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Union Drilling, Inc. (NASDAQ:UDRL)

Q1 2009 Earnings Call

May 01, 2009 10:00 AM ET

Executives

Ben Burnham - Investor Relations, Dennard Rupp Gray & Easterly, LLC

Christopher Strong - President and Chief Executive Officer

A.J. Verdecchia - Vice President, Chief Financial Officer and Treasurer

Analysts

Jeff Tillery - Tudor, Pickering & Holt

Steve Ferazani - Sidoti & Co.

Victor Marchon - RBC Capital Markets

Mark Brown - Pritchard Capital Partners, LLC

Operator

Welcome to the Union Drilling First Quarter 2009 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will open for questions. (Operator Instructions). This conference is being recorded today, Friday May 1st of 2009.

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

Ben Burnham

Thank you, Michaela and good morning, everyone. We appreciate you joining us for Union Drilling's conference call today to review first quarter 2009 results.

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

A recorded replay of today's call will be available until May 8th. Information for accessing the telephonic replay is in yesterday's press release. The replay will also be available via webcast by going to the company's website at www.uniondrilling.com.

Please note that information reported on this call, speaks only as of today, May 1, 2009 and therefore you are advised that time sensitive information may no longer be accurate at the time of any replay listening.

Also, statements made on this call that are not historical facts, including statements accompanied by words such as may, believe, anticipate, expect, estimate or similar words, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding Union Drilling's plans and performance.

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

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

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

Now, I'd like to turn the call over to Chris Strong, Union Drilling's President and Chief Executive Officer.

Christopher Strong

Thank you, Ben. Good morning, everyone and thank you for joining us today.

We had a tough first quarter as a result of the severe decline in the U.S. rig count. Revenues totaled 54.3 million and EBITDA came to 11.9 million. We reported a net loss of $271,000 or a loss of $0.01 per share during the quarter which included a non-cash rig impairment charge of $1.3 million. Much like the U.S. rig count, our fleet utilization began the quarter in better shape than it ended.

Average utilization for the fleet was 47.6% during Q1, down from 57.1% in the same period in 2008. Barge utilization rate came in at 40%.

During January, we repurchased approximately 300,000 shares to complete our 2 million share repurchase program that began in Q4. In total, we spent 10.5 million or an average $5.23 per share including commissions. Means our debt-to-cap ratio is only about 20% after funding the buyback and four additional rigs. We think that buying in almost 10% of the outstanding shares at these prices was a good decision.

Moving on to our rig fleet, three of our four new rigs have now been delivered The fourth is substantially complete but we still have a couple of weeks worth of the rig up work to do in our yards before it is taken to its first location.

We also decommissioned three smaller older rigs in April and plan to do the same with one more in May, so our recount will remain unchanged at 71.

While the accounting is not complete, these assets have been on the books a long time and I think any write-downs in the second quarter related to these four rigs will be nominal.

Now, I'll turn the call over to A.J. to run through the numbers before I finish up with some comments about the current environment and what we're seeing for the rest of 2009.

A.J. Verdecchia

Thanks Chris.

Revenues for the three months ended March 31, 2009 totaled $54.3 million or 17,867 per revenue day, compared to revenues of $64.1 million or 17,361 per day in the first quarter of 2008.

Operating costs for the first quarter totaled 34.8 million or 11,440 per revenue day compared to 43.3 million or 11,736 per day in the first quarter of 2008.

We took aggressive measures starting in the fourth quarter to keep cost in line with declining revenues including significantly reducing our workforce and implementing pay cuts for many of the remaining employees.

As a result, we were able to post solid average drilling margin of 6,427 per revenue day compared to 6,531 for the fourth quarter of '08 and 5,625 in the first quarter of 2008. And keep in mind that Q4's drilling margin included $3 million of one-time contract termination payments.

General and administrative expenses increased to 7.7 million compared to 6.8 million in the previous year's first quarter. Approximately 1 million of the G&A expense was due to bad debt expense recorded to fully reserve accounts receivable on three customers partially reserved in the prior quarter.

