me turn this over to Cloyce who wants to respond.

There's two different markets in Appalachia and for us to tell you that we're going to go try to capture the 2000 to 5000 foot market in Appalachia I would say we would not try to do that. As more the Trent (ph) and Black River and the deeper horizons are drilled, certainly we're going to look at that market. But we're not going to go up there. We have both been there before the merger at different times. And it's a very, very competitive market when you work in the real shallow areas up there and the barrier to entry is real low and they use a very low quality equipment to drill. Now the deeper stuff is a different story. And if that market heats up, we will be in that market. But we probably won't be in the 2000 foot market in the Appalachia.

Okay. And my final question and maybe I'm just slow here or something. I completely understand the leverage you have with your stat (ph) capacity. Help me understand given such strong demand for rigs and the returns on capital employed that that can be realized from building new rigs, why Patterson is not interested in building new assets as well as refurbishing their idle capacity?

The answer to that question, Scott, is at this point, we would be -- our yards and our available capacity is fully utilized doing these refurbs which we think if the most attractive return on capital we can possibly find. So that is kind of in effect -- we've taken the best.

The next piece would be to have third parties build rigs for us or rebuild rigs for us, either one of those two. Build new rigs or rebuild rigs for us. Our experience is that those rigs are not as good for our purposes and for our customers' purposes in our mind. I mean I'm not trying to quarrel with other people's assessments -- I'm just saying for our view of these rigs. When we acquire rigs we typically modify the rig to put it to what we think if the best most optimal capability to operate.

And so we think that that would be a step down from what we are doing in terms of what we're getting and the quality and so on and so forth. And in effect would require us to in effect change our existing refurbishment plan while we worked on these other rigs from these third parties. It doesn't strike us as really adding to our mix.

That is helpful but let me ask it this way. Why wouldn't you consider increasing the capacity that you presently have?

Scott, certainly you could do that. But there is limited capabilities of any company to add rigs efficiently and from a labor standpoint. I don't think there is anybody in the industry adding rigs faster than we are whether it's our rebuilds or whether it is new builds. I don't know of anybody that is adding 30 rigs a year, and it's going to be two years in a row. We feel like we are doing what is the best not only for our stockholders, but for our customers too where we can maintain efficiency and continue to drill wells at a fairly efficient rate.

If we were to dump another 10 or 15 new builds on there, that would really stretch our ability to add the personnel to run those rigs. We will someday be there but we are just not there yet and we're going to continue what we're doing right now.

That's actually very helpful. And again, congratulations on a very good quarter.

Arun Jayaram with CSFB.

Good morning. Mark, post the storms we've seen a kind of upsurge in onshore permit activity in September. I was just wondering to see if you are seeing any incremental demand with E&P companies who are having trouble investing capital right now in the Gulf of Mexico given these storm related damage?

Certainly the demand is great -- I'm not Mark by the way.

I was asking this to Mark, but Cloyce, you are good too.

Certainly I think it is very reasonable to assume that some of the people that are not going to invest offshore are going to invest where they have prospects onshore. And maybe increase that and I think that might be part of the uptick you see in onshore permitting. But the demand is so great everywhere for drilling rigs, I can't see a correlation between the offshore shutting down and the increase in demand for equipment onshore because the demand couldn't be any greater than it is right now.

Second question, Cloyce.

Oh, come on, I want to try to answer this one.

All right. You talked about a five rig acquisition. At what cost did you buy those rigs and how does that compare? It looks some of the new build costs are about $13 million or so on a new build basis.

We bought the rigs at about $2 million a rig, and we will probably spend about $2 million a rig by the time we have them in the condition, what we call the Patterson condition, to work.

So none of these were working?

They were working, but they needed some repair, I will put it that way.

They were actually in the field working.

Three of the five were in the field working.

But they were not in a condition that we were comfortable with. We would not have worked them in that condition.

Okay. Last question, Mark or Cloyce.

We'll be able to share this answer.

Exactly. Your margins around $7600 are very similar to some of your peers who on paper have higher spec rigs, which is not entirely intuitive. I was just wondering if you could maybe comment on some of your commodity rigs. Are you getting very similar margins in HP or in Nabors at the upper end?

