Pioneer Drilling Q1 2009 Earnings Call Transcript

| About: Pioneer Energy (PES)

Pioneer Drilling Company (PDC) Q1 2009 Earnings Call May 7, 2009 11:00 AM ET

Executives

Lisa Elliott - Senior Vice President, DRG&E

Wm. Stacy Locke - President and Chief Executive Officer

Lorne E. Phillips - Executive Vice President and Chief Financial Officer

Donald G. Lacombe - Senior Vice President, Marketing

F.C. 'Red' West - Executive Vice President and Chief Operating Officer

Analysts

James Rollyson - Raymond James

Steve Ferazani - Sidoti & Company, LLC

David Deckelbaum - UBS Investment Research

Judson E. Bailey - Jefferies & Company

Sean Boyd - Westcliff Capital Management

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Pioneer Drilling First Quarter Earnings Conference Call. At this time, all participants' lines have been placed in a listen-only mode. During today's presentation you'll be given a chance to ask your questions. Instructions will be provided at that time. As a reminder today's teleconference presentation is being recorded on May 7 of 2009.

At this time, I'd like to turn the presentation over to the Senior Vice President of DRG&E, Lisa Elliott. Please go ahead now.

Lisa Elliott

Thank you, operator and good morning everyone. We appreciate you joining us for Pioneer Drilling's conference call to review its first quarter of 2009 results. And before I turn the call over to management, I'd like to remind you that in a few hours a replay of today's call will be available and it can be accessed via webcast by going to the company's website. That's www.pioneerdrlg.com, where it will be archived for one year in the Investor Relations section, and also via telephone replay through May 14, by dialing 303-590-3000 and entering the passcode 11130309.

You'll also find that information in today's press release. And information recorded on this call speaks only as of today, May 7, 2009, and therefore time sensitive information may no longer be accurate as of the date of any replay. Today management may make forward-looking statements which are based on management's beliefs as well as assumptions made by and information currently available with the management.

And although management believes that expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions, which are described in this morning's earnings release and in the company's most recent annual report on Form 10-K and its subsequent filings with the Securities & Exchange Commission.

Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially from those expected. Please also note that this conference call may contain references to non-GAAP financial measures and you can find reconciliations of these non-GAAP financial measures to GAAP financial measures in the Form 8-K filed by the company earlier today as well as in this morning's press release.

Now, I'd like to turn the call over to Mr. Stacy Locke, President and Chief Executive Officer of Pioneer Drilling. Stacy?

Wm. Stacy Locke

Thank you, Lisa and good morning. We appreciate people joining the call. Here in San Antonio with me today are Red West, President of our Land Drilling Division; Joe Eustace, President of our Production Services Division and Loren Phillips, our new Chief Financial Officer.

I'd like to take a few minutes first to kind of talk about the overall oil service market and then give a brief overview of each of our businesses before turning the call over to Loren to review the financials.

First, with respect to kind of broader oil service market, I think it's our belief that we are very near if not at the bottom of the land rig count. We've observed in the last couple of months the rate of decline slowing and decreasing and I would expect over the next four to six weeks that we will see some evidence that the rig count is going to flatten out.

In addition, I think that while I hope it's not a bubble and it could be premature, I think we're seeing a very slight increases... an increase for all our services. And we need a little more time to let that mature, but I think we are seeing and have seen that for the last couple of weeks. So we're cautiously optimistic about that.

I think in addition, all of us are very pleasantly surprised and pleased to see the strengthening in the commodity prices over the last of couple of weeks. I think that our expectation here was that natural gas prices would be more likely in the twos than pushing four. And right now, the natural gas strip in the July of 2010 is a little over $6 an Mcf. So we're very encouraged by that.

I think more importantly, we're encouraged by what is probably driving the firming of the commodity prices and that's stronger economic news across the world and also particularly here in the U.S. We've seen just in the last 10 days construction spending improvements, housing starts, consumer spending improvements, even as recent as today. And I think we're seeing some optimism now and some of the foreign driver economies like China and India.

So, that, coupled with the fact that now we have our first operator who has actually stepped in and increased capital budget for the remainder of the year by 30% and has announced the increase of four additional rigs. While we don't expect that it'd be a flood of activity and announcements of that sort, in the short-term we do feel like that in the medium-term through the course of the year, that we are going to see more announcements of improved capital spending.

I now think that we are seeing this in our drilling business. We are seeing it in our Production Services businesses. We feel and we have felt for the last few weeks that we've kind of bottomed in there, both in pricing and activity, so we are feeling encouraged. And I think that you can't ignore the fact that broader stock market has improved. I think that makes everybody feel a little bit better and may be potentially less capital constrained. I know that our specific operator basis stock prices have improved handsomely, and I think we're all feeling better as a result of that.