First quarter EBITDA totaled $11.9 million in 2009 compared to 14.1 million in 2008. EBITDA excludes the non-cash charge of 1.3 million with the impairment of one of our idle rigs.

Depreciation and amortization for the quarter totaled 11.1 million, up from 10.6 million last year.

We reported a net loss for the quarter of 271,000 or a loss of $0.01 per share compared to net income of 2.1 million or $0.10 per share in the prior year period. Excluding the non-cash rig impairment charge, net income would have been $1 million or $0.05 per share.

On the balance sheet, we had $46.5 million drawn on our revolver as of March 31st that number is at $46.3 million today but should be close to the peak balance for the year since the cash commitments on the new rigs have now been funded.

Capital expenditures for the first quarter totaled $18 million of which 3 million was designated as maintenance CapEx. The actual amount of cash disbursed for CapEx during Q1 was $31 million because we had $13 million of unpaid invoices in accounts payable at year-end.

By comparison we averaged just over $10 million per quarter for maintenance CapEx in 2008. Expect that number to remain low until we begin, putting idle rigs back to work.

We recorded $15 million of CapEx prepayments on our new rigs during the quarter. As of March 31st we still have 2.3 million on the new rigs, all of which has been paid as of today.

And now I'll turn the call back the Chris.

Christopher Strong

Thanks A.J.

I am going to talk a little bit about our term contract coverage as there have been some developments in the Barnett Shale since our last call. We now have two rigs, one of which is our new build walking rig that are understand by tolling agreements. We're being paid a daily fee to defer the contracts and when the customer is ready to resume drilling, the original remaining term and day rate will be in full force in effect.

The fees are enough to cover depreciation as well as basic maintenance in a little extra margins. So there won't be any impairment issues on these rigs. However, they will generate incremental margin without generating any revenue days. So the daily averages we report will be a bit skewed.

We also had three rigs running for our customer in the Barnett Shale that asked us to scale back to one rig. We agree to keep the rig with the highest day rate running and to add to it's term asset day rate, the remaining term on the other two rigs plus an additional four months which takes that rig's term to June of 2010.

We also agreed that Union Drilling would have a right of first refusal on two of the first three additional rigs back running when conditions improve in the Barnett Shale.

Although, stretched down until the middle of 2010, the incremental cash flow from this extension will more than offset the lost cash flow from the two cancelled contracts. These two recent arrangements are taking our North Texas operations down from nine to five running rates at this point in the second quarter.

Because I think it could take well into next year before we see a meaningful recovery in the drilling industry, we are also having discussions with some of our other customers about making some concessions on term contract day rates in exchange for additional term.

I think these are good discussions to have now since it often takes a while for recovery in the rig count to turn into a recovery in margins and cash flow. We may see more modifications in the structure of our term contracts but at the moment during the second quarter we have 21 rigs working under term contract, generating total estimated margin of $11.5 million.

In the third quarter we have 19 rigs contracted that should produce an estimated $11 million of margin. Q4 drops to 16 rigs in 9.5 million. And for 2010 we have an average of six rigs on the contract expected to generate approximately 16 million of drilling margin for the year.

Since we've gone from 19 rigs to five rigs working in North Texas we are scaling back employee head count at every level with the only exception being safety.

The Arkoma is in somewhat better shape due to the Fayetteville Shale which appears to have better economics at low natural gas prices than the Barnett. I think we'll probably be running eight or nine rigs in that area through the summer and perhaps through the balance of the year.

Appalachian with continued activity in the Marcellus Shale will most likely generate higher cash flows from sequentially increased utilization and reasonably stable rates there during the summer and fall months when utilization in that region is typically at its highest.

With delayed end of winter and rain in April it's only been in the last week or so that we've heard about a number of customers being able to get into the field and drill locations.

