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Q3 2008 Union Drilling, Inc. Earnings Conference Call - Final.

Article Excerpt
OPERATOR: Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Union Drilling Inc. third-quarter 2008 earnings conference call. For today's presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference call is being recorded today, Friday, October 31, 2008. I would now like to turn the conference over to Ben Burnham of DRG&E. Go ahead sir.

BEN BURNHAM, IR, DRG&E: Thank you. Good morning everyone. We appreciate you joining us for Union Drilling's conference call today to review third quarter 2008 results. Before I turn the call over to management, I have some housekeeping details to run through. You may have received an email of the earnings release yesterday afternoon. If you did not get your release or would like to be added to the email distribution list, please call DRG&E at 713-529-6600.

A recorded replay of today's call will be available until November 7. Information for accessing the telephonic replay is in yesterday's press release. The replay will also be available via webcast by going to the Company's web site at www.uniondrilling.com.

Please note that information reported on this call speaks only as of today, October 31, 2008 and therefore you are advised that time sensitive information may no longer be accurate at the time of any replayed listening. Also, statements made in this conference call that are not historical facts including statements accompanied by words such as will, believe, anticipate, expect, estimate or similar words are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding Union Drilling's plans and performance.

These statements are based on management's estimates, assumptions and projections as of the date of this call and are not guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties and other factors including but not limited to the factors set forth in the Company's prior filings with the Securities and Exchange Commission.

Union Drilling cautions you not to place undue reliance on forward-looking statements contained in this call. Union Drilling does not undertake any obligation to publicly advise or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this call. For further information, please refer to the Company's filings with the SEC.

During today's call management will discuss EBITDA and drilling margin, which are non-GAAP financial measures. Please refer to yesterday's press release for disclosures about these measures and for reconciliation to the most directly comparable GAAP financial measures. Now with that out of the way, with me this morning are Chris Strong, the Company's President and Chief Executive Officer, and A.J. Verdecchia, Chief Financial Officer. Now I would like to turn the call over to Chris.

CHRIS STRONG, PRESIDENT AND CEO, UNION DRILLING, INC.: Thanks. Good morning everyone and thank you for joining us today. The third quarter saw a continuation of the sequential improvement we experienced in Q2. We reported revenues of $82.4 million, EBITDA of $22.6 million and earnings-per-share of $0.27 for the three months ended September 30, 2008.

All three of our divisions experienced good utilization during the quarter with our fleetwide average coming in and 74%. Those of you that have followed us for a while know that we consistently use the total number of rigs in our fleet as the denominator and that anything over 70% is a fairly strong quarter for us.

Looking first at Appalachia, we expect to drill in the Marcellus Shale play to accelerate over the next few years. We added two rigs in this division during the third quarter. The first was a 1000 horsepower mechanical rig built in 2007 which came online at the end of July. The other was the 1600 horsepower IVM quicksilver rig which went to work at the end of August and contributed 21 days to the quarter.

Our average margin per day in Appalachia was the highest it has ever been, which is primarily a result of the larger rigs we added to that fleet to target the Marcellus Shale. We have one additional rig scheduled to go into service early next year that also will be drilling horizontal Marcellus Shale wells. In the Arkoma Basin utilization improved to levels we have not seen since 2006, although margins were compressed in that region due to some above-average repair costs.

We have upgraded one rig in Arkoma with a 1000 horsepower drawworks and have a second rig scheduled for drawworks and derrick upgrade in the fourth quarter. We also have two new 900 horsepower electric rigs scheduled for delivery in the first quarter of 2009 that will be drilling in the Fayetteville Shale under two-year term contracts.

Utilization was very strong in Texas. This was helped in part by the addition of a 1000 horsepower Barnett Shale rig which came online during the second quarter and by the mobilization of two of our smaller triple derrick rigs to the shallower Fayetteville Shale play.

Additionally, we've made significant upgrades to two Texas rigs during the second and third quarter, upgrading both to 1000 horsepower drawworks. One of these rigs also required a new derrick to support the larger drawworks. We have one more Texas rig that will receive a new derrick and drawworks in the next few weeks after it comes off its current multiwell pad project.

Finally we have one new walk-in rig designed for reentering existing wells scheduled for delivery in the Barnett shale in the first quarter of 2009. These new rigs all have term contract cover and most of our rig upgrades during 2008 have been supported by contract extensions and higher dayrates with existing customers. Now I'm going to turn the call over to A.J. to cover the financials.

A.J. VERDECCHIA, CFO, UNION DRILLING, INC.: Thanks Chris. Revenues for the third quarter of 2008 totaled a Company record $82.4 million compared to revenues of $76.9 million in the third of quarter 2007. The increase in revenues was driven primarily by higher utilization.

On the expense side, operating costs totaled $52.5 million or $10,879 per revenue day compared to $43.9 million or $9548 per day in the third quarter of 2007. The increase reflects the higher labor expenses and increased material costs especially for steel products and fuel.

General and administrative expenses increased to $8.6 million compared to $6.9 million in the previous year's third quarter. $1.3 million of the G&A expense was due to bad debt expenses for two customers. With the slowing economy and...

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