Pioneer Drilling Q2 2009 Earnings Transcript

Aug. 6.09 | About: Pioneer Energy (PES)

Pioneer Drilling Company (PDC) Q2 2009 Earnings Call August 6, 2009 11:00 AM ET

Executives

Lisa Elliott - Senior Vice President, DRG&E, Inc.

Wm. Stacy Locke - President and Chief Executive Officer

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

Analysts

J. Michael Drickamer - Morgan Keegan

James M. Rollyson - Raymond James

David Deckelbaum - UBS Investment Research

Steve Ferazani - Sidoti and Company

Ryan Fitzgibbon - Pritchard Capital

John Daniel - Simon & Company

Judson Bailey - Jefferies & Company

Sam Rebotsky - SER Asset Management

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Pioneer Drilling Second Quarter Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday August 6, 2009.

At this time, I'd like to turn the conference over to Ms. Lisa Elliot with DRG&E, Inc. Please go ahead, ma'am.

Lisa Elliott

Thank you, operator and good morning, everyone. We appreciate you joining us Pioneer Drilling conference call to review its 2009 second quarter results. Before management makes their formal remarks, 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 is www.pioneerdrlg.com, where it will be archived for one year in the Investor Relations section and also via telephonic replay through August 13 by dialing 303-590-3030 and entering the pass code 4106201.

You'll also find that information in today's press release. Information recorded on this call speaks only as of today, August 6, 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 belief as well as assumptions by and information currently available to management.

Although management believes that the 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 subsequent filings with the Securities & Exchange Commission.

Should one or more of these risks materialize or should the 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 reconciliation 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.

Wm. Stacy Locke

Thank you, Lisa and good morning. Joining me on the call this morning is Joe Eustace, President of our Production Services Division and Lorne Phillips, our Chief Financial Officer.

I've like to open the call this morning with some general comments on the market. As we predicted in our last quarter cal, I think we have clearly bottomed during this second quarter. In levels of rig count levels, work over utilization, while on activity. But, the feel is more of a balancing along the bottoms as opposed to clear path to recovery. You know there -- weeks it look good and weeks it look bad but it's clearly a bottoming out phase of the cycle.

And as we alluded to you in the last quarterly call, there are isolated areas of demand. Clearly, the Marcellus shale continues to be an area of drilling rig demand. As we mentioned in our press release, we have mobilized our rig to the Marcellus its drilling its first contract currently through this average in office there. We will begin taking loads of our second rig out there. Both of those are the identical rigs there 1000 horsepower trailer amounted quick moving rigs with top drives.

And we are hopeful that we'll add opportunities to place additional rigs there perhaps prior into this year. I think we're also seeding a modest pick up in our South Texas market. Some of that for Pioneer at least is turnkey work. We have increased our turnkey activity. But I also think it's impart due to the Eagle Ford shale play that continues to develop -- we just completed a well or we just completed a drill in a well therefore a customer and there has been a number of well drilled. And it looks like that activity will continue to increase even this year.

In addition; as a continued sense of optimism in the Bakken shale in North Dakota that charter as you might call it is, has not really translated yet into increased drilling rig activity. I think we are seeing an increased activity in our wireline operations.

But I think that too will show some improvement as we progress through the rest of this year; particularly with oil pricing permanent. In general, the production services sector kind of as I mentioned before having and flowing. But generally activity is up but pricing is still very, very competitive. I think the bottom line is that the CapEx dollars are not being spent for drilling oil production services still today.

And but I think that the situation appears to be beginning stages of improvement. With respect to the quarter, just ended. I think we've came out a little better than our own expectation. I think this is impart due to the production service revenue stream holding up a little better than anticipated. And then seeing the results of our effective cost controls.

We were able to hold our drilling margin at 38% quarter-over-quarter. And our production service margin at 36% quarter-over-quarter, due to the efforts of our management team on controlling their costs extremely; pleased with that.

