Patterson-UTI Energy Inc (PTEN) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2010 Patterson UTI Energy earnings covered call. My name is Jeremy and I will be your coordinator for today. At this time all participants are in a listen-only mode. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. At this time I would like to to turn the presentation over to your host for today's call Mr. Geoff Lloyd on behalf of a Patterson UTI.

Think you very much, Jeremy. 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 six months ended June 30, 2010. 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 dayrates, rig utilization and planned capital expenditures, excess availability of land drilling rigs including 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 SECs EDGAR system. The Company undertakes no obligation to publicly update or revise any forward looking statements. Statements made in this conference call include non-GAAP financial measures. The required reconciliation to GAAP financial measures are included on the Company's website and in the Company's press release issued prior to this conference call. Now it is my pleasure to turn the call over to Mark Siegel for some opening remarks. Mark?

Thanks, Geoff. Good morning, and welcome to Patterson UTIs conference call for the second quarter of 2010. Thank you all for joining us this morning. Second quarter 2010 was noteworthy for a number of reasons. Most importantly, we saw improvement in both of our core businesses which both performed ahead of our expectations. In terms of carrying out our strategy we also had two notable events. Namely, the selling of some ENP assets for a substantial gain and the pending acquisition of Key's pressure pumping and wireline assets.

We strongly believe that we are making good progress on our strategic plan which plan we will be transformative for our customers, employees and most importantly our shareholders. We are, as I think you will hear all very excited about these developments. I trust that by now you have all had an opportunity to read our earnings release which was issued earlier this morning. Before we get into the details this morning, our plan would be to take a few minutes to review the financial results for the three-month period ending June 30, 2010. I will then turn the call over to Doug Wahl Patterson UTIs President and CEO who will make some detailed comments on the results of the individual operating units and some operational highlights. After Doug's comments on the second quarter I will share a few brief thoughts on the market outlook and the pending acquisition. As always, we will be pleased to take your questions following these prepared remarks.

We are pleased to report this morning that the Company recorded net income of $29.5 million or $0.19 per share for the three-month period ended June 30, 2010, compared to a net loss of $17.7 million or $0.12 per share for the three months ended June 30, 2009. Revenues for the quarter were $307 million compared to a $140 million in the same quarter last year. On a sequential basis revenues in the second quarter improved by $35 million from first-quarter or 13%. We are very pleased with the sequential revenue growth with drilling recording an improvement of 14% and pressure pumping recording revenue growth of 10%. EBITDA for the quarter improved to $125 million which represented a $41 million improvement over the preceding quarter. The substantial sequential improvement in EBITDA was the result of better operating performance in our businesses and the sale of deep drilling rights associated with certain of our oil and gas working interests for a gain of $20 million.

Capital expenditures for the second quarter were $190 million bringing our six-month total to approximately $300 million. Once again, most of this CapEx relates to our APEX rig new build program as well as new frac equipment.

I am pleased to say that even with this level of capital expenditure we ended the quarter with $96 million in cash and no debt on our balance sheet. During the quarter we received the proceeds from the federal tax refund of $114 million. Before turning the call over to Doug I'd like to take -- I'd like to make a couple of comments about drilling and pressure pumping.

On the drilling side through July, we will have seen our US recount increased for 13 consecutive months. The drilling industry has now seen the rig market tighten as the excess supply from a year ago of AC and SCR electric rates has been absorbed by the market with this tightening we've seen pricing for top end rigs improve. Additionally pricing across the fleet has risen as our US rig count has increased by 56 rigs from December 2009 to July 2010.

As for pressure pumping, the news is similar respecting our existing universal well services. Basically, more work at better pricing. With respect to the pending acquisition of the pressure pumping and wireline businesses from Key we believe that the assets are very high quality, their personnel are likewise very high quality, and moreover, their locations are totally complementary for Patterson UTI. We are expecting a September closing and of course we will have much more to say about this business post closing. As you can appreciate, during the question and answer period we will not be able to respond for legal reasons to questions about the historical operations of the business. All in all, we are cognizant of the changes in the market for our services and we have taken steps to respond to market dynamics. As I said, we think we are on the right track in both core businesses and this quarter's results support that conclusion.

I would know what to turn the call over to Doug who will give -- who will further discuss our operations for the quarter.

Thank you, Mark, let me start this morning with some comments on the drilling company then I'll turn my thoughts and comments to the pressure pumping company. But starting with the drilling company for the quarter ended June 30, the Company had an average of a 156 drilling rigs operated including a 154 rigs in the US and 2 in Canada. This was a 14 rig increase or roughly 10% over the average activity levels we experienced in the first quarter even with the ten rig decline in Canada sequentially. The US improvement of 24 rigs or almost 18% from the first quarter was further proof of our ability to meet the demands of the industry with rigs that meet our customers needs. The biggest activity increases came from the Permian where we were up seven rigs, south Texas this was primarily the Eagle Ford where we were up four and the Rockies where we were up four.

In addition to the ongoing activity increases we were also pleased to see pricing increase during the quarter. Of course this pricing movement comes from the spot market rigs which currently account for roughly 70% of our active rig fleet. We still have additional rig capacity capable of going back to work and it is this capacity plus the potential for price increases in the spot market that gives us a marked advantage going forward. Based on our read of the market it appears that almost all of the high-end rigs in the industry are now working. We are now seeing increased customer interest in our high-quality conventional rigs and we expect to see a additional demand in this area. As we have said, we believe that our diverse rig fleet provides unique opportunities to provide service for our customers and profits for our shareholders. Average revenues per operating day during the second quarter were $16,920 compared to $16,440 in the first quarter an improvement of $480 per day. Average direct costs per operating day stayed relatively flat at $10,520 compared to $10,540 last quarter. Daily drilling margins have again begun to increase and improved $490 per day during the quarter.

The US rig count is still moving upwards with a focus on the oily and the high liquids area. In Canada, breakups hit us relatively early this year, roughly mid-March, and the cool wet spring kept rigs from getting back to work until very much later in the quarter. I'm pleased to say that Canada is now back to work with nine rigs and we expect the US rig count to grow at a measured rate for the third quarter. We now expect our rig count to average approximately 175 to 180 rigs for the third quarter. We expect daily drilling margins in the third quarter to increase by approximately $400 per day.

During the second quarter we had an average of 46 rigs working under term contracts. Based on contracts currently in place we expect to have an average of 53 rigs working under term contracts over the second half of this year. Let me give you a brief update on our 2010 new build program.

In total, we delivered four new rigs to the marketplace in Q2, of these four rigs two were APEX 1500s currently wonder in the Eagle Ford and two additional APEX 1000s were delivered to the Marcellus. Overall we have been extremely pleased with the startup and operating performance of all of our new APEX rigs. Of particular note one of our customers in the Eagle Ford told us that our APEX 1500 set a new field record for them on its very first well out of the box. We now expect to complete 23 new rigs this year and are pleased to say that we have term contracts signed on all of them. We're still seeing a lot of ongoing interest in our APEX rig technology and are currently acquiring components for the construction of 11 new rigs for delivery in 2011.

Turning now to the pressure pumping business, as Mark said earlier we had another very solid quarter from Universal Well Service. Our revenues for the quarter were up 10% sequentially and our operating income was up 50%. Revenues for the quarter were $59.4 million and average revenue per job came and at $30,980. The number of jobs completed during the quarter increased by over 20% as we completed more traditional jobs in this market. This was primarily a result of some delays by customers on multistage horizontal frac jobs so these job slots were filled with a number of smaller more traditional jobs. This had the impact of lowering our average revenue per job for the quarter however we do not see this as a long-term trend. During the quarter we completed 25 Marcellus horizontal fracs, an increase of 1 over the previous corner. The number would've been higher but for the delays mentioned above. Overall drilling activity and completions in the Marcellus Shale continues to increase as the number of new customers get their projects underway. We continue to be very excited about this market and expect this to translate into further improved demand for our services.

We have already taken delivery of a portion of the equipment required for our third quintuplex frac spread. We now have a total of 24 new quints in service. We expect an additional six quints to be delivered over the next few weeks and this equipment will be put into service over the remainder of the third-quarter. 15 additional quints are currently on order and are expected to be delivered late this year and early into 2011. Training of additional crews to support this equipment is already underway to ensure that we maintain our high service quality.

Obviously as I said before we are very encouraged by the ramp-up in industry activity in the Appalachian. In fact we now expect pressure pumping revenues for Q3 two increase by approximately 25%. Appalachia has become a very key market for us in both the pressure pumping business as well as the drilling company and we are very pleased with our positioning in both of our businesses.

Turning quickly to the ENP business we saw revenues improve by almost 8% sequentially. Revenue for the quarter improved to $7.7 million. Production volumes were up 20% in crude oil but down 4% in natural gas. One final comment before I turn the call over to Mark, with respect to CapEx for the Company in 2010 we now expect our total CapEx spend to be approximately $700 million. Including, some early delivery of certain rig components and frac equipment that were purchased for 2011 capital projects. With that I'll now turn the call back to Mark for some concluding remarks.

Thanks, Doug. We are very pleased with the progress we've made this year on a number of fronts. In terms of the rig market we believe that the current market confirms several important points. Increases in our recount in a wide variety of markets reflects our ability to respond quickly to the changing marketplace and to activate rigs quickly to meet customer demand. Almost half of our rig increases during the quarter occurred in West Texas and South Texas. Beyond again demonstrating the resiliency of Patterson UTI our consecutive 13 month uptick in US rig count has confirmed our long-standing conviction that it takes a wide variety of rigs to satisfy the needs of the overall marketplace.

Second, our substantial market share gains in 2010 have confirmed to us that our loss of market share in late 2008 and early 2009 was due to Patterson UTIs relative decision on term contracts. A trend that has now been reversed to a very significant degree. As Doug mentioned, we are continuing to see interest in term contracts and interest in new APEX rigs. We are extremely pleased with the customer acceptance of these new technology rigs and we will continue to build on their record-setting performance. We believe that our APEX rigs are second to none in the industry.

Number three. We are delighted with the improving utilization of our existing pressure pumping assets in the Appalachians and look forward to the new capacity additions coming online. We have continued to invest in new equipment for this business to sustain a market leadership position in the Marcellus.

Number four. The pending acquisition of pressure pumping and wireline assets of Key will expand our presence in this business into some strategic markets such as the Barnett, Eagle Ford and Permian basin. Combined with our existing fleet this acquisition would bring the total horsepower of Patterson UTIs pressure pumping operations to approximately 470,000-horsepower by the end of the first quarter 2011. We expect this reinvestment in existing operations and the pending acquisition of the additional pressure pumping assets will position us as one of the significant players in this business segment.

With respect to the market outlook for the balance of 2010, we remain cautiously optimistic. We have been pleasantly surprised by the resiliency of the rig count driven by the shale plays and other unconventional resources and oily and liquids rich plays. We feel very strongly about the long-term potential for natural gas in North America and have taken steps to enhance our position to take advantage of this. We do believe that that shale plays and the other conventional resources have changed and will continue to change the supply equation and ultimately the demand equation in North America. We fully expect that demand for oil and gas will improve as the economy improves but we won't try to set a date for the economic recovery.

In closing this morning, I'm pleased to announce that today that the Company declared a quarterly cash dividend on its common stock of $0.05 per share to be paid on September 30, 2010, to holders of record as of September 15, 2010. I would also like to take this opportunity to thank our employees throughout the United States and Canada for their efforts each and every day in working safely and efficiently. We look forward to welcoming the hard-working people currently working for Key's Pressure Pumping and Wireline Group to our family. Working together our future has never looked brighter. Thank you.

At this point I like to open the call for questions.

(Operator Instructions) Our first question comes from the line of Marshall Adkins with Raymond James.

Good morning, guys. Great job. Mark, you've obviously had a pretty massive transformation you spent a gazillion dollars retrofitting the fleet over the last several years, and I guess another $700 million this year. What percent of the 175 rigs or 170 rigs or so working now are drilling in horizontal applications or maybe another way to ask, what is the percent of those rigs that are capable of drilling in horizontal type plays?

Marshall, the answer to that question is that based on this kind of information we now have available to us, we think that number is over 60% to 70% of the wells that we're currently drilling right now for our customers with the equipment that's onsite is drilling directional or horizontal.

Okay. And obviously you're continuing to expand with these new builds on the new build site, give me some sense of what type of terms and rates or margins that you're looking at? Also, are the cost of these rigs going up or down relative to where they were a few years ago?

Marshall this is Doug virtually all of the contracts that we been looking for are pretty much three-year terms, we have had some interest in some longer terms than that, obviously the customer is looking for a price break for longer than that, but pretty much standard we've been looking for three-year terms for new capital, the interesting thing is the price of these rigs has really stayed in a fairly tight band to this point. Most of these rigs are still in the $18 million per copy range, obviously that includes in our case a number of rigs with blocking systems that do add some cost to the rigs but we really haven't seen much price inflation on the cost side.

Margins there are we talking $10,000 a day margins is that a good ball park to guess for the term contracts?

I think we've been pretty reluctant, Marshall, to give too much information about that for obviously competitive reasons.

Yes. But is it in the ballpark? I don't care if it's exactly $10,000, but in that range, maybe?

That's -- it's actually we think a little bit above that, but I'll leave it at that.

That's very helpful. That helps us in terms of the modeling. The last question then I'll turn it over. It seems like you're doing more new builds than upgrades, can you kind of discuss where you stand on the new build versus upgrade thought process?

Well, I think over the last couple years we certainly felt that the quickest and easiest way to get some rigs to some of these shale markets has really through upgrades, we've been through our fleet and quite frankly we were at the point where we felt it made more sense really, Marshall, to go new as opposed to refurbs. Very quickly, with refurbs to get exactly what you are looking for for these shale plays you can get pretty close to the cost of building a brand-new rig, so we have chosen to really focus more on the new build brand new rig than continuing with refurbs.

One of the things, Marshall, that you'd be interested to know I think is that we're seeing customers actually willing to support refurbs with contracts, and so, there are some term contracts being offered to us for refurbs, but frankly, from a business perspective we've tried to do both in judicious amounts appropriately. We've done some refurbs, we've done some new builds and we think we have the kind of fleet that allows us to really profit on both sides of the market.

Thanks, Mark.

And your next question comes from the line of Dan Boyd with Goldman Sachs, you may proceed.

Thanks, guys. I just want to follow up on pressure pumping and I know that that's an area where you didn't cut your prices as much as others. You weren't worried about maintaining market share there but what are you seeing on the pricing front now that things our tightening up?

I think, Dan, that prices have firmed up and you're absolutely correct? We certainly did not cut our prices through the last cycle as much as some other people did to buy their way into the market so we've probably seen a little less ability to move prices up as quickly as some the other people because they're still trying to get to our levels, but we are now starting to see some real shortages of equipment in that marketplace and prices are moving up pretty dramatically in fact, I think between Q3 -- Q2 and Q3 we really are going to be able to improve our margins there.

So you're really looking for -- operating income could almost double then just by the revenue guidance you gave. So how do I think about then -- or how do you think about your market share going forward I think you saw a competitor announce today that they are going to head to the Marcellus. We've seen a lot of capacity additions announced just over this past quarter. Ar you looking to maintain your market share there or how do you think about that?

Well, as you know market share is real balance between price and market share. We're not strictly after market share in that market. We do have a limited amount of equipment. We can't ourselves totally meet the needs of that marketplace, so every day we play this balance game between pricing, margins, trying to make money for our shareholders, we've been fighting this incremental frac fleets coming into that market really for the last 18 months I expect that the needs of the market will see some work equipment come into that market and as I said we don't strictly focus on market share although it is an important factor to us, but with limited equipment we're certainly going to be looking for the best returns for our shareholders.

Dan, we're also happy that -- we've been in business in that area for 30 years, so we're the old experienced player in the Appalachian region who knows the region and local knowledge is always a useful thing. And it's an especially useful thing in that area. We think we bring to it, a level of expertise and knowledge that we think make us a pretty strong competitor.

I just want to follow up on one other thing you said. That 60%, 70% of the fleet on horizontals are directional. One of the things I noticed, I think it was Range Resources, commented on a conference call that they have 13 rigs in the region I think there was six drilling horizontals, seven drilling the vertical so they're drilling the vertical portion but Baker, Hughes and Smith both rig counts count those as total horizontals, so when you say 60% to 70% of your fleet is horizontal does that mean they're actually drilling the horizontal leg as well or might they just be drilling the vertical portion of a horizontal well?

This is John. The basis for that answer is actually revenue by well that we drill, so if the permit says it's horizontal, we count it as horizontal for this purpose. It doesn't matter if we're drilling the vertical portion at that time or the horizontal. It's revenue on horizontal wells.

Dan, this is Doug. Let me give you some further color on that since we do a lot of that work for Range, Range actually does bring in some smaller what they call spudder rigs to drill the vertical section of the hole and then they would move our rig on top of it after they've drilled that section to drill the horizontal section. That's not all that common in the industry typically, when we drill a horizontal well we drill both sections of it. Range has just chosen to do it a different way. They believe it's more economic. But typically that's -- most people would handle it with one rig.

That's a very good helpful clarification. I'll turn it back over. Thanks.

Your next question will be from the line of James West with Barclays Capital.

Good morning guys.

Morning, James.

Doug, in your comments you mentioned or you alluded to the fact that most of the high spec rigs are working and you're seeing more demand for what you termed your high-quality conventional rigs, how -- what percentage of your fleet or number of rigs would you put into that category now that aren't currently working or idle.

Well, James, we probably have another -- I'm not going to answer your question exactly but we have another 35 to 40 rigs that are 1000 to 1500-horsepower at what we consider to be the sweet spot of the market. That either worked in 2008 or in 2006 and are capable of going back to work today. Now all of those rigs would have some varying degrees of do they have all the right equipment, are they absolutely highly suitable for the shale plays. To answer that it really depends on each and every one of those plays but I would say for the most part we have another 30 to 40 rigs in that category that with some expenditure of capital we could easily put them back to work in shale type plays.

Okay, that's fair. Then just one question for me on the new builds for the next year the 11 rigs you implement next year, would those be evenly spaced throughout the year or are those targeted for early 2011?

Well, most of those are targeted for the first half of '11.

And would you -- before you ordered additional components for rigs on top of that would you want term contracts for those 11?

Well, James, the answer to that really depends -- we look very closely at lead times of the equipment, I will say this out of those 11 rigs we always have for those under term contract already with another two that we expect to have signed in the next couple weeks. So 6 out of those 11 we've already really we think have been spoken for, we will continue to pursue term contracts and as that market demand increases or whatever it does we will make decisions on further rigs.

That's all for me.

Your next question will be from the line and I hope I pronounce this correctly, of Kurt Hallead from RBC Capital Markets.

That's the closest I've heard yet. Good morning. On the CapEx program that you have slated for this year, $700 million, I was wondering if you can give us a breakdown of what's maintenance, what's new builds, what's refurb, and then given the fact that you have got 11 new rigs that you are already planning for 2011 if you can give us a quick glance into what you think your CapEx plans is going to be for next year?

Kurt, the breakdown for this year about $400 million of that relates to new rigs, some of it's for the 2011 program as previously mentioned. About a $140 million that relates to upgrades, a fair amount of that is top drives. From a maintenance capital perspective let's say that's somewhere $60 million or so and I am including just maintenance capital on rigs, we also have a trucking fleet and so on and so forth. ENP side I think we will probably spend about $20 million and somewhere in the $40 million to $50 million range treated to pressure pumping.

Those numbers obviously exclude Key, the Key acquisition, right?

Yes, with September closing, we wouldn't expect a significant amount of CapEx related to that in the fourth quarter but yes we certainly could spend $5 million or $10 million on that.

Okay. Now with respect to the transformation process here of your rig fleet, you have the 35 to 40 number that are in that sweet spot. What about the -- what's your outlook for the other rigs that are in your fleet. I know you've always said you take it on a rig by rig basis but given the direction the market is going are you becoming increasingly convinced that some of these older mechanical rigs just won't see the light of day again?

No, Kurt, I'm not sure we're convinced of that yet. If you look at the rig fleet of 170 rigs working today there's 90 or 100 working in shales or light type plays but it tells you that there's another 70 or 80 rigs working in non-kind of shale plays. I think as we said to you the biggest increases in activity we saw in the last couple quarters have been in South Texas and granted the South Texas a lot of that's been driven by Eagle Ford but West Texas has also seen a huge increase and I think we've been pleasantly surprised by the number of rigs that have gone back to working West Texas which typically is kind of an oily region of the country. So to say that at this point that we believe there's a lot of mechanical rigs that are just never going to see the light of day, I just don't think we believe that at this point.

I'd have to say, Kurt, I'd go a step further. One thing that's interesting to us is that as the supply of in effect new rigs has been soaked up by the market and then the second sort of wave is just to take the suitable rigs that are not necessarily new for shale plays, there's been an interest on the part of customers in mechanical rigs for drilling some of the shale plays, so in effect especially fit for purpose mechanical rigs are now seeing demand that we would not necessarily have anticipated a quarter go.

Then for new rigs, I've heard quite a bit of this over the last couple of days, what is the lead time now for delivery?

Well, I think you're still looking at the 9 to 12 month timeframe.

And one of your big competitors yesterday stated that they actually saw 15% or 20% reduction in their new builds cost, you guys mentioned there hasn't really been much of a change, I'm just trying to connect the dots here.

Kurt, I can't really comment, I don't know what their starting point was, we only know what our costs are.

And lastly, on the five-year terms that some of your customers have shown some interest in, I take it the reason you haven't really pursued those has been more along the lines of the economics is that a fair assessment?

I think that's a fair comment. Most of the five-year contracts we've been looking at the rates are significantly lower than probably where we'd like them to be. So you're giving up -- certainly there's some certainty for a five-year period but so far we ust don't like the discount that's required to get there.

That's all for me thanks.

And, gentlemen, your next question will be from the line of John Daniel with Simmons and Company.

Good quarter. First question is the 25% quarter over quarter increase in the pumping res is that being driven primarily by the third frac spread price or is it just increasing conventional work?

I think it's a combination, John, of all of those things. Certainly every one of them comes into play. We lost a little bit of revenue during the second quarter due to some delays, we don't anticipate that in Q3, pricing has continued to improve I think that'll be a big part of it. But we're also seeing some gains in the traditional areas of the work so I think it really is a combination of all of those things plus the new equipment that will have hit the market during.

In that third frac spread is it fully working in the month of September or what's the date on that?

I can't give you an exact date that's probably be close to correct. Once we get the equipment up in Meadville we have to do some things to get it rigged up before it gets to the field but I fully expect we'll see most of that equipment operating pretty fully in the month of September.

And then, just taking it a step further, the fourth frac spread is that slotted for the Marcellus and do you have an estimated time on when it will be deployed.

It is slotted to the Marcellus. It was ordered really I guess within the last three months, really our supplier told us that we would probably see it late in Q4, towards the end of the year. It really was originally planned for our 2011 budget but given demand we've seen in that market, we've asked the supplier if he could deliver early, apparently he thinks he can, so we do think now that we'll see it -- pretty much most of it by the end of the year.

Okay, any color you guys can provide on the preferred financing tools for the incremental CapEx in the Key build?

The short intro to that question is that we have a $250 million line for 364 days that we have arranged for before we signed the Key deal. We did that so there'd be no questions about our ability to pay for that acquisition at closing, we have as you know an existing line of credit as well, so we are fully capable of closing the transaction with our existing resources currently around. We're obviously looking at financing alternatives at this time, that's what prudent management would do at this point so that's what we're doing. But we don't anticipate any need to go to equity markets or anything else to support the transaction we think we have the resources available through credit facilities to take care of all of our needs, we have existing facilities that meet our needs but we're thinking that we can also potentially do some interesting financing at this time.

Than just the last one for me on the frac spreads that you have got now before that you'll have, have you locked any of those up under term arrangements? I don't know if you said that earlier in the call. If you did, I apologize.

We have not to this point but I would tell you this we are certainly looking at some term type arrangements in the future.

Thank you very much.

Your next question will be from the line of Arun Jayaram with Credit Suisse.

Good morning, gentlemen. Just a broad question in terms of your pressure pumping segment, you're broadly doubling your horsepower following Key in with the addition of the additional horsepower, as you think about the earnings power from that segment, going forward, thinking about next et cetera, does this essentially take what you've been generating and you think about doubling that number, is that order magnitude at similar margins or will the margins be higher because you're moving up a little bit in terms of the food chain?

I think we've more than doubled the horsepower from December 2009 to the end of the first quarter 2011, it's I think it's quite a bit more than doubling of horsepower and there is a different type of equipment, it's the (inaudible) that we can drill or frac the horizontal jobs which is a little different than our traditional work. So I think that the potential margin capability -- or, I'm sorry, the revenue capability of this equipment is more than double what we had in say 2009, from a margin perspective as Doug mentioned earlier we do expect the margins to expand a bit in the third quarter, relative to the Key assets as Mark mentioned earlier we have no comments relative to that do at this time.

But in general this is going to be accretive to your margins and revenue per job on what you've ordered or what you've added?

As it relates to our existing business, yes, I believe that will be true.

John, can you help us a little bit with some of the housekeeping items for third quarter and the rest of the year given the increase in CapEx, and I'm most interested on your DD&A guidance going forward, the tax rate and interest?

Relative to the DD&A my estimate at this point in time is that it would be about $330 million for the year. Currently we're estimating an overall tax rate of 36.2%. In terms of interest expense again with a pending transaction no comment on that, there was one unusual item and it's a small number but net interest income some of the problems we had with customer collections last year turned into collections this year, and in a couple of cases we received quite a bit of interest income which generated roughly $1.4 million of interest income in the second quarter. I would not expect that to be recurring.

And last question in reading some of the publications it looks like in terms of new build orders somewhere between maybe 58 to 85 is being cited as some of the industry wide rigs in terms of the new build order to -- do you agree with those numbers, do you think it's higher or where do you think we're at in terms of the new build order book? Including your orders? H&P announced a few more today as well.

No, Arun, we don't have any idea about that. We watch carefully what we're doing, but that's about the extent of the watching.

Your next question comes from the line of a Brian Olmer with Pritchard Capital.

Thank you. Good morning. I had a couple of just simple questions. When I look out at OpEx for the land rigs, should I assume that that's going to be declining based on your bigger spread of your facilities cost and your yard costs as you increase the number of rigs out there. Can I expect that to continue to decline? On a per rig basis.

At this point we are not expecting that to occur. What's occurred over the last several quarters is that as our, in effect fixed cost gets spread over more rigs that's been beneficial. On the other hand, as we activate rigs there's costs associated with that before you have any revenue. So generally we've been able to hold our cost per day pretty stable this year and would hope to continue to do that but I don't know that our check at this point in time will see a declining cost per day.

Along the same lines, how is the labor market looking out there? Obviously as this rig count continues to go up are we starting to tighten up there where we are starting to see labor increases or is it staying flat? Just a little commentary on that?

I think the labor market certainly has tightened up a little bit but I don't think it's tightened up to the point that we really had to see labor cost increases other than a few particular markets. The Bakken has been very very overheated, there is a limited number of highly capable both rig and oilfield service workers in that market so we've seen some cost pressure in certain markets like the Marcellus and for example the Bakken type areas but I really don't think that carries over into most other markets at this point. And, I think as long as the industry continues on this sort of measured pace of growth we should be able to attract and fully prove the rigs going forward. I think when you get into the big problems is when we see these big activity increases all in a very short period of time.

Drilling a little down on the Marcellus, we were up there with a customer that loves your rigs, he said that they were adding two guys per crew from the Pennsylvania area to train them up at his expense. Just curious, are crews going to be expanding to local workforces where possibly you could end up having labor costs actually go down because you're going to start using more local labor then bringing guys up from down here in Texas?

Well, I suppose that's possible but I really do think with the amount of additional breaks that are going into that market over the next couple of years we fully expect that -- we've been doing a little bit of that ourselves in terms of trying to train some additional people for the rigs that are coming so I really don't see that in a big way going down. But if there's still continued pressure and the demand -- the competitive environment with people trying to come after your best people,.

Fair enough. Finally, one more modeling question on G&A post acquisition, are you providing any guidance for that at all at this time?

Not at this time.

I'll turn it back over. Thank you.

Your next question will be from the line of Andrea Sharkey with Gabelli & Company.

Morning everyone.

Good morning.

I was curious if you could maybe give a little bit of a breakout on what your utilization is on the APEX rigs versus the utilization on your other rigs, that maybe are working in West Texas and in other areas?

The APEX rigs are running close to a 100%. Very close to 100%. In terms of the other areas I don't have that breakout here available with me.

Okay. And then with the acquisition of the Key assets clearly you're expanding your geographic presence in pressure pumping, you're also adding wireline. Is this a shift maybe in strategy that you would maybe look at also expanding into additional regions like Haynesville, the Fayetteville, Bakken on pressure pumping and then also would you consider adding additional type of service lines like maybe coil tubing or things like that or is that not really what you would look to do?

First things, our basic strategy is to concentrate on two core businesses, our drilling business and our pressure pumping business and so that's really the focus for our business, obviously through the Key acquisition we're also acquiring the wireline business that Key had. We recognize the opportunities that that presents and we do think that there will be an opportunity to consider whether our service offerings are in a little broader range but for right now the areas of concentration for us are pressure pumping and drilling. In terms of marketplaces and basins we've always been willing to move rigs into marketplaces that we think can offer us attractive opportunities and we've done so kind of for the 30 years the Company has been around and we would continue to expect to do so as well going forward. The same applies with pressure pumping assets in that case the thought has been historically that the resources are so limited and we've been hard pressed to meet our own customers demands in our existing markets but to the extent to which we think there's better opportunities in other basins, we will certainly consider that and think about that going forward. John, Doug, you want to add anything?

Next question comes from the line of Scott Gruber with Bernstein. You may proceed.

Given some unique drivers in the gas marketplace today, how are you thinking about balancing your spot versus contracted exposure? Is your thinking largely today to stay open to potential price increases and largely contracts for new builds and upgrades? I think the short answer to that question is historically we have responded to customers needs in terms of their term contracts.

We felt that rather than forcing customers into a certain kind of a contract where they don't really want it is to find a contract that meets their needs and our needs and frankly, with regard to the new builds the customers have been oftentimes very much looking to lock in those rig because they want access to a certain kind of rig for a certain kind of project that they are looking to be doing for quite a while. One of the things that I think is a Patterson UTI advantage is that we have even among our new rigs three different kinds of offerings that meet different kinds of needs for customers and many of our customers who have those rigs are very anxious to keep them and so they've been anxious to lock up term contracts. As I think I mentioned earlier in the call one of the surprising things that's occurred recently is to see customers being interested in term contracts for mechanical rigs. So the marketplace is always kind of changing and what we're always trying to do is to find that balance between the different kind of contracts that give us the best opportunities and the best returns for our shareholders.

That certainly makes sense. But is there any potential changes that you can foresee in the marketplace that would suggest to you that it's time to start pushing more contracts?

I guess I think of it as a little bit differently than the way your question is suggesting it. Frankly, my own sense of it is that the customers have been more anxious to sign contracts because they've been -- for term contracts because they're concerned about the scarcity of rigs. There's been a -- I think that the view that says that we're going to push them into or cause them to is really kind of to misunderstand the marketplace or not to see the marketplace in the same way I do anyway. I think the customers our pushing that because they want to assure themselves a supply of a certain kind of rigs and that's why they signed term contracts. When I see a greater emphasis on term contracts I think it reflects the marketplace as seen by the customers.

Okay that's hopeful. Thank you.

And at this time like to turn the call back over for an enclosing comments.

Thank you. To everyone who participated our thanks for your participation in this call and we look forward to speaking with you at the end of October when we report third quarter. Thanks everybody.

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have yourselves a wonderful day.