I think that, in addition, we are beginning to see strengthening in the financial sector. Just reported yesterday, JPMorgan Chase improvement in loans, both in big business, medium business, small business, auto loans, mortgages. So I think we're just going to see an improving credit market as we progress through the year. So, anyway, make a long story short, I think that we are basically at the bottom and we will see that materialize in evidence over probably the next six weeks or so.

Even before this kind of recent improvement in commodity prices and economic news across the world, I think we've seen demand in certain markets, both inside the U.S. and outside the U.S. We are aggressively bidding these new opportunities and new markets for Pioneer and are still in the running on several opportunities there.

Now, let me turn to our business lines and begin with the Land Drilling sector.

Our most stable markets in the Land Drilling side has been in Columbia and in the Balkan shale play, both of those are oil-driven activity, and then in East Texas, which I think has been positively influenced by the Haynesville play. South Texas has been surprisingly weak over the last six months, but we're seeing some signs of firming up in that market, perhaps even a little strengthening. Historically, that's been an extremely strong market for Pioneer and one that has been the most resilient.

Utah, the Uinta Basin, Barnett Shale remained very weak and Western Oklahoma where we have our shallow rig fleet has been essentially dead for eight months or so and we still have all six of those rigs cold stacked. So presently, in the U.S., 23 of our 65 rigs are operating for a 35% utilization, six of which are stacked but earning under their term contract. In Colombia four of the five are earning for an 80% utilization, one of which is currently earning standby rates that will resume drilling within the next couple of weeks for a total land drilling utilization of 39%.

We have one additional newbuild to add to the fleet. It's our state-of-the-art 1500 horsepower AC rig top drive, automatic catwalk, BLP handling system, joystick operation, that is in our opinion, the most efficient rig in the market, very versatile and that rig will be moving out at the end of this moth under a three-year term contract to one of our very good customer in the Balkan Shale.

That brings our U.S. fleet to 71 total rigs, five of which are in Columbia and we have no additional newbuilds planned for this year.

Our... a real exposure is our term contracts. Today we have 14 term contracts remaining, three will expire in Q2, six more in Q3, two in Q4, leaving just a few as we enter 2010. But in the month of April, we... and so in Q2, we actually will have a total of seven expired, four expired in the month of April. So, the net effect is seven rolling off Q2, six Q3, two Q4 and then the others will persist into 2010 and some into 2011 and beyond.

Turning to the Production Service side of the business, start with work over. Very, very tough business but clearly showing signs of firming up. By way of perspective, our highest utilization in 2008 was in Q3 at 80% utilization, Q4 was 67. Q1 of this year was down to 50% but so far into the second quarter we've been stable, averaging about 44% utilization with a range of 41 to 49%.

So we feel that over the last four weeks, we certainly firmed that up and the hourly rates though have continued to deteriorate rather precipitously into this New Year. Q4 of '08 year was our highest hourly rate average of 620 an hour. It declined to 530 in Q1 and has declined another 15% into Q1... I mean, excuse me, 15% into Q2 from the Q1 average at about 456 per hour today. However, there again we feel like we have reached the floor on the hourly rate.

On the work over fleet, we have not added any additional rigs this year. We're still operating a total of 74 or we still have a total of 74 rigs. The group has done a very good job in adjusting its cost structure with the decline in hourly rates and utilization, and we remain cash flow positive in that sector.

Wireline has also been faced with pressure particularly on pricing but to a lesser extent on activity. We were hit hard going from Q4 of '08 into Q1 of this year. I think we are going to be hit pretty hard going into Q2, but there again, like with the work over, we are seeing firmness and some optimism that we have perhaps bottomed out there.

We did add two additional units into the Wireline sector. These were orders that we had made last year that were delivered in the first quarter. We have no additional plan for that wireline for this year but that takes their unit rig count up to 61 units.

Fishing and rentals has actually been hit the hardest of the Services group. It's been faced with very tough markets. We declined precipitously from Q4 to Q1 and almost equally as bad into Q2 and that we continue to struggle there but we've got a number of strategies at work to stabilize that to the best we can.

I'd like to turn the call over now to Lorne to review the financials. When Lorne is complete, I'll come back and try to provide a little bit of guidance through the course of the year for your modeling purposes.

Lorne?

Lorne E. Phillips

Thanks Stacy. As we reported this morning for the first quarter, we had net earnings of 618,000 or a penny a share. This compares to adjusted net income of 18.7 million or $0.37 per share in the fourth quarter of 2008, adjusted to exclude goodwill and intangible asset impairment charges.