In addition, our G&A was down over $1 million that also was a result of the effort of our management team controlling these costs. Our current rig count is 37% or 26 of our 71 rigs working. We have eight term contracts remaining, three have already expired in this current quarter with three more expiring in Q3, two in Q4 and then we'll have three continue into 2010.

On the production service side in particular work over, a utilization declined a little bit further from 50% to Q1 to 45% in Q2 the hourly rates declined another 12% averaging 465 in Q2 as compared to 530 in Q1.

I would say lately we're bouncing around a bit. I think utilization has been as low as 38% and is high as in the low 50%. But I would say on average were about flat with Q2. And I think hourly rate is kind of decline very modestly in the kind of the 2% range from Q2.

But it's still counting a little bit too but averaging in the four -- 50 to 460 per hour range.

Our wireline business continues to be steady if not increasing but is very, very competitive. And our fishing and rental business is extremely depressed currently probably will remain that way for the foreseeable future but should improve at some point.

I'd like to turn the call over to Lorne to give a financial recap and then I'll visit further about what we see going forward.

Lorne E. Phillips

Thanks Stacy. Good morning, everyone. As reported this morning for the second quarter of 2009, we had a net loss of 6.3 million or $0.13 per diluted share. This compares to net income of 618,000 or $0.01 per diluted share in the first quarter.

EBITDA on the quarter was 17.9 million compared to 53.4 million, a year ago and 27.8 million in the first quarter of this year.

Drilling revenues were 45.7 million, down 36% from the first quarter of this year, due to the steep decline in drilling activity following the commodity prices to introduction last fall.

Approximately 10.2 million of this quarter's drilling revenues came from our Colombian operations and another 7.8 million came from rigs that were earnings revenue through standby rates under longer-term contracts in the U.S.

Revenue from rigs earnings standby rates is estimated at 6.4 million for the last six months of 2009. Stacy mentioned that our margins were in the drilling NPP area were flat with the prior quarter.

Our operating cost in the second quarter of 2009 for drilling included a $1 million charge in connection with the wrongful debt loss we settled in early July.

SG&A cost were down another 11%, sequentially to 9 million and that request reduced primarily reduced compensation cost and lower professional consulting fees.

The effective tax rate in the quarter was 36%, driven by U.S. pre-tax loss partially offset by pre-tax income generated in Colombia. And based on the current outlook, we expect the full year effective tax rate to be in the low 30s.

Turning now to our capital liquidity position, our cash at cash and cash equivalent at the end of the quarter were 43.7 million, up 13.7 million versus March 30th. A debt balance under the revolving credit facility remained 257.5 million plus an additional 11.5 million in the letters of credit.

As of today, we remain in full compliance with covenants of our credit facility. But as we indicated last quarter, the outlook in the second half of the year indicates that we would potentially experience difficulty maintaining compliance beginning in the fourth quarter of 2009.

Based on our active discussions today with lenders, we believe we will be successful to negotiating some relief on covenants and anticipate completing an amendment to our credit facility in the next 60 to 90 days. At June 30, our leverage ratio was 1.64 to 1 and our interest coverage ratio was 15.3 to 1.

The credit agreement requires a maximum leverage ratio in long ways in 2.75 to 1 through March 2010 and 2.5 to 1 to maturity in February 2013. And we also maintain the minimum interest coverage ratio 3:2:1.

Looking at CapEx, our CapEx in the second quarter was 18.5 million with approximately 4 million of that classified as routine expenditures, 7.6 million or three top drives and other equipment upgrade and 6.9 million to complete construction of rig 67 which we have discussed that I want work in early May in Bakken shale play in North Dakota.

Looking forward, we focused on routine expenditures needed to maintain safe and efficient equipment or expenditures that are required to secure new drilling contracts. And we expect to fund our CapEx primarily from operating cash flow. Our priorities for the second half of the year remain the same just to match our operating cost and capital out ways to our expected activity levels to preserve our liquidity and to maintain and grow our market share in each segment.

Now I'll turn it back over to Stacy.

Wm. Stacy Locke

Thank you, Lorne. With respect to our outlook for the third quarter on the drilling side. As I mentioned earlier, in total we'll have nine term contracts, excuse me six term contracts fall off during the quarter. I believe will be able to replace that work at spot rates. But I'm not sure we can do much better then that in the quarter based on the activity level that we're seeing. So I would call the utilization level roughly flat with Q2. I think the core day rates are going to continue kind of in a flattish realm relative to Q2. But, our margins are going to be severely impacted as a result of loosing the sixth term contracts, during the quarter which include some term on rigs that are idle which therefore has a very healthy margin.

So, as those roll-off and are replaced by spots that average margin per day will come down significantly. Our estimate is in a range of 5500 per day as where we should end up.

One aspect of our business of note is, what I mentioned earlier the increase in the turnkey business. In Q1, we completed one turnkey, in Q2 we completed two turnkeys, in Q3 so far we've already completed two turnkeys and we have three rigs currently drilling on turnkey contracts. So, I would anticipate to that we would complete this quarter having drilled five, six, maybe in seven turnkey that will have an impact on the revenues and cost going up and in particular revenues per day and cost per day, because all of that extra expense run to the revenue line and the cost line.

Just want to make you aware that as we look towards Q3. With respect to Q4, I don't think our guidance has really changed any from our last quarter guidance. We're attending more towards spot rate margins, which are probably 25 to 3500 a day. And there maybe even 2 to 3,000 a day. But in utilization, is a little bit of unknown, I think we would anticipate the rig count improving in Q4, but I think there is some gas price risk there and it should be unknown whether their operators increase their capital spending.

With respect to production services, as we had anticipated, we have definitely bottomed in Q2, I think our forecast is going into Q3 is for revenues to be flattish, as opposed to that decline that we've experienced in Q1 to Q2 that Q2. And we think the margins, we should be able to hold where they are as well.

So, that concludes our prepared remarks. I would like to open the call open the conference the calls, please.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question is from the line of Mike Drickamer with Morgan Keegan. Please go ahead.

Wm. Stacy Locke

Good morning, Mike.

J. Michael Drickamer - Morgan Keegan

Hi. I just needed a follow-up on your guidance included drilling mix -- of course a lot of moving piece in there between the rigs flowing of term contract in the turnkey well. Do you think margin are going to decrease during the quarter, or be somewhere between 5,000, 6,000 per day?

Lorne Phillips

Yes.

J. Michael Drickamer - Morgan Keegan

And then average daily revenue perhaps since last?

Wm. Stacy Locke

Well on drilling?

J. Michael Drickamer - Morgan Keegan

Yeah.

Wm. Stacy Locke

I don't know where the revenues are linked out, because we are likely to say, we have a lot of moving parts, I think that -- I guess with the turnkey business there is a chance between whole of our utilization roughly flat, you're going to have offsetting factors that work, you're going to have declining day rates, but you going to be increasing your turnkey exposure. So, it's going to be hard to say, I guess flat would be as good as guess as anything.

J. Michael Drickamer - Morgan Keegan

Where do you see current spot rate that relative to the term contract that have little rollover quarter (ph)?

Lorne Phillips

Well, spot is fairly broad now, because of different areas of the country we're working in and different equipment required on the rig. So, it's a little hard to guess. But I think where we given guidance in the past it's kind of South Texas, East Texas spot. There has been kind of in the 95 to 125 range. I think it's still roughly there maybe 9 to 12. It hadn't changed much. So that's where I think we are.

J. Michael Drickamer - Morgan Keegan

Okay. If I'm looking at the geographic issue you mentioned moving cover rate that the Marcellus shale are there are any other repositioning that you are doing right now?

Wm. Stacy Locke

Well, we are going where the action is wherever that maybe. So we're looking, we continue to look heavily in the international markets. We feel think the Bakken is going to be attractive. We think when we see a little Caroline and gas prices obviously the Haynesville will be attractive, either we'll be attractive. So, we're kind of position ourselves and what we feel like are the better place we continue to do very well in Colombia. We see opportunity there where, we feel like Mexico is another area with lots of great demand. We've been working on projects there. So we're pursuing all of the front where the action will be.

J. Michael Drickamer - Morgan Keegan

All right; last one from me you guys did a good job controlling cost during the quarter. Have you sneeze something you can have your cost structure or is there still where you can stand?

Lorne Phillips

No, Mike we don't have a stuff. We're still looking at lots of aspects of cost. And I think that the figure aspect evidence squeezed out. But I think we're continuing to do a little fine tuning as we see opportunities to do so.

J. Michael Drickamer - Morgan Keegan

Right, that's it for me guys. Thank you.

Lorne Phillips

Thank you.

Operator

Thank you. Our next question comes 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

Can you talk about obviously the margins help up well and good job on cost cuts. Can you talk about kind of what the margin opportunity you see in the turnkeys maybe relative to those 2 or $3000 margins issue in swap market today?

Lorne Phillips

Well, you've been calling us a long time and you've recall the history where this is on the turnkey. I mean I think in a general sense that with turnkey assume in you can work the rate on turnkey, which is a stretch to make that assumption because otherwise if you weren't willing to the turnkey your rate would more likely be set that in the event you're able to work, that same doubling day work as opposed the turnkey, I think of margins would be at least 50%, higher on turnkey.

James Rollyson - Raymond James

Which is on average about what you guys have seen in the past if I recall?

Lorne Phillips

Right, right.

James Rollyson - Raymond James

And if you look at your overall margins, the numbers this quarters is 5 to 5500 next quarter and you've maybe and I know you haven't given this detail too much in the past but let me tell us how much is the approximately Colombia is helping out because that's five rigs that almost 20% your fleet. Right now and I thought when you guys signed up rigs here in the first place the margins are pretty strong and so I think why you move down there is some, so just kind of relative to scale of that?

Wm. Stacy Locke

I don't want to give too much color there but I would say that the same principles that we were driving for last year and the year before in Colombia still hold true I think we're anticipating with the average margins there will be a little bit higher than what we have here in the projects.

James Rollyson - Raymond James

Can you remind us how much time do you have left on the contracts, you've got go right now?

Lorne Phillips

In Columbia?

James Rollyson - Raymond James

Yeah.

Lorne Phillips

Well. They've done differently, there they give you every rig is different. And as an example, that might give you two firm jobs and three option at their option at the pricing. Our experience is then I drilled all of the firm wells what you could call return and the option well. So, it's a you don't have a term contract of great link, but the lightly there is that the rigs will work for a long time. I think the majority of those rigs should work through the end of this year and beyond.

James Rollyson - Raymond James

Okay. And last thing just on the Marcellus, unlike your belief as you get opportunity to go beyond the two rigs, any better pricing up their or is it just more of a utilization gain?

Lorne Phillips

Well, we did not generated our P&L yet for that market. But I believe that the pricing there will be higher than our average pricing in the U.S.

James Rollyson - Raymond James

Excellent. Thanks.

Lorne Phillips

You bet.

Operator

Thank you. Our next question comes from the line David Deckelbaum with UBS. Please go ahead.

David Deckelbaum - UBS Investment Research

Good morning Stacy. Good morning Lorne.

Wm. Stacy Locke

Good morning.

Lorne Phillips

Good morning.

David Deckelbaum - UBS Investment Research

I wanted to just ask you a little bit more about your Marcellus operations now, does that recall you had a few rigs that you have identified that will original go through purpose in the Barnettt that could be moved up in the Marcellus? Any more significant in the Barnettt now approximately four more rigs you said that you will consider moving in Marcellus before getting contracts there?

Wm. Stacy Locke

Yes. In fact we are mobilizing another rig out of the Barnettt in the Eastern the winterize it, put a top drive on it and have it prepared to move to the Marcellus although we don't have a contract yet for it. But we have as you pointed out those are fit for purposed rigs that we built for the Barnettt shale to the application to Marcellus is just very similar to the Barnettt. They are just ideally suited their double rigs, their electric. We managed to top drives in. They've got 1000 horsepower pump, they are trader amounted. So, in total they're about 17 loads excluding the two dealers.

And they have a small footprint moved rapidly. So they really, ideally suited for that play. In fact on the first hole that we've drilled, we've achieved penetration rate, greater than any other rigs in that area to my knowledge.

So, we feel like once those rigs are established there and other people here on that they are just going to be ideally suited. We probably have a total of five or six rigs that far identical that we can chip over there. And then we have some others that are very similar more the -- kind of the Cabot file (ph) that also would work there very effectively. So we feel like we could make that a very nice division if we can attain the contracts.

David Deckelbaum - UBS Investment Research

Okay. Congratulations on the good results there.

Wm. Stacy Locke

Thank you.

David Deckelbaum - UBS Investment Research

On the second rig that you have going to work out there is that for the same operator.

Wm. Stacy Locke

No.

David Deckelbaum - UBS Investment Research

Okay. Interesting to here as well. Any granularity that you could give on some of the turnkeys and just a dollar amount that may have been attributable to turnkeys through 2Q?

Lorne Phillips

For Q2, we completed two turnkeys an just per year-to-date I'll tell we have turnkey revenue 3.5 million.

David Deckelbaum - UBS Investment Research

Okay. And both for those turnkeys were their growth in South Texas is that where must turnkey billing right now?

Lorne Phillips

Basically, 100% of the turnkey work in South Texas.

David Deckelbaum - UBS Investment Research

Okay. I think the 60 million, but thank you guys.

Wm. Stacy Locke

Hey, David. Thank you.

Operator

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

Steve Ferazani - Sidoti and Company

Good morning, Stacy. Good morning Lorne. Usually, just work going to a new country or new region you talk about meet critical so the Marcellus steel was a little bit different in how that rig into that sales and what you are looking at really?

Wm. Stacy Locke

Well, where you've been tremendous amount -- as you can image its highly competitive every contractor in the country in the country is trying to move rig there. We've aligned with some customers that shift things work out, their goal is to not just have one rig. So hopefully will have opportunity to bring additional equipment to those two operators in addition we're talking a number of other operators. So what we have to sell there. And we're confident of is that we have a rig that works effectively and efficiently in that play. So if we have been likely just a matter of time before we will have the critical math of five, six rigs working there.

Steve Ferazani - Sidoti and Company

Okay. The rates discussed during now is that under contract over the will you take response when up there?

Wm. Stacy Locke

No, no it's under contract.

Steve Ferazani - Sidoti and Company

So is that a legal with under contract somewhere else should be operator just want to move it there can you explain that order?

Wm. Stacy Locke

No, it is the rig that set in the Barnett shale and this was a customers that we've not work for; it's an existing customer. But they were not using those rigs in the Barnett. They had a different operator used rigs to Barnett. Those were all fit for purpose build for a specific operator in the Barnett, we built I think a total of 5 or 6,7 form and so with different customer.

Steve Ferazani - Sidoti and Company

So you just like into our contract now what's the time of that and it is a good time to be locking into a contract?

Wm. Stacy Locke

Well, we basically just locked into a short-term contract. We didn't -- we preferred not to take it up on a one well contract. But we would be; we're comfortable because the demand is high there and we know our rigs and in perform. But this contract will run through the end of the year.

Steve Ferazani - Sidoti and Company

Okay. And then just do we talked about the eight term contracts left in place that exclude any other working Columbia.

Wm. Stacy Locke

That excluding to, we referred those job Columbia. I think If you really analyze them you probably could pick couple of and they would need our classification of term that we use in the U.S. that which is term of six month or greater but, we don't include those.

Steve Ferazani - Sidoti and Company

Okay. Last question just in terms of the five rigs operating Columbia activity there. How much of that just going to be driven by spot oil prices and how should we look at that.

Wm. Stacy Locke

Well, I think that the fundamental lease and that we moved into and picked selected Columbia as our first international expansion is because of the faded goals of the administration there to spend the dollars on increasing production. And they have -- that's been in effect for a number of years. And they have done what they've said there we're going to do.

I think that it's a long-term goal of the country to improve their production and they have put their money where their map is and they spent the dollars, I think they have continue to spend the dollars. We had a little a bleak when the U.S. market melted down and oil prices fail, but I think that was more opportunistic maneuvering on behalf of people in Colombia there. They certainly are aware of everything going on in the world. And so they're going to take advantage of that and our rates will reduce at that time. But I think there'll be increased demand into the future there for many, many years.

Steve Ferazani - Sidoti and Company

Great, thanks a lot Stacy.

Wm. Stacy Locke

Okay.

Operator

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

Ryan Fitzgibbon - Pritchard Capital

Good morning.

Wm. Stacy Locke

Good morning.

Ryan Fitzgibbon - Pritchard Capital

Cash flow product with production services, where are you seeing the most activity right now and is that primarily oil driven or are seeing some gas work as you kind of stand expand on that?

Wm. Stacy Locke

Well, I think the oil markets are the more active ones although oil, the oil markets are on a big percentage of they're overall production service business. But I think the oil isn't more active, but there different pocket. I think of the three business lines I think our wireline business is performing the best. And activity has been up. And we've just got a stellar team of professionals in that group that we're doing some of the highest tech completions and various other wireline works.

We're just -- we continue to get business even when things are soft. And I think the pricing is very competitive particularly in those all markets where wireline companies have left depress gas regions and they've all of kind of focused on where there is oil in the U.S. But that'll change when the outlook of gas improve where people go back to where their customs are working. But I think the group is solid and doing good business. The work over side is also showing some signs of improvements.

We pulled a two or three more rigs out of stack state and put them back in the field just because we had opportunities to do so and so we're seeing some improvement there. But as I mentioned in the opening remarks it's having in flowing I mean it moves ahead looks pretty good and then backs of a little while but I think generally that business is going to do well later in the year as things turn up in the market.

But there is no doubt that in the production service arena there is a lot of pinup demand that has been developing. So I think we have to believe that at some point when people starts opening their first streams at the production service market is going to come back pretty heavily.

So, we are poised ready and waiting for that. The one area that has been hit a very hard but also will have tremendous spin of demand fishing and rental, it's been just severely punished in this cycle but when things come back it'll come back with a vengeance as well.

Ryan Fitzgibbon - Pritchard Capital

Okay, that's helpful. And of the 71 rigs in your drilling fleet, how many are you actively marketing right now and how many are stacked could you step more a cut cost?

Wm. Stacy Locke

Well we have only six rigs that are cold stacked that are -- we're not really marketing at this time and those are the shallow rigs low horsepower rigs in our Western Oklahoma division. So we're really not marketing those rigs that market has been dead for over a year. But all of the rest of our fleet we continue to market. And they are -- we've got them stacked and have the cost very, very low. But we're working different rigs. They're stacked in different locations around the country which help us when the job comes up, we don't have to move a rig long distance because you're yet to be competitive on your moves to get the work. So it helps having a rig stack closer to where that work might be.

Ryan Fitzgibbon - Pritchard Capital

Okay. That's helpful. And then on my last question you mentioned Mexico, some products here thus primarily sharing is that come out in which constant basis thus somewhere we should expect you guys do in the future is that's I guess in partner international case, you're interested or is there other markets we should expect, I guess some results in as well.

Wm. Stacy Locke

I think our priorities for the near-term in our kind of capital constrained environment we're in, we'll focus more on Colombia and Mexico. And we're pursuing -- and other areas in Mexico with various customers not I mean we're -- not all I mean fairly not targeted at pre-mix, it's targeted for the other vendors.

Ryan Fitzgibbon - Pritchard Capital

Okay. Thank you.

Wm. Stacy Locke

See you then.

Operator

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

John Daniel - Simon & Company

Hey, guys. Good morning.

Wm. Stacy Locke

Good morning.

John Daniel - Simon & Company

I've got few here for first just on the capital structure. You mentioned that you expect to get in the next 60 to 90 days given that most of the debt is bank financing or your bankers asking you to rates going others into the capital structure that's a high yield or equity type of transaction might be also down the road?

Wm. Stacy Locke

At this point, what we're really contemplating with the banks is something that we'll address our concerns in the market without doing a public market transaction.

John Daniel - Simon & Company

Okay, fair enough. Lorne just a housekeeping question. Lorne there? You mentioned and the early in the Q&A that the Columbia margins are little bit higher than the U.S. were you are trying to the guidance sort of the 5,500 per day or we speaking more to the stock market which is two to three per day?

Lorne Phillips

Well I was really thinking more towards where I guess openly going to head with our combined average margins, which as we move up this term combined average margins, there going to be a better little bit lower. So, I guess that your question is probably more. We're effectively spot there, right? So, those margins are going to be greater than our U.S. average stock margin.

John Daniel - Simon & Company

Okay, fair enough. Just to Appalachia permanent, you've got drilling there now, it's been the wire line, how long can we see more couple rigs move up there?

Wm. Stacy Locke

Well we're examining that and I don't release any guidance on that.

John Daniel - Simon & Company

Okay. And when it give one more I got. Are you getting in that work over activity will be higher in Q4 and Q3 that we don't see the normal seasonal slowdown?

Lorne Phillips

Well, that's a good question. I think that activity other than the holiday should be up in Q4. Right, I think you right as a quarter due to the seasonal slowdown you might not see the full impact of it.

John Daniel - Simon & Company

Okay. That's it thanks well guys.

Lorne Phillips

Thank you.

Operator

Thank you. Our next question comes from the line of Jud Bailey with Jefferies & Company. Please go ahead.

Judson Bailey - Jefferies & Company

Thank you, good morning guys.

Lorne Phillips

Good morning.

Judson Bailey - Jefferies & Company

Stacy I want to make sure I wanted to circle back on your outlook for the fourth quarter did you say thought your margin per rig day would average between 2500 and 3500 or we referring to just what a general spot ranges are right now where you can go to eventually?

Lorne Phillips

Well, I think that our spot will probably average somewhere that 2 to 3000 a day range in that quarter. But we still have the benefits of some term contracts. So, I think the blended margin will be on the high into that are above that.

Judson Bailey - Jefferies & Company

Okay, that's helpful. Second question looking a little bit may be in the next year as you hopefully move some more rigs round that up to Appalachian. How should we think about costs you going to have encourage you are want to rising some of the rigs and it has been tough drives on that I imaging we are paid a little bit there. Is any way to quantify how would you think about the drug that could be on margins as you put more rigs in that market.

Lorne Phillips

Well, that's a good question. The margins will be impacted, the cost of the top drive and the winterization all of that will be capitalized into the cost of the rig and only be see that in the depreciation.

But the mobilization will impact margins because that we pay an expensive when we make that move. So and in not all faces and it's a pessimistic what the lock are not going to suggest we're paying for the move in every case to any region.

But it's hard to quantify because the different in every circumstance but it will have an impact on margins.

Judson Bailey - Jefferies & Company

Okay. And then my last question, could you remind us how many rigs you currently have in the Bakken and then how many are active; any opportunity or would you see a need or the opportunity rather to move some more rigs into that region?

Wm. Stacy Locke

Well in the Bakken we currently have seven and we've got some good rigs that are ideal that we hope we will put those back to work. And then we have other rigs that we could move into the Bakken.

Judson Bailey - Jefferies & Company

Okay. And how many do you active or currently working in the Bakken right now?

Wm. Stacy Locke

We had three rigs working in the Bakken.

Judson Bailey - Jefferies & Company

Okay, great. Thank you.

Wm. Stacy Locke

Okay.

Operator

Thank you. Our next question comes from the line of Sam Rebotsky with SER Asset Management. Please go ahead.

Sam Rebotsky - SER Asset Management

Yeah. Good morning Stacy.

Wm. Stacy Locke

Good morning.

Sam Rebotsky - SER Asset Management

It is been difficult time to you guys but you will pull of its like you've done in the past. But the 300 million if you have the (inaudible) files is that just a back-up plans relative to dealing with the banks?

Lorne Phillips

Basically we just thought it was prudent, because in the early stages of our negotiate with the bank. We had know for sure where we would end up. And we just thought it was prudent to have that filing on records so that in the event, who wanted to access the markets that part we leave behind us. We don't have any intention to use it, but it's filed.

Sam Rebotsky - SER Asset Management

Okay. So, and the 69 and what's your lead bank at this point?

Lorne Phillips

Wells Fargo.

Sam Rebotsky - SER Asset Management

Wells Fargo. Okay. And did you talked about 24 drilling rigs on July 24th and you talked about 26, is that currently in use. So, you have two more in use relative to the July 24th date?

Wm. Stacy Locke

Yes, I think that queue was as of the certain dates and we've increased some activities since then in fact, we've actually increased another rig overnight but that's not in the press release. So, everything is changing all the time.

Sam Rebotsky - SER Asset Management

Okay, okay. All right, and that's all I have. Well, just good luck.

Lorne Phillips

Great. Thank you very much.

Operator

Okay. Thank you. (Operator Instructions). And our next question comes from the line of Shawn Board (ph) with Westward Capital Management. Please go ahead.

Unidentified Analyst

Good morning. At this point Stacy in terms of Eagle Ford, given the current prices on oil and the higher liquid content. It's logical that with those economics down there, you might see that pickup first, are you seeing any to that or you're seeing import activity that kind of thing going a little bit faster than maybe the Marcellus or Haynesville at this point.

Wm. Stacy Locke

Well, it still in it's infancy but there is very active leasing activity. There have been a number of wells drilled there probably several rigs running today that are drilling in the -- as I mentioned earlier we just finished drilling one. And I would say that activity will probably continue if not picked up towards the end of the year. There are some operators talking about really starting to drill it that evaluated further and I think its' a very attractive play essentially for the point you mentioned that some area that oil and other areas that condensate rich gas. So, I think it could be a pretty significant place.

Unidentified Analyst

And just one other the spot rigs given what you have already said on the call in terms of replacing rigs that ruling off. It looks like we will go from sort of the -- and the flag number of active spot rigs of 11 last quarters about 17 this quarter. So, it's all the 6 rigs there. For better the worse we are going on a real small base here. In the Q4 with the word as you see it right now is it that much stretch to be looking for at least that many as that more in the Q4?

Wm. Stacy Locke

Well, I tell you what I -- should we would like to see and pick up in Q4. I did don't know what will happen my believe has been that activity I have been a little more optimistic I guess in others and continue to be disappointed. But I just came in vision that operators consist for so long with out spend in money. It gives countered inferior to me that that's going to happen for much longer. So, I am hopeful that Q4 will see activity pickup really in all of our areas of business.

Unidentified Analyst

Okay.

Wm. Stacy Locke

But, if we doesn't have any Q4, I think it's becoming a near uncertainty in early 2010.

Unidentified Analyst

Good enough and good luck. Thank you.

Wm. Stacy Locke

Thanks John.

Operator

Thank you. At this time, we have no additional question. I'd like to turn it back to management for any closing remarks.

Wm. Stacy Locke

Right. Well, we thank you all very much for joining us on the call today. And we look forward to and the Q3 call. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, if you like to listen to the replay of today's conference, please dial 303-590-3030 using the access code of 4106201 followed by the pound key. We would you like thank you for your participation. You may now disconnect.

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