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Executives

Jeff Lloyd - Investor Relation Officer

Mark S. Siegel - Chairman

Douglas J. Wall - Chief Executive Officer

John Vollmer - Chief Financial Officer

Analysts

John Fischer - Raymond James

Doug Becker - Banc of America Securities

Dan Boyd - Goldman Sachs

Mike Drickamer - Morgan Keegan

Alan Laws - Merrill Lynch

Jeff Tillery - Tudor Pickering

John Dan Yells - Simmons and Company

Kurt Hallead - RBC Capital Markets

Arun Jayaram - Credit Suisse

Todd Garman - Peters & Company

Geoff Kieburtz

Amanda Scott

Patterson-UTI Energy, Inc. (PTEN) Q2 2008 Earnings Call July 31, 2008 10:00 AM ET

Operator

Good day ladies and gentleman, and welcome to the Second Quarter 2008 Patterson-UTI Energy, Inc. Earnings Call. My name is Jack and I will be your coordinator for today. Now at this time all participants are in a listen-only mode. We will facilitate the question-and-answer session at the end of the conference. (Operator Instructions). On behalf of Patterson-UTI Energy I would now like to turn the presentation over to Mr. Jeff Lloyd. Please proceed sir.

Jeff Lloyd – Investor Relation Officer

Thank you Jack and good morning everybody. On behalf of Patterson-UTI Energy, I would like to welcome you to today’s conference call to discuss the results of the three and six months ended June 30, 2008. Participating in todays call will be Mark Siegel, Chairman; Doug Wall, Chief Executive Officer; and John Vollmer, Chief Financial Officer.

Just a quick reminder that 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 natural gas prices that could adversely affect demand for the company’s services and their associated effect on day rates, regulization, and planned capital expenditures; excess availability of land drilling rigs including as a result of the reactivation or construction of new land drilling rigs; adverse industry conditions; difficulty 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 in the forward-looking statement is contained from time to time in the 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 it is my pleasure to turn the call over to Mark Siegel for some opening remarks. Mark?

Mark S. Siegel - Chairman

Thank you Jeff 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. I planned to begin by taking a couple of minutes to review briefly the financial results for the just completed quarter. I will then turn the call over to Doug Wall, Patterson-UTI President and CEO for some brief comments and color on our operating results.

As always we will be pleased to take your question following these prepared remarks. Today we reported net income of $81.4 million or $0.52 ended June 30, 2008, compared to net income of a 140 million or $0.88 per share for the three months ended June 30, 2007.

Revenues for the second quarter of 2008 were $526 million compared to revenues of $523 for the second quarter of 2007. We reported net income of a $159 million or $1.02 per share for the six month ended June 30, 2008, compared to net income of 255 million or $1.62 per share for the six months ended June 30, 2007.

Revenues for the first six months of 2008 were $1.03 billion compared to revenues of $1.07 billion for the six months of 2007. The results for the three and six months ended June 20, 2007 include pre-tax non-recurring gains of $58.4 million resulting from the sales of certain EMP asset and the recovery of embezzled funds. These gains net of tax increased our net income for the three months and six months ended June 30, 2007 by $37.9 million or $0.24 per share.

Today I am also pleased to report that our board declared a quarterly cash dividend on our common stock of $0.16 per share to the pay on September 30, 2008, to the holders or record as of September 12, 2008.

I would now like to turn the call over to Doug Wall for discussion of our operating results.

Douglas J. Wall – Chief Executive Officer

Thank you, Mark and good morning. I would like to make a few brief comments on each of the operating division and I will start with the drilling company. For the quarter ended June 30, 2008 the company had an average of 244 drilling rigs operating, including 242 rigs in the US and two in Canada. Compared to the first quarter our US rig count increased by 10 rigs and our Canadian count decreased by a like amount. Our drilling business over the quarter saw an accelerating improvement in the US rig count. This very positive trend is shown by the average of 238 rigs operating in April, 242 rigs in May, and a jump to 248 rigs working in June. We estimate that our average rigs operating in the US will increase to 258 rigs for July stronger of this further acceleration.

As usual our Canadian utilization declined dramatically due to breakup which was early and long this zero. We averaged zero rigs working in Canada in both April and May but finally saw some rigs go back to work in early June. In June we averaged five rigs operating, we expect that we will average 11 rigs operating in Canada for July.

Overall, average revenues for operating day during the second quarter were $18,740 compared to $18,900 in the first quarter, a decline of a $160 per day. Average direct cost for operating day were $11,300 for the second quarter up from 10,990 in the first quarter. These increase daily cost were impacted by startup cost to put additional rigs back to work, mostly in the latter part of the quarter. These additional startup cost were consistent with prior up cycles. Overall gross margin declined by $468 per day from Q1. At the end of the quarter we have 41 rigs working under term contracts which add an original term of a year or more.

Along with these increase activity level we are also seeing improvement in our pricing levels, particularly in the 1000 to 1,500 horsepower category. With the majority of all rigs working in the spot market we feel we are well positioned to benefit from the expected improvement and rig rates.

Now let me turn to a few operational highlight for the quarter. We introduced the early rigs to the marketplace during the second quarter three of which were our new ideal rigs. One rigs was deployed in the Barnett Shale, one if Freestone County, and other one is East Texas to work in the Haynesville play. The other new rig was another of our highly successful locking rig that was deployed in Milwaukee’s. Three of these four new rigs were activated late in the quarter so they did not contribute much to our operating results.