First thing I'd like to do is just take issue with the concept of commodity rigs. It's interesting for me. Right now, we are seeing demand for long-term contracts across all sizes of our rigs. And our customers, I don't think, think of our rigs as -- the ones that they are using as commodity rigs. They think of them as being assets that are well-sized and well-matched to the needs they have in the particular market. And so the view that says that the new Chevy that you happen to just see at the dealer is a better piece of equipment than the truck that was specifically manufactured for the job that it is doing is not one with which I would agree, and don't think it works as sort of a model.

And finally, I think that you get really good margins because you do a really good job for the customer in meeting their needs. It is not about having the newer car or that newer this or that; it's about having the equipment that is well-matched and being able to operate it very efficiently. And we've said that for a long time, that we think having the right rig fleet is really what is required.

I would point out to you that Southwest Airlines doesn't have the largest planes, but historically made more money in the airline industry than anybody else did. My point is the fitness of the equipment for the route that it's flown really matters the most. And we think we've always had rigs that are well-matched to our customers' needs.

Well, it is clearly evident. Thanks a lot.

Mike Drickamer with Morgan Keegan.

Good morning, guys. A little bit of a follow-up to Jim Wicklund's question here when you're talking about how much it's costing you to reactivate rigs. You know based what it was year-to-date and then what you expect for the fourth quarter. But have we hit the point where you are digging deeper into the corners of the yards and perhaps new rig reactivations in '06 can be much more expensive?

I think what we said is that we think that the cost of the rigs done through the third quarter has been approximately $3.3 million per rig. I think I indicated that we expect in fourth quarter the price to be at about that same rate probably slightly up from that. I don't think we actually gave the number for fourth quarter -- pardon me for 2006. But in my mind it is in the 4 to $5 million kind of range for next year.

Based on what we are now looking at, the rigs that we are looking to refurb for next year are higher horsepower, SCR electric rigs with greater depth capacity. So that to some extent, the difference between current cost and next year's cost is related to the difference in size of those rigs that we're going to be activating for next year. And in part it's also due to changes in pricing from our suppliers as costs go up in the industry.

And then finally to some lesser extent, it may be that as we get to the next phase of rigs that we need more parts for them and more equipment for them as we upgrade them.

Okay, thank you. Kind of sticking on these rig reactivations. The lead times for the components that you need to reactivate these rigs, have you seen those lead times continue to increase and where do you think those lead times are right now?

It depends on what you are talking about. But just take pumps and engines for example; they've gone from 90 days to six to nine months and they have expanded out all the lead times. Drill pipe lead time is out if you were to just call in an order now, it would be several months out, at least that's what we are told. We are in the food chain though -- taking drill pipe every month. Most other components you build you know and it just depends on how many welders you can get, like welding substructures, derricks and pits and things like that. So you are limited some by that but I'd say to answer your question it is from probably gone from 90 to 120 days out to six to nine months out.

Okay. Let me switch gears on you just a little bit. Your guidance was that the average margin per day would increase pretty much in line with your increase in the average daily revenue. Previously we've talked about pressure on cost such as labor and repairs and everything. Have you seen the pressures there leveling off or what is going on there?

I think going into third quarter we thought our costs would be somewhere in the 7900 range, we did a little better at 7800. Going to fourth quarter, that 78, 7900 we think is still a reasonable estimate for that timeframe. The item that its biggest which I think you guys might recall from last quarter's call is changes in payroll. We had an increase in rig crew payroll June 1. It had a little impact on the cost in the second quarter and the rest came through this quarter taking us to 7800. Apart from another payroll increase, I wouldn't expect our cost to increase significantly over the next several quarters.

The price of steel is going up some and in general parts you buy are going up some but it is not a significant jump like when you have a big payroll increase. That is such a large part of our cost. And then when you have a significant pay increase across the industry, you see a big bump -- and I'd be very -- but kind of John -- I think it will go up gradually, but it will not be a dramatic increase.

So you don't have any visibility then into when you may have another big payroll increase?

Hopefully it will be a while because we've given them a pretty dramatic pay increases to our employees in the last -- in June, as John said. That was pretty much throughout the industry. I think it will be a while.

Great, thank you guys.

Robert MacKenzie with Friedman, Billings, Ramsey.

Good morning, guys. Cloyce, I wanted to address this to you. If we look back to the most similar prior cycle say the late '70s, early '80s, it seems to me if I recall correctly from what I have been told at least -- 1000 horsepower rig dayrate may have peaked around 15,000 a day versus the cost to build of around 5.5 or so. The same rig is costing 10 or 12 to build today, who is to say or why can't rates for 1000 horsepower rig peak in the 30 to $35,000 a day range?

Well certainly I guess they could, it would sure be nice for us. I will put it that way. I don't think we need 30 or $35,000 a day dayrates to do quite well in our Company, I will put it that way. Certainly I think the new build dayrates will be less than 30 or $35,000 a day but they're going to be substantial. As long as commodity prices support it I think we're all going to do well.

I'm sure you get it all the time. One of the questions that I get a lot of time is how much higher can rates go? Where can they peak? And you've got to look back to prior periods to try and get a handle on that. I'm just trying to figure out ways to potentially shoot down that argument.

I think it has to do with commodity prices. I think you got to watch commodity prices and as long as the companies can make returns and drill wells, they're going to do that regardless of what the costs are. You go back to the times that you were speaking of which was you probably weren't in the industry back then, but I was. It was totally different back then. A lot of those were tax phenomenons and tax partnerships. This is all economics. I think you need to look at the commodity prices and see if they will support it. See what the sensitivities of E&P companies what they are using for their economics.

As long as you believe that the gas prices are going to be $6.00 to $8.00 and oil $40 to $50 a barrel, it's pretty easy to run the economics. And the higher the costs go, there will be some things that will drop out and not be economic, some of the lesser projects. But right now there is a pretty good gap between the sensitivity and what the E&P companies are receiving for their products and I think there is a lot of room there yet.

The thing I would add Robert, to what Cloyce said and what you said it that there is no reason to believe there is a limit to what the price of the dayrate can be. A limiting factor is, as Cloyce said, in effect commodity prices and availability.

And I think if I recall back then you had 20, 25 rigs coming on on a daily basis for a while back then?

I don't know if it was quite that -- there was a lot of rigs coming on the market. But we had 20 or 25 rig manufactures and they were all making a lot of rigs and there was a lot of capital being thrown at the industry back in the late '70s and early '80s. It has been very more sensible this upturn than even it was in 2001. I've never seen build in the industry and as long a term as it appears we're going to have this time. And of course it is commodity price driven but there has been a lot of restraint with both the E&P companies and the drilling companies and all companies. They don't want to overbuild and do something foolish like has been done in the past. Because nobody does any good when it is that way.

Right. My last question is going back to I guess what John talked about earlier with use of cash. He talked about preference for buying private companies but the company now is a product of two big public companies. Is there any interest or differentiation between making a public acquisition versus say a share buyback of Patterson?

Rob, this as John again. As we mentioned in our second-quarter conference call, to some extent response to calls we were getting about doing public mergers. We took a hard look at different ways to use cash and leverage enhanced shareholder return. And what we found is that frankly between buying back our own stock and merging with another public company, the returns are better if we buy our own stock.

And so as Mark indicated earlier, we first look to the dividend and we think stock buyback is another great strategy. But the public companies as the stocks would the line up today or have really throughout this year doesn't really make sense for us.

Fair thank you.

(OPERATOR INSTRUCTIONS) Kevin Andrews (ph) with (indiscernible).

I noticed the operating returns on the drilling business obviously haven't kept up with the rest of the businesses. Any thoughts to that?

Could you ask the question again, Kevin?

I noticed that the pricing in the fluids business hasn't kept up obviously the pricing or the returns in the fluids business margin improvement hasn't kept up with the rest of your businesses I guess. What are your plans to kind of grow the profitability in that space?

I think I might differ a little bit with your thought. Our fluid business has performed better than it ever has in the timeframe that it's been owned by Patterson. Frankly we've had a great year through August of 2005. The hurricanes had an impact on that business, as you well know, and the first one slowed things down a lot and the second one slowed things down more.

So the fourth quarter probably will not be as good as the first three quarters. I think our take is that that business has improved dramatically in 2005. And we've been pleased with the margin near 20% in what's to some extent a commodity business, the drilling fluids business.

In terms of plan for it going forward, we've been real pleased with the results. As we've said before it's not as strategic as some of our other businesses since it is not as in line -- it's offshore. But we been again, very pleased with the returns. Do you have anything to add, Cloyce?

I couldn't agree with you more, John.

Thank you.

(OPERATOR INSTRUCTIONS) At this time, there are no additional questions. Gentlemen, please conclude with your closing comments.

On behalf of management, we would just like to thank our shareholders and our employees for their participation and we look forward to speaking with you next quarter. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes today's Patterson-UTI Energy third-quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by access number 11040960. Once again if you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by access number 11040960. We thank you for participating. You may now disconnect.