Financially, we remain in a strong position despite a challenging first quarter. In addition to the weaker EBITDA, a lot of the remaining progress payments went out the door to finish paying the four additional rigs we received in the last month.

This was offset by substantial accounts receivable collections and minimal maintenance CapEx expenditures and as a result the balance on our revolving credit facility peaked well below what we expected.

Going forward, that balance should decline as we devote most of our free cash flow toward paying down debt. While future industry conditions are difficult to predict with any degree of certainty, second quarter operating results maybe comparable to or a bit below the first quarter.

This in part, we are correlating the forward natural gas strip with future rig utilization for purposes of rig impairment testing. A significant decline in the forward strip may result in further impairment charges on idle equipment.

In the second quarter, the month of April will likely be similar to March as we doubt with weather issues in the Northeast. However, with new rigs under contract coming online to offset other rigs going off hire and seasonality shifting in our favor in May and June I think that Q2 may end in better shape than it began.

And with that Michaela, I believe we are ready to take questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Jeff Tillery with Tudor, Pickering & Holt. Please go ahead.

Jeff Tillery - Tudor, Pickering & Holt

Hi, good morning Chris.

Christopher Strong

Good morning.

Jeff Tillery - Tudor, Pickering & Holt

Your comment around Q2 exiting better than its starting. Is that principally around Appalachia or is that -- are you seeing inquiries on the rigs of rollout contracts as much you think utilization may hold up a little bit better than you feared?

Christopher Strong

Now, that's really principally Appalachian, Jeff. We're still in a market where there's scarcely any bid. There really doesn't seem to be a number at which rigs are going out in the Barnett. I think the Barnett is probably still in an environment where it's shedding rigs.

Fayetteville, I think we've got some opportunities there to do some smaller work. And I'd say maybe further out there maybe some opportunities out in the Permian but that may even be on a footage basis at this point in the proceedings given that oil prices really haven't rebounded. So principally Appalachian.

Jeff Tillery - Tudor, Pickering & Holt

And then you discussions with customers on existing contracts, I would assume that those discussions are focused on the first rigs, the roll-off contracts and trying to secure term to keep those rigs from going idle. I guess one is that correct and two, could you provide us a little color for how much additional term you think you'll be able to secure on some of these guidance?

Christopher Strong

Well, it's not completely correct. Actually we have some discussions going on with rigs that are turned up fairly far out where customers are saying what about yet another year on the tail-end of that contract and how many thousands of dollars a day would you come down if we gave you a third year, so it's like that.

Jeff Tillery - Tudor, Pickering & Holt

Okay.

Christopher Strong

So what we're seeing some of that. None of it's really mature enough for me to -- to have announced anything concrete but there are several discussions like that as I said earlier. I think we may see some rig recovery possibly at the end of the year, possibly early next year but at this point I think 2010 maybe a recovery year in terms of utilization but it could take us a quite a ways through that year before we get to the utilization level where we see recovery in pricing.

So those kinds of discussions where you accept a little bit less but lock-in further out and cover up a bit more of 2010 I think make sense right now.

Jeff Tillery - Tudor, Pickering & Holt

Okay. That make sense. And my last question just, could you provide some thoughts around how do you think operating cost per day will trend? I mean you guys have done good job taking cost out. Do you think that you can hold flattish with your recent results on a per day basis?

Christopher Strong

As I mentioned on last quarter's conference call we made some across the board cuts in Texas in terms of salary and wages. We've made some other cuts up in the Arkoma area on that area.

And I'd really like to complement our division heads in these different areas, these are very tough times for them to layoff people. You've gone through the fact, into the muscle of long-term employees that are great performers and it's certainly not a pleasant task and they've done an excellent job, kind of rightsizing to the amount of work that's out there.

I think we probably will be able to maintain clearly the maintenance CapEx number coming down to 3 million. You'll probably see some benefit not only in that area but on the repair and maintenance that flows the P&L. These are areas where with the amount of rigs that we have idled, clearly we're going to pull assets that are stacked to support the running rigs rather than spend cash.

That's fairly normal and it's also fairly normal that when things do turn back up we'll have a significant investment need in deferred maintenance on some of these assets. But that's really how the game is played to preserve cash and lower the balance on the revolver.

Jeff Tillery - Tudor, Pickering & Holt

Okay. Great, thank you very much.

Operator

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

Steve Ferazani - Sidoti & Co.

Good morning, Chris. Can you just remind us that the four rigs you have gone to work in Q2, are those all under term and how secure are the term?

Christopher Strong

I mentioned, you may not have caught a little earlier in my scripted comments, Steve. One of the four rigs has gone into this tolling arrangement, the walking rig in the Barnett Shale that is a rig that cost around $14 million.

The other rigs I am pretty comfortable with as far as the term contracts on right now, two of them that are in the Fayetteville and the one that's up in Appalachia. The tolling arrangement, I think is a pretty good solution where, as I mentioned earlier, we're getting enough to cover the depreciation and some -- couple of hands in the field to turn over the engines and keep the rig more or less warm stack. That precludes us from any real impairment risk on the rig. It minimizes the cash flow out the door of our customer during this period. And it also preserves the amount of the contract in terms of what in this market is a fairly robust day rate and margin and puts that multi-year term contract essentially on hold until the customer is ready take the rig out. So preserves the terms and therefore a nice cash flowing asset when things start to turn up.

Steve Ferazani - Sidoti & Co.

Okay. So the other three rigs does that help your average day rate from what you reported in Q1 or heard it?

Christopher Strong

Yes, it helps. Those rigs are in high teens the 20 area.

Steve Ferazani - Sidoti & Co.

Okay. And then with the rigs that are coming out from under contract, how much pressure is that going to be, what are you looking at going well-to-well compared to what you were coming off of with the terms?

Christopher Strong

We've had some of the security in this market. There are other competitors that have idle equipment that are coming in with very low bids and not really getting any response. And that very well may happen to us as well. Operators are certainly trying to live within cash flow and a lot of their projects just turned economic right now.

Steve Ferazani - Sidoti & Co.

And then, can you just give a brief explanation about the impairment charge on the rig?

Christopher Strong

We had a rig in Texas was on the books for little over 3 million, A.J?

A.J. Verdecchia

3.2 million and down 1.3 now.

Christopher Strong

We took it down to 1.3, we did a rig-by-rig analysis. And as I mentioned little earlier we were trying to correlate looking backwards rig utilization and activity to where the forward gas strip was. And as I said earlier, part of this is contingent on I guess the amount of contango in the curve and if we see some flattening there in the out years one would then have to parse it with the utilization of the fleet would be lower. And from an accounting standpoint we might have to look at other rigs that are close on impairment where you run a multi-year discounted cash flow and assume certain things about utilization based on where the forward strip is.

Steve Ferazani - Sidoti & Co.

I would just presume most of the rigs you're looking at not being utilized though would have or already been fully depreciated. Is that fair or do you have a lot of rigs you're still depreciating that look like you're not going to--?

Christopher Strong

I don't think -- we have some exposure but I don't think it's a huge amount in part because we have a lot of the high dollar rigs on our -- mix it on our books for high dollar amounts are the ones that have termed contracts on them. Those are also the ones where you can make more assumptions that as you go through the traunch and come out the other side that you would expect those rigs to be the more sought after rigs, quickly and that the smaller older rigs in our fleet are the ones that are more fully depreciated. So there is somewhat less exposure on those smaller, older rigs.

Steve Ferazani - Sidoti & Co.

Okay, thanks Chris. Thanks A.J.

Christopher Strong

You're welcome, Steve.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Victor Marchon with RBC Capital markets. Please go ahead.

Victor Marchon - RBC Capital Markets

Thank you. Good morning.

Christopher Strong

Good morning, Victor.

Victor Marchon - RBC Capital Markets

Chris, a question, you had mentioned if I heard correctly that the results would be comparable to below first quarter and the second quarter. What was that related to? Was that drilling margins?

Christopher Strong

Just our overall results Victor I think, as I said, I think March was a pretty poor month for us and certainly the rig count had been trending down and we shed some rigs through the first quarter.

April with Appalachia getting through the end of winter and a lot of rain has delayed some people building locations that kind of moves backwards and forwards depending on how winter is up there year-after-year.

So we really didn't get any kick out of Appalachia in April. I think May and June we're going to get the benefit out of Appalachia and we're going to get the benefit out of the new rigs that have come online and those new rigs are going to offset some of the other rigs that we've lost.

So I think the net of it is that April -- March, April maybe a near-term trough in terms of utilization will pick up. I had mentioned we were down to five rigs in the Barnett, eight to nine in the Fayetteville, Arkoma area. At this point maybe it turns into I don't know low 20 something in Appalachia so you're looking maybe more at -- I don't know something in the 50% utilization area for the summer.

And then as we get into follow-up in Appalachia remains to be seen but often that's a period where things slow down again and there's a big push to get things done between May when things dry up in kind of Thanksgiving. So that's kind of what it looks like right now.

Victor Marchon - RBC Capital Markets

Okay. So would it be just from looking at the second quarter, just from the different moving parts is that utilization would be down but your average day rates will be higher as these new builds come on which would provide for us, a modest boost on the margin.

Christopher Strong

I don't know utilization maybe about the same, because we mentioned we're decommissioning four rigs and then we have these other four rigs coming on that are going about three of which are going to add, day rate and one of which is going to add standby fees.

So I think when you run through the math of adding four and subtracting four that weren't doing anything. And then you get some overall improvement in Appalachia, I think you probably got utilization that's in the same area by the time, you get through the quarter.

Victor Marchon - RBC Capital Markets

Okay. And then as it relates to sort of just the mix on the day rate that would improve in the second quarter versus the first or would the Appalachia rigs coming back to work, flatten that number out -- meaning you have the new built --

Christopher Strong

I wouldn't go for any -- I wouldn't be doing any guidance here Victor.

Victor Marchon - RBC Capital Markets

Understood, understood.

Christopher Strong

I'm parsing my words cautiously. But, I think you do have that where you have Appalachia and utilization. We are seeing, there's a good bit of demand for vertical Marcellus drilling which will be with some of the smaller rigs up there. And they won't be commanding the high teens type rates of the larger doubles we have up there, that are doing the horizontal work with the top drives.

Victor Marchon - RBC Capital Markets

And just in the Marcellus, that low 20 number that you talked about, was that sort of -- during the summer, where you guys are lower now and you are gradually going to move up to that number?

Christopher Strong

That's kind of what I'm thinking, that we have some vertical rigs that were not working during the winter. But we are having some discussions with customers and they are trying to get locations, bill, permits and so on, that's getting a little easier to do now and there is still a good biz -- buzz and activity up there and people who are going to spend money on are indeed and if gas prices are low to mid 3s.

Victor Marchon - RBC Capital Markets

And a second one I had was just as it relates to, what you guys are seeing and what your appetite is on the asset purchase side, as well as anything you could say on additional share repurchase authorization?

Christopher Strong

We do not have any additional share repurchase authorization at this time and I think we're probably focused on managing for cash and probably managing the balance of the revolver down. As far as acquisitions go, that's -- you can make a lot of money or obviously lose a lot, in this part of the cycle where there are distressed asset deals, there have been a couple of auctions so far down here in Texas and I assume there will be more.

It's tough to layout cash, to sit on a rig that has no contract and wait for the brighter day to come along in sometime in 2010. But, at some price, you start to think those things make sense.

