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

Patterson-UTI Energy, Inc. (NASDAQ:PTEN)

Q3 2007 Earnings Call

November 01, 200710:00 a.m. ET

Executives

Geoff Lloyd - Investor Relations

Mark S. Siegel – Chairman of the Board and Director

Douglas J. Wall - President & Chief Executive Officer

John E. Vollmer III – Senior Vice President-Corporate Development, Chief Financial Officer & Treasurer

Analysts

John Fitzgerald - Raymond James & Associates

Kurt Hallead - RBC Capital Markets

Geoff Kieburtz - Citigroup

Scott Gill - Simmons & Company International

Arun Jayaram - Credit Suisse

Waqar Syed - Tristone Capital

Brad Handler - Wachovia Securities

Todd Garman - Peters & Company

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Patterson-UTI Energy earnings conference call.  My name is Fab and I will be your coordinator for today.  At this time, all participants are in listen-only mode.  We will conduct a question and answer session towards the end of this conference (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.  I would now like to turn the presentation over to Mr. Geoff Lloyd on behalf of Patterson-UTI Energy.  Sir, you may proceed.

Geoff Lloyd

Thank you very much.  Good morning and on behalf of Patterson-UTI Energy, I would like to welcome all of you to today's conference call to discuss the results of the three and nine months ended September 30, 2007.

Participating in today's call will be Mark Siegel, Chairman, Doug Wall, President and Chief Executive Officer, and John Vollmer, Chief Financial Officer.

Again, statements made in this conference call, which state the company's or management's intentions, beliefs, expectations, or predictions for the future are forward-looking statements.  It is important to note that actual results could differ materially from those discussed in such forward-looking statements.

Important factors that could cause actual results to differ materially include, but are not limited to, declines in oil and actual gas prices that could adversely affect demand for the company's services and their associated effect on day rates, rig utilization, and planned capital expenditures.

The excess availability of land drilling rigs including, as a result of the reactivation or construction of new land drilling rigs, adverse industry conditions, difficult in integrating acquisitions, demand for oil and natural gas, shortages of rig equipment, and ability to retain management and field personnel.

Additional information concerning factors that could cause actual results to differ materially from those inthe forward-looking statements is contained from time to time inthe company's SEC filings, which may be obtained by contacting the company or the SEC.

These filings are also available through the company's web site or through the SEC's EDGAR system.  The company undertakes no obligation to publicly update or revise any forward-looking statements.

And now I would like to turn the call over to Mark Siegel for some opening remarks to be followed by questions and answers.  Mark?

Mark Siegel

Thanks, Geoff.  Good morning and thank you for joining us today.  I hope that, by now, all of you have had an opportunity to read our earnings release, which was issued earlier this morning, prior to the opening of the market.

Before discussing the results of operations, I would like to take a minute to officially introduce Doug Wall in his new position as Chief Executive Officer.  While we will clearly miss Cloyce Talbott's unmatched experience and knowledge of our business, we are extremely fortunate to have Doug on our team.

In his brief time with Patterson-UTI, Doug has already demonstrated the leadership strength and management skills that we believe will help to develop Patterson-UTI to its fullest potential inthe years ahead.

I would like to review the results of the three and nine months ended September 30, 2007, and to indicate some of the financial highlights from the just completed quarter.  As always, we will be pleased to take your questions following these remarks.

To summarize, net income for the three-month period totaled $98.2 million or $0.62 per share compared to $186 million or $1.12 per share for the three months ended September 30, 2006.  Revenues for the just completed quarter were $524 million as compared to $674 million for the third quarter of 2006.

Net income for thenine months ended September 30, 2007, totaled $354 million or $2.24 per share compared to net income of $517 million or $3.03 per share for the first nine months of 2006.  Revenues were $1.6 billion for the nine-month period ended September 30, 2007, compared to $1.9 billion for thenine months of 2006.

Turning to our drilling operations, average revenues per operating day during the third quarter were $19,150 compared to $19,410 inthe second quarter of 2007.  Average direct costs per operating day were $10,840 for the third quarter compared to $10,570 for the second quarter of 2007.

For the quarter ended September 30, the company had an average of 243 drilling rigs operating, including 234 rigs inthe United States and nine rigs in Canada.  This compares to an average of 237 drilling rigs operating, including 235 rigs inthe United States and two rigs in Canada for the second quarter of 2007.

We estimate that our October rig count was 238 average rigs operating, including 229 inthe U.S. and ninein Canada.  For the fourth quarter, we currently expect our rig count will be similar to the third quarter with an average of approximately 243 rigs operating.

Recently, we have seen some encouraging signs and we believe that the land rig market continues to stabilize.  For the quarter we expect a decrease of approximately $500 per operating day in margin, taking into account changes in mix between the U.S. and Canada, costs from idle rigs atthe holidays, and some other factors.

For the drilling industry, in the United States, lower 48, land rig counts have remained at high levels during 2007.  Land rigs added to this marker have currently exceeded the market's demand.  In response, the construction of additional land rigs for the domestic market has slowed significantly.  In this climate, day rates began to stabilize during the third quarter.

Importantly, we believe that the long-term upward trend inthe number of wells drilled will continue, as it is the principal mechanism to meet demand for natural gas and to offset steep decline rates.  For this expected increase inrig demand, we currently have approximately 90 marketable land drilling rigs available to reactivate.

Most significantly, despite this temporary oversupply of rigs, our drilling business has remained fundamentally strong throughout 2007.  We have been willing to stack rigs ina systematic and disciplined matter in light of this current rig oversupply, which we believe to bea pause inthe long-term upward trend toward the utilization of more rigs.

Turning to our pressure pumping business, I'm pleased to point out that this business has continued to successfully expand its operations and had another record-setting quarter in both revenue and operating income.  During the quarter, revenue increased by 45%, and operating income increased by 57% compared to third quarter 2006.

I will now turn to our balance sheet.  We are continuing to deploy capital ina manner beneficial to our shareholders.  During the just completed quarter, the company purchased 2,275,000 of its shares for $50.3 million.  These purchases were made pursuant to the board's previously announced decision authorizing purchases of up to $250 million of the company's common stock.

In addition, we recently acquired three FCR electric land drilling rigs, two 1500 horsepower and one 1000 horsepower rigs and spare drilling equipment, for $29 million.  We spent $136 million on capital expenditures during the third quarter and we expect a similar amount in the fourth quarter, and that total spending for 2007 will bein the $600 million range.

I would now like to take a moment to summarize our actions in this area.  During calendar 2005 and 2006 and for the first nine months of 2007, we have spent approximately $1.4 billion on upgrading our rig fleet and increasing our assets inthe pressure pumping business.

We're also pleased that during this period, calendar 2005 and 2006 and during the first nine months of 2007, we have returned $635 million to our shareholders inthe form of dividends and buybacks.

With $1.4 billion reinvested in our company's assets and more than $600 million returned to our shareholders, our balance sheet has no net debt.  We believe our strong balance sheet, our dividend and buyback strategy, and our commitment to invest in our rig fleet and pressure pumping business; all have served and will continue to serve our company and its shareholders inthe future.

In addition, the company also declared a quarterly cash dividend on its common stock of $0.12 per share to be paid on December 28th to owners of record as of December 12th, 2007.

Most significantly, we would like to express our appreciation for the hard work and dedication of all of our people in each of our business units.  We thank them for their efforts.

At this point, I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions)  And your first question comes from the line of John Fitzgerald from Raymond James.

John Fitzgerald - Raymond James

Good morning, guys.

Doug Wall

Good morning.

John Fitzgerald

Congrats on the quarter, did really well.

Mark Siegel

Thank you.

John Fitzgerald - Raymond James

Wanted to ask a couple of questions, on the pressure pumping market you guys are really successful there this quarter.  Could you give some color on how you performed so well?

Was it just a different region you were working in or what was the deal going on there?

Doug Wall

John, I think the answer to that question is really we've seen a lot of strength in both the fracking and nitrogen markets.  The number of jobs that we've been on has increased significantly.

The revenue for each of those service lines has increased dramatically.  And I think our people up at Universal are very well connected in that marketplace and I think we're very well positioned for future growth.

John Fitzgerald - Raymond James

Okay.  And as a follow-up, I think when you announced that you'd acquired the three new rigs.  I think you said two of them were working already.  Have you found a job for that third rig?

Doug Wall

The third rig, at the moment, is not presently working.  We do have a number of leads and we expect to have it working before the end of the year.

John Fitzgerald - Raymond James

Okay.  And were the other two signed under long-term contracts?

Doug Wall

No, they weren't.  The other two were both working on well-to-well contracts.  Both operators have expressed interest in keeping the rigs, but we also had some very strong possibilities for placement of all three of those rigs.

John Fitzgerald - Raymond James

Okay.  That's it.  Thanks.

Operator

Your next question comes from the line of Kurt Hallead from RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

Hey good morning.

Doug Wall

Good morning.

Kurt Hallead - RBC Capital Markets

Hey.  I just have some questions.  There is obviously a lot of chatter out in the marketplace that the asset quality of Patterson rigs is far inferior.  I know Mark you just referenced the $1.4 billion upgrade program, and I also seethe fact that you've got 90 idle rigs and Neighbor's has 84, so it doesn't look like you guys have lost any differential share relative to Neighbor's.

Also, you did pretty well in terms of your cash margin, so what else can you guys do to put this false rumor to rest here?

Doug Wall

Well, Kurt, it is Doug here again.  As you know, we've spent a little over a $1.4 billion over the last three years on upgrading our equipment.  We think it is a common misnomer inthe marketplace both with our competitors and really with the street about the quality of our fleet.

I think our customers are speaking very loudly with their wallets, and they do appear to like the work we do for them.  As I said, we've taken a very disciplined approach to upgrading our fleet.  We've added new rigs.  We've completed over 67 refurbs inthe last two or three years.

We've spent a great deal of money on our fleet on pumps and mud systems, which is probably one of the key components of improving drilling efficiency.  By the end of 2007, we will have in excess of 260 rigs with 1,000 horsepower or greater Triplex pumps.

We spent a tremendous amount of money on safety improvements on our rigs.  We now have iron roughnecks on over 170 rigs.

There's no question that we still feel we have some way to go, but we've come a long way in this company, and I think our results both with what our equipment has done and with the people that we have inthe field, I think it points out that we do a very good job in the field and people pay for operational efficiency.

Kurt Hallead - RBC Capital Markets

Right now, broadly speaking, there's got to be some element of rig attrition that occurs here over the course of the next six to 12 months.  You have a number, like what was it, 350 to 500 depending on what the count is of new rigs that have been entered into the market.

It's got to make a lot of the older rigs somewhat obsolete.  What's your general take on rig attrition?

Doug Wall

Well, I think you're correct on there's some rig attrition in the market place.  If you look atthe rig data numbers there’s been about 650 rigs added to the marketplace in the last three years.

We think only about 300 to 350 of those are what I would call brand new rigs.  The interesting piece is a lot of those new rigs are not necessarily fit for purpose.  We think in terms of quality, not all of those new rigs are what I would call new rigs.

There's going to continue to be some attrition, we believe.  But I think the attrition is shifting inthe marketplace in terms of the horsepower and it really isn't all about new rigs.

A lot of it is rigs need to be fit for purpose and the rigs that are very efficient and will improve drilling performance will continue to work.

Kurt Hallead - RBC Capital Markets

Okay.  And my next follow-up question, given the fact you guys got  90 rigs ready to be marketed as demand warrants, what is your game plan for drill pipe?

Doug Wall

Well, we currently we're ina very good situation with drill pipe over the last couple of years.  We took the opportunity to make sure we had plenty of pipe and inventory and I'm very, very satisfied that we're in very, very good shape with drill pipe.

Kurt Hallead - RBC Capital Markets

Are you going to need to be buying any or are you guys pretty much done for a while?

Doug Wall

Honestly, we haven't really looked at that in any depth at this point, but I would be real surprised if we add any significant amount of drill pipe in 2008.

Kurt Hallead - RBC Capital Markets

Okay.  All right, thanks.

Operator

And your next question comes from the line of Jeff Kieburtz from Citigroup.

Jeff Kieburtz - Citigroup

Thanks very much.  Doug, I would just like to carry on that point and maybe your comment that the rigs need to be fit for purpose in obviously Patterson does have a very substantial amount of legacy equipment that wasn't built for the drilling environment we see today.

But then you've spent a lot of money on it.  Can you give us a sense of, as you're still relatively new to the company, do you have a vision of what the Patterson fleet of the future will look like?

And can you give us, if you do have some sense of where we arein the progression toward that goal?

Doug Wall

I guess to respond to that, the fleet of the future I don't think is going to look dramatically different than the fleet today.  Lots of people over the last couple years have talked about the fact that SCR rigs are going to replace every rigin the market place.

Today that conversation is around AC rigs.  There's no question that, I think, the industry is moving in that direction.  But will every rigin the future be a new SCR rig?  The reality is no.

I think probably as I mentioned earlier, probably the most significant improvement in drilling efficiency over the last five years is really related to bit technology.  And from our point of view, that has meant larger size mud pumps and, in lots of cases, top drives.

I think those two things are where we have been very disciplined in terms of employing our capital, and I guess my point is there's only about 350 out of the 1750 or 1760 rigs that are working inthe marketplace are new.

And I think this industry has probably spent and this is probably the first time in the last 20 years that we've seen this kind of capital infusion into the industry.  And there are 1400 rigs out in the marketplace today or more that are not new.

And those rigs in my mind are never going to disappear.  I think it is a fallacy that new equipment is going to totally replace every rigin the marketplace.  There really are markets today where brand new technology is just not fit for purpose.

So, I think to generalize and say new rigs are going to totally replace everything inthe marketplace is just a misnomer.  So, in our own case, to respond to your question, Jeff, we're going to continue to employ capital.

We're going to continue to upgrade our rigs in areas where we think it makes sense.  And I think you'll see those.  We're in really good shape, I think today with things like mud systems and mud pumps.  We're going to selectively continue to upgrade our rigs in those areas where we think it is appropriate.

Mark Siegel

Hey, Jeff, I would just like to add one or two little small points, which are really emphasis points to what Doug just said.  One is that one of the things we've seen is that some of the brand new rigs that have entered the market, some pursuant to long-term contracts are not fit for purpose and are likely to either retire before the term contract ends or certainly atthe expiration of the term.

So, that's point one.  And point two, in some markets, the newest, supposedly most technologically fit rig cannot outperform a mechanical rig that's very, very well suited to its purpose in that particular marketplace.

So, we think that in both cases, there's a common misconception that either all new rigs are fit for purpose or that some mechanical rigs or no mechanical rigs can outperform a new rig.  Both of those are flatly wrong.

Jeff Kieburtz - Citigroup

Right, I don't want to get into a semantic or definitional discussion too deeply, but you're drawing a distinction between new and fit for purpose.  I think, what you're saying is the market needs fit for purpose and that may or may not bea new rig.

Doug Wall

I think that's correct.  We would all agree with you.

Jeff Kieburtz - Citigroup

Okay, as you stand today, how much of the Patterson fleets, inclusive of the 90 rigs that aren't contracted, would you consider to be fit for purpose?

Mark Siegel

I don't think we're prepared to go through that estimate today, Jeff.

Jeff Kieburtz - Citigroup

Okay.  All right, fair enough.  In terms of those 90 marketable rigs that are idle right now, are they off the market, they're just capable of being marketed, or what’s kind of that, how are you thinking about those 90 rigs right now?

Doug Wall

Jeff, the easy answer to that is of the 90 rigs, most of them are of the smaller horsepower size of rigs.  They're scattered around in our various regions.  They are currently marketable, are ready to go to work.  We probably could not put all 90 of them to work tomorrow.  I think the crew situation is all of these rigs have actually run within the last 15 months.

So, I think, to answer your question, we have not taken them off the market.  I think the limiting factor today would be people and as long as we had enough lead time, I think we could crew the rigs in some reasonable period of time.

Jeff Kieburtz - Citigroup

Do any of the 90 idle rigs have crews standing by?

Doug Wall

I would saythe crews are not necessarily standing by.  We've redeployed a lot of the drillers and some of thekey personnel on other equipment.  So, I would call those people standing by.  But, we certainly don't have them waiting at the house for the call.

Jeff Kieburtz - Citigroup

Okay.  And on the margin decline, at the end of the second quarter you had forecast that margins would decline $300.  They declined $500.  Does that reflect a somewhat greater weakening of the market than you had anticipated or how should we think about that variance?

Doug Wall

I'm not following the question.  Could you sayit again, Jeff?

Jeff Kieburtz - Citigroup

I think inthe second quarter conference call, I believe that you had forecasted margin on the land drilling business would decline about $300 sequentially and it declined I think about $500?

Doug Wall

No, I think we had, I think you've got that backwards.  We believe talked more like an $800 decrease in margins and we outperformed that a little bit on the expense side.  We talked about $11,000 in costs per day and they turn out to be $10,840 and the rest of it was the stronger pricing.

As Mark mentioned in his opening comments, we saw some stabilization in pricing in the third quarter.

Jeff Kieburtz - Citigroup

Okay.  Thank you.

Operator

And your next question is from Scott Gill with Simmons & Company.

Scott Gill - Simmons & Company

Yes, good morning, gentlemen.

Mark Siegel

Good morning, Scott.

Scott Gill - Simmons & Company

Just a quick question here on the guidance for activity, I think you guys are calling to be flat for the fourth quarter.  October was 238, a little bit below that.  We've got the holidays approaching.  Are you seeing anything in hand today that indicates that November is going to bea meaningfully up month for your rig count?

Mark Siegel

Scott, there's really two components of that.

Scott Gill - Simmons & Company

Okay.

Mark Siegel

Our rig count kind of, U.S. rig count peaks at about August 31 and then September it got a little bit softer.  I suspect that just being atthe end of the injection period.  And then, in recent weeks, we've seen that U.S. rig count move back up, over the 230.

Now, granted atthe end of the year, I would agree with you that the last couple of weeks of the year, around the holidays, you lose a little bit of U.S. rig count.

On the Canadian rig count, is also, it is not great but it has been good, running more than ten rigs of late.  And taking the two together, our guess is that the U.S. is going to be something a little north of 230 rigs running for the quarter and Canada, would average something inthe 11, 12 kind of range, so our 243.

Scott Gill - Simmons & Company

Okay.  You wouldn't have a company in hand that would say that it is going to jump to 245 for the month of November or something like that?

Mark Siegel

No.  I think it is just really more gut-feel based on inquiring on how the rigs are getting deployed right now.

Scott Gill - Simmons & Company

Okay.  That's fair.  We haven't talked much about the fluids business.  It looks softer here in the quarter, was that due to the weakness in the Gulf of Mexico?

Mark Siegel

Yes.

Doug Wall

Yes.  Absolutely, I think we were very surprised the number of rigs operating inthe gulf, I think has dropped down to 50 or 52.  It’s down from I think 80 rigs a year ago.

And our business inthe fluids business is heavily oriented toward the Gulf of Mexico.  So, as the Gulf of Mexico is strong, our business is strong, as the Gulf of Mexico declines, we see some weakness there.

Scott Gill - Simmons & Company

Okay, a couple of other quick ones, on the oil and gas side, DD&A was up quite a bit.  Was there some sort of impairment inthe quarter?

Mark Siegel

Yes.  There was, it was about $2 million.

Scott Gill - Simmons & Company

Okay.  And we're not expecting that for the fourth quarter, right?

Mark Siegel

We evaluate it every quarter, Scott.  But certainly, I have no visibility of impairment at this time.

Scott Gill - Simmons & Company

Okay.  My last question, again a pretty quick one here, Mark, you spent a lot of time talking about the investments that the company has made over the past two plus years, $600 million of which for 2007, any insights to what the spending might be for 2008 and where that spending might be directed?

Mark Siegel

Actually, I'm going to let Doug respond to that.

Scott Gill - Simmons & Company

Okay.

Doug Wall

I can't give you a number at this point.  We are just in the process of working on our 2008 budget.  But I will say this.  We were going to continue to be extremely capital disciplined.  We certainly got a look at our capital expenditures in conjunction with what we plan on doing with dividends, with what we plan on doing with our share repurchase program.

And also, looking at our free cash flows for 2008, so, as I said, we're not finished with that process at this point but I do expect it is going to be down significantly from the numbers that we spent inthe last couple years.

Scott Gill - Simmons & Company

Doug, would you say that as you look at your rig fleet, you're more inclined to be building new assets as opposed to upgrading some of those 90 idled assets?

Doug Wall

I think that's true.  We've shared with you before that we ordered 15 brand new IDEAL rigs from National Oilwell.  We have taken delivery of all of that equipment.  To-date, we have only put one of those rigs inthe field.

We are currently constructing another two of them.  And we will be looking at selectively adding those rigs to the marketplace over 2008.  Now, a number, as I said, most of the capital expenditures of thebig components, we've already paid for.

Scott Gill - Simmons & Company

I'm sorry.  You said how many have been delivered?

Doug Wall

One is actually out inthe field working.

Scott Gill - Simmons & Company

Okay.

Doug Wall

We presently just started construction of two additional.

Scott Gill - Simmons & Company

Okay.

Mark Siegel

Scott, all of them have been delivered to us in our CAPEX expense.

Scott Gill - Simmons & Company

Right.  But they're not field ready though, right, Mark?

Mark Siegel

Correct.

Scott Gill - Simmons & Company

Got you,  okay.  Thank you.

Operator

(Operator Instructions)  And your next question comes from the line of Arun Jayaram from Credit Suisse.

Arun Jayaram - Credit Suisse

Good morning, gentlemen.

Mark Siegel

Arun, How are you?

Arun Jayaram - Credit Suisse

I’m doing well.  Mark, in your comments, you mention you're seeing a stabilization in the marketplace and you're guiding to a higher rig count I guess for November and December.  Are you seeing that the same stabilization in margins and when do you think, Mark, we could seea plateauing of Lower 48 margins for you?

Mark Siegel

Arun, I think the word you used that starts with a "P" we don't use.

Arun Jayaram - Credit Suisse

Okay.

Mark Siegel

But all kidding aside, I think that the sense we have with $94 oil prices and $8.33, using yesterday closing prices, natural gas, that it's not surprising to us that we're seeing some encouraging signs from our customers, both in terms of utilization and some extent of lessening inthe pressures on pricing.

And so that's what causes us to talk about encouraging signs.  Doug, you want to say something more to that?

Doug Wall

No, I don't think really.  Arun, there isn't much we can add to that.  I don't think we're ready to say that good times are here again but I think we've certainly seen some encouraging signs that there's some stabilization in the market place.

Arun Jayaram - Credit Suisse

Okay.  Fair enough.  Gentlemen, the tax write-off, I don't know if you mentioned this a bit earlier, the tax rate came in a little bit lower than I had modeled in.  Was there anything unusual there?  And is that a lower tax rate going forward, could you give us some guidance there?

Mark Siegel

I think for the year, you would be looking at 35% tax rate.  What you're seeing there inthe third quarter is when you file your return for the prior year, you true everything up at that point in time and we were a little conservative on our tax rate last year.

You're seeing the benefit run through the third quarter.  35% for the year would be the way to look at it.

Arun Jayaram - Credit Suisse

Okay.  My final question, guys, I asked the same question of Neighbor's but the Baker Hughes onshore rig count in the U.S. is up 6% in quarter-on-quarter year-over-year versus 2006.  Yet your rig count was down 19%, Neighbor's down 14%.

Why do you think you guys and Neighbors are bucking the trend and losing so much share relative to higher rig count by Baker Hughes and Richard Mason saying that this is an all-time high at least in the modern history of the onshore rig?  And why arethe trends so different?

Mark Siegel

Well, I think, Arun, we started out by saying that the market's been good in the land drilling business and our business has been fundamentally sound.  I mean, that's the critical thing to see.  You know, you look at our business and you see net income being in the 19% of revenue.

The business is fundamentally good.  That's a critical fact to see as a starting point.  And I want to make sure that we say that and we remember that.

Against that, we’ve been very disciplined about our business and we think that our charge is to maximize the profitability of our company for the benefit of our shareholders.

And given that we're the largest player in the U.S. land market, it makes sense for us to be very careful and very disciplined about the utilization of our rigs.  And since we're careful about the utilization of our rigs, ina market that's got an oversupply, we're likely to bea player who takes into account that oversupply and works with itin a disciplined fashion.

But I would like to make sure that, you note while you talk about that, the net income results that have been achieved by the company.  And the real point here is did the management maximize the returns for the investors with the assets that are under their handling?

We're not supposed to maximize utilization, we're supposed to maximize return, and we did that and have done that for a number of years.  And that's what my point was.  I think all of this other conversation starts to look at some of the detail and overlook the fundamental point.

Arun Jayaram - Credit Suisse

Okay.  Thanks a lot, Mark.

Operator

Your next question comes from the line of Waqar Syed from Tristone Capital.

Waqar Syed - Tristone Capital

Hi, good morning.  Some questions on the pressure pumping side.  Fourth quarter pressure pumping typically slows down.  Are you going to see, do you expect that to happen this year as well in Appalachia, and also if you could talk about some margins for the fourth quarter?

Mark Siegel

Yeah.  Is based on your comments, you realize the fourth quarter is typically lower than the third, driven by less hours with a shorter days and less days to work because in Appalachia, the custom is to ship out at Thanksgiving through the first day of hunting season.

There is also a similar slowdown around the Christmas holiday.  So, my guess at this point would be revenues in the fourth quarter would be more similar to the first quarter.  Atthe same time, with less days to work.

Doug Wall

More similar to the second quarter.

Mark Siegel

I’m sorry, more similar to the second quarter,  and with, the same number of working days, but less days working, the margins should be slightly lower in the fourth quarter than they were inthe third.

Waqar Syed - Tristone Capital

Okay.  And then, kind of longer-term picture, are you seeing this Appalachian market seems to be, at least for now, different than what we're seeing in other regions on the fresh pumping side.

Do you expect your competitors to start putting more equipment in there or how do you seethe market develop next year?

Doug Wall

I think a lot of our growth there has really been driven from theMarcellus shale play.  Its certainly that's where we've seen the biggest volume in our business.  All of our major competitors are already in that marketplace.

I can't comment whether they're going to bring more equipment into that marketplace or not.  The reality is that marketplace is different than working in West Texas; it certainly has some different drivers.  Like I say, I really can't comment what our competitors are doing.

And I think the other thing I guess I would like to point out is the shale plant up there is in its very preliminary stages of development and at this point, we do expect to see further growth but I think it is a little too early to make that call.

Mark Siegel

The one thing I would like to add to what Doug said is that while Appalachia, as you correctly point out, is a good area.;  We've been operating in that area for many years.  And because of the fact that we're a long-term player in that marketplace, we think we have some considerable advantages over new entrants.

We have relationships with customers.  We have equipment.  We know the area.  We have a lot of, we think, significant advantages that we think differentiate our business in Appalachia from our competitors who may be our new entrants who may be trying to join the marketplace.

Waqar Syed - Tristone Capital

Sure.  And then on the drilling fluids business, you did not disclose the number of jobs that were done in the quarter.  Do you have that number handy?

Mark Siegel

I'm afraid not, Waqar.  Talking to our management in that area, they kind of concluded that that wasn't the best indicator and so we've got away from talking about itin our press release.

Waqar Syed - Tristone Capital

Okay.  And how do you see that market developed in the fourth quarter?

Doug Wall

We really think we don't see any significant changes in the fourth quarter from what we saw inthe third quarter.  I think until the Gulf of Mexico gets reactivated and we geta few more rigs back to work, we see our business there staying in kind of the levels that we witnessed in Q3.

Waqar Syed - Tristone Capital

Okay.  That's great.  Thank you very much.

Operator

And your next question comes from the line of Brad Handler from Wachovia Capital Markets.

Mark Siegel

Hi, Brad.

Brad Handler - Wachovia Securities

Yes, thanks, good morning.  I guess a little bit more on the pressure pumping side, please.  Can you just update us on your capital program on hydraulic horsepower that you have added this year and plans that are already in place for next, if any?

Mark Siegel

I'm sorry, Brad.  We don't have that information available here with us in terms of the horsepower we've added.  Over the last couple of years, we've made significant investment as you know, as we look into 2008, we have not finalized our budget yet in terms of what we would add.

Brad Handler - Wachovia Securities

Okay.

Doug Wall

I don't have anything to add to that.

Brad Handler - Wachovia Securities

Okay.  Fair enough.  And then just, I guess just a follow-up on Waqar's question.  You do not have a sense as to what peers, competitors are doing in terms of their plans for Appalachia, is that right?

Doug Wall

I think that's fair.  We had some idea of what some of them are doing but I don't think I want to disclose that on the call.  There's no question that the market there is on the verge, I think of us knowing whether the shale play there is going to work like it works in some other places around the world or certainly around the U.S.

Our competitors, since they've been coming into the market really for the last year, so I really don't know what their further plans are.  The one thing I do know, to point out what Mark said earlier, we're pretty tough competitor in that marketplace and we're just not going to cede that marketplace very easily.

Brad Handler - Wachovia Securities

Understood, I'm not as close to your trends as I could be but perhaps you can just clarify how much the revenues per job, how much of that reflects pure pricing over the last three quarters?  So, it is a positive pricing progression, I guess?

Mark Siegel

In the Appalachian base, I think the pricing works a little bit different than it does in some other markets.  That pricing gets really set in February, March timeframe and a lot of these programs are annual programs.

So, I think there's pricing improvement over the year, maybe I would guess, somewhere toward 8% or 10% and the rest of it is I think driven more by job size.

Brad Handler - Wachovia Securities

Okay.  And that's helpful.  And I guess so, you are getting ready to sit down atthe table and so that February, March review in '08?

Doug Wall

That's correct.

Brad Handler - Wachovia Securities

Okay.  All right, very helpful.  Thanks, guys.

Mark Siegel

Thank you.

Operator

And there are no further questions.  Actually, you have a question from the line of Todd Garman with Peters and Company.

Todd Garman - Peters & Company

Good morning,  just wondering if you could give us a little bit of color in your land drilling rig business by region.  So, are there any regions in the U.S. that are either materially busier than you thought they would be or materially slower?

Doug Wall

Well, let me start with the slower ones.  I think the one that probably has been as everybody knows, has been very slow over the last three quarters is really Canada.  But in the U.S., certainly I think the areas where we've seen some declines in activity would be the Permian Basin in West Texas and Oklahoma has probably been slower than we anticipated.

The strength, as you might anticipate, has certainly been in the Rockies.  Ithas that we've seen tremendous amount of strength certainly inthe Barnett Shale of North and Central Texas.  We've seen some recent signs of strength in South Texas.

Todd Garman - Peters & Company

If you look out to 2008, are you seeing any indications from your large clients that in terms of spending or activity levels that are going to be materially different from the smaller ones?  I mean do they plan to be busier than the smaller ones do?  Or is it vice versa?

Doug Wall

I think that's true that some our larger customers are planning on remaining very busy.  I think what we don't have a real good handle today is on some of what we call the checkbook drillers in West Texas.

As you know, most of those people are driven very quickly, based on commodity prices.  So, I do anticipate we'll see some resurgence in West Texas towards the first part of the year.

Todd Garman - Peters & Company

Okay.  Thank you.  I guess just a follow-up to that then.  What about larger clients in the other regions of the U.S.?

Doug Wall

Well, again, without mentioning names, some of the larger customers, I think, are presently looking at and trying to determine what their '08 budgets are going to be.  But most of the larger customers that we've talked to show that at least flat plans for '08 are somewhat up, but it depends really on the region.

Todd Garman - Peters & Company

Okay.  Thank you.

Operator

And there are no further questions at this time.  I would now like to turn the call back over to management for closing remarks.

Mark Siegel

Thank you.  We’d like to just thank everybody for their participation in our call and look forward to speaking with you following up on our fourth quarter.  Thanks, everybody.

Operator

Thank you for participation in today's conference.  This concludes the presentation.  You may now disconnect.  Have a wonderful day.

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: Patterson-UTI Energy Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts