Patterson-UTI Energy Inc (PTEN) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Patterson-UTI Energy third quarter 2006 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, Wednesday, the 1st of November, 2006.

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

Thank you very much.

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 six months ended September 30, 2006. Three and nine months, I'm sorry.

Participating in today's call will be Cloyce Talbott, President and Chief Executive Officer; and John Vollmer, Chief Financial Officer. Mark Siegel, the Company's Chairman, will not be on today's call, as he is attending a funeral. Mr. Siegel, will, however, be presenting tomorrow at the Merrill Lynch Global Energy conference in New York.

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, rig utilization, and planned capital expenditures; adverse industry conditions; difficulty [inaudible] acquisitions; demand for oil and natural gas; and ability to retain management and field personnel.

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

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

Thank you, Geoff.

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 prior to the opening of the market.

Before responding to your questions, we would like to take a few minutes to review briefly some of the highlights from the third quarter ended September the 30th, 2006. I would like to cover four points this morning. First point being continued record financial results. Second point, continued record operating results. And the third point being update on our refurbishments. And finally, our outlook for land drilling.

First point, continued record financial results. I'm pleased to report that total revenues, net income, and net income for common share all set new records in the third quarter of '06.

To summarize briefly, net income for the quarter increased by 75% to $186 million or $1.12 per share from $106 million or $0.61 per share for the third quarter ended September the 30th of 2005. Revenues for the quarter were up by 44% to $674 million compared to $469 million for the third quarter of '05. Once again, the results demonstrate the earnings leverage we're able to achieve at high levels of rig utilization as a 44% increase in revenue generated nearly a 75% increase in net income.

We continue to maintain a strong balance sheet and as of September the 30th, 2006, we had $322 million in working capital and $48 million of net debt.

During the third quarter, we also purchased $167 million of the Company's common stock. Since September the 30th, we purchased an additional $23 million of the common stock and substantially eliminated our net debt. In the aggregate, we have now repurchased approximately $390 million of our outstanding shares and reduced our outstanding share count by approximately 8%.

Second point, continued record operating results. We achieved our 15th consecutive quarter of increases in average revenue per operating day and average margin per operating day. Average revenues per operating day increased by $1,030 to a record $20,810 and our average margins per operating day grew by $190 to $11,170 compared to the quarter ended June 30th, 2006.

While the high level of activity in our industry contributed to increased pricing for drilling services, it also contributed to substantial increases in compensation and repair costs during the quarter. Our third quarter expenses were impacted by a substantial increase in field wages, which was implemented in June, and by some lost drilling days which were caused by delays in the delivery of some needed components for certain rig repairs.

During the third quarter of '06, we had an average of 301 rigs operating, including 290 in the U.S. and 11 in Canada. Compared to the second quarter of '06, our average rigs working increased by 4 in the U.S. and by two in Canada.

In addition, our pressure pumping and fluid businesses continued their outstanding performances in the third quarter. We acknowledge the contribution made by our colleagues in all of our business units.

Third point is update on rig refurbishments. We are on target with respect to our 2006 rig refurbishment program, with 23 refurbished rigs now being marketed. These refurbished rigs have virtually all the characteristics and qualities of new rigs. We expect to complete seven additional refurbished rigs before the end of the calendar year, bringing our total to 30 essentially new rigs for calendar 2006.

Like others in the industry, we face the challenge of increased cost and slower-than-expected deliveries of rig components. As a result of increased level of activity and the increases of cost of rig components, we have increased our expected capital spending for 2006 from approximately $500 million to $600 million.

These delays with respect to components have also caused repairs of running rigs to be delayed and to be more costly. We are continuing our program for refurbishing rigs and adding new rigs to the fleet for 2007, but are undertaking a careful review to determine whether greater efficiency can be achieved with respect to our capital spending.

And finally, our outlook. Given the warm weather last winter, the level of natural gas in storage [inaudible] before the start of the upcoming winter is not a surprise for us. The current gas storage overhang combined with the effect of some customer budgets that are running low and have not yet been replenished, have resulted in some recent moderation of demand in certain markets.

Our operating strategy has been and remains based upon the conviction that the trend to a substantial increase in natural gas wells drilled in North America is a long-term trend, albeit subject to some weather and other volatility.

We believe that our quality service approach and upgraded rig fleet, along with our strong balance sheet, position our Company to take full advantage of the next upward wave in the natural gas market.

Lastly, the Company also declared a quarterly cash dividend on its common stock of $0.08 per share to be paid to the shareholders of record as of December the 14th, 2006, and will be paid on December the 29th, 2006.

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

All right. Thank you, sir. [ OPERATOR INSTRUCTIONS ] Our first question is coming from Jim Wicklund, Banc of America Securities. Please go ahead.

Good morning, guys.

Hi, Jim.

Cloyce, in undertaking the review of greater efficiency for Cap Ex. Can you tell us just kind of what that consideration is, what that kind of means?

Jim, it's John. I'll answer that one.

You know, we started the year thinking that we would spend about 500 million, actually, I think it was about 480 million, on Cap Ex. We find ourselves here in the fourth quarter with plans to spend closer to 600 million and so we want to take a hard look at that and see if we can be more efficient because if we can get the --

Just in terms of your executing, you mean? Or the type of assets you spend your Cap Ex on.

It would be the efficiency, can we save some money.

Okay. Okay.

Yes, if we didn't expect to spend the extra 100 million, if we were able to squeeze some of that out of there, we could buy back more stock with those dollars.

I couldn't agree more.

And this is efficiency in your yards and your operations and your maintenance and this would just be kind of what any company would do in the face of rising costs and trying to be more efficient, right?

I think that would be correct.

Okay.

