Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Stacy Locke - President and Chief Executive Officer

Lorne Phillips - Executive Vice President and Chief Financial Officer

Red West - Executive Vice President and President of Drilling Services

Anne Pearson - DRG&L, Investor Relations

Joe Eustace - Executive Vice President and President Production Services

Analysts

Brian Uhlmer - Global Hunter

John Daniel - Simmons & Company

John Keller - Stephens Inc.

Michael Urban - Deutsche Bank Securities, Inc.

Daniel Burke - Johnson Rice & Company

Lenny Bianco - Raymond James & Associates

Pioneer Drilling Company, Inc. (PDC) Q4 2011 Earnings Call February 21, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to Pioneer Drilling’s Fourth 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) I would now like to turn the conference over to Ms. Anne Pearson of DRG&L, Investor Relations. Please go ahead, ma’am.

Anne Pearson

Thank you, Kelly, and good morning to everyone. Before I turn the call over to Pioneer’s CEO, Stacy Locke and to CFO, Lorne Phillips, for their formal remarks, I have a few of the usual items to cover. First of all, a replay of today’s call will be available and is accessible by webcast by going to the Investor Relations’ section of Pioneer’s website, and also by telephone replay. You can find the replay information for both of them in this morning’s news release.

As a reminder, information reported on this call speaks only as of today, February 21, 2012, so any time sensitive information may no longer be accurate at the time of the replay. On this call this morning management may make forward-looking statements 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 will prove to be correct. They are subject to certain risks and 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 materializes 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. Now I would like to turn the call over to Stacy Locke, Pioneer’s President and CEO. Stacy?

Stacy Locke

Thank you, Anne, and good morning. Joining me on the call here in San Antonio is Red West, President of our Drilling Services division; and Joe Eustace, President of our Production Services division; and Lorne Phillips, Chief Financial Officer.

We have completed another solid quarter for Pioneer. Both revenue and EBITDA was up another 8%, that is eight quarters now of steady revenue and EBITDA growth, derived by a combination of unit growth and pricing. For Pioneer, because of the way we have positioned ourselves, we think this trend continues for at least another eight quarters and sets us up to be able to reduce a substantial amount of our indebtedness in 2014.

Let me explain this in a little bit more detail by reviewing our unit growth starting with production services. For our wireline business, at the end of 2011, we ended the year with 105 units. That’s up 25% on the year which that year was up 33% on the prior year. So we have had very very significant unit growth in our wireline units mostly in case hole and mostly targeted to the horizontal shale plays. Today we are at a 107 units, so we are up an additional two units with 12 more wireline units on order. So as of, what's been ordered to date, sometimes by the summer, late summer, we should be a 119 wireline units.

Looking at well servicing, at the end of 2011, we had 89 rigs, that was up 20% for the year. Today, we are at 91 units, up an additional two units with 11 more workover rigs on order. Mind you these are all, like the rest of our fleet, all 550 and 600 horsepower, top of the line well service units.

Now let me digress just a bit to talk about our new business line. On 12/31/11, we completed the acquisition of Go-Coil. Strategically, coiled tubing has been in our sides for a couple of years and we feel that it is a must have business line in our production services businesses. Coiled tubing has very similar characteristics to our wireline, which is high margin and low cost per units and offers excellent cross-selling with our other existing production services businesses, well service and wireline. These are the core businesses along with drilling that we have wanted to be in to provide to comprehensive onsite services to our horizontal customers.

So Pioneer can now drill the original horizontal borehole. We can perforate that horizontal leg with our case hole wireline units. We can drill out all the plugs between the frac zones with our coiled tubing units and we can run tubing in a established production for the operator with our well servicing rigs. Granted, all of those services do a lot more than just that, but it’s pretty much a soups to nuts from the original borehole to putting the well on production. And just as importantly, we can provide maintenance and workover services with all of these business lines for the life of the borehole which is many many years into the future.

The obviously onsite services that is missing from our portfolio of businesses, is pressure pumping. Our view on pressure pumping has been that it is another very capital intensive business, much like drilling, and it doesn’t offer the same contract protection in the form of long-term take or pay contracts. So we felt like we already had one capital intensive business, we didn’t necessarily need another, and we certainly didn’t want it for us at least without having the same protections that we have on the drilling rig side. So that’s one business that would be another obviously fit to our onsite services.

