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Executives

Geoff Lloyd – IR

Mark Siegel – Chairman

Doug Wall – President & CEO

John Vollmer – SVP of Corporate Development, CFO and Treasurer

Analysts

Dan Boyd – Goldman Sachs

Geoff Kieburtz – Weeden & Co.

Mike Urban – Deutsche Bank

Arun Jayaram – Credit Suisse

Pierre Conner – Capital One Southcoast

Mike Drickamer – Morgan Keegan

Kurt Hallead – RBC Capital Markets

Waqar Syed

Marshall Adkins – Raymond James

Egar Levy [ph] – Morgan Stanley

Patterson-UTI Energy, Inc. (PTEN) Q1 2009 Earnings Call Transcript April 30, 2009 10:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Patterson-UTI Energy First Quarter 2009 Earnings Conference Call. My name is Onika [ph] and I will be your operator for today. At this time all participants are in listen-only mode. We will have a question-and-answer session towards the end of the conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

At this time, I would now like to turn the call over to Geoff Lloyd on behalf of Patterson-UTI Energy. Please proceed.

Geoff Lloyd

Thank you very much. Good morning and on behalf of Patterson-UTI Energy I'd like to welcome all of you to today's conference call to discuss results of the three months ended March 31, 2009.

Participating in today's call will be Mark Siegel, Chairman, Doug Wall, President and Chief Executive Officer, and John Vollmer, Chief Financial Officer.

Again, just a quick reminder that statements made in this conference call which state the company's and management's intentions, beliefs, expectations, predictions for the future are forward-looking statements. It's important to note that actual results could differ materially from those discussed in such forward-looking statements. Important factors that could cause actual results to differ materially include but are not limited to, deterioration in the global economic environment, declines in oil and natural gas prices that could adversely affect demand for the company's services and their associated effect on day rates, rig utilization and planned capital expenditures, excess availability of land drilling rigs including as a result of the reactivation or construction of new land drilling rigs, adverse industry conditions, difficulty in integrating acquisitions, demand for oil and natural gas, shortages of rig equipment and ability to retain management and field personnel.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's SEC filings, which may be obtained by contacting the company or the SEC. These filings are also available through the company's Web site and through the SEC's Edgar system. The company undertakes no obligation to publicly update or revise any forward-looking statements. Now, it's my pleasure to turn the call over to Mark Siegel for some opening remarks. Mark?

Mark Siegel

Thank you. Good morning and welcome to Patterson-UTI's conference call for first quarter 2009. I trust by now that all of you have had an opportunity to read our earnings release, which was issued earlier this morning prior to the opening of the market.

Our plan this morning is to take a few minutes to review the results for the three months ended March 31, 2009 and to indicate some of the financial highlights from the just completed quarter. I will then turn the call over to Doug Wall, Patterson-UTI's President and CEO, who will make some brief comments on the individual business units. After Doug's comments on the quarter, I will make a few comments on the market outlook. As always, we will be pleased to take your questions following these prepared remarks.

To summarize, net income for the three month period total $16.2 million or $0.11 per share compared to $77.4 million or $0.50 per share for the three months ended March 31, 2008.

Revenues for the quarter were $296 million compared to $505 million for the first quarter of 2008, a decline of 41%. As you have seen in our press release, our earnings this quarter were impacted by, number one, the significant drop-off in the number of rigs running in both the U.S. and Canada, and number two, a decline in the number of traditional jobs in our pressure pumping business in the Appalachians, combined with fierce price competition in that marketplace.

In addition to the severe drop in market activity, our quarter was also impacted by, number one, on the positive side, $6.6 million in early termination payments from term contracts. Number two, offsetting that, an impairment charge of $2.5 million of our E&P assets and a $4 million provision for bad debts.

All of our business units continue to decline during the quarter and we are now witnessing land rig activity at levels we have not seen since the early 2000s. We have undertaken numerous steps to mitigate the impact of this decline.

EBITDA for the quarter was $96 million and the company's balance sheet remains very strong. I am pleased to say that we ended the quarter with $321 million in networking capital including $192 million in cash.

Capital expenditures for the quarter were $90 million, primarily directed towards the previously announced delivery of new rigs

I would now like to turn the call over to Doug, who will discuss our operations for the quarter.

Doug Wall

Thank you, Mark. Let me start this morning with the drilling company. For the quarter ended March 31st 2009, the company had an average of 127 drilling rigs operating, including 116 in the U.S. and 11 in Canada. This compares to an average of 252 drilling rigs operating including 239 in the U.S. and 13 in Canada for the fourth quarter. As you can see, this was a very dramatic drop-off of 50% from quarter to quarter.