Can you buy that 12 or $13 million electric rig that will be sought after in the Barnett, the Haynesville right now for half price or $0.40 on the dollar? I've seen some things like that out there in the auction market but I guess it's a buyer beware kind of thing that some of those deals, those rigs would defer maintenance and when you actually acquire it and then find out what you have, then you have several million dollars of additional capital to put it into to actually get it up to your specks to be ready to run for one of the larger independent. So I won't say that we're not going to do any asset deals but we don't have anything on the radar right now.

Victor Marchon - RBC Capital Markets

Great, thank you. That's all I had.

Christopher Strong

Welcome.

Operator

Thank you. Our next question comes from the line of Mark Brown with Pritchard Capital. Please go ahead.

Mark Brown - Pritchard Capital Partners, LLC

Hey, Chris and A.J., just was wondering if you could say what that term contract coverage is for '09 and 2010 currently?

Christopher Strong

Yes, that was actually in our scripted comments Mark. But we had -- we've got 45 million of margins at this point forecasted relative to term contracts in '09. That number drops down to about 18 million in fiscal year 2010.

Mark Brown - Pritchard Capital Partners, LLC

Do you have that in terms of number of rigs or days?

Christopher Strong

Yes, I'll have to -- let me go back to my scripted comments. 21 rigs under term in Q2 generating 11.5 million, Q3 19 rigs producing 11 of margin and Q4 down to 16 rigs and 9.5 million of margin and just to complete that picture in Q1, we did a little over 13 million of margin with 19 rigs under contract cover.

Mark Brown - Pritchard Capital Partners, LLC

Okay, thank you. Sorry about that.

Christopher Strong

No problem. Had to shuffle my papers a bit.

Mark Brown - Pritchard Capital Partners, LLC

Just a follow-up question. It sounds like you manage the account receivable collection process very well this quarter. Do you feel like, if there are any customers out there, that are at risk going forward or from what you have done so far, it sounds like things are on track, I just want to confirm if that's the case?

Christopher Strong

I will say, we are in a risk free environment, I think we had a few bankruptcies that hit us with some smaller accounts we made some -- reacted to that fairly quickly and made some changes internally where we're aware of the credit risk of the environment and trying to not only bill faster, but make more progress billing, so that we work down the accounts receivable and we have also worked down our DSOs in an environment, where people are actually trying to stretch you.

So I am very pleased with that activity and we certainly did it quite well on the collection side and that shows up in the cash flow statement for the first quarter. Are there other potholes in the road ahead of this, it's hard to say, I mean but we're trying to be vigilant and assess our risk and assess how much exposure we want to have to customers in this environment.

Mark Brown - Pritchard Capital Partners, LLC

All right, thanks a lot, I will go back in queue.

Christopher Strong

You're welcome Mark.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Shaun Boyle with West Quest Capital Management (ph). Please go ahead.

Unidentified Analyst

Good morning, Chris, good morning, A. J.

Christopher Strong

Hi, Shaun.

Unidentified Analyst

Just trying to get clarification on two things. Going off to that last question, on the thinking about bad debt, and what it cost us in the quarter, basically we had 727 million and within that, we had a million, so we had 6.7 million in core SG&A?

Christopher Strong

Correct.

Unidentified Analyst

And I didn't quite catch you. But in terms of looking at your book of business now and your customers that you might think are a little bit more on the roofs than others do you think that we should be thinking about that $1 million a quarter, going forward or should we expect to see that taper off?

Christopher Strong

I should hope not, I mean, the million in this quarter, we reserved a couple of customers, that were -- well, I guess, they have already filed. And we reserved 75% of one and I believe 50% of another and based on discussions with David Goldberg, our General Counsel and his work on the various credit committees of these creditors. We decided we needed to go ahead and fully reserve them and that it could be a long time winding its way through the course before we saw anything.

So we did not see anything in the first quarter that was additional. The reserves we took were more to fully reserve problems from last year. And as I said earlier to Mark -- I'm not saying that something can't pop out but we've certainly -- we are certainly paying a lot more attention to it and trying to get the bills out the door much quicker and follow-up much more rapidly so that we have lower balances and lower risk and I'd say also, with the contraction in the rig count, at this point we probably have a higher percentage of our business and cash flows that are coming from larger publicly traded independents.

Unidentified Analyst

Got it.

Christopher Strong

Not that we haven't gotten in trouble with some publicly traded independents but I think you have a bit lower risk profile than with some of the smaller people or smaller companies that often take out the smaller equipment.

Unidentified Analyst

Understood, understood. Given where we are at this point and the four -- a little over 4 million --

Christopher Strong

I don't believe it's realistic that we should be booking another million a quarter for bad debt expense at this point.

Unidentified Analyst

Moving over for a second to the contract coverage. When you think about that margin that you talked about on average and if you just tried to back into like a per day number on that, and it certainly depends on what you're assuming on utilization. But if you assume a 100% utilization, it brings you down to the $6,100 a day level that then ramps. So my question is, number one, is the 100% utilization wrong as you'd assuming some much lower number there and number two, that ramping effect that's going on over the next few quarters, is that as these the newer -- with the contracts that were inked more recently sort of become a bigger chunk within that contract to coverage?

Christopher Strong

Its really I guess is a combination of some of the ones that are falling off and the -- the highest dollar rigs we purchased are the ones that have the highest day rates and margins of course but they were also the ones we negotiated with the longest term to really provide a scenario where we were at least on a margin basis recouping our entire investment and a lot of those fields were kind of three times cash flow type fields--

Unidentified Analyst

Right.

Christopher Strong

Where we wanted a three year contract cover. Some of the other ones, where it was more of a -- say you put 5 million into refurbish a rig, bigger pumps and the top drives, something like that. We didn't have a very -- as a larger basis in that piece of equipment, even after those improvements. And therefore, we didn't need as much term and we didn't need as much day rate or margin to provide a return on the incremental capital investment.

So if those are the ones, with some of the shorter contract terms tied to them, they are also going to be some of the ones with lower margin. So as they drop off, what remains is fewer rigs, but on average higher margin rigs.

Unidentified Analyst

Right, so that makes sense what's going on. So back to the first part of my question. The utilization on the contracted rigs in terms of our modeling, should we -- what's a good number to use to that?

Christopher Strong

I never like a 100, because you know its the drilling business --

Unidentified Analyst

I thought you might say that.

Christopher Strong

Yes, yes if everything works perfectly, you should be billing your 30 or 31 days a month. But if you have an engine go out on you and the customer says hey, we're just going to circulate here and so you get that second engine on that, that on other months can't fix, that kind of new, you are eating that.

So somebody thinks that, okay it's the middle of the night and it's eight hours roundtrip for the mechanic to get there and fix in it, you end up, saying okay, we lost half a day of that month. When they have to drive out, swap out an engine. But those are the things, that make me a little more cautious because, we are working with mechanical devices and people on those rigs and things happen and at times you have to negotiate with the customer and eat a day here and there. If really it was, something that either your people or your equipment -- that caused you to not really be delivering at 100% for the customer that month.

Unidentified Analyst

Got it. So perhaps 90, 95% rate might feel a little bit more, refer -- resembling reality?

Christopher Strong

I would say so.

Unidentified Analyst

Got it. Good enough thank you much.

Christopher Strong

You're welcome Shaun.

Operator

Thank you. And at this time I am showing, no further questions in the queue. I'd like to turn the call back over to Mr. Strong. Please continue.

Christopher Strong

Thank you all for your continued interest in Union Drilling and we look forward to our next quarterly conference call. Good bye.

Operator

Ladies and gentlemen, this concludes the Union Drilling first quarter 2009 earnings conference call. This conference will be available for replay after 12 PM or 12 AM Eastern Standard Time today through May 8th, at midnight.

You may access the replay system at any time by dialing 303-590-3000 or 800-405-22-36 with the access code of 111-3037-0#. Thank you for your participation. And at this time, you may now disconnect.

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