In terms of the rigs that you have that are still idle, I am assuming that those are generally smaller horsepower rigs, Cloyce, or -- I know they'll eventually be needed, I guess, but you're building new rigs. So can you talk about what it will take to get the remaining idle rigs back to work?

Well, our plans, Jim, are in '07 to refurbish the remainder of our 750 and greater horsepower rigs that we have available. That's going to leave a certain -- a number of very small rigs that might or might not be brought back into the marketplace if demand ever -- if we ever need those rigs. And that's the reason we bought the 15 rigs for the last half of '07, to put into the marketplace.

So to answer your question, the biggest demand for rigs is still the intermediate depth rigs and that's between the 800- and 1,500-horsepower rigs.

And the reports I get from people in the field, looking at the design of the new rigs you're building, are fabulous. Can you tell us what differentiates those from other rigs or previous rigs of yours?

Well, we have designed what we call a walking rig, but it's a self-moving rig and it's -- reports that we're getting back are probably very similar to what you're hearing. It's working very, very effectively and we've got a lot of inquiries from different customers, orders for that type of rig for pad drilling and we have plans to build several of those through the remainder of this year and into next year.

Okay, gentlemen, thank you very much.

All right, thank you. Ian MacPherson with Simmons and Company. Please go ahead with your question.

Yes, good morning. I guess my first question would be, when you look at adding efficiencies to your Cap Ex program, another consideration would presumably be looking at new builds opposed to reactivations, and what are your thoughts on how many more new builds might you add to your order book and what your timeframe considerations would be in terms of when you would want to place orders to lock in pricing and what deliveries would look like?

Well, we've got our plans made for '07 and it depends on what our customer demand is, when we place another order for additional rigs.

Ian, I am not sure the conclusion you're drawing is correct. The industry -- there's been a tendency for us and other people like us to spend more money bringing stuff out than we initially think and we want to take a look at that and see if we can do it more efficiently.

I don't think the comparison of new versus refurbished rigs. The refurbished rigs have generated dramatically better returns than the new builds. I mean, Jim Wicklund pointed out he's hearing fabulous things about this rig. It's a virtually new rig. The ones that are out there can drill 28 rigs in one location. That's a refurbished rig by the terms that you're using, done for dramatically less money than new builds.

So I think, for us, it's just a matter of deciding how to spend the shareholders' money in order to maximize returns and try to do that efficiently so, again, we maximize returns.

Okay, thanks, John. Just as a followup to that, I guess the other side of the equation would be have you seen any meaningful rig attrition in your fleet this year and do you have any view towards expected attrition next year that might factor into your reactivation program?

Well, we've not seen a meaningful attrition. Certainly, as I said in the opening remarks, we've seen some moderation in some markets, but what we're hearing from our customers is that they're -- almost without fail, that they're going to be working more rigs in '07 than they were in '06. Some of the budgets are running short towards the end of the year and they're going to have to get their budget money reappropriated, but I haven't heard any -- I don't think any of our customers say that they're going to cut back on the number of rigs next year.

Okay. And you haven't had any rigs come out of your marketed fleet this year, was really my question.

There has been no attrition. We maintain the rigs to keep them running, rebuilding them over time. One, in fact, observation I would make is we didn't have a large increase in our rig count from the second to the third quarter, even though we're bringing out additional rigs. And that is caused by having three to five more rigs down at any given point in time for us to take those rigs out of service, make sure that they continue to be in good working order to be responsive to the customers, and in fact that is a part of the increase in expenses per day from the second to third quarter, because you can't let those people go home.

So we believe that we're maintaining our rig fleet and avoiding attrition by maintaining them at the appropriate time.

Okay. Thanks, John.

All right, thank you. Marshall Adkins, Raymond James. Please go ahead with your question.

Hey, Cloyce. A quick question on the -- what I'm hearing from investors on your rig quality is a concern that if there is a slowdown, the perception is you have lower quality rig and yours is going to be the first to come off-line. A couple of questions. First, I want your general thoughts on that concept and that perception. Secondly, what percent of your fleet is booked under long-term contracts right now?

I think our numbers, we have 83 rigs working under term contracts right now, and your perception is right. I have heard that perception now for 10 years and we usually market about as many rigs as anyone else, unless we make the decision to quit marketing rigs because of pricing. And I would anticipate that our rig count wouldn't drop any quicker than anyone else.

I think people lose sight of the fact that we put 60 rigs into the marketplace in the last two years that are like brand-new rigs with the quality of the refurbs that we have done to them, and a lot of people lose sight of that. These rigs are as good as any rig that you can put out there in the marketplace. First off, we wouldn't spend all that money if they hadn't of been that way. But I think that is a misperception in the marketplace. It always has been, we just have to live with it. It's just the nature of our company.

You think if there is a slowdown activity of a broader spread between margins for your rigs and a new built fleet like H&P?

We've always seen that. They will always be a little bit higher on their day rates, but basically if there is a real slowdown, we all come down and we're at the same price. That's just the -- did that in 2002 and it did it in '98. And it's always done that.

We all -- a 1,500 or a 2,000-horsepower rig is going to work the same as a 1000-horsepower rig, just almost the same price, if you have a real slowdown. It's always been that way. I don't see it being any different if we have that type of slowdown again. I've got to tell you, I don't anticipate that kind of slowdown. If we were to have that kind of slowdown, you're going to see an absolute wreck in the gas markets with the type of stuff that we're drilling in the gas markets today.

All right. That makes sense.

John, one followup here. Tell us about Canada. Obviously there is some slowdown on the lower-end rigs. How is that affecting you and what should we look for in the fourth quarter on your Canadian operations?

Most of the rigs we have in Canada, the three that fall in the -- not real shallow but shallower markets, and the other now 16 up there fall in what we call mid-depth and I think it's actually relatively deep in Canada. You know, we expect that in the first quarter -- our operating people up there tell us that we'll be working all our rigs.

Fourth quarter is always a little bit tricky because it's pretty weather dependent. Everything has contracts coming up but it's really a matter of when things freeze up and really get going up in Canada.

So basically, ramping up to where all of your rigs are probably working the first quarter.

Yes and --

From the 11.

-- the first quarter, we will have 20 in Canada.

Okay, excellent. Guys, thanks for the help.

All right, thank you. Arun Jayaram with Credit Suisse. Please go ahead with your question.

Good morning, gentlemen.

Good morning.

Guys, in this upcycle, you know, the strategy of Patterson has been to generally keep a high level of spot exposure to maximize margins and to refurbish about 30 rigs per year. How does that strategy change if the rig count stabilizes or goes down?

I think the strategy doesn't change. I think the strategy has really been as follows: that, initially, we like to spot rate, we still like to spot rate. But then we found that many of our customers wanted to go to longer-term contracts to have greater certainty on their costs looking forward, and like other drillers we responded to that by being willing to work at long-term rates in addition to the spot rate, and I think that is still true today.

We're trying to serve customers and trying to meet their needs and at the same time maximize returns for our shareholders. You -- if there were a declining market, that's the time when, I don't know, but I wouldn't expect our customers to be seeking term contracts, so I would think you would see term contracts in the industry as the percentage declined.

You know, if the market, as the next wave of increased drilling occurs, I would guess that customers would look for more long-term contracts and we would be willing to work both on the spot and the long-term contracts, right?

Okay. Thanks for that.

Cloyce, in August you ordered $100 million of components, I believe, from NOV for 15 new builds.

That's correct.

On a completed basis, what do you estimate for those 1,500-horsepower rigs, the all-in cost, including pipe and collars, will be?

$11million, I believe.

With pipe and collars, I believe it's $12 million.

Okay, $12 million with pipe and collars.

Okay. And as you think about 2007, you obviously have those 15 new builds. Have you made a decision today on how many refurbs you plan next year, excluding those 15 new rigs?

We have 15 planned in the first half of next year.

Okay. That's all I -- actually, one quick question. John, can you give us -- you have been pretty good in terms of providing good guidance on margins. What does your crystal ball tell you for Q4 on margins?

Yes. Q4 is kind of a tricky one. There are a lot of factors out there. Our rates right now as we look at them weekly are higher than they were in the third quarter.

Yes.

On the other hand, as Cloyce mentioned in his comments at the opening of the call and also in some of the questions, answers, that we do have customers out there that are waiting for their budgets to be replenished. So we're seeing the market right now is -- some rigs going well to well at a little more dollars and some seeing a little less. Overall at this point, it appears, I guess what I call relatively stable. So there is no deterioration from here, you expect the revenue to go up a little bit for the quarter. It really just depends when these people get back active and hand down their 2007 plans.

On the cost side, we continue to be working on a few more rigs than we did a year ago, which has held back the rig count a bit. On the rig count side, my guess is it's relatively stable through the fourth quarter from what we saw in the third quarter. Somewhere around 300 rigs. The opportunity for things, I think, to move upward, both in the rig count and on the margin side, would be in the first quarter.

Okay, so would it be fair to say maybe a slight uptick in margins, sequentially?

It could be. I guess I'm -- my guess is that it's going to be in some ways similar to the third quarter, whether that could be off a couple hundred dollars or down a couple of hundred dollars is a little unclear to me. The rates aren't moving up a lot right now. Yes, we do face increasing costs in the drilling business right now.

Okay, most helpful. Thanks.

Thank you. Next, we have Kurt Hallead with RBC Capital Markets. Please go ahead.

Hey, good morning.

Hi, Kurt.

Marshall kind of hit on the question, a lot of people are saying that your rigs are going to get displaced by some of these new rigs that come in. I am aware of a certain situation on the Canadian contractor that has seven rigs coming into the Barnett Shale, new rigs, next spring, that's going to replace, obviously, seven rigs that are currently working for an operator. What is your exposure in the Barnett Shale right now?

We have about 40 rigs working in that area, so I guess we have some risk, but I anticipate the rig count going up in the Barnett Shale.

Now, I know topic of conversation, it comes up every single cycle, and I think based on your corporate performance it shows that it basically is untrue that there is much of a differential between the different classification ranks and different cycles. And so far to date and I guess over the course of the last few months, you guys can unequivocally say that none of your rigs have been displaced in any situation?

We have had some rigs released but we have put them to work someplace else. But I don't know of a case, Kurt, where somebody brought a rig in that was a superior rig and replaced our rig. We have had some rigs maybe replaced because of pricing in some areas where somebody has chose to cut their price low enough to get the job, but we moved the rigs -- in some instances, we've moved the rigs at a higher price than where we left.

So you never know all the details of why people do what they do, but we have -- I guess I would anticipate that maybe if we had a real shallow rig working in a market and we have been working there for years and a deeper type of rig came into that market and they needed a bigger rig than the smaller rig, we might be replaced. And that's a very, very limited type of deal. I don't anticipate a fleet of rigs coming in and replacing a fleet of Patterson rigs, you know.

All right.

Now, the other question that I have, John, you mentioned that -- stuff that you're seeing from the field, your customers are basically waiting on budget approvals, replenishment of budgets, so you're hearing more about that than you are hearing about drilling economics?

I think that's right.

I certainly think that's right, Kurt. We have had several -- as I mentioned earlier, I don't know of a customer that I've talked to or heard our salesmen tell me that next year we're going to work less rigs than we worked in '06. I am sure there will be some out there. We just haven't heard that.

