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Pioneer Energy Services (NYSE:PES)

Q1 2013 Earnings Conference Call

April 30, 2013 11:00 AM ET

Executives

Anne Pearson –IR, Dennard - Lascar Associates, LLC

Stacy Locke – President, CEO

Lorne Phillips – CFO

Red West – President, Land Drilling Services

Analysts

Jim Rollyson – Raymond James

Michael Cerasoli – Goldman Sachs

Brian Uhlmer – Global Hunter Securities

John Daniel – Simmons & Company

Daniel Burke – Johnson Rice

Trey Cowan – Clarkson Capital Markets

John Keller – Stephens Inc

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Pioneer Energy Services First Quarter Earnings Conference Call. During today's presentation all parties will be in a listen-only mode, following the presentation the conference will be open for questions. (Operator Instructions) This call is being recorded today April 30, 2013.

I’d now like to turn the call over to Anne Pearson with Dennard - Lascar, Investor Relations. Please go ahead ma'am.

Anne Pearson

Thank you Camille and good morning everyone. Before I turn the call over to Pioneer CEO, Stacy Locke, and to CFO, Lorne Phillips, for their formal remarks, I have a few, the usual items I need to cover.

First of all, a replay of today’s call will be available and is accessible via webcast by going to the IR section of Pioneer’s website, and also by telephone replay. You can find the replay information for both of these in this morning’s earnings news release. As a reminder, information reported on this call speaks only as of today, April 30, 2013, so any time-sensitive information may no longer be accurate at the time of a replay.

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

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

Stacy Locke

Thank you Anne and good morning everybody. Joining me on this morning’s call is Red West, President of our Land Drilling segment; what I was saying about Joe Eustace is not able to be here this morning who is President of the Production Services; and then also joining us Lorne Phillips, our Chief Financial Officer.

Generally, our first quarter of 2013 was a very solid quarter and kind of came in about as we had anticipated. In the land drilling segment utilization came in a little above expectations, at 84%, versus our guidance of 81% to 83%. I would say the biggest factor impacting that improved utilization was Colombia where we had all rigs basically fully, all eight rigs fully utilized.

Likewise, our margin per revenue day was 8,258 considerably better than the 7,300 to 7,600 a day guidance that we had given. Again, a big part of this was the improvement down in Colombia, we had a terrific quarter there, very tight cost controls, improved revenues per day and that compared to the US market where we did have declining margins per day and declining utilization as well.

In the production services segment of the business, slightly softer than anticipated on the top line, revenues were down 1% as opposed to our guidance of being roughly flat. And margin as a percent of revenue was also down 1%, but right in the middle of our guidance to 37%.

Coil tubing followed by wireline suffered the biggest decreases in performance relative to the prior quarter.

Going through each of the four core businesses in a little bit more detail, drilling as I mentioned, Colombia had probably the best quarterly performance ever, 99% utilization and very strong margins per revenue day. All six of our rigs were extended through the end of the year that are working in (inaudible) Field there and then the other two rigs while not on term, but with our expectation of them drilling the optional wells as part of their contract, we expect one of those rigs to be busy through the end of the year as well and then another one into the middle of 2014, if they choose to drill option wells which we believe they will do.

Switching back to the United States, so anyway Colombia outlook looks very good for the rest of this year.

Switching to the United States, South Texas continue to be very strong for us, we occasionally will have a rig or two down, but they don’t stay down for a long, generally go right back to work. We think that’s going to continue to be a strong market for us, I think today we're at 100% utilization there.

The Bakken also at 100% utilization, all under term contracts, rigs performing extremely well there. The Marcellus likewise at 100% utilized, we do have one rig that is a little questionable, we were optimistic, we will have it renewed, but we don’t know at this point.

And then, turning to the Uinta Basin, we did move a new build into the Uinta this quarter, this past quarter and we've also transferred a mechanical rig with a top drive from the Bakken down there and both of those are under long-term contracts. But, our shallower rigs that we've had there, some of our 60 series are struggling just because the well depths and lateral links are getting a little too great for those rigs. We have one of those down now, we anticipate another one coming down in a month or so most likely. So, it's a little bit weaker for the shallower rigs, but generally an okay market.

East Texas is actually operating, East Texas proper at 100% utilization because we've only left one rig in that market and that rig is working. We’ve sold and closed the sale of one of East Texas's mechanical 1,000 horsepower rigs. We hope to be closing this week on the sale of a second rig also a 1,000 horsepower mechanical, both kind of in that million and a half range pricing wise and will generate a little bit above net book value in profit for us.

We still have a rig in Houston yard that came from East Texas that was originally scheduled to move to West Texas that remains in the Houston yard so that is assigned to East Texas, but the one rig that’s actually working in East Texas is active and utilized.

West Texas market is probably our weakest market; it's mostly weak in the vertical, mechanical market. The outlook remains a little uncertain about putting the stack rigs back to work, we'll have to just see how that market develops through the course of the year; we're running about 61% utilization out there today. Lorne will provide a little bit more color on the West Texas contract status here in just a second.

Returning to our well servicing business remains very solid; we were almost back to 90% utilization and $600 an hour in this first quarter which is typically a seasonally low quarter for us, so they performed extremely well. We expect the second quarter and the third quarter to kind of go back to those levels or better, outlook is extremely good there. The 109 rig which is the only rig that we have left to be delivered, it's another 116 foot masthead rig that will begin in June working for a super major in the Eagle Ford. So, all in all it’s doing extremely well.

In wireline which has always been one of our top performing areas, the activity levels in the first quarter were roughly on par with what they were in the fourth quarter. These two quarters are seasonally lower quarter then the second and third quarter. And the revenue per job did decline about 3% in Q1 over Q4. We do think the pricing has bottomed and stabilized and we're optimistic about the improvement taking place in the more active second and third quarter. So, generally wireline continues to be a very strong business for us.

Turning now to coil tubing, I would say coil continued to underperform in the first quarter, even though offshore market which was strong throughout 2012 took basically the whole quarter to get kick-off, today activity is up, offshore units are back to work. Land utilization is also improving and we continue to believe that the second quarter will be improved over the first quarter and third quarter better or even than the second quarter so I would say that our outlook is cautiously optimistic that, that business is improving.

Now, I would like to turn the call over to Lorne for some financial discussion.

Lorne Phillips

Thanks Stacy, good morning everyone. This morning we reported consolidated revenues of $229.7 million which is up 1% from the prior quarter. Our EBITDA was $55.9 million which was down 7% from the fourth quarter. We reported a net loss of $0.02 per diluted share compared to earnings of $0.06 a diluted share in the prior quarter.

Drilling services revenues were $133.1 million which represent a 2% sequential increase that reflect strong activity in Colombia and the fact that all our new build rigs were working during the quarter. These two items offset our lower utilization rate and lower pricing in the US versus the fourth quarter.

Average drilling margin per day 8,258 up 2% quarter-over-quarter with the increase being driven by the same factors I mentioned regarding revenue. In Colombia all eight rigs worked steadily throughout the quarter and Colombia generated revenues of $30.8 million which is up 25% from the fourth quarter and represents 23% of total drilling revenue. Six of our Colombia based rigs are under term contracts that have been extended through the end of the year. Five of these rigs are currently working, sixth rig is temporarily down in April and May prior to drilling one to two wells for another customer and then will resume working again for Ecopetrol after that.

For the two other rigs in Colombia, we expect our customer to elect to drill optional wells that would keep one rig working into the first quarter of 2014 and the other rig working into the third quarter this year.

Overall, drilling services utilization in the first quarter was 84%. Currently, 62 of our 71 drilling rigs are generating revenue including five that are not working, but earning standby revenue through late second quarter into the third quarter. 44 rigs are currently under term contracts including the earning not working rigs. Of the rigs on term contracts in the US, eight are up for renewal this quarter, 15 in the third quarter, four in the fourth quarter and 11 are expiring beyond that point. The average remaining term for drilling contracts in the US is 10 months. During the first quarter we renewed five of seven rigs that were up, four renewal in the US, with two moving to working on a spot basis both of those in West Texas.

Now, the renewals, the average decrease in day rate was approximately 750 per day. The rigs coming up for renewal this quarter, the average renewal day rate is expected to be down on similar amount as they adjust to the current pricing environment. In West Texas nine rigs are currently down with five of those nine earning, but not working. Based on a visibility today, we expect to be flat this quarter in terms of rigs working in West Texas but will likely have an additional one to two rigs go down in West Texas in the third quarter and then we expect to stay flat through the end of the year.

In regards to the revenue utilization impact, three of the five earning not working rigs roll-of contract in mid to late June, one rolls up contract in early July and the other in late August. If we’re not able to put those rigs back to work, you would see the impact, the negative impact on our utilization which really be seen in the third quarter. When you combine the continued re-pricing of US term contracts, lower expected utilization in the US due primarily to the West Texas shift to the horizontal market and one Colombian rig down for two months during the quarter.

The second quarter drilling margin is expected to be down by approximately 3 million from the first quarter. I should point that we, to reiterate what Stacy said that we did sell one mechanical rig and we do expect to close on another this week. In total the percentage of total company's gross margin from non-top drive mechanical rigs in the first quarter was approximately 9%.

Turning now to our production services segment, Q1 revenue totaled $96.6 million which was down about 1% sequentially. The decline is due in part to normal seasonal factors along with somewhat slower spending ramp up this year by our clients. In addition, we had an unexpected activity slow down in our coal tubing business related to poor weather conditions and some permitting issues, both of those delayed the start of some offshore projects. We were also impacted by plan downtime for upgrades to some of our coil equipment on land.

April is experiencing higher utilization as Stacy mentioned and we expect to more normal level of activity in this business in the second quarter. Gross margin for production services was $36.1 million which is down about 2% compared to the fourth quarter and our margin as a percentage of revenue was 37.4% down slightly from 37.8% in the prior quarter.

Utilization for well servicing in the first quarter improved 89% compared to 83% in the prior quarter. April has started out strong and overall for well servicing and production services we do expect activity to increase as the year progresses. I should also point out that with natural gas prices now around the $4 per MCF, we're beginning to see a small pick up in gas related activity in production services.

Looking at our expense trends for the first quarter, interest expense was $11.5 which is up about $1.1 million from the prior quarter. The increase reflects additional borrowings as well as the reduction in capitalized interest that was related to our drilling rig program. Capitalized interest in the first quarter was approximately $0.8 million versus $1.8 in the fourth quarter. For the second quarter of 2013, we estimate interest expense will be approximately $12.5. The increase is due to the elimination of capitalized interest and the drawdown of our credit facility in the first quarter.

General and Administrative expense was $23.2 million, an increase of $2.3 million driven primarily by payroll taxes and incentive base compensation. For the second quarter we expect G&A to be in the $24 million range.

Depreciation and amortization was $46.3 million which is up 4.5% sequentially and reflects the recent additions to our fleet. With the new build program and drilling services now complete we expect G&A to grow at a slower rate as our overall capital budget declines this year. We expect second quarter depreciation in the range of $47 million to $49 million.

Our effective tax rate for the quarter was 29.7% which was low primarily due to foreign currency exchange loss. Excluding the impact of currency gains or losses we continue to expect a tax rate of 38% to 40%.

Turning to the balance sheet, we had cash and cash equivalence of $10.5 million and a $140 million outstanding under our revolving credit facility at March 31st. The increase in borrowings was primarily used for payments on our new build. With our new build program now complete we expect to begin paying down on our revolver either late this quarter or early in the third quarter.

Our total CapEx spend for the first quarter was $71.3 million with approximately half of that amount dedicated to new drilling rigs and production services fleet addition. For all of 2013, we continue to expect CapEx to be in the range of $140 million to $160 million.

With that I'll turn it back over to Stacy.

Stacy Locke

Thank you, Lorne. Looking to our guidance a little bit, I think that we still are optimistic that rig activity will pick up in the second half of the year, it's been fairly sluggish in this first four months of the year. But, the commodity prices have held well and we can believe that activity levels will improve to the course of the remainder of the year. So, with that backdrop, we think our drilling utilization will come down a little bit, we're guiding in the 80% to 83% range and that’s kind of taking into consideration this continued softness in West Texas, a little more softness in the winter basin for our 60 series shallower rigs and a slight bit of uncertainty up in the Marcellus. And then, we also know in Colombia will have one rig not earning for a couple of months mostly due to timing and location issues. But, the rig will be contracted, it's going to go drill for another client and we have winter outfalls with Ecopetrol, but there has some delays in that location. But, Traubel (ph) would assist a little bit there in Colombia for that one rig.

And in terms of margin, we're guiding there a little bit lower to take into consideration the day rates that have come down and the renewals of the term contracts at these new lower rates and our guidance here is 7,600 to 7,900 a day. And then, on the production services side, we do see an improvement on the top line, we’re going to guide in the 6% to 10% up on revenues, but I think, we will hold with flat kind of margin guidance, just to make certain that we’ve got pricing bottomed out like we think. And it could possibly even be down maybe a percent. But generally, I would say the outlook is pretty positive and we will see how the second quarter performs and then the third quarter we think should a better year.

So, I will end there and we would be happy to entertain any questions. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Jim Rollyson with Raymond James. Please go ahead.

Jim Rollyson – Raymond James

Good morning, Stacy, Lorne.

Stacy Locke

Good morning.

Jim Rollyson – Raymond James

Just kind of circling back to your comments on margins for the guidance for the quarter, when we think about the moving parts on rigs, softness in West Texas, you mentioned in a couple other areas just the short-term timing issue on Colombia one rig. How much of the sequential dip in margin is day rate related versus just what you're thinking about cost and I guess if you take that forward beyond the quarter knowing what you guys know about contract renewals over the course of the year and kind of where leading edge rates are and once you get Colombia back working like how do we think about day rate trends beyond the second quarter, with what you know today?

Stacy Locke

That’s a good question. I would say that it's all day rate, cost we're not seeing really any cost creep at all, Colombia had an exceptionally favorable cost controlled quarter which that built in, we would like to see that repeated, but it was an exceptionally good one. So, we built in a little bit of normalization there or hopefully this will be new norm. So that’s factored in there and so its all really related to the day rates having come down and then having those being reflected in the renewals.

And then, of course, the West Texas market, we do have some uncertainty there, in terms of what rates are going to do, we have a number of rigs down, they were being paid on through the second quarter for the most part and a little bit into the third. But, if we are able to put those back to work, will it take a lower day rate to do it? We don’t know, there are a lot of rigs working there, there are lots of folks working a lot at a lot lower day rates and we have been willing to work just because we provide a lot more for the client then just a rig, with the safety and the downtime control. So, it’s a little uncertain, but I would say guidance going forward is, it’s a tough call right now, I'd really rather wait and see what the second quarter shows before I guide beyond, I would say, kind of flattish until I know more. Do you have anything you would add to that Lorne.

Lorne Phillips

Not - well, I guess, I would just say that as I broke out the rigs up for renewal there were eight this quarter, 15 in the third quarter. And so, kind of depending on where the rates are going to your point, the third quarter there is a lot of uncertainty because there is - and nine of those 15 rigs in the third quarter are in West Texas and some of those included, they went over to some of the earning not working rigs. So, West Texas is going to have a big impact on how the overall dollar margin works in the margin per day in the third quarter.

Jim Rollyson – Raymond James

Understood, that’s helpful. And Stacy or Lorne, now that your 10 rigs are delivered, you've got one more well service rig coming in, I think, you said in June, I think that’s about all the equipment you have coming in, how are you thinking about your kind of targeted plans for reducing debt as the year progresses from here, like how do you think about that today?

Lorne Phillips

Well, the only thing where you're missing there are two skid wireline units that are, I think, due to come in May and then those are the last two pieces of equipment other than the 116 foot mast well service rig and so, after that, at this time have no plans to add any incremental units at all. We're focused on applying all the cash flow to reduce our revolver initially and then try to prepare ourselves to take a whack into the higher yield debt next year.

Jim Rollyson – Raymond James

Any magnitude thoughts, Lorne?

Lorne Phillips

Well, I think we had, as I said earlier, we plan to start paying down late this quarter or early in the third quarter. In terms of magnitude I had guided that we’d end the year in that $40 million to $60 million range on a revolver. Last quarter, I think, it will be a little higher than that but it depends on collection rates and timing of some of the CapEx. So, I would maybe increase that to maybe instead of 40:60 it might be in the 60 to 80 range and it would be a target. But, that will be dependent on timing of some those items.

Jim Rollyson – Raymond James

Got you. Well, helpful guys, I appreciate it.

Stacy Locke

Okay.

Operator

Thank you. Our next question is from the line of Michael Cerasoli with Goldman Sachs. Please go ahead.

Michael Cerasoli – Goldman Sachs

Thanks, good morning. Looks like your outcome, looks like a solid outcome in Colombia, this a little counter to what we’ve heard about that market. Did you have to make any concessions to achieve that result or that is to secure utilization etcetera or…?

Stacy Locke

No, we just renewed the contracts for the six rigs operating in one field there in Southeast of Bogota, in [Castillo] [ph] field and then we have also put to work the other two rigs. The pricing is a little improved actually even over what we had through the back half of last year that we roll it forward one quarter and now we roll it forward three more quarters. And, on this last round, we actually strengthened that rate just a little bit. So, it's I think, it's really tied to performance, we - our group there has continued to perform at the top of the market in pretty much all respects. In terms of downtime, they virtually have no downtime, we do only scheduled maintenance and keep the rigs in great operating condition. Safety has been stellar, footage, penetration rates has been stellar. So, I think that’s really what's driving, it’s just really strong performance and then once we got other two rigs back to work, I focus very hard on getting the cost under control, I think, we've seen the effects of that here in this first quarter a little bit. So, it's just really exceptional performance there.

Michael Cerasoli – Goldman Sachs

That’s great to hear. And then, my follow up question, just on production services, specifically the work over rigs, I was actually little surprised to see pricing come in a little bit quarter-over-quarter given I think it's been two year streak of increases. Can you give us a little more color on that, is that just a function of the type of work that was done in that specific quarter?

Stacy Locke

Yes, I think it's more a mix. When you just step back and look at it from afar, it's been fairly firm around the $600 per hour level and so in any given quarter you can have a shift in mix of doing different type of work with different people. And it will throw that a few dollars one way or the other and that’s I think essentially what happened here. I think that our group feels like that activity is going to be strong, we have the right rigs for the right work, we're doing quite a bit of 24-hour work, I think yesterday we had nine units on 24-hour work. We average anywhere from 5 to 10 I would say. But the pricing, we're not feeling really any pricing pressure, it's competitive out there, but I think that we’re hopeful in the third and fourth quarters we might even see some pricing improvement if activity levels do pick up.