EBITDA in the quarter was 27.8 million versus 36.2 million a year ago and 60.4 million in the fourth quarter of 2008, a decline of 23% year-over-year and 54% quarter-to-quarter.

Drilling revenues for the quarter were 71.4 million, down 42% from the fourth quarter. Almost 15 million of that came from our Columbian activities. Approximately 2.2 million came from rigs that were earning standby rates under contract. As Stacy mentioned, we currently have seven idle rigs earnings stand by rates, six in the U.S. and one in Columbia. For the full year 2009, the total expected revenue from rigs earning standby rates is currently estimated at 18.3 million.

Production Services revenues declined 38% sequentially to 29.5 million, due to declining market activity overall.

Selling, general and administrative costs were down about 17% sequentially to 10 million due to lower professional fees and compensation costs related to our head count reduction as well as cutbacks and bonuses.

The overall tax benefit for the quarter results from a U.S. tax benefit at 35%, partially offset by pretax income generated in Columbia, where we have a significantly lower effective tax rate.

Now looking at our capital and liquidity position. Our cash at the end of the quarter was 30 million, up 3.2 million from December 2008. During the quarter, we made a principle payment of 15 million on our credit facility, bringing our debt balance under the revolver to 257.5 million, plus an additional 10.4 million in committed letters of credit. We are currently talking with our lenders regarding the credit facility. We are in full compliance today but if utilization and revenue rates to remain depressed for the rest of the year, we could potentially experience difficulty maintaining compliance beginning in the fourth quarter of 2009.

Based on our preliminary discussions, we believe our lenders will work with us to negotiate some relief on covenants if market conditions persist. However, as a result of any amendment, we would also incur higher interest rates, additional fees and modification of other terms. We expect to complete an amendment to the credit facility in the second half of the year.

At March 31, our leverage ratio was 1.34 to 1, and our interest coverage ratio was 15.13 to 1.

The credit agreement stipulates the maximum consolidated leverage ratio no greater than 3 to 1, through this quarter. 2.75 to 1 through the March 31, 2010 quarter, and 2.5 to 1 through maturity in February 2013. If our leverage is ratio is greater than 2.25 to 1 at the end of any quarter, then we must have a minimum asset coverage ratio of 1.25 to 1. And finally, we must have a minimum interest coverage ratio 3 to 1.

CapEx in the first quarter was 26.7 million with approximately 5.6 million classified as routine. Included in the total number was approximately 12.4 million for the previously mentioned newbuild rig that would be moving to the Balkan this month, two spare 500-ton top-drives and two new wireline units.

We will review our capital spending plans each month so we can keep our capital outlays in line with expected activity levels. We expect to cover CapEx with cash flow from operations in 2009 but the second quarter CapEx will likely exceed cash flow from operations due to previously committed expenditures.

Looking forward, we will continue to focus on generating and conserving cash, reducing cost throughout the organization and maintaining and growing our market share in each segment.

Now I'll turn it back over to Stacy.

Wm. Stacy Locke

Thank you, Loren. Looking out to the remainder of this year, what we clearly see is that our term contract exposure declines and so by the end of the year, on the Drilling side, we're essentially at spot rates, spot margins. Why we're in this situation relative to perhaps a few of the other drillers is, because we made the decision, the strategic decision to move into the Production Service businesses last year and we borrowed and made that acquisition.

And so we quit building new until just at the end of '08 where we jumped in and caught a couple of term contracts at kind of the peak of that market and had a couple of more that almost landed but the customers were feeling the decline, so it didn't materialize which in retrospect I think was a mixed blessing because we saved that capital outlay.

But anyway, so our term contract exposure is lower than some of the peers just because we discontinued the newbuild activity that usually was accompanied with a two or three-year term contract. But nonetheless, it is what it is and I think that our utilization as we mentioned earlier and pointed on the press release in Q2 is about 39%. I think that's probably a reasonable expectation for the whole quarter. Depending on whether we are at the bottom as I think we may be, the utilization in Q3 could be flattish or beginning to improve. I think Q4, we will see an improvement.

The forward day rates have continued to deteriorate a little bit. I think our estimate is about 12%. In the Q4 call we gave four rate guidance of about 11,000 to 14,000 a day and a range from 750 horsepower class up to the 15, this is for rigs without top drives, without fuel. Today, we are calling that range about 9500 to 12,500 roughly.

As I previously mentioned, we've already lost four term contracts in the month of April; we'll lose three more this quarter and six more thereafter in Q3. And so, as we progress through the year, we are going to be essentially operating at the spot rates for the bulk of our fleet by Q4, and it's a little difficult to estimate but in order to give you a range, I think those spot margins in Q4 are probably going to be between 1500 and 3000 a day margins.