Since the end of the quarter we have completed two additional ideal rigs, one working in the Haynesville play and the other moving to the Barnett Shale this week.

To give you a complete update on our 2008 new build program we now have a total of eight of the ideals rigs deployed in the field and we are delighted with the performance of these rigs by every measurement.

As mentioned previously we expect the remaining seven rigs of our regional 15 new build program will all be completed during the next six months. All remaining seven rigs have now been contracted and most of these rigs will be deployed in either the Barnett Shale or the emerging Haynesville play of East Texas and North Louisiana.

Today we are also pleased to announce our plans to add 20 additional new build rigs scheduled for deliveries in 2008 and continuing through early 2010. Let me give you some details on these new orders. Six of the rigs are especially designed, fast moving, AC electric 1000 horsepower rigs designed for drilling horizontal wells in the Marcellus play of the Appalachian. All six of these rigs have been contracted three year term with very favorable pricing. We anticipate all six of these rigs will be completed and delivered by the end of Q3 next year. As you know, we have had three of our existing rigs drilling horizontal wells in the Marcellus for well over months now. We feel we are extremely well positioned to meet the needs of the industry in this play. We expect the three more rigs for more existing fleet will be deployed in Appalachia priority to year end.

In addition to these six new thousand horsepower rigs we have also placed totals for six new 1500 horsepower rig for delivering in 2009. These rings will be virtually the same as our previous fifteen idle rigs with one exception. The new rings will be AC as opposed SCO electric. A couple of these rigs are already under contract. We have verbal commitment on a couple more, and we expect to sign additional contracts in the very near future. These rigs will be ideal many suited and highly desirable for the emerging Haynesville Shale play.

In addition to these 12 new rigs we are also constructing eight of our highly successful walking rigs and we have contracts in place for all of these. This technology has proven to be highly efficient in drilling from pads in various resource plays such as Rockies and the Barnett Shale. We see growing momentum for this technology. With the construction of these additional eight walking rigs we will have a total of 20 walking rigs on our fleet, additional orders for these rigs are expected in the coming month.

Over the last few years we have significantly upgraded our drilling rig fleet, with our industry leading walking rigs all of the aforementioned new build rigs for both '08 and 2009 we will exit 2009 with a substantial fleet of new state-of-the-art drilling rigs.

In addition, we also had a large number of rigs that have been refurbished over the last three years. We feel our fleet is very well suited to meet expected future drilling activity both with its increasing emphasis in unconventional plays as well as traditional infield drilling. We are well positioned to meet expected increases in rig demand with the deployment of our new rigs, our continuing rig upgrade programs and our existing idle capacity.

Turning now to the pressure pumping business, I would like to make few comments of our Universal Well Services. As expected, business level in our pressure pumping operations in Appalachia improved during the second quarter. Both the number of jobs completed and average revenue per job increased compared to the first quarter.

Revenues for the second quarter 2008 were up 33% sequentially and 10% higher than the same quarter a year ago. After a small start to the quarter due to late winter weather condition our business rebounded nicely in May and June. The number of jobs was still down from the record quarter of 2007, but average revenue per job posted a new all time high during Q2. Revenues for the quarter were $57.1 million and average revenue per job improved to $16,792. Operating margin are still being impacted by high fuel cost and high sand cost, two of these items are really the major expense items in this business.

In terms of capital we spend $18 million on new equipment during the quarter with the large amount of that directed towards upgrading our fracturing capabilities.

We have now taken delivery of two of our new 2250 horsepower Quintplex pumps specifically purchased for horizontal fraks in the Marcellus Shale. The remaining three quints are expected to be delivered by the end of August. We expect this traditional equipment to drive significant growth for the balance of 2008 and in the coming years.

Turning now to the drilling fluid segment, Ambar Lone Star t experienced the better quarter with revenues up over 18% sequentially. Lack of activity in the Gulf of Mexico is still hampering our operations and of course has impacted our revenues and earnings. Revenues year over year were down 2%and this has been compounded by cost increases in barite, fuel and other raw materials. Obviously these things have put even more pressure on our margins.

Due to these rise in cost we were however able to institute a broadbased price increase during the quarter and margins have been improve somewhat in June. And with that I will now turn the call back to Mark for some concluding remarks.

Mark S. Siegel – Chairman

Thanks Doug. As Doug's comments reflect we saw major step change in our growing in June and again July with accelerating demand for both new and existing rigs. As we had discussed in prior conference calls we had expected this change based on strong commodity prices again in particular natural gas prices at $9 or higher which started in late February.

I would now like to discuss and make a few observations about our expectations for the third quarter. As we see the current business environment we expect #1) Our recount for the third quarter will increase sequentially by approximately 30 rigs. #2) In Q3 we expect our average margin for drilling day will increase by approximately $300 per day. And #3) In Q3 we expect our pressure pumping revenue to increase sequentially by 10 to 15%. Our customer’s confidence in the long term future of US drilling has never been higher. We are seeing customers willing to sign multiyear contracts reflecting their confidence both in the market for rigs in general and in the quality of our rigs and service in particular. Additionally, we’re seeing strong demand by customers to activate additional rigs in the accelerating upward trends and movement in average revenue per day. We believe our strong balance sheet, our dividend and our commitments to invest in a rig free and pressure pumping business has and will continue to benefit our company and its share holders in the future.

Before we open the call to questions we would like to take this opportunity to express our sincere appreciation to our employees in each and every one of our business units for their dedication and hard work. Our financial results, our operating performance and our safety improvements would not have been possible without their efforts. We are very excited about the future. Our people will continue to play a key role in our success.

With that Eric, we will turn it over to questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from line of John Fischer with the Raymond James. Please proceed.

John Fischer

Good morning guys.

Douglas Wall

Hey John, good morning.

John Fischer

Just couple of questions on your stack fleet. Could you guys give kind of ballpark number for how much cash to put into stacked rig for you to bring back in the service?

Douglas Wall

John that's – it really varies rig by rig we had look current 60 some stack rigs we have today, probably half of room could go back to work tomorrow with little or no capital expenditures. There is always some incremental operating expenditures that you face when you reactivate a rig. But in terms of capital about half of the stack fleet could go back to work with very little capital. The remaining rigs in that would -- could vary anywhere from as little as a $100,000 to upwards of a couple of million dollars before we put them back to work.

John Fischer

Okay. And I guess out of those 60 or so you could put out in near term. Are those waited on a certain region or certain debts capacity?

Douglas Wall

Well, probably that’s a good question. To give you some idea about 40 of those rigs are 750 horsepower rigs and under. About another 20 years so are 750 to a 1000. So that's the bulk of the stack rig, we do have four of them much larger rigs, the 2000 horsepower rig that are also stacked, but at the moment we think those will go back to work in the short term. In terms of regions, those – the smaller rigs are primarily in West Texas and the Rockies are probably the two big areas where those rigs reside.

John Fischer

Okay. And then I guess switching over to the margin side, cost increase a little bit more than we expected in second quarter, is that kind of begged into the $300 margin increase you guys see I n next quarter and is that like a labor issue, a fuel issue and something you kind of see going forward or is that one time deal?

John Vollmer

It is concerned in the comments of our margin going forward. Here there is couple of aspects toward the most significant of which is when are activating rigs you have to hire people and you have to prepare the rig before you have running revenue, and that was couple of hundred dollars of the increase and the cost per day in the second quarter, and with he activation rigs you can see in July we expect that to continue. There is also an increase in repair cost and cost of operating rigs in over the last 12 months.

Douglas Wall

John, let me add a point to that. We expect to see another 10 or 15 of those currently stack rigs go back to work here in the next quarter or two, we have work for them, and I think we feel there will be some additional startup cost for those rigs to go back to work as well.

John Fischer

Okay guys great. Thanks for the call.

Operator

The next question comes from the line of Geoff Kieburtz with Citi. Please proceed.

Geoff Kieburtz

Good morning.

John Vollmer

Good morning Geoff.

Geoff Kieburtz

Really kind of following along the same thing with plans that you have for adding new rigs, should we really think about this $200 a day as sort of going to continue going forward as a cost, was that also inflating?

John Vollmer

Geoff, I think if we look at other up cycles what you will find initially there is a bump in average cost per day. And then as we run more rigs on a per day basis our cost then begin to decline because you get past that point of having people activating rigs and you get to more stable rig count.

Geoff Kieburtz

That’s right John. With your point that Doug outlined before that doesn’t seem like that slowing of the rate of addition is going to occur until maybe the end of `09, is that right?

John Vollmer

You know, I am clear he has mentioned 15 rigs, and the question is how many really go out over the next couple of quarters, it could be more than that. If that was a case then that couple of hundred dollars would stay in it as the rig counts begin to stabilize those cost could drop that down. The other side there is inflation in the sense that we are having lot of demands from people on the oilfield which has created a bit of a higher cost environment that we’ve seen in the past. So that’s the fact that it will go the other way and potentially if you keep the cost at these levels going forward.

Geoff Kieburtz

Do you have a ballpark estimate of what that underlying inflation is excluding the specific startup cost?

John Vollmer

Well, we know, while there is some expenses, people service the rigs in more expense then they were a couple of a years ago, there is a lot of demands in their time, exactly what it is I don’t know. One observation to make these two things going on relative to rig count, one is we are activating the new rigs that we announced back in 2006, we have also added to that program. Those rigs have a very small impact from a cost per day point of view because you‘re constructing a new rig and when its constructed and rigged up it goes directly to the field that is moved in your generally collecting revenues at the movement of activation. The place we incur the extra cost is where rigs has been fact from more than a couple of months, and that time there is parts within that rig, not capital parts expandable, that mean to be a replace, you also have to hire a new crew because we don’t keep the crews around when the rig is back, you have train them, they have to learn to rig up the rig and et cetera. So, the extra cost per day is really about reactivation and about the new build program.

Geoff Kieburtz

And I appreciate you cant maybe pinpoint the inflation, but would you put above or below 10%?

Douglas Wall

I would have to say at the moment it would be well below 10%. But you know as this industry heats up Jeff, we – who knows we are about to be here, we’re running more rigs in the industry then we have in the long, long time and there is increasing for almost every facet of the service business from labor to welders to repairing to black off. So at the moment I think we have kept a pretty good lid on it, we are starting to see some signs as completing inflation.

John Vollmer

Geoff I would add to that also keep in mind that an excess of 50% of our daily operating cost is payroll driven Rich, for the most part is to pass-through the customers under our contracts.

Geoff Kieburtz

Okay.

John Vollmer

And then what we have seen of late is the increase in cost per day has been driven by the startup cost and then also in the repairs and maintenance side for that, call 35 or 40% of our cost that are not payroll driven.

Geoff Kieburtz

Okay. So that under 10% and a fair portion of that can be passed through immediately within a quarter?

John Vollmer

Yes.

Geoff Kieburtz

Okay. And on the pressure pumping side, would you say the same thing under 10% inflation?

John Vollmer

Yes, I think I would, Jeff.

Geoff Kieburtz

Okay. And last question, can you give us a sense of what the leading edge rate is today for say 1,000 horsepower and a 1,500 horsepower rig?

John Vollmer

We don’t typically dissolve those numbers, Jeff. So I prefer not to get into that. But certainly pricing has moved pretty dramatically in the last 30 to 45 days and in the areas where for example 1,000 to 1,500 horsepower rigs there just aren't any of them available today. Obviously the prices have moved more quickly in those rigs than others.

Douglas Wall

Geoff, we think that the better indicator is average revenue per day. That’s why we talk about it.

Geoff Kieburtz

Yeah.

Douglas Wall

Because otherwise you start to speak about in effect one rig and it's about as misleading as a portfolio manager talking of that one stock.

Geoff Kieburtz

Got you. All right, thank you.

Operator

Your next question comes from the line of Doug Becker with Banc of America Securities. Please proceed.

Doug Becker

Thanks. Doug, you mentioned some favorable economics in the new-builds. Just hoping to get a little more color on that, whether it's a day rate or a pay back debt that you are expecting?

Mark Siegel

Maybe I will take that question, Doug. This is Mark Siegel. Frankly we think that we wouldn't be building new-builds if we didn’t think the economics were favorable. We have always talked about entering into long term contracts and doing things as a sort of customer driven organization. We see our customers having a demand for a certain kind of rig and our ability to provide it. We are very proud of the fact that over the last five years our average return on equity has been 24%. We think that’s among the industry leaders. When we make these decisions to invest in new-build rigs, we think that we are going to continue to generate the kinds of returns for shareholders that we historically generated otherwise we wouldn’t be doing it. So I guess I am trying to tell you in a long winded way that we don’t want to get into the specifics of the economics of each transaction. We think that that doesn’t do our company and the shareholders a lot of good, but we think that we are achieving rates of return consistent with historical rates of return.

Doug Becker

Let me ask it this way. You are getting a lower payback than you were maybe in the past?

Mark Siegel

I don’t believe we are getting a different payback. We are getting just a payback.

Doug Becker

Okay, fair enough. Obviously demand is picking up pretty aggressively, are there any opportunities or I guess customer inquires that you haven't been able to meet because of crew constraints?

Douglas Wall

Doug, there has been a little bit about in certain markets at least on a temporary situation. Obviously when if a customer phones today and wants a fire up that rig tomorrow, we can't always meet what they are requiring. But for the most part, other than the unavailability of 1,000 and 1,500 horsepower rigs, we really haven't had to turn away customers.

Doug Becker

Okay. And then I guess that leads into a question about the 740 horsepower rigs and below, given the demand trends that you are seeing, what's the prospect that they are those being reactivated?

Douglas Wall

Well, the interesting thing is that since I have been here Doug, I have heard repeatedly that those rigs would never go back to work and it's interesting the first six months of this year we have put 25 or 30 of those rigs back to work in the six months already. We have another 10 or 15 that are probably going to go back to work by the end of the year. So I think there is a significant of them that they are still are prospects and they will work.

Doug Becker

That's definitely encouraging. And then just briefly you mentioned previously in the last quarter that North Texas and Rockies had been relatively weak compared to some of the other regions? Has that reversed and are there other regions that neither or maybe not growing as fast as others?

Douglas Wall

I think both North Texas and Rockies were at a point in time there was some weakness there. We have actually seen virtually all of our regions Improved pretty dramatically. If there is one area that’s a little more spotty than the rest, it could be West Texas.

Doug Becker

Okay. Thank you very much.

Mark Siegel

Doug, I would just add one thing to that that what we have really seen is a significant demand for this that Doug was really speaking about this return of existing rigs from our fleet as well as for the new rigs in various different horsepower rigs.

Doug Becker

Okay. Thanks Mark.

Operator

The next question comes from the line of Dan Boyd with Goldman Sachs.

Dan Boyd

Hi thanks. I know you don’t want to talk about specific leading edge day rates, can you give us some color on where average day rates in your fleets to 1,000, 1,500 horsepower class relative to the free average?

Douglas Wall

I don’t think we have ever divulged or tried do that and sort of take out a particular class and we are getting this kind of average rate for this particular sort of set of rigs and frankly, the reason is because I think it will be quite misleading. We do business as you know many basins in North America and prices vary among basins and they vary also depending on what in effect the contractor is furnishing et cetera. So I think that that information is not something we generally give because we don’t think there is a way to encapsulate it in a way that’s terribly meaningful.

Dan Boyd

Okay. And then in the new-build program, some deliveries you might start going into 2010, does that imply that you wouldn't be able to get additional rigs delivered in 2009 or is that not the case?

Douglas Wall

We still certainly have some capacity to deliver some additional rigs in 2009. I am not going to share with you just how much, but at the moment I would be real surprised if we don’t have some further announcement for rigs to be delivered later in 2009. But at the moment, with what we have announced, pretty much takes us through about the end of Q2 next year and maybe end of Q3. So we do have some additional capacity for later in the year next year.

Dan Boyd

Okay. How do you think about your internal capacity to deliver rigs, I guess maybe on a per month basis?

Douglas Wall

Well, we have a lot of capacity of rig building. Let me share with you, we primarily with our new-build rigs that we purchased a complete rig from a particular supplier. We buy components and we basically rig those rigs up and two of our rig up yards, one is Thailand and one in Victoria. All of our walking rigs are built in our Midland yard and West Texas. We have other capabilities around the company to add capacity if we need it to, but we are trying to do things prudently to make sure that we maintain a handle on our costs and it's also very important to make sure that we spend the appropriate time to introduce rigs to the marketplace in a very controlled prudent fashion so that they go to work with little and no problems.

Dan Boyd

Okay. Just one last question. You mentioned I think you have 64 sort of idle or stack rigs at the moment. So at spot sort of at the peak of the market you had over 100 idle and stack and maybe that calculation is wrong and then implying that you put maybe 30 back to work. Does that suggest that you did scrap a few or take those out of the what would you consider marketed fleet?

Mark Siegel

I think we may have ignored Canada in that set of numbers. I mean with us running with 20 rigs in Canada and I think Doug was speaking to US number of stack rig so that another 10 in Canada may reconcile that for you.

Dan Boyd

All right, that makes sense. Okay, thanks guys.

Mark Siegel

And no, we have not scrapped any rig.

Douglas Wall

350 approximately rigs we have talked about.

Operator

The next question comes from the line of Mike Drickamer with Morgan Keegan.

Mike Drickamer

Hey, good morning guys. Would you guys taking and ordering some rigs yet? I was interested, what lead times are you being quoted for new rig delivery that is going on?

Douglas Wall

Well Mike, most of the lead times are in the 9 to 12 months timeframe. I think as you know, we had a significant amount of inventory that we had purchased back in '06 and '07. So we were able to put some new rigs together just based on our inventory but anything new that we are ordering today we are looking at 9 to 12 months.

Mike Drickamer

Okay. What bottlenecks are being seen right now for the new build rigs?

Douglas Wall

Well, I think that I would like to say the big bottleneck is just getting the equipment component deliveries from our suppliers.

Mike Drickamer

Okay.

John Vollmer

Mike one thing is I think we are betting to what Doug is that part of the reason that we are able to get the equipment when in the time split that Doug spoke about is that we have been in discussion about with suppliers and in the supply chain for long time and it may held our major customer.

Mike Drickamer

Okay. So perhaps if your smaller moment top contract or it take a longer than the 9 to 12 months then for new rig?

Douglas Wall

I would think so, and that’s really what I was trying to indicate was that you know, in fact, I don’t think that those availabilities are availabilities for everyone who would want to go by our rig today.

Mike Drickamer

Okay. And then what kind of cost inflation that we’ve seen in the cost of building or buying these new rigs?

Douglas Wall

I would think the cost inflation has been a little bit, but its probably under 5% -- probably the biggest difference with us from the rigs we ordered in 2006 versus the rigs we’re ordering today is actually the fact that we’re going AC as opposed to HCR and that had probably a million dollar per rig to the cost, but that was something that – but we made the decision man have decided about way to go. But cost inflation overall is probably in that 5% range.

Mike Drickamer

Okay. And then one more ideal rigs, you discussed number of those rigs could go back with minimal capital being invested in the rig, what is your capacity Doug as far as being able those back, as far as crewing them up and I guess, supplying the pipe and everything else that would be needed for those rigs, you know, one, two month or is it higher than that?

Douglas Wall

I think its higher than that, we probably could understand how is it go through, we probably could putout five a month, but again we’re trying to do it prudently, we’re not going to put the rig out and do a better job for our customer. So we want to make sure we’ve got quality crews, we want to make sure the rig is ready to go to work.

Mike Drickamer

Okay. I guess, I will just add one more there, I mean, in previous calls the industries talked about labor and how much the bottleneck labor was, that seems to be less of an issue this earning season, I am I reading that long or something else going on there?

Douglas Wall

I am not sure if you’re reading that wrong, but I am just not sure people are talking about it very much, I think, I think the labor is going to be huge challenge for this industry in the next two or three years if it isn’t already today. I think so far we have been able to get the incremental amount of rigs in the marketplace with literally no problems, but I think we’re going to see increasing demand for those kinds of skill set that are throughout the industry. So I think as an industry we’re going to have to do more training in on boarding people and getting peoples that get attract to this business. Over the comment I didn’t mentioned, you asked about drill pipe, we are activating the lid with us drill pipe is not a problem whatsoever, we have plenty of drill pipe to reactivate, all the rigs we wan to.

Mike Drickamer

Alright, thanks a lot gentlemen, that’s all from me.

Operator

The next question comes from the line of Alan Laws with Merrill Lynch. Please proceed

Alan Laws

Good morning.

John Vollmer

Good morning Alan.

Alan laws

I got a couple of followups actually more than anything. On the 20 new the ones that you’re building, you talked about the cost inflation just previously. How much of these rigs costing them?

John Vollmer

Alan on average they’re going to be about $17 million.

Alan Laws

And these are full AC with top drives and everything else on the..

John Vollmer

Top drives, hydraulic catalos virtually state-of-the art anything that you could put on rig today that our customer would want. Some of those also includes the packages for rigs in the Northeast.

Alan Laws

Okay. So those are – the 17.5, you said 17.5?

John Vollmer

17.

Alan Laws

17 and that’s excluding drill pipe?

John Vollmer

That includes drill pipe.

Alan Laws

Oh good right. And then of the 20, it looks like you have contracts of most of them, you didn’t mention any contracts for the eight walking that you’re constructing?

John Vollmer

Actually, I thought I did, they are all contracted.

Alan Laws

All contracted. Okay I missed that.

Douglas Wall

I am sorry, but now all rate of those walking rigs are contracted. And I think that these rigs are state-of-the-art second in them.

Alan Laws

These are option the path, the walking, stocking kind of.

Douglas Wall

That’s right. That‘s the who asked the other 12 are not walking rigs.

Alan Laws

Okay, yeah, okay I got that. Now on the reactivation you have 60 stack, neighbors had some more number they thought that only 20 of theirs would ever go back to work. You have 30 that could go back. Could you may be say something about the size of these rigs and their configurations and how many you actually expect to go back other than the 10 to 15 you have already mentioned here.

John Vollmer

Well, I think, as I mentioned the ten or 15 we already know at some point in time are going to go back to work in the neck couple of months. They are primarily in the kind of 750-horsepower range. We certainly haven't seen much interest in the 500-horsepower and less. So I think most of the rigs that you'll see go back to work are in that 750-horsepower category.

Alan Laws

These have top drives on them?

John Vollmer

No.

Alan Laws

Would you put that on? Does that make them more.

John Vollmer

Some of them you might be able to, Alan but lot of more with that small a rig it's difficult to get a top drive that will fit in the mast. You can rent some top drives that will fit but typically they tend to be the smaller top drives with more limited capability.

Alan Laws

Okay, and last thing I got here is on universal. Can you remind me how many spreads you guys run and how much horsepower in the whole company?

John Vollmer

Well, we don't normally talk about the spreads or horsepower. We have – I think I mentioned to you a couple conference calls ago that we will end or exit 2008 with about 110,000-horsepower fraking capability. I don't have the numbers in front of me for nitrogen and cementing and some of the other things. But we have, this year we will have a full frak crew available using these quintplex pumps for doing the horizontal shale fraks and we have plans to add to that going forward.

Alan Laws

That's all I have, thanks.

Operator

Next question comes from line of Jeff Tillery with Tudor Pickering, please proceed.

Jeff Tillery

Hi good morning.

John Vollmer

The name got shotterred a bit

Jeff Tillery

Alright can you talk little bit about this choice to go with A.C., what's driving that in just comfort level in the technology in the up time?

Mark Siegel

Yeah, Geoff the A.C. technology has been in the lands business now for a couple of years. We were not a first mover to A.C. technology because we wanted to make sure that the bugs got out of the system and that the technology is as described. We have seen some real recent improvements particularly with our suppliers and what they do with both offshore and what they are proposing to do with lands rigs. And the prime benefits really are the control from the drillers perspective to get far more control of the operations, what they see. Obviously the other big benefit to them is the size and the wait of the components. And the fuel consumption. Those are probably the three big things that we see are advantages to A.C. over S. C. R. Having said that S. C. R. technology has been around for 37 some years, highly proven, very effective. But we do feel it's time for to us stick out tow in the water and see just how good the A.C. technology can be for us.

Jeff Tillery

And on, as far as your CapEx budget, do these new builds, are they incremental to the you guys have talked about in the past? And can you give us a little bit guidance on what you're looking at for 2009 just what the new builds announced today?

John Vollmer

Well for 2008 the new builds are going to add a little bit to our CapEx for 2008 and we would guess at this point that it would be about 530 million. Related to those new builds about $350 million is committed for 2009 or will be committed for 2009. In terms of a complete CapEx budget for 2009 that has not yet been completed.

Jeff Tillery

That's helpful, though and then my last question is just regarding some of these smaller rigs that are left in the idle fleet. You guys have talked a little bit in the past about the potential opportunity to move some of them up to the Northeast. Could you just give us an update on how you're thinking about that right now?

Douglas Wall

Well, Interestingly enough we really thought quite a few of those rigs would be certainly suitable and very capable of drilling a lot of the wells in the Appalachia. I think what has surprised us a little bit is our customers interest in actually having new rigs. I think the new rigs that we announced we had initially thought we would probably put some of these lower horsepower rigs to work up in that marketplace, but the customers have actually moved us in a different direction.

Jeff Tillery

All right, thank you very much.

Operator

Your next question comes from the line of John Dan Yells with Simmons and Company. Please proceed.

John Dan Yells

Hey guys, a quick question on your pumping business. It looks like, I mean you had a nice increase in the revenue per job. Is it safe to assume that that’s more business mix as opposed to price increases?

John Vollmer

No, it's actually price increases and us being pretty selective in terms of the jobs we have taken in that market.

John Dan Yells

Okay. And on the jobs that you are doing right now, what would you say, is it 20,000 horsepower for frac job right now?

John Vollmer

No actually, we haven’t done any of the deep horizontal fracs yet to-date. We expect sometime in this quarter we hope to have done a couple of them. But to-date, all of the fracking work that we have done up there has been the traditional lower horsepower kind of fracs where you have got 2,000 or 2,500 horsepower on a location.

John Dan Yells

Okay. Last question. Any opportunity to expand beyond Appalachian on the pumping side?

Company Representative

Yeah, that’s something that we look at all the time and at the moment we feel we have got a niche market there. We feel we are local, we have very good reputation in the local market not to say we won't look at expanding but at the moment but there appears to plenty of capacity in the industry with all our other competitors. So unless we find a niche somewhere we feel we can bring something to the market, we will probably stick to nailing them in the Appalachian.

John Dan Yells

Okay, thank you. That's it.

Operator

The next question comes from the line of Kurt Hallead with RBC Capital Markets. Please proceed.

Kurt Hallead

Hey, good morning.

Douglas Wall

Hi Kurt.

Kurt Hallead

I think finally you guys are pretty well aware of the skepticism in the market about Patterson's ability to effectively compete with the new rigs and clearly you have addressed that with some of your announcements here today and at the beginning of the year. Just wondering if you guys can provide some color because some of the push back now is that essentially the bulk of the markets, one of your primary competitors and it's not neighbor. So can you address how you guys are going to stack up with respect to adding new rigs into the market as required going forward vis-à-vis the rest of the industry?

Mark Siegel

Sure Kurt. Let me take a shot at that and if John and Doug want to add to it, it would be fine. I think that we see this building of new rigs and again this was the same thing we said about long term contract as being highly customer driven and that’s basically what Doug was saying before. We try to offer our customers in effect the opportunity for the right rig at the right price for the right drilling job. And if they want an existing rig that’s great, they want a new rig that’s great and that’s really how we see it. And in fact, obviously from the number of rigs that we are currently running, you get a strong sense that our existing rig fleet does in fact compete very very well with other competitors' rigs. Our walking rigs we believe to be absolutely state-of-the-art and compete with people's state-of-the-art rigs. We think [model/remodel]. So we don’t see it as some kind of need to do this to catch up, we are doing this in response to our customers and that’s the basis for it.

Finally, as respects the question that I think is sort of behind your question if one of our competitors decides to build X rigs, we don’t feel the need to build X plus one rigs for purposes of some kind of race to in effect show the investors that we can build at the same number of rigs as one of our competitors. Fundamentally, our response to building rigs is one which as I say emanates from the customer, in response to the customer and thus so we think in a way that is also responsive to our investors expectations about a great return on equity.

Kurt Hallead

I understood. And I guess the question I had is, I noticed that just period in a lot of these new rigs have contracts behind them and whether or not there is going to be a shift in share of those contracts whether or not you will be able to maintain the current position in the market or is there some other dynamic out there that may cause a shift in share of incremental business going forward?

Mark Siegel

Kurt, I think that we are getting our share of the market. I think we have always gotten our share of the market. I think what we have been is very price disciplined as a company over a lot of years and in up market we have always expanded faster than our competitors because we had the capacity to do so. We have always also seen the fastest increases typically in average margin per day. So we have both gotten utilization as well as increases in margin. What we haven't done I think is in effect try to maintain percentages of market and market share just for the sake of doing so and sometimes in down market and have been in fact willing to accept a lower share of market in down markets but that’s never been the case in up markets.

Kurt Hallead

And then everyone this question, so we have had natural gas prices come off from 13 back to 9, because this probably again before -- just as it's kind of getting off the grounds here, what indications are you getting from customers, what are their price sensitivities? Is it $9 to market or is it 8, is it 7 or what's the sensitivity where everybody starts blowing their horns again?

Douglas Wall

Kurt, we have seen the pricing change, obviously in the natural gas market, but we have seen nothing to indicate that there has been any diminution of interest on the part of our customers. In fact, in the kind of prepared remarks that I made at the end those remarks about the customer is enter into and desire to enter into these long term contract really reflects their bullishness I think about the industry generally and that’s really the point I was trying to make, which is that their bullishness is right up until today. We haven't seen any signs in respect of the fact that gas has obviously come down; that’s point one. Point two is our remarks have always been going back to February that kind of looking at the market at sort of 9 or better that we for kind of a prolonged period has been well, we think our customers were hoping for and expecting and was driving their activity. If it's significantly below that on a long term basis, we wouldn’t be surprised to see some short term issue.

Kurt Hallead

How would you compare and contrast what's going on now versus January of '06, right because the fundamentals of the land business was very good in January of '06 even with -- and gas prices were coming down and everybody started getting nervous and lo and behold six months, nine months later, everybody started blowing in their horns? Can you give a little compare and contrast for that period?

John Vollmer

Kurt, I don’t think I can because fundamentally the question is what's going on with the commodity price and I don’t know that I can perfectly recollect January of '06 at this moment. But the question is if we have $126 oil prices and 9.25 gas prices and we kind of sustain levels in this area, I think everything is going to be great. If it changes dramatically from here, obviously people will rethink what's going on, but this has been historically very very set of pricing that currently exists in the marketplace. So we are feeling -- our customers are quite bullish.

Kurt Hallead

Great, thanks.

Operator

Your next question comes from the line of Daniel Kraemer with Coast Asset Management. Please proceed. Mr. Kraemer, your line is open, you may be on mute.

Your next question comes from the line of Arun Jayaram with Credit Suisse. Please proceed.

Arun Jayaram

Good morning guys.

Douglas Wall

Hi Arun.

Arun Jayaram

I have a quick question for you guys. If the rig count was to increase by 200 rigs from today's level and based on your conversations with operators, how many rigs of those do you think would be existing rigs in the field and how many of those do you think would be new builds?

Douglas Wall

Arun, over what period of time did you say the rig increase?

Arun Jayaram

Let's just over the next six to nine months I think in the short term if the short term is the six-month period, I would say a lot of those rigs are going to have to come out of the existing idle capacity in the industry. And I think that place very well into our hands. If it's a longer period obviously some of these new builds that people have announced as well as us will start to play a major role in that. But I think in the short term its a lot of it has to come from the current capacity.

Arun Jayaram

Okay. Second, I was wondering if you could may be comment on what you are seeing in Canada in terms of pricing and forward-looking demand?

Douglas Wall

We think the Canadian count is probably going to stay in a fairly narrow band similar to what you've seen in the last month or so. I think as the weather is good over the course of the summer I think the rig count may go up potentially 100 rigs up there. But I think typically once you get into September, October, November you get some sloppy weather that can help some fairly large fluctuations. So I think January I think Canada probably will be slightly better than what you have seen but we don’t see a big run away up there. Either our own case we expect 10 to 11 rigs to be running probably through up until freeze up.

Arun Jayaram

Okay, and last question is you talked about the 20 incremental that the new builds. Any help in terms of what you think the ultimate earnings power those rigs could be an annual basis on the rigs there up in running in 2010?

Douglas Wall

I think we will be hesitant to project what the expected earnings for those 20 rigs would be.

Arun Jayaram

Okay, or could you help us or remind us in terms of depreciation, John how you are depreciates those rigs as a 15 years 10% salvage?

John Vollmer

We actually depreciate all our equipments with no salvage value. The way in we do it by component but generally the way is ever to life for rigs is on the 12 to 14 year range so is never diffuse about 13 years you should give pretty accurate answer.

Arun Jayaram

Okay, that's helpful, thanks guys.

Operator

Your next comes from line of Amanda Scott with (inaudible) and company, please proceed.

Amanda Scott

Hi guys, I was wondering if you please provide me with a breakdown as the number of rigs that Patterson owns that are capable of directional drilling?

John Vollmer

That's kind of a very difficult question to answer. Virtually all of them could drill some type of a directional well. There's many, many different kinds of directional wells and horizontal wells. As I said I have to say that virtually all of them could drill a directional well but to drill a deep horizontal wells you start factoring in a number of other things that potentially, three quarters of our rigs could only drill certain types of deep horizontal wells.

Amanda Scott

Okay, that's very helpful. I know that's a big question. But I have couple more. On the Q1 call it was mentioned that Patterson has three rigs in Appalachia that are currently and would have an additional three by the end of '08. Do you have any plans to increase the rig count there and field support services well in the Marcellus play specifically?

John Vollmer

Well I mentioned all of those six new rigs are going up to the Appalachians in '09 and we do expect some additional existing equipment to go to that market throughout 2009. So obviously with that, with that kind of an operation we are looking at building up our infrastructure up there for the drilling company. We do have a leg up I think in that our sister company universal has been established in that marketplace for over 30 years and so we do rely a little bit on our little brother up there to help us with some of these things.

Amanda Scott

Okay. What about the Bakken formation, same thing there or are you not seeing as much demand there?

John Vollmer

Well, The Bakken is a very interesting play. We've moved a number of rigs up in there in the last three to four months. I think you will see continuing rigs go into that marketplace over the course of the next six months. We have several I think at the moment that are probably heading to that marketplace. But again it takes a very specific type of rig to drill those wells.

Amanda Scott

Right. Okay, I thank you very much for your time, appreciate it.

John Vollmer

Thank you.

Operator

Your next question comes from line of Todd Garman with Peters & Company, please proceed.

Todd Garman

Good morning, I just want to come back to your pressure pumping business for a minute. You mentioned that you had hire sand costs here during the quarter. Can you give us some color on why that was.

Douglas Wall

Well I say sand costs primarily we have seen some pressure obviously on getting certain qualities of sands. We have seen some price inflation. We do have contracts with two or three suppliers in the market. But it’s interesting some of our competitors are actually having to truck sand in from the western U.S. for that marketplace. So we have seen some pressure on sands pricing. And the grades and qualities of sands required for these horizontal fraks is certainly different than the standard frak.

Todd Garman

And so you are positioned with your sand suppliers to have enough supply of Barken going forward to meet the forecast demand in that play?

Douglas Wall

Well, our guys certainly talk to our suppliers all the time. We think we are in pretty good shape. It will depends just how quickly that market turns up and heats up. We think we certainly have the capability of doing two of those deep horizontal fraks every month and we are geared up for about that level.

Todd Garman

And is that in addition to the conventional fracturing business that you currently have or is that total?

Douglas Wall

No that's, that's in addition to.

Todd Garman

Okay, thank you.

Operator

There are no more audio questions at this time.

Mark Siegel

Well, we'd like to thank all of our investors and the analyst community for joining us on this call and look forward to speaking with you again at the end of our third quarter. Thanks everybody.

Operator

Thank you for your participation in today's conference. This concludes the presentations and you may now disconnect. Have good day.

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Source: Patterson-UTI Energy, Inc. Q2 2008 Earnings Call Transcript
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