Pioneer Drilling CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug. 5.11 | About: Pioneer Energy (PES)

Pioneer Drilling Company (PDC) Q2 2011 Earnings Call August 4, 2011 11:00 AM ET


Anne Pearson - SVP, IR Counsel, DRG&L

Stacy Locke - President and CEO

Red West - President of Drilling Services

Joe Eustace - President of Production Services

Lorne Phillips - CFO


Marshall Adkins - Raymond James

Brian Uhlmer - Global Hunter

John Daniel - Simmons & Company

John Keller - Stephens Inc.


Welcome to the Pioneer Drilling second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Anne Pearson of DRG&L Investor Relations.

Anne Pearson

Good morning, everyone. Before I turn the call over to Stacy and Lorne for their formal remarks, I have a few of the usual items I need to cover.

First of all, a replay of today's call will be available and is accessible by webcast by going to the IR section of Pioneer's website and also by telephone replay. You can find the replay information for both in this morning's news release.

As a reminder, information reported on this call speaks only as of today, August 4, 2011, so any time-sensitive information may no longer be accurate at the time of the replay. Management may make forward-looking statements today that are based on beliefs and assumptions and information currently available to them. Although they believe the expectations reflected in these statements are reasonable, they can give no assurance they'll prove to be correct. They are subject to certain risks, uncertainties and assumptions that are described in this morning's news release and also in recent public filings with the SEC. 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 a reconciliation to the GAAP measures in this morning's news release.

So now I'd like to turn the call over to Stacy Locke, Pioneer President and CEO.

Stacy Locke

Thank you, Anne, and good morning. Joining me here in San Antonia on the call this morning is Red West, President of our Drilling Services Division; and Joe Eustace, President of our Production Services business; and Lorne Phillips, our Chief Financial Officer. We appreciate everyone joining the call today.

Overall, we had very solid second quarter. Topline revenue growth was 12%. But more importantly, EBITDA grew by 16%. And this was primarily driven by the 21% revenue growth in our Production Services, which is a very high-margin business, just under 42% in this second quarter. And finally, we had enough business and earnings to generate $0.07 on the diluted EPS line, which we're very proud to accomplish.

These good results were achieved by essentially just executing on our strategic plan. In Drilling, we put stacked rigs back to work in our new West Texas division. Today, we have 12 rigs working in West Texas with four additional rigs contracted. Two of those four rigs will be in West Texas, working in mid-September; a third one in mid-October; and the fourth one by the beginning of November.

Incidentally, two of the 16 total rigs were part of these six cold-stacked rigs that have been cold-stacked in Western Oklahoma since the summer of '08. So we're very pleased to activate those two units, one of those with a 550 horsepower and one with an 800 horsepower. The vast majority of other rigs that we have in West Texas are 1,000-horsepower to 1,300-horsepower rigs. And we continue to market stacked East Texas rigs and hope to have 18 to 20 rigs working in the West Texas division by the first quarter of 2012.

On the newbuild front, we continue to market aggressively. We have five rigs under construction currently with signed multiyear contracts. We're very close to executing the contracts on our six rigs. It's another 1,500-horsepower rig. And we plan to deliver at least eight to 10 newbuild rigs during 2012.

Drilling outside of West Texas and in other markets, the Bakken, we had a little bit of a downtime in some of these other divisions. The Bakken had two mechanical rigs down in the month of July in this third quarter. One of those was down and being upgraded. It's a 1,000-horsepower mechanical rig. It was upgraded to a 1,300-horsepower rig with 500-ton top drive and 1,600-horsepower mud pump. And it is just beginning this week on an 18-month term contract at a day rate of well in excess of 20,000 a day. So we're very excited about that opportunity.

We have our smallest rig, lowest horsepower rig down currently, but we have some opportunities that lead us to believe that that rig will also go back to work and put us back to full utilization there in the Bakken.

In the Marcellus, we had a couple of our top drive rigs, 1,000-horsepower rigs, go down at the combination of their term contracts. One of those is contracted and going back to work, and we're optimistic that the second rig will be going to back to work in the next six weeks or so.

In the Eagle Ford, just really more by timing and coincidence, we had two mechanical rigs go down. One was a 1,000-horsepower top drive rig. That's one of the rigs that we've relocated to West Texas. And that makes two 1,000-horsepower, one 1,200-horsepower rig with top drive in West Texas now, all drilling horizontal wells. And then the other 1,200-horsepower mobile mechanical rig in South Texas is contracted and going to back to work within about five days.

Utah has remained solid. East Texas has continued to be steady at a low level, approximately three rigs. And Colombia has remained steady at eight rigs, full utilization there. And again, average margins are holding up, feel considerably above the average U.S. margins.

Generally everything looks very good. I expect utilization to continue to improve, in particular in the fourth quarter where we expect our rig utilization to exceed 80%. Leading edge day rates are firm to slightly up, on the order of $500 to $1,000 a day. We just renewed our first contract from the first two rigs in West Texas. And as we had hoped, these day rates are rolling higher. When they begin the new term, we'll have risen over $1,500 a day. And we extended them from six months to one year of term. So that market looks very good.

Turning to our Production Services business, simply put, we just had an outstanding quarter with 21% revenue growth and 42% margin as a percentage of revenue. It was an all time high for the division in terms of revenue and business done and very close to matching our highest quarter in 2008.

We continue to grow our Wireline division aggressively. We're looking at 23% unit growth in Wireline. We should end the year at 103 units. We're probably going to have 99. Again, Wireline had a record quarter with its top ever revenue and top ever EBITDA generation. Outstanding quarter for Wireline.

Currently, we have a presence in most of the significant shale plays and in some other shale plays. These would include the Bakken, Eagle Ford, Niobrara, Marcellus, Mississippi and Tuscaloosa marine shale, and we're currently exploring a couple of new markets.

We will soon be ordering an additional seven cased-hole units for the first quarter 2012 delivery to further penetrate some of our existing markets and begin accessing these new markets.

Likewise in the Well Services division, it had its best quarter ever in terms of revenue and very close on EBITDA. We continue to see a slow, steady improvement in pricing, and our utilization remains very high.

During the second quarter, we ordered an additional six workover rigs for a total of 12 for this calendar year, which will be 16% unit growth, and we should end the year with 86 units. We plan to continue growing Well Services, mostly likely another 16% in unit count projected for 2012.

And finally, Fishing and Rental also showed some improvement in the second quarter with nice improvements in both revenue and EBITDA. All in all, the Production Services Group did superbly in the second quarter and the outlook is very positive.

I'd like to turn the call over to Lorne to do a review of the financials, and then I'll talk about our outlook.

Lorne Phillips

Thanks, Stacy. Good morning, everyone. This morning we reported second quarter net income of $3.7 million or $0.07 per diluted share. That compares to adjusted net earnings in the prior quarter of $1.3 million or $0.02 per diluted share when excluding the impact of the $7.3 million net worth tax on our Colombian operations last quarter. For the second quarter of the prior year, we reported a net loss of $10.1 million or $0.19 a share.

Consolidated revenues for the quarter totaled $171.3 million, which was up 12% from the prior quarter and up 46% compared to a year ago. Adjusted EBITDA was $45.1 million, an increase of 16% compared to the prior quarter when adjusted to exclude the Colombian net equity tax and 105% from the same quarter last year.

Our second quarter drilling revenue was $106.5 million, which was up 7% from the prior quarter and 40% versus the year-earlier quarter. Colombia generated $29.2 million in revenues in the second quarter, which was 21% higher than the first quarter. The increase was the result of higher rig utilization and mobilization and demobilization revenues as two rigs began operating under new term contract.

Drilling Services margin was $33.3 million in the second quarter, which is up approximately 3% from the prior period. Average drilling services margin per day declined to $7,504, which is down from $7,769 in the first quarter. This is primarily due to the increase of rigs drilling in West Texas and the associated startup cost.

Our turnkey work was a much smaller part of the total business in the second quarter than it has been in prior quarters, with total revenue of approximately $2.6 million. Our overall drilling rig utilization increased sequentially by 4 percentage points to 69% and is currently 72%.

Today, we have 40 of our 71 drillings rigs working under term contracts, which equates to 77% of our total working rigs. The average remaining contract term on these rigs is eight months in total and six months on average for the U.S. fleet. Also, we have term contracts for four additional drilling rigs that we expect will begin operating by the end of 2011.

Turning now to Production Services, our revenues were $64.8 million in the second quarter which was up 21%, driven by higher pricing and utilization and the addition of the new equipment to the fleet. Year-to-date, we have added six well servicing units and 15 wireline units. And as Stacy mentioned, we plan to add six more well service units and four more wireline units during the second half of this year.s

The Production Services margin was $27 million, an increase of almost 33% from the first quarter. And as a percent of revenue, Production Services margin was 41.7% compared to the prior quarter at 38%. Well servicing utilization rate was 90.3% in the second quarter. This compares to 81.7% in the first and it increased to approximately 92% in July. Our average hourly revenue rate increased by $15 to $524 per hour in the second quarter. Production Services accounted for 38% of total revenues in the latest quarter and about 45% of gross margin.

Looking now at our expense trends for the combined company, our general and administrative expenses were $15.9 million, which was up about 9% from the first quarter. We expect third quarter G&A to be in the $16.5 million to $17 million range. The G&A increases are due to the addition of personnel, annual merit increases and higher incentive-based compensation accruals.

Depreciation and amortization expense was $32.4 million, which was roughly flat from the prior quarter. Our current outlook for the full year is for D&A to be in the $130 million to $133 million range. Interest expense was $8 million, which is up about $450,000 from the prior quarter. I would point out that this number included the amortization of approximately $600,000 relating to debt cost that were associated with our credit agreement that we amended in late June.

Our tax rate for the quarter was 22.2%, and the delta from our statutory rate of 38% to 40% is the result of foreign exchange gains on Colombian operations. For the remainder of 2011, our rate should remain in the 38% to 40% range before considering any impact of foreign exchange gains or losses.

Moving on now to our balance sheet and liquidity position, we had cash and cash equivalents of $11.5 million at June 30. Borrowings under our revolving credit facility were unchanged at June 30 at $42 million plus $9.2 million in committed letters of credit.

On June 30, we completed an amendment of our senior secured revolving credit facility. The amendment increases the size of the facility from $225 million to $250 million and extends a maturity date of the credit agreement from August 31, 2012, to June 30, 2016. It also improves the pricing and provides us increased flexibility under the financial covenants.

In addition, in July, we raised $94.3 in net proceeds from the sale of 6.9 million shares of our common stock at $14.50 per share. These proceeds will help fund our newbuild drilling rig program and Production Services fleet addition. As of today, our revolver has no outstanding borrowings.

The cash used for capital expenditures for the quarter totaled $47.8 million, which include $10.5 million for routine CapEx. Our target for the full year is now $200 million to $220 million, although that number may change based on whether we sign up additional newbuilds.

Now I will turn it back to Stacy.

Stacy Locke

Thank you, Lorne. Our outlook really for all of our businesses remains very positive.

Looking at Drilling, I think the bias is towards slightly improving day rates both on existing rigs and on newbuild rigs. As I mentioned earlier, we see our utilization improving this year primarily due to putting rigs to work in our West Texas division. So we think utilization in the third quarter will be up another 3% to 4%. However, as I mentioned earlier, we expect to see a more significant improvement in our fourth quarter where we think utilization will exceed 80%.

As I also mentioned earlier, we are seeing some positive rollover opportunities on contracts, particularly in our West Texas division where we thought like we were going to have an opportunity to roll contracts higher as much as 1,000, maybe even 2,000 a day. And we've now done that on the first two contracts coming due. That will have a greater impact. It will start impacting us in the fourth quarter, but mostly the rigs are out there on one-year term, and we're delivering them. So throughout the year of 2012, we should be rolling these terms higher, and that will be a nice impetus there for improving EBITDA.

Demand for our newbuild rigs continues to remain very strong. We're in a number of different negotiations in multiple plays. And as I mentioned, we're optimistic that we'll be able to deliver at a minimum eight to 10 newbuilds in 2012.

Likewise on the Production Services side of the business, the trends look very positive. We think we're going to have another nice increase in revenue on the order of 12% to 16% growth, and we think our margin will continue to improve slightly an additional 1% to 2% as a percentage of revenue. So all in all, the businesses look great. We're going to continue growing all these businesses.

Anyway, that concludes our prepared remarks, and we would like to entertain any questions.

Question-and-Answer Session


(Operator Instructions) Our first question is from the line of Marshall Adkins with Raymond James.

Marshall Adkins - Raymond James

The Production Services obviously was the big deal here, phenomenal growth sequentially, and it looks like that's going to continue. On the growth that you are looking at, how does it break down between capacity additions versus pricing, versus maybe just higher utilization on the stuff you had before? What's driving that? Of those three things: pricing, capacity additions and/or improved utilization, what's going to drive it going forward?

Lorne Phillips

In the second quarter, the revenue growth, I'd say approximately a third of that was from unit additions, and I'd say the other two-thirds would be a combination of pricing and utilization.

