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Pioneer Energy Services Corp. (NYSE:PES)

Barclays CEO Energy Power Conference (Transcript)

September 11, 2013 09:45 AM ET

Executives

Stacy Locke - CEO

Analysts

Matt Johnson - Barclays Capital

Matt Johnson - Barclays Capital

Good morning everyone. Thanks for joining us. I am Matt Johnson. I work with James West on the oil service team here at Barclays. Up next we have Stacy Locke, CEO of Pioneer Energy Services. Pioneer, as many of you know, is a leading well service company. They have additional operations in wire line, coiled tubing and contract drilling. The company has an extensive footprint in United States and what we think is a very unique position in Colombia. Pioneer recently completed a 10-rig new drill program for the drilling fleet. We're happy to have Pioneer here with us today. Please welcome to the CEO Energy Conference. Stacy Locke.

Stacy Locke

Thank you and good morning. If anybody would like to flip book, both Dan Petro has some, anybody want one he give you one, if you need one, going right here. Any way, appreciate being here. See about the (inaudible), here we go. As he mentioned we are Pioneer Energy Services out of San Antonio, Texas.

Currently about 440 million market cap about just shy of 1 billion in firm value. We are in four core businesses, the top three represented here are in what we call our production services segment, which we’ve expanded to more recently and then the drilling services segment, and in the production services segment, we’ve got well servicing, wire line and coiled tubing, which prior to owning those businesses, we were just out drilling the original bore holes with our drilling rigs and we saw an opportunity there with the clients that we developed in our drilling that we could provide these other services to the same, the same client base and so that’s what we do with these other three core businesses in our production service segment.

We also got a little [threat] going on here, I don’t know, can you take that off in the bag ma’am? Anyways I’ll keep talking while she is trying to get that off the screen there. But anyway as I mentioned, we would drill the original bore hole and then we have an opportunity with the client relationships to provide additional services.

Okay. We are back in action, thank you. And so we started expanding in these particular service lines because we felt like they were ones that our management team knew well enough, they were close enough to our expertise that we could manage them. So we’ve now grown these rather extensively, the well servicing group is a 109 well servicing rig that puts us 7th largest. Wire line is a 120, recent study I saw puts us about the top five in wire line, coiled tubing believe it or not with 13 units here in the top 15, we are actually the 11th largest and then the drilling fleet were the 9th largest out there.

Our real objective with these business lines is to target where all of the action is which is the unconventional plays across the United States. We see a terrific opportunity to grow these core business lines organically and we also have a longer term objective to take our debt down. As you will see on a later slide, we’ve grown aggressively over the last several years and we’ve incurred a fair amount of indebtedness and we are in the process this year and really next year to take that indebtedness down and kind of get our balance sheet back to a healthier status.

Obviously if the market picks up and rig count picks, all these businesses do better, we are actually doing extremely well right now for the modest little slump we have and cash flow is strong and by pulling back our capital expenditures we are seeing that ability to plough the excess cash in to indebtedness. We did have a fair amount of carryover cash in the first quarter the tail-end of our new build program. So we spend a little more this year than we really would next year if we don’t grow again.

So the plan is to take that cash flow and plough it back into this debt reduction. We are also trying to look around the edges of our business line and turn non-core assets in to cash, we have been doing that a little bit on the drilling fleet, we’ve sold several of the drilling rigs that are less utilized than others, and turning that into cash. We are looking into other of our non-core businesses to do the same, to kind of accelerate that debt reduction without affecting our core strategy.

With the production and services side of business, the nice thing about that in conjunction with drilling is that, when drilling does slow down which it hasn’t lately, it did of course in 08, but typically when drilling slows down on the frond end, dollars are allocated to the production and service side of the business to keep production up. So that’s one of the reasons these go well together.

Drilling is a very capital intensive business, high depreciation; the others are far less capital intensive and good margins. Just kind of a recent update, our drilling rig utilization at the beginning of the year had about five or six rigs that were earnings, but not working, those have all trailed offs, so we are down to just peer utilization and we are running at 80% today.

Our rigs down in Columbia are for the most part are utilized. The majority are working for Ecopetrol, we just had one that went down, that we are bidding out to other vendors there right now, but that’s been a great market for us, we have done a great job in Columbia, and then our well servicing and our production services continuous to be just top [slide], we are running 90% utilization, very high average (inaudible) rate just an industry leading position there in well servicing. And our coiled tubing is a most recent business, we've gotten into and we completed an acquisition at the end of ‘11, we've had struggles with it, because coiled tubing market has been a little sloppy in general, but specifically also for us. And so we're in the process of stabilizing that and building it back up and actually 51% utilization is an improvement.

So, we're at least trending in the right direction there, it will help us immensely when that business gets on track and starts contributing, the EBITDA that we thought we’d purchase more and we've got it.

We are spread in across the United States not all of our services are in every market. I would say our key markets for all the services would be the Bakken and the Eagle Ford and the Texas, Louisiana Gulf Coast onshore and offshore. Those we have all our services in.

Other markets that are important to us up in the Marcellus, we've been in drilling up there for a number of years, we see a lot o long term potential there. We're in heavy in the wire line in the Colorado, Utah, Kansas, Montana markets. And then in the Permian, we've also got two of our services wire line and drilling rig. The drilling fleet is actually our largest fleet is in West Texas now, which was essentially a relocation of a bunch of vertical gas drilling rigs pre ‘08 that we've now had to move there to drill vertical oil. So quite a lot of change, and then down in the country of Columbia, we have 8 drilling rigs, we've been there since 2007.

As you can see from here, the production services side of our business is significant, this is the look at the trailing 12 months through June of ‘13, it's 44% of revenues and 47% of margin. That's actually declined a little bit due to the 10 newly built rig that we put out in the market.

As I mentioned earlier, we've had very, very steady growth. You can see particularly wireline. We bought the 59 wireline units back in February of ‘08 and we've essentially doubled it to 120 units today. Coil tubing has been on a steady growth track. We increased it up to 13 by three units last year. Well servicing, we’ve also had very rapid growth. This we brought right before the ‘08 downturn. So first, we stacked a bunch of rigs in ‘08 and then we brought them back to work in ‘09 and ‘10 and then we’ve started growing that and we’ve really captured a market there that I think is excellent, very exciting.

And the drilling rig fleet, it's going to be a repositioning. We're kind of realigning our focus on the drilling side and a lot of the action has shifted away from what had previously been our core markets and so we're evolving with that to the best of our ability within the limits of our capital structure which we will review little bit more in a second.

I think one of the great differentiating factors about our company overall is our effort in safety which a lot of people don’t care too much about it, but we find it important because it really creates a culture for our company and we've been able to differentiate it. And through our success in the safety effort, we have the doors open in pretty much all our business lines to any operator in the country that's out there.

You can see here from this slide left in 2011, we were the safest of the top 15 land contract drillers in the U.S. and we were number one in our division in the AESC which is the well servicing society there.

So we’ve done great. Last year, we were number two of the top 15, so it’s not just, we did just get lucky in ‘11, this is a sustained effort and our Well Servicing Group had a little bit of a rougher year, but they still were in the third place. This year they are in record breaking territory in terms of TRIR. Their underwrite 0.5 which I am certain for this long running into a year is the best TRIR record in well servicing history. It’s phenomenal. They have worked with a tremendous amount of effort into that. And it’s opening doors to clients left and right because of that.

Now to look a little bit more specifically at our well servicing fleet, it’s somewhat unique in that. We are the only one out there that is focusing just on the upper tier end of that market. All of our units are the 550, 600 horsepower. So they are capable to work in any shale play anywhere in the United States.

They are the taller mass variety which we responded to the wishes of our clients by making taller mass which you need to get on top and work on top of taller BOP stacks in the kind of post- Macondo era.

So we’ve got a terrific high-end fleet of all 104 to 116 foot mass, 550 to 600 horsepower. We’ve probably 10, 12, 14 quarters in a row, we’ve been the highest utilization and the highest average hourly rate at any of our peers. It’s a just a first rate organization. Our primary areas of emphasis are on the Gulf Coast, the Eagle Ford and then even up into Arkansas and over to Mississippi and then the Bakken, those are kind of our areas of emphasis at this time where the well service in play.

Looking at our wireline, as you saw earlier there we’ve grown very materially over the years. We’re spread in similar markets, but we also are in other markets besides our well servicing. We’ve got a leading market share position in Kansas, leading market share position in Montana, leading market share in the Colorado, Utah are and we’ve really established ourselves well in the Eagle Ford. And we’ve been in the Bakken for very long time. I think we are still the largest provider in the Bakken and have a great staff there.

So it’s a first rate organization. That business has suffered over the last year in terms of pricing. Just as the rig count came down, efficiencies have improved. We have suffered a little more pricing in that. I think we’re off about 10 gross margin points over the year, but it’s stable, very active, tough life group of individuals working it for us.

As I mentioned earlier, our most recent business line addition has been coiled tubing and the reason we moved into coiled tubing is because we were finding a bit of a competitive threat from coil against our well servicing fleet. A lot of operators want to drill the plugs out after they have done a 30 stage frac with coil as opposed to well servicing. Some do use well servicing a lot still use well servicing, but others use coil and same with wireline, wireline and coil go very well together.

So we made a decision to go ahead and add coil tubing into our product offering. We’ve had a rough road with it, but I think long term it’s going to be a great market. That margins historically have been very, very strong, probably the strongest of all of our business lines. We have not yet enjoyed that other than the first couple of quarters post-acquisition of that company, but we see good a long-term potential there. The need for coil is not going away. And all we need to do is develop our expertise to be as good in coil as we are well and wire and I think we will be able to do that over time.

We’ve got kind of two size of that business, one is the offshore market which is material part of it for the company. We have four of these coil units, 1.25, 1.5 inch coil and the remediation and maintenance markets offshore. We’ve got a great core group of folks to do that and the utilization has been very high there.

Onshore, presently we are in North Louisiana, Oklahoma and Eagle Ford. We’ve had a spot year utilization onshore. We have made some equipment changes that I think are making these rigs a little more durable for the longer reach, the deeper well that sit we’re experiencing today. And then we have added two more capable 22,500 foot capacity, 2 inch coil units to that market. So I think we are going to be developing a steady increase in clients over time and good consistent service there, but we also have seen an opportunity to kind of step out of the crowded 2-inch market onshore land and take advantage of the 1.25, 1.5 inch market that has less competition and step up towards the 2 and 3H. So we've order 2 and 3H coil units that are coil reels that are coming in, in the fourth quarter that we will be offering to our client base there. So we feel like, there is going to be an opportunity to get out of that credit 2 inch market and find some open range there.

Now turning to our drilling services fleet, this is where our rigs are located across the U.S. We've got four units remaining up in Appalachian. We were bigger. We’re originally 7 units up there. And then when the gas prices fell, we went down to 2 and now we've added 2 of our new builds to that market under long-term contracts and we see a great opportunity over the next several years to add more new builds to that market.

So two of the new builds went to Appalachian, 6 went to North Dakota, where we've been since 2004 been in that market back before the horizontal drilling started and we're drilling vertical oil wells and now we have expanded into this horizontal market and we're drilling absolute record wells out there in the Bakken, where we’re somewhat unique in that all of the rigs, all the 8 of the 10 new builds that we built are a little more capable than some of our peers out that and that we have 2,000 horsepower mud pumps on these with 7,500 PSI fluid in.

In other words, you can run a very high continuous pressure in your mud system which enables your penetration rate to be greater for the longer laterals, keep your wellbore clean and they’ve just performed superbly. We’ve drilled several wells in the Bakken in the 25,000 foot. In other words, the lateral leg was north of 15,000 feet. So they’ve performed extremely well. We also have one in Utah and it's drilled the record debt well, longest lateral well in Utah, and then we've now taken a rig, our last rig went down to the Eagle Ford and there we are competing with some of our peers and we very quickly, I think after two wells, we dropped to the number one slot in terms of performance against some very capable peers of our.

So we're very proud of what these rigs have done. There is good news and bad news with that. Because of the success of these rigs, which also are true walking rigs, which a lot of operators today draw a distinction between a rig that is able to walk on a pad and a rig that can only skid because they are less flexible, the skidding rigs are more loads. So these are the rigs that we make are true walking rigs.

Our engineers, we've an engineering group that engineers these rigs and our engineer has worked at the two largest drilling contractors in the company. So he’s got a lot of experience, he knows what works and what doesn’t work, and he has put these rigs out. They’ve come out more flawlessly. In fact, one of the operators was telling me recently in Denver that these had new builds for years. She said our new build startup was by far the best startup of any new builds experience she’s ever had, because you usually have a little teaming issues there.

So very proud of what our engineering team and operations have done with these new builds. As a result, we have had a number of solicitations for additional new build; we are trying to push that off more to a 2014 type discussion, because we are trying to fix our balance sheet. I think we are going to be able to do that. Our client seem to be willing to wait, there’s not a great urgency there. Some wont some will, but anyway we are trying to pay down our debt first.

When you look at our fleet overall, it’s important to understand that there is two markets out there that we service. There is the vertical market, which will never be service by top drive FCR or AC powered rigs. That’s the market that we were most active in ‘08, and previous timeframe drilling vertical gas. It’s been a great market for us, we’ve got extremely high-end mechanical rigs. Most of them rounded bottom mud tanks iron rough necks, modern tier engines, they are not like your rank and follow mechanical rig out there.

So that market is distinct and different from the horizontal market. We own the rigs already and so there is no reason just - you were still making EBITDA of these rigs. We also have a group of rigs that are mechanical with top drives. We have nine of those and I think eight of those are working now and a number of them are under term contract. So those are earning even a better margin than the mechanical rigs, and then of course our FCR or electric rigs are all working pretty much in the horizontal plays all in that top drives. I think 60% of that category is either have a walking or a skidding system and then the new builds on the right are 100% walking and very tough [like].

So these are distinct in different markets. Now on the high end mechanical side, the non-top drives, the ones that require rotaries, we have had softness in, we have virtually minimum vertical gas drilling and the oil drilling that we’ve been doing in West Texas has slowed up. We had one of our biggest clients release five rigs or six rigs starting in the third or fourth quarter of last into the first quarter, and just because they are emphasizing the horizontal. Well that’s probably a continuing trend, we’ve had a number of these rigs down for a while, and so we will turn that into cash. If we feel like we’ve got a stacked mechanical rig that doesn’t have a prospect of going back to work somewhat near-term, we’re going to dispose of it and turn that into cash and redeploy that cash into our kind of a core business.

So and we’ve sold I think two this year, we sold a couple or few last year, and we’ll continue that. We’ll probably sell a couple or few a handful more of this year. So we continue to redefine our fleet and move where the market is. When you look at our utilization over the last decade, we’ve done a superb job, we are red, we’ve always been when the most highly utilized of all of our peers which is just a function of - even though we have portion that’s a mechanical fleet we’ve kept them very utilized and of course all our high end rigs with top drives have been utilized. So we’ve done well there.

These are just a few snapshots. This is a 2000 horsepower rig that we have up in the Bakken. This is one, it’s an AC rig that wasn’t originally put out, it was prior, it was the last rig product to our new build program. We are in discussions now; we are putting a walking system on that rig similar to our other rigs, to continue working there on pads in the Bakken. We are in process on putting the walking system on another rig in the Bakken now for the same clients, on an FCR rig and we put three, we put two on, and we have another one walking system that we are adding on our rig in Eagle Ford as well.

So the FCR rigs with some of the bells and vessels that the new builds have, will have a good long future in the unconventional play. I’ve kind of covered a lot of this. We’ve got crane free rig up, integrated top drives, very good BOP handling systems, automatic catwalks, pretty much everything you can put on a new build. This is kind of an example of what our drillers console looks like here and this is a walking system that’s in the lower right, lower left corner there, it just depend on kind of thumper style walking system very affective, lots of versatility with that system.

All the electronics are gathered up nicely in a festooned systems so we can walk out 75 to 100 feet and all of our electrical discharge travels along nice, neat and safe. And when you look at the company, we have grown, we’ve been striving to hit a billion of revenue and we are going to follow little shorter that this year, but our EBITDA has comeback nicely since the downturn in ‘09, we are building back a good strong cash flow and now we’ve pulled back our CapEx significantly. I think last year we spent over 350 million in CapEx, this year it will be in that 150, 160 range and that's even with some new build carryover. So our actual run rate without the new builds that we carried over from the new build program that fell into the first quarter, our CapEx will even come lower next year.

This is what we're working on, $549 million in debt. We've been starting to pay our revolving line down this year. We've made 2 or 3 payments. We're going to make another one shortly. So, we're fixing up that balance sheet.

And that's I think I'll stop right there and be happy to answer any questions from the group if you have any?

Question-and-Answer Session

Matt Johnson - Barclays Capital

Great, thanks. Stacy I will ask the first one while we get the mic passed around. Stacy when you talk to your customers today, what kind of feedback are you getting regarding activity levels for next years, what do you think the outlook is for drilling in well completion and maybe even beyond if you're getting any feedback?

Stacy Locke

Well, I think there is no doubt that the cash flow is going up. The commodity price particularly oil has been excellent, I think better than people anticipated so far this year. So the cash corpus are building, I think that's going to position the industry for a continued improvement in the 2014. And then in the backdrop natural gas while slow is definitely going to be firming up each year as we go forward here.

I think we're probably done with the days other than the short-term spikes of consistent $7, $8 gas price, just because there is a so much of a supply response when gas activity picks up. But I do think it will, the gas price in the background will be improving, which will cause demand back in the gassier parts of the Eagle Ford into the Marcellus, which activity there is staying pretty strong. And so I think ‘14, ‘15 will be an improvement, I think ‘15 will be better and ‘14 and ‘14 will be better than ‘13. So we're optimistic.

Matt Johnson - Barclays Capital

Great, thanks. We have one over here.

Unidentified Analyst

In terms of dollar amount for the opportunity for selling out the old mechanicals, I am curious about that as well as who you see are the buyers?

Stacy Locke

Well, that's a great question, and I wish I had better news. There is quite a number of mechanical rigs that have been put up for sale. We've been very fortunate so far to sell the four, five rigs that we've sold at book value are greater. We've actually had a gain on those rigs. I think those days are going away because there is just so many mechanical rigs coming out there. We will test the market in the fall, but I think we will start moving more in to an environment where we will start taking losses on some of these, but our rigs are in good shape. We fixed up a lot of these before we went to West Texas and so I think hopefully we will do better, but I would say the value probably is in the 752 million in a quarter range for (inaudible).

Unidentified Analyst

And just your view of improvement for 2014, when we will actually see that, when we will start to really get some visibility on that and also who are your customers in general and what kind of concentration do you have?

Stacy Locke

Well, let me answer the second question first. I think that we work for a lot of the bigger publicly traded companies. A number of our clients are speaking very close to where we are right now that we have some great, great publicly traded clients. Our concentration areas would be companies like (inaudible) Ecopetrol in Columbia, Apache, a very quality name, but we work for pretty much all, we work for a fair number of the majors and we work for a lot of the bigger publicly traded companies, that’s a majority of our customer base.

And your first question was timing, well we thought things would get better this year. So far I think we may be seeing things get a little bit better now and I think it’s possible that by the fourth quarter we are seeing a slight uptick, but it’s too hard to say. But I think if we move into ‘14, we’ve got that optimism like we had moving into ‘13, which didn’t really materialize. Now the well count has done very well, because rig efficiencies didn’t improve.

And that’s great for our production service side of the business, but what we like to see is the demand improve for rig count, because with rig count increases, we can gain back some of the pricing power in the business lines where we lost it, like drilling and wireline in particular and coil.

Well services held on very well, as really had to decline because there is just so much demand for that type of equipment that we have. But I think we’ll see possibly a little improvement in the fourth quarter, more likely as we move into the second and third quarters of next year. So I think we’ll get a little more strength in gas, see what the winner holds for gas, but we have a good [cool] winner, it could come quicker. So good question.

Matt Johnson - Barclays Capital

So I’ll ask one more. Stacy when we look at your geographic footprint in terms of what product lines you are aware, it looks like you have some good concentration in the Texas market, a little bit in the Bakken. There are some other areas where you just have maybe one or two product lines. Any thought going forward to maybe building out the overlap, are there synergies or efficiencies to be achieved and maybe what is the timeline for something like that?

Stacy Locke

Yes, that would be when we start going back to growing again organically. We will be filling in some of those voids. It will be a function of the pricing in those markets, but if the pricing is there, we certainly see the benefits of having all of our services like in the Eagle Ford having coil, wire, well and drilling. It’s tremendous cross-selling capability when you have all your service here, the Bakken. We have a big well servicing facility right next door. We have a big wireline facility. We’ve got a strong drilling there. So coil would be an obvious fit in that market. So we will definitely be doing that when we go back to growing again.

Matt Johnson - Barclays Capital

Okay, great. And maybe just one more before we break, you mentioned some pricing declines and some pressure for wireline, just long-term given that there is some competition, some competing technology, coil sliding sleeve, so what’s your long-term outlook on that product line and has the pricing pressure abated?

Stacy Locke

Well, I think the pricing pressure has abated now. We took started declining in the third quarter of last year and it continued into the first and second quarter. And I think we’ve seen the bottom on wireline pricing. And if what will help it is if rig count starts picking back up again and we can spread out all the competitors to start chasing other rigs going back to work that will help immensely. But I think the outlook is great for wireline. Sliding sleeve has always been a threat. Operators will try it for a while and then switch back to preparations. So I don’t see that ever really taken over one way or another, I think there is always going to be a spot for perforating these horizontal sections.

Matt Johnson - Barclays Capital

Okay, great. Thank you so much.

Stacy Locke

Thank you very much.

Matt Johnson - Barclays Capital

The management team will be available on the Riverside Suite for the breakout. Thanks everyone.

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