Turning to the Production Service side, we know we have a continued decline from Q1 into Q2. I think the range that we could provide is something like a 25% decline in both revenues and gross margin, 25 to 27% further decline Q1 into Q2. But I think our belief is that Q2 will effectively be the bottom in the Production Service sector. We anticipate that we will see improvement there in Q3 and more notable improvement into Q4.

So that concludes our prepared remarks, and we would like to entertain any questions at this time.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question will come from the line of Jim Rollyson with Raymond James. Please go ahead.

James Rollyson - Raymond James

Good morning, Stacy.

Wm. Stacy Locke

Good morning, Jim.

James Rollyson - Raymond James

Thanks for all the detailed guidance and thoughts. What's your sense of... between the two markets you're kind of well servicing in associated businesses versus the rig business? If activities closed to a bottom here in the next few weeks or say by middle of the year, and activity starts to pick up, what's your sense of which of the two business lines might actually see improvements on the pricing side or at least on the margin side from what you can control on the cost side?

Wm. Stacy Locke

Well I think that I believe would be that the Production Service side of the business would most likely improve first on the pricing side and the margin side. They are starting from a higher level of activity. We've got a good fleet and good markets with good people on both, wireline, fishing and rental, and work over, and I think that as things firm, we will be able to move there first.

I think the problem on the land rig side is that the actual rig count utilization is lower than the utilization while reporting those... the 39% represents seven stacked rigs but they are earning. So, you have so many... the true effective utilization is below 30, probably below 30% or so. So, you've got to pick up so many land rigs in different markets in order to obtain some pricing power. So I clearly think it will be the Production Service.

James Rollyson - Raymond James

That makes sense. And as a follow up; on the cost cutting front, you guys have done seems like a pretty good job so far trying to get cost down and that always tends to lag, maybe thoughts on where you cut costs, kind of thoughts on G&A and some of those items as you go forward through the year?

Wm. Stacy Locke

Jim, that's just been a continuous process for us. We are reviewing that pretty much every couple of weeks and we continue to make changes there and are doing so right now again. We also anticipate that we could have some hourly rate roll backs again. We haven't had one since last quarter, early last quarter and we think that that's likely to be in the current year fairly soon.

So I think G&A... Lorne, what's your guidance on?

Lorne Phillips

I think that the 10 million run rate for the quarter is pretty good to roll forward right now. I think that we took a pretty good cut out in the first quarter. There probably would be a few items of benefit that we get going forward that haven't... weren't fully realized but I think around 10 million is about right.

James Rollyson - Raymond James

Excellent. Thanks for the help guys.

Wm. Stacy Locke

Thanks Jim.

Operator

Thank you. Our next question will come from the line of Steve Ferazani with Sidoti & Company. Please go ahead.

Steve Ferazani - Sidoti & Company, LLC

Good morning, Stacy.

Wm. Stacy Locke

Good morning.

Steve Ferazani - Sidoti & Company, LLC

You did threw a lot of numbers so I just want to clarify some things. The 14 contracts you have remaining, are you including the seven that are, are generating the standby rates right now?

Wm. Stacy Locke

Yes.

Steve Ferazani - Sidoti & Company, LLC

Okay. And then can you give a detail on what that covers or is that fully decovering depreciation, labor, what's the terms?

Wm. Stacy Locke

Well, with those rigs, I don't want to get into specifics...

Steve Ferazani - Sidoti & Company, LLC

Right.

Wm. Stacy Locke

Of those contracts but basically... well and let me say something too. Well let me tell you what we've done but what could happen as well. I mean those rigs are contracted to an operator. We have stacked them and we've reduced almost all the labor other than the pushers. But you have some associated fixed costs with those contracts, but they are in the purview of the operator and they can... they may activate those rigs again anytime between now and the expiration of those contracts.

So, most of these seven... one of them will be off here in, well two of them in May and then the others will fall off through Q2, Q3 and then I think we have one remaining into Q4. But we don't want to get into too much detail or specifics on it just because it's kind of confidential information and also we don't know whether that operator with improving commodity prices may go back to work.

Steve Ferazani - Sidoti & Company, LLC

And then you are also including those in your 39% utilization?

Wm. Stacy Locke

Correct

Steve Ferazani - Sidoti & Company, LLC

Okay. Other question was on your average day rate or revenue per day sequentially didn't come down that much, why?

Lorne Phillips

This is Lorne.

Steve Ferazani - Sidoti & Company, LLC

Yeah.

Lorne Phillips

I think it's probably a combination of just the mix of some of the term rigs that once rolled off, others had higher rates and also you also had some fewer days in there but at the end of the day I think it's just a mix of the term contracts and you didn't have that many spot contracts coming on to bring it down.