Now back to why we see eight more quarters or more of revenue an EBITDA growth. Coiled tubing ended the year 2011 with ten coiled units. Three offshore and seven onshore. We have three additional units now on order, an additional offshore unit and two units for this year. Therefore, production services, the run rate and growth for 2012 is from units added throughout 2011 and units added in 2012. And 2013 unit growth in revenue and EBITDA is from units added in 2012. At the present time pricing continues to be firm with an upward bias, just like it was in the 2011, and we foresee that that trend will continue.

Turning now to drilling. At the end of 2011, we completed the year with 64 drilling rigs. Recall that we sold six in auction and we retired one, a seventh rig. At the present time we have ten newly built rigs under construction, eight of which are 1500 horsepower, two are 1000 horsepower, all are pad drilling, true walking rigs that will be delivered throughout the year. Approximately one a month beginning in March or April of this year. So we will have considerable growth like in production services, in EBITDA and revenue from drilling in 2012 and more importantly in 2013.

As we look out to 2013, 2014, we do plan to slow our growth in order to begin building cash. We anticipate modest production service growth but probably in for sizing our newer business leg, coiled tubing. Same at drilling. All of our rigs are working so we don’t have the same upgrade requirements that we had in 2011 as we repositioned stacked gas rigs into West Texas to drill for oil. So all that’s basically behind us and the rigs are working.

And I don’t think we are going to have nearly as many newbuilds. I think the market is going to correct that, but even if the market was there, I think Pioneer is ready to limit its growth of newbuilds to no more than two, three, four newbuilds for 2013, if the opportunity arises in order to start building cash for the company. We think that it is going to be a little bit taller order as we go forward just due to the gas rig count having come down in certain markets and being relocated to the more oil and liquid rich markets.

In 2014, we want to be in a position to materially reduce our indebtedness at least 50% or more. We feel that our debt has served us well. It’s allowed us to build the necessary critical mass at the right time and in the right business lines, and allowed us to position in the shales in horizontal plays across the U.S. and down in Columbia. These are the plays that we have wanted to be in. We are there. With the critical mass that we now have and the quality of our assets, and service, and safety, we have the flexibility to move where we can to perform at the very best for the company.

Let me turn now to Lorne to go over our financial review.

Lorne Phillips

Thanks, Stacy. Good morning, everyone. Before I go into the numbers, I will just make a quick comment about, we had mentioned in the past that we were looking at another transaction related to the production services business that was quite a bit smaller than the coiled tubing. And at this time we have chosen to pass on that, given some of the changes in the market. Particularly on the dry gas side we felt that it was prudent to not proceed with that transaction. So that deal is currently off the table. So I will go now into the numbers.

This morning we reported fourth quarter net income of $6.8 million or $0.11 per diluted share. That compared to net earnings of $6.7 million or $0.11 per diluted share in the third quarter of 2011. And it also compares to a net loss of $6 million or $0.11 per share in the fourth quarter of 2010. Our fourth quarter of 2010. Our fourth quarter results included two items which are not expected to continue. The first item is a $590,000 pre-tax expense, primarily to the acquisition cost for Go-Coil which we purchased on December 31.

A small portion of that expense related to the additional acquisition I just mentioned, that in the end we decided to pass on. The second item is additional income tax expense in Columbia of $605,000 relating to a non-deductible operating expense. This increased our tax rate in the fourth quarter which I will come back to in a moment.

Looking at the top line, our consolidated revenues in the fourth quarter totaled $203.7 million, which was up approximately 9% from the prior quarter and up about 37% from a year ago. Total adjusted EBITDA in the latest quarter was $55.5 million which is almost 8% higher than the previous quarter and 47% higher than a year ago. Fourth quarter adjusted EBITDA was reduced by the $590,000 of acquisition expenses I referenced a minute ago.

Drilling services revenue totaled $118.9 million which is a 9% increase over the prior quarter. Our drilling operation in Columbia accounted for just over $28 million of that total which was flat with the third quarter. And turnkey revenues contributed an additional $2.2 million. Gross margin for drilling services was $39.4 million, which was up almost 9% from the third quarter. Average margin per day was 7686, was about 110 a day lower when compared to the third quarter. This reflects the increased activity in West Texas where the margin per day is lower than in other areas where we work.