But most of the customers we've talked to are going to have more rigs working in '07 than they did in '06 and we have had some rigs that they've dropped off and we've put to work for somebody else. But we're going to want these rigs back at the end of the year or the first of the year, once we get our budgets replenished.

Okay. And John, one last question. What do you think it's going to take for you guys to recapture some pricing power. And I don't mean recapture, you have some pricing power, having pricing power accelerate.

I think the decisions made on budgets by our customers over the next number of weeks is going have an impact on that, clearly. Because if, as Cloyce has indicated, these customers want to increase the rigs that they're working next year versus what they ran this year, I believe that's going to generate pricing power. As you know, to maintain the gas supply as we have over the last nine, 10 years, we have had to drill more and more wells every year. So the fact that we're bringing out additional rigs than others are, that's what is going to be necessary, we believe, to maintain that gas supply.

So, I think it's -- as we look into the first quarter and gas storage, hopefully, works itself out, we could see an opportunity to see increased pricing.

Hey, guys, great. Thank you very much.

Thank you Ben Dell with Sanford Bernstein. Please go ahead with your question.

Hi, guys. My first is just on the dynamics. You talked about EMPs keeping their budgets maybe flat going into next year. Obviously, we've got about a 20%-plus expansion in the fleet. How do you see that growth in the fleet versus essentially flat demand or expenditure from the EMPs playing out, in terms of day rates?

I guess I've heard a lot of the budgets are going to be increased next year. Maybe I heard incorrectly, but it's my understanding, if they're going to work more rigs next year, I would think that the case would be that they would spend more money.

Okay. And on a specific question, up in Canada, how much exposure -- or do you have any exposure to CNQ and to the trust? Obviously, CNQ cut their Cap Ex 23% today and the trusts have had this new ruling on the tax dividends today.

What did he ask? CNQ?

It's one of the customers up there.

Our people tell us through first quarter, if -- during the winter drilling, we'll be running all of our rigs.

Okay, great.

And just on a margins basis, obviously on a [inaudible] they compressed this quarter. Do you expect them to start expanding again into the fourth quarter and into next year or is that compression, at least on percentage terms, something we should expect going forward?

The compression you're referring to is the margin increase? Is that correct?

Yes, your margins on a percentage basis.

I guess -- I think I covered that, but I will go back through it.

Really, in the third quarter, the net effect compression that you're seeing is a combination of increased oil service costs, but a big part of it is that we had more rigs that we took out of service to work on maintaining them, et cetera, have them in the best shape they can be. When you've been running lots of rigs over a long period of time, you're going to have to do that some of the time and you can't send the people home, so you're going to have expenditures for pay roll and other costs without an offsetting revenue. That's part of the compression of the margins in that quarter.

Plus there was a wage increase in U.S. land drilling that occurred. For us, it was roughly mid-June, so most of the impact of that was in the quarter, where you got, say, a $600 increase in wages and at the same time, a $600 offsetting increase in revenue. For the margin to expand, we need real pricing to move more than it has over the last couple of months and as we indicated, we think the opportunity for that would be when we get into '07 after budgets are replenished.

Okay, and just one last question, if I could. On the M&A front, you talked about buying back your stock as a way of basically increasing your rigs' per share. Obviously, another way of doing it quickly is buying other companies and other smaller [inaudible] and you have got a good cash balance. If the market looks so good going up over the next two, three years, doesn't it make sense to leverage up the balance sheet and take on debt to go and acquire some other other small [cap land] plays?

The other public companies have not made a lot sense to us for, really, more than a year. The way we look at it is when we buy our stock back, that's no different than buying another public company or, frankly, buying a private company. We're buying rigs because that's mostly what we consistent of. And we trade at a multiple that is well below any other public company I'm aware of. Therefore, I can buy my own stock back without paying any kind of premium by being in the market on a regular basis and not impacting the stock price, and in affect, our shareholders then own more rigs per share that they have.

We have $60 million remaining at this point on our authorized buyback and I personally think a great use of that is to buy back our stocks because I think our prospects are very good. Once that buyback's completed, I guess we'll re-evaluate what we should do next, but at least in the math that I have done, buying the other public company has not made any sense to me at all.

Okay. Great. Thank you very much.

All right, thank you. Geoff Kieburtz with Citigroup. Please go ahead with your question.

Thanks, good morning.

Good morning.

Hi, Geoff.

I'd just like to kind of explore a little bit more -- I know, John, you have made a few comments here, but just in terms of some of the things in the quarter that were different than you were thinking three months ago.

First, on the Cap Ex, what has been the biggest factor here in changing your outlook for how much you're going to have to spend to get what I think is the same program completed this year?

Yes, it's cost of components, costs of labor. Welders are twice what they were a year ago.

There were a lot of aspects of it and the questions that we're trying to address and maybe we can't impact it at all. But the questions we're trying to address are are there small ways that we can do things better to be a bit more efficient to get the same work done.

I guess what I've -- I was focusing more on what's happened in the last three months. It sort of seems as if that Cap Ex expectation has come up from 500 to 600 in the past three months. Am I misunderstanding that?

I think there is, I guess, probably two parts to that. One, a portion of it is are we fully efficient. Maybe we were just -- maybe we should have anticipated the increase and we didn't. I don't know. We didn't evaluate that.

But you've got another aspect of it that I think that more of the dollars related to our '07 activity is also going to hit the fourth quarter than we had anticipated. They're working hard over the year, starting from the beginning of the year they've been working hard on 45 or so rigs and you also have some '07 expenditures in there that would have been in the '07 budget anyway. That's another aspect of it.