Steve Ferazani - Sidoti & Company, LLC

Right. We do expect based on the Stacy's guidance that you are going to see a much more significant decline over the next two quarters, is that fair?

Lorne Phillips

Yes.

Wm. Stacy Locke

Yes.

Steve Ferazani - Sidoti & Company, LLC

Okay. Thanks a lot Stacy, thanks Lorne.

Wm. Stacy Locke

Yeah, to say what Lorne was saying in a different way, as utilization comes down, the percentage of term of your active rig goes way up. And so that's really what kept your revenue line up.

Steve Ferazani - Sidoti & Company, LLC

Thank you.

Wm. Stacy Locke

Okay.

Operator

Thank you. We'll move to the next question from line of David Deckelbaum with UBS. Please go ahead.

Wm. Stacy Locke

David, you there?

David Deckelbaum - UBS Investment Research

Yeah, can you hear me?

Wm. Stacy Locke

Yeah. Go ahead now.

David Deckelbaum - UBS Investment Research

Great, good morning, how are you?

Wm. Stacy Locke

Good morning.

David Deckelbaum - UBS Investment Research

In terms of... we're hearing a lot of great (ph) around activity by the markets (ph) and its hopefully pricing and bottoming at some point later in the year. What's your position in South Texas? Some of the talk around the Eagle Ford Shale, have you seen any perspective jobs coming your way out of there? Are you positioned well to capturing any share down there?

Wm. Stacy Locke

Yes. We are about to those. We are seeing some opportunity and we are positioned well for it.

David Deckelbaum - UBS Investment Research

And were there any other the contracts? How is the appetite down there in terms of potentially giving some more term contracts given some of the leasing efforts down there?

Wm. Stacy Locke

Well, the problem is, David if from the perspective of a contractor, we really don't have much appetite to term it out at these levels. If particularly if we see an improving market, we would want to ride up with that utilization and eventually, we'll get some pricing power back. It doesn't happen all at once. Certain markets might gain a greater across the market utilization and give you better pricing sooner than the overall U.S. market. But you need to pick up some utilization to get your day rates up. And I think that we'd rather just stay... we're in the spot now and we adjusted our cost structure accordingly. And I think that we'd rather just stay in the spot market for the most part right now.

David Deckelbaum - UBS Investment Research

Fair enough. And while staying in the spot market, has there been any interest at all in turnkeys because I believe that'd be something that you'd be pursuing?

Wm. Stacy Locke

Yes, we have been aggressively pursing the turnkey market. Last 2008, we have done turnkeys really forever. But we've been kind of prevented from doing it in recent years, just because the overall fleet has been utilized so heavily in the markets where we traditionally do the turnkeys which are South Texas and East Texas. So, we haven't had rigs available to do the turnkeys and so we kind of dropped off the radar a little bit. But we are aggressively pursuing turnkeys currently. And we will be doing more turnkeys through the course of the remainder this year.

David Deckelbaum - UBS Investment Research

Great, and then just one more if I could on the balance sheet side. You said a revolver and then it would be coming out some time in the second half. I assume that there's... that you all have been pushing the, any sense that that there would be some loosening on leverage ratio covenants because we've seen they are occurring with some of the other contractors out there?

Wm. Stacy Locke

Do you mean some relief on the covenants, is that what?

David Deckelbaum - UBS Investment Research

Yeah, particularly on the leverage ratio and how concerned are you guys about that right now?

Wm. Stacy Locke

Yeah, that would be the point of spending is that we would be asking for, negotiating for relief on some of the covenants. And like I said in the comments, based on our discussions with them, we believe that we'll be able to get something done that provides us some relief.

David Deckelbaum - UBS Investment Research

Okay, great. Thank you very much guys.

Wm. Stacy Locke

Thank you, David.

Operator

Thank you. We'll take the next question from the line of Jud Bailey with Jefferies & Company. Please go ahead.

Judson Bailey - Jefferies & Company

Thanks, good morning.

Wm. Stacy Locke

Good morning, Jud.

Judson Bailey - Jefferies & Company

Stacy, I wanted to follow-up on some of the numbers you gave during your prepared comments. 39% utilization as you said includes the seven rigs on standby and I believe you said you thought it would be roughly flat for the second quarter and in the third quarter. Do we take that to mean those rigs are on standby that are rolling off, do you have work lined for them, as they come off those, kind of after the standby work? Or is it based on your conversations with customers you have a high degree of conviction that there is going to be some work form when they come available?

Wm. Stacy Locke

Well, I think that it kind of feeds into what we believe is maybe a slight increase in the level of increase and as David pointed out, we have been aggressively pursuing some turnkey work that we will get quite a bit of it. And so we know we're going to have some additional rigs going on turnkey as well. And so, I think that we just feel like... that we should be able to stay flattish it in the utilization even as these terms are rolling off.