Our fourth quarter drilling services utilization was 87% versus 79% one quarter earlier on a apples to apples basis. Meaning, if you excluded the seven rigs we retired at the end of September from the third quarter. Currently, 80% of our working drilling rigs are operating under term contracts. This is excluding the newbuild rigs that are not yet deployed. The average remaining term on these contracts is approximately 6 months in the U.S. and 7 months division wide. Six of our eight Columbia rigs are working on contract and we are marketing the other two to various operators in Columbia. Approximately 87% of our drilling rigs are targeting oil or liquid rich gas plays.

Turning now to production services. We generated $84.8 million of revenue which represents a 7.5% increase from the third quarter. Of that increase, approximately 42% is estimated to be driven by unit growth. Production services margin was $35.8 million which was up almost 4% from the third quarter. And for the fourth quarter PPS represented 42% of combined revenues and 48% of our consolidated gross margin. Production services gross margin percentage was 42.2%, down from 43.7% in the third quarter. The decrease quarter-over-quarter was driven by slightly lower utilization as well as increased cost, partially offset by pricing increases.

Driven by typical seasonality, our well servicing utilization was 86% in the fourth quarter compared to 92% in the third. The average hourly revenue rate for well servicing increased to 577, a 4% increase from the prior quarter. I should also note that the first quarter tends to be our slowest quarter of the year across our production services business lines. Stacy will provide guidance on revenues and margins in Q1 for PPS later on the call.

For production services, approximately 79% of the assets are targeting oil or liquid rich gas plays. Looking next at overall expense trends for the company. SG&A expenses were $19.2 million, which was up 8.6% from the prior quarter and exceeded our November fourth quarter guidance of $18 million to $18.4 million. The delta from the guidance is related to the acquisition related expenses I mentioned earlier as well as increased accruals for incentive related compensation.

Including the coiled tubing acquisition, first quarter SG&A is estimated to be in the range of $18.5 million to $20.5 million. And our initial view for the year is roughly $80 million to $84 million of SG&A. Depreciation and amortization expense was $35.2 million in the fourth quarter. For Q1 of 2012, we expect D&A to be in the neighborhood of $37 million to $70 million. And our initial D&A guidance for the full year is in the range of $160 million to $170 million. Interest expense in the fourth quarter was $8.1 million, which was approximately $1.9 million higher than the prior quarter. This increase primarily relates to the $175 million of bonds we issued in mid-November, the majority of which was used to fund the Go-Coil acquisition.

Offsetting this cost was the capitalization of about $1 million of interest expense related to the construction of equipment. Without any capitalized interest in 2012, our estimated interest expense would be in the $46 million to $48 million range, with approximately $3 million of that cost is non-cash. Based on our current outlook, we expect to capitalize approximately $6.5 million to $8.5 million of interest in calendar 2012, with the first quarter estimated to be in the $2 million range.

The tax rate for the fourth quarter was 44.5%, which was impacted by the $605,000 Columbian tax charge. Excluding the impact of gains or losses from foreign currency translation, our normal tax rate going forward should be in the 38% to 40% range. At December 31, we had cash and cash equivalents of $86.2 million. We currently have 0 balance on our revolving credit facility with the exception of $9 million in committed letters of credit. This leave us with borrowing availability of $241 million on our revolver. We expect to begin drawing on the revolver as we experience greater spending related to the drilling newbuilds.

During the year, depending on timing and the actual commitments that we make, we estimate that our revolver balance could be in the $40 million to $60 million range at its peak. During the fourth quarter, we had capital expenditures of $69.5 million, which included $12. 4 million for routine CapEx. For the full year 2011, we invested a total of $210.1 million in CapEx. And of that amount, $43.4 million was for routine expenditure. For 2012, we currently expect to spend $300 million to $330 million of Capital expenditure. That includes $50 million to $60 million of routine expenditures, the balance on the ten new drilling rigs and the additional wireline well servicing coiled tubing units that Stacy mentioned earlier.

The increase in guidance from our prior guidance on CapEx is predominantly related to increases in production services CapEx with the majority of that being in coiled tubing. With that I will turn it back to Stacy.

Stacy Locke

Thank you, Lorne. When you look around the country at our various markets, I would say almost all of them continue to be very very strong. You look in the Bakken, we are at 100% utilization there in drilling. All the other business lines are doing very well. You look at in Utah, same 100% utilization, our wireline operation there is strong. And in West Texas, 100% utilization. Our well servicing business there is strong as well. In the Eagle Ford, where we do have some of our South Texas not in the Eagle Ford, the shallower capacity mobile rigs, we have essentially 100% utilization. We actually have one down today, but they go up and down and they are drilling gas.

