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Drillers Suggest a Turn in the Market

Two drilling companies reported disappointing financial results last Thursday but hinted that things could be looking up in the gas/oil patch as the rig count seems to have hit its nadir.

Patterson-UTI Energy Inc. has seen decline across all of its business units with activity now at levels not experienced since the early part of the decade, Chairman Mark S. Siegel told financial analysts. "We have taken numerous cost-control steps...while striving to maintain our capability to respond promptly to increases in activity.

"We have recently experienced an increase in demand for our rigs under spot rate contracts. Accordingly, our rig count has increased in July, but our average revenues per operating day are being reduced since these spot rate contracts have lower dayrates than our long-term contracts."

Houston-based Patterson-UTI reported a net loss for the second quarter of $17.7 million, or minus 12 cents/share, compared to net income of $81.4 million, or 52 cents/share, for the second quarter of 2008. Revenues for the quarter ended June 30 were $161 million, compared to $526 million for the quarter ended June 30, 2008.

"We had an average of 63 rigs operating in the second quarter ended June 30, 2009, comprised of 61 in the United States and two in Canada, compared to an average of 127 rigs operating in the first quarter of 2009, including 116 in the United States and 11 in Canada," said Patterson-UTI CEO Douglas J. Wall. "Due to a recent increase in spot-rate rig activity, we currently have 68 rigs operating, including 66 in the United States and two in Canada."

Wall noted that the rig count has remained "fairly constant" through May and June, "and we are now starting to see some improvement...The rig count has picked up modestly in the last month or so, and we expect the next couple of quarters to remain in a rather narrow band, but with a somewhat upward bias. For the third quarter we expect our average U.S. rig count to be approximately 67 rigs and the Canadian count to average three."

Rig revenue is down, but so are costs. The company's average revenue per operating day for the second quarter was $17,780, compared to $19,670 during the previous quarter. Average direct operating costs per operating day for the second quarter of 2009 were $9,960 compared to $11,010 for the previous quarter.

The Patterson-UTI executives noted that the company has experienced some pricing pressure from customers, but it is pushing back. Most customers taking new rigs this year have asked for some sort of concessions, they said. However, contracts are essentially "take-or-pay" and the company has made only a "limited number of modifications."

Siegel noted that the company has seen tough times before and is well-positioned for opportunities with $168 million in cash and no debt.

"Although we can't say with certainty we've seen the bottom, we do believe the worst period in the rig count is behind us," Siegel told analysts. "During the last four weeks, the rig count has steadily increased...In short, we will be very nimble."

Helmerich & Payne Inc. (H&P) CEO Hans Helmerich told financial analysts that the company's executives were reluctant to call a bottom to the U.S. land rig count three months ago, and in fact the count has continued to fall since then.

"As we discussed then, the concern centered around the downward pressure on natural gas prices, which since just a year ago have fallen by over 70%," he said. "Those worries remain as shale plays continue to contribute to brimming supplies as underground storage approaches capacity limits and faltering demand shows no real prospect of a short-term turnaround...[C]learly, better natural gas prices represent the key driver for sustainable rig count recovery."

However, he said executives are encouraged by what appears to be a bottoming in the industry rig count.

"That said, there are two powerful trends that bring encouragement to the big picture for us: gas depletion and the changing profile of the average gas well," Helmerich said. "In short, depletion is approaching a 40% annualized rate, and the average gas well more and more requires a drilling rig with advanced technology and performance capabilities. Even in an energy environment that is as challenging as any that we've seen in the last 30 years, we can identify some so-called green shoots of encouragement."

Helmerich maintained that the company is particularly well positioned because of its FlexRig fleet, which is particularly well suited to challenging drilling applications. The downturn in domestic land activity has freed up some of these rigs for deployment internationally. "[W]e can provide international customers immediate access to best-in-class performance without waiting for a rig to roll out of our manufacturing effort."

Domestically, though, H&P is active in the Haynesville, Woodford, Eagle Ford and Marcellus shale gas plays. Helmerich said for the first time H&P has more rigs working in the U.S. land segment than any of its competitors.

Tulsa-based H&P reported net income of $53.04 million, or 50 cents/share, in its third fiscal quarter ended June 30, compared with net income of $125.37 million, or $1.18/share, during last year's third fiscal quarter.

Rig utilization in H&P's U.S. land segment declined to 51% for this year's third fiscal quarter, compared with 96% for last year's third fiscal quarter and 72% for this year's second fiscal quarter. The segment had 110 rigs contracted (including 89 rigs under term contracts) and 100 rigs idle and available at the end of the third fiscal quarter. The company expects an average of approximately 91 rigs to remain under term contracts during the fourth fiscal quarter of 2009, and an average of approximately 80 rigs to remain under term contracts during all of fiscal 2010.

Average rig utilization in H&P's offshore segment was reported at 93% for this year's third fiscal quarter, compared with 89% during last year's third fiscal quarter and 98% during this year's second fiscal quarter. Average rig margins per day declined to $18,555 during this year's third fiscal quarter from $22,330 during this year's second fiscal quarter.

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