Okay. So there is, to some degree, an expansion of the scope of the work you're going to complete with this higher level of Cap Ex.

Yes. It will hit this year instead of next year.

Right, okay.

And then kind of a similar question on the cost. When we talked three months ago, you kind of -- well, both cost in revenue per rig day here -- you'd sort of forecasted an $800 a day increase in the revenue per rig. You got a little over a thousand, but on the other hand, you'd forecasted about a $500 increase in the cost per rig and came in at 855.

I think you've addressed the cost issue, although presumably you knew about the wage increase at the time that we spoke 3 months ago. Is it, is the delta versus your thoughts 3 months ago primarily more rigs in for maintenance?

More rigs which?

In the shop for maintenance.

Yes, I think at the time we also guessed a rig count around 305 and it was 301. Particularly starting in, really, shortly after the last conference call. The first week in August, so to speak, we had more rigs out of service. We received daily reports indicating who's drilling, who is being repaired, who is in the shop and so on and so forth, and that number was running four to six rigs more than what it had been and we did not anticipate that and looked into it, and understand that that was all appropriate work that needed to be done.

Okay. And on the revenue per rig, was it just mix or was there -- was the market stronger than you expected from a revenue perspective?

You know, our estimate on revenue is always, obviously, a range. We know what we know about a month after the end of the quarter. A couple hundred dollars difference I didn't view as significant.

Okay. Fair enough. That's what I thought, but I just wanted to ask it.

In terms of the dynamics here, you brought 23 refurbs into the fleet since the beginning of the year. Your active U.S. rig count, though, is basically the same as it was in the first quarter. Or, I'm sorry, it's up 8. What are those refurb rigs doing? Are they going out in order to bring in rigs that have been working into the shop? Or are they waiting to be contracted?

I think you have a couple of different things going on. One is, I think if you look at the timing of the rigs, even though we have gotten 23 out, that at the time of the last call, I think the number was 16 and that was in the first week of August. So they have -- if you weighed them throughout the year they have been fairly back ended, even though we got to 23.

The same thing is going to happen in the fourth quarter, that I don't expect to get rig count benefit in the fourth quarter from this next group of seven rigs that will come out, I think, when you will see the impact of the rig count is actually in the first quarter. It's just really been the nature of timing. They're hitting very late in quarters instead of early in quarters.

The other thing I think you're seeing going on there is this increased work we're doing starting primarily in August to make sure that everything is in good working order so that with the next wave in increase that those rigs are ready to work and be efficient and generate revenue for us.

So really, as we look, even with the refurbs, when we look to the fourth quarter, I would expect our average rig count actually to be very similar in the fourth quarter to what it was in the third quarter, and then where you see the real leg up, I think, is first quarter of '07.

Okay. And as we look into '07, 15 refurbs, I think, Cloyce, you said that you would intend to put any refurb, any rig in your fleet that is over 750 horsepower. Do I do the math and conclude that you have got 80-plus rigs that are sub-750 horsepower in the fleet?

I think you're currently -- I believe currently marketed, we have 330 or 31 rigs.

Okay.

Don't translate that to we run at 90% utilization even though that's what we're running right now. You have a couple of things going on there. One, we're in a timeframe when the Canadian rigs don't run at full utilization.

Sure.

So when you get to winter, you, in effect, expect those to come back into the rig count.

On an ongoing basis -- and this is a gut number on my part, based on having watched the stuff day to day for years -- we're going to have somewhere, five or so rigs at any point in time that are going to be stopped, having some form of work done on them. And when you're running over 300 rigs, that's not a very big percentage.

What we have had more recently is a situation where we have had more rigs that we have taken out of service. They needed some work done, we wanted to do that and felt like it was the right thing to do to keep the rig both efficient and safe.

What we have been able to do for -- during 2005 and early 2006, is we could actually run at 95 to 97% utilization of our marketed fleet. It's been in the last few months that we have been closer to 91 or 92%. I would expect that we will move back toward the 95% if the market demand is there in 2007.

Okay, great. And that's the lead-in to my last question, which is just, Cloyce, you're -- or I guess you didn't, you're not quoted, it was Mark -- just, in terms of seeing some recent moderation of demand in certain markets, could you elaborate a little bit on what those markets are and does recent moderation of demand mean that the rates are falling in those markets or the queue waiting for rigs has just shrunken?

I think it has more to do with the perception of gas prices being low and when those gas prices dropped down to $4 last month, there was some moderation in a couple of markets, primarily Oklahoma and West Texas, which is where you -- it typically happens in those markets. I think that pretty much as the gas prices bounced back real quickly last month, or, I guess, yes, October, from early in the month it was $4 and then it got back closer to 8 and I think the perception changed a lot in those areas. And that's what we meant by the statement that we made.

Okay. Did rates actually drop?

Actually, you know, it was more as rigs dropped in a couple of places and we replaced them in other areas or in other markets in that area with not necessarily so much drop in rates as it was that you just -- customers just dropped them. And we had some people that took some rigs that someone elected to give them a rate drop in that area, but when we actually moved the rig to another customer, it's basically the same rate we were working for the other customer. So, I haven't seen a significant drop in rates anywhere yet.

Great, thank you very much.

Thank you. Kevin Wenck with Polynous Capital. Please go ahead with your question.

Good morning, John and Cloyce.

Good morning.

One more cut on the Cap Ex increase. What was Cap Ex in Q3, John?

167 million, I believe.

Okay. And of the, let's say, 480 to 600 increase, is that all in drill rigs or has some of it gone into pressure pumping and drilling fluids?

Drilling fluids, not; pressure pumping, yes. Within, this we haven't gone through it in great detail with you, but there is a variety of situations. For instance in the case of the pressure pumping, they had an opportunity to get some of their '07 equivalent early. It's going to come in in the fourth quarter of this year and it's stuff that really relates to their expansion plans for '07 and that is around $5 million.

We have another situation, just giving you a sense of just how all this occurs, where we also had some difficulty getting some rig-moving trucks. They were planned for the second quarter. We then found an opportunity to both replace those that were lost and, in fact, get some of what we would have intended to get in '07. That is another $7 million in the budget.

So it's not all about drilling rigs and those items aren't inefficiencies, those are -- if you believe what we believe about the market, those are opportunities. The number that I think relates, the portion we're looking at in terms of efficiency is really more in the neighborhood of 30 or $40 million, off the top of my head.

Well, if you had to come up with a list of three surprises or the three biggest surprises of how, in the second half, Cap Ex has gone from let's say 225 to 345 to get to the 600 number, what would those three things be and how would you quantify how much those three things contributed to, let's say, a $120 million increase.

I don't think, in terms of surprise on costs of things, I have three such items. I think that when the industry is working as hard as it's been to bring equipment out, that that produces some level of inefficiency and we want to understand whether that level of inefficiency is something we can control. I think what we're seeing is no different, quite frankly, than any other driller. I have listened to calls of others and they've experienced the same thing. We're just simply trying to see, is there a way that we can be more efficient and further maximize shareholder returns.

Okay.

We're trying to do our best we can to manage your money.

And what would a preliminary Cap Ex budget for '07 look like at this point?

We have not done one.

Okay. Well, with the increase I was concerned that Jody was back on the payroll. But --

No, in fact, he's been sentenced to 25 years in federal prison.

Sorry for the bad joke about that.

But the -- in terms of gas moving from 480 to $7, I mean, Cloyce said that it's somewhat stronger activity right now, but you still see comments from analysts here and there that prices have dropped 10 to 20%. There is now daily phone calls from drilling contractors trying to get rigs placed. Are these apocryphal sort of one-off stories? Or -- what are your thoughts on overall comments like that?

I think that's more -- in our Company, it's more one-off stories than it is a major laydown of rigs.

You have a -- we have two things that happened to us, or maybe three things. But one is we have been told by several different companies that we have got to release this rig right now because we're out of budget but we are certainly probably going to pick it back up at the end of the year or first of next year. And then you talk to them, or their companies, and I'm not going give any specific names, but the bottom line is they say we're going to work more rigs in '07 than we've been working in '06, we're just out of budge it.

The other thing is some people tend to drop prices real fast if they stack a rig. And we keep our market share. But it's such a small percentage of what we're doing right now. We haven't seen a massive turndown.

If you want to go back to 2001, 2002, we went from 250 rigs down to 95 rigs. I mean, that's a drop. That was in a 90-day period. We're not seeing that type of thing right now. I think it's more year-end and more perception that gas prices are cheap. I am still the one that believes that $55, $60 oil is a pretty good price and $7 gas is not all bad.

Well, most of the companies you sell to have 30 to 40% operating margins at current prices and gush-out cash, so maybe things will be more stable than people think.

But one more general question: If it's currently -- with the Cap Ex increase the second half, if it's costing you, let's say, 25% more to refurb a rig or to possibly do a rebuild, how might that affect your projected ROI over time and possibly decrease the number of refurbs that you would consider doing, or new builds that you would consider doing?

Well, I don't think that these cost differences would have any impact on that. We have -- for the Cap Ex that we have spent over the last couple of years, our paybacks, based on the margins ultimately achieved, have been under 15 months. I mean, the great situation we have is that we've put -- depends which year, but we've put rigs up for 3 million and we've put them up for 4 million, and the current ones are probably between 5 and 6 million, which is well below the cost of putting out a new rig.

The economics, as we've announced we bought [inaudible] put together 15 brand-new rigs versus just-like-brand-new refurbished rigs. In the end that will cost more, closer to $12 million. And the returns there still are quite good, so long as margins continue to be, frankly, even at below current levels, the returns are quite good.

So I don't think it will impact our refurbishment plans. We're trying to meet the need of our customers.

Okay. Thanks for your help.

Thank you. Mike Drickamer with Morgan Keegan. Please go ahead with your question.

Hey, good morning, guys.

John, during the third quarter your tax rate came in a little bit lower than I expected. I apologize if I missed this during your prepared remarks. What do you expect it to be here in the fourth quarter?

The decline in tax rate to the third quarter was really driven by a true-up to the 2005 return. So that is a period item whenever to you true-up [inaudible] you find that your affective tax rate that you used wasn't -- was higher or lower, it runs through the current quarter. So we're getting a benefit there that I would not expect to repeat itself in the fourth quarter. I would guess that the tax rate for the fourth quarter would be somewhere around 36%, which is still lower than what we saw in the first two quarters but higher than the roughly 34.2% in the third.

Okay. And then, John, you added some debt during the quarter. What kind of interest rates are you seeing on this debt?

It's so short-term for us that we're staying in prime, which makes it actually a higher rate than it probably would otherwise be if we went to LIBOR. But it's around 8% because it's prime-plus, 5/8 to one, depending --- no, actually, no I'm sorry, it's at prime. And it's been so short-term for us, we were at the $60 million, roughly, debt level at the end of the quarter. We continued to buy another $23 million of stock in the first five business days after the end of the quarter, at which point we were cut off from buying stock.

You know, the debt climbed to 95 million in paying -- settling all those shares and has since reduced to 30, 40 million and we've built cash to net zero debt position. So we will be fully out of debt, I would expect, in the next week or two, subject to any more stock buyback. And if we do spend the other 60 million, I would expect to pay that back quickly.

So I think we will see, if we continue to be a buyer of stock, we will have some interest expense over time. But at the levels we have been buying at, given our cash flow, we don't expect to have a lot of debt in balance sheets.

Okay. And then, John, one more thing. During the quarter here, average daily revenues increased by a little over $1,000. Can you give us some color? How much of that increase was driven by higher day rates? What was the actual day rate increase versus how much of that was driven by cost recoveries for higher operating costs?

I think the cost recovery component would be about $500 a day and the rest would be driven by day rate increases.

Great, perfect. That's what I'm looking for. Thanks a lot, guys.

All right, thank you. Waqar Syed with Petrie Parkman. Please go ahead.

John, of your $600 million capital budget for '06, how much is dedicated to the drilling division?

We ignore the 500 million -- I don't have the sheet in front of me right now. Someone's trying to grab that for me right now.

But I'm going to bring up something else, make sure we get it before people go off the call. One thing no one asked about is the secondary businesses, and I realize that everyone's very interested in the drilling business. But the Pressure Pumping and Drilling and Completion Fluids businesses have had great years. But I would like to remind people that there is some seasonal aspects of those businesses that you want to make sure that you take into account looking at our fourth quarter.

Our Pressure Pumping business, in the fourth quarter most years, the revenue will pull back some from third to fourth. It's really driven by the fact that they work in the daylight hours, unlike our drilling business. Days are shorter. You have a lot of holidays that can't work and we work in Appalachia where you actually shut down from the Wednesday before Thanksgiving until -- through the Monday after. So people, I think, should take into account on their thinking that third to fourth quarter revenue, even though demand is great in that business, would likely be lower than it was in the third quarter.

And in the fluids business, we would guess that they would still have a great quarter, but in the fourth quarter, hurricane season, there has been a little less activity in the Gulf and instead of $46 million in revenue in the third quarter it would likely be somewhere closer to 40 million in the fourth quarter.

One other item that has not come up that I think I probably ought to mention, given the stock buyback that's occurred to date, we would expect our weighted average shares in the fourth quarter to be somewhere in the 160 to 161 million shares range.

In terms of the question related to how much is drilling versus not, I think about 60 to 65 million is businesses other than drilling. Including the E&P business being 20 to 25 million of that. Pressure pumping, we're spending 35 to 40 million, and all of those are very small.

Okay. So of the 540 million, let's say, for drilling, how much of that would be sustaining, how much refurbishment, and how much new construction?

For the numbers for '05, you haven't seen any actual new construction. Those components don't get delivered until '07.

Okay.

It's all refurbishments.

Okay. So it's -- all 540 is refurbishment for -- is it a sustaining budget as well for just keeping your rigs running?

Yes. Well, it would have refurbishment in it, it would have tubulars, which at this point we spend a little over $100 million a year on drill pipe and collars. We have a rig-moving fleet and all the various [fuel] pusher trucks, et cetera. We spend $15 million a year on -- 15 to 20 on trucks alone.

Right.

We have also, with our expanding footprint in the Rockies, in particular, have been acquiring land and buildings to support our rigs, and this year in that area we're going to spend between 10 and $15 million. Frankly, land is very expensive in the Rockies.

Right.

Where you'd spend a couple hundred thousand in east Texas, you can spend 2, 3 million in the Rocky Mountains for the same land.

Just for a working rig, how much do you have to spend in Cap Ex on an annual basis?

You know, it varies. First quarter this year, we were extremely low. I would say in the 5 to $600 a day, drilling day range. Third quarter, we talked about more rigs out of service that we would going to stop and do some work on and that, what I'll call maintenance capital, ran about $1,000 a day, without tubulars, and that is the way the nature of those costs come.

Right.

You know, in some quarters it's higher, some quarters it's lower. A good average, I would guess 800 to $1,000 a day.

And then the number, the shares outstanding number that you gave for the fourth quarter, 160, 161, is that basic number or diluted?

That's intended to be weighed average diluted shares.

Diluted shares. Okay. Great.

It's obviously an estimate. You can't know what the impact of securities [inaudible] on your stock price.

-- Right --

Somewhere around 161 million or a little less.

Okay. Thank you very much.

Thank you, sir. Bill Sanchez with Howard, Weil. Please go ahead.

Good morning.

Good morning.

Good morning, Bill.

John, I was curious, when you guys initially announced the plans to buy the 15 new -- or build the new 15 land rigs with delivery at mid-2007, is there any risk to slippage on the delivery dates of those new rigs, given now that you guys are taking more existing rigs out of service than perhaps you had planned at that point? Or -- and it sounds like that's going to continue here, causing rig count not to go up in the U.S. Or is that being done in different facilities here?

I don't think there is risk of slippage. I think -- let me restate what I think is going on with the rig count. I think that -- in the third quarter I know that. That was an appropriate time, which is a little bit hard to predict, that we needed to take some rigs off the market, for whether it be a week or 60 days, to stop and do some work.

In the fourth quarter, I think that that continues and you have a little bit of additional -- two factors, one of which is that the remaining deliveries are late in the quarter in terms of putting out the refurbs. The other one is that you are going to have some rigs that are looking for spots between wells where customers are waiting for the budget to replenish itself. And then the last component is Canadian rig count, one that is strong in the third quarter. Fourth quarter, whether that will be a lot better or not is really driven by when the winter weather starts.

So you put all that together and get kind of an August through December where you don't get a lot of movement in your average rig count. But we believe that would be higher, come January.

I just didn't know, given the rigs that you're soon to have to do work on that were already part of the running fleet here, does that backlog of work now ultimately put at risk getting the new builds out in that mid-2007 delivery day, at least the start of the delivery at that time.

I don't believe so. It could happen. Clearly, I know some other drillers who have had problems getting stuff out on time. Our refurbishments are really virtually like building a new rig. It's not like there is unrebuilt used components on it. We have been able to hit -- we had 28 last year and it looks like we'll hit 30 this year. So far, we have been able to stay on track. If lots of rigs, more rigs than we have seen to date have to come out of service to have work done on them, that could affect our average rig count, but I believe that we're still on schedule for what we have talked about for '07.

Okay, last question. 83 rigs on a term contract. I know you guys have talked in the past, one of the big reasons driving term contract committals is because it's something your customers had asked. Talk to us about as those contracts expire what the plans are to kind of renew on terms or do we just see in this market those rigs coming into the spot market. Maybe, John, could you just talk about the average rates associated with those term contracts versus maybe the third quarter average we saw or maybe relative to the spot average. Thanks.

I don't have the numbers to give -- here with me to give you those averages. I think in terms of the rigs we're doing on long-term contracts, it's totally a matter of what our customers want to do and whether they're willing to pay prices that make sense for us to enter into the long-term contract. Our experience has been to enter into a two- or 3-year agreement that we expect the rate to be higher than the current spot rate for that to make sense for us. Whether customers will want to do that right now or not is unclear to me.

But, again, we'll continue to look at what our customers needs are and how they wish to contract the rigs and try to contract them as rates make good sense for our shareholders.

the 15 now builds currently don not have terminal contracts, correct?

That's correct.

That is correct.

Okay. Thank you all.

Thank you. Pierre Conner with Capital One Southcoast. Please go ahead with your question.

Good morning, John and Cloyce.

Good morning.

Good morning.

John, I wanted to pursue a little bit more about these rigs that are available to come in and the needed work gets done on them and the sort of maintenance work, I'm assuming because they have been running pretty much flat out. So just to characterize, this work is required, nothing that is being upgraded here. These aren't things where you're taking an opportunity to install a top-drive or something of that nature. Is that right?

That actually, I think, varies.

Okay.

Sometimes they're coming in to have specific work done. But if you take a rig out of service for more than -- practical matter is every day, all the drilling companies have some number of rigs that are not drilling, they're having some type of work done on them. The smaller items. The ones that we're talking about is where -- that's brought the average running down a little bit in the quarter are ones that needed something more significant, for the most part, that took them out of service. I think I referred to a week earlier. That was probably not accurate.

Okay.

It's more like a month or more. And in that process, I'm going to turn it over to Cloyce, but they do a variety of things that -- whatever makes sense for that rig at the time.

In most case when we bring a rig in for a refurb, what we call a run-in refurb, when it goes back to the field, it's a much higher quality rig than it was when it came to the yard. It might be a smaller rig but it will be higher quality.

Okay.

And if it's -- we might include a top drive or we might not include a top drive. We might put an EDS system on it or we might not. Depends on the size and the quality of the rig when it starts. But generally speaking, if we bring a rig in and shut it down for several weeks or months to refurb it, it will be a higher-quality rig when it goes out.

Cloyce, on these running refurbs, when they get back in the field and, of course, market dynamics in certain areas are changing, are they able to command better margins? Are they coming back in at the same margins?

In most cases, they'll come back in at probably the same margins, but it helps us because if we have a rig running in the field and we have to -- we're down for repairs, we pay for this.

Okay.

So it's better for our shareholders to get the rigs in good shape and it makes our customers a lot happier. Nobody's happy when a rig's down.

Okay. And then kind of related, it speaks possibly to Bill's commentary about the new builds that you acquired the components for. Let's just on the assumption done and, Cloyce, that you don't get an increase in absolute levels of activity sometime in -- next year after the first quarter, what is your flexibility to take -- how much do you have in the existing fleet that you could come in and do more than just a running refurb, do more of your complete upgrades and defer on these new -- the assumption is, then, that the best use of your cash capital here is for rebuilding as opposed to the new builds.

That's right.

Well we certainly have several rigs out there running that would be capable of what we have called a refurbishment of a rig. And we would certainly look at that before we'd throw shareholders' money away just to go put rigs out to be putting rigs out. We have never done that, as you well know.

The unique position we're in, if the scenario were to happen as you suggest, which we don't think that is going happen, all of the parts that we have bought for these rigs that we're going to build can be interchangeable into our fleet that we have running. So let's assume that we don't have any more than 300 rigs running or we have done -- we've bought parts that we can use on the rigs that we have running, so assuming your scenario --

Got it.

-- we can use all of that equipment somewhere in our running fleet that we have today. What it would do, we'd take a draw, a new drawworks derrick substructure and put it on something where, right now, when we're refurbing a rig, we buy a derrick substructure and refurb the drawworks. It's very expensive to do that.

Right. Okay. Now that's --

If we just actually bought parts ahead of time, then certainly that was in our plan when we did that. You saw that we didn't buy the complete rig. We bought parts to assemble rigs the way we want to assemble them.

Okay, that's what I was looking for. Thanks, guys.

Thank you, sir. [ OPERATOR INSTRUCTIONS ] Gentlemen, there are no further questions at this time . Please continue with any closing comments.

Well, we want to thank everyone for participating in this call and we look forward to having another call next quarter that will be equal to or as good as the one we just had. Thanks a lot.

All right. Thank you.

Ladies and gentlemen, this does conclude the Patterson-UTI Energy third quarter 2006 conference call. If you would like to listen to a replay of today's conference, you may do so by dialing 303-590-3000, input the access code 11071822. Again, to listen to a replay of today's conference, please dial 303-590- 3000 and input the access code 11071822.

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