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Executives

Stacy Locke- President and Chief Executive Officer

Analysts

Angie Sedita - UBS Securities

Pioneer Drilling Co. (PDC) UBS Global Oil & Gas Conference May 24, 2012 12:20 PM ET

Angie Sedita - UBS Securities

We are very pleased to have Pioneer Drilling here as our next presenter, Stacy Locke, who is the President and Chief Executive Officer of Pioneer Drilling. Stacy has served as President and CEO since December 2003. Prior to that he served as President and CFO from 2000 to 2003, and had been the President and COO from 1998 to 2000. He also actually started his career at investment banking. Stacey has been actually one of my favorite COOs and we give him even more credit this morning given the fact that he did see spasmodic last night, so here it goes.

Stacy Locke

Thank you, Angie. I do feel a little spasmodic today, but anyway I appreciate you all being here. Let's move this slide along. I must be pushing the wrong button. There we go. Okay. There we go.

Pioneer Drilling, pretty simple story, really. We are in four primary business lines. The top three identified here are part of our production services group. That group is headed up by a distinguished gentleman, Mr. Joe Eustace, over here. He is President of our Production Services group. Joe has been in the industry for about 30 years, started Dawson Wells service back in 1982, so he has been around the industry very, very long time.

Sitting next to Joe is, Joe Freeman who runs our Well Services division, which as I have said to many people over the years, I think Joe is probably one of the best well service operators in the United States today. He has done an outstanding job and you will see a little more of that as we go through the presentation.

Then on the bottom, is our Pioneer Drilling segment, but if you look where we sit today in these four core businesses, we are at 98 well service rigs presently. We will end the year at about 108. We are 112 wireline. Most of those are cased-hole wireline units. Today, we will end the year at 119. We have 10 coiled tubing units and we will end the year at 13 there. Drilling rigs, 62 today, and we will end the year about 69 or 70, and then we have got a total of 10 new builds under construction, but we will deliver about seven or eight this calendar year.

Geographically, we are kind of spread in all of the places you might think we should be in, mostly the shale plays around the United States. One of our tube, I guess the tube core areas for us are the Bakken Shale up in North Dakota, and leaning over in to Montana, and the Eagle Ford Shale, which is right in our backyard and then we are headquartered in San Antonio, and so we have got a lot of our services in both of those plays and then we have our presence in the Marcellus and the Haynesville, the Permian, the Rockies, and then Louisiana on-shore and offshore and then down in the country of Colombia. We have been there since '07, just in drilling.

A few points that I would like to make. We basically got the businesses that we feel are the most important for Pioneer to own, and with these four core businesses, where we can drill the original bore hole with drilling most of which are horizontal these days and the shale plays and then the verticals in the Permian.

So we drill the original bore hole with drilling. We come in after that with either a well service unit and do some maintenance work or do some completion work on it and/or we come in with our wireline units and perforate to do the multi-stage fracs.

We don't do the fracking, we do the perforating and the plug setting in all of these key shale plays, and then when the perforations are there and all the stages are complete and have been fracked, our cased-hole moves off. We come on with our well service rig in some cases and drill up the plugs and run tubing and set the well on production, or in other cases we will come in with our coal tubing unit and drill out the plugs and then come in with our well servicing rig. Nonetheless, we drill the original bore hole and then we set the well up on production after running the production string of tubing.

That's kind of the completion side of our business, and then for the life of these boreholes, which are growing rapidly in number across the country in these shale plays, we will service that bore hole with all of these production service businesses. So that has really been our strategy is to do that start-to-finish on the completion side and then be able to service that bore hole with these services for the life them.

We have grown at pretty clip over the last couple of years. 47% revenue growth in '11. 40% projected for this year. We should end the year at about $1 billion in revenues for the first time.

You probably heard a lot of talk about his bifurcated rig market. Well, I am actually going to talk about a different sort of bifurcated rig market and it's one that creates a great opportunity for those of us that have high end mechanical rigs and I will talk about that more in just a second.

Then of course, a big consideration with us is our safety. It is something we worked very, very hard on. It is deeply engrained in our culture, we've been extremely successful and it is a big part of our company and it is opening lots of doors for us with new customers almost on a daily basis which is terrific.

Just to give you a flavor for the materiality of these two businesses.

On the left is the first quarter of this year. For the first time, our Production Services segment of the business produced more operating margin, 52% of the total pie of the company, which is great, and then on the right is the trailing 12 months look. We have accomplished this growth and what we have perceived to be $1 billion in revenues this year from very steady high return on investment organic growth primarily.

You can see if you look at the wireline business on the left, in 2010, we grew at 33% unit counts. In 2011, 25%. This year, I think we are growing at about 15% unit count, so very steady unit growth. Coiled tubing will grow this year about 33% from 10 to 13 units and we will be ordering additional coils later in the year for next year delivery.

Well service was basically coming out of the '09 downturn, where we stacked rigs, we put those rigs back to work in '10, back to 100% utilization and then we have grown there about 20% or so each, last year and this year, projected.

Then the land drilling. Actually, we paired back. We sold a total of nine of our lowest horsepower drilling rigs at the end of last year and the beginning of this year, and so that's kind of behind us. We are running about 90% or so utilization today. We anticipate staying 90 plus percent for the remainder of the year and then we will be layering in a total of 10 new builds between now, actually we are moving one today to the Bakken, the first of our 10, and then we will complete those 10 in to the field by the first quarter of next year.

This is something I really want to spend a second on, because there's a great misunderstanding out in the marketplace, and I think the reason for it is if you look on the right side, in blue are the number of rigs currently drilling horizontally and then up at n the top are the numbers that are drilling vertically or directionally which the vast majority of that is vertical work and so you would surmise from that, well, the world is going horizontal and that's what everybody should be focused on.

You go over to the left and you can see what the reality is of what's happening. If you look at 2011, the number of wells that were drilled in 2011, 62%, and that's the red, the bigger part on the top of the blue, were vertical or directional holes 10,000 to 11,000 feet deep.

This is the bifurcation of market I am talking about. All of the new build rigs that we are building and others that our competitors are building, they will not drill those wells. You do not need a 1,500 horsepower joystick top-drive rig to drill a 10,000 or 11,000-foot vertical hole. So there is a huge segment of the market that people don't really talk about, and the demand for these rigs, this data is from Spears and Associates, and if you can see going forward for the next five years, they are projecting even through 2017 that the majority of the holes drilled will be vertical and slightly directional 10,000 to 11,000 feet deep.

That is a very important market, because a lot of people have kind of disregarded their mechanical side of their fleet. We have invested in our mechanical fleet and I will show you in a second, we have an extremely high end mechanical fleet and its all working. They are earning today a good margin and when gas prices come back those margins will improve significantly. So I just wanted to point that out. It's often misunderstood part of the market.

As I mentioned earlier, safety is very important to our company. We have had a concerted effort in safety for over five years now. You can see in the top, there the drilling company, really for the first time in 2011 we were the safest land contract driller of the top 15 onshore in the United States. Last year, I think, we were number three. I think the year before that we were number three, so we have been good. For last five years we have been better than the industry averages considerably so, but now we are actually at the top of the fact, and so far through the first-third of this year, we are doing considerably better in safety than we did in 2011. So I am confident we will again be the safest land contract driller.

The second bullet point there is Joe Freeman’s group. They won the AESC, which is a well servicing organization, Gold Award for safety in 2011 for our well service fleet in their category. We know what the bigger guys are having in terms of their safety record and so I am confident in saying that in well services we are also the safest of all the large well service providers in the United States. So it is something we are very, very proud of.

Now turning just briefly here to look at these individual business segments. Our well service fleet is the youngest and highest average horsepower fleet in the industry. It is all high-end. It's all 550-horsepower, 600-horsepower, the horsepower ratings that are required in the shale plays, the 300 horsepower, 400 horsepower and below can't really work in the shale plays and that's where we are doing a lot of our work and we have grown, we have got a good position in the Bakken, we have got a position in the Eagle Ford and growing in both of those. It is just a stellar well service fleet.

We have been, for probably nine quarters now, the highest utilization of all of our peers, and for the same nine quarters, we have been the highest average hourly rates of any of our peers. So it is truly a top of the class performance there that Joe and his team have provided us.

We are primarily located in the Bakken and then down in the Texas, Louisiana, kind of the Southeast, with the Bakken, Eagle Ford being the two biggest. We are recently moving into the Permian on well services and it is targeting 76% oil related activity. So it's just a terrific fleet, very well located.

Similarly on the wireline front, we are little more geographically spread out. We have actually got leading market share position in a number of key markets for us like the Bakken. We are the biggest cased hole wireline provider in the Bakken, been there very, very long time. We are the market share leader in Montana. We are the market share leader in Kansas. We are the market share leader, I believe, in Colorado and we are one of the top now in the Eagle Ford Shale as well and we also have Louisiana on-shore and off-shore. We have cased-hole units for off-shore. So it's just a great group as I have mentioned earlier, very, very high growth rate for us over the last few years and well established, they are pretty much in every shale play, the one market where aren't is the Marcellus.

Coiled tubing is something we have entered into more recently, we had actually been looking at coiled for the last couple of years, we just couldn't find the right fit and finally we did with the company called Go-Coil based out of over south of Lafayette, and it's just a terrific little company, very new, young, 10 units, all new since '09 and they were the largest. Actually they were the only independent that worked in the off-shore market for coiled tubing and we have four of the 10 in the off-shore market. We have a fifth off-shore unit coming in next month and I am sure we will order another off-shore unit for next year.

That's all maintenance-oriented work, and then six on-shore units are mostly in the Eagle Ford, but also in the Granite Wash, Haynesville and the Marcellus, presently, but we are probably going to move that unit south, because the Marcellus has just softened quite a bit, and that kind of represents geographically where we are. We will be losing that little piece up in Pennsylvania soon, but run mostly two-inch coil, servicing about 19,000 foot of depth and then the off-shore and the bobtail units are one-and-a-quarter to 1.5 inch units. Great little company, we anticipate quite a bit growth there this year and we will grow it quite it bit again next year.

Turning now to the Drilling Services business. This is where we are presently located with the 62 rigs that we currently have. In addition to these rigs, we will have seven of our new-builds going to the Bakken, one of which is there today, starting to rig up. We will have two going up to the Marcellus, and we will have one going into the Eagle Ford.

So presently up in the Marcellus, we only have two rigs left there. We have had seven. We moved our first rig out of there in the fourth quarter of last year. We have moved four more this year all under one-year term contracts, three of them have gone to the Granite Wash, and two to Utah to drill shallow well oil and we have been able to hold the day rates firm and move them into these new years and roll the contracts forward a year and have taken them to areas with lower daily operating cost. So we expect to see some margin expansion from that relocation out of the Marcellus.

Up in North Dakota, we currently have nine rigs working there in the Bakken. We have got five, or six there in Utah, at least five, and West Texas has been saving grace for us. We started 2011 without a single rig in West Texas. By December 31 of last year, we had 17 rigs operating there and these were mostly the rigs that had been stacked since '09 in the Barnett Shale or in East Texas, waiting on gas prices to come back and we finally got tired of waiting, we started marketing there and we have just got a tremendous opportunity to move these rigs into West Texas, and they are working for Blue Chip Group, big publicly traded companies doing a terrific job, very safe and so that 20 represents 17 in the Permian, 3 up in the Granite Wash.

We have one more rig. It's showing it in East Texas presently, because that's where it came from, but we have one rig that's labeled as East Texas, it's in Houston, being upgraded and we are marketing that rig also to West Texas but we will leave two rigs in East Texas. We have 15 in the South Texas market, probably about nine or so of those are in the Eagle Ford, and then we have the one new-build going there.

Then we have eight drilling rigs down in the country of Colombia as I mentioned earlier. We moved into Colombia in '07, and it has been a great experience for us where we have done a terrific job in Colombia. Six of the eight presently are working for Ecopetrol. We have two that are down temporarily, but we are in negotiations to put those back to work, very high margin workforce, considerably higher than our U.S. margin and it's just been a great experience for us.

When you look at the company, well let me just mention that top point. In Colombia, since we are talking about Colombia, I mentioned, I think, we are the top performing drilling contractor in the country. We were the first contractor to introduce new rigs into the country of Colombia in '07, and we have stayed at the top of the charts. Out of 140 rigs that Ecopetrol operated or participated in, two of our rigs were rated number one and two in terms of performance in Colombia, but all of them very low down time, exceptional safety record, just top drilling performance down there.

With the rest of the land fleet. Well, total land fleet, we have 79% back by term contracts. These are mostly one-year term in some cases six months. We are continually rolling them every month. We are rolling them forward with additional one-year term contracts. In part due to safety, we have up tiered our customer base. So today, 80%, 50%, something like 80% of our customers are bigger, publicly traded, at least mid cap up to a mega cap-type companies, a lot of names that obviously you would know. Here again, 88% of our rigs are working in oil or liquid rich areas. So we basically go the gas movement that was required out of gas areas behind us at this point.

This is a slide I would like to spend just a second on. It relates to the slide I talked about earlier, about all the vertical drilling. On the far right are our 10 new-builds. Eight of those are 1,500 horsepower with 2,000 horsepower mud pumps. As far as I know we are the only drilling contractor building new-builds in the U.S. today offering the 2,000 horsepower mud pump. It has been very, very well received. That's not only 2,000 horsepower mud pumps. That's the whole fluid movement system rated to handle 7,500 PSI pressures. So it just allows you a lot more gallons per minute across your down haul motor to increase your penetration rates and keep your bore hole clean in the long horizontal lateral plays.

So, those rigs are under construction. As I mentioned, seven to the Bakken, two to the Marcellus. The two in the Marcellus are 1,000 horsepower with 1,600 horsepower pumps on them. All the rest are 1,500 or 2,000 horsepower.

Then we have our prior new-builds that are all SCR rigs, and those are doing great, all pretty much contracted, fully utilized, good day rates, and then you move into our mechanical fleet. The first category coming from the right to the left is our high end mechanical fleet with topdrive. These, as you can see are 100% utilized. Mostly have good solid term contracts. They are earning average day rates of over $21,000 a day. So extremely high return on investment projects for the company.

We have had several of these replaced AC joystick rigs due to lack of performance and we expect that to continue. We are actually putting our 10th topdrive on a rig in West Texas currently that will be on a one-year term, and then you go to the rest of our high-end mechanical rigs, and I think this is where we separate ourselves from some of our competition.

We have invested heavily in to these mechanical fleets and we have got big pumps on pretty much everything, 1,000 horsepower or greater on most of these rounded-bottom mud tanks on the majority of them. Iron roughnecks on the rigs that can take an iron roughneck, has a big enough floor. We have modern tier engines on them low knock. We have got dual linear motion shaker cleaning the mud. Just very, very high quality fleet and you can see that it is 87% utilized, so high utilization and just a very high quality fleet. The 85% of the fleet once the new-builds get out will be 1,000 to 2,000 horsepower.

If you look back over, say, this the decade of the 2000s, we have historically enjoyed a very high utilization rate relative to our peers. We are in red at the top. We have obviously got hit like everybody in '09. Now, we are right back up to the top of the pack again and we expect to stay 90 plus percent utilized for the remainder of this year. So we have done a great job working with our customers, performing safely and simply performing.

I had kind of alluded to this, on the mechanical fleet, but we have bought since '09 starting really in the summer of '09, we have added 37 topdrives mostly 500-ton, 16 walking systems, 36 pairs of mostly 1,600 horsepower mud pumps and 80% of our rigs have iron roughnecks and mostly rounded-bottom mud tanks just like any new-build, so it is very high-end fleet, overall.

These are just some pictures of our new-build rigs. That's the integrated topdrive. All of our 50 series and all of our new-builds will have integrated topdrive that allows you to move it without rigging down your top-drive and rigging it back up. You can leave it in the mass, move it in the mass, and we have a lot of BOP handling systems and automatic catwalks, lot of the bells and whistles that operators like.

All 10 of our new-builds will be walking rigs and we will be also adding this year and next year to our existing rigs more walking features for pad drilling and these are not skid rigs. These are walking rigs. A lot of the newly-build AC joysticks out in the marketplace that have been built 100s of them are skid rigs, not walking rigs and there is a distinction there and now that the market slowed down a little on new builds, you are going to see that illuminated by operators.

Operators are gravitating more and more, like in the Bakken, we don't have a single walking system there today, but seven all of our new-builds will be walking rigs. So the tendency is going to be for more and more operators going to pad drilling and they are going to the walking rigs over skidding rig, because the skid rigs, you have got to put your wellhead in a cellar gas accumulates in the low areas and it is a safety hazard and a lot of operators don't want to do it. So, some of these guys that have these AC joystick rigs will most likely have to retrofit some of their rigs to put some new mass and subs on them that will walk instead of skid.

This is kind of a need. We build with our rigs with a festoon system. In other words you plant your backyard, your mud tanks, your mud pumps, your generator houses, your VFD houses, all in one spot and then the rig actually with the mass tub drill pipe and the mass. It picks up and walks on its hydraulic feet as far as 75 to 100 feet forward and all the electrical just tracks along with this festoon system. So it's nice and neat and clean and safe. I think this is going to work terrific.

I don't know where I am on time. We are possibly doing okay?

Angie Sedita - UBS Securities

We are doing okay. (Inaudible).

Stacy Locke

Okay. Quick snapshot of some financials here. '09 was a rough rev year for us. We have had very steady growth. I think that's Q1 annualized. I can't quite read it, but it's getting close to $1 billion and the same on EBITDA. I think that takes our first quarter annualized EBITDA and puts it at 280. I think consensus EBITDA is probably about 300 for '12 and 350-ish or so for '13. So we have got a lot of built in steady growth just due to all the unit growth we have added this year and some that will grow into next year.

This is just margin. We have good steady improving margin in these businesses, and our balance sheet, we do have a lot of debt, but it's all senior unsecured public debt that has a maturity of 2018. It's roughly $425 million. We are going to spend a fair amount of CapEx this year mostly relating to our newly constructed drilling rig.

We will spend about a total of 330-ish range of cash this year. Next year we would expect that to drop about 50% and we will start building cash. We are going to pull in. We may do no new-builds next year. If we do any, it wouldn't be more than one or two on the drilling side and we will have growth in the production service side of the business but the net of it is that CapEx is going to come down considerably in '13 because in March of '14 we can pay our debt down at 105%.

So we are targeting in the first half of '14 to have built enough cash up in the second half of '13 and the first half of '14 to take about 50% of our debt out. So that's our number one strategic objective right now. We have had a lot of growth in the past. We will continue to grow a little bit next year but we will certainly see a big revenue increase and EBITDA increase just from the growth we put in this year into next year and the year after but we are going to take that debt down. That's just priority number one at this point.

That's it. I would be happy to answer any questions or if there are any questions for Joe and Joe on the production service side.

Question-and-Answer Session

Unidentified Analyst

I have a question. On the well services business, how much of that business is completion work versus rig (Inaudible).

Stacy Locke

Good question. It varies across the business lines. I would say probably the mix today, as a production service group the total is about 50-50.

The completion work is all there now and looks like it will be there for the foreseeable future but one of our big strategies is to build up their production service base of this type of assets to do all that bore hole maintenance work for the next few decades.

In the Bakken, we are probably up to 6,000 bore holes and you will be at the highest rig count in the Bakken's history by the end of this year, something over 300 rig. Eagle Ford will be over 300 rigs probably at the end of this year. Bore hole after bore hole being put in, huge backlog of service work and all three of these coiled well and wire will service those bore holes for a long time. So that has really been a key component of our strategy.

Unidentified Analyst

That’s what I wanted to ask next. (Inaudible).

Stacy Locke

Well, it's different for every basin. In the Bakken, I was out there a while back and I was out on one of the Joe's well service rigs. On a well, we didn't actually drilled the well but we were there on the well service. It was six months after it was drilled and our well service unit had already been there once before. So we were already on there the second time.

In that specific incidence, it was related to paraffin buildup, but any way you shape it, there is nothing better from a service perspective than a high decline rate, long lateral oil well. There is nothing better because a lot of these are going on pump. You've got tubings that will wear, you got pumps that will go out, you will have recompletion, you have paraffin buildup. So that service intensity is considerably greater than a vertical gas well and that's why we have embarked on this rapid growth because I think that's underappreciated in the marketplace and we feel like that there will be great demand for the types of assets that we are adding a lot for the completion, but a lot more for the future. Good question.

Unidentified Analyst

If I can one more, have you looked at converting any of your equipment more on natural gas or (Inaudible).

Stacy Locke

We would love to run our rig, engines and a lot of components on natural gas. That really has to be driven. The fuel is paid for by the operator. If an operator wanted to switch to run it on natural gas, it is actually better for our equipment to run it on natural gas and we would loved to do it, but we have had some preliminary discussions with operators about that, but we would embrace it if an operator wanted to do it and encourage them to do it. It's better for all of us.

Angie Sedita - UBS Securities

Then the final question is. When I met you years ago, Stacy, you were very focused on the drilling side. You have diversified yourself nicely. Is there any business that you think you want to be in that you are not already in or you are very happy with the portfolio that you have today?

Stacy Locke

Coiled tubing kind of rounded out the businesses. We've been looking at coiled for a couple of years, because sometimes, they don't call Joe to drill out those plugs. They go to Coil and we were losing enough business to Coil for that purpose that we felt like why give it up because these businesses they are all at the same touch points with the operators. The cross-selling opportunities are just outstanding.

Like Joe sent me a picture. Joe Eustace, last week of one of our cased-hole units and well service rigs both on one location for an operator. The week before, he sent me a picture of one of our drilling rigs with our coiled unit in the background on a pad side. So the cross-selling is terrific in these three businesses.

So, right now, there is nothing that stands out as a business that we feel like we really need to be in. we are real happy with the four core businesses but we are always looking and trying to determine that. We have looked at some direction. We had a directional company under Letter of Intent, and we just decided it wasn't right for us to move into that direction. So we are always looking to see if there is something that might make some sense.

We have shied away from pressure pumping because it's too much like drilling. Its bore hole-oriented, high CapEx, high depreciation. We already got one of those and we like these other businesses that are not only in completion but recurring maintenance. So we kind of like what we have right now but we are always looking.

Angie Sedita - UBS Securities

I would assume you feel that you have reduced some cyclicality of your portfolio of assets and earnings stream because of (inaudible).

Stacy Locke

That is exactly why we did it because at the time we bought the production service business, we had zero debt, $80 million in cash, constantly criticized because our cost to capital was too high. It was all equity cost, so we levered up, bought new product service. Unfortunately, our timing was that we were 10 months away from the '09 crash but we like to have a comfortable amount of debt in our capital structure much lower cost debt in this public debt at some point, where we truly can lower our cost of funds and lower the hurdle rate a little bit, but it has tremendously reduced our risk overall.

Angie Sedita - UBS Securities

Well, we want to thank Pioneer Drilling, Stacy and team, gentlemen for joining us. Thank you very much.

Stacy Locke

Thank you very much.

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