Average revenues for operating day during the first quarter were $19,670 compared to $20,210 in the fourth quarter 2008, a drop of $540 per day or approximately 2.7%. Average direct costs per operating day were $11,010 for the first quarter compared to $11,210 for the fourth quarter.

In March, we instituted a rollback of field wages which will amount to approximately $500 per day savings, but of course we did not see the full benefit of this rollback in the just completed quarter.

As you may recall, our activity levels in the U.S. peaked in mid October, with account of 285 rigs. Since that time, we have witnessed perhaps the steepest and quickest decline we have ever seen.

Our recent U.S. average monthly rig counts have been as follows. October, 270, November, 247, December, 201, January, 147, February, 116, and March, 87. Our current U.S. rig count is 62 rigs. Although the rig count has continued to fall modestly in April, the rate of decline has certainly slowed during the last few weeks. For the second quarter, we expect our average U.S. rig count to be approximately 60 rigs, and the Canadian rig count to average one.

Looking forward, we don't see any great impetus for a surge in Canadian activity even after road bans from winter break-up are lifted. We expect the Canadian market to remain very slow for the remainder of 2009.

This decline of some 200 rigs in a six month period has been unprecedented for our company. As you can imagine, we have been very busy properly stacking rigs and right-sizing the organization. These lower utilization rates have not been the only problem we have faced. As could be expected with a substantial drop in industry utilization, pricing pressure in the spot market and I should say what little spot market there is, has also been very severe.

Over the past five months or six months, customers have cut back a substantial portion of their drilling programs. Were it not for term contracts in our industry, we believe the rig count would be lower than it is today.

Patterson-UTI's comparative lack of long-term contract has certainly hurt our market share, particularly early on in this downturn. Geographically, no segment of the market has remained unscathed, although plays like Haynesville and the Marcellus have held up better than most. This is partially due to the impact of new build rigs working in these markets under term contracts. All our regions and all sizes of rigs have been impacted. Some of our best performing rigs are idle today.

In the first quarter, we averaged 49 rigs working under term contracts, including 11 rigs which were earnings standby revenues. We expect that rigs working under long-term contracts will average 33 rigs in the second quarter and 30 rigs in both the third and fourth quarters of this year. In aggregate we are seeing the impact of some new rigs under contract coming into service, while other rigs will be coming off contract during the year. In 2010, we expect to have an average of 28 rigs working under long-term contracts and in 2011, 21 rigs.

Couple further comments on our 2009 new build program. We delivered four new rigs to the marketplace in Q1. Two of our Apex 1500s that are currently working in the Haynesville play, and another two Apex walking rigs that were moved to the Appalachians.

We're pleased to say that this is the first time our walking rig technology has been tried in the Marcellus and to-date the rigs have performed very, very well. As you know, this technology has been highly successful in pad type drilling and was pioneered in the Rockies. This technology is now being successfully deployed in the Barnett and now the Marcellus shale. We believe it will become the technology of choice in many other shale and resource plays in the future. Patterson-UTI has a market leading position with this technology.

Also important to note the first of our new Apex 1,000 rigs designed specifically for the Marcellus is scheduled for delivery this quarter. This AC technology rig is fast moving and has a very small footprint and is ideally suited for the Marcellus.

Turning to our pressure pumping business, our results for the first quarter were hampered by low commodity prices, fierce price competition, and project delays due to poor location conditions.

Revenue for the quarter was $38.1 million, down 33% sequentially. Our margins declined as a result of reduced pricing and lower activity levels over which to absorb our fixed costs. After completing our first five horizontal fracs during the previous quarter, we completed an additional four horizontal fracs during the first quarter. A number of other horizontal fracs that we had on our schedule have been delayed until the roads or locations dry up.

Even with the slow first quarter, we are encouraged by our prospects in the deeper Marcellus and Huron shale plays. Although the pace has been slower than expected, we do believe we will see a pickup for the balance of the year.

Low commodity prices have caused retrenchment in the traditional business in this market and without a recovery in gas prices; this traditional business activity will likely remain low.

We spent $21.8 million on new capital equipment during the quarter and are presently in the process of taking delivery of our second complete Quintuplex fracs spread. As you know, Universal has been a market leader in the Appalachians in pumping these large horizontals fracs. With our new equipment, we feel we're very well positioned to service this growing market.

Turning to the drilling fluid segment for a moment. The dramatic decline in the rig count has obviously hampered our fluids operation as well. Revenues for the quarter were down almost 27% sequentially and down 15% from the same quarter a year ago. Lack of activity in the Gulf of Mexico and the dramatic decline in the number of wells being drilled on land will continue to negatively impact both our revenues and earnings for at least the remainder of 2009.

Our E&P business had an operating loss of $3.6 million for the quarter as a result of lower commodity prices, higher depletion, and as Mark said earlier, the noncash impairment charge of $2.5 million.

