Patterson-UTI Energy Inc (PTEN) 2007 Q1 法說會逐字稿

Good day, Ladies and Gentlemen, and welcome to the the first quarter 2007 Patterson-UTI Energy incorporated earnings conference call. My name is Catena and I will be your coordinator today. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Geoff Lloyd on behalf of Patterson-UTI Energy. Please proceed.

Thank you very much, good morning. On behalf of Patterson-UTI Energy I would like to welcome all of you to today's conference call to discuss the results of the three months ended March 31, 2007. Participating in today's call will be Mark Siegel, Chairman, Cloyce Talbott, President and Chief Executive Officer. Doug Wall, Chief Operating Officer and John Vollmer, Chief Financial Officer.

Just a remainder 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 result s could differ materially from those discussed in such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to, declines in oil and natural gas prices that could adversely affect demand for the company's services and their associated affect on day rates, rig utilization and planned capital expenditures, excess availability of land drilling rigs, adverse industry conditions, difficulty in integrating acquisitions, demand for oil and natural gas, shortages of rig equipment 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 company's SEC filings which may be obtained by contacting the company or the SEC. These filings are also available through the company's website at Patenergy.com or to the SEC's EDGAR system at www.sec.gov. We undertake no obligation to publicaly update or revise any forward-looking statements. And now, it is my pleasure to turn the call over to Mark Siegel for some opening remarks followed by questions and answers. Mark.

Thank you, Geoff Good morning, and thank you for all joining us today. I hope 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, I'd like to take a few minutes to review briefly, some of the highlights from the first quarter ended March 31, 2007. To summarize, net income totaled $116 million or $0.73 per share, compared to $159 million or $0.91 per share for the comparable three months in 2006. Revenues for the just completed quarter were 547 million compared to 598 million for the first quarter 2006. As we have previously stated, warmer then usual temperatures occurred twice in the winter months of calendar 2006. Both in the January/March period, and again in the November/December period. This unusually warm weather resulted in high levels of natural gas in storage and lower natural gas prices. As a result, customers postponed projects and reduced their drilling activities during the first quarter of 2007.

Our average revenues per operating day during the first quarter were $20,350 compared to $20,760 in the fourth quarter of 2006. The decrease in operating days, costs associated with deactivating drilling rigs and the retention of skilled personnel resulted in our average direct cost per operating day increasing to $10,720 compared to $9,940 for the quarter ended December 31, 2006. During the quarter, we had an average of 255 rigs operating, including 243 in the U.S. and 12 in Canada. This compares to a total of 290 rigs operating, including 278 in the U.S. and 12 in Canada in the fourth quarter of 2006.

Natural gas prices improved as colder winter weather that began in mid-January of 2007 resulted in increased demand for natural gas and a decline in natural gas in storage. We continue to expect the combination of decreased drilling activity, along with a high production decline rates for many existing wells, will reduce the natural gas supply and require increased drilling activity to avoid a shortfall of natural gas.

We have seen the first signs of spring in our land-drilling business as our rig count in the United States has begun to increase in recent weeks. Although it is too early to call this recent uptick a trend, we do note this apparent change in direction from a bottom of 225 rigs running per day in the U.S. in early April. Our expectations for the second quarter are for approximately 235 rigs to be running per day, on average, in the U.S. with a decline in average daily drilling margins of approximately $1,300. Based on our historical experience, the downward trend in revenue will likely continue for at least a quarter, following the uptrend in activity. We believe that this U.S. downturn will prove to have been modest in both severity and duration.

The Canadian drilling market experienced an early spring breakup, remains weak and the near out-- near term outlook remains bearish. Consistent with our strategy over the last four years, during this quarter we reinvested $176 million in our businesses and we continued our four-year program of upgrading our rig fleet with an investment during the quarter of $153 million in land drilling. In anticipation of increased demand later in 2007, we expect to add a total of approximately 15 new, or like new, drilling rigs to our marketable fleet during the year.

Lastly, the company has increased its quarterly cash dividend on its common stock to $0.12 per share to be paid to holders of record as of June 14, 2007, and will be paid on June 29, 2007. This marks our third yearly increase in our dividend and reflects our continued confidence in the North American land-drilling business and our other businesses. We continue to maintain a strong balance sheet and as of March 31, 2007, we had $268 million in working capital and zero dollars drawn on our line of credit. These results would not have been possible without the hard work and dedication of all of our people in each of our business units, and we want to thank them for all of their efforts. At this point, I would like to open the call up for questions.

(OPERATOR INSTRUCTIONS) Question and Answer segment:

Your first question will come from the line of Marshall Adkins representing Raymond James. Please proceed.

Good morning, guys. You talked about-- you put another $150 million to work in land rigs, give me some flavor on what your doing to upgrade the fleet, number one, and number two, I guess is part of that. We've laid down a lot of rigs here. How many of those rigs you think just go away eventually, in other words, they're in too bad condition to put money into an upgrade?

Marshal, we don't think any of our rigs are going to go away. None of our rigs are in such bad condition that they would be replaced. What has happened in the industry is very typical of what usually happens in a downturn. Is, first your shallow rigs shut down and then your deep rigs shut down the 2,000 horsepower and greater, that's where you have the most pressure.

To tell you what we're doing in upgrading our equipment we are putting some top guys on some rigs, we've put iron rough necks-- we will have put iron rough necks on almost 2,000 rigs by the time this year is out. We're continuing to do that, putting hydraulic slips on 'em.

On the rigs that we are upgrading we're putting 13,000-- 1,000 to 1600-horsepower mud pumps on.. The mud pumps are one of the big factors now, with so much horizontal and directional drilling and with the new technology and bits, you just almost have to have minimum of 1,000 horsepower pumps and a lot of the people are wanting 1300 to 1600 pumps, particularly where you're drilling longer laterals and with poly (inaudible) disks. That is typical things we are doing. We've placed many mud systems. We have some of the highest quality mud systems in the industry and we will have added over 100 of those to our 300 rigs but we've already done that and we'll add more this year to our rig fleet. That's kind of what is going on.

There's obviously a perception -- a lot of brand new rigs. These "high efficiency rigs out there" how far away as you put money into these rigs, how far away are these refurbed rigs from all of the new gin rigs-- land rigs.

Marshall, what we're seeing is -- there's not a lot of difference.. We're rigging up a brand new rig and we're going to have really good numbers to compare it with, but we have quite a bit of comparison already. You have different rigs in different areas and sometimes you put these high tech rigs into areas that they don't work very well in, So you've got to be careful when you say all high tech rigs are great for certain areas, but what we're seeing -- what we're doing to our rigs, we compete very well. In fact, beat lots of times what we call the brand new high tech rigs. There's not a lot of difference in them. Primarily, it's sub structures and derricks that are different. Most all of the new-- like our NOV rigs that have top drives on them. So that's one difference. If we don't have top drives on all of our upgrades, but we're adding top drives because our customers are demanding it.

All right, well, Last question-- I'll turn it over to someone else. Mark, I believe I heard correctly that you're looking at another sequential decline of 1300 a day in daily margins, which is a little better than we were thinking. Going into the third quarter, I understand-- our visibility out that far isn't real good. Decline again there and any rough sense of magnitude, again, I understand it's a crap shoot at this day, to see where it bottoms. But, can you give us your thoughts on that?

Marshall, let me turn that to John and maybe comment additionally on what he says.

Marshall, we look past the second quarter, third, as you know our visibility is not great as we get out beyond a quarter. But our take is that margins will not decrease as much in the third quarter and guess somewhere maybe $800 a day. We think that a combination of similar decline in revenue, but we think our expenses may come down a little bit from the second to the third quarter as we have more rigs active.

And in the third quarter most likely being the bottom -- if, obviously if gas continues to do what it's doing and the trends continue as you're seeing them now, third quarter kinda bottom that day rate of deterioration?

Yeah, if you look at the various upturns over the last ten years I think what you'd find is that the first thing that happens is the rig count stabilizes and begins to move back up. And a quarter after thal you start to see the margins begin to expand a little bit. So, we don't know yet, but we saw 225 rig counts in early April and it's moved up from there. If gas prices hold and that trend continues, we would expect that our rig count would be a bit higher in the third quarter, maybe 250 rigs or something like that. And as you go towards year-end, pricing should firm up.

Very helpful, guys, thanks.

Thank you.

Next we have Arun Jayaram -- representing Credit Suisse please proceed.

Good morning, gentlemen. Mark, I was wondering how you're responding. You do have quite a few rigs laid down. How are you responding competitively and are you doing anything on the pricing front where you can help stimulate some demand for your rigs?

Arun, I think that we were -- we've been very clear in terms of our activity-- kind of our behavior says it all, in which we thought it was more valuable for our company to protect price and to give up share in the downturn. That's historically what we have done in 2002. So it's very much, kind of the strategy that we've pursued. We think that makes some sense to us.

We believe that we could have a significantly higher percentage utilization now, if we were willing to give up more margin. That's not directionally what we think is best for our company. So we're being willing to give up that incremental pricing to maintain-- or give up that incremental utilization to maintain pricing.

So you're losing little market share but holding onto your pricing?

We think so.

Okay and second question. In Canada obviously a surprise with your rig days. Mark, what do you think we need to see in Canada in terms of restimulating demand. Is this service cost pricing, or are customers just going to wait to see what happens on gas prices?

My instinct on Canadian market right this minute is that the Canadians are waiting for the end of breakup, which has been later and more delayed then -- and so in effect the road rules that have historically had to be lifted before rigs can go back to work, is one factor which is causing the market to be as weak as it is. But another factor is clearly the perception of the relationship between F & D costs and the overall price of the commodity. As we've gotten closer to $8, though it looks pretty darn attractive from my perspective.

Last question, Gentlemen, your margins about 96/40 in the quarter. What are some of the margins you're seeing on some of the new builds as you get those out and operating in the field relative to that 96/40.

We don't have any of the NOV new builds out yet. The first one will come out in July.

Okay, okay, fair enough. Thanks a lot, guys.

The next question we have Ian Macpherson -- representing Simmons and Company, please proceed.

Hey, good morning, Mark, I guess I was wondering as it relates to couture activity level forecast per quarter, nothing happening in Canada in April. So, where do see your Canadian rig count unfolding over the next three or six months given the, I'd say, a more structurally challenged near-term situation there than in the lower 48?

We have relatively low expectations built into the number that we gave you for rigs running or expected rigs running. The 235 rigs for second quarter has in it a relatively small number for Canada. Recognizing that, as you obviously correctly observed, our release this morning showed zero rigs running for the month of April. So, that's kind of where -- we're cautiously optimistic about the U.S. market. We think that we had gone from kind of bearish to cautiously optimistic in the U.S. market.

The Canadian situation is harder to read because of breakup, kind of coinciding with this period in which gas prices were-- had been challenging and have just recently recovered. So, I think it is kind of-- for us it's difficult to get a real good handle on it and to be super bullish at this point. So we're kind of watching it with uncertainty, I think is the best way to put it.

Okay, thanks for that. If I can just do a quick followup here with your guidance for the second quarter margins it's down an estimated 1300 a day. Can you split that out between what's happening with the day rates and what's happening with your costs?

John, you want to do that?

Yeah, we think most of it would fall in day rates. Similar quarter to quarter.

Okay. Thank you very much.

Thank you.

Kurt Hallead will have the next question representing RBC Capital Markets. Please proceed.

Good morning,.

Hey, Kurt.

On my front here, the rig stuff is what it is. How 'bout-- how should we think about the fluids and pressure pumping business? And the pressure pumping are you guys typically impacted by seasonality up in Appalachia? It looks like the first quarter came in pretty strong on that front. ISo, was wondering if you could give us color on what is going on with fluids and pressure pumping, as we move forward.

On the pressure pumping side, we do not think that we're going to see a significant effect from breakup in Appalachia, revenues we think will be down a little bit but activity has remained pretty strong up there and so have margins. In terms of fluid, we're a small business in drilling fluids and we work with a shorter list of customers. Our customers have been a bit less active over the first quarter and I think running at similar levels over the next few quarters, is about as good a visibility as we have. It could be better than that, but right now we think we'll remain somewhere in the 30 to $35 million of revenue per quarter.

Do you guys already talk about CapEx for the year?

Yeah, I don't think there's really any change from what we talked about on our last call. Somewhere in the 600 to $650 million on CapEx for the year. We're -- as Mark indicated earlier, we don't think that the downturn in activity is going to be long-lived and gas prices have firmed up over the last several months. So, what we strive to do is be ready to put the full marketable fleet to work when the demand is there. So, we continue to finish our refer program. And, we're putting together the first of the new rigs. And, add that up, it's somewhere into 600 to 650 range.

As we look out beyond '07, and assuming that activity does pick up a tad going out into 2008, is there any significant requirement on your participate for additional CapEx or can we expect CapEx to go down in '08 versus '07. How should we think about that?

We're not making significant commitments for '08 because there's no need to. We don't like to commit until we need to commit. At this point, we were to put together one of the new rigs, the other 14, we're, at this moment, holding off because we don't wish to put them out there in a softer market. We could significantly reduce our CapEx in '08, if we chose to, given we haven't made commitments. But, we'll wait and watch the market and make that decision when we need to.

I guess maybe ask a question just slightly differently. If activity were to pick up in the 5 to 10% range from where we are now going out into '08, could you need to increase your CapEx or have your refurbs and the new builds you have in process, would you need to really raise your CapEx any more to capture --

No, I don't think so. We have 321 rigs today that are currently marketable and ready to work when customers are ready to get more active. We also have another 20 rigs in Canada. So, the way we describe the fleet now is current-- based on what is currently marketable and those are ready to run.

Great, thanks.

With another, I believe, nine that will occur this year that will also be added to that?

Great, that's it for me, thanks. Thanks.

Your next question will come from the line of Geoff Kieburtz representing Citigroup.

It's Ed for Geoff Kieburtz, how are you. Quick question, can you talk a little bit more on the cost side on rigs, particularly with employee retention --

Excuse me, could you speak up just a little bit, please?

Is that better, guys.

Yep.

Okay, sorry about that. Can you talk a little bit more on the cost side as far as the rigs go, and particularly employees. I know that you guys, I think had said originally you were starting to lay some people off and guidance costs were (inaudible) flat from quarter to quarter. Why wouldn't we see that come off a little bit with some layoffs or is there a little bit more cost related to putting some rigs down or what's the situation there?

There's really two factors. I don't think I can perfectly break them out for you, but when you're stacking rigs, the price of-- protecting price in effect is, that you have to demobilize the rig.

Some number of them you're going to move to a location where you aren't going to be paid for that move. The other thing that you want to do, is to maintain the rigs as currently marketable, you've got to go through procedures to insure that they'll be ready to come back quickly. Any minor or more major repairs that you'll feel like you'll need to bring the rig back promptly you go ahead and take care. And, those things have some cost. At the same time, you're maintaining your most skilled personnel so that when people are ready to work you have the tool pushers and what not to put them out.

That is-- has historically been the price of maintaining market share and that's what we've done. Then when you go to reactivate rigs, you have a similar situation where your costs will tend to stay a little higher than they would be if you're running at high level utilization, because you've got to bring the crews in and in effect get the rig back out there, so, we had a little bit higher cost in the first quarter. We're not maintaining all the people, just the most skilled people. As rigs begin to reactivate as we think they will, over the next couple of quarters, that will keep our cost a bit higher for a period of time and the cost per day should decline.

Okay and just on the pressure-pumping side. Clearly things are apparently fairly strong and looks like pricing held up pretty well with maybe some honest uptick in the quarter. How do you see things going forward in terms of the pricing side? Do you see some incremental pricing power there or --

I don't know that we see incremental pricing at this point in time but the Appalachian market where we operate has been very strong and we expect it to continue to be very strong. I don't think I would venture that over the next couple of quarters we will see meaningful movement in pricing either direction.

I agree with that.

Okay. Thanks, guys.

Your next question comes from the line of Mike Urban representing Deutsche Banc please proceed.

Thanks, good morning. Was wondering with Doug coming on, if he has any plans to draw on some of his expertise in some of his background previously to either expand in some of the existing, non-drilling service lines or potentially get into some new businesses?

I'll respond first and see if Doug wants to add to that response. I think we're delighted to have Doug join us. We think he brings to us vast experience both in the land-drilling business and in other segments of the oil services industry, plus a lot of management experience as well just overall. So Cloyce and I and John and the balance of the rest of the team are thrilled to have him join us. So I guess that's the first point of the answer.

The second point of the answer is that we have always been looking for good opportunities. With Doug's more complete portfolio of experience, I think the range of potential activities and potential opportunities for us has been expanded and over the course of the next several months, I suspect he will want to look at them, but Doug's been with us now, I guess, a total of about three weeks. This is his fourth week. So it's a little early, I guess to be getting too deeply involved in a specific transaction, but with that, let me turn it over to Doug and see if you want to add anything to that.

Thanks, Mark. Mike, I think it's certainly too early to say much more then what Mark has already said. I will say this, we have recently been looking at some international opportunity, but I think it's way too premature for us to comment much beyond that, but as Mark said, I think in the future certainly it's an area of our business that we think we can grow and we do think there's some opportunities in the marketplace that we will be looking at.

And again, I understand completely that it's early on. As you look at some of the international opportunities, would that be something where you would take rigs and maybe potentially bundle some services along with that just rigs, just services? Or still too early on all of the above?

Well, I think it's too early to comment. I think it could be any or all of the above. I think there's lots of opportunities in the international markets. There's other opportunities in other business segments and over the next year or so we're certainly going to be looking at those opportunities and hope to take advantage of some of them.

Okay, great, thank you.

Your next question will come from the line of Kevin Pollard, representing J.P. Morgan please proceed.

Thanks, good morning. Most of my questions have been answered but I did want to dive into the pricing question a little bit more. You talked about your expectation on day rates and all of that is pretty visible, but what are you seeing on sort of the ancillary charge for lack of a better word like stand-by rates, mobilization, per diems, things like that might impact margins in a little bit less visible way to us?

When markets experience downward pressure, the price negotiation takes many form and we're experiencing our customers pushing back on price in lots of different areas including as you correctly noticed in day rates as well as in mobilization, stand by and other kinds of fees.

I think that this is one of those situations in which the opportunity to give customers value, which is obviously the most important thing that a supplier company, such as ours can do, is what, in effect,, wins the day. And so, we're trying to provide to our customers a level of service both in terms of drilling service as well as rig moving and the other things which we provide, at such a high level that we can continue to generate significant margins from it. But, you're correct in observing that there's pressure in that area particularly mobilization charges and to some extent stand by.

Is that something you would expect to persist even after, sort of, the main day rate started to stabilize?

My own perception of this, and I'll throw it to Cloyce and to Doug if they want to add something to this, is that as the industry finds that rigs have gone back to work, then that is the moment at which, in effect, the pricing equation becomes more favorable to the contractor and we're able to get better terms throughout both on day rate and as well on mobilization. So I expect that as day rates improve, so do mobilization, stand-by charges and the like and I would not think that one would do significantly better then the other. Cloyce?

I agree with that analysis

If I could switch gears just a second to -- , you said you have 321 marketable rigs. That's close to 100 more than are working or you expect to be working this

321 U.S., an additional 20 in Canada total 341.

Right. I guess my question is how many of those rigs -- presumably you don't have a crew on all of those rigs so I'm wondering, how many rigs above what you're working, do you have crews available that you could put out shortly. What would be sort of the time table at which you could adequately staff all that equipment and redeploy it in the event of a demand upturn?

Well, you know, we always have ten or 15 crews available to work on rigs but from our experience in the last upturn I think it's going to be much easier in this upturn to staff the crews. We're paying so much more money for our crews today then we were in 2002, 2001, 2002 and 3. Yeah, always -- labor's always a problem but I don't think it's going to be near as difficult ramping back up from the level where we're today compared to what we did in the last downturn.

I think that's all I had, thanks, guys.

Your next question will come from the line of James Wicklund representing Spinnerhawk.

Hey, guys.

Jim.

A follow on I guess to Kevin Pollard's question. I slept through most of my economics class in college, but I understand that rates will stabilize but with all of the private equity in rigs being built, don't you want to hit an equilibrium level of day rates, or do you expect day rates as the rig count comes back, which it will do later this year, do you think day rates and margins will come back to where they were a couple of quarters ago. You know, Jim, one of the things about this industry is equilibrium not been its highlight.

The short answer to the question is that we believe that with the change from 10,000 wells per year being drilled to more then 30,000 wells per year being drilled, we see that-- we think there's, again, going to be a shortage experienced of rigs as in effect we overcome this unusual weather that occurred twice in 2006.

So our expectations could be for a significant uptick in the business and with that we think there will be an uptick in price so, no, I don't see equilibrium ataining in the marketplace. And in respect of your comment about private equity building lot of rigs, kind of my anecdotal evidence is that there may have been some appetite to build some rigs before the downturn and there maybe some rigs still being built as a carryover from that, mid to '06, but as the end of '06 occurred and throughout '07 as those people found themselves building rigs into a soft market, I think there's been a decline in private equities' interest.

I agree, Mark, I'm talking more about the the private equity that's going into the company that's build rigs.

But, finally speaking, Jim, I think that ultimately, if you're going to go from 10,000 wells per year to 30,000 wells per year a couple of hundred additional rigs per year into the marketplace is exactly what the market needs.

I agree, okay, thanks, guys.

(OPERATOR INSTRUCTIONS) Your next question will come from the line of Alan Malls representing Merrill Lynch please proceed.

Good morning.

I see the pattern that using for the decline in margin versus say the last cycle. I just wonder, given a forecast for flat or slow growth coming into the third quarter, how basically forecasting something like a $7,500 a day margin and with lots on the fence sitting there waiting to come to work, 100 of your own and new builds continuing to come into the market,,I don't see how $800 in the third quarter will be the last down drop in the margin. Can explain why you think 7500 is the level where it can normalize at?

Alan we seldom say anything beyond the coming quarter, frankly, we don't have a lot of visibility.

Our view as been pretty consistent that we have a number of rigs down, we know that neighbors last indicated they had 60 plus down. With that number of rigs not running. We believe gas production will not only cease to grow but will affect decline If you look at the (inaudible) 14 reports., they are starting to support that. Gas prices are starting to indicate that we maybe correct in our view and in effect we think that the industry doesn't get back to work there will be a shortage in natural gas.

If you take all of that together, we believe more rigs are going to be running as time passes here, and that helps pricing. We have been pursuing maintaining reasonable pricing for our services, rather then pursuing high utilization, and I would suspect we continue to do that. So as more rigs goback to work we would think that pricing would firm up and then follow by increases.

So at $7,500 a day, you think that will just get you a couple of hundred rigs a year and you will be able to put all of those rigs back to work. That's what you're saying?

I think more what we're saying is that following the third quarter, we would expect to see, in effect, a change in direction in terms of margin.

First stabilizing and then as the market tightens up, increasing pricing.

Okay. Appreciate the answers, guys. Thank you.

There are no further questions at this time. I would like to turn the presentation back to Mr. Mark Siegel for closing remarks.

We want to thank everybody for their participation in our call this morning and for their interest in our company and again to thank our employees for their contributions and dedicated hard work. With that we'll say goodbye and look forward to speaking to all of you next quarter.

Thank you for your participation in today's conference. This concludes your presentation, you may now disconnect. Good day.