Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Ben Burnham - DRG&E - IR

Chris Strong - President and CEO

A.J. Verdecchia - CFO

Analysts

Mike Mazar - BMO Capital Markets

Byron Pope - Tudor Pickering Holt

Victor Marchon - RBC Capital Markets

Steve Ferazani - Sidoti & Co.

Kevin Pollard - JPMorgan

Mark Brown - Pritchard Capital Partners

Union Drilling, Inc (UDRL) Q3 2008 Earnings Call Transcript October 31, 2008 10:00 AM ET

Operator

Welcome to the Union Drilling Inc. Third Quarter 2008 Earnings Conference Call. For today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference call is being recorded today, Friday, October 31, 2008.

I would now like to turn the conference over to Ben Burnham of DRG&E. Please go ahead sir.

Ben Burnham

Thank you. Good morning everyone. We appreciate you joining us for Union Drilling's conference call today to review third quarter 2008 results.

Before I turn the call over to management, I have some housekeeping details to run through. You may have received an email of the earnings release yesterday afternoon. If you didn’t get your release or would like to be added to the email distribution list, please call DRG&E at 713-529-6600.

A recorded replay of today's call will be available until November 7. Information for accessing the telephonic replay is yesterday's press release. The replay will also be available via webcast by going to the Company's web site at www.uniondrilling.com.

Please note that information reported on this call speaks only as of today, October 31, 2008 and therefore you are advised that time sensitive information may no longer be accurate at the time of any replayed listening. Also, statements made in this conference call that are not historical facts including statements accompanied by words such as will, believe, anticipate, expect, estimate or similar words are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding Union Drilling's plans and performance.

These statements are based on management's estimates, assumptions and projections as of the date of this call and are not guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties and other factors including but not limited to the factors set forth in the Company's prior filings with the Securities and Exchange Commission.

Union Drilling cautions you not to place undue reliance on forward-looking statements contained in this call. Union Drilling does not undertake any obligation to publicly advise or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this call. For further information, please refer to the Company's filings with the SEC.

During today's call management will discuss EBITDA and drilling margin, which are non-GAAP financial measures. Please refer to yesterday's press release for disclosures about these measures and for reconciliation to the most directly comparable GAAP financial measures.

Now with that out of the way, with me this morning are Chris Strong, the Company's President and Chief Executive Officer, and A.J. Verdecchia, Chief Financial Officer.

Now I would like to turn the call over to Chris.

Chris Strong

Thanks Ben. Good morning everyone and thank you for joining us today. The third quarter saw a continuation of the sequential improvement we experienced in Q2. We reported revenues of $82.4 million, EBITDA of $22.6 million and earnings per share of $0.27 for the three months ended September 30, 2008.

All three of our divisions experienced good utilization during the quarter with our fleet-wide average coming in at 74%.

Those of you that have followed us for a while know that we consistently use the total number of rigs in our fleet as the denominator and that anything over 70% is a fairly strong quarter for us.

Looking first at Appalachia, we expect to drill in the Marcellus Shale play to accelerate over the next few years. We added two rigs in this division during the third quarter. The first was a 1000 horsepower portable mechanical rig built in 2007 which came online at the end of July. The other was the 1600 horsepower IDM Quicksilver rig which went to work at the end of August and contributed 21 days to the quarter.

Our average margin per day in Appalachia was the highest it has ever been, which is primarily a result of the larger rigs we’ve added to that fleet to target the Marcellus Shale. We have one additional rig scheduled to go into service early next year that also will be drilling horizontal Marcellus Shale wells.

In the Arkoma Basin utilization improved to levels we have not seen since 2006, although margins were compressed in that region due to some above average repair costs. We have upgraded one rig in Arkoma with a new 1000 horsepower draw works and have a second rig scheduled for draw works and derrick upgrade in the fourth quarter.

We also have two new 900 horsepower electric rigs scheduled for delivery in the first quarter of 2009 that will be drilling in the Fayetteville Shale under two year term contracts. Utilization was very strong in Texas, this was helped in part by the addition of a 1000 horsepower Barnett Shale rig which came online during the second quarter and by the mobilization of two of our smaller triple derrick rigs to the shallower Fayetteville Shale play.