Before I turn the call back to Mark, let me give you a brief glimpse of some of the things that we have done to address the weaker demand for oil field services and our own cost structure. We are consolidating facilities and reducing headcount throughout the company. We are scrubbing the supply chain for cost savings. We are sizing our organization to meet what we feel are the requirements of the current market. At the same time, we are very determined to try and maintain our ability to react quickly to the next market upturn. This has been a very difficult balancing act. These cuts to our valued employees have been extremely painful, but are very necessary to adjust to the current market conditions.

We have also taken a major cut from our original 2009 capital budget. Virtually all discretionary capital has been put on hold. We now estimate our capital spend for the year to be in the area of $500 million, almost two-thirds of which relates to the new rigs we are building.

With that I'll now turn the call back to Mark for some concluding remarks.

Mark Siegel

Thanks, Doug. At this time, it is of course difficult if not impossible to assess whether we are at a bottom. We can say that during the last few weeks, our rig count has remained relatively steady. We are hearing other industry leaders say that they think we are at a bottom and we see some signs from customers that some additional demand for rigs may arise late in 2009.

Although we can't say with certainty that this is a bottom, we believe that the current natural gas production is not sustainable at this level of drilling activity. Almost 1,000 less rigs operating. Production we think will inevitably decline due to depletion, and we are mindful of the increasingly rapid depletion rates in natural gas basins such as the Barnett.

As to our operations, we think the steps we are taking which Doug outlined will make our company leaner and stronger for the long-term. As Doug said, a fundamental strength of our business is the very high degree to which operating costs are variable.

Patterson-UTI has a track record in past industry cycles of being able to scale the business to the current levels of activity whether expanding or contracting. During the current contraction period, we are reducing our costs and streamlining our business while maintaining the capability to run a large number of rigs. This streamlined structure, along with our large fleet of new and recently upgraded equipment makes us confident that we will greatly benefit from the next upturn in drilling.

In this difficult period for the oil services industry, we believe we are in a strong position. At March 31, 2009, we had no debt. $192 million in cash and a huge array of unencumbered hard assets. These hard assets include significantly upgraded fleets of drilling rigs and pressure pumping equipment. In addition, we have substantial other drilling and pressure pumping assets as well as the assets in our E&P and drilling fluids businesses.

With respect to our financial condition, we're also pleased to report that we've entered a new revolving line of credit with our banks. Our new facility is for $220 million and expires on January 31, 2012.

Given the current difficulties in the credit markets, we are very pleased to be able to negotiate a near three-year deal. One of the very few that we have seen that is longer than one year, and again, a testament to the strength of our company.

I'm pleased to also point that the company declared quarterly cash dividend on its common stock of $0.05 per share to be paid on June 30, 2009, to holders of record as of June 15, 2009.

Before we open the call to questions, we would like to take the opportunity to express our sincere appreciation to the employees in each of our business units for their dedication and hard work. In tough times, inevitably, people work harder. Our people are second to none and we wish to thank them for helping us to weather this storm. At this point, I'd like to open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Dan Boyd with Goldman Sachs. Please proceed.

Dan Boyd – Goldman Sachs

Hi, thank you. I'd like to talk a little bit about the costs. You have a lot of moving parts there; you lowered wages which should roll through at $500 a day. I'm sure there are other cost savings that also roll through. But at the same time, I would expect the rigs that you currently have working just have higher costs than average for your fleet. So can you give us just with that 60 rigs working, what are your expectations for what we could see cost do in the second quarter?

John Vollmer

I think you're speaking to the drilling business specifically.

Dan Boyd – Goldman Sachs

Yes. Exactly.

John Vollmer

Our operations people have worked hard in the last six months to scale the company back consistent with rig count. As Doug indicated while maintaining our ability to support the great number of rigs I don't see our costs per day being significantly different than what you saw in the first quarter. I think we've successfully scaled the organization where we can stay at similar per day costs.

Dan Boyd – Goldman Sachs

Okay. And then how should we think about on the margin side then and that would flow right through the day rate because the rigs you are working I would expect to be working at higher day rates than average. At the same time, you're experiencing significant pressure on the spot market. So if you could help us understand the spot market margins today and then also what your expectations would be for margins next quarter. I would assume they're down. About what type of magnitude would you expect?

John Vollmer

I think I can actually make it simpler for you. I think from a margin per day perspective, in the second quarter, it will be very similar to what you saw in the first quarter. Not significantly different.

Dan Boyd – Goldman Sachs

That is in a mix issue, correct?

John Vollmer

Yes. The rig counts gone down, you have more rigs on long-term contract, and we did three months or six months ago and those rates are under long-term contracts, therefore, they're not changing. You do have some long-term contracts from a couple of years ago rolling off and new builds coming on. But overall, we think the margins will stay very similar.

Dan Boyd – Goldman Sachs

That's very helpful. And if you could just add any color to where spot market margins are currently.

John Vollmer

It's going to vary by rig. As mentioned there's rate pressure out there, and there has been declines in the spot in the margins for spot rate rigs. I prefer not to really give any more detail.

Doug Wall

Dan, this is Doug. There's been very little spot market available and I think what spot market available, it's very hard to generalize. It really depends by region, depends by your customer mix. So we tried to do an analysis of spot market and it really quite frankly is all over the map. So there's no real general conclusion we can give you about spot market rates and margins.

Dan Boyd – Goldman Sachs

How about this – it does sound like you probably have some high performance rigs that are currently idle by your comments? One of your competitors suggested that margins on high performing rigs even in the spot market are still in the $5,000 to $6,000 range. Is that consistent with what you're seeing?

Doug Wall

In the spot market?

Dan Boyd – Goldman Sachs

Yes.

John Vollmer

I think it depends again on the rig and the location. I mean fundamentally that's the issue which is that if you have the particular rig and the particular location that the customer wants and they're willing to pay for it, by the same token there is obviously an oversupply of available rigs. It's so – it's a situation which – it so – as Doug said, it so – and I hate to use this pun, but I will, it's so spotty that it's hard to give you a good indication of what in fact is a trend across the whole spot market.

Dan Boyd – Goldman Sachs

Okay. So it does sound like then that's not a trend and those might just be one-off situations that that particular company had.

Doug Wall

And I would actually say each company probably has their own one-off situations. I would actually think we have some of those too. But they're one – to try to say, okay, there's a trend here that you can generalize on I think it would be problematic. And I think what we're trying to say to you is it's – there's not a lot of markers for the data so that you can't say, oh, there's a nice array of data that I can look at and say there's a clearer line across the date which gives me this number. Number two, each one of the data points is idiosyncratic and therefore, given those two things the best we can say is what John said, which is the expectation that margin in the second quarter is pretty consistent with margin in the first quarter.

Dan Boyd – Goldman Sachs

Okay. Thanks. I appreciate all the help. Turn it back over.

Operator

Your next question comes from the line of Geoff Kieburtz with Weeden & Co. Please proceed.

Geoff Kieburtz – Weeden & Co.

Good morning. I was listening to my name being pronounced.

Doug Wall

I said that deliberately to try to make it clear that we knew who you are.

Geoff Kieburtz – Weeden & Co.

Okay. In terms of understanding the margin that you posted in the first quarter how – were there rigs associated with the early termination or was that revenue that was recognized with no rig count associated with it?

John Vollmer

Geoff, to the extent it's – was a buyout of a term contract, there's no days associated with that. Just revenue coming through, no days. For the situation where you have rigs running on standby, that's a scenario where a customer says we want you to stack the rig for now. You don't need to retain the crew. We may call you back. But for now, you're on hold in terms of drilling and that scenario, it would count as a rig day. And you'd have the associated standby revenue in the revenue number. That clarify for you?

Geoff Kieburtz – Weeden & Co.

Which doesn't have any costs associated with it so you're basically getting standby revenue that's roughly equivalent to the margin that you would have had if it had been active?

John Vollmer

Correct. Yes.

Geoff Kieburtz – Weeden & Co.

And are you – I mean, what's the kind of the activity in terms of early termination of contracts? Is that over or is that still continuing in your dialogue with customers?

Doug Wall

Geoff, I would say it's still continuing, but I think the pace has abated somewhat. We still have conversations every day, every week with certain customers. But I think for the most part we've had those discussions with virtually every company that we have a term contract with. So I won't say it's over, but I think certainly we've seen the majority of the discussions have been at this point I think we've come to some agreement between the two companies.

Geoff Kieburtz – Weeden & Co.

Okay. Am I right in thinking that the revenue associated with those early terminations is boosting the calculation of average margin per day in the quarter? Is that correct?

John Vollmer

From a revenue per day perspective I think it actually doesn't because you got the standby revenues with days that are lower than normal and you've got revenues from other contracts that have no days and my take was it had, in effect, no impact on revenue per day. On a cost per day side, there's no costs associated with those. So that probably did help the costs a little bit for that quarter. But I would also point out that your rig count basically cut in half twice. From fourth quarter to first quarter, you roughly cut in half. Into the current level you cut in half. And our operating people in my opinion did an extraordinary job of adjusting our cost structure to that. But there's still a delay from the moment you stack a rig until the costs are gone. As Doug suggested, we're – rig count similar to where we're today for the second quarter, it would seem we'll actually see some cost benefit from, from that lack of further decline.

Geoff Kieburtz – Weeden & Co.

Okay. So your cost benefits start to flow through in the second quarter offsetting the negative effect of losing that, that early termination revenue.

Doug Wall

Well said. It's– a number – Geoff, I would just add that it's a number of factors going in several directions. And that John's comment and my comments about margin were meant to sort of take an aggregation of all of those different – some facts going this way, some facts going the other way. But you're correct in pointing out two of them.

Geoff Kieburtz – Weeden & Co.

Okay. Alright. And then the outlook as you peer into the second half of the year, do you think margins can be sustained at the current level?

John Vollmer

Instant question. The vast majority of the rigs and the contribution from rigs is going to be coming from rigs under long-term contracts, the stable pricing, and if we are able to continue our success at controlling costs, then I don't think there's significant margin deterioration as the year goes on.

Geoff Kieburtz – Weeden & Co.

Okay. Alright. Can I ask – the increase in pressure pumping CapEx, can you give us any color on that? Where– it's a little bit out of sync with the revenue line. What's going on there?

Doug Wall

Geoff, virtually all of that is related to the second Quintuplex fracs spread that we wanted to get in position, for us to compete with the large horizontal fracs we see in the Marcellus. We took delivery of our first frac spread last year and made the commitment last Fall that we felt we needed another one to be able to handle the volume of work that we see coming there. So we made the commitment last Fall and felt that for the long range future in that business that we needed two of those to make us competitive in the marketplace.

Geoff Kieburtz – Weeden & Co.

Alright. Given the company's strong financial position and sort of dire outlook, is this an environment which you see an opportunity for further consolidation?

John Vollmer

I think that the way we see it, frankly, is that our company is fortunate to have the cash, the strong asset position, and the opportunity – and the situation in which many of our competitors for these assets are not as well situated as we are. So frankly, we think that our strong balance sheet plus the fact that we have I think such good handle on, on scaling our business and controlling our costs set us up we think for a particularly interesting potential opportunity set as we look forward. Frankly, there's a number of people sitting in the room who have lived through various ups and down cycles in the energy business and having done that, we understand that this kind of set of challenges provides us unique set of opportunities. And so yes, we're very interested in looking at what the opportunities are.

Geoff Kieburtz – Weeden & Co.

Great. Thank you.

Operator

Your next question comes from the line of Mike Urban with Deutsche Bank. Please proceed.

Mike Urban – Deutsche Bank

Thanks. Good morning.

Doug Wall

Good morning, Mike.

Mike Urban – Deutsche Bank

You'd mentioned some glimmers of hope out there, some potential opportunities. I realize nobody's going to be committing to anything at this point. I was wondering if you could elaborate on that, or is it inquiries out there, anything formal, or just more discussions about longer term needs from your customers?

Doug Wall

I think, Mike, it's fairly informal. But I would say that the conversations that we're having with our customers today are – are slightly different than we've had in the last three, four months. It's moved from, gee, please don't call me anymore because we're getting rid of rigs, to some glimmers that people realize that with the current commodity prices, they still have some work to do in various fields. So we have seen a slight increase in the number of bids that our guys are getting in. Some of it I think is just people kicking tires to see where the market is for pricing. But we are starting to and realize that people will have to continue to drill some wells, whether it's lease expiries or certain situations that they're in. So I think some of it is also a seasonal thing. Typically, we always see a ramp-up in business in various markets coming after the first quarter.

Mike Urban – Deutsche Bank

Got you. Okay. And then just wanted to make sure I heard you right in your comments on the pressure-pumping business. Did you say that the business as a whole, you expect to improve from here, and if so would that be the conventional business kind of remaining weak if not further declined and then that's offset by the deeper stuff, the Marcellus and whatnot?

John Vollmer

Mike, I think there's a short-term perspective and a longer term perspective. Short term are the low commodity prices. I think that the second quarter is going to be similar to the first. There's a longer term aspect also. The business is growing in terms of large, horizontal fracs, and I think Doug was speaking to the opportunities there as we look out farther. You want to add to that, Doug?

Doug Wall

No, I think that's true. I think there are some offsets there. I think the traditional business, we think is probably going to remain relatively weak as long as we've got commodity prices in the range they're in today. How quickly that gets offset by the ramp-up, I think, in the Marcellus horizontal business as I mentioned before, it's been a little slower than we thought. But we haven't talked to one customer that still isn't very encouraged by what they're doing there. And we think long term that part of the markets got a very bright future.

Mike Urban – Deutsche Bank

That makes sense some. Again, sticking with the short-term, just given that activity levels are much lower, would Q2 actually be down, or do you get a seasonal pickup, hence your comments about that business being relatively flat?

Doug Wall

Well, we think it's very similar. I mean, unfortunately, there they have a little bit of what we would call breakup. So we get some weather-related issues in April. Depending how quickly the road locations get back to being high and dry, really depends whether we get back working in May or June. And if it's June it's – we're going to see that activity level as being down.

Mike Urban – Deutsche Bank

Got you. And then similar kind of near-term question on the fluids business. Again, given activity levels, the exit rate much lower than the average. Would you expect that to be down sequentially?

John Vollmer

I think we'd expect it to be similar to the first quarter. Maybe just a little bit better.

Mike Urban – Deutsche Bank

A little better. Okay.

John Vollmer

So not – not significantly.

Mike Urban – Deutsche Bank

Okay. Great. Thank you.

Doug Wall

Thanks, Mike.

Operator

Your next question comes from the line of Arun Jayaram with Credit Suisse. Please proceed.

Arun Jayaram – Credit Suisse

Hey, guys. A pretty nice build on the cash line item. John, can you comment on how much of that you got from working capital improvement, and how much you think there is more to go in terms of 2009?

John Vollmer

Well, always an interesting question with the quick decline in rig count, obviously receivables have been coming down in the payables. And a lot of the cash build was associated therewith. With where the business is today I think we continue to get a little bit more out of working capital. As we collect receivables for this lower level rig count. Also, we're realistically not going to be paying any cash taxes this year, which has also helped with the cash line.

Arun Jayaram – Credit Suisse

Okay. Second question is in terms of the daily rig costs. You're going to have some stacking costs and things like that. Do you think you can hold those at current levels, or do you think you see some increases based on them – these other types of stacking costs, et cetera?

Doug Wall

Let me comment on the stacking cost. I think it's important to note that we've stacked a lot of rigs right from October to really to now. And you're right in that there are some incremental costs when you stack those rigs and put them away properly. And as you've noticed, with those costs have been included in the numbers we have given you on the average cost per operating day. So from here on in, I expect that we'll actually see some improvement, because we won't be incurring as much of those costs as we have in the last six months. John, do you want to add anything to that?

John Vollmer

Yes I agree. I think with the rollback in wages, with the little bit of help we didn't get in the quarter, you've got some stacking costs. I think costs per day going back to our earlier comment are going to be similar in the second quarter to what we saw in the first when you take all these factors together. And we're going to endeavor to control our costs and not to allow costs per day to go up. And potentially even to – as the year goes on, maybe we can get a little savings there. But overall, we think they're going to be just similar.

Arun Jayaram – Credit Suisse

Okay. And final comment. As you talked a little bit, Doug, about market share, I think historically you guys have run 12%, 14%, 15% share, and you're quite a bit less than that. How do you put that in the context and what are your thoughts – let's just say that I'm making this number up, but let's just say longer term that the rig count is normalized in a 1,200 to 1,300 rig kind of number, most of that being onshore, what kind of rig count do you think you could operate under that kind of scenario?

Doug Wall

Well, Arun, as you know, I think we got hurt disproportionately on the way down because of our – at least comparative lack of term contracts. We think that does start to level out over time. And we think going forward that with – with the changes we've made to the scalability of our business, the quality equipment that we've got and then how competitive we are in all these different markets that we will get back to our fair share of the market when we think the thing settles out.

Arun Jayaram – Credit Suisse

Okay. Fair enough. And just one – actually just a clarification on the press release. You have 17 more Apex rigs which you're constructing. Are those in the term contracts that you cited in the press release, as well some the –

Doug Wall

Yes. They are. Yes, they are.

Arun Jayaram – Credit Suisse

Okay. Thanks a lot.

Operator

Your next question comes from the line of Marshall Adkins with Raymond James. Please proceed. Your next question comes from the line of Pierre Conner from Capital One Southcoast. Please proceed.

Pierre Conner – Capital One Southcoast

Good morning, everybody. I wanted to check on Arun's question about the APEX rigs, then with your comment earlier, Doug. You don't expect further cancellation revenues, will all those APEX, will they be going back to work, will they potentially be in discussions out going to some of the standby account?

Doug Wall

We believe at the current time that they will all go to work. We have had some conversations with some customers about either delaying them or moving them to a different market from what they were originally intended for. But as of today, we believe that the revenue associated with those term contracts will be pretty much as per what we expected initially. There's some moving piece there, but we don't see it being any substantial change to it.

Pierre Conner – Capital One Southcoast

Okay. Alright. Fine. And then, Doug, on a geographic area that you mentioned a little bit and you did talk about the Marcellus, you have a good position in the Haynesville. That's one of the areas that could potentially continue to grow. Can you give us what your discussions are with customers there in sort of the next couple of quarters? Where would you expect your count to do there?

Doug Wall

Well, I guess the way I would answer that is most of the new equipment that we are building and will come out in 2009 is going to those two markets.

Pierre Conner – Capital One Southcoast

Okay. So those would be the two growth areas. And then I mean (inaudible) half of that's going to Haynesville?

Doug Wall

Yes. It's pretty close to half and half. We believe that about half of those new rigs will end up there, half of them probably be up in the Marcellus.

Pierre Conner – Capital One Southcoast

Okay. Great. Alright. You got the rest of it. Thank you very much.

Operator

Your next question comes from the line of Mike Drickamer with Morgan Keegan. Please proceed.

Mike Drickamer – Morgan Keegan

Hi, good morning, guys.

Doug Wall

Good morning, Mike.

Mike Drickamer – Morgan Keegan

Mark, when you're talking about the opportunity that you guys see ahead of you here, I imagine you have to have some kind of wish list going forward here. Can you talk about what's on that wish list as far as perhaps is it additional rigs? Is it certain types of rigs? Is it additional product lines or anything?

Mark Siegel

The best thing I can say to that is probably we would be willing to look at assets of all kinds that you just described without being much more specific than that. Frankly, I don't want to box us into a particular set of assets that are attractive and they exclude another set of assets. I think that doesn't do us as much good as I think we can do by being prudent buyers of things that come along at attractive prices that are very attractive assets for our company.

Mike Drickamer – Morgan Keegan

Okay. Those are my questions, guys. Thanks a lot.

Operator

Your next question comes from the line of Kurt Hallead with RBC Capital Markets. Please proceed.

Kurt Hallead – RBC Capital Markets

Hey, good morning.

Doug Wall

Good morning.

Kurt Hallead – RBC Capital Markets

Just want to clarify one thing, John. Just to make sure I fully understand. So you think as the year progresses here, the cash margins will remain fairly constant? Did I understand that correctly?

John Vollmer

Well, I can't tell you we have perfect visibility. We know we have rigs coming out under term contracts. And I think – I know that the trend from new ones coming on and old ones going off actually slightly increases margins. So the wild card is what is the pricing for spot rate rigs. And I think my comment was that I didn't think margins decrease significantly. But really the spot rate rigs will ultimately determine what that is. But we have a fair number of rigs on term contract that are producing reasonable margins.

Kurt Hallead – RBC Capital Markets

Okay. That was it. Thanks.

Operator

Your next question comes from the line of Waqar Syed. Please proceed, sir.

Waqar Syed

This is Waqar Syed. Good morning. My question relates to your new build rig program. How many of your rigs by the end of the year will have the ability frequency driver AC systems?

Doug Wall

I'm going to have – I won't get this number exactly right. But by the end of the year, it should be close to eight. Could be in the range of eight to ten.

Waqar Syed

Eight to ten, okay. That's fair enough. And secondly, in terms of pressure pumping in Appalachia, if you look at the rig count, the rig count actually has held up quite well year-over-year as well as sequentially. Yet your number of jobs has dropped quite a bit. Are you seeing fairly dramatic market share loss in that market or – because the margins are also have not really dropped that significantly. It's primarily the – the number of jobs that have dropped.

Doug Wall

Well, I think there's two things there, Waqar. It's one we've had a number of competitors have moved into the marketplace. So there's much more equipment there in that market than there was six months ago or a year ago. And consequently, pricing pressure has been far more fierce in that market than we've seen in a long time. But secondly, I think part of it is some of the way the – these wells are being drilled and developed. I mentioned here earlier we have moved our first two walking rigs up to that marketplace for a customer. And so what's happened there is we're drilling all six wells or eight wells on a pad before they're bringing in the completion work. So part of it is just in a way that they're actually handling their own processes. Some of it has just delayed some of the completion work. And I'll say the second factor is a lot of that traditional business has just been slowed down to a level that we haven't seen in quite some time.

Waqar Syed

Sure. But do you have any sense of what the market share change has been for you guys year-over-year or (inaudible)

Doug Wall

I really don't think it's – it's hard at this point. There's been such – this has all happened so quickly that we really don't have a number there for you.

Waqar Syed

Okay. And then do you expect any early termination revenues for the second quarter? From your early comment it seems no. But I just wanted to ask that.

Doug Wall

At the present time we would say, no.

Waqar Syed

Okay. Thank you very much.

Operator

Your next question comes from the line of Marshall Adkins with Raymond James. Please proceed.

Marshall Adkins – Raymond James

I made it this time. I just want to make sure that the spot price is going to be spotty, Mark. This only question I had left after Kieburtz asked them all. Actually couple of just quick ones, how many rigs are you realistically marketing right now?

Mark Siegel

Marshall, I don't know if I can give you an answer to that. As we said to you before, there's very little spot market work available. But one week you'll get three bids or four bids in west Texas. The next week you won't see any. So as these bids come up, we obviously have a lot of rigs available to market. But it's just the opportunity to put them to work has just been really few and far between.

Marshall Adkins – Raymond James

Right.

Mark Siegel

I guess my – my ultimate answer is all of the rigs that are down, we would like to be marketing them if we had willing customers.

Marshall Adkins – Raymond James

And you could bring them back fairly easy?

Mark Siegel

Yes.

Marshall Adkins – Raymond James

That gets me to kind of the corollary question here is, obviously the worse it gets this year the better it gets in '010 one would think. Let's say the rig count bounces back up to 1,200 rigs or 1,300 rigs, do you see any pricing power there or are we going to kind of – the margins kind of hold down at lower levels until we get back up to 80% plus utilization?

John Vollmer

Marshall, that's a real interesting question. And often people look at it and say got to get a certain rig count before this pricing pressure. What I would tell you is that all the drillers are doing what we've done, and I suspect they are because I don't think a driller has a choice but to cut their costs. That means that there's a lot of labor that kept the muscle, we've – we have our superintendents, we have our tool pushers. But there's a lot of labor that's left this industry. And the availability of a rig is driven by both the hard assets and the people that know how to run it correctly and safely. And so I think as the rig count goes to move significantly, I think pretty quickly customers are going to find that good rigs with good crews that run safe aren't going to be available. So I don't know if pricing pressure comes. I just don't think you can go up 300 rigs overnight is what I guess I'm trying to tell you.

Marshall Adkins – Raymond James

Okay, alright. That's helpful. Couple housekeeping items. Depreciation was down a little bit. Also you also had a pretty big other expense. Can you just give us clarity on what we should look for going forward there and what the other expense was?

John Vollmer

The other expense is provision for bad debt. Are you talking the $4 million?

Marshall Adkins – Raymond James

Yes.

John Vollmer

Yes. That's provision for bad debts. Things have come down, we have a handful of customers that have found themselves with some difficulties when the commodity price took the dip that it took in the last little bit here. We provide conservatively for those type situations. I don't have any visibility of that being similar in the second quarter, third quarter, or fourth quarter, but then again I guess we didn't see this. But receivables are down to a point where there's just – I don't see a high likelihood that you're going to see a similar number that area in the next quarter or two.

Marshall Adkins – Raymond James

Right. Might be negative but certainly not that magnitude.

John Vollmer

Right. That would be my estimation.

Marshall Adkins – Raymond James

And depreciation?

John Vollmer

Yes, depreciation wise, really what you've got is assets in this business get amortized from 5 years to 15 years, and we continue to end up with fully depreciated assets from acquisitions that were 5 years to 10 years ago. It might take us still the depreciation kind of quarter to quarter given the rigs we bring in out moves up some more toward $3 million a quarter as we're continuing to roll out new rigs this year.

Marshall Adkins – Raymond James

The walking rigs and stuff. Okay.

John Vollmer

Yes.

Marshall Adkins – Raymond James

Okay. Thanks, guys.

Operator

Your next question comes from the line of Egar Levy [ph] with Morgan Stanley. Please proceed.

Egar Levy – Morgan Stanley

Good morning.

Doug Wall

Good morning.

Egar Levy – Morgan Stanley

Given the decoupling we've seen in gas prices relative to oil, what kind of activity are you seeing in oil versus gas drilling?

Doug Wall

Well, I think at this point, I'm not sure we've seen any incremental business or seen the split between them although we get the sense that there's some people in west Texas looking at some oil plays today with oil being a little stronger. I guess around the $50 to $60 range. We think that has the potential for maybe putting some rigs back to work over the summer if those prices continue to firm up. So I think in some ways in the short-term, our prospects in some oil plays we could start to see that pickup before we see gas driven rigs pick up. At this point, I'm not sure we've really seen anything that would indicate that, that there's going to be a big rush for people looking for rigs that drilling for oil.

Egar Levy – Morgan Stanley

Great. And of the – the rigs you guys have idled right now, how many would you say are more suitable for oil drilling and would you be able to put a number of how many you would be able to put to work if oil prices remain (inaudible)?

Doug Wall

Well, it's really hard to break that down. Most of these rigs are obviously capable of drilling for both. But very specifically in certain markets like west Texas, some of them have been set up to drill in oil kind of basins. I guess you could probably look at maybe half of our rigs in west Texas, for example, might be very, very or highly useful for drilling oil wells. But they can drill both.

Egar Levy – Morgan Stanley

Great. Thanks. I'll turn it over.

Operator

At this time, there are no additional questions. I would now like to turn the call back over to Mr. Mark Siegel for closing remarks.

Mark Siegel

We would like to just thank our investors and thank all of the participants on this call for their participation and look forward to speaking with you at the end of the second quarter. Thanks, everybody.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.

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Source: Patterson-UTI Energy, Inc. Q1 2009 Earnings Call Transcript
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