But they stay substantially busy all year, so I am going to refer to that as a fully utilized fleet as well in South Texas. And all our business lines in South Texas, which would include well service wireline and coiled, are all doing very well there. And then down in Columbia, we have eight rigs there, six of which are continuing under term contract. And our two 1000-1200 horsepower capacity rigs are presently down. Although the market continues to be strong, it’s oil, we see a bright future there. We have got those two rigs down. They are down marketed to a number of different customers, so we are confident that they will go back to work here hopefully by the end of this quarter or the beginning of the next quarter.

So overall, the Columbia market looks good. It’s just some temporary weakness there for us. So that leaves really two markets that I haven’t discussed, and that’s East Texas which continues to be very very weak. We have only four rigs there remaining today. One of which is working. And it continues to be a weak market. We have taken two additional rigs from East Texas and moved them into our Houston yard for preparation to move to West Texas. One of those is already under contract, a one year term, and will be moving out next month to begin it’s one year term. And the other rig we are continuing to market.

So, and then we have -- actually in the Marcellus, that is choppy market. We have had rigs down there. Today we have five rigs working but earlier in the month we had some activity there down. And our wireline business had been soft there and we have recently exited that business in the Marcellus. So Marcellus is probably going to remain weak as gas prices remain weak. We have taken two rigs from that market. One we moved across the country to go to work in Utah. The other we are operating out of our West Texas division in the Granite Wash. And more than likely we will move additional rigs through the course of this year, away from the Marcellus.

And hopefully we will get the second rig in Houston being ready for West Texas under contract sometime over the next 60 days. All that being said, all the liquids, oil rich markets are very very strong. Dry gas are weak, which is no surprise. And we still have quite a bit of activity on the production service front even in the dry gas markets. But the vast majority of our activity as Lorne has explained, is not in dry gas.

So with respect to the first quarter guidance. Our drilling utilization today is 88%, we averaged 87% in the first quarter. We are actually going to guide lower at 83% to 85%, as we know we have had a little softness earlier in the month of February, and we are anticipating additional softness in these gas markets. That may prove to be a little conservative but it does illustrate the risk out there for gas rigs. In addition we are going to guide the margin down $300 to $600 a day. That has nothing to do with day rates, it is solely about a greater number of the total rigs working -- coming from West Texas, which are operating at a lower day rate. And thus, lower margins.

So as more rigs average in to the total, it brings your average margin down. In addition, as you have these dry gas rigs go down, hopefully very temporarily, to get them ready to move to other markets, you have stack-out cost. So we are absorbing some of those cost in that decline in margin as well. So it’s very little or nothing to do with day rates. Day rates continue to be firm in all the other markets, if not improving. And as we mentioned before, we think in the second and third quarter in particular we are going to have day rate opportunities as we reprice in West Texas and in other markets. So we continue to see day rates at a minimum to be firm.

Switching over to the production services side of the business. Revenues we’re forecasting to be up pretty significantly at 20% to 27%. The bulk of that will be contribution from our coiled tubing business, but not all of it. We do project some modest revenue growth from the legacy business. And we project margins to be flat for the quarter, which is better than we would normally guide for what is seasonally the lowest quarter. So we are pleased with how we see our legacy businesses performing in the quarter, and we think that the coiled tubing is going to assist in this first quarter as well.

Weather overall has been a little more favorable than last year and we are seeing that in our results for the quarter. So we are pretty optimistic on all of these businesses. I might mention that in the drilling, I think as we have got it over the last couple of quarters that we would always forecast that the first quarter of ’12 would probably be the turning point in margin. And I think that going forward from there you will see average drilling margins improve each quarter thereafter as we reprice West Texas and layer in our newbuilds into the quarter.

So I think we will conclude our remarks and be happy to entertain any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Mr. Brian Uhlmer with Global Hunter Securities. Please go ahead, sir.

Brian Uhlmer - Global Hunter

Yeah, I just wanted to follow-up a little bit more on Columbia and kind of our outlook there. With a couple of rigs down, you say that you’ll hopefully get them re-signed up by this quarter or early next quarter. What’s kind of hold-up there and what’s the pricing environment look like down there. And how do you look at that throughout -- maybe over the next two year period, how do you look at that market down there as developing?

