Pioneer Drilling's CEO Discusses at Bank of America Merrill Lynch Global Energy - Conference Call Transcript

| About: Pioneer Energy (PES)

Pioneer Drilling Co. (PDC) Bank of America Merrill Lynch Global Energy Conference Call November 16, 2011 2:50 PM ET


Stacy Locke – President and CEO

Lorne Phillips – Chief Financial Officer


Unidentified Analyst

… CFO, Lorne Phillips.

Stacy Locke

Thank you and good afternoon. Appreciate you all waiting to the last presentation time for today. As Doug said traveling with me is Lorne Phillips, our Chief Financial Officer. I’ll go ahead and move into the presentation and I’ll try to allow some time for some questions.

Turning over to page five here, we are in three core businesses and we operate in two divisions. One is Pioneer Drilling Services division and the other is the Production Services division. In the Pioneer Drilling Services division, we’ve got 64 land rigs, all in the United States in various shale plays around the country and except for eight rigs, which are down in the country of Columbia, South America.

On the Production Services side of the business, we have two primarily core businesses. One is the well services. There we have 86 well service rigs. We still have a couple of more coming in this year. So we’ll end the year at 88. And in the wireline business, we have a 103 presently we’ll have two more coming in -- three more coming in. We’ll end the year at 106 and then I’ll go through what our capital plans are for the upcoming year.

Just a quick snapshot of where we are located across the United States. We pretty much represented in all the shale plays in one form or another. In some cases, we have all three of our primary services like up in the Bakken, we are drilling, wireline, well services, in the Eagle Ford, we have all three services. Certain other markets like the Uinta Basin, we have drilling and wireline but not well services. The Marcellus we primarily have drilling and wireline there. But we’ve got pretty good representation across the U. S. and then the eight drilling rigs down in Columbia.

The Production Service side of the business, you see over on the right, it’s significant to us, on a trailing basis it’s 44% of margin, in the third quarter it was actually 49% of margin as we’ve been growing it pretty rapidly.

A couple of things to think about in terms of investment considerations. We have a lot of organic growth in these three core businesses. We put out an 8-K yesterday announcing several things, but we announced a 10th new-build drilling rig. These are all term contract drilling rigs that we have under construction. So we now have 10 rigs under construction that will be delivered during 2012. We’re adding 14 well service units this year in 2011 and 22 wireline units in 2011.

In 2012, on our well service side, we’ve already ordered an additional 14 well service units and those will begin in the first half of the year. And we’ve only ordered six more wireline units for the first quarter so far into 2012 on the wireline side. So we do have a lot of growth plan, pretty much all of the incremental units are going into further penetration in shale plays or opening up into a newer shale play.

We have 14 rigs operating out in our West Texas division, which we opened at the beginning of this year. We kind of repositioned our fleet in all the shale plays in ‘09 and ‘10. We started this year with what to do about the rigs that had been drilling vertical gas in the past. So we set out to find the home for that, founded in West Texas.

And so we basically, shutdown our North Texas division and drastically reduced the rig count in our East Texas division, which the rigs that are there, most of the rigs that were there were not drilling Haynesville, they were drilling vertical gas, we’ve centrally located 14 rigs to West Texas.

We’ve got two more in Houston being ready for West Texas to begin contracts in December and then we’ve identified a couple of few more out of our East Texas fleet that we will probably move to West Texas over the next couple of quarters. So we’re getting our utilization back up, at our third quarter call we were 88% utilized.

So we also announced in our third quarter call that we sold four of our lowest horsepower rigs, these were mechanical 550 horsepower rigs that are basically been stacked since the summer of 2008 and we couldn’t get anything form until this year with the rise in oil prices, we’ve had a pretty good market, so we sold those just last month.

And we have since sold two more rigs that have been cannibalized as a result of high-grading rigs and taken them to West Texas, and we had just parts and pieces left of couple of rigs, so we sold those in auction last week. And so we -- and then we had another rig we sold or used most of the equipment and we just put it into inventory for potential future use. So our rig count down from 71 to 64 but then now we have 10 new-builds that will replace those with and be up to 74 rigs by the end of next year.

We worked very, very hard at backing all of these rigs, the existing rigs with term contracts. We’ve got over 70% of our working rigs under term contracts and we’re rolling them over on a regular basis every month, either into six month or one year, probably more one year these days and six month term.

We’ve even just done 18-month term and we have one of the rigs in Houston is being winterized out of our South Texas fleet and it’s going to Uinta under a two-year term. So we’ve got very good term contract protection on that existing fleet and of course, all of the new-builds are -- they as a group of 10, they average about three-year term, some are four-year, we have a couple of two-year, the bulk are three-year term. So that’s good solid cash flow protection there as well.

We’ve done a little work on our balance sheet. This year, we did a little $94 million equity offering in July to ensure as our new-build program was continuing to develop. We didn’t want to run out of cash there. So we raised $80 -- $94 million and then right before that we redid our bank facility, increase the size, improve the terms and conditions of the bank facility, and pushed out the maturity to 2016. So we have the full $250 undrawn, at this time zero balance on it and gives us a lot more flexibility.

Yesterday, in addition to announcing the 10th new-build rig under construction, we announced that we have two acquisitions under of Letter of Intent aggregating about $155 million in purchase price. Those businesses are in our production service segment and will bring considerable EBITDA to 2012 for us and we issued a check on to our bonds, high yield bonds and we issued another $175 million in long-term bonds that mature in 2018, yesterday.

So that acquisition is fully funded and then what’s remaining will go again towards our new-build program, which we think will continue. So that will allow us to keep building, adding to the new-builds, consummate this acquisition and not use all of our availability under our revolving line of credit. So we feel like we’re in pretty good shape there. Those price incidentally the bonds at $101, so the yield was about 1% below what we originally issued in 2010 in rate.

Looking at the drilling fleet, you’ve got to talk a little bit about the math, but if you focus on the math, we currently have seven rigs all working up in the Appalachia Basin in the Marcellus Shale. We’ve got nine rigs working in North Dakota and Montana in the Bakken Shale. We’ve got two rigs presently working in the Uinta Basin.

We’re about to move one of our rigs from the Appalachia over there to start a one-year term contract and we’re moving one of the rigs out of South Texas that’s now in Houston being winterization also out to Utah, that’s the one entering a two-year term contract.

There’s a shallow oil drilling play over there for one of our good customers and they love that style of rig. It’s one of our 60 Series Rig, a fast-moving mobile rig, this ideally suited for their needs and they contracted one of the rig came back and said, we need another one and we didn’t have one. But we had one coming available at the end of its term in Appalachia and they said, we’ll take it and they’re paying to move it all the way cross country and start on the one-year term. And now they’ve decided they have to have a third rig as these rigs are performing really well for them, fast drilling, quick moving, and so the only other one we could access was one in South Texas, but it required winterization

So and then in South Texas, we’ve got the fourth 12 Street West Texas, this shows 16 rigs, that’s counting the two rigs that are in Houston be in prep to go there, that will go into December, although we have 14 currently working there, we started the year with zero and they’re all under term-contract there as well. In South Texas, we have 15 rigs or actually 14 excluding the one in Houston, probably 11 of those are working in the Eagle Ford and that’s been maintaining very good utilization there.

In East Texas, we’ve got the seven rigs remaining at one point with a 23-rig division and did very well in the past decade drilling for gas, but with gas prices where they are that activity just extremely soft. At any given, we’re working three to four rigs there and that’s it. So we’re probably going to grab two or three more of those and reposition them somewhere where’s there’s some oil. And then, the eight rigs over in Colombia.

Again a reference utilization where in blue at the top in the dark blue, I think it’s H&P and light blue in Patterson and neighbors on here, but we’ve enjoyed a very high utilization rate for the past decade, we’ve kept these rig busy, we before about the middle of the 2000, we really were drilling 100% U.S. gas, we had a conservative strategy of trying to move more to oil and that led us into the Williston Basin, chasing the Bakken and then later into Columbia, those are both oil plays.

And then since all the oil shale plays has developed. So now we’re over 70% oil derived business. So that’s been a nice change and our utilization as I mentioned are just coming back up. We’re 88% in this at the time of our last quarterly call and the three rigs in Houston will go out on a contract that will push us up in the below 92%, 93% range.

The rig fleet that we have, we have about we have slightly more mechanical rigs then we do electric, but our mechanical rigs have been upgraded just as we’ve upgraded our electric and so there’re lot of similarities, we have what I’d call a very high-end mechanical fleet and then we have a real high-end electrical fleet.

This picture is the last new-build that we delivered and that’s working in the Bakken, that’s a 2000 horsepower, one of I’d call our 50 Series Rig. It has an integrated top drive into the match. You don’t have to rig it up, rig it down. It’s a top forming rig in the Bakken working alongside a number of other of our 50 Series down rigs.

But we’ve worked hard coming out of the ‘09 downturn to position all of these 50s and 60 Series Rig and even some of the mechanical rigs into the shale play. And as a result we bought -- had about 35 top drive, we put a lot of walking and skidding systems on these rigs to do pad drilling, a huge expense we bought 70 mud pumps, mostly 1600 horsepower mud pumps, but that’s what’s really desirable for the long lateral completion in drilling work.

So then we have iron roughnecks on almost all the rigs. And anyways, so when you look at the fleet for instance that we’ve taken out of East Texas into West Texas, these rigs have round the bottom mud tanks just like a modern joystick rig. They’ve got matched hydraulic horsepower and mud pumps just like the big rig. They’ve got iron roughnecks. They’ve got dual linear motion shakers cleaning the mud. In many cases they have top drives, I think 10 of our mechanical rigs have top drives and many of them are earning extremely attractive day rate. Those mechanical rigs with top drivers are some of our highest margin -- highest return on investment rigs we own.

The rigs that we have under construction are all state-of-the-art AC powered joystick drilling cabins like that up on the rig floor. As I mentioned, there approach to them is, we don’t speculate when they put the blue ink on the contract. We start ordering and so they go out, we deliver them. Originally I guess the first since we’re delivering about nine months, now we’re delivering them probably about 11 months out.

But the way the shale plays work, it’s so long range planning, it hasn’t hurt us, so we’ve been able to contract into these rates put them under construction. We target 20% minimum internal rate of return on all these new-builds and they’ve worked very, very well, that’s the stellar rig in the shale play.

Just a bit of history on us, we are one of the early pioneers of the AC technology. We actually put the first two AC rigs onshore in United States back in 2001. We’ve been building rigs since 2001 and build about 31 of our fleet since that time. So we’ve been involved in this technology. We were unfortunately a little ahead of the curve and the technology was not as proven as it later became. But it’s really been well-accepted technology today. We think there’s lots of benefit to it.

Couple of other features that we have on our new-builds, which really a lot of the big contractors we can all deliver a very similar product. We tend to think our rigs maybe a little better than anybody else but they all think that too. So, but these are all 10 of our rigs have integrated 500 10 top drives into the math that you can leave them stronger and we have to rig them down. They’re all eight of the 10 are 1,500 horsepower with 750,000 pound hook load mass stub, two of them are for Marcellus are a little bit smaller, little bit mobile at 550,000 pound hook load mass stub.

All 10 are designed to be rigged up, rig down without a crane. You don’t have to wait for a crane company to come out, operators like that feature. They are very fast moving as few loads as can possibly be designed. They all have blowout the winter handling systems for back into the end, quick rig up, testing, all have automatic catalogs and all of our 1,500 horsepower rigs have 2,000 horsepower mud pumps that’s somewhat of a unique feature that we have on our rig with 7500-psi fluid in. So for the long lateral work we have a lot more pump pressure and gallons per minute driving your down own motor and cleaning your bore well out. So that’s been very well received by our customers.

And of course, they’ve got the latest software technology that’s available today. And all 10 of ours are pad drilling rigs, every one of them are pad drilling rigs that very efficiently walk from -- walk down lines or roads, or can cut over and drill other roads.

Just a quick explanation, we were using pin on hydraulics feet to the four corners of the substructure. You can have your math up with all your drill pipe rack back and these feet are lifted up and walk it forward 10 feet, 20 feet whatever it is. The spacing on your well bores. These things just work great for us. We’ve got one working in Utah and literally we’re moving to the next borehole in less than an hour, very efficient.

In this walking pad oriented rig, you leave your backyard, what we call the backyard with your mud tanks, mud pumps, generated houses, water tanks, fuel tanks all in one spot. And then the mass stub walks forward on the hydraulic feet and all your electrical wiring tracks along in this testing system, makes it a nice clean package.

One other point I’ll mention on the drilling type before I leave it. We’ve worked very hard on delivering performance to our customer’s that’s probably why even a small company like us is able to get all these new-build contracts. We do a good job on the drilling. Our safety is in the top 20% of the top 15 drilling contractors in the country. We’re right at the very top. So we’re able to work for pretty much anybody. Were breaking in and working for the major ones, super majors now in this year due to the performance and the safety record. So that’s great.

Turning to our production service side of the business, focusing in on well services. We have the highest average horsepower well service fleet in the industry and it’s pretty much solely a 550, 600 horsepower fleet. And it’s pretty much brand new and we continue to add new equipment. We focused on just a few vendors so it’s a real high quality, high quality units.

We have kind of led the industry for the probably the last seven quarters in terms of utilization and in terms of average hourly rate. We’ve been running 90% of better utilization for quite some time now for about four quarters in our average hourly rate far exceeds anybody else in the industry.

So these are very nice rigs, they’re focused in the Williston Basin, drilling the Bakken, in the Eagle Ford and the Haynesville, Barnett and we’re expanding into other shale plays as well, Haynesville so anyway. So good fleet and we continue to grow it, we like it very much.

On our wireline and fishing and rental -- our fishing and rental is a very small piece of our business and one that we’re not putting capital into right now, but its doing fine, just not a business line that we wanted to grow. Conversely our wireline business is something we’ve grown tremendously over the last couple of years. We grew at 33% unit count in 2010. In 2011, we’re growing it about 26% unit count and then we’re already planning to grow here in the first quarter and will grow more throughout 2012.

But its -- we’re pretty much in wireline have representation everywhere in the U.S., every significant shale plays that’s out there. And in both wireline and in our well servicing business its not all completion work, I would say the mix is probably still over 50% in maintenance work and the completion and in the case of workover rigs, workovers and maintenance as opposed to completion.

The wireline are lot of the new additions we’ve added have gone into the shale plays to do the long lateral perforation, multistate frac but w do the perforation side not the fracking side. And that’s been great business for, so we have got a lot of expertise in that area.

Just a few quick comments, I think everybody knows from the industry perspective all the activities in the shale and/or West Texas. We’re pretty much represented in all of them. I think another aspect of the business that we see is that with the rig count having gone up so much and all the drilling that’s taking place and the efficiency of the rigs doing the drilling. These days you just put more boreholes in the ground, think in the Bakken they have already got over 6000 boreholes and that rig count is going to well exceed 200 rigs next year. In the Eagle Ford we’re already a little over 200 rigs and that’s going up.

So as more and more of these boreholes are drilled, you’re just going to have greater and greater production service intensity, well service work, wireline work, coil work, other related type of services. And I think people just don’t estimate they’ve really done the math of how many boreholes will be there in two to three years now that will need servicing on it -- on a multiple time on annual basis. So it’s a pretty extensive what’s to come.

Also the majors have all moved back onshore, takes the plain, a bigger role in the U.S., they tend to be a little bit more stable. We’re working for a number of them in different areas and are continuing to pursue additional work particularly on the drilling side. We’re doing quite a bit on the wireline and the well servicing side already.

CapEx, I think looks good for 2012, not all the capital budgets have been announced, but our guess is that it’s going to be up from the kind of fourth quarter, at least equivalent to fourth quarter, if not up from that run rate. So our outlook is optimistic with respect to capital spending going forward.

Looking at the financials, this is just kind of quick snapshot of our revenue base, this $661 is trailing 12 months, the $751 in revenues is just the third quarter annualized and then we have done the same for adjusted EBITDA.

So you take the third quarter annualize it that’s $206 million. Obviously that doesn’t take any consideration the additional units that we have added and it doesn’t take into consideration any future EBITDA that we might have obtained from these acquisitions we’re working on. So we see quite a bit of growth in both revenues and EBITDA as we go forward.

This is not been updated this -- we did this presentation before we launched bond offering yesterday. So this was our balance sheet, 32% debt-to-book capitalization and 1.5 times debt-to-EBITDA post doing the bond transaction yesterday, I think our debt-to-EBITDA went to about 2.4, but next year as we move end of the year and we get credit for the EBITDA, it will be back under and the projected EBITDA that we have will be well under two again.

So the balance sheet is, I think the debt is structured long-term as a lot of our growth is and we feel very comfortable with balance sheet and we just want to take advantage of these great growth opportunities that exists today.

So I think that concludes and would be very happy to answer any questions either from myself or Lorne.

Question-and-Answer Session

Unidentified Analyst

If you could just start up with a little more detail about the two production service acquisitions that you’re working on.

Stacy Locke


Unidentified Analyst

… just area of focus or just any additional color you can provide?

Stacy Locke

Well, unfortunately, we can’t talk too much about it, because we’re under a confidentiality agreement. But as I mentioned, I think we purchased those companies at a reasonable multiples that’s on average under four times future expected EBITDA. They’re in the productions service space. They could be complementary to it i.e. our new business line or more of the same. We really can’t talk about it.

But we do think that we will have one or both consummated assuming our due diligence plans out, we should have those consummated close to the end of the year or by the end of the year or shortly thereafter. But that’s -- but we do think they will run project out about $40 to $45 million of EBITDA into next year without any CapEx growth.

The real value to those businesses for us and it’s the way we approach some of these acquisitions in the past. We don’t try to buy too bigger business. We try to buy the management team, the team that we think, we can grow with and it fits our culture as concern for the safety like the people we’re looking at in these transactions.

We fully expect all the people to join the company and stay with us long-term. But we also plan to grow the businesses pretty considerably and that’s where we really get the value out of it. We -- as opposed to buying it two years from now where you pay a big multiple on a much larger company. We like to grow organically when possible. Yeah, sir.

Unidentified Analyst

On the land drilling side, given the recent economic turmoil or capital markets turmoil, have the conversations with your customers changed, let’s say, what they were six months ago, obviously WTI has recovered lately…

Stacy Locke


Unidentified Analyst

But, that was my number one question and number two is, just on the back of it, if you could speak to your 2012 outlook for land drilling business?

Stacy Locke

Well, those are good questions. We’ve had a lot of concern about that very issue, we’ve spent some time in New York and Boston in September and October, and everybody was trying to leap out of the windows and so we had concern, we weren’t seeing it in our business. And I will tell you that we still don’t see it in our business.

We are having as many conversations on new-builds today as we’ve had in the past. We still see demand and request for other production service assets. We see requests from our customers to broaden our service offering, so they can do more business with us and so we can help provide other services where they could go and the perfect world as we drill the borehole. We do the wireline work to complete it. We go in and drill the plugs out with the well service rigs and establish production. That’s a great outcome. So we’re trying to expand in our service line there to be able to offer more services to these customers.

But on the drilling side, I think that our guidance was eight to 10 rigs that we thought we could obtain contracts four build for 2012, we already there. I would say based on the level of conversations that we’re having today. We see that going up next year and that’s part of the emphasis we’re doing the bond, transaction.

We don’t have anything to announce at this point, other than the 10th rig. But just based on the conversations, we would expect to obtain more new-build drilling contracts. Right now, out of those 10 we have seven going to the Bakken, two the Marcellus and one to the Eagle Ford.

We still haven’t sold the new build into the Utica, we think there is a lot of opportunity there and we are positioned-well there in wireline and from a drilling standpoint we can service it out of -- we have two drilling divisions in the Marcellus, one is in the Southwest that could easily service the Utica.

So we’re marketing hard in there, we almost had a contract to move a couple of rigs into the Mississippian, but we see some opportunity there for new-builds. And of course if the Tuscaloosa Marine Shale has some success early next year then there maybe some opportunities, I think there is some big acreage position there.

So we’re pretty optimistic and even the Niobrara, we’re really not even there yet with any of our rigs and we’re seeing a little more success out in Niobrara. So we feel like there is quite a bit of reason to be optimistic. We think rig count is going to stay at a minimum flat with Q4 levels, if not go up. So we’re pretty optimistic.

Unidentified Analyst


Stacy Locke

On the drilling side. Well, for us, our margins have been flattish, we keep guiding flat to down, we were actually up in the third quarter, but because of adding rigs to West Texas, those day rates are lower and that the margins are lower and so as we everything else is working so as we keep adding rigs to west Texas it causes our average margins to go down.

But once the west Texas relocations stabilizes, I think we’ll see our average margins on the legacy fleet continue to go up, because we are being able to price existing rigs up a little bit and we’ve taken so many rigs to West Texas. We -- most of those are on one-year term but we had a couple of early ones on six months those have been renewed. And we went up over 1500 of day on the first two that renewed roll them into one-year term from six months. So we feel like West Texas affords a nice opportunity to raise rates.

And we’ve added several circumstances with our mechanical rigs, with top drives where we’ve got a number of them that are earning well over 20,000 a day, in day rate under term contract. So we see some up side there too.

So we’re -- we, so legacy fleet margins should start going up next year and then you layer in the new-builds, those margins are 12 to 14,000 a day. So that is -- those layer in particularly in the third and fourth quarter you’ll see the margins continuing to rise more rapidly there.

Unidentified Analyst

You are in Colombia for number of years now?

Stacy Locke


Unidentified Analyst

What’s the prospects for other international markets are growing Colombia further?

Stacy Locke

Well, we’re -- it’s an allocation of capital situation right now in Colombia. We’re getting such good returns here in the U.S. and the rigs in Colombia cost more, because you have to put on a third mud tank, a third mud pump, a fourth generated package, extra tubular good.

So that all in cost is probably $3 to $4 million higher. So you need incrementally higher margin to get the same 20% IRR. And when the ‘09 downturn hit, we -- they took advantage of it lower day rates. We had a real nice day rate in ‘07 and went higher in ‘08 and then it came down pretty good significantly in ‘09.

But we think the environment most of the six to eight rigs are under three-year term that expire at the end of next year. So we’re pretty confident. We’re going to see rates go up at that point. And it’s feel a great market lot of, the Gulf country has done and Ecopetrol has done, everything they said there we’d do, they’re increasing CapEx, increasing their production in the country. We’ve had a great experience there and we’re kind of good relationship with Ecopetrol and we think that’s going to continue. So we see a lot of promising in Colombia.

Other markets in South America, there is clearly some that are on our Radar. We’re particularly interested in the markets that offer shale opportunities. When we moved into Colombia, we were the first one to introduced brand-new rigs in the country and that kind of quickly took us up with our safety record in our downtime percent.

We moved up to the top of the pack. So we’ve got a good reputation in that part of the world and will be able to lever off that into other country over time. But there’s such good opportunity here in the U. S., we’re going to allocate our capital here for the near-term. Any other questions?

Unidentified Analyst

Stacy, Lorne, thank you very much.

Stacy Locke

Right. Thank you all very much.

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