Patterson-UTI Energy Inc (PTEN) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Patterson-UTI Energy fourth quarter and year ended December 31st, 2005 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, March the 30th of 2006. I would now like to turn the conference over to Jeff Lloyd on behalf of Patterson-UTI Energy. Please go ahead, sir.

Thank you very much. Good morning, and on behalf of Patterson-UTI Energy, I would like to also welcome all of you to today's conference call to discuss the results for the 3 and the 12 months ended December 31st, 2005. Participating in the call will be Mark Siegel, Chairman; Cloyce Talbott, Chief Executive Officer; Glenn Patterson, President and Chief Operating Officer; and John Vollmer, Chief Financial Officer.

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, 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 fuel 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 the contacting the Company or the SEC. And 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?

Jeff, thank you. Good morning, and thank you for joining us today. I hope that by now, all of you have had an opportunity to read our earnings release, which was issued earlier this morning. Before responding to your questions, we would like to take a few minutes to review briefly some of the highlights from the just completed quarter, and to add some context to the results. I would like to talk about 5 basic points this morning. Number 1, record results for the overall Company in the fourth quarter and for the year. Number 2, exceptional performance from all of the Company's operating units, including the Company's 3 smaller business units. Number 3, record performance from the Company's largest unit, the Land Drilling Business. Number 4, the Company's authorization to buy back $200 million in stock. And number 5, our outlook for the land drilling business and our other business segments.

Turning to point number 1, record Company results. I'm pleased to report that total revenues, net income, and net income per common share all set new records in the fourth quarter, and for the full year. To summarize briefly, net income for the quarter nearly quadrupled to $134 million, or $0.77 per share, from $34 million, or $0.20 per share for the fourth quarter ended December 31, 2004. Revenues for the quarter were up by 84% to $531 million, compared to $288 million for the fourth quarter of 2004. Net income for the 12 months ended December 31, 2005, nearly quadrupled to $373 million, or $2.15 per share, from $94 million, or $0.56 per share, for the year ended December 31, 2004. Revenues for the 12 months were up by 74%, to $1.7 billion, compared to $1 billion for the previous 12 month period.

I should point out that the results for the 3 months and 12 months ended December 31, 2005, include expenses of approximately $8 million and $20 million respectively for the -- related to the previously announced embezzlement by the Company's former Chief Financial Officer. Absent these expenses, earnings per share for the fourth quarter and year ended December 31, 2005, would have been $0.80 and $2.22 respectively. The results for the year also continue to demonstrate the earnings leverage, as a 74% increase in revenue generated nearly a 300% increase in net income.

Point number 2, exceptional performance from Universal Service, Ambar Drilling Fluids and Patterson Petroleum. These record results reflect strong performances from all of our operating segments, including our Pressure Pumping Operations, Drilling and Completion Fluid segment, and Oil and Natural Gas Exploration activities. All achieved record performances for calendar year 2005. We are proud of the exceptional achievements by our colleagues in each of these businesses.

Number 3, Patterson-UTI Drilling. Our Land Drilling segment, which generated 85% of our are revenue, had an outstanding year. From an operational standpoint, we achieved our twelfth consecutive quarter of increases in average revenue per operating day, and average margin per operating day, reflecting the continuing demand for our services, along with the ongoing scarcity of land-based rigs. Compared to third quarter, our average revenue per operating day for the fourth quarter of 2005 increased by $1,720, to $17,130. And our average margin per operating day increased by $1,410, to $9,020.

During the fourth quarter we had a an average of 292 rigs operating, including 275 in the U.S. and 17 in Canada. This compares to an average of 283 rigs operating, including 269 in the U.S. and 14 in Canada, for the third quarter of 2005. We estimate that our rig count will increase to an average of 300 rigs operating in the first quarter of 2006, including 282 in the U.S. and 18 in Canada. And we expect that average revenue per day will increase by approximately $1,000 per day. We believe that these industry-leading results reflect having the right equipment for our customers' needs, and the excellent services provided by the exceptional field personnel, who are the backbone of Patterson-UTI.

Point number 4, buybacks. We also announced today that our Board has approved an increase in the Company's stock buyback program, authorizing the purchase of up to 200 million of the Company's common stock. The increase in the stock buyback program demonstrates continued confidence in the Company's strong cash flow, and our continuing commitment to deploy excess capital in a manner beneficial to shareholders. As you will note, we did buy back $12 million in stock during the fourth quarter, before we learned of the embezzlement and were precluded from purchasing additional stock. As we have said on numerous occasions, we believe that excess capital should be deployed in the most favorable manner for our shareholders, and we believe that we are among the first companies in the oil services group to institute a dividend in more than a decade. And we see the increased buyback as further demonstrating this strong corporate commitment to our shareholders.

Point number 5, outlook. Looking ahead, we see continued strong demand for our rigs, and ongoing scarcity of rigs in the overall market. To paraphrase a line from Mark Twain, in a recent comment, we believe that reports of the demise of the land drilling segment are greatly exaggerated. The demand for rigs, and indeed our services in pressure pumping and fluids, remains strong. And we continue to see the land drill -- a land drilling market characterized by a scarcity of rigs. We have seen no indication that customers, whether large or small, have retreated or plan to retreat from their drilling programs. Although we, too, are aware that natural gas prices declined since the highs following Hurricane Katrina, and the start of winter, we believe that the current prices, and the expectations with respect to future prices, are such that our customers will continue with their expanded drilling efforts.

In short, gas prices, having run up from $2 to $4 to $6, and after Katrina, having spiked to the mid-teens, have now returned to the $7 range, but we haven't seen any signs of our customers deferring projects or work. Moreover, we believe that the $7 natural gas price is well above the price deck used by our customers to determine whether to drill wells. Based on what we are seeing from our customers, we are continuing our program of activating approximately 30 drilling rigs during 2006, including 4 that have been activated so far this year.

Before opening the call to questions, I would like to make a few brief comments about the events of the past several months. While we cannot comment directly on the matters that are subject to ongoing criminal proceedings, on behalf of Cloyce and myself, I want to express my profound appreciation to all of the men and women of Patterson-UTI Energy, who have maintained their focus and commitment during this period. We have not, and we will not, allow this situation to detract from our commitment to serve the needs of our customers, and to build value for our shareholders. We reported earlier this month that the audit committee had completed its investigation into the embezzlement, and the investigation confirmed the amounts embezzled by our former CFO, and concluded that no other employee of the Company knowingly participated in the embezzlement. At this point, I would now like to open the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] Arun Jayaram, Credit Suisse.

Mark, I was wondering if you could comment on your term versus spot exposure, as you look into '06, and maybe into '07?

I will let John answer that.

Hi, Arun, how are you?

Good.

At the end of the third quarter, we had roughly 10% of our contracts on term. And term for us, is anything a year or more. In most cases, ours are 1 year term contracts. As of the end of the fourth quarter, we had increased to just under 15% term contracts. And as we look out based on term contracts we have today, as they come into play over the next quarter or 2, we would increase to about 20%, maybe a little less than that. Everything else is either well to well, or a couple wells to a couple wells-type contracts.

Okay. That's helpful. Second question, I was just wondering if you could look back at '05. In drilling, you spent about $330 million. Can you comment on how many rigs did you complete under the refurbishment program, and maybe tell us how much of the capital was maintenance CapEx versus the refurbs?

Arun, this is Cloyce. We got out 28 rigs last year. We fell a little behind towards the end of the year, and we're going to see if we can't catch up and get a total of 60 out over 2 years. We're telling you now, we're going to get 30 out. Our plans are to try to catch up with 2 we missed last year, and an additional 30. I'm going to let John answer the CapEx question for you.

Arun, for last year's activations, we spent about $3 million, a little under that, plus drill pipe for the rigs that we put out. I do not have the full break down of CapEx here with me. But basically, the rigs that went out were called 3.5 million with drill pipe. And of course, we expended money on rigs that will reactivate this year, because in effect right now, we have 45 different rigs we're working on. Some of which will go out in the current year, and some of which will go out in 2007.

Okay. Nice results. Thanks.

James Wicklund, Banc of America Securities.

Great quarter. Good job.

Thank you.

Of the rigs, how many rigs do you have left idle, that are rigs that can be refurbished? And I ask that because some companies have announced that some of them are only going to be parts rigs. How many rigs do you have that can be turned into rigs?

Well, Jim, currently, we have about 310 rigs that we're working between U.S. and Canada. We have another 45 or 46 that we're -- have in yards that are being worked on to be brought out this year and into '07. That would bring us to a total of 355 rigs. There is another 48 to get to the 403 total rigs that could be activated.

And you think all of those, with the technology today, you think those will eventually be put back to work?

I think we haven't made a judgment on that, one way or another. We -- if you think back to a year ago, initially, I think we planned on bringing 20 rigs out last year. We increased that over the year to be 30, and ultimately brought out 28. Given we know what we're doing for the next roughly 15 months, about a year and a half worth of things to bring out in the pipeline, we really don't have to make a decision on that yet. And we would try to be thoughtful about that when the right time comes.

One of your competitors made a big [C] change in its fourth quarter announcement, saying that it actually ordered new rigs. Are you guys -- I mean is National beating on you enough, that you're tempted to actually build some new rigs, in addition to refurbishing what you've got?

I think, Jim, this is Mark. We feel that we've got an advantage potentially in the marketplace, by virtue of this ability to refurb rigs. John said the cost at $3.5 million last year. We think that compares exceedingly favorably to our competitors' costs. We expect going forward this is going to cost a little bit more for this year's rigs.

Yes, but still a heck of an advantage, you're right.

Probably, kind of in the $4.5 million kind of area. Plus drill pipe. But, we think that is is a pretty sizable advantage. And in our mind, we would like to mine that advantage as long as we can, with the 45 rigs that are kind of in shops in various states of refurbishment now, we think we've got an advantage, both in terms of speed of getting these rigs to marketplace, and costs. So the answer to us, from our perspective, is yes, we talk to National. Yes, we think about that. But right at this minute, we think we've got an advantage in another direction.

Okay. Gentlemen, last question. People. The constant question that gets asked is, with such an in quote, shortage of people, how can you put out more rigs? Who is going to man them? Can you just give us an update on your personnel position, and any price escalation you've seen?

Jim, this is Cloyce. I continue to be amazed at how efficient we've remained in this upturns, compared to the last upturn in '01. We have more rigs working than we've ever had working in the modern history of the industry. In the last, you know, 8, 10 years.

Yes.

And yes, it is difficult. Yes, we've given a large wage increases. But we're now not the low payer in the -- in the overall industry. We are one of the high payers, so we're starting to draw some more people. Is it hard? Yes, it is hard. And are we trying to train people? And yes, we are training people. We have them on our rigs training them, as well as there's some schools that we're training people. But I think this upturn has been very, very modest and slow, and both from the E&P side, as well as the contractor side. And we've been very -- I've just been real pleased. We've been far more efficient than we were in the last upturn. We are actually drilling some wells faster today than we were a couple or 3 years ago. So that's -- and I know it's bit technology, and some other technologies that is helping that. But still, we're maintaining some sort of efficiency.

Gentlemen, that's very helpful. Thank you very much.

Ian Macpherson, Simmons & Company.

Mark mentioned guidance for Q1 revenues per day to be up about another $1,000 over Q4 levels. In Q4, you translated your revenue per day increase about 80 -- a little over 80% of that went through your cash margin. Is that a fairly representative amount of cash margin translation you would see on that $1,000 in this quarter?

I think that my estimate would be that margin would increase about $1,000 a day this quarter. We described it that way for simplicity. We might see a little bit of cost increase, maybe $100 a day, and so the revenue might be $1,100. But our belief is that the drop through the margin will be in the range of $1,000 a day, is our guess right now.

Okay. Thanks, John. Just a follow-up, as you look at Canada, obviously you've gotten some help from accommodating weather in March. As you look out over your longer term prospects, do you -- are you comfortable with your mix of U.S. versus Canadian rigs working this time of year? Which -- do you see an opportunity to increase that mix, one way or the other, going forward, in terms of the relative market conditions?

I don't know -- let me -- initially I wouldn't think about an opportunity, in the sense that second quarter, seasonally, Canada's declines. It's declined every year we've been up there. And I suspect it will do it again this year. So when you look at our rig count, quarter to quarter, we will go from running roughly 18 Canadian rigs to, at the low point, running somewhere between 3 and 5. And then toward the late part of the second quarter, that will begin to increase again. So actually, Canada will be a declining part of our rig count in the second quarter, and should return to a higher utilization for the summer. If you've been on these calls the last number of years, we would have warned you about margin deterioration relative to that, because the last few years Canadian margins have been higher than U.S. That is not true today.

U.S. margins, at this point for the first quarter in our case, were ahead of Canadian margins, which I think you probably know, first quarter Canadian margins is as good as it gets. In effect, you're running the most equipment you do all year. So we're real happy with the amount of rigs we have in the U.S., and that weighting. We continue to increase our fleet in Canada, and we think of our new rigs, that we may add another 1 or 2 this year. But at this point, U.S. margins are ahead of Canadian margins.

The other comment, for the second quarter rig count, even though we're bringing out 30 rigs this year, because of the Canadian drop-off, I would expect that our rig count in the second quarter -- we estimate 300 for the first quarter. For second quarter, it could come down a few, because of Canada, maybe down as low as 295. And if Canadian activity is stronger, it may remain the 300. But probably somewhere in that range. And then as we get to the third quarter with the Canadian rigs coming back to work, then we really would hope to see the benefit of the rigs we're bringing out, and move up to levels that are above the 300. Maybe 310 or so.

That's very helpful. Thank you.

Jim Rollyson, Raymond James.

Mark, just going back to your comments about Q1 rates, margins being up 1,000. Can you can kind of talk about where the market is today, maybe relative to what you're expecting for Q1? Just, I mean how much higher is the ceiling at this stage, versus what you're seeing on average?

I'm not sure I understand the question Jim. I think I will pass it to John. Because I'm not sure I know where you're going.

I think I know where you're going. I'm not sure I can be terribly helpful. I think the comments here have indicated, and will continue to indicate that our rates are continuing to move up. Even though we're in late March, we don't have a lot of visibility, relative to second quarter, because primarily we're a spot rate driller. But the demand continues to be good, and rates continue to move up.

Right. I guess what I'm asking is, if you look at recent signings for spot contracts, are they still materially above what your fleet average is running for Q4, Q1, that kind of thing? In other words, is the needle still moving up?

Rates continue to increase.

Great. CapEx for -- you've got 30 new rigs. You said you're working on 45 for the next 18 months. What's your overall CapEx outlook for '06?

Jim, I think our perception at this point is that taking the fourth quarter number of 117 million, and taking it to -- rounding it up to 120, is probably a fairly good estimate, going forward, for the first couple of quarters of '06.

Got you. And then on the buyback, nice to see that. Any thought on timing of that over the year? Is that a kind of sooner rather than later type of event?

I think we'd like to get it done as soon as reasonably possible.

Fantastic. Nice quarter. Glad to -- glad you guys are all behind the -- got everything behind you.

Mike Drickamer, Morgan Keegan.

Mark, I got to tell you, I love the quote of Mark Twain there.

Thank you.

Going forward here, have we materially added anything that would affect SG&A going forward here, such that we don't have another situation -- embezzlement situation?

That sounds like 2 different questions. I will try to answer both. Relative to the embezzlement, the primary way that was accomplished, is you had a trusted officer of the Company who could move money. I cannot do that, nor can anybody else in our Company. Wire transfers now require 2 people at a high level within the organization to look at the [inaudible] that supports it. That, I do not believe, could be repeated.

Relative to, I think might have been the other question, on the SG&A side, fourth quarter SG&A was a little lower than what I would expect a normal run rate to be. And if you look to third quarter, it was 10.5 million roughly, and dropped to about 9 million in the fourth quarter, which was generated by probably nonrecurring events. Part of it relates to, with the switch in Chief Financial Officer, the person who left had some vested restricted stock, had some bonus accruals associated with them, all of which were reversed in the fourth quarter, which gave us a little bit of a benefit there. I would expect that right now, the G&A run rate would have been a little bit higher, somewhere around that $10.5 million level. Then going into next year, we have to implement the 123R, whereby unvested stock options will be, in effect, expensed going forward. And I think my estimate of that is that would add to G&A somewhere towards $1 million a quarter. So that first quarter, my guess is somewhere in the $12 million range.

Thanks. I didn't intend for it to be a loaded question. I was just trying to get to what you expect SG&A to be the first quarter. Looking at your operating costs going forward, [inaudible] do you expect pretty much the $1,000 a day to flow through to your cash margin. Is any of that related to, say, a product mix, with increasing day rates in Canada? Or is that you're just not anticipating any increase in labor costs or anything this quarter?

There's no mix factor. I mean over the first 2 quarters, I think that we will see some increase in costs per day. I think most of that will hit in the second quarter. There have been some additional wage changes in the field. And first quarter, my estimate is that margin will increase $1,000 per day. And costs, if they increase, will not be significant.

Great. Thanks a lot, guys.

Pierre Conner, Hibernia Southcoast Capital.

John, elaborating a little bit on your term contracts that you're growing a bit in terms of percentage, can you characterize the rates there? Are they above your current spot? And then tell us a little bit more about is there any cost escalation protection in those term contracts?

The answer to that question is that the contracts oftentimes do have some cost protections in them.

Okay.

Standard IADC contracts do, as you probably know, have those costs, allowing us to pass on wage changes to our customers. That being said, it is often a point of negotiation with our customers on a specific contract basis. In terms of long-term contracts, we're still seeing long-term contracts above the spot market.

Okay. Great. Thanks, Mark. This will be for Cloyce. Maybe looking into this backlog, and I think actually, Mark, you gave us some guidance on the expected costs per rig, reactivation, a combination of cost pressures there. But Cloyce, as you go deeper into the inventory to refurb, have we not picked the newer, less expensive refurbs first? And would expect them to climb over the course of the year? Could you comment on that?

Well, certainly, in the past couple of years, we've been refurbing rigs, we pick the low-hanging fruit. And I would certainly think that they will go up, because we need more parts for them. But also, we're refurbing greater horsepower rigs in most cases. It makes a difference.

But do you feel that this guidance -- I think we mentioned 4.5, is that correct, Mark? That that will encompass the remaining 45 that are in -- or 48 -- ?

That's our best estimate right now, that we think that we can do the 45 rigs for 4.5 million, based on what we know today. And you know, some of that, we have ordered a lot of parts for those rigs. It will be delivered out several months. And we have a fixed price on most of that. But with some of the parts we might order later that might be more expensive. But I would not think it would exceed it more than 3 to 5%, because of what we have locked in now.

Okay. That's helpful. That's good. And then, Cloyce, this is a high level question, but it seems that you mentioned the efficiency gain, drilling wells faster now than 3 years ago. And we're faced with the pressures of new people. A lot of that is mud and bits. But what do you see -- are we reaching a near-term, and I'm thinking peak in efficiencies here? Do you see anything else on the horizon than will increase rig efficiency?

I certainly don't see it now, but I didn't see this coming, either. I mean I never dreamed we would be drilling some wells faster today because of bits. But maybe some bit technology will change. I just don't know. But certainly, I know in west Texas we're drilling many wells, and even in south Texas. But it has to do with the bits and mud motors and that type of thing. And it is just people learning how to drill things faster in certain areas.

And you still feel that we've made gains sequentially even in the shorter time frame of the last 9 months or so, just in terms of efficiency. Is that fair?

Yes, I think it is fair to say that we're gaining efficiency all the time. And I know there are some people that will say certain things, "Boy, it's a lot less efficient than it used to be because the hands are terrible, you know, and that." But the reality of it is, I look at the drilling reports every day, and we have made remarkable strides in this upturn, compared to the previous upturn in 2001, as far as maintaining efficiency.

Okay. Great. That is real helpful, too. Okay, guys. Thank you, I will turn it back.

Judd Bailey, Jefferies and Co.

Guys, could you remind us your contracting strategy for the rigs you're reactivating? I know you're working on 45 or so rigs, you said. How many and what kind of contract term are you looking for? How many of those have you actually contracted already? If you could just comment on that a little bit.

It is not dissimilar from how we contract the rest of the rigs. Some of them are on a term basis, and some are on a spot basis. We are not following the strategy that says to activate a rig, you will have a 1 or a 2 or a 3 year contract. Although, a slightly higher percentage of the rigs being reactivated have long-term contracts, than the ones currently running. And that's why the percentage would move up to somewhere around 20%, as we go over the next couple of quarters.

Okay. So the contracts could be anywhere from 30 days to 90 days, or anywhere in between?

Or a year.

Or a year. Okay.

But the majority would be spot rate, I think.

And 1 other question, and I apologize if you covered this. Could you give us a little depreciation guidance for the next couple of quarters?

As you look at the coming quarter, I would guess somewhere in the $45 million range. And Mark and Cloyce gave some information on CapEx that is 120 million a quarter. If you layer that in, it would seem like depreciation would get somewhere a little under 200 million for the year, would be my guess.

Okay. Great. Thanks, guys. Good quarter.

Thank you. [OPERATOR INSTRUCTIONS]

While we're waiting to see if there is additional calls, just to cover a couple other comments, thinking back. Relative to the investigation-related matters on the embezzlement, we had $1.5 million of costs in the fourth quarter related to that. And those are costs that you record as you incur them. So the for the first quarter, I would venture a guess that we would probably incur somewhere around another $2.5 million, and possibly a small amount in the second quarter, call it $1 million. I don't really have any real visibility of that. We're wrapping up the process, so those costs should drop pretty quickly. The other thought is on tax rate for the coming year, I would suspect it would be similar to this year, somewhere a little under 37%. Operator, I'll turn it back to you.

Todd Garman, Peters & Co.

Just wondering if you guys are planning on expanding further into either the fluids business or into the -- further into the pumping segment?

We have been increasing our Pressure Pumping business through internal investment substantially over the last, I would say, 4.5 years, with significant capital being committed to that enterprise. We have not found, particularly in the past, very attractive opportunities for third party acquisitions in either of those 2 businesses, although we've done a couple of very small ones in the Pressure Pumping area. If we could find something attractive, we certainly wouldn't rule it out. But at this point, that's not where we've been able to find most of the attractive opportunities.

Thanks.

Thank you. Management, there are no further questions at this time. I will turn the conference back to you for any closing comments you may have.

I would just like to thank everybody for their participation in the call, and for their investment in our Company.

Thank you. Ladies and gentlemen, that does conclude today's teleconference. If you would like to listen to a replay of today's conference, you may dial in at 303-590-3000, and then followed by the access code of 11057346, and then followed by the pound sign. Once again, that number is 303-590-3000, and followed by the access code of 11057346, and then followed by the pound sign. . Thank you again for your participation. And at this time, you may disconnect.