Michael Cerasoli – Goldman Sachs

Great, that’s it from me, thank you.

Stacy Locke

You bet.

Operator

Your next question is from the line of Brian Uhlmer with Global Hunter Securities. Please go ahead.

Brian Uhlmer – Global Hunter Securities

Very good morning gentlemen, how are you?

Stacy Locke

Good morning.

Brian Uhlmer – Global Hunter Securities

I had a couple of quick follow ups, I guess kind of partially answered. I wanted to ask on Colombia, on the day rates on those rigs, the six versus the two, are the six all of the same or eight has the other two or is there some varying in the rates across those rigs down there?

Stacy Locke

Basically, all seven of the 1500 horsepower rigs are at the same rate, and then 1000 horsepower is at a modest discount to that.

Brian Uhlmer – Global Hunter Securities

Okay, perfect. That’s very helpful. Moving onto production services, while I look at coal tubing and your optimism over the land businesses that in terms of just more utilization increase, more 24-hour, potential 24-hour ops or some completions work or from the cost cutting and operations, what's going to be the primary driver or just seasonal benefit of more daylight hours and more work?

Stacy Locke

Well, on a coil, the first quarter of this year in the offshore market was very, very slow from, I don’t know that we really fully know why just our particular clients were slow to get started. Whereas a year ago quarter, we had a terrific quarter and both offshore and onshore, but offshore was a big surprise for us in this first quarter, but it looks like the projects are now lined up and we really got going at the end of March and April was much more active in the offshore. It looks like the outlook is very positive there with kind of a backlog or work behind it, so that looks very strong. And then, on the onshore market, we talked about that quarter-over-quarter about all of the changes we made there and as Lorne mentioned in this first quarter, I think, we were placed three or four injectors heads on units and then we had one of the offshore units down for a complete makeover and all that back onto the field now.

So, we're fully functional in terms of the equipment, I think the equipment upgrades or making a difference. And so, we're just utilization, it just takes time, but our utilization is just gradually building and we're building a stable of repeat customers and so it just steady growing process and I think that will really see it take all in the second quarter. And then, hopefully continue to improve on this point forward. I mean, that’s what our, other than maybe little seasonality, but I think, we're building a foundation of good solid business we believe.

Brian Uhlmer – Global Hunter Securities

Thank you, sir.

Stacy Locke

You bet.

Operator

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

John Daniel – Simmons & Company

Hi guys. Thanks for taking my question. Just a few from me, the first is on the production services, you mentioned that you got nine rigs running 24-hours and average 5 to 10. In light of the fact that there is, you sort of filling up the order book now for the 109 rig coming in and nothing officially ordered. Do you see opportunities with customers to transition to more 24-hour rigs and realistically how many could you convert to continue to grow the hours for the business?

Stacy Locke

Well, it is a growing trend, I mean, we used to, we look back just a year-and-a-half ago or so, two years ago maybe we were only doing just a few and now it kind of got pretty steady in the 4 to 6 range, now it's pretty stable and there is 7 to 10 range, and I think that we will see a gradual increase in the number of 24-hour works. It does, as you know, you need more labor and initially it causes you to cannibalize one of your daylight rigs that get crews. So, you need to build out your crew base in order to do that work. So, it has some challenges to it because the majority of daylight hours. So, we're just kind of gradually trying to be conservative, we don’t want to staff up a bunch of crews and then have the 24-hour work fall off. But, I think the trend is definitely towards more 24-hour work and we're staffing up slowly and steadily to handle it. So, we don’t have to cannibalize our daylight units and I think that’s we could really go as far as the market takes us on 24-hour work because 100% of our units can do 24-hour work. So, there is a right size as such for the work that’s why you do 20 hour work.

John Daniel – Simmons & Company

Is it one particular basin where you're seeing the shift to 24-hour or is it just across your portfolio?

Stacy Locke

I would say it’s a little mixed, but we're doing 24-hour work in the Eagle Ford, we're doing 24-hour work in the Bakken, we're doing it out of El-Campo yard as well that I can think of. Did you think anything else Lorne.

Lorne Phillips

So, it's kind of around.

John Daniel – Simmons & Company

Okay. Just want to come back to Jim's first question and sort of attack it another way and I understand your likeness to want to avoid forecast beyond Q2, but can you give us the sense as to what the average cash margins are on those 15 rigs that will in Q3 and just how that might compare to what the stock market is today?

Lorne Phillips

Well, the 15 are, I said nine are in West Texas, the other six are through the rest of the country. So, I don’t have an average of those 15 that would roll together. We've talked about in West Texas and for the vertical rigs, on average margin per day and that 3500 to 4500 before some of the pricing pressure that were out, that was out there. So, potentially it could dip lower on those rigs and we do expect to renew the majority of them, so that would factor in into that analysis.

Stacy Locke

I would hope that the clients were working for out there, appreciate what we’re giving them and we won't, Don will come sit in here, but I'm hoping we won't much on day rate. If we do it at all, it will be, I think minimal, do you agree, Don?

Unidentified Company Representative

I do.

Stacy Locke

Yeah, I don’t think it would be an impact, it's more of the 500 a day, I bet you. I think there is a highlight that will renew at current rate.

John Daniel – Simmons & Company

Okay, fair enough, alright. But, from a modeling standpoint that it sounds like and then all wells being equal world, it’s probably going to be down slightly Q3 versus Q2, the cash margins, but probably not materially?

Stacy Locke

I think it will, I think it will, here we have the benefit of the new builds all working, first quarter we will have them all working and the earlier new builds will get lined out, so that they're trending upward towards the margins that they should be operating now. These latest winds hopefully will get there quicker so you kind of got that element going on, then you have the loss of the stack but earning rig margin factored in there.

And then, you have a little bit of Colombia which we had, like I said stellar first quarter, we would like more to have another quarter despite the one rig being down for two months. For the rest of them to have another great quarter, but it was such an exceptional quarter, we have to be little cautious there that that could come in a little bit and that will affect the margin. So, we just have quite a few move in parts and makes the estimates complicated.

I don’t think, what I would say, generally I don’t see anything on the cost side, where you can interject that’s going to impact, it’s not anything on the cost side, its coming at us, I think the day rates I would say across the board in every market excluding West Texas, I think, firmed up and in some cases, we have some pricing strength, we’ve been able to roll some pricing higher. So, really everything is very firm except that grouping of West Texas rigs and then the shallower capacity 60 series rig in the Marcellus they're struggling that’s more of a utilization issue, less pricing. But, if you, when your utilization goes down, you usually have stack up cost in order to park those units somewhere, if in fact, you can't get them active. So, you have to be careful of the cost there that will impact margin.

And then, the Colombia whatever, we hope it will be another great quarter there, but first quarter was just off the chart. So, we will have to see there. But, day rates are firm if not improving, cost is completely under control, it's more of these other moving pieces.

John Daniel – Simmons & Company

Okay, thank you very much.

Stacy Locke

You bet.

Operator

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

Daniel Burke – Johnson Rice

Good morning guys.

Stacy Locke

Good morning.

Daniel Burke – Johnson Rice

Stacy on the production services side, you have been constructive on your comments on coil and the seal progression what we typically see in production services. So, just in terms of the margin guide in the business for Q2, is that really in deference to ongoing pressures in wireline or is it just taken at generally conservative package as you enter the second quarter?

Lorne Phillips

Well, I think, wireline is for the most part, we think it stabilized. We do want to wait and see as Stacy said, but there is a little bit of the roll in the end of fourth quarter if any negative pricing impact had occurred in the first. But Daniel, some of it is or lot of it is just going to be mix of businesses that we think are going to pick in revenue. So, pricing we feel is pretty, well servicing like Stacy said, we’re optimistic that’s its flat. In wireline we're optimistic, it's stabilized. Coil there maybe some pressure out there, and so, and then when you put the mix of where the revenue growth is coming from, our estimate is conservative, our estimate is that’s it flat. And if its down, its flat to down 1% is what Stacy said, I think that’s reasonable right now, we'll just have to kind of see how it unfolds.

Stacy Locke

Yeah, Lorne brings up a good point. In wireline the pricing really has come down in the third quarter last year, fourth quarter last year, first quarter less so this year and we think now it's bottom then activity levels are building and that outlook looks good and we hope that we will recover some pricing in the back half of the year on that business.

The coil probably he mentioned, the pricing there has probably come down a little bit and for us, we really just need more utilization, I think that if we can get our utilization up like we hope to, even at the current pricing that could be a pleasant upside to it. But, we can't forecast that based on our experience. But, the pricing, we don’t talk about that pricing too much just because for us we got to get the utilization up for pricing to make that difference. But, the pricing has softened in coil a little bit, but I think if we get our utilization up, you're still going to have a great contribution from it at some point there even at the current pricing. But, that’s been our struggle there as utilization.

Daniel Burke – Johnson Rice

Okay, great. Those are helpful. And then, I want to just point of clarification, Lorne. I thought you said, was it 9% of revenues from the nine top drive mechanical rigs, was it 9% of drilling revenues or total?

Lorne Phillips

It was 9% of the total company's gross margin. Total company including production services and it was for the non top drive mechanical rigs and that does the earning not working rigs as well was that 9% of the total company's gross margin, was their level of contribution.

Daniel Burke – Johnson Rice

Okay, great. Thanks for the clarification, thanks guys.

Operator

(Operator Instructions) Our next question is from the line of Trey Cowan with Clarkson Capital Markets. Please go ahead.

Trey Cowan – Clarkson Capital Markets

Good morning.

Stacy Locke

Good morning.

Trey Cowan – Clarkson Capital Markets

Just looking at West Texas for a second and I get the sense that the inventory of viable vertical wells really hasn’t changed, if anything has probably grown a little bit. So, against that what have you seen as far as your customers of why they're moving away from drilling those wells at this time?

Stacy Locke

Well, not all of them are moving away from the vertical, we've enjoyed some fairly high concentration from a few clients out there. One of them has their own drilling rigs and so their choice was to drop their third-party rigs, utilize only their own drilling rigs and focus that capital that they were spending on third-party vertical rigs into their horizontal program. So, it just kind of changing of their approach which I think probably for them makes a lot of sense. But, they had at one point they had six of our rigs out there. So that was a big blow to us that was almost over a quarter of our fleet. We also have another big client out there who as far as we know, fully intends to continue their vertical program certainly through the end of the year that we know and maybe longer. And then, we have others that have maybe one or two rigs that change their focus more towards to the horizontal but then we still have others that are steady on the vertical drilling.

So, what we're trying to find, we had the good fortune of having a lot of the bigger publicly traded companies out there as our client and we would like stay with those folks because they generally appreciate that work that we put into the rigs, as I have mentioned down to four, our rigs are different from a lot of other people out there and that they have (inaudible) a lot of them have 500 ton top drives, they have big hydraulic horsepower pumps. So, we have a lot more in those rigs then you're traditional West Texas. So, the bigger operators tend to appreciate that more and the service, safety and the downtime that we kind deliver. So, we're trying to look for those higher end clients out there to replace the ones we have lost. So, it's taking a little time, we would rather not go to the spot market with these units if we can avoid it. So that’s where we're going to hunting for to replace that business with other good operators.

Trey Cowan – Clarkson Capital Markets

Great that makes sense. Switching gears, can you give us a little color as far as your fleet of rigs that will be used pad drilling what the number is magnitude, kind of client may understand out there for pad drilling?

Stacy Locke

Well, we have seen a steady increase in the number of clients that are wanting to go to pad drilling. As an example, where our 10 new builds we had clients wanting walking capability on all 10 of those new builds, so all of those have it. And then, we have been adding walking systems to our existing SCR fleet, so we think it’s a rapidly growing trend, we're seeing it a lot more in the Eagle Ford now, as I mentioned in the, I should have mentioned in the Bakken prior to our first new build going there, none of our rigs had walking system and no one had ever required it before. But now, I think, all the six of our 10 new builds went there, they're all doing pad drilling, we're in discussions with one of our other major client there about putting walking capability, I think it's three other rigs, three other rigs in the Bakken and then in the Eagle Ford I think we're putting currently two rigs currently and then we've ordered walking systems for a third rig.

So, it’s a growing trend and I think it's great, it does cost us a little money, but it does make these rigs more what clients want in today's world. And the pad drilling is a big help for us and we're asking to be paid back for the cost of the pads through an increase in the day rate and an increase term. But, it makes these rates a lot more competitive in the growing trends toward pad. And these are true walking rigs that perform very, very well on the pad sides with a lot of flexibility, they're the kind of walking systems that the operators prefer. In addition, we have, we're installing on these ones, we had the walking systems to our SCR rigs, we're adding on fasting (ph) systems like we've noticed in our flick that we've got a picture fasting system where all your cabling is kind of accord in the lawn as you walk the rig in a nice, neat controlled safe manner. And so, we're doing both the walking system and the fasting system to handle all the wiring as we operate these rigs. So, I think it's going to be beyond the increase and it keeps us on day rate, not old rate and we like it.

Trey Cowan – Clarkson Capital Markets

Great. And just one quick question on that, is there any difference in the crew size for whatever you're talking about a rig that are walk versus one that doesn’t?

Stacy Locke

No, same crew.

Trey Cowan – Clarkson Capital Markets

Alright, thanks a lot.

Stacy Locke

You bet.

Operator

Our next question is from the line of John Keller with Stephens. Please go ahead.

John Keller – Stephens Inc

Hey, good morning guys. Just a couple of quick, kind of picky ones I guess. Stacy I think you had mentioned the average sale price for those two rigs you're selling, one that was sold, one that’s pending about a million-and-a-half each?

Stacy Locke

Right.

John Keller – Stephens Inc

And I guess, how many more rigs are left in the fleet that you guys sort of think of disposing it, what I would guess are pretty low valuations?

Stacy Locke

Well, those rigs were literally unique in that we had really put any capital in them at all. And when we sold them they didn’t include the (inaudible) or the tubular. So, we kind of took off the valuable components of it, and our netbook value was in the low ones I would say. Now, of course, that’s a gross sale amount to, there will be commission taken out of that. But, as we move into some of these other rigs, do we have any more like that, that are at that real low, those were the two at the lowest netbook value?

Lorne Phillips

It's only two.

Stacy Locke

Only two? So, those are gone, we think the other one will be finalized here this week. But, then we will go into another tier of rigs that will have a higher netbook value that will have to, will try to add for a higher price on those rigs as they have a little more, they're in better condition and a few more bells and whistles on them. But, I would say the way we're approaching it John, is if we have an asset that’s down and we think that the utilization outlook is low for the next 6 to 12 months then we're going to try to monetize that asset. We will keep a core of these mechanical rigs to drill the vertical oil, and then or course when the gas price proves a little bit more we will see vertical gas really come back and that will put a little more demand on this asset plus, because right now you only have oil demand for it.

And so, we will allow the chance to drill vertical gas and vertical oil with it and so we will keep a core group of them, the ones in real good shape, try to sell the ones along the fringe that we don’t feel like we have chances of keeping, hardly utilize. And I would say that’s probably another four to six rigs potentially in that range.

Lorne Phillips

At the most.

Stacy Locke

Yeah, at the most.

John Keller – Stephens Inc

Okay, perfect. And then, I think you had mentioned just sort of off-hand there that you had seen some pockets of strength recently there maybe you had seen some days were you able to increase on success in current tracks, could you elaborate on that at all?

Stacy Locke

We've got Don (Inaudible) he is the man that does it, so I'll let him comment a second.

Unidentified Company Representative

The part of that is that Marcellus has been adjustment on some pricing in that market and also in addition, I associate that with the gas pricing helping a little bit utilization or the market out there has been pretty well. Relatively holding flat out there and then the Golf Coast market, there has been a little stimulus there when it comes to pricing readjustment on some pricing that either hold them flat or have increased slightly.

Lorne Phillips

Yeah, some of those Eagle Ford rates got pretty competitive there and in the fourth quarter, early first quarter where the rates dropped, I would say in the 19, even some in the 18 level and for the most part would say, those have kind of gone back up to the 19, 20 level at the floor.

Unidentified Company Representative

Correct. Just everybody was assessed and what was going on in the market pricing wise and now there is stabilization, reassessment value added on what’s out there and the prices have adjusted accordingly.

Stacy Locke

So, I don’t see any market other than West Texas on the mechanical vertical rigs where we really have pricing pressure on drilling, do you Don?

Unidentified Company Representative

I agree with that.

Stacy Locke

So, things pretty stable and opportunity for improvement.

John Keller – Stephens Inc

Perfect. Well, that’s it from me guys, thanks.

Stacy Locke

Okay, thank you.

Operator

Our next question is a follow up from the line of John Daniel, please go ahead.

John Daniel – Simmons & Company

Hey guys, thanks for putting me back in. Just one quick follow up on the production services. Lorne, the margins there, you get back to 2011 and part of 2012, just historically they're sort of low of 40% gross margins and then the last several quarters were sort of high 30%, I mean, if you look out beyond the guides that you did, just something structurally different that weren’t new normal, if you were on sort of the mid high 30s or is there anything out there like a big pricing increase that will take effect to the historical levels?

Lorne Phillips

Well, we have had some impact related to wireline pricing which is I think kept it from getting to that 40% plus level. I think that’s the biggest contributor, I think if you had the stabilization there and if you can get some pricing benefit back in the say, second half of the year either in wireline or coil or both. I think that could give you some potential to get back there, but that’s probably what you need. I think well servicing as we talked about is going to be pretty stable and maybe some opportunity, but it's really probably going to be done by pricing in wireline and coil.

Stacy Locke

And rig count is really what cause that, I mean, we had the declining rig count in Q3, Q4 of last year that’s persisted into this first part of this year. And so, if rig counts starts moving upward in the back half of this year, then all of these businesses will have a chance to get their pricing back. We think about the Bakken as an example that rig counts come in quite a bit so all those wireline units are chasing those top downs on the fewer number of rigs so the pricing has come down per stage pretty significantly, but is stabilized now. So, the rig count picks up another 20, 30, 40, 50 rigs that’s you're back into very favorable pricing situation.

John Daniel – Simmons & Company

Okay, thanks guys.

Stacy Locke

Okay, thank you.

Operator

That does conclude the Q&A session. I would now like to turn the call back over to management for closing remarks.

Stacy Locke

Okay. Well, those are good questions, we appreciate everybody's participation on the call today and we will look forward to the second quarter call. Thank you very much.

Operator

Ladies and gentlemen this concludes the Pioneer Energy Services First Quarter Earnings conference call, information for accessing the replay is available in this morning's press release. ACT would like to thank you for your participation, you may now disconnect.

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