Additionally, we made significant upgrades to two Texas rigs during the second and third quarter, upgrading both to 1000 horsepower draw works. One of these rigs also required a new derrick to support the larger draw works. We have one more Texas rig that will receive a new derrick and draw works in the next few weeks after it comes off its current multi-well pad project.

Finally, we have one new walk-in rig designed for reentering existing wells that scheduled for delivery in the Barnett shale in the first quarter of 2009. These new rigs all have term contract cover and most of our rig upgrades during 2008 have been supported by contract extensions and higher day rates with existing customers.

Now I'm going to turn the call over to A.J. to cover the financials.

A.J. Verdecchia

Thanks Chris. Revenues for the third quarter of 2008 totaled the company record $82.4 million compared to revenues of $76.9 million in the third of quarter 2007. The increase in revenues was driven primarily by higher utilization.

On the expense side, operating costs totaled $52.5 million or $10,879 per revenue day compared to $43.9 million or $9548 per day in the third quarter of 2007. The increase reflects the higher labor expenses and increased material costs especially for steel products and fuel.

General and administrative expenses increased to $8.6 million compared to $6.9 million in the previous year's third quarter. $1.3 million of the G&A expense was due to bad debt expenses for two customers. With the slowing economy and tight credit markets, we will be focusing on our credit approval process to mitigate customer credit risk.

Steps we are taking include, timely upfront review of all new customers, prepayment for customers with limited credit, frequent accounts receivable follow up to identify collection risks earlier, and we continue to be prepared to walk away from customers that represent an excessive credit risk. All of that being said, we're comfortable with the accounts receivable balance on our balance sheet. We have one of the lowest day sales outstanding metrics of any public driller.

As of September 30, that number stood at 49. In yesterdays press release we disclosed a $1.2 million gain on disposal of assets this quarter compared to a $200,000 gain in the third quarter last year. This quarter's gain was primarily from the sale of used drill pipe and insurance settlements. Income tax for the quarter was 45% of pre-tax income. We expect the effective tax rate for the full year to be about the same as the third quarter.

Net income for the quarter totaled $5.9 million or $0.27 per share compared to $9.3 million or $0.42 per share a year ago. Third quarter EBITDA totaled $22.6 million in 2008 compared to $26.3 million in 2007.

Moving over to our operating metrics, revenue days totaled 4823 up from 4597 in the third quarter of 2007. Utilization for the third quarter of '08 was 73.8% with 70.4% a year ago. The average day rate in the third quarter was $17,093 versus a year ago average of $16,737.

Drilling margins per revenue day average 6214 for the third quarter of '08, down 14% from the third quarter of 2007 average of 7189 largely due to cost inflation we have experienced over the last year.

Moving over to the balance sheet, I'm very pleased to report that our bank agreement was renewed with a total revolving credit line of $97.5 million through March 2012. We had a $28.3 million balance drawn in our revolver as of September 30. That number is currently at $33 million today and I expect the revolver to top out around $50 million to $55 million during the first quarter given our current CapEx plans and excluding any share repurchases we may undertake.

Capital expenditures for the third quarter totaled $30.5 million, of which $13 million was designated as maintenance CapEx including $6.4 million for major rig upgrades. The remaining $17.5 million was for payments on new rigs.

Finally, I would like to highlight possibility of a goodwill impairment during the fourth quarter as our market cap has recently declined below book value.

I will now turn the call back to Chris.

Chris Strong

Thanks A.J. As you are all probably aware, many industry experts are predicting a significant downturn in domestic land drilling activity in the near future for a number of reasons. The general economy is in tough shape, there's plenty of gas and storage heading into winter. Natural gas prices have dropped 50% since their peak earlier this year and production has been growing. And the situation in the credit markets is making it tough for E&P companies to raise capital for drilling.

While the duration and magnitude of the downturn are difficult to predict, if hundreds of rigs are idled in the near future I do think overall increased reliance on high decline rate wells because production to decline after a several month lagged to complete and hook-up wells drilled in today's rig count environment.