Marshall Adkins - Raymond James

So relatively balanced between those three. I know you aren't going to know exactly, but roughly?

Lorne Phillips

We added units in the businesses and then we had improvement in both pricing and utilization. And so, yes, I think that's probably a fair comment.

Stacy Locke

You're seeing revenue per job improved. You have seen it for a number of quarters. And in Well Services, you're seeing the hourly rate improved for a number of quarters.

Marshall Adkins - Raymond James

Good guidance here on CapEx, $200 million, $220 million. Obviously, the new rigs will take up a chunk of that. But of the remaining part not taken by these new rigs, how does that break down in terms of where you're spending? You mentioned the service rigs, more Wireline rental. But in percentage terms, where does the remaining CapEx break out?

Lorne Phillips

Well, we've talked about publicly that our routine is probably in the $50 million range. So they're not for the whole company. And then the Well Service units cost about $1.75 million to $1.8 million a unit, and then the Wireline units are around 800,000 units. And after that, you're really looking at additional equipment in all the businesses. It might be downhole tools or some replacement equipment drilling that you wouldn't classify as routine, but using that information, you can kind of back into some of the allocation.

Of the total 16 rigs, just ballpark, we probably spent on average $1.7 million, $2 million on average for all of those rigs. We basically sand-blasted them, primed them, painted them, did G4 inspections and improved mud tanks, put on roughnecks, increased draw work size. It was already a very good mechanical fleet. It is now an excellent mechanical fleet.

Marshall Adkins - Raymond James

Last question from me is on the newbuilds. Who is building the rigs? What type of rigs are they? And can you give us a little more specifics on estimated timing?

Stacy Locke

We have two of the current five 1,000-horsepower fit-for-purpose designed rigs for the Marcellus. And those are low-limit height and width limitations to make sure they can get under bridges and under overpasses and over bridges and not be delayed. And then the 1,500-horsepower, they are all going to be AC joystick-driven rigs. All of these first five have true walking systems, not skidding systems.

They all have automatic catalogues on roughnecks, BOP handling systems, 500-ton top drive. So they're basically the same rigs. The 1,000-horsepower rigs will have 1,600-horsepower pump. The 1,500-horsepower rigs have 2,000-horsepower mud pumps with 100 psi fluid ends to really accommodate these longer lateral plays. We're going out over 10,000 feet laterally.

So they're very high-end rigs. We generally contract them and we sub-contract all our various vendors. So there is quite a few vendors involved. We're not buying an off-the-shelf from anybody.

So they're going to be fairly uniform. Most of them will be 1,500-horsepower rigs except of those perhaps going to the Marcellus. These will be predominantly going to the Eagle Ford. The eight to 10 or so we plan to deliver will be mostly Eagle Ford, Bakken and Marcellus.


The next question is from the line of Brian Uhlmer with Global Hunter.

Brian Uhlmer - Global Hunter

When you're talking about Production Services growth, you said about 16% growth?

Stacy Locke

Yes, that was 16%.

Brian Uhlmer - Global Hunter

So you are talking about getting to 100 well services?

Stacy Locke

That's correct.

Brian Uhlmer - Global Hunter

What's the timing on that? What are you guys thinking for timing and how those come out?

Stacy Locke

Well, we're hopeful we will get two at the end of the year and then one in next year.

Brian Uhlmer - Global Hunter

And then following up on Production Services, are there any other product lines or pieces of equipment or things like that that you guys would be looking to add to kind of that service offering, whether it's coil tubing or whether it's just some other product line or servicing?

Stacy Locke

We continue to look at both acquisitions and any business expansions in there. The one that has peaked our interest probably more than any other that seems to fit very well with those well service and wireline is the coil tubing. So we're investigating that. We have not moved forward on anything, but we are evaluating it. So that would be one, the logical business line, that would fit very nicely in our Production Services offerings.


Our next question is from the line of John Daniel with Simmons & Company.

John Daniel - Simmons & Company

You mentioned an average cost of about $1.75 million to reactivate the rigs, ballpark. Was any of that expense in the past couple of quarters or is it all capitalized?

Stacy Locke

It was probably about $2 million per rig for the 16 total rigs. The first rigs obviously were less costly. And then as we dug deeper into the stacked pile of rigs, that cost goes up. And then the demand out there is really for 1,000-horsepower and up. We have put some sub-1,000-horsepower rigs out there, but the vast majority of demand is for 1,000-horsepower and greater. So we've actually had to up here some of these rigs with 1,300-horsepower brand new driller. But anyway, all of that cost is capitalized.

John Daniel - Simmons & Company

Can you just give us a sense for what the spot markets are, cash margins are in the Permian?

Stacy Locke

What we've kind of been talking about all along is that the day rates probably range $14,000 to $15,000 a day and average margins of $3,500 to $4,500 expect for the top drive rigs. For those, the day rates are kind of in that $19,000 to $20,000 range, and those margins would be double the other rigs' margin.

We think that rate is moving up. And as we mentioned, the first two contracts that are just about to come up on their six-month anniversaries, we will be rolling those higher by a little over $1,500 a day. So I would say that the current spot rate is probably more instead of in the $14,000 to $15,000, probably in the $15,000 to $16,000 a day range. That's for non-top drive, good-quality 1,000-horsepower rigs.

John Daniel - Simmons and Company

I know you guys have exposure to the Marcellus. Has anyone approached you yet to look at drilling in the Utica? If so, can you share with us what your thoughts are?

Stacy Locke

Well, I know just a little bit about it. We have been approached by some people, and we think that activity is picking up, although it looks like all of our seven rigs that are currently in the Marcellus are going to stay there. And so we don't have any plans yet to move equipment there. We don't really have any equipment to move there quite frankly unless it's a newbuild.


The next question is from the line of John Keller with Stephens Inc.

John Keller - Stephens Inc.

I just want to get a better sense on the timing or the cadence of newbuilds as they fold into your fleet next year. Did you do get up to that eight to 10? How would those hit? I guess even looking beyond into maybe 2013, I know it's a long way out, but assuming the newbuild continue, what kind of cadence could we think about those rolling into the fleet?

Stacy Locke

I would say that we would have our first newbuild probably operational by March and maybe even a second one at the end of March, probably a third one in April, probably a fourth one in May and a fifth one in probably June and sixth one probably July. It's going to be pretty close now. We may skip August and have one in September, then one October, one November. We'll skip a month in there. Just based on what we see right now, I certainly would hope we could put out one a month in 2013. If the market for us is better than that, then we'll increase that.

John Keller - Stephens Inc.

I guess either from a liquidity or even a personnel logistic standpoint, internally what do you think the fastest clip you could add those realistically?

Stacy Locke

If we had that business, I think we could achieve with time. Obviously we'd run out of money at some point, but we couldn't do all of that out of cash flow. So that would be the limited factor. I think we could figure out a way to get them out. We're already looking at some training centers and some things just to be prepared for one a month delivery.

So we'll do what we have to do to deliver the rigs and maintain our high level of service and safety. So we will do what it takes to get that done. The people is always a challenge.

John Keller - Stephens Inc.

Shifting gears a little bit to West Texas, it sounds like you were bringing a couple of rigs out of stack in Oklahoma, I think you said? I think it was my understanding that maybe some of those were not very good candidates for work and that maybe they would be up for sale. Is that kind of a shift in the fact that you are putting some of those to work? Is the market that strong, and are you not going to look to sell those rigs?

Stacy Locke

Well, we've six cold-stacked rigs there, and we had one of those with 800-horsepower, and that is the one that's already out of that stacked status and it's in West Texas working currently. Then a little bit to our surprise, we had an opportunity for a very, very good customer to put a 550-horsepower rig to work at a good day rate. And so that rig is out being sand-blasted right now and going through inspections.

And so that did surprise us a little bit. I think we are continuing to evaluate the remaining four stacked rigs. They're 550-horsepower range rigs. They are probably a little lower quality than the one that went out already. But we're considering a lot of things either if we get good contracts for them, we might activate them; but the worse being, we might sell some or all of them. And we are evaluating the need for a couple of those units potentially training rigs to be prepared to crew up these newbuilds, in particularly if our cadence gets up to the one a month like we hope.

So we're going to need to train crews to man these rigs. You're not going to find skilled labor on all these rigs with what we're putting out and what others are putting out. So we feel like we'll probably get to the point where we're going to need some training centers.


(Operator Instructions) And I am showing that there are no further questions at this time. I will turn it back over to management for any closing remarks.

Stacy Locke

Well, thank you very much. We appreciate everyone participating on the call and we look forward to visiting at the third quarter call. Thank you.


Ladies and gentlemen, this does conclude the conference call. The replay information for today's call was posted on this morning's news release. ACT would like to thank you for your participation and you may now disconnect.

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