Stacy Locke

Good questions. Well, the situation that we are in right now, I would say is in part due to some unfortunate timing. We really didn’t expect to have both these rigs down. At this point we had one -- we had one of these rigs that had a number of option wells at the option of the customer, and we were under the impression they were going to continue their drilling. And they changed their mind in December, which in Columbia isn’t a good time to have that type of decision. Because not a lot happens really for -- I would say you could almost extend it for December, January. People are vacationing during the holidays and it’s tough to get a lot of work done.

So we had these rigs, both come available during that period. And now that we are out of the holiday period, we are aggressively bidding these to other customers including (inaudible) drill. And we are optimistic that we are going to get them back to work and we think the day rate environment is improving there and so we are confident we are going to get them back to work. And more than likely they will go back to work at a higher day rate. So we have some good things going on there in that market. And we intend to stay there and keep doing what we are doing.

Brian Uhlmer - Global Hunter

Thanks. Completely unrelated follow-up. When you talk about, you get another short coiled tubing unit on order. When we look at the offshore market, is there any other services or any kind of plethora of other stuff that you do on land, that potentially you want to take to that and commit capital towards the offshore. Can you just kind of talk about the decision to grow the offshore coiled activity and anything that goes along with that.

Stacy Locke

Well, we were already in the case hole offshore market. And we have four skid units for case hole and we are considering a couple of additional units for that market. But we entered that market at exactly the wrong time. It was, I think months before the big spill. And so it’s been a pretty soft beginning for our case hole there. Now that we have purchased the Go-Coil group, we have already moved one of those case hole unites immediately to work for the same customer, as the coiled unit is working. So there, as I mentioned in my prepared remarks, the synergies and cross-selling opportunities, it’s all the same customers, different relationships. And I think we will see a lot of cross-selling opportunities between those two offshore businesses.

Brian Uhlmer - Global Hunter

Okay. And if I could sneak in quick third one. What is your kind of your goal on reducing debt in terms of debt-to-cap, debt-to-EBITDA, what are you talking there when you are talking about drilling gas and paying down debt in 2014? Just so we can try and model out what you are planning on?

Stacy Locke

Well, I think for modeling purposes, our goal would be -- as I mentioned in my remarks -- that we would reduce at least 50% of that debt in 2014. Was that fair Lorne?

Brian Uhlmer - Global Hunter

And the targets on it? Just to hit some level of debt-to-cap or debt-to-EBITDA, Lorne, or...?

Lorne Phillips

I think it’s -- well, we have always talked about debt-to-EBITDA two times or less. Obviously, reducing the debt by 50% would take it. We are already -- we will be at two times or less in the next quarter or two. So it’s more just the absolute dollar amount. I think on a long-term basis we have also said we felt like out debt-to-cap would be more appropriate in the 20% range. Maybe a little higher, maybe a little lower but that’s something that just takes time. And so from our perspective we just think those bonds are callable in early 2014 and as accumulate some cash and expect that our revolver is low or under on, that you can take out the bonds and do in such a way where you end up with a net result where your debt is down significantly.

Operator

Our next question comes from the line of John Daniel with Simmons & Company. Please go ahead, sir.

John Daniel - Simmons & Company

Hey guys. I just want to follow-up on Brian’s question. What would lead you to reevaluate the debt reduction strategy? And should we assume that acquisitions are off the table might have been subjective.

Stacy Locke

Well, we never stop looking at things that we will continue to look at opportunities. But I would say that if were to look at more stop -- for stop type opportunities that would be more consistent with our goal. But we are, what I would say is the big use of cash for us are newbuild rigs. If the market was out there, where we could build 10,12,15 more newbuilds, we would not do that because we have got a nice critical in our core businesses. And that’s the area we need to cut along with some of the other businesses. We need to cut the capital expenditures to build the cash. So we are -- that is our strategic plan, and I don’t think we are going to alter it. Just going to have to reduce capital expenditures.

John Daniel - Simmons & Company

Okay. Fair enough. Stacy, you mentioned that we will see gains in cash margins after Q1. Can you provide some sort of framework in term of the magnitude that you would expect later this year?

Stacy Locke

Well, it’s basically the same story that we have been talking about throughout 2011. We, as a production service company, for instance in ’08, we were at roughly at 50% margin. We were, I think our highest quarter so far, we have been about 45% or 44% margin. And so if this market continues the way it’s going in these oil and liquid rich areas, we think that margin has a chance to improve. Pricing has gone up but so have costs. But we do feel like that the trajectory is for margin improvement. It could gradually get up to ’08 levels by the end of the year, it’s hard to say.

John Daniel - Simmons & Company

I was actually referring to the drilling side.

Stacy Locke

Okay.

John Daniel - Simmons & Company

I am sorry. But thank you for that answer because I was probably going to go there anyway.

Stacy Locke

Well, on the drilling side, the average margins for Pioneer, assuming everything else is constant, is going up due to the ten newbuilds coming in. And so they will be impacting second, third and fourth quarter this year, and then we will get the full impact in 20/13. But in addition to that, we have now 16 rigs out in West Texas. A number of those were signed on one-year term contracts. A fair number of them start coming due here. We have had a number of them come due and I would say almost without exception we have rolled them at a higher day rate on the order of $1000 a day or more. And we say that trend continuing and we will be renewing those contracts in the second and third, and fourth quarter of this year. So that will be a help.

And then in the other shale play markets, it’s going to be -- we are just going to have to see. I don’t think you are going to see pricing go down. And the reason I say that, because the rigs that are being dislocated out of the gas markets. You have some competition risk there, but I don’t think we are going to see pricing do down and we are seeing day rates remain firm today. So I would call that market which has been going up slightly in rate, probably to be flattish to firm. It’s just hard to say how many of these rigs are going to be dislocated and where they are going to go out of the gas markets.

John Daniel - Simmons & Company

All right. Last one’s for now....

Stacy Locke

Did I answer that?

John Daniel - Simmons & Company

Sort of. Not really. I mean, I am just trying to guess -- I mean I know they are going to migrate higher, right, because of the newbuilds and the repricing, I just don’t know if it could get you to quantify where you thought that might potentially be by later this year. I mean do cash margins break the $8000 level overall or do they sort of migrate to the high sevens?

Stacy Locke

Yeah, I thank that -- I see where you are heading. You want a real specific modeling type answer. You got it.

Lorne Phillips

Yes, I do think you (inaudible) by the end of the end of the year. Absolutely. It’s probably third, fourth quarter type. Yeah. And beyond.

John Daniel - Simmons & Company

Fair enough. My last one. I got confused, which is not surprising, but on your prepared comments you talked about pressure pumping. Were you suggesting that that’s a business you are interested in or not interested in?

Stacy Locke

Well, I was suggesting that it’s a business that we are not interested in at the present time because it’s too much like drilling, in that it is a very capital intensive business. We already have one of those. And the other downside of pressure pumping as compared to drilling, is in drilling you can get multi-year take or pay contracts. So you truly have some protection on the cost of that newbuild that you don’t have in pressure pumping. So for these reasons we would rather stick with the business we know well and like with the take or pay term contract protection.

Operator

Thank you. Our next question comes from the line of John Keller with Stephens Incorporated. Please go ahead, sir.

John Keller - Stephens Inc.

Just kind of wanted to get your thoughts, Stacy, I think I know directionally where this is going but you had talked about getting the 90% plus utilization kind in the first quarter. Is that still a target? Obviously it’s been pushed out a little bit but do you think that that’s in the cards for -- at some point may be middle of this year? I just kind of get your thoughts on how the fleet utilization progresses?

Stacy Locke

Yeah. Well we’re, like I said, today we are at 88% utilization. We have got a rig in Houston we know is going back to work. We have got two rigs down in Columbia that we think are going back to work. We have got one rig in South Texas that we also know is going back to work. And we have another rig in Houston that we’re optimistic about putting back to work in the West Texas. We’re putting to work in West Texas.

So to answer your question. Yes, we do think that we will be north of 90% of utilization the majority of this year. The caveat for guiding in this first quarter is the rigs that are presently down in Columbia and rigs that have been down and probably will go down in the Marcellus. When those things go down, you have got costs associated with them and it takes time to get them relocated. So we are having some good conversations about other markets that we can take. One or two more rigs out of the Marcellus to other spots in the U.S. And we are going to take advantage of that opportunity.

Now, if conversely, they all still busy there in the Marcellus, then we are probably being overly cautious on our first quarter guidance. But that market is just uncertain. We don’t have as much long term protection there as we used to have. And we do not plan to exit the market. We have -- we hopefully will leave one, two, three or four of our existing rigs there because we do have two newbuilds going into that market. But it is a risk for us. And the only market that we don’t have much optimism on is East Texas. We have been generally running one, two or three rigs working there throughout 20/11. And today we have one, and so we just don’t know. We just don’t know what will happen in that market.

And we are evaluating some more rigs there to either relocate them or whatever. So we will keep you apprised. But to answer your question, we do think the utilization will get back up to 90% and stay there the majority of 20/11, based on what we know today.

John Keller - Stephens Inc.

Got it. And then also, I just kind of hope you could qualitatively kind of elaborate on your comment about production services pricing being firm with an upward bias. Maybe, kind of regionally or across service lines, it’s not as easy as thinking about that as just the well servicing business anymore, I guess. So, just across the different service lines within that segment as well as different geographies in the country.

Stacy Locke

Well, if you look at our well servicing business, I would say, and I don’t have it in front of me, but I would say that for probably the last eight quarters there again, that we had our hourly rate trend upward. And most of those quarter improvements have had margin improvement as well for PPS in total. So I think that pricing on average, maybe not in every single quarter like this quarter this just ended, I would say pricing on average is slightly staying ahead of cost. And over the trend, you are getting margin improvement. I think that’s going to continue.

We don’t see anything out there right now other than soft gas prices that could derail that, but based on the activities we are seeing today, levels we are seeing today with low gas prices, we are not seeing it. So I think margins we expect for PPS as a whole and well service pricing, hourly rate pricing to go up through the course of this year. Joe you have anything else?

Joe Eustace

No, I would concur. This first quarter starting out well.

John Keller - Stephens Inc.

Our first quarter is surprisingly robust. And I think a lot of that has to do with weather being much better in certain markets.

John Keller - Stephens Inc.

Now, you’re talking about pricing or utilizations, or both?

Stacy Locke

Both.

Operator

Thank you. Our next question comes from the line of Michael Urban with Deutsche Bank. Please go ahead.

Michael Urban - Deutsche Bank Securities, Inc.

I wanted to follow up a little bit on the pressure pumping question, I was pretty clear that you are not interested right now. But just wanted to summarize if I could. That you do see it as a business that makes some sense industrially or in terms of being a fit with what you do. But you wouldn’t be doing it anytime soon for the reasons you have talked about. The capital intensity and the contract start sharing and things like that.

Stacy Locke

Correct. Yeah, we are out there with our case hole wireline at the same time the pressure pumpers are there. So it would make sense to have both businesses. But when we are growing, we can't do everything with our limited balance sheet. And we have chosen to grow drilling significantly that it’s a lot per rig. We just didn’t -- we would have to give up some of that growth if we were in pressure pumping. And we don’t have the same three, four year term contract protection that we have in drilling for the pressure pumping growth. So it just for us, we can't do it all, let’s stick to one business that we like and know and get the protection on. It’s not anything bad against pressure pumping. It would be a fit. Absolutely, would be a fit for our business. There may be a time in the future when we are less levered and cash flowing tremendously where we would look into it.

Michael Urban - Deutsche Bank Securities, Inc.

Okay. Just wanted to clarify that. And then in terms of slowing down the growth profile, generating a little more cash as you get into next year. What -- to change that outlook -- since it certainly doesn’t look like gas prices are going anywhere anytime soon, but if for some reason they did rebound in some of these gas markets began to come back and you felt like they were sustainable. Is that something that could change your outlook, or just trying to get a sense for what if anything could?

Stacy Locke

Well, it’s a good question. I think right now, we are pretty dead set on that being a strategic goal for us. I would say nothing -- we don’t ever put blinders on but that’s an important strategic goal for us much like getting into the coiled tubing business was for the last couple of years. We are just looking out, couple of years out, when we see that opportunity with this market. If gas came back stronger, it would give us a chance to take out even more debt because all our pricing would be up and we would be cash flowing more and sooner.

So, we don’t think that’s happening. We think it’s a pretty good -- I think our timing just worked out that we were able to seize the opportunity when it was there on the drilling newbuilds. And we did that with debt and now we can harvest the cash off that growth and take that debt down. So that’s really the plan.

Operator

(Operator Instructions) Our next question comes from the line of Daniel Burke with Johnson Rice. Please go ahead.

Daniel Burke - Johnson Rice & Company

Question on the CapEx spend for this year. $300 million and $330 million, I think Lorne, you said maybe $50 million or $60 million is routine. Can you split the reminder? I know we can get pretty close but can you split the remainder of the growth capital between drilling and production services?

Lorne Phillips

Well, the biggest piece of that is the remainder of the newbuilds. I would say that’s probably -- it’s probably in the range of $170 million to $180 million, that we would right checks for this year, on the drilling newbuilds. And then there is probably -- you know I would say probably $10 million to $20 million other related to drilling that could happen, may happen but not necessarily for sure committed to. And the rest is really is all production services split between coiled tubing, wireline and well service.

Daniel Burke - Johnson Rice & Company

Okay. And I guess what I wanted to ask was then, as you contemplate beginning debt pay down in ’12 and ’13. Does that imply that you slow the rate of capital investment on the production services of the business or simply that the newbuild rig side goes away?

Lorne Phillips

Probably more the latter. I mean we may slow down depending on the business. I think that will be more of a market based on call. Because as Stacy said, if the newbuilds requirements were to go away, you generate a lot of cash flow and you could still grow your production services businesses and accumulate cash to help you pay down debt. So, I think it will be more based on specific markets. I would say right now, we probably would expect that coiled tubing, as Stacy said, we would emphasize that. Going forward I think well servicing also has very -- they all have very promising prospects but I would probably say coiled tubing, well servicing are near the top and then wireline is very good business as well, but it’s one where we will just kind of monitor and see how aggressively we grow it.

Daniel Burke - Johnson Rice & Company

Okay. And then just one other one. Guiding production services margin flat here, Q4 to Q1. I would assume that Go-Coil is actually helping support margins and offset what would otherwise be the seasonality you would see from the underlying production services businesses. Is that the way to think about it?

Stacy Locke

That is fair. That business is accretive to our gross margin on the production services line when you average it in. So I think that is a fair way to look at it. Even when weather is good you still have the impact of fewer daylight hours. Even though as Joe and Stacy said, that market has been quite strong here in the first quarter, you still have that impact of the daylight hours even when weather is cooperative.

Operator

Thank you. And our next question comes from the line of Lenny Bianco with Raymond James. Please go ahead, sir.

Lenny Bianco - Raymond James & Associates

Quick follow-up on the CT side. Three units on order, two onshore, one offshore. Will the contribution for those be more of 20/13 even or maybe, should we be thinking 4Q ‘12.

Stacy Locke

It will mostly be 2013, I mean they will be delivered probably early fourth quarter that we -- I suppose there is a chance that we might be able to pull them in earlier. But what we are planning on now is in the fourth quarter, probably early in the four. So there will be some benefit then, but then you get the full year in 2013.

Lenny Bianco - Raymond James & Associates

Great. And beyond these additions, obviously overall CapEx, you put more of its emphasis on the CT side. Will those be two inch units, maybe two and three eighths inch? Can you give us a sense of what you are seeing demand for out there?

Stacy Locke

Right now, the offshore unit is smaller. That’s more of a one and a quarter to one-half inch. That’s just more a maintenance work offshore. Almost primarily maintenance work. Onshore, we are really, right now, these units will be two inch units. We just feel like there is a good demand at that level and it’s a good return for that sized unit. It can't do everything but it can do the vast majority of what you need. And so we think that that’s a pretty good area. We are evaluating the two and three eights and certainly talk to customers about that all the time. Wouldn’t rule it out. But these we would expect to be two inch.

Lenny Bianco - Raymond James & Associates

Great. Thanks. And one more. So would we be thinking maybe in the three to five additions for 13 units on the CT side that is. Or maybe kind of down or back one to three, kind of dependent on where the market goes. Any kind of preliminary thinking?

Stacy Locke

I think that we will probably evaluate the course of the first half of this year. Some additional orders of coiled units and I am pretty confident we will order at least another three to five units before this calendar year is over for next year. So we are just evaluating the markets and where we want to position and we will complete that at some point during the first half of this year. And then we will probably go and place some orders for deliveries next year.

Operator

Thank you. There are no further questions in the queue. I would like to turn the conference over to management closing remarks.

Stacy Locke

Okay. Well, thank you all very much for participating on this morning’s call and we look forward to visiting next quarter. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes the Pioneer Drilling’s Fourth Quarter Earnings Conference Call. We thank you for your participation and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pioneer Drilling's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts