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

Pioneer Energy Services Corporation (NYSE:PES)

Q4 2012 Earnings Call

February 13, 2013 11:00 am ET

Executives

Lisa Elliott – SVP, IR Counsel

Stacy Locke – President, Chief Executive Officer

Lorne Phillips – Chief Financial Officer

Red West – President, Drilling Services

Joe Eustace – President, Production Services

Analysts

Michael Cerasoli – Goldman Sachs

Jim Rollyson – Raymond James

Brian Uhlmer – Global Hunter

John Keller – Stephens Inc

Daniel Burke – Johnson Rice

Dave Wilson – Howard Weil

Travis Bartlett – Simmons & Company

Trey Cowan – Clarkson Capital Markets

Brett Hendrickson – Nokomis Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Pioneer Energy Services Fourth Quarter 2012 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Lisa Elliott with DRG & L. Please go ahead.

Lisa Elliott

Thank you, Marissa, and good to morning to everyone. Before I turn the call over to Pioneer’s CEO, Stacy Locke, and to CFO, Lorne Phillips, for their formal remarks, I do have a few items to go over.

First, a replay of today’s call will be available and accessible via webcast by going to the IR section of Pioneer’s website, and also by telephone replay. You can find the replay information, both in this morning’s news release. As a reminder, information reported on this call speaks only as of today, February 13, 2013, so any time-sensitive information may no longer be accurate at the time of a replay.

Management will be making forward-looking statements today that are based on beliefs and assumptions and information currently available to them. While they believe the expectations in these statements are reasonable, they can give no assurance that they’ll prove to be correct. These statements are subject to certain risks and uncertainties that are described in this morning’s new release and also in recent public filings with the SEC. If one or more of these risks materialize or should underlying assumptions prove to be incorrect, actual results may vary materially. Also, please note that this conference call may contain references to non-GAAP measures. You’ll find a reconciliation to these in this morning’s news release.

And now, I’d like to turn the call over to Stacy Locke, Pioneer’s CEO and President. Stacy?

Stacy Locke

Thank you, Lisa, and good morning. And joining me on this morning’s call is Red West, President of our Drilling Services segment; Joe Eustace, President of our Production Services segment; and Lorne Phillips, our Chief Financial Officer.

As you can see from the press release, our fourth quarter of 2012 was a little bit better than we added – expected in pretty much all categories. In Drilling, our utilization was 87% higher than we thought it was going to be and basically a result of the markets in general holding up just a little bit better than we had anticipated, plus we’re able to put two rigs back to work in December down in Colombia.

Another nice improvement there was our average margin per day, was up about $1,000 a day over what we had anticipated. And that was really kind of combination of several things. One is lower supply, repair and maintenance in part, that is due to just lining up this new build rigs. We’ve been put in a steady supply of new builds and they have a little bit of startup supplier per maintenance costs associated with them, and that’s hitting kind of lined out, so we are getting good margin contribution there, and our guys are doing a great job controlling cost on a daily basis.

Another kind of improvement in overall employee cost also in part due to the guys just doing a great job controlling the labor cost, but also we had a reduction in our Workers Comp allowance, which is usually is a once or twice a year type event, and that just due to our ongoing efforts and safety. We’ve had several very, very good years of safety this year, it was the best year ever for us and it’s paying – paying off.

So – and then lastly, we had some higher mobilization cost really in the third quarter, some one-time relocating rigs, et cetera., and we saw an improvement in cost on that front in the fourth quarter.

The Production Services group was down as expected, but it was certainly at the more favorable end of our range there and margin, we thought to be flat or slightly down in the fourth quarter due mostly to the holiday period and we’re actually up 1%. So that fared better than we thought, activity levels were just a little better and pricing held up a little better than we expected. So, overall revenues were down, but EBITDA was up 8% to $60 million, which we’re pleased with.

2012 was also another year of steady growth in all of our core businesses. As the press release discusses, we put out a total of eight rigs in the year. We’re currently moving a rig presently to the Bakken. But thus far we’ve put out six 1500 horsepower rigs, five of those have gone to the Bakken, one to the Eagle Ford, and then two 1000 horsepower rigs, those both have gone to the Marcellus. So, we’ve had nice growth. The rigs have performed exceptionally well and we’re pleased with that.

On the Production Service side wireline, we had another 14% unit growth year. So, we ended the year at 120 units. We also – in the first quarter – we had ordered in the fourth quarter two additional cased-hole skid units for the offshore market. Those will come in, in this first quarter and then we’ll be retiring one unit in the first quarter, so, but in the first quarter level 121 wireline units. Now that’s up, after a 25% unit count increase in 2011. So, we’ve a good steady growth in wireline. Same in well service, we’re up 20%, well service rigs in 2012. We ended the year at 108. We have one final rig to be delivered, that will be delivered in the first quarter and so we’ll be 109 at end of the first quarter and that’s after a 20% increase year in 2011.

And then coil which was new to the company at the end of 2011, we grew 30%, three units in 2012. So, when you kind of look back over the last couple of years, we’ve had some very substantial improvements in the company overall. Revenues at the end of 2010 were $487 million, at the end of this year 2012, $919 million, that’s 89% increase in revenue due to an improved market and this growth in all of these core businesses.

Probably more importantly than that we ended 2010 with a $103 million in EBITDA and this year at $249 million. So we’ve had a 142% improvement in EBITDA over two years. So we’re proud of those accomplishments and kind of varied within those numbers. You look at the Production Service group, in 2012 we almost generated as much revenue from Production Services alone in 2012 than we did from the entire company in 2010. So, our strategy of diversifying into the Productions Services space, we’ve executed on it. They performed extremely well and we’re proud of those accomplishments.

Now looking briefly at some of the core business lines. Drilling today is at 84% utilized, now that includes three rigs that are earnings, but are not working. Our biggest division is West Texas with 23 rigs and there we have a little bit of instability. We’ve actually got seven rigs back in West Texas, that’s after running basically 100% utilized for the last couple years. And what that reflects is a shift from our client base, which is all the big – publicly traded companies for the most part to more horizontal activity and deemphasizing the vertical drilling.

Now three of those seven stacked rigs as I mentioned are earning and they will be earning on their term contracts through this summer, but we definitely have some instability there that were evaluating and we’ll talk a little bit more about that in a minute.

South Texas, our second largest division, 14 rigs. We have two rigs stacked there today. Those are both the low horsepower mobile rigs, one electric and one mechanical, and those kind of go up and down and in fact those are both scheduled to go back to work here, but they do go up and down because they are not on long-term contracts.

The third biggest district is the Bakken where we have 12 rigs with a 13th mobbing there today. We have two stacked rigs in that market, and both of those are mechanical rigs that we knew at some point would stack out with all of the supply of SCR and AC joystick rigs that have come available on the market in the latter half of the of 2012. So, we kind of expected that.

And then Colombia eight rigs, back to 100% utilization there. Utah, five rigs, 100% utilization there. Appalachia, four rigs, 100% utilization there, and East Texas, still about the same, we have three rigs, with two rigs down. And then we have the one rig still in the rig up yard, that’s in Houston that we’ve never did deploy to West Texas due to the instability in West Texas, so that’s 70 total rigs. And I would say their rates are firm pretty much in all markets, and may be a little uncertainty there in West Texas, but we are still adjusting rigs as they roll on to off existing term on to new term at the lower day rates that we’ve talked about kind in the last quarterly call.

Quickly looking at production service. Well servicing doing great. Today utilization is up in the 95% range. Pricing is still held in the $600 an hour range and up. Outlook is very positive there. Wire line, pretty much the same, started the year fairly strong, Outlook is positive, we think for the year. We are seeing possibly some pricing uncertainty in a couple of markets, but it’s too soon to tell, we don’t know whether we’re seeing any trends there or an enormous events.

In coil, we’ve now received the two new deeper capacity – 22,000 foot capacity units. We – and the one offshore unit we received earlier in the year, so that’s really helping us where we’re in the process and using those new units to help pull four of our existing units out and retrofit the injector hedge to the new hydra rig heads that allow for a little greater capacity use for those units. I think we’ve done two and we have a couple left and most of that should be done in the – by the end of the first quarter.

We also are retrofitting a couple of offshore units. I got one in now that we’re retrofitting, you just need to do that every so often because of the tough environment, and – but overall the market to us looks fine and we think pricing is holding up, so we expect a much improved year in coil in 2013.

Now, I’d like to turn it over to Lorne to go through some of the financials.

Lorne Phillips

Thanks, Stacy. This morning we reported revenues of $228 million flat with the prior quarter, and as Stacy mentioned, EBITDA was $60.3 million up 8%. Earnings per share was $0.06 compared to $0.04 from the prior quarter. Our Drilling revenue totaled $130 million, which is the sequential increase of 3% quarter-over-quarter. Most of that was driven by additional new build rigs and higher turnkey revenue, which was – the turnkey revenue was $4.8 million compared to $1.9 million in the third quarter.

Average drilling margin per day was 8,103, a 13% increase driven by factors that Stacy outlined a few seconds ago.

Currently 59 of our 70 drilling rigs are generating revenue and 43 of these rigs are under term contracts that range from six months to four years. 37 of those are on term contracts in the U.S., of those seven are up for renewal this quarter, eight in the second quarter, 12 in the third quarter, and 10 are expiring beyond that point. The average remaining term is 10 months for drilling contracts in the U.S. And as Stacy mentioned as they renew, there will be a downward trend in pricing as the contracts adjust to the current market. And the combination of this repricing and our moderately reduced utilization guidance is expected to decrease the Drilling margin quarter-over-quarter by around $3 million to $4 million when you look at the first quarter.

With the recent softening of demand in West Texas as Stacy mentioned, we have seven rigs that are not working. We have an additional two that are expected to be released by the end of the quarter. Of that nine, five of those rigs will continue to earn a standby rate until contract expiration which ranges from early June to mid August. Our operations in Colombia accounted for $24.6 million of our total Drilling revenue, that’s up slightly from the prior quarter. All eight of our rigs are currently working with six of those rigs working under a contract that has been extended through March – through the end of March and we are continuing to negotiate a longer-term contract.

In December, we began mobilizing two rigs in Colombia that had previously been idle for most of 2012. These rigs are now working under contract for a minimum of one well plus two optional wells. Historically, Ecopetrol, our customer for those rigs had us drilled the optional wells. If they were to drill them, it would take one rig out to July of 2013 and that the other rig out to May of 2014.

Turning now to our Production Services segment, revenue totaled $98 million in the fourth quarter, which was down 6% due to normal seasonal factors. Gross margin for Production Services was $37 million, which was down approximately $1.7 million or 4% compared to the third quarter.

Our margin as a percentage of revenue increased modestly from the prior quarter to 38%. Pricing in Production Services has stabilized in most areas in the fourth quarter while servicing averaged 601 per hour down from 606 in the third quarter. Utilization for well services was 83%, down from 91% in the prior quarter. And all the businesses had moderate dips in utilization due to the anticipated seasonality and a pullback in spending as our clients closed out their yearend budgets.

Looking at our expense trends for the quarter, interest expense was $10.4 million approximately $900,000 from the prior quarter. This primarily reflects the continued reduction in capitalized interest and in the fourth quarter we capitalized $1.8 million of interest expense related to our new build drilling rig program compared to $2.4 million capitalized in the third quarter.

For the first quarter of 2013, we estimate interest expense to be approximately $11.5 million and we expect to capitalize approximately $600,000. We expect our interest expense for the full year 2013 to increase to a range of $47 million to $49 million, due primarily to the reduction in capitalized interest year-over-year.

G&A expense for the fourth quarter was $21 million, which was down about $300,000 from the third quarter. In the first quarter of 2013, we expect G&A to be in the $23 million to $24 million range, as we accrue incentive compensation at target due to the start of the new year and also have increased payroll taxes, some of which reset at the beginning of each year.

For the full-year 2013, we expect G&A to be in a range of $93 million to $96 million and depreciation and amortization expense was $44.3 million, which is up about 5% sequentially. That reflects the continued additions to our Drilling and Production Services fleet in the fourth quarter. First quarter D&A is estimated to be in the $45 million to $47 million range and $180 million to $190 million for the full year of 2013. Our effective tax rate for 2012 was 35.3%, and again we – for 2013, we expect a rate of 38% to 40% before the impact of any foreign exchange gains or losses.

Turning now to the balance sheet, we had cash and cash equivalents of $23.7 million and $100 million drawn on our revolving credit facility as of year-end. We expect to begin paying down the revolver in the second half of this year. Our full year 2012 CapEx spent came in at $364 million, which includes approximately $10 million of capitalized interest. For 2013, our CapEx spending is now estimated to be in the $140 to $160 million range, which includes approximately $40 million of carryover related to the new build rigs, $65 million to $75 million of routine expenditures, an additional well servicing rig. The upgrade of a Colombia rig to 1,500 horsepower and some other discretionary expenditures primarily focused on U.S. land drilling.

And with that I’ll turn it back over to Stacy.

Stacy Locke

Thank you, Lorne. Just a couple of comments on our kind of outlook and the guidance. I’d say in the Drilling segment generally, we see a very favorable outlook for most of the United States, day rates are bottomed and stable and we think utilization is going to be good everywhere except for West Texas, probably. I mean East Texas has been – that will continue to be weak, but West Texas is the only kind of new change in there. And we don’t know yet how that market will develop.

With little surprise with oil prices as high as they are, that there isn’t more continuation of vertical drilling, I don’t know for sure that it won’t creep back up in the course of the year. But I would tell you that it’s uncertain at this point, what’s going to happen there. And so for that reason, we are going to guide for lower utilization, we’re going to guide for 81% to 83% utilization, now that includes the stack but earning rigs, we’re earning revenue on them and average margins a little over at the 7,300 to 7,600 per day, mostly as a result of all of the renewal of contracts at the lower day rates that we have in the market today.

On the Production Service side of the business, that market looks very good going forward. Other than Q1 is a seasonally, typically the weakest quarter for Production Services, just shorter days, weather typically and new budgets take a little while to kick off. But we definitely see a positive outlook for the year for Production Services. But for the first quarter we’ll guide kind of flat revenue and flat to a little bit down may be 2% down on margin as a percent of revenue. So, that’s our outlook for the first quarter, the whole year outlook I think is very favorable with one uncertain market really West Texas and we’ll just evaluate that through the course of the year.

So, at this point we’d be happy to answer any questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line Michael Cerasoli with Goldman Sachs. Please go ahead.

Michael Cerasoli – Goldman Sachs

Thanks. Good morning.

Stacy Locke

Good morning.

Michael Cerasoli – Goldman Sachs

On your services, you stated in your opening comments you mentioned some pricing uncertainty in a few markets, you’re kind of little bit, like you’re not sure if you’re seeing a trend or anything, can you just clarify what regions or – I may have missed it, what assets you’re referring to?

Stacy Locke

Well, I would say what was on my mind was in wireline, mostly in the Bakken. It seems to have gotten a little competitive up there. We just have isolated data points, so I don’t whether it’s a trend. I mean, I think they got off for a good start this year. I think wireline across the board has gotten off to a good start. But when you see those little things, you’ve got to pay attention just to see if it’s going to be pervasive through the market or not, so we just don’t know at this point.

Michael Cerasoli – Goldman Sachs

Okay. And then you separately mentioned some improvement in coiled tubing, can you just give us a sense of how much more – how much more if any operational efficiencies you think you extract as you kind of improve that business or does any further improvement at this points sort of require kind of activity that pick up more broadly?

Stacy Locke

No, I think what I was kind of referring to there is that we’ve had some challenges in 2012, part of it was not having the right equipment, and not having enough equipment, and maybe not even having the right management in certain markets, and we made changes in all those areas, and broadly speaking, the market has held up fine. We are not seeing a big meltdown in that market. The rates are very reasonable. And, so the game is really just to get utilization, and by making the changes that we’ve talked about equipment people, we feel like we have a far greater chance of getting our utilization up through the course of this year, mostly starting in the second and third quarters. And, so as a result of that, it can be a big contributor to overall margins and EBITDA, and to that’s really what I’m referring to.

Michael Cerasoli – Goldman Sachs

Okay, and then – and just my final question on the weakness in West Texas. Would you move rigs out of that region or is it safe to say that the vertical rigs aren’t working in West Texas and they are probably from anywhere to move them?

Stacy Locke

We’ve always had a few vertical rigs working or handful I’d say vertical rigs working in South Texas, and those will continue to work there, may be more so than say East Texas, which has been largely – other than the Haynesville has largely been a vertical market, but that’s a gas vertical market, and that’s pretty dead.

South Texas is mostly gas with some associated liquid and we’ve had fairly good activity on our vertical rigs in South Texas. West Texas has been our shining star over the last couple years. We’ve had basically 100% utilization, improving day rates, a number rigs there with top drive earnings exceptional margins, but now our customer base, which as I mentioned earlier kind of the bigger, bigger publicly traded companies with massive programs they are kind of shifting their attention to the horizontal play. And so for us we’ve got to find new clients that are going to be drilling vertical with those rigs.

Some of the mechanical rigs are drilling horizontally, but I think the mechanical topdrive rigs are not the rig of choice for the developing horizontal plays out there because laterally links are just getting deeper and longer. So, we do expect to keep a number of those mechanical rigs with top drives working in the horizontal play. But we’ve got to find a new home for those vertical rigs. And as you mentioned, there is really not a lot of other markets to take those rigs to at this point, in fact we brought one of the mechanical rigs from the Bakken down in the third quarter that was part of the shale expensive I referenced earlier in the third quarter relative to fourth.

We brought it to Texas, but we thought that’s where it most likely works. So, now we have this vertical instability there, the question is going to be is it going to persist or are we going to be able to put these rigs back for new clients or is the market just going to get stronger and some of our past clients come back into that vertical market because oil prices certainly aren’t a problem.

Oil prices are strong and I would think that activity be better there. So, we’re just trying to evaluate it, all this kind of hit it right at the beginning of the year. One client had five of these rigs, another client had two other rigs. So, we’re just trying to evaluate it.

Michael Cerasoli – Goldman Sachs

Okay. Just one I’m sorry one last question. Did you say well servicing rig utilization is back into the mid 90%?

Stacy Locke

Yes, right now it is. I don’t know if its averaged, but hadn’t averaged that high quarter to-date, but it’s probably up in the upper 80s average for the quarter, ut right now we’re back over a little 90%.

Michael Cerasoli – Goldman Sachs

Okay.

Stacy Locke

Little over 95% actually. So, it’s just a real strong well service market for us.

Michael Cerasoli – Goldman Sachs

That’s great. Thanks for taking my questions.

Stacy Locke

You bet.

Operator

Thank you. Our first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.

Jim Rollyson – Raymond James

Good morning, Stacy, Lorne.

Stacy Locke

Good morning.

Lorne Phillips

Good morning.

Jim Rollyson – Raymond James

Great work on the quarter. I guess first one, going back to your comments on margins and kind of some of the things that drove the upside versus what you originally guiding. As you look at that going forward, and I know you’re guiding things down, but do you think some of the issues that hurt you in 3Q that helped you 4Q on the cost side? How much of that’s repeatable over time? I know you’re going to have payroll tax pick up and you do have kind of getting a couple of those rigs back out in the field in Colombia and in the states, but as we go beyond the first quarter and you look in to the rest of the year, but how are you thinking about cost and the impact of margins outside of movements in their rigs?

Stacy Locke

Well there is several – there are several thoughts on that. One certainty is that putting the two rigs back to work in Colombia and having amend for the full first quarter, you’re going to see average revenues and average cost go up going forward, because the cost structure and revenue structure is still much higher on a per day basis down in Colombia, and we barely got any of that in the fourth quarter. So that’s going to have an impact that we didn’t see in either the third quarter or the fourth quarter. So that’s going to muddy things up a little bit.

But in terms of the that I illuminated, the employee cost savings quarter-over-quarter probably was mostly due to the reduction in the worker’s comp allowance. And that won’t be tested again until the summer. We don’t know whether that’ll be an adjustment or not, and then it’ll be tested again in December of next year. And we’re hopeful that we’ll have further reductions, but we’ll just have to wait and see on that. It’ll depend on our experience.

And then the SRAM cost, I think those trends are going to remain fairly favorable. I think our guys are doing a very good job of controlling costs. And I think that these new-builds were doing a lot of more of the work in the yard on them before they get to the field. So I don’t think we’ll experience the same SRAM kind of impact as these first quarter rigs go out. So those could be improvements. I’d say there is some upside there, but we got a lot of moving parts, it’s hard to get gauge that.

Jim Rollyson – Raymond James

So it sounds like the safe bet beyond the first quarter is something probably in the range of what you’re thinking about for the first quarter?

Stacy Locke

I would think so, yeah.

Jim Rollyson – Raymond James

Okay, that’s helpful. And for a follow-up, Lorne, you talked about a couple of things, CapEx is obviously getting cut in half and then some and you mentioned debt pay down’s really going to start in the second half. I assume that implies that your CapEx is a little more weighted first half than second half, if you could give us maybe some magnitude there. And likewise, just kind of how much debt you think you can pay down this year based on what your view is today?

Lorne Phillips

Yeah, you’re correct about the first half waiting. In fact I would say it’s more of a first quarter waiting. I think that, it’s because of the new-builds there is still around $40 of carryover and the majority of that I think will be spent in the first quarter. And then at, and I think, I believe we’ll be delivering the well service rig around late first quarter or early second quarter. So it’s going to be, first half of the year, it’s going to be heavier on CapEx but as you really get into the second quarter, it should start to be pretty steady. I think at that point, because it becomes more of a – more focused on routine and a little bit discretionary.

In terms of debt pay down, we – I’d say probably as we look at it today, we think the range is probably $40 million to $60 million of debt pay down by the end of the year, but that’s our current outlook and hopefully it could get higher, but we’ll – that’s the range I’d give you right now.

Jim Rollyson – Raymond James

Okay, very helpful. Thanks, guys.

Stacy Locke

Okay.

Operator

Thank you. Our next question comes from the line of Brian Uhlmer with Global Hunter. Please go ahead.

Brian Uhlmer – Global Hunter

Hey, good morning.

Stacy Locke

Good morning.

Brian Uhlmer – Global Hunter

Now, I want to start off with something that’s going to be gross, millions and want to publicly applaud you, Stacy, for writing a check for a bunch of your own company shares as a lot of CEOs have not been doing that in this downtime. So I just wanted to make sure people recognize that and I’m sure I am going to catch some grief from my competitors for saying that, but there you have it.

Stacy Locke

Thank you.

Brian Uhlmer – Global Hunter

No, problem. And then I want to head south to Columbia and discuss that a little bit with the 6 rigs coming up for contracts, do you see that as one contract for all six, is that where we are heading with that, and then can you just discuss the market down there and what you are thinking with the market down there; and if you are fully utilized, are you tapped out at those eight rigs?

Stacy Locke

Well, let me start with the last one first. I think from our perspective, with the U.S. market being so rich now as opposed to when we were evaluating Colombia back in 2006 and moved in 2007, we would not anticipate adding additional equipment down there at this time. We just feel like there’s going to be some continued strong opportunity here in the U.S. The market though overall I think is good and probably getting stronger.

I think it – I still believe it’s probably one of the best markets internationally to be in. It’s all oil and they are a big multinational company and there is challenges with any big organization of that size. But, we are very optimistic. We have a great relationship with Ecopetrol.

We expect, they are using all eight of the rigs now, and a number of things could happen. We could roll in another rig and add it to the six and it could go long-term as long as anywhere from two to five years in length. There is a chance – everybody is very, very busy. There is a chance to roll forward these contracts a little bit longer to give time that to analyze, to negotiate a good long-term contract. We just don’t know for sure what will happen. but we do believe and we’ve been – we are fairly reassured that they’re planning on using us for the long-term there. We’ve been one of their top-performing, if not the top performing, if not the top performing contractor for them. So, we see it as a positive, very positive market.

Brian Uhlmer – Global Hunter

Good deal. Thank you. And my second question is, you get knocks on the door all the time from the bankers, how would you characterize the M&A market right now as far as, are guys struggling and there is some stuff that maybe available to you at a discount or people just waiting out the cycle or folks expecting too rich of a multiple on the businesses right now, just characterize that market in general and kind of what your views are over the next six months or so in that market.

Stacy Locke

Well, I would tell you the – for us on the Production Services side, our organic growth model works so well that it would have to be a very special deal situation to cause us to want to go buy something else. We have the core businesses that we want to be in now and so organic growth probably makes the most sense for us.

And then on the drilling side, really what you need in the fleets are more of the new build, state-of-the-art rigs like we’re putting out now. So, there is just very few, if any, real acquisition opportunities on the drilling side. And, our stock, currency is too low to really use. We wouldn’t want to dilute ourselves by using our stock. We don’t want to use cash because we’re trying to repay indebtedness. So, I just don’t see really much M&A activity that will be involved in. Do you want to add anything to that, Lorne?

Lorne Phillips

No. I think you covered it.

Brian Uhlmer – Global Hunter

Okay. And quick one for Lorne, why the – I may have missed this, but why the 10% increase in G&A year-over-year?

Lorne Phillips

It’s driven really by few things. One is, is the incentive contemplation resets that target. so that guidance is based on target performance, which I would – give you little more flavor on that in 2012 was little bit less than that, given the results that didn’t meet our budgeted expectations. On top of that is, you have some merit increases and then some healthcare costs, the payroll tax roles in, we had that last year, but it’s arguably little bit higher given some of the structural changes, the payroll taxes and the legislation. Those were the primary causes of it.

Brian Uhlmer – Global Hunter

Perfect. I’ll turn it over someone else. Thank you.

Operator

Thank you. Our next question comes from the line of John Keller with Stephens, Inc. Please go ahead.

John Keller – Stephens Inc

Hi. Good morning guys.

Stacy Locke

Good morning.

John Keller – Stephens Inc

I was hoping that may be you could help us hone in a little bit on sort of the leading edge or spot rates out West Texas and maybe how they compare to what you’d seeing as recently in the fourth quarter and may be over the last – progression over the last year?

Stacy Locke

Well, I would say that when we went to West Texas, I would say the rates were kind of in the 15 to – this for vertical rig, 1,000 horsepower vertical rigs, no cut drive. I’d say they were in the kind 15 to 16 five range and then we due the course over couple years we were there, it’s been like that was going up more to the 16, 17 range. I’d say that it’s kind of reverted back closer to where we started now for our class rig. We’re kind in that 15 to 16 range again I think is kind of the going rate.

Now others are bidding lower, some substantially lower, I’ve heard rates and prices you may have color on this, but I’ve heard rates of $12,000 to $14,000 a day out there. But they aren’t our own rig and they don’t come with the safety that we bring. But that is a challenge for us. On the mechanical rigs, we’re top drives. The market there is that’s where the greatest change has occurred.

We were obtaining rates of kind of 20 to 21.5 before and that’s come down to more in the 18 to 19.5 range, which is a little bit – it’s kind of reset to where it probably always should have been, which historically for FTR rigs and mechanical rigs, their top drive usually brings about a $3,000 a day margin increase. We were actually getting $5,000 to $6,000 a day margin increase on those mechanical rigs. It was just a bit of an anomaly, but that’s kind of come to an end, but it’s – that’s kind of where the rates are out there right now.

John Keller – Stephens Inc

Perfect. I appreciate the detail on that. And then I’d like to just get your thoughts out there more broadly as it pertains to the mechanical fleet. Is that – you noted that the horizontal, the shift on horizontal by your customer base is sort of cycling in maybe higher spec, maybe some AC rigs is what I would presume. How does that play into your thinking about the mechanical rig fleet as it goes forward and potentially how does that position you from a competitive standpoint in West Texas if that indeed is the trend going forward.

Stacy Locke

Well, we aren’t – we aren’t building new mechanical rigs, really nobody is anywhere. And so, if West Texas slows, it’s a liability. The West Texas vertical markets slows because natural gas prices, the recovery there has been pushed out due to the mild winter at least a year, if not longer. So I think that we were kind of hoping that by 2014, gas prices would be looking – looking more favorable. And that – that would put some competitive day rate pressure on the West Texas mechanical rigs and therefore the whole mechanical fleets, which start going up in rates.

Now the gas prices is kind of still out of the picture for the medium-term. You’re left with the oil market and at West Texas a lot of – like I said, a lot of our players, customers, clients have chosen to chase the horizontal market more. So, we’re recalibrating there, but I would say it puts the West Texas mechanical – really mechanical rigs in general in a riskier category. Because there are fewer places for vertical drilling.

Now, that’s what it appears right now. I don’t know if by the summer there will be quite a bit more vertical, oil prices are very good if they stay up 95, 100 whether there will be more activity picking up through the course of the year in the vertical side, I don’t know. But I do know that we don’t expect to be able to take any rigs back to gas markets. So, it’s a little bit of a risk there and so we’ll always be evaluating. We were careful not to put a lot of money into these rigs.

We fixed them to take them to West Texas. There is a chance – we retired nine rigs. There is a handful of rigs that we didn’t deploy out in West Texas and didn’t upgrade and refurbished to deploy there. So, we’ll be evaluating those rigs through the course of the year.

And stacked rigs, we just don’t want to have them sitting on the grass for a long, long period of time. We’d rather think about doing something else with them. But that’s something we’ll just have to evaluate. But clearly our long-term direction is going to be continuing to add state-of-the-art new build rigs like we put out this year and last year. That’s really the future. It’s a shale play. So, that’s the direction we will be going. But those mechanical rigs when they are working, they earn a very good return on investment. So, we can get the utilization back up where we were. You’re a lot better off owning them than you are selling them for example, because they will generate one – three good mechanical rigs will earn almost the same margin as a new build.

John Keller – Stephens Inc

Sure. It makes sense.

Stacy Locke

Maybe you keep it utilized.

John Keller – Stephens Inc

Yeah, absolutely. And then just one more quick one, if I could, just I wanted to get a little color on this. I was a little unclear. Your guidance for the Production Services business in the first quarter, is the lower sequential guidance really a function of seasonality or just kind of current market dynamics relative to where we’ve been say in the fourth quarter?

Stacy Locke

It’s really a 100% seasonality. First quarter is always the worse, fourth, the second worse and then third, second and third are great quarters.

John Keller – Stephens Inc

So, is it fair to characterize that business is pretty stable both from an activity and pricing standpoint and really what we’re seeing is just kind as a low in activity and shorter daylight hours?

Stacy Locke

Right.

John Keller – Stephens Inc

Okay.

Stacy Locke

I think that – those businesses are very stable and we got very solid businesses in the right markets and our outlook for really the rest of this year and next year is positive.

John Keller – Stephens Inc

Perfect. I appreciate it, guys.

Stacy Locke

Okay.

Operator

Thank you. Our next question comes from the line of Daniel Burke with Johnson Rice. Please go ahead.

Daniel Burke – Johnson Rice

Good morning, guys.

Stacy Locke

Good morning.

Daniel Burke – Johnson Rice

Hey, Lorne. Just before I forget this one, is there just to true up the rig margin progression. Can you quantify the worker’s comp recovery in Q4?

Lorne Phillips

Yeah. That was – it was a $1 million roughly, which was, it was about 185 day impact on the margin per day.

Daniel Burke – Johnson Rice

Okay. That’s helpful. And then, Stacy, looking at West Texas, can you talk about your exposure rolling forward, you alluded, you got the nine rigs that are working off a contract, a handful of those are I guess actually maybe the majority continue to get paid for a bit. But I guess that means you got 14 still working, do you have the – may be the contract schedule on those or any way to identify what level of risk you feel like you’ve got on those 14 as the year advances?

Stacy Locke

Well, we have seven down now, and we have two more that we think will be down by that end of the first quarter and five of those within 9 rigs will be earning through June, July, August, they kind of staggered in there. Then we have a couple of those rigs that we – at this point feel like they’re going to go back to work as well. So we’re – one of the rigs, we have two – well actually we have three rigs that are stacked that have top drives. Two of those rigs we’re hopeful will be going back to work here. So, you have some coming down, some coming up. In the fleet that’s still working, we have one significant client – we have a number of clients, but we have one significant client in there, and it’s one of the very large publicly trading companies. And, we feel like based on our conversations with them that they plan to keep those rigs busy all year. In fact, they’re looking at one or more of these other rigs that are stacked to pick up.

So, we are still – we don’t think it’s a total meltdown, but we’d rather not have 70% utilization in that market. We’d like to get it back up closer to what we’ve been enjoying last couple of years. So, we’re just trying to sort all that out, but we’re – and it may take trying to find some new clients that our bread and butter has been the bigger guys with the massive programs, and we can start looking at other folks.

Daniel Burke – Johnson Rice

Yeah, that’s helpful. And, maybe just to append the last one. It’s called a question or two, but wireline had a rough Q3, but the message coming through today seems to be pretty optimistic. I think last quarter you’ve alluded to some customer mix changes going on there, you maybe just bring us up the speed on whether the improvement or the relative stability of wireline, how much of that is due to just broad base that market maintaining its strength, and how much of that is due to you guys really getting your arms around that business after a tough Q3?

Lorne Phillips

Daniel, this is Lorne, I think it is sum of both because in Q3 we did – I think we talked about – we had one customer that went to sliding sleeves and then we had another customer who just went in house, bought their own fleet and in the third quarter that hit us and we had to kind of redeploy those assets and put them to work. I think we were successful in doing that in the fourth quarter. So that contributed to a little better performance. But then there is some overall stability that Stacy talked about. So it’s a little of both.

Daniel Burke – Johnson Rice

Okay, guys. Thank you.

Lorne Phillips

You bet.

Operator

Thank you. Our next question comes from the line of Dave Wilson with Howard Weil. Please go ahead.

Dave Wilson – Howard Weil

Good morning gentlemen. Thanks for taking my questions. Stacy, I just want to get a better idea about the rigs that roll off contracts and whether or not they’re rolling into the spot market or getting re-contract. I think last quarter you mentioned that circa about three fourths of them would be re-contracted. I’m just trying to get a sense of how the day rates will soften over the remainder of the year, trying to get a difference between the spot rates and contracted rates?

Stacy Locke

Well, I’d say that as the contracts are rolling, the majority of them we are rolling forward on term again. It might be the median might be more six month term than one year term like we had last year, but we are still rolling the majority of them on to new existing term contracts. I guess the day rate delta that’s kind of what we’re factoring in our margin per day – do you have any – do you want to share any line on that Lorne.

Lorne Phillips

I think, well, when we renew down from a pricing perspective when we renew and then pricing rolls, it seems like it’s anywhere from kind of 500 to 1,500 depending on the rig. Stacy had talked about in the past that some of the – we’ve had 10 top drive mechanical rigs out there and those rigs are performing very well. They had been priced at good levels and so those are definitely renewing down compared to when you have SCR and AC rig stack, but it’s probably generally in that range, not in every case, some are flat or up for various reasons, but and then from a tenure perspective, it’s kind of a – it’s more of a six-month market, but we do have some of that renew longer than six months.

And we’re increasing some day rate contracts as well. So, we’re – there is a – so, you have a mix of – you got the one’s repricing, then you have some going up and I’m not – we’re not seeing 1,000 or 1,500 leaps, but well actually I would say $500, maybe to a $1,000 increases on some, and then you have the new build flaring in there, which you’re at substantially higher margin. So, that’s – but you kind of get the blend of all of that and that’s where we derive our guidance.

Dave Wilson – Howard Weil

Sure, okay. And then just as a kind of a follow on the rigs that are stacked or expected to be stacked, how many of those are – I guess, kind of your vertical only are, I guess, another way to ask, how many of those will be able to – are able to drill horizontally?

Stacy Locke

Well, three of them have – three of this current rigs that are stacked have top-drives on them and have been drilling horizontally in the past. Two of those are being considered by client right now to be picked up. So – and we would – right now we’re not planning to add anymore top drive unless we relocate one top drive from one rig to another, but we like to just keep the rigs that we have utilized as we don’t want to have additional allays of capital for those mechanical rigs. But – so that – I think we answered the question.

Dave Wilson – Howard Weil

Okay. And then one final one on the well service side. We’ve seen the demand uptick for the taller mast equipment and you guys responded by adding additional units. Do you think this trend of demand will continue and be more pervasive or is it just limited to a certain play or two out there?

Stacy Locke

Well the greatest demand for the taller mast has been in the Eagle Ford. I think that we could source additional units into that market and what we’ve done a number of times as we’ve rolled out these 116 foot tall mast, we’ve taken 104 foot mast out of that market and moved it to another market, for instance North Dakota where 104 foot mast works fine.

Dave Wilson – Howard Weil

Okay. Great. I’ll turn the call back over. Thanks for taking my questions guys.

Stacy Locke

Thank you.

Operator

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

Travis Bartlett – Simmons & Company

Hi, guys. Good morning.

Stacy Locke

Good morning.

Lorne Phillips

Good morning.

Travis Bartlett – Simmons & Company

It sounds like the well servicing business has been pretty favorable for you guys despite some seasonal slowness in Q4. Rates now have been above $600 per hour for the past two quarters and it sounds like they are still above $600 per day our – sorry per hour today. Are you seeing any relative weakness in certain areas or is it pretty strong across all areas?

And then secondly, how should we think about rates for the balance of 2013?

Stacy Locke

I would say rates are stable through at these levels, through the year possibly with some increase in the latter part of the year. I’d say all – not all markets generate the same rates, but they’re good. They’re good. We like to have a – we don’t want to have all of our units in a given market, we have too much concentration. So, we actually still deploy units to markets that might have an average hourly rate of under 500 an hour. But there is still good, strong, steady markets. So, we’ll have a blend of rate, pricing across different markets. And that will be how we continue our strategy just to kind of diversify the assets across a number of different good markets.

Travis Bartlett – Simmons & Company

Right. Are there any markets where you are seeing pricing declines or is it pretty stable across the different markets for well servicing?

Stacy Locke

Yeah, it’s fairly stable. I would say there is probably one market that we are evaluating that we might be better served by moving some of those units to a more favorable long-term market. But we’re constantly evaluating – in all of these businesses, we are constantly evaluating relative long-term market strength and we’ve moved – we make the call on that on a pretty regular basis in each business. And it’s not a lot of movement, but we probably move assets from one area to another, couple of few times a year in every business.

Travis Bartlett – Simmons & Company

Great, okay. And then my second and last question, I was curious on the Colombian rig contracts, on the six rigs that are under extension through March. Should we expect those rigs to be priced lower or should they be contracted at similar pricing compared with current levels?

Stacy Locke

I would say that we don’t really know yet. I would say the bias would be slightly lower, but we obviously will try to – we would, if we could keep our existing rates, we would lock it them for 10 years. So, we like to – we’re going to fight, hold them where they are and keep them as always we keep them, but there would be – there is always – it’s always pressure on them, but we don’t know the outcome yet, but I’d say it’s going to be close to the current rate or bias downward a little bit.

Travis Bartlett – Simmons & Company

Okay. Great. Well, thank you, all. I’ll turn it back.

Stacy Locke

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Trey Cowan with Clarkson Capital Markets. Please go ahead.

Trey Cowan – Clarkson Capital Markets

Good morning. Thank you for let me sneak in here.

Stacy Locke

You, bet.

Trey Cowan – Clarkson Capital Markets

I am looking at your Production Services. How much your business is offshore right now as part of the mix?

Stacy Locke

Our Production Services, coil tubing four of our 13 are in the offshore market, cased-hole, wireline, presently we have four cased-hole Skid units in the offshore market and we’ll be adding two more. That market is getting better. Now that offshore is settled out a little bit and we’re seeing improvements there in activity levels and pricing. So, we’re going to – we have made the decision going to add two additional cased-hole units and there were – it’s a real benefit for both of them to have the other, to have in coil and cased, they can cross sell their services pretty effectively.

Trey Cowan – Clarkson Capital Markets

Right. Very complementary. With that in mind, do you think the growth outlook for your offshore is somewhere to what we’re seeing in the Gulf of Mexico industry wide or little bit better, little bit worse, how do you think it shell?

Stacy Locke

Where we are – for 2013, we’re – other than the two-cased hole units and the one remaining well, served with 116 foot mast well servicing rig. we are not planning to add units to any market. We’ve had a lot of growth, and we are at the point where we like to build up a nice cash reserve, so we can make a meaningful reduction in our indebtedness, and so, we are just kind – we’ll have all the full-year effect of all the equipment that we’ve added through the course of the year impacting us in 2013, but we don’t really plan to add other than these couple of trailing – few trailing new build rigs and the two-cased hole wireline and the one well service, we are not playing to add units.

Trey Cowan – Clarkson Capital Markets

Got you. And, then back to the onshore site and the drilling side, actually started to be the dead horse here on the West Texas, but it sounds to me if I’m connecting the dots that for the rigs that will be on standby, the rolling to a new term in the future, looks three top drive units, and two of them go to work. It sounds like the Delta is about $3,000 on margin, that’s what we’re talking about here is, am I in the ballpark?

Stacy Locke

Well, I think you could say you are in that range going from say 18 to 21.5 – going down to 18 from 21.5 or 19 from 22, kind of that range is in the ballpark.

Trey Cowan – Clarkson Capital Markets

Okay. All right. Well, thanks a lot gentlemen, and congratulations on a great quarter.

Stacy Locke

Thank you.

Operator

Thank you. Our next question comes from the line of Brett Hendrickson with Nokomis Capital. Please ago ahead.

Brett Hendrickson – Nokomis Capital

Hey, Stacy and Lorne, how are you doing?

Stacy Locke

Fine.

Lorne Phillips

Good.

Brett Hendrickson – Nokomis Capital

So, I just – I want to get just a little bit of detail if you could on your restricted payments basket on the senior notes. I think the filings I saw just say that it’s a customary, kind of customary levels of restricted payments. Do you have any details for us on kind of how that calculation is done?

Stacy Locke

No, not with me, I don’t. It’s something we monitor all the covenants in our bonds and it’s not something that is an issue for us.

Brett Hendrickson – Nokomis Capital

No, no, I know it’s not right now. But – I just want – I’m curious by customary you mean it probably is for some percentage of net income or some percentage of free cash flow, you can allocate the things like dividends and share repurchases going forward, is that kind of how we mean by customary?

Stacy Locke

Well, I would need to have it in front of me to go through. I don’t – I can’t really recall it and I apologize for that. But it’s not something that those things you just mentioned the share repurchases as an example is something that we’re not contemplating right now, because we we’ve talked about reducing debt. So it’s not something that has come up as a discussion relative to our bonds.

Brett Hendrickson – Nokomis Capital

Yeah. I know it has, I was being a little more forward-looking, we are long-term holders and I guess that’s kind of the next question. I mean I thought was after a quarter or two of debt pay down, just talk to me just of a second about it, would that maybe make sense because we look at your discretionary free cash flow where we just take your maintenance CapEx and forget the $50 million or so debt pay down this year, if you’ve got some growth CapEx that’s benefiting the company.

So when we kind of calculate this quote-on-quote discretionary free cash flow yield it’s in the, after closing price where your stock traded yesterday, it’s in the mid to upper 20 free cash flow yield, if we add back the growth CapEx, which we think will be economically positive investments in crucial. So, we kind of wonder after the debts gets paid down a little bit in the free cash flow, not linearly, but generally continues to grow, why it wouldn’t make sense to buyback from stock at that kind of valuation?

Lorne Phillips

Well, I think – no, it is something that we need to evaluate and – but, as you said in the future as we get further down this path and so – and we will evaluate it. But as we look at it right now the – obviously we could do something with the bonds earlier than March 2014, but they are callable in March 2014, and as Stacy said earlier, we would like to be able to make a sizeable dent in the bonds when we do something. So, it looks like 2014 event right now and after we have dealt with that, we would certainly look at what you’re talking about and it is a good point and it is something we should be looking at and we do.

Brett Hendrickson – Nokomis Capital

Okay. And in my mind, I guess I had it calibrated it more like a quarter or two, you get ways into this big free cash flow you guys are going to have that you’ve been waiting for a long time, and that you would be prepared to do. But it sounds like as part of that, maybe you want to – you wouldn’t want to do that before you refinance that debt because all other things equal buying back stock would hurt you as the rate you get on the new debt, if you call in current markets?

Lorne Phillips

We have talked about that we would like to reduce the overall debt level and not have the same level of bonds outstanding, and I hope I’m understanding your question, but – so, when Stacy was talking about making a meaningful impact on the debt, it was to pay down our revolver and then have the ability to not only do something to hopefully improve the rate on the debt we have outstanding, but reduce the total amount that’s outstanding as well and that will take some quarters of cash flow generation. And so it could be an early 2014 event, it could be a late 2014 event, but that’s in our minds that’s the concept right now.

Brett Hendrickson – Nokomis Capital

Yeah, I got you. I think I’ve been on the same page and understood what you guys have been saying for multiple quarters, but I guess that’s due to the definition of the meaningful debt pay down might have been not different in my mind. So that’s fine we can talk more offline and...

Stacy Locke

Yeah. We will be happy to do it. We’d like to reduce debt, high-yield debt by half if we could.

Brett Hendrickson – Nokomis Capital

Yeah, I know it’s – I know it’s expensive debt, especially relative to what the company could probably issue today, I mean, even with the make hole penalty you might be able to cut into it and then refinance the portion of it and walk out of the whole deal with less debt and a lower rate.

Stacy Locke

You’re exactly right.

Brett Hendrickson – Nokomis Capital

It’d rather be a double whammy on your interest payment going down.

Stacy Locke

That’s what we are after.

Brett Hendrickson – Nokomis Capital

Okay, all right. We’ll talk more offline. Thanks guys.

Stacy Locke

Good. I appreciate your question. Okay.

Operator

Thank you. And at this time, I’m not showing any further questions. I’d now like to turn the call back to Mr. Locke. Please go ahead.

Stacy Locke

All right. Well, thank you everybody for the participation and we look forward to visiting on the next quarterly call. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference call for today. If you’d like to listen to the replay of today’s call, you may do so by dialing 303-590-3030, using the access code 458-9184. Thank you for your participation. You may now disconnect.

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: Pioneer Energy Services' CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts