Patterson-UTI Energy Inc (PTEN) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Patterson-UTI Energy second quarter 2006 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, August 3, 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. Good morning. On behalf of Patterson-UTI Energy, I'd like to welcome all of you to today's conference call to discuss the results of the three and six months ended June 30, 2006. Participating in the call this morning will be Mark Siegel, Chairman; Cloyce Talbott, Chief Executive Officer and President; 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's important to note that actual results could differ materially from those discussed in such forward-looking statements.

Important factors that could cause actual results to differ materially include, but are not limited to, declines in oil and natural gas prices that could adversely affect demand for the Company's services and their associated effect on day rates, regulization, 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 is 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'll 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. Hope that by now you've all had an opportunity to read our earnings release, which was issued earlier this morning prior to the opening of the market. Before responding to your questions, we'd like to take a few minutes to review briefly some of the highlights from the second quarter ended June 30, 2006. I would like to cover four points this is morning. Number one, continuing record financial results. Number two, continuing record operating results. Number three, increase of stock buyback program. And, four, our outlook for land drilling.

Let me start with the first, continuing record financial results. I am pleased to report the total revenues net income and net income for common share all set new records in the second quarter of 2006. To summarize briefly, net income for the quarter increased by 132% to $172 million or $1.00 per share, from $74 million or $0.43 per share for the quarter ended June 30, 2005. Revenues for the quarter were up by 63% to $637 million compared to $390 million for the second quarter of 2005. Once again, the results demonstrate the earnings leverage we were able to achieve at high levels of regulization as a 63% increase in revenue generated nearly 132% increase in net income.

We continue to maintain a strong balance sheet and as of June 30, 2006, we had $353 million in working capital and no long-term debt.

Number two, continuing record operating results. We achieved our 14th consecutive quarter of increases in average revenue per operating day, an average margin per operating day, reflecting the continuing demand for our services along with the ongoing scarcity of land-based drilling rigs. Average revenues per operating day increased by $940 to a record $19,780, and our average margin per operating day grew by $800 to $10,980 compared to the previous three months ended March 31, 2006.

During the second quarter of 2006, we had an average of 295 rigs operating including 286 in the U.S. and nine in Canada. Compared to the first quarter of 2006, our average rigs working increased by four in the U.S. and decreased by nine in Canada. The decrease in Canada reflects the decrease in Canadian drilling activity resulting from the annual spring breakup.

As we announced yesterday, our rig count in the U.S. during July averaged 304, including 290 in the U.S. and 14 in Canada. I should say our total rig count averaged 304, including 290 in the U.S. and 14 in Canada. In addition, our pressure pumping in fluids businesses continue their outstanding performances in the second quarter. We acknowledge the contributions made by our colleagues in all of our business units.

Number three, increase of the stock buyback program. During the second quarter of 2006, the Company completed its previously authorized stock buyback program of $200 million with the purchase of 6.7 million shares of the Company's common stock. With the completion of this $200 million repurchase program, our balance sheet remains strong and we have reduced our outstanding shares by approximately 4%.

Today, we announced that the Company's board of directors has approved an increase in our stock buyback program authorizing future purchases up to $250 million of the Company's common stock in open market or privately negotiated transactions. The decision to increase 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 our shareholders. Additionally, the Company has increased its revolving credit facility from $200 million to $375 million. This facility may be used for purchases of the Company's common stock, as well as general corporate purposes.

Point number four, outlook. The demand for our drilling services continues to exceed the supply of drilling rigs. As a result, the pricing for our drilling rigs has continued to improve, but the current perceived gas storage overhang has moderated the rate of increase. Based upon the continuing strong demand, our rigs under term contracts has increased to approximately 25% of the operating rigs and we are maintaining our program of activating approximately 30 drilling rigs during 2006, including 17 that have been refurbished so far this year.

Lastly, the Company also declared a quarterly cash dividend on its common stock of $0.08 per share to be paid to holders of record as of September 14 and to be paid on September 29, 2006. At this point, I'd like to open the call for questions.

Thank you. Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [OPERATOR INSTRUCTIONS] One moment, please, for our first question. Our first question comes from James Wicklund from Banc of America Securities.

Good morning, guys. And congratulations on records.

Thank you, sir.

The dividend. You're currently paying about 1.2% yield. Is it tempting, and considering you bought back on the quarter, I guess the answer is obvious, but going forward, is it tempting to make that dividend more significant, or to continue to raise the share base?

Jim, I'm --

You've raised your dividend once since you instituted it so I'm complimenting you on that and just curious where priorities lie?

I think we've actually doubled it twice, Jim, in the time we've had it.

Okay.

And I think that we think that the dividend is an indication to our shareholders of a steady flow of cash back from the Company. And so I think we expect to continue to look at that, basically on a once a year basis. And at the same time, in regard to the stock buyback, our thinking is that to the extent to which there's excess cash flow generated by the business that we can deploy, and we can deploy it by buying back shares which we think, given the multiple that our Company is trading at, is a very, very, very effective use of shareholder capital.

Okay. In the quarter, and I know this is fungible in terms of numbers, but your market share of the total Baker Hughes counted land recount declined slightly. Do you see that you are losing share, gaining share, or maintaining share in the land rig business?

I think, Jim, the thing that we look at principally, I think basically share has stayed about the same, is the basic answer to your question. And I think you can see small fluctuations in those numbers quarter-to-quarter. I think the thing that we take great pride in is that we've had a continuing strong uptick in our revenue per day, margin per day and all of the metrics by which we measure the business.

And the overall profitability return on equity, all of the things which I think we're obliged to measure and should measure. And I think actually in terms of market share, I think we're about maintaining market share although I believe there are fluctuations from time-to-time.

Would it be fair to say that your more concerned about increasing your returns and margins per day than you are increasing market share or holding market share?

I think that, a little bit like asking me whether I left my left eye or my right eye better. I kind of like them both, frankly.

Okay.

So the answer to that question is, I don't know what we feel we have to make that judgment. I mean, we have the strength of capital, the facilities, and so on and so forth. 17 rigs being refurbished year-to-date is, I think, a real indication of Patterson-UTI's continuing ability to put very, very, very first-class equipment into the field. To do so in a meaningful way, you know, I think perhaps in a superior way to most of the rest of the market.

Great. Last question, Mark, what do you think the return, what do you estimate the return on invested capital is on your 30 upgrades this year, or refurbishes this year? Do you all look at it that way?

Jim, frankly, I typically look at it as return on total capital. Because for the entire Company, rather than return on capital for each rig, we do make that decision, we do make that decision in respect to our capital budgets each time we allocate capital. But I would point out to you that we're allocating capital, obviously, to the drilling business, which is the lion's share of our Company, but we're also allocating capital to our pressure pumping and to our fluids businesses. So from our perspective --

That showed in the quarter.

The point here is to make sure you get a good return on all of the capital you employ.

Okay, gentlemen, congratulation on records.

Jim, I had one more thing to that. The margin is in excess of $10,000 a day. The rigs we put out to date have varied, but they've all been between $3 million and $5 million we've spent refurbishing them.

Yes, we can figure out that math. It's a great return.

$3 million is a one-year payback and $4.5 million to $5 million it's about a year and a half, so --

And I think, Jim, you're well aware of where we stand in terms on -- return on equity calculations by comparison in industry.

Oh, yes.

We like that leadership position.

I don't blame you. Good job, guys. Thanks.

Thank you.

Thank you. Our next question comes from Jim Rollyson from Raymond James. Please go ahead.

Hey. Good morning, guys. If you look at margins, everyone talks about leading edge rates in margins, care to just kind of talk about where that level is today, maybe versus where your average was for the second quarter, how much of a gap is there at this point?

In terms of on the rate side, we went up $940 first to second quarter. We had gone into the quarter expecting about an $800 a day increase. And we would guess that the increase from second to third will be similar at about $800 a day.

But that's, obviously, in your average. I'm just trying to get a sense of leading edge. I mean, if you priced every rig out there today at what the leading edge price you're seeing in the market, presumably it's a little higher than $800 or $1,000 or is that still about what it is?

Frankly, I have not done the math, Jim. I mean, I would think it would be something higher than that. But I don't have numbers to support it here with me.

Understand. On the cost side, it seems like a number of your competitors saw their average daily cost go up a bit in the second quarter and I think some of the notations were relating to wage increases. Yet your costs didn't move up much at all. What's your thoughts on how your cost kind of progressed for the rest of the year?

You know, as you know, there's a point of view out there that wages pass through I think that's true, they do under the contract, but as a practical matter, we're selling our services at, a given rate. And anyway, from a wage perspective, we increased our wages a little later than some other people did. So we had very little impact for the quarter. Figure it was about $100 a day, where the total impact is about $600 per drilling day.

Right.

So we would expect our expenses in the third quarter to, in effect, catch up a little bit and probably increase somewhere around $500 per day.

Very good. Last question, share count, you bought back your $200 million. Could you kind of update us on where your share count is right now and, maybe, following up on that, how aggressive you plan to be with the $250 million, similar to what you did with the $200 million or any thought there is?

I'll speak to the current share count as a little over 166 million. But of course you have the effect of diluted securities. So based on the current share count, I would expect that weighted average shares for the third quarter would be somewhere in the 168 million range, compared to the 171.5 million that we had in the second quarter.

Jim, obviously, just to follow up on John's point. We didn't get the full benefit in second quarter for the share repurchase because, of course, it was made during the quarter. So, John's numbers first kind of indicate that third quarter will be the first time that we get the full benefit of that 4% reduction, approximate 4% reduction in outstanding shares. So that's kind of a part B to his question.

In respect of the newly announced additional $250 million stock buyback. I guess our thinking about that is that of course we always are looking at the market and market conditions to try to make a judgment about that. But, obviously, with trailing price earnings ratios of significantly below 10, and a business that we think is very, very strong and has been very strong and shows every sign of remaining strong for the foreseeable future, that our stock is cheap and a great investment for the Company.

And that to the extent to which we have the authorization and the credit facility, that it's a huge opportunity for us. So, that's we're, obviously, going to continue to look at the market conditions. But for us, it looks like a great opportunity.

Great, excellent quarter.

Thank you. Our next question comes from Ben Dell from Sanford Bernstein & Co.

Hi, guys.

Hello.

I had a question really. You talked about multiples reflecting a slowdown in the market and I was wondering, given that, do you see an opportunity to go and leverage up your balance sheet and acquire or consolidate in this market?

I guess the short answer to that question is that we have been among the most acquisitive companies in the industry for a very, very long time. To the extent to which we see opportunities, we would be very interested in taking advantage of them. The most interesting opportunity, though, that we see right now is our own stock, which is the opportunity to buy back, in effect, rigs at the cheapest possible price. So, yes, we're always on the lookout for acquisitions which would benefit the Company. Right now, it's, you know, and [INAUDIBLE] I think the most attractive opportunity is our own stock.

Okay, great. Obviously, over the last 12 months, oil drilling is now off about 100% year-on-year, that's been a big contributor to the strength as gas prices have come off. Do you have a view on how much further oil drilling can go up from this level?

Well, certainly we've seen an increase in the oil drilling in our business, both in just about all areas, particularly in west Texas and then in the Rockies. And I think as long as the price of oil stays at the levels where it is now, you're going to see a gradual increase in people drilling more and more oil wells. A lot of it is infill drilling but it becomes economic at these higher prices. So, I think you'll continue to see an increase in oil drilling.

And you believe that gradual increase will be enough to soak up the capacity additions coming onto the market?

Well, I'm, happen to be one the ones that believes we're going need the capacity additions coming onto the market to supply natural gas to this, this country. So, I think oil drilling will certainly be part of the equation. But nothing compared to what the natural gas equation is.

Okay, great. And just lastly, there's been some comments or signs, especially from EMP operators, there's been weakness in Canada, obviously, with gas prices there that have gone below the marginal cost of supply for Canadian players. Can you give us a view on your outlook in Canada what you've seen in the last month or how you're seeing the market develop from here?

What we've seen in Canada that we still have a huge demand for our equipment. You know, we have 18 rigs there now, and we're actually adding a couple of rigs this year and we have a tremendous demand for those rigs. And I think most people look past the softness in the price that we've seen because of the perceived surplus of natural gas.

And I think most of the EMP operators are looking to the future. That's what we're seeing everywhere we go, that the demand is still there, and people, that's their business to try to talk the rates down for us. It's our job try to hold rates steady and let the commodity prices fall where they're going to fall. But the reality of it is, more than likely, this is a short-term deal, this perceived surplus of natural gas.

And certainly I don't think anyone knows what it's going to be. A lot of analysts making projections on it, but no one knows because you don't know about hot weather, the hurricanes and/or how quick it's going to get cold in the winter. So we're seeing a continued demand for our rigs and particularly going into 07, we're getting a lot of questions about additional, adding additional rigs for companies.

Okay. That's great. Thank you very much.

Thank you. Our next question comes from Scott Gill from Simmons & Company.

Yes. Good morning.

Hey, Scott.

I want to go back and address a couple of prior questions. The first one, John, I want to make sure I understand. You guided Q3 revenue per day to be up about $800 in the third quarter? And did you say costs were going to be up $500 per day?

That is our guess.

Okay. So, in other words, we should expect cash margins to be up only $300?

In round numbers, yes, that would be about right.

Okay, I wanted to make sure I got that correctly. And then, Mark, on the, I guess the market share question, I understood your answer to that. But as I look at your monthly rig days, you go back to December, I think, the number of rigs working was 293, and then this past month, I think the number was 304. And that looks like 11 rigs working but you've reactivated 17. I guess I'm wondering, are we going to see a big jump in the month of August? Or how should we be reading this data versus reactivations?

Scott, let me try to address that one. I think the most recent U.S. rig counts because the Canadian seasonality adds some confusion. But you look at the July rig count, averaging 290 and go back to January, it was 282. So we're up eight, double that number because they come in over time and you get 16. I would maintain it's actually quite in line. You might recall in the first quarter, I believe we put out six rigs off the top of my head. And, you know, since that time, we've put out the rest of the 17, 11 of them, several of which went out in June and July. So, actually I think if you just look at the monthly rig counts, you know, I might have expected to be a little less than 290, given the timing of those coming out. But I would expect our rig count, with those additional rigs out there, to further benefit in the coming months.

Okay. And would you care to speculate, will that be up five in August or would it be more like up 10 in August?

I guess I think about it more in terms of the quarter.

Okay.

And in terms of the quarter, I would guess that we'd average somewhere between 305 and 310, I think it's going to be above 305, total rig count. And I don't know that we can quite get to 310, but somewhere in there would be the average depending on weather and other factors.

Okay. And for you, Mark, just, you probably have touched on this. But how much would you be willing to draw on your increased credit facility, you know, should your stock price dip down lower than it currently is? I mean, would you be willing to draw completely on the $375 million?

Well, Scott, I think as a prudent corporate executive, I would hope that we would always maintain some margin which is appropriate for a business. But the answer to the question is that we are extremely bullish on the Company's prospects. We are not afraid of having the amount of $375 million in debt that the credit line provides. You know, whether we would go above 250 or some number about that size, I don't know. There's a measure of leaving some powder dry. But we also believe that 375 could likely be expanded, as well.

Okay. Is there any --

I don't think it's a today question if that makes any sense.

That's fine. Is there any shelf filed for the Company to issue debt?

I don't believe we have a shelf on file.

Okay. Thank you.

Thank you. Our next question comes from Geoff Kieburtz from Citigroup.

Good morning. A couple of questions. You mentioned that roughly 25% of your rigs are on term contracts right now. What are your thoughts going forward? Are you seeing more customers wanting that? Would you be willing to go higher or what are your thoughts on that?

Geoff, if you kind of go back and look at our quarterly announcements, it's kind of going up by kind of a couple percent from 20% to 25% over the last -- so we keep on seeing an increase in that. As we indicated, I believe, when this topic first kind of became more popular among our customers, that originally our customers were pushing us into these contracts because they wanted to assure themselves of rigs.

And it was really a defensive mechanism for customers to say, look, I want to make absolutely certain I've got this rig and I'm willing to pay you, in effect, for that certainty on a term contract. And we've continued to see customers pushing us towards term contracts and that's what's I think accounted for historically why that rate of contracts has gone from a couple percent up to 25%.

At this point, you know, I think we expect that that will continue to build. To the extent to which customers look out further and get even more bullish on the market and even see greater demand for the rigs and potentially see even greater ebullience in the market, then I think it wouldn't surprise us for us to see that number continue to increase and, in fact, potentially increase at a faster pace later on.

In so far as it's driven by customers, are you in a position to extract a premium for someone, for a rig that someone wants to keep tied up for a while?

Yes.

Okay. And typically, the length of that term?

I would say one year, but there are two-year and three-year terms.

Okay.

But predominantly one-year terms.

Okay. You reiterated the plan for 30 refurbishments this year. I think you previously talked about that really being constrained by various components and labor availability to do it any faster than that. Is that still the case? And if so, what would you expect after these 30 are completed?

It's still, it's still on track and we're still -- you know, we've done a lot of planning to make this happen. And you order these parts months in advance. So I think that we've really done, our people have done a really good job keeping us on track.

In fact, we feel real comfortable that we're going to get our 30 rigs out this year. And if you remember earlier we talked about at least 15 in the first half of '07 and we're literally working on those right now. And we haven't made the final decisions on the second half of '07, but we're in the process of planning for that right now.

And you've got to do that because as many parts are nine months to a year out to be ordered. So, yes, we are planning in '07 and, yes, we're on track. And I think our people just have done an outstanding job getting parts in and on time to get our equipment out when we need to get it out.

If you, let's say, have 30 more in '07, where does that leave you in terms of refurbishment? You're pretty much getting down to the bottom of the list of rigs that you could refurbish, aren't you?

That would leave us with somewhere around 40 more.

Okay, all right. Both the fluid and the pressure pumping segments had pretty strong results relative to our expectations. Can you give us any comments on the outlook from here? Is this a new baseline that you're going to build from? Is there some --

I sure would like for it to be.

We'd agree that extremely strong results. Relative to pressure pumping, second quarter is historically been a time where weather and other factors get in the way of work and it just was not the case. Guys up there worked extremely hard and I think were operating, frankly, near their capacity. We do continue to add equipment to increase that capacity.

But as we look to third quarter, you know, we see some additional bump, maybe somewhere in the $37 million, $38 million of revenue versus the $36 million in the second quarter. But truly the weather really did cooperate with extremely strong demand up there for our services.

And anyway, we expect third quarter to be somewhat better, but not a lot because we're very near capacity. In terms of the fluids business, you know, they have also been doing just fantastic this year. The roughly $60 million in revenue for the second quarter, we would like to repeat it, but our people there feel that, you know, something that looks more like the first quarter is more realistic, something in the $45 million to $50 million range in revenue would be our guess.

And the reasons for that?

It is just size of unique jobs offshore in the second quarter that resulted in just, we think, extraordinary revenue.

Okay.

We had hoped to repeat it, but truly internally, that's not what we're hearing.

Okay. And just in terms of capacity, I know it's a little bit less well defined concept in the fluids business, but is there any reason, if the demand is there, that revenue couldn't exceed $60 million?

There's no doubt about that. We have the facilities to do it. And if the demand is there, we could exceed $60 million. We're just telling you what we see in the pipeline as far as demand. There's usually a lot of preplanning for offshore stuff. So they pretty much know ahead of time what their jobs are going to be. So, you don't usually get one of those on the spur of the moment. There's a month of planning ahead.

Right, okay. And presumably in both segments, the margin performance you expect to hold or improve?

Yes. We would expect it to be similar.

Okay.

One other, since you brought up our other businesses, I guess I'll bring in the other one that's not particularly significant. But the EMP business that did not have a great quarter with operating income somewhere in the $0.5 million range compared to first quart was more than $3 million. Specifically, we used successful efforts accounting for EMP. We had an exploratory well that we determined to be a dry hole. The impact of that is to increase our costs. It's not an impairment that goes through DD&A, and actually increase your cash costs by the cost of that well. That was about a $3.1 million increase in segment costs for the quarter. If not for that dry hole, the results would have been very similar to first quarter.

Got it. And then just finally on the buyback topic, you know, what I'm hearing is this authorization is almost tantamount to the current quarter buyback plan. I mean, how often can you go back and get a new authorization?

I used to answer this question, Geoff, when we were being asked, do you discuss the buyback, and I used to say to the analyst community, and to the investor community, we do it at every board meeting. We continue to do it at every board meeting. So I guess the short answer to the question is that I think the board and management all concur that we have a combination of this cash flow beyond the, other investments for ourselves and an opportunity to deploy that cash in a business we know well, and at a very attractive multiple. So a pretty attractive combination.

Right. Thanks very much.

I don't know what else to say.

All right. Got it.

Thank you. Our next question comes from [Kevin Link] from [Paul N. Esk] Capital Management.

Good morning. I have a couple of questions. The first is on the term contracts that are being signed. How much of a difference in premium are you saying on ones that are one year, two years and three years?

You know, it's real difficult to say, because the different types of rigs that we're putting out on the term contract, sometimes you have a lower quality rig that you're putting out so to get -- I guess you're asking the leading edge. But it's -- I just don't think there's that--

I don't think there's a hard, fast answer to -- In effect it's a $1,000 for one year, $2,000 for two years, and $3,000 for three years. It's easy to think in that kind of formulaic basis, but the problem is that different rigs in different markets command different prices.

And the rate of increase that's to be expected with regard to each of those things, both in terms of the equipment, the cost of operations, et cetera, are all in effect complexities that you factor into the contract.

So I'd love to give you a formulaic answer because it would make it a lot easier for us to be driving the business and operating the business, but fundamentally, the management team looks at the terms of every long-term contract and decides whether we think the terms are attractive enough to warrant us signing it.

Literally the top four management reviewing what the sales team brings up in terms of a long-term contract.

As part of it, I was looking a little bit more color. As for the people that are looking for longer-term commitments, how much are they willing to pay for that?

It's interesting you asked it that it way. I think Cloyce's answer was revealing as an answer based on the color. It's really interesting. I see it very much more as customer and rig specific. In other words, I customer have a certain kind of prospects that I need to drill. And you have the rigs that are well matched and well suited to that. And I want to assure myself that those rigs remain available, or become available, for that need and for that period. And I have a program of 200 wells and each rig is going to drill, you know, six or eight of those wells per year and I need this many rigs for this long a period. That's how I see them thinking about it.

Okay. That's helpful. Mark, you made a comment earlier that you described the current gas surplus as perceived. I found that pretty interesting because the last time we had such a surplus was when gas was $1.50 to $2.00. Here it is still at $6.00 to $7.00. What are your thoughts as to what is keeping the price up as high as it is, and keeping drilling activity as high as it is in the current environment?

I'll let Cloyce answer that one, if you don't mind. He's got more years in this business than just about anybody.

Well, I think the reality of the situation is we're short of natural gas in this country. We built this infrastructure that natural gas was the fuel of choice, it was plentiful and it was cheap, and you're seeing it come up in spades right now with this hot weather, when all the incremental power comes on is burning natural gas. And we have no choice but to furnish natural gas for this increased demand in the energy, because that was our energy policy.

We built gas-fired electric generating plants. They're all over the United States. We've been doing it for 10 or 15 years. So now we have no choice and everybody thinks there's a surplus of gas right now, but when you really take what storage is, it's 15% of the gas that's consumed in the United States, and we're trying to, everywhere you read, the supply is down, decline rates are increasing, we're drilling more wells, and to give you an idea, in 2005 there was 27,000 gas wells drilled to supply the same amount of gas that we supplied the previous 10 years.

And those previous 10 years we were drilling anywhere from 10,000 to 15,000 wells. So we're up now to where we're having to drill more and more wells to supply the same amount of natural gas and so it's a perceived, you know, surplus of natural gas, I think, that a lot of the analysts have made a market in. It's perceived it's going to be short. It's very short term.

I mean, you might accidentally have some gas-on-gas pricing competition, but look at the strip. The people are buying the gas have a pretty good idea that gas prices are going to be high for some time to come.

Thanks, Cloyce. Just a couple of other short questions. CapEx is a little bit over $250 million. What's it look like for the second half?

John, you want to --

We would, our estimate is that we'll spend a little under $500 million for the year.

Okay. And then onto the final question. With your cash flows and with likely CapEx plans in the next couple years, looks like excess cash to me with my model, is potentially $200 million to $250 million a year. And, on one hand, buying back the stock is a great investment as you've said. But I think a $2.00 dividend would make this stock $40 with current dividend yields available out there in the market. What are your thoughts on that?

I guess the question of dividend versus buyback is a, one of those great long-lasting debates that we can see both academics as well as investors debate as to which is the preference. Obviously, we have pursued a policy in which we were among the very first companies to institute, or reinstitute a dividend following the sort of cessation of dividends kind of in the mid'80s.

So, obviously, we've shown ourselves to be people who believe in that strategy. We also think that returning cash the shareholders through buybacks is a hugely beneficial thing for the share base. Whether we'd be better off to, in effect, put all of our eggs in one basket, be it the dividend basket or the buyback basket, is a question that we debate around the table, with our directors, on a regular basis.

I will tell you that for every investor who says to me, we should do it only with the dividend, there's another investor who says, we should do it only with the buyback. And so, you know, I'm perplexed by the question. We give it a lot of thought and try to do the best we can. I can't much say anything much more than that.

Okay. Thanks for your help.

Thank you. Our next question comes from Alan Laws from Merrill lynch.

Good morning. I'm sorry if I missed this earlier. I joined a little late. But many of the producers have been talking up purpose built rigs, the new builds, rather, rather than increasing their rig counts more high grading. Have you changed your stance really on reactivations versus new builds?

You know, the truth is on this point, we think that the market perhaps is not appreciating what we've been doing. The refurbished rigs that we've been putting out, we think of as being as technologically advanced as any new build that is being built anywhere in the country. What we think we're doing is, in fact, in many places, some places I would say, we were actually ahead of other people in terms of technological advancements that we've brought to the rigs.

It's not something that we want to talk about for obvious competitive reasons, but we believe that we actually have rigs that have all of the technical capabilities that some of our competitors are touting in the marketplace. That said, we are upgrading our rigs when we refurbish them and additionally, I would point out to you that we do some number of rigs which are refurbished in between wells.

We sometimes call them walking refurbs. Running refurbs, I'm sorry. And those running refurbs are oftentimes the incremental improvement in pumps and other technology. Cloyce, you want to add to that?

Pretty much you're telling it the way it is. Certainly, all the refurbs we've done, not only last year but this year, the majority of them, have all the technology on them that you would get in a new build.

There's a lot of perception out there that you're going to move faster with some rigs, and I think that if you check our record, that we move about as fast as anybody. And we have some technology with some moving rigs that other people don't have. So, you know, it's in the eyes of the beholder. And I certainly don't think that the rigs that we're putting out would take a back seat to any of the rigs, the new rigs, that are being built.

That's good answers, guys. Just a little bit of follow-up to that. Are you, from the producer standpoint, do they have a preference? Do they come to you and say, it would be great if you would build us this new rig, or do they have a design in mind that you can kind of put through in your refurbs? What's the market like?

Let me answer that question this way. We're very, very much in contact with our customers on a regular basis. And very often, they ask us for rigs and tell us of their rig needs and we refurbish rigs with a particular customer need in mind. And so in effect, the concept that I think some of our competitors are putting in the marketplace that, oh, they're building custom purpose rigs and that this is something that is special to them, and there's sort of this likewise notion that some players are non-commodity drillers and others are commodity drillers, we think is just kind of completely missing the point.

A rig is a rig kind of thing?

We think that we're doing the same kind of, in effect, customization to meet our customers' needs as others are doing. We just don't necessarily spend as much time talking about it.

All right. Thanks again. Thanks, Mark, thanks, Cloyce.

Thank you. Ladies and gentlemen, our next question comes from Todd Garman from Peters and Company.

Good morning.

Good morning.

Just wondering how the needs or the demands of your clients have caused you to change the way that your rigs have been designed? Are there any trends there is? Do you expect them to continue into the future?

I don't think we've changed the way our rigs are designed. We've put new technology on rigs to make them a safer place to work and easier to move, with the, and we even have some self-moving rigs that we've designed to move on pad locations where you drill wells. But certainly, we're adding all new modern technology to our rigs, but we're not really changing the design of the rigs.

Are you seeing clients ask you to drill wells on average to deeper depths? Is that, I guess, are you requiring to outfit rigs with larger pumps, and that sort of thing?

Certainly we're putting larger pumps on just about all the rigs. But again, that's technology that's driving that, because we're drilling more with directional wells, more horizontal wells, using more pdc bits and more mud motors. To say that we're seeing more and more, deeper and deeper wells drilled, they're just not that many real deep wells drilled.

But we do drill deep wells. We are building some larger rigs. We're actually putting out a 3,000-horsepower rig right now that's going to drill some fairly deep wells. We're drilling a couple of 20,000-foot wells right now.

But we want to make our rigs where they'll move quickly. We have iron roughnecks on them. We're putting triplex pumps on most every rig, I think, that's a big change that I've seen in my career. We used to use duplex pumps primarily. A lot of triplex pumps were used offshore, onshore in the mid-80s and the early 90s it was all duplex just about. Now we're going to where it's going to be all triplex but it's because of the technology of drilling the wells, it's not the rigs themselves.

Are there any limitations in terms of the rigs that are available to be refurbished by Patterson that would prevent you from continuing to capitalize on those trends? In other words, are the rigs that are available to be refurbished, are they singles or are they --

We don't have singles, but we do have some smaller rigs and it would be whether the marketplace dictates to us to whether we refurbish those rigs. When I'm saying smaller rigs, I'm talking about 350 to 500-horsepower rigs. If we're going to bring something out right now, it's usually 800 to 1,500 horsepower, in that range.

We're a mid-depth driller, that's where most of the drilling takes place. If we were to buy something new, it would be in that depth category because that's where the majority of the work is being done, particularly in the unconventional plays, the 1,000 to 1,500-horsepower rigs are the ones in the greatest demand.

Actually, we've been preaching that now for 10, 15 years, that's where the work is. UTI, before we merged with them and Patterson, were both considered mid-depth drillers and that's where, the majority of our rigs are in that category. And if we add rigs, we'll be adding them in that category.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] One moment, please. Our next question comes from Kevin Pollard from JPMorgan. Please go ahead.

Thanks, good morning.

Hi, Kevin.

Just wanted to see if you were seeing any change in the cost per rig as you work through your refurbishment this year, or is it still running at, I think, you last said $5 million to $6 million per rig?

Yes. Actually, to date I think we're actually below that number. I think the first quarter rigs were kind of in the 3 to 4 range. And second quarter, you know, they've been a bit higher, which I don't think is relative to passage of time. It's just which ones are being refurbed when. Our belief is that the ones that we refurb this year would average about $4.5 million plus drill type.

Okay. And how would you see that changing as you sort of looked to '07 and moving into the next batch of 30 rigs, I would assume that between component price increases, labor and just getting further into the pool of rigs, that cost would go up. You know, what do you think that might look like?

I would expect you're correct, but I, we have not completed full budgeting for the '07 rigs. But my guesstimate at this point would be somewhere around $5 million a rig plus drill type.

Okay. That's all I had. Thanks, guys

Thank you.

Thank you. Our next question comes from Pierre Conner from Capital One Southcoast.

Good morning, gentlemen. Just a little bit more on that same question, actually. Cloyce, how far out are you ordered on components that you don't have currently available in the yard, in terms of, or how deep in the number of rigs you have components?

I can tell you that what we have seen, I used to tell people it was 90 days to six months. Now, then, it's six months to a year. And there's some components that are even over a year out. I'll give you an example, drill pipe is a year out right now.

And we have several other components, bearings for rotary tables are a year out. Just many, many parts that are a year out. And we've seen that waiting time grow rather than get shorter. I don't know, I'm sure there's some things that have gotten shorter. But, you know, we can only get the rig out as quick as the longest, the longest time it takes us to get the part. So we might have a rig sitting, almost ready to go, and be waiting on a bearing.

And how far ahead are you ordered out, Cloyce, in terms of --

We're ordering stuff, and I mentioned it earlier. Our guys have done a great job the last year predicting what we're going to need into the next year for refurbishing. We're in the food chain. That's the reason we're going to be able to get the 30 out that we said this year. And the end of next year, we're ordering stuff right now, well into, to be delivered well into '07.

Okay. And then continuing on the theme of the new equipment coming out and it's efficiency, my question is around specific technologies and such, on some of your larger rigs, you mentioned a large rig. Is it coming out with top drive, with enough derrick height to be able to put a rental in it? What's the trend there in terms of demanding efficiency by the customer?

All of our larger rigs that come out are capable of putting a top drive in. We have actually have some top drives on order for delivery towards the end of this year and next year.

Several of the rigs that we're going to have term contracts on in '07 are going to have top drives. We're seeing more of that, particularly when the directional wells and the horizontal wells, and the longer the horizontal laterally you drill, the more need there is for top drive. So, yes, we can put top drives in them and we are putting top drives in several of the rigs.

Great. And the last one is, around, you sort of, the trends on other efficiency items, just sort of what you're experience is in turnover right now, or, and maybe that's related, your comment on your safety trends?

I guess I didn't understand the question.

Well, what's, has the turnover been stable here? Are you seeing any changes there? And maybe also reflected to how your safety performance has been?

No, I think that turnover is -- I've been really pleased with the upturn that's been going on for the last four years. It's been, as far as maintaining the efficiency of our Company, even though it's not as efficient as it was when we had all drillers and tool pushers running the rigs, we've done, I think, an adequate job throughout the industry. The upturn, of maintaining employees on our rigs. Certainly, you know, we're trying to maintain a safe workplace like everyone else is. And we're adding iron roughnecks and EDS systems, and that type of thing to our rig to make them a safer place to work.

Okay. That's helpful. I'll turn it back. Thank you.

Thank you. Our next question comes from James Wicklund. Please go ahead.

Yes, as a follow-up on Mr. Kieburtz' question. I think, John, you said that after you finish the 17 rigs that you'll do this year, maybe it was Cloyce, I apologize, that you'll have about 40 more left in the pool to refurbish?

Jim, I think what the answer, let me just kind of clarify it. I think we've said that we're going to do 30 this year, of which 17 have been completed. We expect to do an additional 30 next year. And we've sort of targeted the first 15 of that 30 for next year.

Got you, okay.

The question was, in effect, once you've done both sets of 30, thereabouts, how many rigs would be remaining? If you think about it, for just a second, you know, 300 rigs currently, plus 60 rigs approximately, equals 40, equals 360 plus 40, is 400 rigs.

Got you. I just needed help with the math, Mark. I appreciate it.

Yes, that's the arithmetic.

Thank you. [OPERATOR INSTRUCTIONS] One moment, please. And there are no further audio questions at this time. Do you have any concluding comments?

I thank everybody for their participation in the call. And appreciate their time and interest in our Company. Thank you.

Thank you. Ladies and gentlemen, this concludes the Patterson-UTI Energy second quarter conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 and enter the pin code of 1106590. Once again, that number is 1-800-405-2236 and a pin code of 1106590. Thank you.