Pioneer Drilling Co. Q3 2008 Earnings Call Transcript

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 |  About: Pioneer Energy Services (PES)
by: SA Transcripts

Pioneer Drilling Co. (PDC) Q3 2008 Earnings Call November 6, 2008 11:00 AM ET

Executives

Lisa Elliott - IR

Stacy Locke - President and CEO

William Hibbetts - Interim CFO

Red West - President, Land Drilling Division

Joe Eustace - President, Production Services Division

Analysts

Marshall Adkins - Raymond James

Douglas Becker - Banc of America Securities

John Daniel - Simmons & Co.

Andrew Coleman - UBS

Steve Ferazani - Sidoti & Co.

Marshall Adkins - Raymond James

Operator

Welcome to the Pioneer Drilling third quarter 2008 Earnings Call. During 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, Thursday, November 6, 2008. I would like to turn the conference over to Lisa Elliott with DRG&E. Please go ahead.

Lisa Elliott

Thank you, Mary, and good morning everyone, thanks for joining us for Pioneer’s Conference Call to review its quarterly results. Before I turn the call over to management, I would like to remind you that in a few hours, a replay of the call will be available and it can be accessed via webcast by going to the company's website at www.pioneerdrlg.com, where it will also be archived in the Investor Relations section. And via telephonic replay you can listen to the call through November 13, by dialing 303-590-3000 and entering passcode 11121169 and that’s also in the press release.

As you know, today’s conference call contains forward-looking statements and information based on management’s beliefs and assumptions. Forward-looking statements include but are not limited to, statements related to the overall markets from land drilling services and production services, Pioneers’s anticipated growth, capital spending decisions by oil and gas companies, hence the availability of capital and qualified personnel and as well as company’s expectations regarding its rigs and ongoing expansion into Latin America.

Although Pioneer’s management believes, these expectations are reasonable, they can give no assurance and they will prove to be correct. Such statements are subject to certain risks and uncertainty, and assumptions which are described in this morning’s earnings release and the companies most recent Annual Report on Form 10-K, subsequent filings with the Securities and Exchange Commission. Should one of more this risk materialize or should underlying assumptions prove incorrect, actual results may vary materially from those expected. Please also note that this conference call may contain references to non-GAAP financials and you can find reconciliations to these non-GAAP financials and the company’s earnings release this morning as well as Form 8-K filed.

Information we will put on this call speaks only as of today November 6, 2008, so you are advised that time sensitive information may no longer be accurate at the time of he new replay. Now I would like to turn the call over to Mr. Stacy Locke, Pioneer CEO and Chairman. Thank you.

Stacy Locke

Thank you, Lisa. President and CEO.

Lisa Elliott

Yes.

Stacy Locke

Thank you, Lisa, and good morning everyone. Joining me on this mornings call is Red West, President of our Land Drilling Division; and Joe Eustace, President of our Production Services Division; and Bill Hibbetts, our Interim Chief Financial Officer.

As you could see from this morning’s press release generally we had a terrific third quarter on all fronts. In our land drilling division quarter-over-quarter Q2 to Q3 revenues were up 14%, primarily as a result of a 96% rig utilization up from 90% in Q2 exceeding our expectations. Average drilling margins increased $753 per day to $8,967 again exceeding our expectations; and Colombia continued to perform at a 100% utilization with margins exceeding our goal of 20% to 25% greater than the U.S. average margins.

Equally as impressive was our drilling services division quarter-over-quarter. The revenues were up 15% for that division, again generating very impressive operating margins of 50%, up from 49% in Q2. We’re very, very pleased with the addition of the production services in our product line. In this quarter, they represented 29% of our revenues, and 32% of our operating margin. All three of the business lines and production services performed well. The workover business improved in utilization and average hourly rates despite a minor impact from hurricanes. In the third quarter, they operated at a 80% utilization, up from 75%, and a $595 per hour rate compared to 588 in Q2. Wireline again performed very, very well as did Fishing and Rentals.

Now I’d like to turn the call over to Bill Hibbetts for a few brief financial remarks.

William Hibbetts

Thank you, Stacy, and good morning everyone. Rather than taking the time to go over the income statement and for which you’ve probably already walked through yourself, I would like to focus instead on our liquidity position, which I know is of great interest to all of you in this troubled credit market, and some cost trends.

So let me go ahead and start with our balance sheet. At September 30, we had cash and cash equivalents of 17.3 million, and total working capital of 60.4 million, which excludes an additional 14 million of auction rate preferred securities, which are classified in long-term assets. We currently have 273.5 million barred against the $400 million line of credit that we took out to finance the production services acquisitions earlier this year. The debt is priced at LIBOR plus 2.25% and the outstanding balance isn't due until 2013. That plus our total debt per total cap – that puts our total debt to total cap ratio at the end of the quarter at about 35%, which is a level we're very comfortable with.

Next year, our goal is to retire a portion of these borrowings, which we think we can do even in a potentially declining market. These factors combined with our strong cash flow give us financial flexibility as we move into 2009 despite the turmoil in the overall credit markets.

Now, looking at some of the expense items and trends for modeling purposes. During the third quarter, drilling costs grew by about 8% to $70.3 million due to an 8% increase in revenue days. However, drilling costs declined slightly on a per day basis. In September, we also had a 6% wage rate increase, which will push our labor costs up a little going forward.

Total SG&A came in at about $12.8 million versus – I mean, $12.2 million in the second quarter. Approximately $2.7 million of third quarter SG&A, which related to the company's investigation of internal controls over financial reporting that was completed earlier this year and for severance payments to our former CFO.

With this behind us, we would expect SG&A to be approximately $2.5 million lower in the fourth quarter. Interest cost on the senior secured revolving credit facility and subordinated debts were $3.8 million and we expect fourth quarter interest expense to be roughly in line with that. Depreciation and amortization was $24.2 million in the third quarter versus $20.6 million in the second quarter.

In the third quarter, we transferred approximately $66 million of goodwill that we had booked at the time of the wedge acquisition to amortizable intangibles, resulting in an increase in amortization up $2.9 million in the third quarter, which accounted for most of the $3.6 million increase. Depreciation and amortization will likely be slightly higher in the fourth quarter as we take delivery of four additional work-over rigs, four wireline units, and place one drilling rig in service in November in Colombia and one newbuild drilling rig in service in December in the U.S.

CapEx in the third quarter totaled $47.4 million, which included partial payments towards two drilling rigs that are under construction as well as four new work-over rigs and four wireline units, which we took delivery of during the quarter. Through the first nine months, we spent a little over $100 million of CapEx and we expect to wind up the year with total capital expenditures of about a $153 million.

Committed CapEx for 2009 is currently approximately $45 million and routine CapEx for ’09 will probably be $35 million to $40 million. Now, I’ll turn the call back to Stacy.

Stacy Locke

Thank you, Bill. During the third quarter, we experienced steady modest growth. In the land drilling sector, we activated our fourth rig in August, down in Colombia and in November, we – well I guess, in October we moved our fifth rig of 1500 horsepower of rig to Colombia. It is currently rigging up on location and shoots PUD there in Colombia within the next 10 days.

In addition, and so that fully activates our entire 69 rig fleet. In addition to the 69 rigs we have two 1500 horsepower newbuilds under construction; one of those rigs will be delivered to our Williston location, the drilling for the Bakken in December we, for income statement purposes, we feel like it will impact about the first of the year of ’09 and the second rig also go into the Bakken; we should deliver in March of ’09 and we think that will impact the income statement about the beginning of April.

With respect to the production services division, the work-over fleet we added four additional rigs in the third quarter. We've added two more since then; so we're at 70 rigs today and we should add four additional work-over units by the end of the year, should end the year with 74 workover units.

With the wireline, we added three additional units in the third quarter as a result of a small wireline acquisition we made in September. We have added another unit since then so today we are operating 55 wireline units and we anticipate adding four additional units by the end of the year and in the year at 59 wireline units.

Fishing and rentals, we also added about a $1 million of equipment bringing that total to just under $15 million in fishing and rental equipment. Our outlook into Q4 and into 2009 is a little different than what we saw in our last quarterly call as we anticipated in the Q2 call. We saw a weakness in our -- in particular our Western Oklahoma market at that point, which is our lowest horsepower shallowest our capacity rigs. Since our last call, that market is just about shut down for us. Out of the six rigs, five are stacked today. We have some reasonable hopes of activating a couple more perhaps by the end of the year, but I think for all practical purposes that’s going to be a weak market in the foreseeable future, and we're in discussions now about cold stacking some of those rigs for a while.

Outside of Western Oklahoma, quite a bit has changed in the last few weeks in the rest of the United States. With our top ten customer base, I would say just here recently, we probably had indications from about half of them that they are going to reduce their rig count including some Pioneer rigs that represents roughly nine total rigs. They’re not down currently, but they will be, and we’ve worked on placing those rigs, and I would say today, we’ve probably placed six of the nine that will be laid down out of our primary customer base; and that’s pretty much spread across the United States. That would be in Uinta, [in the Bakken], in North Texas and in East Texas. So far South Texas is still pretty firm.

So we are clearly getting some indications of some upcoming softness, and for that reason, we’re tempering our outlook less so for Q4, but certainly tempering it into 2009. With respect to Q4, we know now we've got a certain number of stack rigs, we think that we will end the quarter with an 88% to 90% utilization. We think that our margins are probably going to be okay, of the rigs that we have rebooked. We had almost flattish rollover rates as we've had some a little higher, some – we have actually had some down as low as maybe a $1000 a day reduction. But it's going to be modest and we've had some increases that were put into effect during the quarter earlier. So, I think that our margin per day will actually increase in Q4 perhaps up to $300 a day.

Well, the production services business, I think will call the revenues flat for Q4. That's, we had a nice increase from Q2 to Q3 with an impact from hurricanes in there. But, Q4 we have traditional slow period with the holidays, Thanksgiving, Christmas. So we feel like those might offset and we could end up with a flat revenue quarter. And we think the margins should hold in Q4 in the 48% to 50% range.

After Q4, going into Q1 we fully anticipate Q1 will be lower. It's difficult to quantify that it is time and I think it's more difficult to even to try to quantify what could happen in Q2, Q3 and Q4 into next year. But I think that, this year, more than many we are very much weather dependant again, and so I think our – excuse me, I think our posture will remain very conservative and we look in to 2009 unit we saw, or see some positive signs, healthy weather demand, improving commodity strips or improving capital expenditure budget. So for our CapEx going into ’09, we’re not going to be planning any additional newbuild rigs and we will plan modest growth and work-over, wireline and fishing around.

So we’ll have a fairly peered back capital budget, more than likely going into 2009, very similar to what we had going into 2008, which we adjusted upward rather materially due to course of the year as we saw very positive indications so we will be flexible to do that again in 2009 if we see those positive signs.

With that, I’d like to conclude the prepared remarks and open to questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Marshall Adkins with Raymond James. Please go ahead.

Marshall Adkins - Raymond James

Good morning, Stacy. Actually that was an excellent overview and obviously a very, very nice performance this quarter. You didn’t really quantify any meaningful hurricane impact this quarter. Did that, I mean, great numbers, but could they have been better without the hurricane; and if so, quantify that a little bit.

Stacy Locke

Well, the I didn’t even address it on the land – as you know on the land side, when you have a hurricane approaching there were probably, I'm guessing Red, about a half a dozen rigs that we secured and we released the cruise on. Usually that reverts to a portion of these euro rates that we're not really hurt by it but where we had more of the impact was on the work-over side. There we had a number of rigs and that protects the Gulf Coast. In fact, still today we have one rig that is back in service that took on quite a bit of weather and we are kind of going through it and clean it up and making sure it's in good shape, but we anticipate or we estimate about a 3% reduction in the quarter of rig hours for the work-over. Not modest impact on fishing and rental perhaps but other than that’s about it.

Marshall Adkins - Raymond James

Okay. All right I want to leave since we are going to be limited to we have two questions into one here. First term contracts can you give us some sense of or try to quantify going through ’09 how many of this rigs you expect to have long term contracts where they are not susceptible to weakening rates? And secondly, back of the envelope given the maintenance CapEx that Bill guide to plus your, I guess, CapEx plans are already in the works. I am still coming out with your cash flow positive, this for ’09 even in my pretty bearish environment. Does that seem to make sense for you as well so those are kind of two questions, and I'll re-queue?

Stacy Locke

I’ll answer the second question first. We also agreed that we’ll be cash flow positive. We haven’t completed our capital budget for ’09 year; we’re going to be presenting that to our Board next month, but on a very rough preliminary basis, it will be under 100 million, which is similar to what it was going into 2008. So, and that’s total CapEx growth, routine, everything rolled in, and we’ll fine tune that and it could be lower than that, but -- so we anticipate that we will have free cash flow that we would be able to further reduce our debt in this during fiscal 2009.

Now to address the term, ‘Contract Exposure’, it’s a little tricky but -- and there’s kind of good news, bad news. We’ve got 48% of our fleet under term as we go into 2009, which is a pretty high percentage. And I’m taking some liberties on the rigs there in Colombia because those are not actual terms but in a practical manner they are -- it is a little different how they do their contracting, but -- and I'm -- so I’m assuming that those rigs will continue at 100% utilization like they did over the last year. So that’s kind of the good news. Bad news is that 56% of those contracts will roll in the next six months. So that will knock out about 19 of those. So in terms of overall days protection -- being a little liberal on the Colombian rigs, we have roughly 25% of our '09 days protected, we believe. But -- and that's a little liberal. But, so it's not a tremendous amount of protection. Now that is up in terms of term contracts from where we were as mentioned in Q2 that we were aggressively pursuing additional term and we were able to bring up the number of term Q2 to Q3 but here in the last few weeks, that is become a little more challenging. But that's kind of where we sit today.

Marshall Adkins - Raymond James

Very helpful. I'll re-queue for someone else to give a shot at you.

Stacy Locke

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Steve Ferazani with Sidoti and Company. Please go ahead.

Steve Ferazani - Sidoti & Co.

Hi. Good morning, Stacy. Curious about the potential of moving some of those rigs down to Latin America. I know you did require some upgrades, but if you at least knowing certainly I am going to see a two to three quarter minimum significant downturn. Is that potential out there?

Stacy Locke

Sure. The answer is, yes. We actually have been talking about that a little bit. There are a couple of different avenues we could pursue there. As you know, we've already taken two of our (U.S. fifth) 1000 horsepower newbuilds down to Colombia. The other three 1500, we bought new and shipped down there, but we're exploring that. There is some potential limitation on how much we can take into Colombia because of our borrowing base here in the U.S. and it's collateralized by our U.S. assets, so – but we are kind of exploring what opportunities exist there to trench for some additional assets.

And as I mentioned too in prior calls, it continues to be our intent to explore the workover and potentially even wireline, fishing, and rental tool business in Colombia. And we are currently doing that.

Steve Ferazani - Sidoti & Co.

And I guess, actually on the workover side, what seen like what those assets can do when the market is strong. Can you give any kind of indication of, or do know at this point in a much weaker market, how I know those are high quality rigs, how they might perform in a significantly slower market?

Stacy Locke

Well, I think the broad trend follows the drilling markets that I always had to believe that amplitude of change is less than the drilling. Drilling can be pretty severe, peaks and valleys and changes, precipitous changes. The workover wireline, I think will, you know if we have as Marshall was describing a very challenging 2009 environment. It’s undoubtedly going to impact workover wireline, fishing and rental. But I don’t think that it will impact those three business lines to the same severity as it will to land drilling.

Steve Ferazani - Sidoti & Co.

Okay. That’s it from me. Thanks Stacy.

Stacy Locke

You bet.

Operator

Thank you. (Operator Instructions). And our next question comes from the line of Andrew Coleman with UBS. Please go ahead.

Andrew Coleman - UBS

Good morning

Stacy Locke

Good morning, Andrew.

Andrew Coleman - UBS

I had a question about the Bakken rigs, you know, can you talk about how the markets looking out there and how easy is it going to continue adding newbuilds to that market in the future?

Stacy Locke

Well, I think the – I believe that you haven’t already had a contract signed for newbuild for the Bakken. I think the opportunity is about over. We have two signed term contracts, one for two years term, one for three-year term. I think another, a number of other contractors are also providing newbuilds and newly refurbish rigs that the market as well under term contract, but I think there will be a dislocation I think you'll see some substitution of newbuilds or rigs that are not under term contract.

And second I will make is that the dynamics of that market have changed quite a bit since we have made our purchase of the Wolverine assets in late 2004. Those were fairly shallow rigs, the biggest rigs being 1000 horsepower and having 1000 horsepower pumps and the market now has kind of gravitated more towards heavy (1000) toward 1500 and in some cases 2000 horsepower rigs to drill these longer reach laterals. While the preference is more for the 1300, 1600 horsepower pumps.

And a little more hook load on your mass and sub structure; so that’s where we’re suffering; we moved our very shallow rigs out of there sometime ago and the one rig that we have up there currently stacked is on the lighter end of our fleet spectrum in the Bakken; and those lighter rigs are little more challenging than the solid heavy 1000 or 1500 horsepower rigs. But I think you will see a number of rigs unfortunately let go for those who don’t have term contracts

Andrew Coleman - UBS

Okay

Stacy Locke

To make room for the newbuilds.

Andrew Coleman - UBS

All right. Thank you. And then the second question I had was then you mentioned then I think Western Oklahoma, you guys were in a cold stacks and rigs.

Stacy Locke

Right.

Andrew Coleman - UBS

Does that mean, this is what I have heard is like cold stacking as prior to 3 to 6 month impact there. Does that mean that you are a little more bullish on the near term kind of improvement in that part of market?

Stacy Locke

No, it's actually the opposite. We are pretty bearish on really the long-term outlook in that market for those shallow rigs. We're – we have kind of high-end low horsepower rigs, and our customer base there has just kind of dried up for the publicly traded independent companies that usually want the higher-end, safer low horsepower rigs. And so, more than likely, we’ll take two maybe even three of those rigs and cold stack them in our yard, pickle them and park them there and let the crews go until we see conditions change, where we can -- what we don’t want to do is work a rig and then stack it for a month and then pull your crews back and work it again. You just can’t make money doing that. So we would rather just kind of pull in and pull the rigs out of the market until the market improves, which could be for entire 2009 period, maybe even into early ’10. So, we just don’t know. We’ll wait and see, but we’ll -- we'd very likely keep two or three of the rigs activated and running there if we feel like the market is strong enough, and if it’s not, we’ll cold stack all six of them if we have to.

Andrew Coleman - UBS

Okay. Thank you.

Stacy Locke

Yes.

Operator

Thank you. Our next question comes from the line of John Daniel with Simmons & Co. Please go ahead.

John Daniel - Simmons & Co.

Hey, Stacy.

Joe Eustace

Good morning, John.

John Daniel - Simmons & Co.

A quick question on the workover business -- actually a couple. Are you hearing of any E&P companies putting their ’09 workover programs out to bid yet?

Joe Eustace

No, I have not.

John Daniel - Simmons & Co.

Not?

Stacy Locke

Joe Eustace is saying, not so much yet.

John Daniel - Simmons & Co.

Okay. Then, moving over to capacity. I know that the big three have talked about lowering CapEx and not putting out incremental rigs. Do you think that the smaller players that grew aggressively in the past couple of years will slow down as well, or do you think they’ll try to take advantage of the declining rig prices and add a few more?

Stacy Locke

Well, I guess you're, I mean we're one of those smaller [wings]. So, for us I would say that we're going to scale back our growth plan there. I think we might add maybe up to 10 workover units in '09 unless we see some changes or if we would not put in an order to add some rigs there in Colombia, as I mentioned. But, for the U.S., I'd say maybe up to 10 units and that's really to address some growth opportunities that we have in new markets for us. But, so it's going to be modest. Certainly going in '08 and '09.

John Daniel - Simmons & Co.

Any chance you could shed some color on what's happening to the new rig prices in terms of the declines where they were say in '06 when you were buying rigs?

Stacy Locke

Well, they've gone up a little bit. We're buying from just a couple of vendors. The prices have gone up a little bit. '06 to '07, '07 to '08. And we have some on order for '09. Those had – they were almost flat to slight increases, but I expect that will level out, if not decline a little bit going in further into the year. I can tell you that Red West is sitting here and we're ordering various components for our newbuild rigs and I'm sure the same is applicable in the workover. Late times are certainly a lot shorter, everything is easing up and prices appear to be coming down. So, that's a good sign.

Red West

Yes

John Daniel - Simmons & Co.

Okay, well. Thanks guys. Good quarter.

Stacy Locke

You bet

Operator

Thank you. Our next question is a follow up from the line of Marshall Atkins with Raymond James. Please go ahead.

Marshall Adkins - Raymond James

I guess, we could probably back into believe is our just ash on the workover side. Can you just give me a rough breakdown of the hourly revenue and cost structure you had there or may be you don’t have that in front of you?

Stacy Locke

Well, for the workover business, as I mentioned we ran it about a 80% utilization and the average hourly rate for the Q3 was $595 an hour.

Marshall Adkins - Raymond James

Okay, and all right. In the cost side or margin side?

Stacy Locke

We really don’t publish any of that, Marshall. We kind of, we kind of, present the whole production service group as a whole.

Marshall Adkins - Raymond James

Okay, we’re going to regional and you have already hit on this a little bit but you've talked some of the regional areas, obviously, Oklahoma, Western Oklahoma, I guess, the Rockies as well somewhat weak, any other kind of regional commentary you can give us in terms of one areas of the – on the drilling site and also on the workover side that are strongest versus weakest.

Stacy Locke

Well on the drilling site, I would have to say, South Texas and East Texas are the strongest. I think, East Texas is being helped a little bit by Haynesville activity. South Texas is still very firm, obviously, Western Oklahoma in the shallow rig market is by far the weakest and the Barnett Shale has been kind of flattish for us, for we actually took two rigs out of there this year just because we couldn’t get the margin improvement that we were able – the day light improvement that we were able to achieve in other areas; so we've downsized there a little bit. It's just kind of a status quo type of market, the Bakken I still think holds tremendous promise, I think it’s a great field discovery with a lot of new technology and I think the cost is fairly high on these wells and I think $70 oil becomes a little bit of a hurdle, but – and then in the lower Rockies and the gas plays I think that that’s it's just so natural gas dependent that people are cautious there and as they should be. So that’s kind of my overview.

Marshall Adkins - Raymond James

Okay. Now that’s helpful.

Stacy Locke

The one shinning star is Colombia. That is just going very, we got strong demand. Great customer relations, it's all oil driven there, CapEx budgets continue to increase and so that just really worked extremely well for us.

Marshall Adkins - Raymond James

And there we – I know, we had some higher start up cost. It's same – it has got going, but in terms of kind of where you see the margins leveling out there, similar to what you are seeing in the U.S.?

Stacy Locke

No. Our goal was always to achieve average margins 20% to 25% greater in Colombia over the U.S. and even with the startup cost and everything that we're dealing with, we've achieved that and beyond and I think we're kind of in the phase now where we can really focus. It's kind of tough when you will have one or two rigs now that we have already spudded in our fourth rig and by the end of the month have our fifth rig spudded. That spreads the fixed costs quite a bit over more revenue days and our people are starting to fine tune the cost side of operations there. And I think naturally a lot of those start up cost will be settling out on their own, and then we're continuing to look for ways reduce daily operating cost, so I think it's just going to get better over time.

Marshall Adkins - Raymond James

Are you still good over that 25%, kind of over --

Stacy Locke

Oh yeah, we’re above that. Yeah.

Marshall Adkins - Raymond James

Fantastic. Last question is maybe more for Red. You know, you got this 100 million of CapEx kind of thrown out there for ’09, and you went through a little bit -- you know, adding some workover rigs and what not, but are you still upgrading your existing rig fleet, are you adding top drives, is it -- and tell us about the type of CapEx, I guess that you’re putting into these things? Is it retrofits or is it just all for the new rigs?

Red West

I will be upgrading top drives on rough mix, automatic catalogs…

Stacy Locke

Some bypass...

Red West

And upgrading to 1,600 horsepower pumps on several rigs. So a lot of – is upgraded on existing rigs. We won’t continue to bring those rigs at another level.

Marshall Adkins - Raymond James

Okay. Good. Thanks guys.

Stacy Locke

Okay.

William Hibbetts

Thank you, Marshall.

Operator

Thank you. Our next question comes from the line of Douglas Becker with Banc of America Securities. Please go ahead.

Douglas Becker - Banc of America Securities

Stacy, you’ve historically been able to maintain high utilization in most of the peers for the drilling rigs. You're already contemplating cold stacking a few rigs. How do you think about the tradeoff between price and utilization in this cycle?

Stacy Locke

Well, I think that that becomes more difficult as time goes on with all these newbuilds. For a number of years there, there were really only one or two contractors building much in the way of newbuilds, and now we’ve got all the big three aggressively kind of in a footrace to add newbuilds. Those are the -- rest of it, we kind of steadily have built over the years. We’re actually kind of pulling back a little bit on the newbuild, just because we feel like the market is going to be so grossly oversupplied. So that probably impacts utilization more than anything else and causes the great dislocation and just the broad market oversupply of rig and for many people it will be cannibalizing some of their existing fleet.

But to answer your question and I have had this. I know, Marshall is dying to hear my answer. We've talked about this many times. But in a vacuum, if there is one, maybe two contractors you might be in a position to hold utilization back in order to retain your margins.

But on the battleground of South Texas or East Texas or any other market, where we compete day in and day out with the top five, six contractors out there. For every job that we're willing to try to hold on margin on and walk away from one of our competitors will step in immediately and reduce the day rate.

Just to give you an example. Just this very week, against one of the top drilling contractors, one of the most aggressive of the newbuild contractors out there, we were [monomer mono] with a customer and our rig will survive, okay.

Well that other customer got a very nice rig, its good crews, well maintained. I don't think they're going to stack that rig. They are going to probably reduce the rate a little bit and put it to work. So as I talked about many times over the years, stacking a rig has tremendous costs, labor, safety consequences that are just harmful to drilling contractors.

We spent a lot of money and time training our crews, achieving tremendous safety results and that can hurt you worse than stacking out a rig for 30 days. You can’t afford to keep 100% of your crews in those situations.

And so you end up, letting some go and then rehire and if you activated again and frequently you got to take the rig and move it off location, which anytime you have to bring in a trucking company and crane to rig down and move your rig, you incur costs there and labor. So, anyway well we are going to compete just like we think every other drilling contractor does no matter what they tell you.

Douglas Becker - Banc of America Securities

So may be just to paraphrase it sounds like it’s a case-by-case basis, but still a preference for utilization maybe than pricing?

Stacy Locke

I will tell you. I believe every drilling contractor in the US approaches it in the exact same way of we do no matter what they tell you all.

Douglas Becker - Banc of America Securities

Okay,

Stacy Locke

And we see it in every market. If we stack out; I mean, we [fight] for a rate and walk away someone will move immediately in there and take that job at a lower rate. Would you agree, Red?

Red West

Yes. It will happen.

Stacy Locke

It’s just the right way the real world works. Now, if you were in a vacuum with one contractor being yourself, you could easily control that or maybe even with two in isolated markets where you have great market share. But in today’s world, you generally have more than a handful of competitors battling it out for the work and you go market to market and look at the competitors and I will tell you they are fighting hard for the work.

Douglas Becker - Banc of America Securities

Absolutely. In terms of free cash flow priorities comparing debt reduction versus share repurchases, it seems pretty clearly a preference for debt reduction at this point?

Stacy Locke

Yes.

Douglas Becker - Banc of America Securities

Okay. And then just one last quick one Colombia looks like to be a resounding success. I think it kind of proves that you can go into markets outside the U.S. and be successful. Are you considering other countries at this point in time or is it still really building out Colombia at this point?

Stacy Locke

No. We are looking at other countries. We have actually made some bids and we are looking into other areas.

Douglas Becker - Banc of America Securities

Something that could be imminent or (inaudible).

Stacy Locke

I would not say imminent. But I would say in the medium term plans.

Douglas Becker - Banc of America Securities

Okay. Stacy, thank you very much.

Operator

Thank you. (Operator Instructions). To management, I'm showing that there are no further questions. I will turn it back to you for closing comments.

Stacy Locke

Great. Well thank you very much for participating today. Those were some great questions and a good conversation we appreciate it and we will look forward to visiting for the fourth quarter call. Thank you. Bye-bye.

Operator

Ladies and gentlemen that will conclude Pioneer Drilling third quarter 2008 earnings conference call. We do thank you again for your participation. And at this time you may disconnect. Have a nice day.

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