Then there is probably an additional lag associated with prices firming and budget increases being approved. So the second half of 2009 may set the stage for an improving rig count in 2010. This scenario would have a negative impact on our financial results in 2009. However, there are a number of reasons why I believe we are relatively well prepared for such a downturn compared to some of our peers and compared to our situation in the past.

We’ve invested a lot of money in improving our rig fleet over the last few years, and while it remains a work in progress, we have a different fleet with different customers than we had a few years ago.

In addition to purchasing new rigs, we have also upgraded many of our existing rigs principally to gain market share in the horizontal shale plays so we now have more last fired and first rehired rigs.

New rigs and upgrades to our existing rigs have provided more opportunities for term contracts. We have approximately $50 million of gross margin covered by term contracts in 2009. Consistent with past practice almost all capital for upgrades and new drilling rigs will be associated with new or extended term contracts.

Following an internal audit review of our procurement function we have a renewed focus on cost control. I recently promoted a longtime employee to the position of purchasing Director who will be reporting directly to me and our purchasing managers in the field will report to him as opposed to our district managers. This should promote tighter control and higher visibility over the purchasing function. I will continue my longstanding practice of approving all capitalized expenditures.

As you may recall during the slowdown in late 2007 and early this year, we made the decision to keep our crews engaged with general maintenance projects on numerous rigs that had been running continuously through the previous two mild winters. This maintenance was necessary but it reduced the weighted average margin on our fleet because we incurred costs on those rates while no revenues were being generated. In the current environment, we will be more aggressive in our approach to taking people off-rigs that are not generating revenue so they don't decrease our overall results.

As A.J. mentioned in his remarks, we're one of the better drilling companies when it comes to timely collection of receivables and we don’t intend to take on undue credit risk in pursuit of higher utilization.

Finally, our conservative balance sheet and over $60 million of current availability on our recently renewed revolving credit facility gives us a lot of flexibility and staying power if the market remains soft for a protracted period.

As of today, we have not been exposed to significant cutbacks, but quite a few competitors' rigs in the Texas and Oklahoma markets have been idled recently and we have seen applications from recently unemployed rig hands in these markets on the rise.

I would not be surprised to see unemployed rigs competing for work through more aggressive pricing and it remains to be seen how the seasonal reduction in utilization we generally encounter approaching the holidays will play out in the first quarter.

This is where the lower horsepower rigs in our fleet have been prone to longer periods of inactivity with small independents delaying new programs. With all of that being said, I am confident that domestic natural gas production will be a growing part of our energy portfolio for the foreseeable future.

And with that, Mary, I think we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Mike Mazar, BMO with Capital Markets. Please go ahead.

Mike Mazar - BMO Capital Markets

Hi, Good morning guys. How are you?

Chris Strong

Good morning Mike.

Mike Mazar - BMO Capital Markets

A couple of questions here, first of all, Chris, you mentioned the $50 million of margin time to term contracts. Can you translate that into rigs for us?

Chris Strong

A.J. has that sheet as far as the number of term contracts that are out there supporting that, Mike. Well, I'm trying to eyeball it. I would say we are probably around 20 rigs.

Mike Mazar - BMO Capital Markets

Okay, that is close enough. Great. Also, you talked a little bit about kind of the upgrading of the fleet you have done here in the last few years. Can we kind of quantify that in terms of what new or refurbished say in the last three or four years?

Chris Strong

I don't have that at my fingertips, Mike, as far as three or four years' worth of upgrades. But it's certainly been a continuous program. This year in particular as far as the four rigs where we ordered four new 1000 horsepower draw works and then the rigs we put new derricks on, we’ve a major push, really as the market has moved into longer reach rig horizontal drilling, we have had to increase the draw works capability and at times the derrick capabilities. We are seeing 4000 foot horizontals now being 6000 foot horizontals. And it’s not solely the derricks and draw works field, we have a large movement to much larger pumps to improve the circulation capabilities. But I do not have a three year summary for you off the top of my head right now.

Mike Mazar - BMO Capital Markets

Sure. That's okay. And then finally, can you kind of characterize for us what the permitting issues are or where we stand as far as permitting whether it be water usage or whatever is in Appalachia?

Chris Strong

I think the water issues are receding to some extent, the Rendell administration in Pennsylvania has been very pro natural gas drilling. I just think as they, as a state have really not been set up for this kind of activity and they are trying to get the additional bodies in place to regulate it. I believe the odds are that there will be a severance tax imposed for the first time in Pennsylvania in 2009.

That we have one of our customers up there that was having some water issues, was recently granted 4 million gallons a day of water access which really should be plenty for almost anybody's program in the State of Pennsylvania. That is probably be one well being fracked per day. So it seems like there is a movement towards allowing the water permits to be granted.

I think some of that also is not solely the concern about just taking the water out of the streams and rivers in Pennsylvania but the disposal issues that had to be dealt with before those permits could be granted. So, in general, I think we have seen easing of that and we will see more horizontal Marcellus drilling as we go forward.

Mike Mazar - BMO Capital Markets

Okay, and then finally, where would you be comfortable taking the debt up to in light of the CapEx program, the term contracts you have and the idea of buying back stock?

Chris Strong

We have to see how the market evolves. But obviously we’ve had very low debt even if we were to use up the entire revolver would be south of 30% debt to capital. I don't know that our plans are to be that aggressive. But I would like to both have the flexibility to take the opportunity to buyback stock if we are at levels where it seems more highly accretive than building that next rig.

And the way we come down on the modeling is that around $7 we're kind of neutral. With if we can get a three year full payback type contract and you run that through depreciation, interest and tax affected, that accretion is about the same as a share buyback.

But, if you are really neutral on it, I think I would still prefer to build that rig assuming that term contract was out there. I would be continuing to grow the company and have an asset that would be generating cash flow.

But as you get considerably south of seven the accretion to us looks pretty compelling and I think we have the balance sheet strength to do it. What I would hope not to get into is a situation with either-or where we spent a sizable sum of money buying back stock and then had to delay or curtail some of the new builds, especially for Marcellus Shale opportunities because I think, there look to be opportunities in the Marcellus right now for maybe one rig per quarter as far as the new build per quarter out in '09 secured by term contracts.

So, I don't want to foreclose on that opportunity by using too much of the line for purchasing stock. But down at $5 it looks compelling to us.

Operator

Thank you, our next question comes from the line of Byron Pope, Tudor Pickering Holt. Please go ahead.

Byron Pope - Tudor Pickering Holt

Good morning guys.

Chris Strong

Good morning Byron.

Byron Pope - Tudor Pickering Holt

Is -- your gross margin coverage for '09 was very helpful in roughly 20 rigs. But I'm just trying to calibrate among the three different regions. I guess --

Chris Strong

We counted them up now. It's 22 rigs.

Byron Pope - Tudor Pickering Holt

Okay. And so of those 22, a disproportionate number of those in any given region for you guys? I'm just trying to think about your regional exposures as I think, kind of the mix impacts going forward?

Chris Strong

I would say slightly more in the Barnett. But, we have a good concentration in the Fayetteville and in the Marcellus in Appalachia. So, we still have the six ideal rigs we built essentially under term contracts. I think one of them is rolling off in the near future and repricing but those were three year deals done on rigs that were built in '06 and '07. The additional rigs that we brought in recently have been under term contracts. So that’s -- that may be eight out of the 22. But we are pretty well balanced between the three divisions as far as term contract cover in '09.

Byron Pope - Tudor Pickering Holt

Okay, and then how should we be thinking about '09 CapEx for you guys? And I guess, I'm thinking kind of maintenance CapEx versus discretionary when you talked about the potential to build new builds. But as kind of the baseline what are you guys thinking in terms of '09 CapEx and then how much of that would be maintenance?

Chris Strong

I think we’re have really spent a lot this year on items that what hit maintenance CapEx as opposed to new build CapEx, the various draw works and mud pumps and derricks and so on. There is a lot less of that that I see coming in 2009. And really, some of this is just dependent on how poor the market is or how good the market is. If our run rate may be, say, $35 million something in that neighborhood, if things really go South and you have rigs that idled. The typical maintenance CapEx items where you need a new engine for a mud pump, well, if you have a rig that’s down that has a mud pump you're not going to go spend the money on a new engine. You're going to transfer that asset from an idled rig to the rig that is running.

So those are the typical things that you do where you could see maintenance CapEx go down below $20 million in an environment like that. And of course on the way back up that means you have a large CapEx need where you have deferred maintenance on a lot of your idled fleet. But that’s a – its scenario we have been through more than once.

Byron Pope - Tudor Pickering Holt

Okay. That’s all I had. Thank you.

Chris Strong

You’re welcome Byron.

Operator

Thank you. Our next question comes from the line of Victor Marchon with RBC Capital Markets. Please go ahead.

Victor Marchon - RBC Capital Markets

Thank you, good morning everyone.

Chris Strong

Good morning Victor.

Victor Marchon - RBC Capital Markets

First question I have is just on acquisition opportunities, Chris just wanted to see what you're seeing out there. Are you seeing more opportunities? Are you seeing asking prices come down? And sort of triangulate that with -- what you maybe looking, whether from a new build side or repurchasing stock?

Chris Strong

That’s a very good question. There are already at a couple of bankrupt drilling companies out there, Victor. And we are getting -- it's kind of like what we went through on the bank syndication process where we thought we had a hard closing date and it seemed sort of soft and it dragged on a little bit longer than we would've liked.

I guess these things from folks that are trying to sell the assets of some of these bankrupt drillers and it says – we’ve got a deadline approaching and I’d say well, yes the deadline is approaching and it will come and go if you have not gotten any offers. I think there may be some more of that. There is certainly some deals that were funded with fairly easy capital that have a lot of leverage on them.

So some private drillers are not in very good shape and there may be some opportunities to pluck off some recently built rigs at discounted prices. We have also been chatting with some of the rig builders, specifically thinking about Marcellus designs. And their backlogs are dwindling as well. So, I think there is an opportunity even on the new build side to look at prices coming in and clearly steel prices have come in some.

So, we are really presenting to customers, particularly in the Marcellus, Victor, different price points for different levels of technology on the rigs and then correspondently different day rates. And we are going to see where the appetite falls, we’ll be happy to build AC rigs, we’ll be happy to build DC rigs or mechanical rigs depending on customer appetite for paying incremental day rate for a higher technology.

Victor Marchon - RBC Capital Markets

Okay, alright, thank you for that. And I just wanted to also just ask on the cost side just what you are seeing from labor or repair maintenance costs, are you seeing some easing of that now or are things still look pretty tight?

Chris Strong

I think the labor market is certainly one where we are not going to have to be imposing any wage increases. We did pass along in the Arkoma a $1000 a day increase in the third quarter that went over fairly well. We certainly were able to document through our financials that our average operating expenses have gone up about $1000 a day year-over-year. And those contracts which had the rights to revision clauses in them were ones we took advantage of.

I don't see there being labor pressure right now, given as I mentioned earlier that we are already seeing application activity rising rapidly from people that were working on rigs that have been laid down.

There are again kind of some deals out there were people have inventory, whether it’s people who rebuild engines or put mud pumps together people who did some of that on spec and are now sitting with those things on their balance sheet. So I think there are some opportunities there. I haven’t seen pipe come in substantially at this point but you would think, that again in a softening environment with steel prices coming down you should be able to acquire drill priced for less than you did earlier this year.

Victor Marchon - RBC Capital Markets

Alright. Okay, and last one just as it relates to utilization and the rig upgrades and the new rigs you guys have added this year. If you look at a situation like late last year and early this year when you saw some of the lower horsepower rigs go idle. And obviously there was some weather effect to it as well up in Appalachia. I wanted to see what your thoughts were. If you ran into a similar current, how would utilization for your fleet hold up relative to that high 50%, low 60% range back in the fourth quarter of last year and first quarter of '08?

Chris Strong

You know I think we are probably a bit better positioned. In part, I’d say that because I think Appalachia is going to hold up better than it might have in the past, even on the small rig side. We transitioned a number of the small rigs into vertical Marcellus drilling and we see a good bit of activity there where we have actually been able to secure some term contracts on some of the small rigs to do those vertical Marcellus wells. And those are -- those seem to be doing about $700,000 a day in production and I think we are early enough in the play where customers can drill a well fairly cheaply, get some science, maybe go back later and do the horizontal with a bigger rig. But it’s a fairly low cost way to get some production and get some information about the acreage.

So, I think there is the possibility what we’ll hold up a little better in Appalachia. Arkoma, which really hurt us in the first quarter last year with a lot of the small independents, we have really worked on changing the rig profile of that fleet. We moved a couple of rigs up from Texas. We are buying a couple of electric rigs, we’ve made upgrades in that market.

So, I mean, it’s a 20 rig fleet there, but now we really moved in quite a few of the larger rigs for the horizontal Fayetteville Shale work and been trying to migrate what was a small rig fleet doing shallow or Arkoma work into something with larger iron for the Fayetteville Shale. I think we're little better off there as well.

The Barnett Shale, pretty good term contract cover. So, would we go down as far as we did in '07? It is certainly possible, I mean, we are in a much different gas price environment. I think people were concerned about where prices were going to be in shoulder season '08 and they turned it out to be above $10 and everything was fine. I think we are probably in a different environment as we go into '09 with that.

So I could certainly see something where the utilization would be at those levels or if it gets really ugly even possibly below.

Victor Marchon - RBC Capital Markets

Alright, well I appreciate that. That’s all I had. Thank you.

Chris Strong

You’re welcome, Victor.

Operator

Thank you, our next question comes from the line of Steve Ferazani, Sidoti & Co. please go ahead.

Steve Ferazani - Sidoti & Co.

Good morning Chris.

Chris Strong

Good morning Steve.

Steve Ferazani - Sidoti & Co.

You mentioned the potential for even as much as one rig a quarter in new rig built contracts. I mean, has that shifted given where we are in the pricing environment or is it still based on the regulatory issues in the Marcellus?

Chris Strong

Some of it, Appalachia is still a fairly tight market on labor force, Steve and generally even though you may have rig hands looking for working in Oklahoma and Texas. They don't migrate up to West Virginia and Pennsylvania. So, the market in Appalachia is a bit tighter for labor and some of the concern is just fielding a quality crew on a new rig every three months. I think that’s a good pace for us.

Again, we really have to see how things develop in '09 and how bad or not bad it is. But, based on our discussions, I think we have the capability to field one new rig a quarter as far as putting a good crew on it.

Steve Ferazani - Sidoti & Co.

The question is, is the demand there? Will the demand be

Chris Strong

I don't think there is an issue with the demand. I think we have enough discussions going on with pretty well heeled the customers up there. I think right now the -- where is that the Marcellus Shale lobbying or operating group or whatever you would call it has 28 different E&P companies. So, there a lot of people that have spent considerable sums of money up there and I think we are going to have the appetite to get term contracts written on a rig a quarter in '09.

Steve Ferazani - Sidoti & Co.

Okay, given the number of upgrades and the new rigs you have added, do you know at this point the number of rigs you have that are 1000 horsepower and above?

A.J. Verdecchia

Well, I don't have that handy.

Chris Strong

We don't have it handy, it’s certainly going to be something in our table as we get the 10-K dialed up. So, we have the table in our 10-K but I have not really -- I don't have a number for you.

Steve Ferazani - Sidoti & Co.

Characterize this way, how many rigs have you upgraded now to the 1000 horsepower or above from below, in the last 12 months?

Chris Strong

We have done, well we did four this year and then of course we have all of the purchases we’ve made this year as well, where we brought three additional rigs on. What we are doing early next year in the first quarter is two more 1000 horsepower rigs and then the two 900 horsepower electric rigs.

A.J. Verdecchia

Steve, that number is 14 for 1000 horsepower.

Steve Ferazani - Sidoti & Co.

Great, thanks. Does that mean as you have upgraded? So in general we’ll see average day rates declining over the next two quarters but given your year-over-year comps. You are going to have a higher horsepower rigs, those are the ones that keep working. In general your day rates shouldn't be maybe necessarily hit as bad as other guys out there on a comp basis. Sort of for the circuitous question but --

Chris Strong

I'm not sure how to answer that. I would hope so, I think we are -- in the spectrum of things we’ve run it pretty conservatively. We have a lot of term contract cover. Now, a lot of the term contract cover it is specifically on the rigs, we’ve upgraded or the new builds. So it is the lower horsepower end of the fleet that is exposed.

Steve Ferazani - Sidoti & Co.

Any changes in how we should look at Appalachian seasonality Q4, Q1 economic weakness maybe hunting season was slower or given your higher horsepower rigs maybe they're moving a little less so it could get less hit in the spring -- or do we think?

Chris Strong

We have certainly -- we put some higher horsepower rigs in there. As I mentioned earlier, actually some of the lower horsepower rigs have moved into Marcellus Shale type drilling, which is a benefit where there is less seasonality in that type of work. But then again it is still a weather bet. If it gets ugly and cold up there, which would be good for gas prices, we will be hurt more than our peers that don't operate in that area.

Operator

Thank you. Our next question comes from the line of Kevin Pollard with JPMorgan. Please go ahead.

Kevin Pollard - JPMorgan

Good morning, Chris.

Chris Strong

Good morning Kevin.

Kevin Pollard - JPMorgan

I was wondering if you could comment on what you are seeing in Appalachia outside of the Marcellus. Has there been -- I realize you have the Marcellus as kind of its own unique play up there so -- where things are going to be fairly stable going forward. But are you seeing any signs of weakness given the lower commodity prices in your operations in Appalachia outside of that basin?

Chris Strong

I haven’t at this point, Kevin, we actually have some shallow rigs doing this Huron Shale play down in Southern West Virginia that is pretty shallow, 4000 or 5000 feet. We have some small top drive rigs that are doing horizontal work in that play. Equitable has a very large position down there and is pretty happy with the results. We also do some work for CDX Gas down there doing horizontal work. That seems to have held up fairly well at this point.

Kevin Pollard - JPMorgan

Okay. Thanks. And if I could touch, you mentioned you're putting one additional new build into Appalachia and then you mentioned a new walking rig for the Texas market. Are those new incremental -- are those brand new rigs you have ordered?

Chris Strong

The rig for Appalachia is a rig that we purchased, which is a used IDECO H1000 rig that where we had to wait for quite some time to get some specialty parts built for it. That rig has been moved out of the Arkoma and it’s going up into Appalachia. We actually have another IDECO H1000 rig already running up there it’s a good sized rig that’s what’s going in there. The rig before the Barnett Shale the walking rig I mentioned for reentry work that’s a new build.

Kevin Pollard - JPMorgan

Okay, and what kind of CapEx commitments do you have heading into Q4 and into '09 on these new rigs you are going to be deploying. And in that question, I am also including like the two for the Fayetteville.

Chris Strong

Right. The CapEx overhang as far as what remains to be funded outside of the deposits and various things we have already put down.

Kevin Pollard - JPMorgan

Right.

A.J. Verdecchia

Probably around 20 million.

Kevin Pollard - JPMorgan

That will be spread over the next couple of quarters?

Chris Strong

Yeah, some of these supposedly like these Fayetteville electric rigs have said December but I will believe it when I see it. I'm guessing it is more like January and February we will see them actually go into service. No, in all of the progress reports are good. It is just getting a new rig delivered around Christmas is a little suspect in my mind it probably will trickle over into the first quarter. So, I think probably the four rigs I have talked about will be first quarter events.

Kevin Pollard - JPMorgan

And the walking rig, do you expect it to be in the first quarter as well?

Chris Strong

No. The walking rig, we lost sometime, a lot of that -- it was supposed to be fourth quarter, Kevin, and a lot of what we are doing on that rig was down in Houston and we lost two or three weeks with the hurricane. I didn't think, I’d have to mention the hurricane impact to Union Drilling but there it is.

Kevin Pollard - JPMorgan

Okay. And then, I think, the one last question, did you actually scrap a couple of rigs in your Appalachian fleet?

Chris Strong

We have decommissioned some rigs, we have some rigs that are on the books for next to nothing and some of them we decided to decommission. We may have a couple more like that coming up. So whether the rig count actually grows to 75 at the end of the first quarter or whether we essentially net a couple of old rigs against it and write them off, I'm not really sure how we are going to go on that at this point.

Kevin Pollard - JPMorgan

But all of the decommissioning in Appalachia not in any other region?

A.J. Verdecchia

We had one insurance settlement or an accident in Arkoma.

Kevin Pollard - JPMorgan

Alright, thanks guys.

Chris Strong

You’re welcome, Kevin.

Operator

Thank you. (Operator Instructions) and our next question comes from the line of Mark Brown, Pritchard Capital Partners. Please go ahead.

Mark Brown - Pritchard Capital Partners

Hi, Chris, just wanted to ask if you have any plans to redeploy any of your rigs from your three main regions if we see a slowdown there and if there are any other region you're currently not operating in that would be well suited for some of the rigs that are most likely to feel competitive pressures?

Chris Strong

I don't have any current plans, when you redeploy or you go into a new market I’ve had bad experiences in the past taking A rig 500 miles from all of the other rigs. The safety guy never gets out there or doesn't get out there as often. The crews are on a camp job, and it’s just harder to manage. I think if something like that were to occur it would be more like what we did with the rigs we had in the Rockies and Piceance and Uinta basins a couple of years back where we obtained a contract to move a chunk of five rigs into a new market. I think, as I said it is really tough just to move A rig. We have been queried on this about some of the moving in and where we would deploy capital. What about the Haynesville for instance? I think we have a good niche up in Appalachia and I would rather keep the powder dry for expansion in that market, where we essentially have a head start as opposed to moving into a market where larger drillers are already well established and try and gain a beachhead there.

Mark Brown - Pritchard Capital Partners

Okay, well, that’s it for me. Thank you.

Chris Strong

You’re welcome Mark.

Operator

Thank you our next question is a follow up from the line of Mike Mazar with BMO Capital Markets. Please go ahead.

Mike Mazar - BMO Capital Markets

Hi, guys. Sorry. Last question I guess I had is what changes have you seen here in the last quarter or two as far as the competitive landscape in Appalachia as far as new entrance, etcetera?

Chris Strong

It has been pretty muted Mike. We’ve had I think there has been maybe one or two precision rigs that have come -- like super singles that have come down from Canada into New York State to do some of the Trenton Black River. Paterson, which has a footprint up there via the pressure pumping business has had a couple of rigs up in the area but it hasn't really been a significant penetration of the market.

I think they have brought up some larger iron that wasn't terribly well suited. My understanding though is that they are building an ideal rig or maybe more than one that has been modified for Marcellus work. Chesapeake did add some iron through its [no make] subsidiary they purchased a small private driller their called Joist and they have brought some additional rigs in there to do their own work.

But we really don't have a lot of exposure to Chesapeake. We have a rig in the Fayetteville or in the Arkoma that was running for them that will cease running for them at the end of its contract a little later this quarter.

I have heard that Grey Wolf has purchased a yard up there but we haven’t really seen anything in terms of a presence. So, at this point, it is not -- as I said it is fairly muted at this point. And my own feeling is that to the extent that we can continue to grow our market share up there and supply customers with rigs that they want, that should be one of our primary focuses.

Mike Mazar - BMO Capital Markets

Alright, okay, terrific. That was great. Thanks.

Operator

Thank you. And there are no further questions. Management I will turn the call back over to you for closing comments.

Chris Strong

Thank you, Mary. Just one more comment before I sign off. I know we went through a lot on the various rig upgrades and moving rigs. As of today, we have 32 rigs in Appalachia, 20 in the Arkoma and 19 in Texas. After what I mentioned as far as the new builds coming online in the first quarter, that would be 33 in Appalachia, 22 in Arkoma and 20 in Texas, and that would exclude any potential retirements. And with that, I would like to thank you all for joining us today. Bye.

Operator

Thank you. Ladies and gentlemen that will conclude today's teleconference. We do thank you again for your participation and at this time you may now disconnect. Have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Union Drilling, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts