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Executives

Stacy Locke – President and Chief Executive Officer

Lorne Phillips – Executive Vice President and Chief Financial Officer

Anne Pearson – DRG&L, Investor Relations

Blaine David – Executive Vice President, Operation

Joe Eustace – Executive Vice President and President Production Services

Analysts

Brian Uhlmer – Global Hunter Securities

Veny Aleksandrov – Pritchard Capital Partners, LLC

Daniel Burke – Johnson Rice & Company

Jim Rollyson – Raymond James

Josh Lingsch – Simmons & Company

Rajiv Singla – Putnam Investment

Pioneer Drilling Company (PDC) Q1 2012 Earnings Call May 8, 2012 11:00 AM ET

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Pioneer Drillings First Quarter 2012 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] This conference is being recorded today, Tuesday May 8th, 2012. I would now like to hand the conference over to Anne Pearson of DRG&L, Investor Relations. Please go ahead.

Anne Pearson

Thank you Alicia and good morning 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 will be accessible by webcast by going to the IR section of Pioneer’s website and also by telephone replay. You can find the replay information for both in this morning’s news release.

As a reminder, information reported on this call speaks only as of today, May 8, 2012, so any time sensitive information may no longer be accurate at the time of replay. Management may make forward-looking statements today that are based on beliefs and assumptions and information currently available to them. While they believe these expectations 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 as well in a recent public filings with the SEC. If one or more of these risks materialize or underlying assumptions prove to be incorrect, results may differ materially.

Also please note in this conference call we 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. We appreciate you all joining us on our first quarter call. In the room with me today, filling in for Red West is Blaine David, our Senior Vice President of operations for the Drilling Division and Joe Eustace, President of our Production Services division; and Lorne Phillips, our Chief Financial Officer.

Well we have completed another very solid quarter for the company. About everything that could go right did so in this quarter. Revenues were up another 14% quarter over quarter and EBITDA was up 26% quarter-over-quarter. Unless the market changes from what we are seeing today, we’re on track to potentially hit a billion in revenues for the first time in our company’s history. That would be an approximate 40% year-over-year growth in revenue, and that would be on top of our 47% year-over-year growth in revenues from 2010 to 2011. Likewise, as we look out into 2013 with the unit additions in drilling and well service, and wireline and coiled tubing in 2012, we see another robust year revenue and EBITDA growth.

Now, turning to our four core business areas starting with drilling. Utilization held up better than expected at 87% in this first quarter. We pretty much completed our transition from gas to oil regions and liquid rich regions and it happened more seamlessly than we expected in this first quarter. Today on the drilling side we’re over 90% driven by oil or liquid rich related business.

Due to this not having the impact of relocation and other factors are US day rate margins per day were up, our US turnkey margins per day were up considerably, our Colombia day rate margins per day were up and we also had a fuel, one time fuel reimbursement, in Colombia that helped the margins in this quarter. So it’s a great quarter. We’re operating at about 90% utilization today. Our mechanical fleet is performing very well at 91% utilizations. Day rates for the mechanical fleet are still trending upward particularly in the West Texas market as we’ve discussed on previous calls. The electric fleet is also performing very well at 90% utilizations. Day rates are firm in every market with the exception of the Marcellus where rates have declined in the 5% range or so. We will actually be moving our fourth rig out of the Marcellus this month that’s down from 7. We moved one out in the fourth quarter to Utah, and two out in the second quarter to the Granite Wash and we’ll be moving third rig this month out of the Marcellus into the Granite Wash. All of those will be on one year term contracts.

We only have six rig down today, three mechanical, and three electric. One rig in South Texas is down, but it’s just down temporarily and will go back to work with a backlog of business. We have got one rig down in East Texas in the gas market. That’s one down out of two. That’s all that we have really remaining in East Texas today, and we have one down in Marcellus, but that’s the one that will be relocating here shortly to the Granite Wash and start its one year term.

We have one mechanical rig in Houston that is in the process of being upgraded and I don’t think that will be completed until the end of next month or early July. We still have the two rigs that are down in the country of Colombia. However, on those two rigs we are in negotiations on both stacked rigs to go back to work in the third quarter under term contract and at attractive day rates. One of the rigs is in process of being upgraded from a 1000 to a 1500 horse power rig. The other, we are putting on – it’s walking system that’s the last installation of a walking systems for now. Once that’s complete all the rigs in Colombia will be on walking systems.

We renegotiated some new day rates on the six rigs operating in the Cassia [ph] field and those will remain under contract through the end of the year at improved day rates.

Performance for the Colombian group continue to be outstanding. They were awarded the top one and two rigs out of the six rigs working for Ecopetrol in 2011 for total performance including safety, drilling parameters, downtime and that’s out of about a 150 rigs that Ecopetrol is either operating or participating in. So it’s quite an accomplishment for that group in Colombia.

New builds, we have several of new builds nearing completion and they look outstanding. The first Bakken rig actually should have gone out, it was held up by Floss Laws [ph] in effect in North Dakota and then now we have to wait for a new location to be build because the operator had to begin operations on that location that we would have gone to had the Floss Laws not delayed it.

I think we are going to be delayed in the delivery of the new builds and I think for modeling purposes what we are doing is shifting the delivery of those rigs back about a quarter or so rather than starting April 01st generating – we are going to go to July 1st and run one a month so that will extend this into the first quarter of 2013, but we have a total of 10 rigs. So we will double up, and that’s probably pretty conservative, but it’s a good safe way to model it.

Turning now to the production services segment of the business, revenue growth exceeded the high end of our guidance for the quarter at 27% growth in revenue primarily due to just very cooperative weather in regions that normally don’t have good weather. Also surprisingly our margin was up almost 2% to 44% of revenues, again ahead of our expectations.

In total, the production services segment of our business contributed 52% of our total margin for the company, pretty astounding. Great progress for that segment of our business. Drilling down more specifically into the subsector there in well services, they’ve achieved another quarter of best in class performance with utilization at 92%, average hourly rates up to $581 an hour.

In 2011, they were awarded by their industry group the AEFC, the gold award for safety, for the division that we compete in and to the best of our knowledge that really could include all of the top layers in well service. So they have just done an outstanding job on safety. Incidentally on our U.S. land division we also recorded in 2011 the best total recordable incident rate as reported through the drilling industry association IADC for the top 15 contractors in 2011. Drilling through the first third of the year we are performing better this year than we did in 2011. So all the groups are just doing an outstanding job on our commitment to keeping our employees safe and employees around it.

For well services March, believe it or not, was the highest revenue month and highest rig hour month ever. And in combination with January and February they turned out the best quarter in well service history. We ended December 31, 2011 with 89 well service rigs to-date. Today we’ve added 9 for a total of 98 and we have 10 more units that will be delivered this year. So we’ll end the year in well service at a 108 well service rigs.

Turning to wireline, just like well service, simply best in class performance. First quarter was their highest revenue and EBITDA ever just doing an outstanding job. A lot of that work is associated with the plug and prep [ph] work in the horizontal shale play.

We ended 2011 with a 105 units, we’ve added 9 units so far this year, we retired 2, so we have a 114 today but we’ve retired 2 in the quarter, so that’s a 112, and we have 7 more on order for delivery this year, so we’ll end this year at 119 net wireline units.

Turning to coiled tubing, the integration is going very well and we have continued to have high degree of confidence in the management team, they came with Go-Coil. We still believe that our EBITDA guidance of $26 to $29 million for the year and an accretive margin to the overall production services, historical margin is very achievable. We ended 2011 with 10 units. We have three units on order we expect the first offshore unit to be generating revenues by the third quarter and the other two land units to be generating revenues by the fourth quarter of this year. And we are evaluating the potential order of some additional units later this year for 2013 delivery.

Surprisingly at 13 units where we’ll be at the end of the year that puts us within the top 15 largest coiled tubing providers in the United States.

And now I’d like to turn the call over to Lorne Phillips for a review the financials.

Lorne Phillips

Thanks Stacy. Good morning everyone. This morning we reported first quarter consolidated revenues of $232 million which were up approximately 14% from the prior quarter and up 51% from a year ago. The majority of the revenue increase was attributable to the Go-Coil acquisition that we made at the end of 2011, adding to that were unit additions in well service and wireline, higher utilization and pricing and production services and improved pricing in drilling services.

Moving to the bottom line, our net income was $14.2 million or $0.23 per diluted share that compares to net earnings in the prior quarter of $6.8 million or $0.11 per diluted share and compares with the net loss of $6 million or $0.11 per share loss in the first quarter a year ago.

One noteworthy item to point out is a $1 million non-cash impairment charge for retiring two stacked mechanical drilling rigs located in East Texas and retiring two wireline units. The impairment had a $0.01 impact to diluted earnings per share.

Out total adjusted EBITDA in the first quarter was $70.1 million, which is up 26% from the prior quarter and is a 121% higher than a year ago. Drilling services revenue totaled $124 million in the first quarter, which is 5% higher than the prior quarter and 25% higher than a year ago.

Our drilling operations in Colombia accounted for almost $24 million of that total revenue number for drilling. Colombia’s revenue was down approximately $4 million from the fourth quarter because two of our eight Colombian drilling rigs had come off contract and were down since the contract expiration.

Our turnkey revenues in the quarter were $8.2 million, up from $2.2 million in the prior quarter. We do expect turnkey revenues to return to a more normal level this quarter around to $1 to $2 million range.

Gross margin for drilling services was $43.2 million, which was up 10% from the prior quarter. Our average drilling margin per day was 8537, which was an increase of 851 a day compared to the prior quarter. As Stacy mentioned, this margin per day improvement reflects several items. The first is a day rate increase that we negotiated in four or six of our Colombian drilling rigs that went into effect in early March and will continue through the life of the contract.

Also in Colombia we benefited from a reimbursement on fuel cost that had previously been under negotiation. Another contributor was the benefit of the increased turnkey work that I mentioned previously. Finally, we did see moderately improved pricing in the US as we rolled some contracts.

As I mentioned earlier, we retired two drilling rigs effective on March 31st. Our utilization for the quarter would have been slightly higher at 90% if our rig account was reduced to 62 instead of 64 for the entire first quarter.

Currently, 56 of our drilling rigs are working and 79% of those rigs are operating under term contracts. This excludes the new build drilling rigs that are not yet deployed. As of March 31st. the average remaining term for these contracts was approximately six months in the US and nine months in Colombia. As we renew contracts, the typical renewal term continues to be for one year.

Looking now at production services, revenue totaled approximately $108 million, which was up 27% to the prior quarter and was more than double our revenues from the year ago. The acquisition of Go-Coil in late 2011 accounted for the majority of the increase, but also contributing were the addition of six new well serviced rigs five new wireline units that were added to our fleet during the first quarter.

Utilization and pricing also had modest improvements in each of the businesses. Our contribution as a percent of Pioneer’s total revenue from PPS continued to decline from 42% one quarter ago to 46% in the first quarter.

The margin from production services was $47 million, which was up approximately 31% from the fourth quarter. As a percentage of the company’s consolidated gross margin, production services represented 52%, which as Stacy said is the first time production services contributed over half of the company’s gross margin.

The gross margin as a percent of revenues for PPS increased to 44%, up from 42% the prior quarter. The quarter-on-quarter increase was again the result of several items, the inclusion of coiled tubing in the first quarter was a contributor. Second, the better utilization, in part driven by better than usual weather conditions in the first quarter, and finally higher pricing also contributed a little to the margin improvement.

As we are seeing in drilling services, demand for production services remain strong in spite of low natural gas prices. For production services approximately 80% of the assets are targeting oil or liquid rich gas play. Also while somewhat of a moving target, we estimate that our current mix of production versus completion revenue in production services is approximately a 50-50 split today.

Looking now at our overall expense trends for the company, our G&A expenses were $21.1 million, which was up almost 10% from the prior quarter. The majority of the sequential increase was driven by the addition of the coiled tubing business. We expect G&A to be in the $22 to $23 million range in the second quarter and now expect full year to be in the $86 to $90 million range for 2012.

Depreciation and amortization expense was $38.4 million in the first quarter, which is up 9% sequentially, again reflecting the addition of coiled tubing as well as the increase in our fleet of other PPS operating assets. We expect second quarter D&A to be in the neighborhood of $40 million based on the addition of new drilling rigs and production services equipment that comes into the fleet this quarter. For the full year we continue to expect D&A in the $160 to $170 million range.

Interest expense in the first quarter was $9.6 million, which was approximately $1.5 million higher than in the prior quarter. This increase reflects a full quarter’s interest due on the 175 million of bonds we issued in mid-November primarily to fund the Go-Coil acquisition.

In the first quarter we capitalized about $2 million of interest expense primarily related to our new build drilling rig construction projects. For 2012 total aggregate interest costs are expected to be in the range of $46 to $48 million, and for the second quarter we expect to capitalize approximately $3.5 million resulting in an estimated interest expense charge of approximately $8.5 million in the second quarter.

Our effective tax rate for the first quarter was 32.9%, the lower than statutory rate was the result of foreign currency exchange gains in the first quarter. Excluding the impact of gains or losses from foreign currency exchange, our normal tax rate will be in the 38% to 40% range. As of March 31st, we had cash and cash equivalents of $21.4 million, we had a zero balance on our revolving credit facility at quarter end but we did borrow 20 million in late April to fund our new build drilling rig construction. Our current borrowing availability is $221 million which reflects the impact of the $20 million draw on April and $9 million in committed letters of credit.

During the first quarter, we had cash capital expenditures of $95 million which included $12.2 million for routine CapEx. We expect our CapEx spent in 2012 to still be in the $300 to $330 range provided earlier this year but likely in the high end of that range.

With that, I’ll turn it back to Stacy.

Stacy Locke

Thank you Lorne. Turning briefly to our outlook and some guidance for the second quarter. At this time our outlook remains positive pretty much on all fronts. We recognize the potential risk of equipment exiting dry gas areas, we’ve not really seen any material impact on us that we’ve not been able to work around. We do recognize the risk of oil prices declining to low sustained levels, however we think that we position the company as well as it can possibly be positioned and in better shape than it’s ever been in the past of whether a downturn with all the drilling rigs pretty much close to 80% being on term contract, and then having diversified the company to be approximately 50% in the production services side of the business which those services are varied both by business line but also by geography. And historical downturns though the production service side of the business is held up well with the one exception of ’09 which was an economic crash and a credit crunch. But we don’t think that’s going to happen all simultaneously like it did in ’09 again in this – in whatever slow period maybe coming.

But, looking at the drilling side of the business. I think we see utilization staying strong. We’re projecting in 89% or 91% for the second quarter and average margins per day in the 8000 to 8300 per day. Now that’s down a little bit from the first quarter but that’s really just correcting for the real improvement that we had in the turnkey margins per day and also the one time gas reimbursement that we had down in Colombia. But you’ll observe that 300 a day is quite a bit better than the day rates we were talking about on our fourth quarter call in February, and that’s because some of the things Lorne mentioned that we’ve had some day rates improve in the US, we’ve had considerable day rate improvement on the rigs in Colombia, we’ve had more seamless relocation of equipment out of the Marcellus and actually into regions where we feel like our cost basis will be a little bit lower. So, and then I think that after the second quarter we’ve add new build start layering in. We will see that day rate go up on a quarterly basis probably for the next four quarters. So that’s a pretty good long term outlook there.

Looking at the production service side of the business, I would have to say that I think we kind of got second quarter in the first quarter just due to the weather improvement. First quarter historically is seasonally soft due to weather, we had exceptionally good weather in the first quarter. And in the second quarter we have the thought to deal with in some of the northern regions. So, we’re still projecting revenues to be up a little bit, we’re thinking 5% to 10%, but we’re going to call the margins are roughly flat with the first quarter at the 44% of revenue range.

I think that the combination of that could produce an overall EBITDA flat to down for the second quarter slightly when you combine the two business lines it’s just hard to make that call for sure. I think as we look out further in production services, I don’t think our outlook has really changed. I think we’re still on a upward in terms of net pricing and some further margin expansion through the course of the year. So we remain optimistic, although we are cautious, and we are watching the market and we still plan to reduce capital expenditure significantly in 2013 in order to position ourselves to build cash and retire a significant amount of our debt in 2014. That’s kind of our outlook at this point. I’d like to turn it over for questions at this time.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We do ask that you please limit yourself to one question and one followup and re-queue for any additional. The first question is from the line of Brian Uhlmer with Global Hunter Securities. Please go ahead.

Brian Uhlmer – Global Hunter Securities

Hey, good morning guys. Congrats on the quarter. Question for you Stacy, throughout the $1 billion revenue number for the years, a little bit higher than what I’ve got and I think most of my peers. Sounds like they are [inaudible] the contract drilling site, but trying to get – dive down a little bit deeper on the production services side. What are you seeing pricing improvement and wireline work and coiled tubing and is that based on specifics or is that across much of the markets?

Stacy Locke

Well, I think that I’d say production service as a whole – you know, we’ve been on a slightly upward slopping track now for a couple of years and pricing is coming up to maintain against cost. But we have seen margin improvement if you look back over the last couple of years and we think that 2012 is not going to be an exception there. We think that we are going to see some margin improvement on the year over 2011. And we think the third and fourth quarters are going to be – they look very good in those markets. Now I would say that’s true and pretty much all of the businesses. There is some risk of gas market weakness and equipment moving into compete. We felt a little of that, but as I mentioned earlier we have been able to work around it, so we are pretty optimistic that that’s going to stay firm and we are – a lot of that growth comes from not only the new bills layering in, but margin improvement on the existing rig fleet in terms of day rates and then all the additions that we are making to wireline for the remainder of the year, to well service for the remainder of the year, and for coil for the remainder of the year. And so, yeah, I think it’s very achievable but the market will need to hold for that to take place. It’s not like we are going to blow through it, but I mean – I think it’s in our sides and we hopeful that we will hit it this year.

Brian Uhlmer – Global Hunter Securities

Okay. Good to hear. And then on the two Colombian rig that are down, do you have contracts in place for those to go back to work in Q3 and when are your expectations for start date and the terms on those contracts, are we looking at 18 months to years or one year deal?

Stacy Locke

Well, we are embroiled in multiple negotiations with both rigs right now and we don’t have signed contracts. We are optimistic that we will, we are working on contract links, Blaine would you say in excess of a year or at least a year?

Blaine David

I will say from one to two years.

Stacy Locke

Yeah, one to two year term and at the prior day rates than the rigs they had been working at before. So we are optimistic there. We don’t have them signed yet, but timing wise I think that we are kind of thinking that we could have them working by July. It could be June, it could be August for one, it’s just hard to say. These negotiations in the international market takes months. And that’s what we have been dealing with for a while. But at least we are having some very serious and healthy negotiations that look very promising right now.

Brian Uhlmer – Global Hunter Securities

All right, that's helpful, turn it over, thanks.

Stacy Locke

Thank you.

Operator

Thank you. The next question is from the line of Veny Aleksandrov with Pritchard Capital Partners, LLC. Please go ahead.

Veny Aleksandrov – Pritchard Capital Partners, LLC

Good morning Stacy and Lorne.

Stacy Locke

Good morning.

Veny Aleksandrov – Pritchard Capital Partners, LLC

My first question is on Colombia. We saw the Argentinean situation and uncertainties there. Is there any risk that you get more competition answering the Colombian market.

Stacy Locke

Well, I think that and Blaine, I’ll let Blaine, he runs Colombia for us. But I think the competition, the competitive picture there has been pretty rough the last couple of years, the last few years. I think that it’s getting a little better down there with strong oil prices and some of the other markets looking a little bit more attractive now than they had. It’s kind of a hard market to break into. I know some of the U.S. contractors have tried and been bidding to try to break in there, but it’s just not that easy to get in there. I think we are very, very well position there. We intend to keep all eight rigs there. Our margins have improved and are in the process of improving considerably and the rigs are performing our – we have a top life group of management down there. So I think it’s going to stay a strong market and I don’t really see and getting any more competitive. Do you Blaine?

Blaine David

No, we may see an increase in the competitiveness down there, but as we see that happen I think our client base will expand as well.

Stacy Locke

Yeah, we held on our own.

Veny Aleksandrov – Pritchard Capital Partners, LLC

Thank you. My second question is on the US land drilling side. We have gone from mixed type of earnings – this earning season and then you come out a bit you reported 7% utilization, 80% contract coverage. Well is it a combination of your safety records, personal relationship, fleet characteristics, what is it that led to strong results in your mind?

Stacy Locke

Well I think you’re right on. We’re really delivering what I would say is best in class performance on both the mechanical fleet and the electrical side of the fleet. We’re working for very top tier customers mostly the big publicly traded company that are – and we are pretty much in the shale plays. As I’ve said in the past our mechanical fleet is very, very high end. We have nine of the rigs with top drives earning average day rates of over 21,000 a day. The other mechanical rigs – a lot of these have a lot of the same components on them that the new build rigs have. It’s just they are not AC with Air Condition, dog houses, and joystick controls, but they are in very, very good shape, and they operate well. Like I mentioned earlier our safety is absolutely at the top of the pack, our downtime is very, very good and we treat the customers well and we treat our employees well, and we are doing I think maybe better than the industry on retaining our people. So I think it’s it all kind of rolled in there and we’re diversified and we’re in lots of different markets, we have some very strong customer relationships and those don’t change much. I think it’s just been – we’ve got good managers out there controlling the cost. I’ve been surprised how well we’ve been able to move these rigs out of the East Texas market over the last year. I mean we went in West Texas 0 to 16 rigs there in 12 months and that’s after taking the majority of the rigs in and doing a critical inspection on them, almost back to the light new status and we’ve done the same move in these rigs out of the Marcellus and to these active markets with very good customers. So it’s just a combination of lots of things. Good question though.

Veny Aleksandrov – Pritchard Capital Partners, LLC

Thank you.

Stacy Locke

You are welcome.

Operator

Thank you. The next question is from the line of Daniel Burke with Johnson Rice. Please go ahead.

Daniel Burke – Johnson Rice & Company

Good morning guys.

Stacy Locke

Good morning.

Daniel Burke – Johnson Rice

Stacy, you just mentioned the West Texas fleet. I think you as well alluded to the idea you will add one or two rigs. Can you catch me up with where that account stands today, what incremental opportunities do you see in that market, and then as well maybe give us a recap of to what extent the 16 rigs you have got there have been re-priced and where you have re-pricing opportunities or you feel like there is upside?

Stacy Locke

Okay. We moved our 17 rigs to West Texas in the first quarter. We have one final rig that is in Houston that’s being upgraded that could potentially go to West Texas and then we are kind of out of rigs. We are going to leave the two rigs that we have in East Texas there most likely, and we possibly will take the rig in Houston that’s being upgraded and going through the same critical inspection as the other rigs did. When it’s complete we may take it back to East Texas to work the Woodbind [ph] play, Eaglebind [ph] that’s going over there if that continues to develop. So, on the 17 rigs that are currently in West Texas, I would say – I mean Lorne you may remember, I think we probably have 6 or 8 rigs that will be re-priced in mostly third and fourth quarter, some at the end of the second quarter. Is it about right?

Lorne Phillips

Yeah, I think, probably yes.

Stacy Locke

Somewhere in that range and I would say the pricing that we have been experiencing has been an increase of $1000 to $1500 a day. So that looks pretty optimistic. The other – currently we are putting on our tenth top drive package on a mechanical rig that’s under term contract for one of the big public companies. We have three operating in West Texas today, this will be the fourth, out of 10 total. I think these mechanical rigs have a great opportunity for horizontal. We have two of them drilling 20,000 foot laterals up in the Bakken. We’ve got one drilling directional well in Utah. We’ve got three drilling directional wells in West Texas, about to be fourth. And so I think that particularly in West Texas these high-end mechanical rigs are very much appreciated even as directional drilling rigs. And so, we possibly will consider putting another top drive and packages on one or two more rigs out there in West Texas for the term. But we will wait and see. It’s pretty expensive to do that but we think those rigs are really ideally suited for the horizontal Wolfcamp and Sprayberry warps.

So that’s kind of what we are dealing with but we are 100% utilized there, we have been 100% utilized since the day we got there and rates have been rolling higher and our customer satisfaction is very, very high and all blue chip customers. So we are still very optimistic on West Texas. The risk, if we had any risk there besides declining oil prices would be that there will be some operators that might prefer to use an electric or AC joystick top drive rig over a mechanical and that could put at risk some of our existing rigs that are currently drilling verticals. But that’s not what we are hearing right now. We recognize that as a potential future risk but we haven't realized anything and don’t see anything coming but it could happen.

Daniel Burke – Johnson Rice & Company

That’s helpful and just to clarify, Stacy when you said that the pricing rollovers you have experienced have been plus $1000 to $1500 a day. Am I translating that directly? It’s a margin or do I need to back out some level of escalation on the cost side there?

Stacy Locke

No, that’s pretty much 100% margin.

Daniel Burke – Johnson Rice & Company

Okay great. And then on the Colombia side, encouraging to see that you were able to negotiate a rate step-up on the 6 rig pack there. What’s – those rigs are still suited to expire at the end of this year. What’s – given you have been in discussions what’s the timing likely to see those contracts formally extended?

Stacy Locke

Well there Blaine and our manager down in Colombia are kind of working that in a little bit with the discussions and negotiations that we have ongoing with the existing two rigs that are down currently. So we don’t know yet where it will end up but we are trying to not only put these stack rigs back to work but we are also trying to extend the term on some of the existing. Would that be fair Blaine?

Blaine David

That’s correct.

Stacy Locke

We don’t know where it’ll come out. These negotiations are never easy, but we’re doing them a very, very good job. We’re making terrific margins now particularly and we think that they want to keep it, and we want to keep working for them.. So, we’re pretty confident that everything will roll forward. We just haven’t got there yet. But we’re not going to wait until November to start negotiating, we’re working on the renewals now.

Daniel Burke – Johnson Rice & Company

Okay, great. Thank you, guys.

Operator

Thank you. The next question is from the line of Jim Rollyson with Raymond James. Please go ahead.

Jim Rollyson – Raymond James

Good morning, Stacy. Very good quarter and I think good color on kind of where you guys stand in the risk profile and everything so a good job. First question just going back to contracts, you are very well contracted for this year, and you’ve given a good detail on Colombia and kind of where you stand for renewals down there and it sounds promising. What do you think about the US? I think you mentioned the average term rate right now is above six months, and you’ve got some stuff rolling here and in the next in third quarter and fourth quarter so like in West Texas. How are negotiations going or you haven’t talks about renegotiating or renewing those contracts already? And are those generally six months, one year – just kind of trying to figure out how this plays into ’13, because we know you’ve got the 10 new rigs delivered between mid this year and first quarter. Those are all more than a year. So I’m just trying to figure out kind of where you stand or how you are likely to stand for contract coverage in while we head into ’13?

Stacy Locke

We push for one year terms pretty much in all cases. We don’t – I would say that the majority of the renewals are one year term but sometimes the best we can get is six months. I think that’s going to continue. We’re doing a good job for these customers, we’re not just giving them a rig, or giving them overall great performance including safety, and that’s important to a lot of these customers particularly the kind we’re working for. So I think the likelihood is that we will continue through the rest of this year in the same manner that we have over the past say six months and that will be the majority of the contracts as they roll forward will be a one year term just like the three that are coming out of the Marcellus this year are all one year term. The ones that we’ve taken in Utah have been – two of them one year and one was a two year term. All the West Texas rig initially were – well not all but three quarters of them were one year term.

We’re pretty optimistic, we’re going to keep pushing for one year term extensions and I think that will be the majority of the contracts as we roll forward.

That being said I think as we kind of get into the third quarter of this year we will have quite a bit – we’ll still have this same kind of average six to eight months as we go into the next year, but we’ll have quite a few that’ll beyond on freshly managed one year term.

Jim Rollyson – Raymond James

Okay, that’s very, very helpful. As a follow up on the CapEx side, you motioned $300 million to $330 million. I think in the press release you mentioned you probably tapped your $250 million revolver a little bit to fund that. Curious, as you look forward at opportunities for either new equipment or M&A possibilities did open up things soften any further. Kind of how high would you be able to willing to use your leverage to take advantage of opportunities? What’s kind of your threshold?

Stacy Locke

Well, I think we’re pretty much has a threshold there with what Lorne’s identified there in the press release. We’re really heading the other direction. We’ve had a lot of growth here in recent years 45% revenue growth from 10 to 11, closed to 40% again this year. We’re looking at going to a couple of harvest years in ’13 and ’14 and by that I mean we’re not going to reduce growth in production services, our primary focus will be on the coiled tubing business because we see some real near term opportunities there. So we don’t want to cut back that much but we will probably slow the rate of growth in wirelines flow the rate of growth, in well services, definitely slow the rate of growth in drilling, and kind of stay on track for coil and so that all means considerably less cash spent in ’13 than ’12 and that’ll enable us to start building up cash on the balance sheet by the time we exit ’13, and then we’ll be in a good position by the second quarter say 14 to materially reduced our indebtedness and that’s our strategic plan on that.

Jim Rollyson – Raymond James

Replenishing the coffer, so to speak.

Stacy Locke

Yes.

Jim Rollyson – Raymond James

Excellent. Makes perfect sense. Thanks Stacy.

Operator

Thank you. The next question is from the line of Josh Lingsch with Simmons & Company. Please go ahead.

Josh Lingsch – Simmons & Company

Thanks guys. Good morning.

Stacy Locke

Good morning.

Josh Lingsch Simmons & Company

Maybe as a follow up to the CapEx question. Are the three rigs that are now going to delivered in 2013 in your new build, is that thing included in the 2012 CapEx budget or is that a 2013 CapEx again?

Stacy Locke

Some of it will be – and perhaps the majority of it will be in 2012. The number I gave you 300 to 330, it definitely includes a portion of those rigs. Frankly I prefer to give an even broader range because when you start talking years it’s arbitrary cut offs. So depending on what you pay December 31st you can have pretty broad swings when you are talking about new build drilling rigs. So definitely some of the cost would be in 2012 perhaps and I think more than half of those costs will be in 2012. But there will be some carry over from 2012 into 2013 related to the new build as we see the world today.

Josh Lingsch – Simmons & Company

Okay. That’s helpful. And then as a power switching pricing drilling in the U.S. the price increases that you are saying is this primarily West Texas or are you saying this on any other basis as well.

Stacy Locke

I think it’s primarily the mechanical fleets in West Texas, and then of course any mechanical rigs were put in top five zone. The rest of the fleet I would say is maybe very modest pricing improvement. We are not seeing any day right declines anywhere and if anything it’s firm to slightly up. And it was accepted into Marcellus, which that is down, but we moved most of that equipment out of there. It’s really more related to the West Texas rigs than anything else. And then in Colombia, Colombia will be up significantly.

Josh Lingsch – Simmons & Company

Right. Okay. And then maybe one more as just a follow-up on that. You touched on it a bit earlier Stacey, but are you expecting a – on the last conference call you were expecting to reach $8000 cash margins by the end of the year. Obviously there is a one-off benefit this quarter. But what has been a bigger surprise relative to your expectations than now that we are already $8000 cash margin than moving out to the end of year from here.

Stacy Locke

Well, I think it’s a combination of factors. The Marcellus is a very high cost operating area. So we have taken four rigs out of the Marcellus at even day rates into areas where the cost side is a little more favorable for us, pretty significantly more favorable. So you have got those four rigs that are contributing more on a margin basis, so that’s one factor.

The other factor is these West Texas rigs are rolling forward at pretty healthy step up in rates. At least a $1000 to a $1500 a day and we are putting on another top guard. And then a big – big contributor are the rigs in Colombia. We have had a very significant improvement in the day rate environment in Colombia for us and so that’s coming into play and those things. And then what is not happening that we were factoring in is a lot more cost associated with down rigs being relocated, and as I mentioned earlier we have been when you take a rig and you stack in, and you try to retain the crews and figure out what you are doing with it, you bear a cost and we have been able to move them almost when they come off contract and relocate them. So we are not varying that cost of labor and another rig moved to stack it out and it has been much more seamless than we felt like.

I’d say I think across the board our group is doing a very – very good job on controlling their costs. We are not doing a lot of moving. It’s business as usual. It’s steady. That we are constantly driving on cost and the group overall is doing a great job. And so, it’s just a combination of those things that really made a material improvement.

Now, we will see what second quarter is, but I hope all those will get us in that 8300 a day margin. That’s the best of our guess at this point based on what we are seeing. But it is a little aggressive compared to what we talked about last quarter.

Josh Lingsch – Simmons & Company

Right. Fair enough. Well, that’s very helpful.

Operator

Thank you. [Operator Instructions]. The next question is from the line of Rajiv Singla with Putnam Investment. Please go ahead.

Rajiv Singla – Putnam Investment

Hey, guys. Congrats on the quarter. On your last earnings call you guys mentioned debt reduction. Have you considered open market bond repurchases?

Stacy Locke

Yes, we’ve, and we will consider that in 2013. We don’t feel like that we can make a huge impact, but as we built cash in the second half of ’13 we will certainly look at that and we feel like we could probably go in and at least purchase you know may be $25 million or $50 million potentially before bond investors get eyes on it, but you know we are looking at it. Of course, you are one of those guys so I probably shouldn’t tell you that.

Rajiv Singla – Putnam Investment

All right. Thanks.

Operator

Thank you. The next question is from the line of Ross Beaumont [ph] with Midwest Capital. Please go ahead.

Unidentified Analyst

Hi guys, congratulations on a good quarter. Can you just help us a little bit roll forward the balance sheet to the end of the year. I mean I know you have given us what CapEx and we can sort of back into operating cash flow. But I think we are at roughly $400 million of net debt right now. What does that look like roughly towards the end of the year?

Stacy Locke

Well, earlier Ross we said that well I think in an earlier quarter we said we thought the revolver match would be in $40 million to $60 million range. I think I would still use that guidance. It’s very time independent on when the rigs go out and when you cut the checks, but I think that’s in the ballpark. Now, I think the peak given that we are moving this kind of the deliveries out a quarter I would say the peak on that revolver is probably late third or sometime in the fourth. I would just answer by saying we think the revolver peak is probably around $40 million to $60 million and then I don’t know if that’s in the third or fourth quarter. At this point it really depends on deliveries and when checks get cut. So that’d be how I answer the question.

Unidentified Analyst

Okay. That’s all I need. Thank you.

Operator

Thank you. There are no further questions at this time. I will turn it back over to Mr. Locke for any closing remarks.

Stacy Locke

Okay. Well, we appreciate the participation on the first quarter call and we will look forward to visiting again for the second quarter. Thank you very much.

Operator

Ladies and gentlemen this does conclude the conference call. As a reminder the information for the replay will be on today’s news release. You may now disconnect. Thank you for your participation.

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