Patterson-UTI Energy Inc (PTEN) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Patterson-UTI Energy earnings conference call. I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I'm now going to turn your presentation over to Geoff Lloyd for the reading of the Safe Harbor statement. Sir?

Thank you, Carol. Good morning and on behalf of Patterson-UTI Energy I'd like to welcome you to today's conference call to discuss the results of the three and nine months ended September 30, 2009. Participating in today's call will be Mark Siegel, Chairman, Doug Wall, President and Chief Executive Officer, and John Vollmer, Chief Financial Officer.

Again, just a quick 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, deterioration in the global economic environment, 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, excess availability of land drilling rigs including as a result of the reactivation or construction of new 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 the 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, and through the SEC's Edgar system. The Company undertakes no obligation to publicly update or revise any forward-looking statement. And now it's my pleasure to turn the call over to Mark Siegel for some opening remarks. Mark?

Thanks, Jeff. Good morning and welcome to Patterson-UTI's conference call for the third quarter of 2009. I trust 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. Our plan this morning is to take a few minutes to review the results for the three months ended September 30, 2009, and to indicate some of the financial and business highlights from the just-completed quarter. I will then turn the call over to Doug Wall, Patterson-UTI's President and CEO, who will make some brief comments on the individual business units. After Doug's comments on the quarter, I will make a few comments on the market outlook. As always, we will be pleased to take your questions following these prepared remarks.

To summarize, the Company recorded a net loss for the three month period of $18.6 million, or $0.12 per share, compared to net income of $109 million or $0.69 per share for the three months ended September 30, 2008. Revenues for the quarter were $176 million, compared to $609 million for the third quarter of 2008. EBITDA was $43 million for the quarter, and $181 million for the nine months.

As you've seen in our press release, our quarterly results were essentially flat from second quarter to third quarter. Although reported results were flat, there were significant changes in our business during the third quarter, and I would like to call out five specific points of interest. Number one. On our second quarter conference call with investors, we spoke about seeing the first green shoots, the first signs of spring in the drilling business. During the third quarter we saw our US rig count increase sharply, albeit from a low starting point. Most significantly, this occurred during the third quarter when natural gas prices averaged $3.18, and oil prices averaged $68.14.

Number two. The upward trend has continued in October in a steady manner and we have recently seen a marked further increase in customer inquiries. Our current working rig count has increased by 67% or 35 rigs from our average working rig count in June of this year. We expect this increase in customer inquiries will translate into continued increased activity in November and December, subject of course to the expected slowdowns for Christmas and New Years holidays.

Number three. This increase in drilling activity is occurring in both natural gas and oil sectors, and across virtually all of the regions in which we operate.

Moreover, we are experiencing increases in activity in both traditional drilling markets and in shale drilling. Number four. Greater than expected drilling activity levels have resulted in somewhat better pricing than we had expected in spot drilling market rates.

And number five, in our pressure pumping business, universal well services experienced a 24% sequential improvement in revenues from the second to the third quarter. This increase is primarily driven by an increase in large horizontal frac jobs in the Marcellus. We spent $104 million during the quarter on capital expenditures, primarily directed towards the previously announced deliveries of new rigs. I am pleased to say that we ended the quarter with $119 million in cash and no debt. I would now like to turn the call over to Doug who will discuss our operations for the quarter.

Thank you, Mark. Let me start this morning with the drilling Company. For the quarter ended September 30, 2009, the Company had an average of 73 drilling rigs operating. Consisting of 70 rigs in the U.S. and three rigs in Canada. This compares to an average of 63 rigs operating including 61 in the US and two rigs in Canada for the second quarter. So a nice improvement of 10 rigs during the quarter.

Average revenue per operating day during the third quarter was $16,800, compared to $17,780 in the second quarter, a drop of approximately 5.5%. Average direct cost per operating day were $10,630 for the third quarter, compared to $9,960 for the second quarter, an increase of approximately 7%. Both this revenue decline and the cost increase were actually better than our expectations. Although average daily costs did increase in the third quarter, primarily due to fewer standby days. Our tight rein on costs, very low Workers' Compensation costs, and more rigs running during the quarter than was anticipated led to our third quarter daily operating cost being lower than we had expected. We also still benefited from rigs being paid under standby rates whereby the rigs aren't actually operating and, thus, don't have significant costs.

We continue to be pleased by the improvements we are seeing in our safety performance. The significant investments we have made in training and equipment are paying dividends in our decreased Workers' Compensation costs and most importantly, the well-being of our workforce. As Mark mentioned earlier, the rig count has continued to improve over the last few weeks, and we now expect to see additional rigs go back to work between now and year-end. For the fourth quarter, we expect our average US rig count to be approximately 90 rigs, and the Canadian account to average approximately four. We expect daily drilling margins in the fourth quarter to be flat, flat with the third quarter, on a slight increase in daily revenue. Although we do not expect to see huge changes in average revenue per day, we are seeing prices firm in all markets and improve in certain regions.

In the third quarter, we averaged 28 rigs operating under term contracts, including four rigs which were earning standby revenues. This is down from 32 rigs working under long-term contracts in Q2, including 7 on standby. We expect that rigs operating under long-term contracts will average 33 in the fourth quarter. In the aggregate, we continue to benefit from the impact of new rigs coming into service. In 2010, we expect to have an average of 34 rigs under long-term contract, and in '011, 21 rigs under contract.

Let me spend a few moments this morning updating you on our 2009 new build program. Drilling capital expenditures during the quarter were $93 million, most of which related to our 2009 new build program. During the third quarter, we completed an additional seven new rigs. This brings our year-to-date total to 14, four in the first quarter, three during the second quarter, and an additional seven rigs this past quarter. Of these seven rigs, two were APEX 1500s. Both are currently working in the Haynesville Shale. Two of the rigs are our newly designed APEX 1,000s. And both of these are currently working in the Marcellus. And the other three rigs were APEX walking rigs, two of which went to Pinedale and one is currently working in the Barnett Shale.

We are extremely pleased with the startup of these new rigs and we're delighted with the record-setting performance we've seen to date. To complete our 2009 new build program, we expect to deliver an additional six rigs during the fourth quarter.

Turning now to the pressure pumping business, as Mark indicated, our revenues for the third quarter increased by 24%. This was up, as I said, 24% sequentially. But it's still well below the record levels that we saw a year ago. Revenues for the quarter were $41.7 million. The number of jobs during the quarter increased by 18%, with a positive improvement in the number of horizontal completions. Average revenue per job improved by nearly $1,000 to $20,950 per job. The mix shift towards multi-stage fracs and bigger nitrogen jobs is certainly driving this change.

The traditional business in the Appalachians continues to be much slower than a year ago as operators continue to focus on both the Marcellus and the Huron shale prospects. We believe this entire market currently has excess capacity and pricing pressures will continue until the market reaches a greater equilibrium. Capital expenditures in the pressure pumping business this quarter were $3.6 million, mostly related to the delivery of additional Quineplex pumps and the associated equipment specifically directed at horizontal completions. A few operational highlights, operationally, we completed 12 horizontal fracs in the Marcellus during the quarter, versus five in the previous quarter. We also performed 27 horizontal stimulations during the quarter, in both the Huron and the Chattanooga shales, using our nitrogen pumpers. This 27 is up from 18 in Q2.

So even though the pace of completions has been somewhat slower than expected, we believe we're beginning to see some momentum building, and we are encouraged by the long-term prospects in these deeper Appalachian shale plays. Although we currently do not expect to see a significant change in the traditional business, absent further changes in natural gas prices, we do feel the shale plays in the regions are starting to gain traction. We have positioned ourselves to be a major player in the development of the Appalachian shale plays and will continue to build on our position as an industry leader in this market.

Turning to the drilling fluid segment, once again low rig counts both on land and in the Gulf of Mexico have continued to hamper our results. Revenues for the quarter were $16.5 million, down 19% sequentially. Price competition in this market remains fierce, and we really do not see any meaningful improvements in the fourth quarter. Looking at our E&P business, we certainly had a better quarter with revenues up 10% sequentially. Average oil prices were up 15% sequentially. Our production volumes were down slightly. Average gas production was down by almost 8%, but the average prices that we received were up by 7%. Once again, save for changes in commodity prices, we do not foresee any meaningful changes in this business segment for the remainder of the year.

Just before I turn the call back to Mark, let me make a few other very general comments on our operations. Over the last 12 months, our focus has been on sizing the organization properly, cost control, and the delivery of our new build program, both with rigs and frac equipment. We have consolidated facilities, we've reduced headcount throughout the Company. But at the same time, we were determined to maintain our ability to react quickly to this next market upturn. We think we may have reached that point. In the last few months, we have rehired more than 500 people. We expect this trend to continue. How fast and how many remain to be seen. With that, I'll now turn the call back to Mark for some concluding remarks.

Thanks, Doug. We are pleased to witness our customers' increased confidence in improved commodity prices for 2010, and with that, to see increased demand for our drilling services and pressure pumping services. As this nascent recovery is now only in its fourth month, we are reluctant to say too much about its trajectory or upward lift. Suffice it to say that our expectations for the rest of 2009 and early 2010 are far rosier than they were three short months ago.

As to our operations, I think we are continuing to see Patterson-UTI's ability to respond quickly to changing market conditions. I said before that Patterson-UTI aims to be nimble and I think we have been reacting very nimbly. Earlier in the year, to a declining market, and now to a quickly improving market. I also believe that our more than five-year investment program in our rig fleet has well-positioned Patterson-UTI for the current uptrend in both traditional and nontraditional drilling.

I'm also pleased to announce today that our Company declared a quarterly cash dividend on its common stock of $0.05 per share to be paid on December 30, 2009, to holders of record as of December 15, 2009.

Before we open the call to questions, we would like to take this opportunity to express our sincere appreciation to all of our employees. We are most proud of the talented men and women who make Patterson-UTI the suburb Company that we are and we want our teammates to know how much we value their talent, dedication, and hard work. We cannot thank them enough. At this point, I you would would like to open the call for questions

Thank you, sir. (Operator Instructions) Questions will be taken in the order they are received. Gentlemen, your first question comes to you from the line of Marshall Adkins of Raymond James. Sir, you may proceed.

Good morning, guys.

Good morning, Marshall.

Mark, quick question here. You have I think a perception out there that Patterson is a rig fleet full of tired old rigs and you've done a lot over the years to dissuade that view. It now appears off the bottom, your rig count is up 67%, the average rig count was up a little less than 20%. So you're clearly gaining share in the North American market. Walk me through and investors through why that's happening, given the perception that's out there.

Marshall, I'll give you my take and open it to both Doug and John to throw their views at it as well. Fundamentally I think Wall Street has misunderstood what really exists in our rig fleet. We've spent more than $2 billion, about $2.4 billion in CapEx over the last five years, about $2.1 billion in drilling to add new rigs to our rig fleet, to upgrade our existing fleet, so we believe that we have the rig fleet that is required for contemporary drilling in North America, both traditional and nontraditional drilling. What happened earlier in the year is we lost some share owing to the fact that we didn't have as many term contracts as some of our competitors. Now that in effect the market's regaining some strength, we think that customers are coming back to Patterson-UTI to our fleet, to our people, to the things which we think distinguish us as a provider of services in the industry. Doug?

Yes, Mark, I can't add much more to that. But Marshall, I think one of the other things, we've actually seen strength in the market in virtually all of our markets and some of it's surprising. I mean, a lot of people today seem to think that it's only oil directed activity. Interestingly enough, yes, we've seen an increase in West Texas, but some of our bigger increases in rig activity have actually been in the markets that people don't talk about very much. So I think what we're saying is it's across the board and our philosophy has always been there's different rigs necessary for different markets and we're just pretty proud of the fact that our customers think enough about us that we can compete with anybody.

It sounds like you're getting a lot more long-term contract interest going forward from the data you put out. Which of these rigs are getting long-term contracts? Are they just brand-new rigs or are they contracting existing rigs for longer periods of time?

Marshall, I think what you're actually seeing is term contracts of three years' length that were signed at much as a year ago and we're delivering the new rigs into those contracts. And that's what you're seeing. And this was pretty much as planned, going back 12 months ago. So what you're seeing right this minute in terms of an increase of certain term contracts is the fulfillment of contracts signed six months ago, nine months ago, even 12 months ago. So it's not that we're so much entering into new term contracts right this minute as we are in effect fulfilling existing term contracts. That said, it's also worth my adding that some customers are asking us for term contracts at this point and, frankly, we're considering the terms, the degree to which it's above the current market, the length of time, all those kind of factors, and trying to make a decision as to whether it's in our best interest and the customer's best interest to do so.

Fantastic. Thank you, guys. I'll let someone else ask questions and requeue.

Thank you, Marshall. Gentlemen, your next question comes to you from the line of James West. Mr. West, if you could state your Company name for documentation, please.

It's Barclays Capital. Good morning, guys.

Good morning, James.

You talked about spot prices improving. I wanted to get some more color on that. Is that within the 100 or so rigs that you guys would classify as fit for purpose or high spec, or are you seeing it also in your more commodity rigs?

I think we've seen it in almost every market, in every size and type of rig. It very specifically depends on activity in that particular region and the customer's perception of both the quality of the rig and crew. But I think what we're really trying to say is we saw the downward spiral in pricing pretty much stabilize during the quarter, and we've been pleasantly surprised with a little bit of the improvement in pricing, almost generally across the board.

Okay. And then with regards to conversations about new long-term contracts, I mean, presumably the spot rates, while they're improving, they're probably not the level where you would lock in for a significant amount of term. At what price or maybe percent over kind of current rates would you consider locking in some of your rigs to new long-term contracts.

James, we can't give you a set formula on that. Because, frankly, it turns on a whole series of factors, for example, what's the quality of the rig, what's the application of the rig, what's the term the customer wants, some customer might want a six month term at a set price, someone else might want a year, someone else might want longer than that. So it's each one of these kinds of things being taken into account and we're -- we do all of these things kind of case by case. So it's not that I sit in a chair and kind of set some arbitrary prices. It's an entire management team that tries to examine each opportunity and see what the best way to take advantage of it is.

Okay. And then I guess philosophically, though, at this point in the cycle, I mean, what's your degree or how much do you even want to enter into term contracts at this point? I mean, given that we -- presumably we bottomed here.

I think for us, it's kind of a classic calculus function. You can think about what the rate of change is in the marketplace. You can think about what the term is. You can start to calculate what you think you're going to get in 3 months, 6 months, 9 months, 12 months. And make a judgment as to whether the term contract will give you all those benefits, some of those benefits. I mean it's very much a risk-reward analysis and that's what we're doing in terms of thinking about pricing on new terms. Let me say this to you. Historically Patterson's been a Company that's been willing to in effect take the risks of the spot market and gain the benefits of the spot market and we have the balance sheet to enable us to do that and I think we've been pretty successful over the past 15 years in sort of garnering the best of the market most of the time. That isn't to say that in downturns we haven't been hurt by not having as many spot market rigs but it's certainly to say that in upturns we've certainly been benefited by what we've done.

You know, James, the other thing that's encouraging by this, we certainly have had a number of people trying to lock in rigs today at today's current prices or slightly above that. What's encouraging about that for us is the fact that they do feel that, one, that they've got enough work to keep a rig busy for that length of period of time, and two, a lot of these guys are pretty smart and being pretty opportunistic. They know or they're feeling today that rig prices are probably going to go up and they're trying their best to lock in today. So both those things are encouraging for us and we're, as Mark said, we're looking at each one of those things on an individual basis and deciding whether we want to do that or not.

Okay. Great. That makes sense. Thanks, guys.

Thank you. Gentlemen, your next question comes from the line of Alan Laws of BMO Capital Markets. You may proceed, sir.

Good morning.

Hey, Al.

If the rig count continues to climb here, where do you think that your margins stabilize? Are we at that? Given the mix of your term contracts and what looks like some price increasing, where do they stabilize?

Al, I think they really, and his group have stabilized it at this point. As the market continues to firm up, that's an opportunity for margins to expand, I think.

So when activating rigs, you can see a margin expansion without price increases, is that not part of the operating leverage inherent in your model?

A couple of different things going on. You have new rigs coming out at higher margins than the spot rate, at the same time by bringing rigs out you actually get better absorption of your fixed costs. You know, just exactly how all that math plays out as rigs get deployed is a little bit unclear. But I expect we do have the opportunity for margins to begin to expand as we deploy rigs and the market tightens up.

I have a follow-up on James' question too. What brings rigs off the fence? I get a lot of questions, many think that rigs get reactivated for free, so-to-speak, but could you maybe give us a little outline of how you go through a process of getting it off the fence and what you look at in order to reactivate it?

Fundamentally, customers come to us, saying they need a rig. Sometimes they come to us and say they need a rig for one well. Sometimes they come to us and say they need a rig for a program of some number of wells, six wells, whatever the number might be. And we look at the opportunity in terms of activating a rig, in terms of how -- if, for example, for one well, we would be less inclined to take the rig and reactivate it because all the start-up costs are inherent and all the crew costs, et cetera. So we're looking for cut customers who are looking to activate the rig into a program of drilling and we make that as part of our consideration. Pardon me. When we see that the opportunity looks like it's attractive to us, we say to the customer, listen, we can give you this rig, starting on this date, at this rate. And that's what makes for a market with the customer and us interchanging for what the desired and acceptable rate is.

My last question is on the balance sheet. You have a really strong balance sheet. Would you continue to build a few new rigs on spec sort of to feed that part of the business, the unconventional side, or are there other like larger transactions that you might look at? Is there anything to report on that side?

Alan, I guess what I would say to that question is the following. We were delighted that during the year like 2009, we were able to build a rig -- new rig program of 20 rigs, consistent with what we had previously announced and completing that this year, a little bit maybe into next, but going forward on this program kind of as planned is something that we think is really a reflective of our strength as a Company and fundamentally stems from having that balance sheet strength. I think importantly, one of the things that's been a hallmark of Patterson-UTI is that when we've had cash, we've either given it back to the shareholders in the form of dividends or buybacks, or try to invest it smartly. And if we can't find good opportunities to invest, we'll give it back to the shareholders. That's historically what we've done and you're well aware of that, of course. What we would do in the long-term future. This 12 months that balance sheet permitted us to continue with this program of expansion of new rigs.

In terms of new rigs in 2010, that's part of our real capital allocation process. Quite frankly, we spend the month of November having budget meetings, kind of rolling up into a final budget in mid-December, which we present to our Board and get Board approval of at that point and then embark on that program for 2010. We're going to start that process kind of literally when we hang up on this phone call. And that will be the process. At this point we really don't have anything to announce about 2010's CapEx program because we haven't made those decisions yet. But everything is under consideration.

Excellent. I'll requeue up for other questions, let other people ask. Thanks.

Thank you, gentlemen, your next question comes from the line of Arun Jayaram of Credit Suisse. Please proceed.

I wanted to follow up a little bit on that last question. Mark, would you be willing to entertain new construction without a term type contract, based on your forward outlook going in terms of the market? Or, thinking about what kind of margins would you like to see in terms of -- what would justify new constructions on the margin front? Because I suspect that some of the capital equipment costs are coming down.

Arun, it's an excellent question, one which we think about hourly or minute by minute. The answer to the question I think is a couple points. Number one, we have built new rigs on spec before. If you go back and look at the original 15 rigs that we built new that are the first in effect NOV rigs that we built, we built those rigs on spec many years ago. So we have as a Company been willing to do that. Whether we're willing to do that in the current environment is something that is actively under discussion and actively under consideration. Whether it's something we do or not do, part of our whole budgeting process and something in which we want to think about.

In terms of returns, historically we have been among the leaders in returns on equity, returns on capital deployed, whatever measure of capital people want to use. You and your firm have been among the leaders in that kind of analysis and know it well. So I feel as if we've been extremely capital-disciplined and want to maintain that capital discipline going forward. I think that we recognize that as Doug said in his comments a few minutes ago, there are different rigs for different kinds of markets. It's important for Patterson to maintain its leadership position in all of the markets in which it competes and wants to compete. So we look at these questions and try to wrestle with them. I can't give you much more than that because, frankly, we're just starting the wrestling process. When we finish wrestling, we'll be happy to tell the world.

That's fair. That's fair enough. In terms of pressure pumping, I was wondering if you could give us a sense, Doug, perhaps of what the mix is today between your traditional and perhaps more shale oriented business today.

Arun, you're asking for the mix between the horizontal type fracs versus the traditional business?

Yes.

I'm not sure I've got that number off the top of my head. We think -- let me just give you a real ballpark. We think our traditional business is probably down 50 to 60% over, say, a year ago, and obviously that's the shortfall, the difference between that and the kind of revenues we're generating today are the difference in the mix with the horizontal fracs and the nitrogen jobs.

Right.

But I don't -- maybe we can -- we'll get you some numbers and maybe John or I could call you after to maybe give you a little bit more. The traditional business has for all intents and purposes almost just disappeared. A lot of it is so many people are focused on the horizontal business and focused on the shales that they've actually kind of taken a time out and we just don't have a real good feel for when that traditional business comes back. We think it takes higher gas prices.

Got you. Could you just, Doug, maybe comment on the competitive landscape in that -- in the horizontal business. Are you seeing new market entrants? How is pricing doing, et cetera.

Arun, I think what we've seen, the number of complete frac crews up there continues to increase. We thought there was about 12 horizontal frac crews up there a quarter ago. That's continued to go up. There's not -- we haven't seen a whole lot of new entrants. It's just the existing players bringing more and more equipment up there. As I said, we think that business is starting to get some traction. I think as I've said in my comments, that we feel the market up there has excess capacity today for the current levels of business. But we do see that ramping up.

In terms of pricing, to be honest with you, pricing has been pretty brutal. Some competitors have moved into that market that traditionally haven't been in there before and one of the quickest ways they can establish a foothold is by buying the first couple. So we've seen some very competitive pricing, some pricing that quite honestly we've chosen not to work at those levels. We're in business to make money, not just to establish market share. So -- but I think as that whole horizontal, shale plays keep moving forward, think of some of the simultaneous operations start you'll see -- I think there is a backlog of some wells there that need to be fracked and completed. So we think that business will continue to improve its utilization and hopefully pricing will improve as well.

Fair enough. Just real quickly, can I get a couple housekeeping items on the model for Q4. John, any sense of G&A and depreciation and tax rate guidance for Q4?

Yes, I think on depreciation, I would guess that it would move up somewhere towards $3 million. We have quite a few rigs go out in the quarter and early in the fourth quarter, so my guess on depreciation would be somewhere around $73 million-ish.

Okay.

G&A I think is, you know, fairly stable at this point. I would guess somewhere around $16 million.

Okay.

Would be the right number. Another one I guess to think about is the tax rate. It's a little bit different this quarter. As everybody else does, you get to September, you file your tax return, you true up to it. And for the coming year, I mean for the total year taken together, I would guess that we would have a benefit tax rate of about 34%, which is somewhere between 33 and 34, call it maybe 33.5 for the fourth quarter itself.

Very helpful. Thanks, guys.

Thank you. Gentlemen, your next question comes from the line of Matt Conlan of MKM Partners. Please proceed.

Hey, guys.

Hey, Matt.

I just was a little bit confused on the term rig count for 2010. In the second quarter release, you said that you had 28 term rigs expected to be on contract in 2010 and now it's 34 rigs. Have you signed new term contracts one year duration contracts in the open market in the last quarter?

Yes, we actually have.

And what kind of -- what kind of rates, margins are those rigs getting? Are there anything -- are they anywhere comparable to the rates that you're getting on the new build deployments?

Well, Matt, they're certainly not new build deployments but they're market by market and I certainly don't want to divulge where they are, but we've actually been pleased with the pricing that we've seen and that's one of the reasons why we've accepted some of those, what I would call shorter term, term contracts. I don't think any of those have been longer than one year and like I say, they're in markets where we feel we got a premium over what the current spot price was.

Okay. But we shouldn't -- okay. That's terrific. That clears it up terrifically. Thank you very much.

Thank you. Gentlemen, your next question comes from the line of Dan Boyd of Goldman Sachs. Please proceed, Dan.

Hi, thank you. Hey, just wanted to follow up on what M&A opportunities you're seeing out there and specifically are you seeing any opportunities to do something of size outside of land drilling, maybe particularly pressure pumping?

Dan, we are looking at the whole array of -- and have been looking at the whole array of kind of related services to see if we could find an opportunity, including opportunities in pressure pumping and anything that was related to what we do in our pressure pumping businesses. Regrettably, what we've seen is that the price expectations from sellers have remained fairly elevated, and so we have not seen opportunities where we thought that our shareholders would significantly be improved by a transaction. And quite frankly, I'm disappointed to give that answer but I'd rather give that answer than to have spent money and in effect lost some shareholder value by doing it. So quite frankly, I'm disappointed that we haven't been able to find an opportunity which we thought was compelling, but that's just the result of the sellers' expectations on pricing.

But you are looking at other deals that might somewhat structurally change the Patterson story or maybe structurally change isn't the correct word but diversification away from just land drilling?

We are always willing to entertain and look at opportunities. We're not looking at anything currently that we would feel the need to disclose, but we're always considering things and in the process of trying to evaluate opportunities to see if we can add to our Companies and add to our shareholders. Quite frankly, we understand the benefit of keeping the story straight for investors. We would be reluctant to change, to do something which would change that story for the obvious reasons, that it would make it a more confusing story. But we're always looking to see whether we can increase value for shareholders. That's what I think our job is.

Okay. If I could just follow up on -- could you maybe just give some more clarity on where you're seeing spot margins today, spot day rates for margins, any color you could give us. I know they've firmed up but where are they exactly or how does that compare to what was just reported in the third quarter.

Dan, the hard thing about this is the variation between markets, between rigs. We operate kind of this fleet of different rigs in different markets for different customers for different purposes, so it's really difficult to say oh, this is occurring and to in effect give you a 35,000-foot answer which will be kind of maybe true for one rig out of the entire fleet, but it's not true really for all the rigs on an individual basis. That's the reason we've been so reluctant to give these kinds of answers because we don't think they tend to be terribly helpful.

Fair enough. I'll turn it back over. Thanks.

Thank you. Gentlemen, your next question comes from trick Mike Drickamer. Mike if you could state your company name for documentation.

Sure. I'm with Morgan Keegan. Looking at the new build question again, what would be your preference right now between building new (inaudible) and then buying somebody else's's higher spec rigs that perhaps at least on paper have similar specifications.

Well, I think that's kind of an interesting question and it gets back to what Mark said earlier. We make that evaluation every day. Unfortunately, when you look around the industry today with probably what we're looking for, it really comes down to does that other contractor or that other -- whoever it is, have enough of the kind of rigs that we're working or that we're looking for without having to take on a bunch of other rigs that you really don't want. And so it's sort of that decision versus building new. As you've seen what we have done lately, most of our focus over the last couple years has been building new and that's for a very specific reason.

Now, again, if we found the right opportunity with the right rigs at the right cost, and we felt it fit the model of what we're looking for, I think we really don't have a preference. But it's that sort of an evaluation we make almost every time we look at either an acquisition or building new. But as I said, I think the fact that we've been building a lot of new rigs in the last couple years should tell you something.

Okay. So maybe it's not completely an economic decision but economics play a large role in it?

Yes.

One more question. How many rigs do you actually have enough crews for right now?

We certainly don't carry any extra people to any large degree. But we're forever -- this business has always been, when you get the next 10 jobs, go get the people that used to work on that rig, see if they're still available. We've -- over time, we've never really had a problem running out of people and I don't expect that to be any different going forward.

Okay. That's all from me, guys. Thanks a lot.

Thank you. Gentlemen, your next question comes from the line of Kurt Hallead of RBC Capital Markets. Please proceed.

Good morning. I'm not going to let you guys off the hook that easy, we've both been through too many cycles. What's your trajectory on the upside going to look like, like '98, '99 or like '02, '03.

Hey, Kurt, we specifically said we couldn't say.

You could postulate. Nobody can hold you to it.

Kurt, I heard you ask somebody the other day, I've got a question for you. What's a Y and an X upturn?

I have absolutely no idea on that. In all seriousness, there's -- coming off the lows here for pretty obvious reasons, we've kind of -- as the cycle did the similar thing coming off the 2002 rig count lows and then pretty much flat-lined for a couple of years and then flat-lined from a pricing standpoint for a couple of years and inevitably that's going to be the next round of questions and John Vollmer and you guys know this all too well, next quarter everybody's going to go well, what's pricing power doing? Just want to get some general sense from you. You've got the pulse on the field. You know what the E&Ps are actually doing versus what they're saying. What's your sense on how this recovery works.

Kurt, I honestly feel what I said in my sort of prepared remarks, about it's being just four months into the recovery, therefore being difficult to kind of tell you what the trajectory was. It was a completely honest comment about lack of knowledge. Obviously, to the extent to which commodity prices are strong, we all aware of a $4.60 kind of nat gas current price and $78 oil price, to the extent to which those prices remain at that or significantly higher levels, we'll obviously see a boost in our business. But it's so difficult to predict what's happening with commodity prices, what's happening with the economy, that I honestly felt we couldn't give you much sense of that trajectory. That's why we said that. And I'd love to give you an answer. I would love to know the answer.

Okay. Now, I think you guys, once again from a fourth quarter standpoint, John, is your comment that margins are flat Q on Q or are they going to be up because obviously you're seeing an increase in your rig activity going to, what, 90 rigs I think is what you said on average in the fourth quarter, versus 70 in the third so are we going to get an uptick in margins in the fourth quarter on that 20 rig jump?

Our take is that margins quarter-to-quarter will be about the same between the third and fourth quarter, it's a slight increase in revenue but also costs will be ever so slightly higher. The higher costs are partly driven by the fact that we're going to have less rigs on standby. We've also in the second and third quarter gotten a little bit of benefit from an actuarial adjustment on workers' comp. So slight increase, couple hundred dollar increase in revenue per day, couple hundred dollar increase in cost per day is our best guess, resulting in roughly the same per day margin.

Okay. So so far through the third quarter, we have two big service companies, two of the biggest service companies come out and say okay we're going to see a pick-up in land drilling activity in the fourth quarter, third, fourth quarter. Then it's going to flat-line for six months and then increase in the second half of 2010. Do you guys share that view?

I don't think we have any visibility, Kurt, to that answer. I mean, obviously in the remarks we made, we said that we're seeing these increases in customer inquiries. We think this is going to translate to an increase in activity in November, December. We are recognizing that part of the usual slowdown of November, December is Thanksgiving and then Christmas, and then New Years and so in the aggregate we see kind of a tempered uptick in this fourth quarter which is with the numbers that we said reflect. Beyond that, frankly, we're seeing this increases in customer inquiries, and it's hard for us to sort of see how -- where that takes us to in January at this point.

Given you know indications out beyond what they can see 30 days out?

I think that they're talking about increased programs for their 2010 programs, but in effect they're not making any commitments that are too terribly long. Doug?

That's correct. I think we're cautiously optimistic that we've seen the worst and things are going to get better from here but to see how it actually plays out in Q1 and Q2 and to say that it kind of flat-lines, I just -- I really couldn't say one way or the other at the moment.

Okay. Fair enough. All right. Thanks, guys.

Gentlemen, your next question comes from the line of Barry Haimes at Sage Asset Management. Please proceed, sir.

Good morning. Thank you. I have two questions. I'll just do them one at a time. First is if we take the 63 rigs that you averaged operating in the second quarter and then I think you're 93 currently, so up 30, and if I -- excuse me. If I did the math right, in the second and third quarters you took delivery of 10 of the new builds. So there were 20 of the more traditional rigs that got reemployed if you will in the second and third quarters. Could you give us a feel on where those are going, oil versus gas and if there are any regional trends there? Thanks. That's the first question.

Barry, let -- this is Doug. Let me answer that. This is just the rig count change quarter-to-quarter. I won't give you the exact numbers but I'll do it from sort of high to low. We saw the most rigs go back to work in South Texas and in fact, none of our new -- that includes none of our new rigs in that market. Second highest change I guess was East Texas and for the most part, that was predominantly both new rigs and newer rigs of sort of within the last couple years. Then virtually all the rest of the regions were pretty similar. The Rockies went up in this case 4, but again, two of those were actually brand-new rigs. And then the rest of the regions were all pretty much similar. So not exactly what -- a lot of people have said we've seen this big uptick in kind of oily basins. We haven't seen that effect maybe as much as some other people. Because a lot of the stuff that I'm talking about here certainly a little bit of it's been oil, the West Texas and a little bit of the Texas and Oklahoma Panhandle business but all across the board, we've seen just as much gas related activity as we have oil. Does that answer your.

That helps. Second question is on the higher spec new build rigs on your program, when do the first term contracts start to expire? And if you were to compare the rates that are coming off to where the rates on a comparable rig would be today, can you give us a flavor of kind of where we are? Thanks.

Well, if you just refer to the new builds we completed in 2009 and there was roughly 20 of them, those were for I think with the exception of one rig, those were all three-year term contracts so most of those will continue on, most of them started in '09, they'll continue on for all of '09, '10 and most of '11.

My question related to when did you take the first deliveries on the program and if those were three years, when would those start to -- when would those start to roll off so that you'd have to go for a new contract and again, what would the rates be rolling off on those earlier deliveries compared to where they are now?

This is John. Let me try to answer the question. Of the 2009 new build program, those contracts were generally signed in the middle of 2008. And were at higher margins than the term contracts that existed prior to these 2009 deployments. So rigs rolling off term contracts that might have been signed in 2006 or 2007 that had been running for a couple of years, as those roll off, those were at good but lower margins than the ones being deployed in 2009. The beginning of the 2009 deliveries, throughout the year, I think Doug gave detail earlier of I think it was 3 in -- 4, 3, 7 by quarter with two more going out in October and with one exception, as Doug mentioned, these rigs that have been deployed under these contracts this year have three-year contracts and that one exception is the two-year. So they'll continue in effect into various dates for the most part in 2012. Does that respond to your question?

Yes, so the '06, '07s that are rolling off this year, next year, those can get redeployed at higher rates? Is that what you're saying?

They could be redeployed on long-term contracts but as Mark indicated earlier in the call, our focus -- we look at each opportunity but most of these rigs go to spot rate.

Okay, thanks.

Maybe a helpful thought for you is that we don't have a large contingent of rigs from prior years that are going to be expiring either in the second half or the rest of this year or the beginning of next year. That may be a helpful way to sort of think about it for you.

Got it. Second half '10 is when they start to expire?

Well, I mean--?

Prior to 2009, we had 30 or so rigs on term contracts from prior years and they've rolled off term contract and are operating for the most part at spot rates.

Got it. I got it now. Thank you so much.

Gentlemen, your next question comes from the line of Joe Hill. Mr. Hill, if you could state your Company name for documentation, please.

Certainly. Tudor, Pickering, Holt. Good morning.

Hi, Joe.

There's been a thought in the industry that the market's going to keep bifurcating between the high spec rigs and the commodity rigs, the high spec rigs obviously having a lot better rates and we've seen that to some extent. What are your thoughts around the ability of the commodity rigs to impede the level of rate the high spec rigs can command because it looks like at a given price, it makes as much sense to use a commodity rig as a high spec rig in some of these plays?

Joe, this is Mark. We think that this view that there's in effect two classes of rigs, there's the high spec and then there's the commodity rigs, we think is a little bit misleading, if not a lot misleading. And the reason we think it's misleading is because the rigs are of various qualities. Some of the new rigs that are categorized very often as being put into this -- the A category that in this view, we would say are probably not As and for many particular uses have been proven not to be A-rigs. So it's really kind of a particular rig for a particular value and a particular use that really is the question. That said, what happens, I think, is that there is price competition among all rigs across the board. Some people are willing to say, look, I want this particular rig with these particular specs and for it, I'll be willing to pay a incremental price over and above what would be a comparable rig, simply because I want that particular rig on this particular job.

Some people want to drive at a very expensive car and they're willing to pay for that very expensive car, even though they don't necessarily need all the capabilities that that car provides. Some another person is willing to say, hey, look, I can get something which will give me 90% of it for 75% of the cost, I'll take that trade every day. And so there are value players in the supply chain and there are -- we've always felt that way. I felt that way since we made our investment in this business 15 years ago and people said that mechanical rigs would not work and that only FCR rigs would work and we always argued that in effect the marketplace would see some kind of price competition between those two rigs and that that price competition would always factor in some incremental value for different kinds of quality rigs. I continue to believe that. The view that says there's heaven and hell is too simple.

Sounds like the notion that if I'm going to the track, it doesn't really matter what the Porsche costs, I'm not taking the Yugo.

Actually, the point is to stay with that phrase is you may as you go to the track decide that you could drive that Porsche as fast as somebody else can drive their Ferrari and decide that that Porsche is a good deal go.

Sounds good, thanks a lot.

Next question comes from the line of John Daniel of Simmons and Company. Please proceed.

I just have one question on your workers' comp comments. You noted in your prepared remarks that you've seen a decrease in the workers' comp expense. Can you quantify that on a per day basis for us?

John, this is John Vollmer. Off the top of my head, in the second quarter I think there was roughly a couple hundred dollars or so benefit from that compared to -- per day, compared to some traditional numbers and I think we continue to get toward $100 a day benefit in the third quarter. Driven by improvements in our safety performance and also there is a component that once a year the actuaries adjust their numbers, that was the second quarter impact, in terms of industry experience, so we got a bigger benefit in the second quarter that was actuary and I think for the whole year we've actually gotten some benefit for good safety performance.

Okay. But as you -- I don't mean to belabor this point but as you guys go into 2010, and the industry quite frankly, activity picks up, it's been my experience that incident rates rise as well. Because of the lag effect, would you maintain the benefit of those workers' comp savings in 2010 and if that played out it would be an issue in '11.

I honestly don't know the answer to that. Let me tell you what we've seen over the last few years. We had a period where the industry kind of stabilized, 2006, 2007, headed up in 2008, and I would tell you that our workers' comp cost has been dropping throughout that time. I think -- I suspect, can't prove it, but driven by improvements in the way we deal with our safety, on operations side and continued focus on that that's continued all the way through to 2009. So contrary to an increase in rigs going from 220, 230 at one point in 2008, up to 270, 280, we saw no increase. And if you're -- if what you said was true, we should have seen an increase in workers' comp costs in 2009 which has not occurred. It's actually gotten better. So we're hopeful for lots of reasons beyond financial that we could continue to maintain a good safety performance as we go forward.

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

Gentlemen, your next question comes from the line of Geoff Kieburtz of Weeden. Please proceed.

Good morning. First on the increased work, I think you've made the point several times on the call here that it was really across the board but in the press release you seem to be focusing particularly primarily working in established conventional drilling areas. Just wanted to clarify there. Was there a particular bias toward conventional drilling in the increased work that you've experienced so far?

I thought we were trying to indicate that we saw the increase both in our conventional rigs and in our new rigs, so no, I don't think we -- I thought we try to be pretty clear by saying it was across all regions and across all types of equipment.

Right. Just wanted to clarify. Seemed to be a little difference between the commentary here on the call versus in the press release. But I--?

if I could add a little color to that. Primarily the new rigs, the new build rigs have primarily gone to what I would call the resource plays, Haynesville, Marcellus, still taking some new builds into kind of the Pinedale operation. Most of the other rigs, the conventional plays have sucked up most of the other rigs.

All right. John, you made a comment earlier that you expected to see margins progress upwards as we go into 2010. I think that's what I heard you say. Was a little surprised at that, although it sounds like you're seeing spot rates rising. I'm assuming that the margins on spot work is still considerably lower than the margins on the new builds that are going into the active fleet. And just by virtue of the numbers, it seems like you've got more rigs going into the spot market than you do rigs going in, starting up on term contracts and I would have thought that that -- just that mix effect would have a tendency to drive the margins lower.

Depending on the speed that rigs get redeployed, that could certainly happen. I think that answering a broad question. But specifically if you look at the rigs, rigs going out under term contracts today and for the rest of this year are at higher rates than the spot rate and in fact are higher margins or rates than term contracts we entered the year with.

Right.

Relative to all rigs, whether they be those on contract or spot rate rigs, we do get better absorption of yard and superintendent and safety people and that whole group of -- it's not accounting back office, it's operational people that support the field. Each rig that goes out we get better absorption of that cost that we deem to be fixed to keep our ability to put rigs out and reactivate rigs. So you're getting a benefit as you bring rigs out on the cost per day. We know historically we can't predict the timing of it but we know that historically as people try to deploy more rigs, it gets more difficult to get them and quickly you get some pricing benefit. Exactly how those play together and exactly what happens with margins on a rig per day basis, I don't know. The thing I think I do know is if we put rigs out at today's prices or a little bit higher prices, the benefit on the cost per day side is there and in fact these things go out profitably and we make more money.

Right. If we looked at a rig that you have going, a new build that is going into the market, starting to work today, versus what that rig would earn in the spot market today, is the margin on the spot roughly half of what the term contract margin is?

I think that just varies. It varies by market. It varies by a lot of different things.

All right. And then lastly, I know, Doug, you didn't want to talk about specifically where or with what customer the new term contracts that you've entered into pertain to, but is there a particular characteristic of those rigs that you can describe signing up on new term contracts?

Well, I think the new term contracts, Jeff, have been very specifically focused on customer requirements, primarily in the shale plays.

Okay.

And as you know, those shale plays are very, very different. So the rig that's required for the Haynesville is certainly a different kind of rig than the rig that's required for the Marcellus.

Okay.

Or Rockies, some of the resource plays there. So like I say, they're built specifically for some purpose that the customer has in mind, primarily for those resource plays.

Okay. Thank you.

Gentlemen, you have one final question in queue. It is from [Ashish Gupta] of BDC. Please proceed, sir.

This is Ashish Gupta. How are you. In your specific guidance from 3Q to 4Q on daily margins being flat, if I go through my model that implies spot margins up about 400 to $500 per day. Is that about right?

I don't think they are up that much, given the information we did, Ashish.

Okay. Fair enough. I guess the follow-up to that would be would there be anything different in this cycle relative to previous cycles, assuming the rig count continues to go up, that wouldn't cause sequential spot margins to accelerate going forward? In other words, would there be something different about the cycle that would cause sequential increase in spot margins to be flattish or decelerate as opposed to accelerate?

Ashish, I don't think we really know the answer to that, consistent with answers we've given to other similar questions in the call. I think what we do -- what we have experienced in the past couple of upturns is we know that pricing moves when there is a shortage of available equipment to drill a well and people want to relate that to the rig and our experience at Patterson, we see it a little differently. We don't keep the people. The industry doesn't keep the people. You have to go and get them back. So when enough customers line up, saying I need a rig next month, we have to go find those people. We have to train them. It takes a few weeks to get a rig ready to work, safely, and that creates some level of shortage for a period of time. And that's what supply and demand, that's what produces pricing. So the exact timing of that we don't know and when you get to those shortages, we don't exactly know. I personally don't think we have to -- Patterson doesn't have to run 270 rigs to get better pricing. But just where that occurs, I think it's a matter of the speed with which people are requesting additional equipment.

Thanks a lot.

Gentlemen, that empties out your question and answer queue. I'm going to turn it back to Mr. Siegel for his closing.

I would like to thank all of those who participated in this conference call. I would like to as well thank our investors and their advisors for their participation. Tell everybody that we look forward to speaking with them at the end of the next quarter and to reiterate that we appreciate these calls. Thanks very much.

Thank you, gentlemen. Ladies and gentlemen, this concludes your presentation today. You may now disconnect. Have yourself a great day.