Judson Bailey - Jefferies & Company

Okay. And then my follow-up question is on the margin per rig day where you thought you could be by the fourth quarter. Does that assume some level of cost reductions from here or the day rates deteriorate from where you're seeing them now or is that just kind of pricing the market, knowing what you got coming and then looking at the average for what you have in the fourth quarter?

Wm. Stacy Locke

I would say that that's kind of based on what we're seeing right now. I think we don't think the day rates are going to come down much further. And but we do think our costs could come down a little bit. So, if we are successful in reducing those costs and we could be at the higher end of that range. So it's just, it's just habit, that's kind of given some directions.

Judson Bailey - Jefferies & Company

Okay, that's fair. Thank you. And one more if I may. On...

Wm. Stacy Locke

Sure.

Judson Bailey - Jefferies & Company

Would it be fair assume that if you do get some turnkey work that there could be some upside for that number, if you get a material amount of turnkey work in the fourth quarter?

Wm. Stacy Locke

Yes, as you know what that the turnkey work, it causes your revenues per day to go up, your cost per day to go up, and it should improve our margins. So if we are successful on getting the work and successfully completing the turnkeys, as we've done in the past and that would be some upside on top.

Judson Bailey - Jefferies & Company

Okay, great. I'll turn it back. Thank You.

Wm. Stacy Locke

Thank you.

Operator

Thank you. Our next question comes from the line of Joe Aguilar (ph) with Johnson Rice. Please go ahead.

Unidentified Analyst

Thanks. Stacy, I just wanted to know, are you hearing anything new and different out of the Balkan recently?

Wm. Stacy Locke

No. I think that we have... I think we're a little encouraged by the price of oil moving upwards. I mean, kind of the word on the street out there is if you can get a sustainable oil price in the 50 to $70 range, then activity could improve. But I don't think we're seeing any direct evidence of that. It's still a very competitive market, still lots of stacked rigs there. We're fighting everyday to keep the customers we have. But we also are seeing some opportunity for some new customers.

So, I think it's... that's really, Don, do you have anything to add to that or.

Donald Lacombe

What Stacy talk about what the cost of oil on the commodity price moving up... Yesterday, I received email from a client that was looking at possibly adding another rig to his program up there, this commodity of this price like Stacy was talking about, get to 60 to 70 and we're getting close to that. So, there is a good chance of some stimulus going on up there in the not too distant future.

Unidentified Analyst

Yeah it seems like with kind of the oil price where they are now with reduced service cost that those, the numbers will start to look pretty good up there for the EP companies?

Wm. Stacy Locke

Yeah, that's our general sentiment as well.

Unidentified Analyst

And I just wanted to clarify one other thing. I don't...I didn't really catch it all of what you said, but you mentioned the spot margins of 1500 to $3,000 by Q4 you say?

Wm. Stacy Locke

Right, well, I mean there's any... what I was saying basically is the forward day rates, we feel like have declined to the 9500 to 12,500 a day. On average that should yield somewhere in the range of $1500 to 3,000 a day margin, depending on what you could do in cost.

And so, we are not anticipating that spot day rate is going to... range will change much, it could improve by the end of the year. But so, we think that even if it doesn't improve, we have a chance of lowering cost through the course for the year; supply, repair and maintenance costs, labor costs. And so we feel like, if we're successful in doing that we could be closer to the high end of that range.

And then as Jud mentioned or David that if we successfully complete these turnkeys, that could add additional margin on top of that. But, that's basically what I'm saying.

Unidentified Analyst

I understand. It just seems like there's a lot of discussion that there's many rigs been bid more towards almost zero margin?

Wm. Stacy Locke

Well, we're not bidding in any rigs at zero margin and we're not really hearing of too many rigs bidding at zero margin. In fact, I think some of our competitors are still bidding at pretty good margins. Those that have the luxury of more term contracts I think are being a little more resistant. And so, I think that that's going to help as the market recovers. The fact that some of the players out there have quite a bit of utilization with greater term exposure I think that will help all the rest of us those bring those day rates up a little bit, even in a lower utilization environment.

Unidentified Analyst

Okay. So the way you anticipate right now, cash breakeven margins would be too low of an assumption to make on so despite contracts 1500 would be a more conservative low end number?

Wm. Stacy Locke

Yeah. That would be a conservative low end range, I think. We're certainly not going to bid the work at cash breakeven.

Unidentified Analyst

Okay. Thanks for clarifying that Stacy.

Wm. Stacy Locke

You got it.

Operator

Thank you (Operator Instructions). The next question will come from the line of Sean Boyd with Westcliff Capital Management please go ahead.

Sean Boyd - Westcliff Capital Management

Stacy, Lorne, how are you doing?

Wm. Stacy Locke

Good morning, Shawn.

Lorne Phillips

Good morning.

Sean Boyd - Westcliff Capital Management

Just a quick question and I you gave it out I apologize for asking but in the first quarter, what was the average on the number of rigs you have running on a contracted basis?

Wm. Stacy Locke

Let's see, we were, we lost, the average number of rigs?

Sean Boyd - Westcliff Capital Management

Yup. So to work out so.

Wm. Stacy Locke

Yeah we entered Q2 with 18 rigs under contract. We lost, I think we lost six if my memory is correct in Q1. So it would be the average, lets say so, six on 18 would be 24. So it probably be an average of about 21 contracts. Is that right? That's 21 averages for the contract under term.

Sean Boyd - Westcliff Capital Management

Okay and if we assume a rig on those...I guess where I'm going is, you assume a 9500 to $10,000 a day margin on those, we are getting to like a 65, 6600 margin on the spot rate. Would Q1 if still been that high on your spot rigs?

Wm. Stacy Locke

Say that again? I assume I think, I think we may have only lost or sitting there thinking that we may have only lost three terms in Q1 which would put that average about 19.

Lorne Phillips

Stacy, I'm looking at it.

Sean Boyd - Westcliff Capital Management

Where I'm going to point is,

Wm. Stacy Locke

But anyway, so we'll say, I was thinking about that has taken up. It's really its not 21, I think it's about 19 but what we were you saying again?

Sean Boyd - Westcliff Capital Management

You've given some great guidance in terms of what we are looking at on the spot rigs. Reaching the spot market toward the end of the year and what I'm trying to get at is where we were in the first quarter on that contracted rigs? I think a lot of it is out there assume, an eight to $10,000 a day type of margin. Is that there what those rigs are running and what you expect them to still produce for you...

Wm. Stacy Locke

Yes. Yeah, those average day rates on those term are north of 19,000, So yes. You're right on the money.

Sean Boyd - Westcliff Capital Management

Going down to I mean about the increase in inquiries, you made a point that you are seeing it across of services, are you seeing that across all geographies?

Wm. Stacy Locke

I wouldn't say that yet but I think we're seeing it in several markets.

Sean Boyd - Westcliff Capital Management

Okay. And you clearly mentioned that top two or three seems to be most active right now.

Wm. Stacy Locke

Well, I think I think is mentioned one is South Texas, and then I'd rather not mention the other.

Sean Boyd - Westcliff Capital Management

Okay. And going to you're the point on South Texas and guys getting ready for more activity on the Eagle Ford Shale you mentioned on previous question that you're positioned well, given the company size certainly makes some sense, is that...what makes you position well, is it high end equipment, is it you got offices and guys that have just been in that areas forever, what's helping you there?

Wm. Stacy Locke

Well, I think that's where the roots of the company have been for so many years. We have a stellar group of employees, very little turnover, exceptional I think as good as any maybe the best drilling safety record of any drilling contractor in the country there in South Texas. Its just a good we have maintained a very, very high utilization there and lot of the rigs have been well may be not on a term contract, they have been working with the same customer year-after-year and just moved from job-to-job. So we just have very good customer relationships, great employees', outstanding safety record, anything you want to add to that Red?

F.C. West

The rigs are right equipments and they are located in the area so we think we got everything we need to play it.

Sean Boyd - Westcliff Capital Management

The rig that you need for drilling at Eagle Ford well, is it similar to say Haynesville well, what kind of rig are we talking about?

F.C. West

Similar.

Wm. Stacy Locke

Yeah. Very similar. Really the Balkan and the Haynesville and that's like your all similar type rigs.

Sean Boyd - Westcliff Capital Management

Okay. Great and just last question for you, assuming that we get back to a little bit more normal environment, how would you rate the potential ramp that we might see in activity down on the Eagle Ford versus say what we've seen in the last year at the Haynesville?

Wm. Stacy Locke

I don't know. I really truthfully don't know on the Eagle Ford. I think there is less information available on that play to know the size and scope at this point. I think we will learn if people start drilling there this year which we think they will; we'll know a lot more on that play by the end of the year. It's too soon to tell.

Sean Boyd - Westcliff Capital Management

Okay, that's it for me. Thanks and good job on the quarter

Wm. Stacy Locke

Great thank you

Operator

Thank you. We'll take the next question from the line of Ryan Gabin (ph) with Pritchard Capital Partners. Please go ahead,

Unidentified Analyst

Hey good morning, gentlemen

Wm. Stacy Locke

Good morning

Unidentified Analyst

Nice quarter, just one quick question, see in your opening remarks you mentioned that you bidding in the new market, can of clarify in that and see if there is any opportunity there that as international and any color you provide would be great.

Wm. Stacy Locke

Well, I would love to but sit down and tell you about it but it is a highly competitive arena we are operating in, and we've got our gloves off and we're dunking (ph) it out with everybody and I just don't want to invite any competition into anything we are doing. So I would rather wait till we secure some permanents in those markets and then we will happy to talk about it.

Unidentified Analyst

Okay, fair enough. One last quick question, if I could sneak it in. The four of the five rigs working in Columbia, can you clarify the term contracts on those will go through 2009?

Wm. Stacy Locke

Well, I think they are not really termed as we describe term here in the U.S. They are typically a firm number of wells with option wells. Our experience has been that they drill all of them firm and auction well but there is no term obligation that they are required to drill the option well. We have gone through a re-pricing scenario as we discussed on our last call there and there was great uncertainty as to how our utilization was going to fare it out.

We've got intense competition in Columbia. Our primary customer is the biggest and healthiest and so we weren't sure how that was going to work out. We are really pleased that we are going to have four of the five rigs continuing to operate and albeit much lower day rates but we still think we'll get out a margin hopefully superior to our U.S. margins as our original intention is going in there. But it is, its still a difficult market. I think as oil price improves, it will get better but it's highly competitive down there right now

Unidentified Analyst

Okay, thank you.

Wm. Stacy Locke

Thank you.

Operator

Thank you. (Operator Instructions) Our next question will come from the line of Jeff Gaggin (ph) with Milwaukee Private Wealth Management. Please go ahead.

Unidentified Analyst

Good morning, Stacy.

Wm. Stacy Locke

Good morning.

Unidentified Analyst

Can you speak to the historical relation between the change in commodity prices and the change in rig utilization and do you believe that correlation will exist in the future given the really radical price movements we've seen with commodities?

Wm. Stacy Locke

Well, I do think that there is definitely a positive correlation between rig activity and the rig utilization and commodity prices. And I think that a relationship will exist again as commodity, I think it'll just as it's done in every cycle really it will do that again.

Unidentified Analyst

Do you have an expectation of the lag time between the price movement and commodities and pickup and utilization?

Wm. Stacy Locke

I think that what is kind of stalled spending out this year has been a lot of it had to do with operators' stock prices with the credit tightness, credit crunch, in addition to the commodity price outlook. I think they were seeing easing in all of those fronts. And I think that is operator based. They want to drill. They want to grow their businesses, and they have the great opportunities to do it. And so I think that we will as the commodity improves, I think it will be very quickly.

Unidentified Analyst

All right, thanks. Second question is as we listen to you over the last year, year and half with regard to your moving to Columbia and the activity there. Would you say you're little bit surprised in a positive way about the way about the way the Columbia market has held up. And it sounds like based on your last question, it held up, but the dynamic there is a little bit different than the dynamic in the U.S.?

Wm. Stacy Locke

Well, it is. We went there with our U.S. strategy which was to supply Columbia the best customer in Columbia and other customers, in targeting the best customer in Columbia with the newest most modern and efficient rigs to that Columbian market. And for that, we needed the highest day rates to justify the expenditure of bringing those rigs to the market. And all of that has worked and so we've been real pleased with the success we've had in Columbia with the people, the team that we put together there. It's matured nicely. We had a goal of getting the five rigs and we're there.

And we like the market, we like the government. We think they're going to spend. So, it's just unfortunate that the U.S. well really, I guess most of the U.S. market rig count meltdown is increased competition there for us. But we're in close with our customer. They've been very satisfied with the service that we provided and we're now a little bit more at commodity pricing, but we hope that will change as the market improves, they clearly much appreciate our service to keep us utilized when at the expense of others.

So we're real pleased with that market, and we plan to stay there, and we plan to explore some additional market down there as well

Unidentified Analyst

Thank you

Wm. Stacy Locke

Thank you

Operator

Thank you. Management at this time we have no additional questions in the queue. And I'll turn the line back to Mr. Locke for any closing remarks

Wm. Stacy Locke

Okay. Well, we thank you very much for your participation and the good questions we've had this morning on an active day. And we look forward to visiting in our next quarterly call.

Thank you

Operator

Thank you, management. Ladies and gentlemen at this time we will conclude today's teleconference presentation. We do thank you for your participation on today's conference call. If you'd like to listen to a replay of today's program, please dial 303-590-3000 with the access code of 11130309 followed by the pound sign. Once again if you'd like to listen to a replay of today's conference, please dial 303-590-3000 with the access code of 11130309 followed by the pound sign.

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