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Edited Transcript of PES earnings conference call or presentation 30-Oct-18 3:00pm GMT

Q3 2018 Pioneer Energy Services Corp Earnings Call

SAN ANTONIO Nov 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Pioneer Energy Services Corp earnings conference call or presentation Tuesday, October 30, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian L. Tucker

Pioneer Energy Services Corp. - Executive VP and President of Drilling & Well Servicing

* Lorne E. Phillips

Pioneer Energy Services Corp. - Executive VP & CFO

* William Stacy Locke

Pioneer Energy Services Corp. - President, CEO & Executive Director

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Conference Call Participants

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* Daniel Joseph Burke

Johnson Rice & Company, L.L.C., Research Division - Senior Analyst

* James Marshall Adkins

Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research

* Jason Andrew Wangler

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* John Matthew Daniel

Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service

* Michael William Urban

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Stephen David Gengaro

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Anne Pearson Vincent

Dennard Lascar Associates, LLC - SVP of IR Counsel

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Presentation

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Operator [1]

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Good morning, and welcome to the Pioneer Energy Services Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Anne Pearson of Dennard Lascar Investor Relations. Thank you. Ms. Pearson, you may begin.

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Anne Pearson Vincent, Dennard Lascar Associates, LLC - SVP of IR Counsel [2]

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Thank you, Michelle, and good morning, everyone. Before I turn the call over to Pioneer's CEO, Stacy Locke; and to CFO, Lorne Phillips for their formal remarks, I have a few of the usual items to cover.

First of all, a replay of today's call will be available by webcast and also telephone replay. You can find the replay information for both in this morning's news release. Just as a reminder, information reported on this call speaks only as of today, October 30, 2018, so any time-sensitive information may not be accurate as of the time of a replay.

Management may make forward-looking statements that are based on beliefs and assumptions and information currently available to them. While they believe these expectations are reasonable, they can give no assurances they'll prove to be correct. They're subject to certain risks and uncertainties and assumptions described in today's news release and also in recent public filings with the SEC. So if one or more of these risks materialize, or should any underlying assumptions prove to be incorrect, actual results may differ materially.

Also, please note that this conference call may contain references to non-GAAP measures. You'll find a reconciliation to the GAAP measures in this morning's release.

Now I'd like to turn the call over to Stacy Locke, Pioneer President and CEO.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [3]

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Thank you, Anne, and good morning, everybody. Appreciate you joining us on our third quarter call. Here with me in San Antonio is Brian Tucker. He's President of our Drilling Services segment, including Colombia as well as our Well Servicing segment; and of course, Lorne Phillips, our Chief Financial Officer.

As you can see from the press release, we had a good quarter, and all our business segments except for one had increases in revenue and most had improvement -- slight improvement in margin as well. But Lorne will kind of cover the big picture financials, so I'm going to dive right into our business lines specifically.

And I'll start with the one business that had a decline in revenue, and that's wireline. And that is a very simple story, really. Revenues were down 15% roughly second quarter to third quarter. And that's mostly related to completion-oriented, perforating and setting plug work in 3 geographic areas: the Rockies, the Permian and in the Bakken, kind of in that order as well. And predominantly related just to 2 to 3 very key clients that we have in those markets. And so it's just that simple. Some of these clients paused for various reasons, and it had an impact on that wireline business.

In addition to that, in both wireline and coiled tubing and well servicing, to some degree, we had a slight weather impact for the operations mostly in Texas, where we had, in several areas, a foot to 2 feet and greater of rain beginning in September and existing into about middle October. So it's been a rather extraordinary weather pattern here for the Texas market.

When you look at the revenue declines for those key clients in wireline in those markets, it's somewhat understandable as these clients were extremely active in the first and second quarters. As you may recall, our wireline overall experienced a 37% increase in revenues from the end of '17 through the end of the second quarter. So these guys were going strong and hard, and they took a little pause for different reasons, really, and we see their activity starting to pick up and level out. And so we're actually guiding up a little bit in wireline for the fourth quarter.

We do expect revenue and margin to be improved in wireline in the fourth quarter, but we will have the normal seasonality that we've experienced pretty much every year. And we'll have holidays, Thanksgiving, Christmas, shorter daylight hours, those types of things, but we do think it will be a good fourth quarter. There is a little uncertainty in the Colorado market around Initiative 97. A couple of our clients are watching that closely and probably have curtailed activity a little bit associated with that and will adjust once they see how that plays out.

Turning now to our well servicing segment. Revenues there were up 5% Q3 over Q2. Well servicing has been a very steady -- with a -- kind of a modest upward bias to it all year long in both revenue and margin. It's just, as we've talked about in the past, that's the one production service business segment that never had negative EBITDA throughout '15 and '16. And we're kind of seeing that it's been a slow recovery for well servicing, but it has been on a slight upward bias all year and last year. And granted it's not explosive growth, but in a market and the type of recovery that we're having this cycle, that's appreciated, really.

So we think that trend continues. Pricing is firm, and activity is steady. We've moved some equipment around. We've added an additional 2 to 3 rigs in the Permian market. We already had one working there. We added a couple of more. We've started doing some drill-outs. While we don't have all the ancillary equipment we would like to have yet, we do have some on order. We've received -- just beginning to receive some of it, where we can do a little more thorough wraparound those tall-masted, 116-foot well servicing rigs and perform really top-notch drill-out solutions for our clients there. So we're just starting to do some of these drill-outs. We started a little bit in the third quarter. And we're going to see more activity in the fourth quarter. And then as we move into next year, where we're adding more of the what we call the wrap products, the pumps and the swivels and pickup/laydown machines and potentially some BOP-handling equipment, then we anticipate those margins will be very positively impacted by adding those rigs there. So we'll see a util pickup and a margin pickup from that work.

As we look into coiled tubing, revenue there was up 4% in the third quarter. Margin recovered nicely as well. We did have some equipment sales in there. But as you know, we've been adjusting to a larger pipe orientation. But anyway, we did have to adjust pricing towards the end of the third quarter, early in October. I think we got a little overreaching on our pricing. We pulled that back. We've seen a util response. Util is strong right now. I noticed today we have all 3 units in the Rockies doing drill-outs: two 2-inch and two -- one 2 3/8. We'll be adding the other 2 3/8 unit to that Rockies district in December. So we're excited about that.

And then in the Eagle Ford, we've had pretty steady activity with the 2 3/8, 2 5/8 there and occasional activity with the 2-inch and sub 2-inch. That's been a little softer. And we're kind of continuing to evaluate that.

We feel good, very good about the large pipe work and demand and receiving that other unit in the Rockies. Once that's received, we'll have 9 marketed units, 5 of which will be large-diameter pipe, 3 of those will be in the Eagle Ford, and 2 of those will be in the Rockies. But certainly in the Rockies, we're still doing some drill-outs with the 2-inch pipe as well.

As I mentioned, in wire and well service, we did have a little bit of rain effect there in coiled tubing in this quarter in the Eagle Ford, but it wasn't all that significant.

Now turning to drilling. I think the best way to describe U.S. drilling is bedrock solid. I -- Pardon the geologic pun there, but it really truly is. It's just been the most solid and stable business we've had. Revenues were up 3% quarter-over-quarter, but margin per day were up $680 a day to kind of a record-setting industry margin of $10,237.

As we discussed in the last quarterly call, our SR&M had ramped up in the second quarter due to mostly the northern colder climate rigs that when things thawed out, we did our mast inspections and research and that kind of ran up SR&M. And that is back in line now, down over $400 a day. So that's really helped with the dayrate improvement as well as rig rates. We had 3 rigs increase during the third quarter, ranging from $2,000 to $4,000 a day. And one rig repriced, one of the new-build rigs repriced. And we have one rig on standby. But that outlook is very, very strong. We've maintained 100% utilization. We expect that to continue. We've got extremely happy clients, good relationships. And we'll be adding our next new-build rig, which will be a state-of-the-art rig, earning the highest margins in the industry out there as our other rigs are. And that rig should hit the Permian mid- to late first quarter.

Looking at Colombia. Revenues there were also up 6%. Margin per day was actually down a little bit to $7,327. But generally, Colombia has been a big success this year. We've diversified to now 5 new clients that are just terrific clients to work with. Our year-to-date margin of $13.5 million is up significantly from $6.1 million through the same first 3 quarters of 2017. So we're seeing a very, very nice recovery there, and the outlook looks great.

For most of the third quarter, we had 7 rigs working, but one rig was released and stacked in September. As I mentioned, a new client. It's a multinational client. We've been awarded the work. We're working through the contract. They're going to pick that rig up. Should be mobilizing in 2 to 3 weeks and then begin drilling in kind of early mid-December.

This is our fifth client there. We've had 4 pretty much all year. And we've had this other client as a targeted client. And we finally secured an order from them, and we'll get the contract signed soon. And we're very, very excited about that prospect.

Another rig was released last week. And that rig, we've also received an order to have that rig picked up by an existing client. And that will -- is currently mob-ing [ph] to a stacked location where it will sit for a couple of -- few weeks and then begin mobilizing to begin its contract. And that will start roughly the same early to mid-December.

Last but not least, we've been able to push through some dayrate increases on 3 rigs. They range from $1,000 to $3,000 per day. And they'll have an impact in the fourth quarter a little bit and the first quarter of next year. I think 2 of the rigs come on in November with the improved dayrate and one in the first quarter, I think, February. So that's very promising. And the outlook, generally speaking, in Colombia is extremely, extremely positive. Across the board, rig utilization has picked up. Demand has increased. And there's quite a bit of optimism in the country.

So I'll turn it over to Lorne now to do a financial review.

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [4]

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Thanks, Stacy. Good morning, everyone. This morning, we reported revenues of $149.3 million and adjusted EBITDA of $28.6 million. Reported net loss was $5.2 million or $0.07 per share. Our adjusted net loss was $5.6 million, also $0.07 per share.

The increase in adjusted EBITDA from the prior quarter was driven primarily by several items, a decrease of $9.7 million in the fair value of phantom stock awards quarter-to-quarter, primarily due to the change in stock price during the quarter from $5.85 in June 30 to $2.95 at September 30. Of the $9.7 million difference, $3.7 million was recorded as a benefit in the third quarter, with the remaining $6 million booked as an expense in the second quarter.

We experienced modestly improved demand for our coiled tubing and well servicing businesses in the third quarter. And as Stacy mentioned, we also experienced improved dayrates and cost control in our U.S. drilling services.

Looking at production services. Revenues in the fourth quarter were $89.6 million, down 8% from the prior quarter. As Stacy mentioned, the decline in revenue was attributable to softer wireline activity. And since the end of the quarter, we've seen several of our clients return to more active levels.

Gross margin for the production services business was 24% as compared to 23% in the prior quarter, which reflects the contribution of our larger diameter coiled tubing units and modest increase in completion-related activities in well servicing.

I think Stacy covered the revenues and util and margin per day for both Colombia and U.S. drilling, so I'm going to talk about our term contract coverage. Currently, all 16 of our AC rigs in the U.S., and 6 of our rigs in Colombia are earning revenues. One of those Colombia rigs is earning revenues under a demobilization currently.

Of the 16 rigs earning revenues in the U.S., 14 of those are under term contracts. Since our last earnings call, we have extended contracts on 4 rigs, each of which has or will reprice upwards between approximately $2,000 to $5,000 per day by year-end.

Our current contract roll off for the U.S. is as follows: 1 in the fourth quarter of 2018; 1 in the first quarter of 2019; 2 in the second quarter of 2019; 4 in the third quarter 2019; 5 in the fourth quarter of 2019; and 1 in the fourth quarter of 2020.

It should be noted that no contracts in the roll off schedule are operating at legacy new-build dayrates. Given the contract extensions and repricing activity mentioned, we currently expect to maintain a margin per day north of $10,000 in the fourth quarter and into and through 2019.

In addition to the noted contracts I just went through, the new-build rig is expected to begin a 3-year term contract upon delivery in the first quarter of 2019.

Turning to company-wide expense items. G&A expense was $14 million, which includes a previously mentioned benefit associated with the decrease in fair value of our phantom stock unit awards. For Q4, we expect G&A expense to be $19 million to $20 million, which with respect to future fair value changes for phantom stock, that estimate is based on a September 30 stock price of $2.95. Every $1 increase or decrease in the stock price from the September 30 price would have resulted in approximately a $2.1 million change in costs.

Depreciation and amortization was $23.5 million in the third quarter and is expected to be flat in the fourth quarter. Interest expense was $9.8 million in the third quarter and is also expected to be flat in the fourth quarter. Excluding the valuation allowance and the effect of foreign currency translation, state taxes and other permanent differences, our tax rate in the third quarter would have been 21% to 23%.

We had $9.7 million in committed letters of credit and $57.6 million available under our $75 million asset-based lending facility at the end of the quarter. The facility remains undrawn, and the available capacity is determined monthly based on accounts receivable and inventory levels. At the end of the quarter, our reported cash balance was $53.5 million, which includes $2 million of restricted cash.

Cash capital expenditures in the third quarter were $17.3 million. We estimate 2018 capital expenditures to be approximately $70 million, which includes $23 million for 2 large diameter coiled tubing units, one of which was delivered in early July; 3 wireline units, 2 of which were delivered in January; high-pressure pump packages for completion operations; and the construction of the new-build drilling rig expected to be completed in 2019.

Regarding the new-build drilling rig, we do expect approximately -- we're estimating approximately $5 million of the costs for that rig to be spent in the first quarter of 2019.

So with that, I'll turn it back over to Stacy for final comments.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [5]

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Okay. Thank you, Lorne. We outlined our Q4 guidance in the press release, but just to reiterate, in the production services segment of businesses, we do expect the normal seasonality of holidays and shorter daylight hours. So we'll guide the revenue flattish to down slightly, up to maybe 4%. And margin, we're going to guide down a little bit. We've got various things going on affecting margin, health insurance accrual but also during a little bit lower revenue, we will have an impact on margin, and sometimes labor can be a little sticky during the holidays. But we also have kind of crewed up and are training in the well servicing segment some crews to be very efficient on the drill-outs that we're embarking on more and more. And we want to have really well-trained crews. And we kind of started a staffing up and training those people to perform that work. So we're a little weighted there on labor. But anyway, that's the outlook for the production services segment.

Drilling, very similar guidance to the last quarter, 100% utilization, average margins $9,700 to $10,200. And in Colombia, the same margins as we guided last quarter, $8,000 to $9,000 and util lower at 67% to 72%. But so not to be confused on the util number, the revenue recognition accounting standards that were implemented beginning of this year have kind of changed the way we account for util days. And so when you're mobilizing like we're doing currently from one operator to a new operator on a new contract, those demobes and initial mobes are not counted in the util number.

So we have 2 of those that will impact us in this fourth quarter, probably roughly 30 days of mob-ing [ph] all-in each one of those. So it does have an impact, and that's the explanation why the util number is lower.

So with that, I will conclude our prepared remarks. And Lorne and I and Brian will be happy to answer any questions you have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of John Daniel with Simmons & Company.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [2]

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Just a couple from me, and then I guess I'll queue back in. But with Colombia, as these rigs go back to work, is there a realistic scenario where the Colombia margins could eclipse the U.S. margins over -- at some point during 2019?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [3]

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Brian, you can weigh in. Go ahead and weigh in if you want.

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP and President of Drilling & Well Servicing [4]

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Yes. No, I think, John, that's a good question. I think one of the challenges in Colombia is the mobilization and demobilization. And one thing that's encouraging for us as we look at first quarter -- and we anticipate margins not only the end of fourth quarter but also first quarter of '19, the one thing encouraging to us is our clients are moving towards more pad development. And that's a very encouraging thing because every time we move the rigs in Colombia, there's much more obstacles and issues to deal with than what we do in the U.S. So it's trending well. We expect to exit fourth quarter with those 7 rigs working, about 3 of them will be in a really nice long pad that can last them from 3 to 6 months. So we anticipate first quarter continuing to increase our margins in. And I believe it is realistic to think we can approach the same level of margin that we're seeing in the U.S. right now and possibly even higher. Again, I think it depends on what our clients do. And if we can stay in the same area on large pad developments, that's going to have a positive impact.

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Operator [5]

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Our next question comes from the line of Daniel Burke with Johnson Rice & Company.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [6]

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Stacy, just wanted to explore the top line guide for production services just a bit longer here for Q4. So want to make sure I heard you correctly. I think you said in wireline, sequentially higher, and that is attributable to some of the same customers that had slowed in Q3. Is that correct? What's inducing them back to market, if so? And then how do we think about your other 2 production services businesses in the fourth quarter?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [7]

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Well, I think we're not -- it's nothing uniform. And they all -- they pause for different reasons. And we're seeing a little more activity in the Bakken currently, which probably is a little surprising. The level of activity that just kind of come on. And it might be a short flurry, but at present, it looks promising. The other -- the Colorado market, I think, is going to be what I would call stable because folks there are just waiting to see where the vote lands on the initiative there in Colorado. So I think until that's resolved, that's going to be just kind of steady state and stable. And then in the Permian, I would say the same. It's just we had some higher levels of activity in the first quarter and second quarter. It's kind of leveled off at slightly lower activity but very steady. And it looks to be steady through the end of the year. So we see that. And then outside of those few customers, we're seeing fairly decent activity. So we are guiding those businesses up -- I mean, that business up a little bit, modest. And well servicing as well, we're on a slight upward bias. Lorne, you want to jump in, [I might get off of my skis].

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [8]

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No, no, I'm just going to say, I mean, if you -- well services kind of flat to slightly down as we're looking at it in revenue and coil down slightly. But again, both those just due to seasonality. And then from an activity perspective, like Stacy was saying, we feel pretty good about it, but we -- the seasonality is going to happen. And they're -- we're trying to factor in, there is some operator budget exhaustion, but we think what we're seeing, this is a good guide, with wire up slightly and well service and coil down slightly.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [9]

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Okay. All right. Well, great guys, that's helpful. And then maybe one more to go back to Colombia, certainly positive to see improving rate there. Is there any chance of improving the terms there around cancellation and demobe clauses as you look at a strengthening market?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP and President of Drilling & Well Servicing [10]

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Yes, we are looking at those opportunities as much as we can, certainly understanding the impact, especially around the mobilization. So we're making attempts to try to minimize that impact, whether that's raising our turnkey mobilization price or also repricing when we have the mobilization rate. So we certainly look at any time we have an opportunity to renegotiate those as we get more experience operating there, I personally get more experience operating there, we're taking those opportunities to try to take advantage of that.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [11]

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He was also asking about term, getting more long term kind of take or pay.

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP and President of Drilling & Well Servicing [12]

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Yes. And again, I think that's a goal of ours as well, is to get as much protection as we can get. Certainly, the demobilization, the mobilization costs there are higher than the U.S. So we certainly have some protection because the cost of switching is extremely high in Colombia. But any opportunity we can get to get more terms similar to what we have in the U.S., we're going to try to take care of those opportunities. And also when we look about executing that eighth rig, and we think there may be an opportunity to bring that eighth rig back to work sometime first, second quarter of '19. We're certainly not going to do that without some protection of the capital investment it takes to put that rig to work. So we're looking at all kinds of different areas to optimize that business.

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Operator [13]

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Our next question comes from the line of Mike Urban with Seaport Global.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [14]

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I wanted to follow up on the production services guidance as well. And recognizing you guys are somewhat underexposed in the Permian that do have some customer-specific issues that presumably revolve here, especially in wireline. But I guess I was wondering if you had a view as to what kind of level of completions activity that corresponds to. So obviously, you don't have pressure pumping or frac, but if you had, say, industry-wide stage counts down in the 10% to 15% range, would that still kind of correlate to your guidance, or is it something less than that, that you're contemplating? Or is it just a bottoms up kind of thing and therefore, not necessarily relevant?

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [15]

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I mean, looking at both, the -- obviously, the completion -- the reduction in completion activity is real out there, but it is customer-specific. So for us, it's definitely looking at it bottoms up and then looking at the macro. And we do have customers that have curtailed activity, whether it's due to budget or other reasons. And so we have factored that in. So I think it's kind of a, I'd say, a general -- a downward bias on what you might say stage count or completion activity, but we're seeing some unique opportunities, I think, like Stacy mentioned, even for well servicing as we get some of these completion and drill-out packages. That's helping us overcome some of the reduced completion activity in the fourth quarter.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [16]

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Yes. And just like Lorne alluded to there, we're actually moving more equipment into the Permian currently. We talk about -- we've had one well servicing rig there for pretty much of last year, 1.5 years. It's operated out of one of our South Texas divisions, but we've now moved another rig from that area and probably going to follow with a third rig. And then we've -- out of a kind of a North or kind of Central Texas division, we've moved one rig and probably going to move 2 rigs there focused more on drill-out. So we're seeing kind of unique, specific-to-Pioneer opportunities to take advantage of additional util. And we're very much focused on it because of the ability to put ancillary equipment around the -- what customarily comes with our well servicing package that can yield much higher margin. So we are excited about that. And on the wireline front, for most of last year and first part of this year, we've been working primarily for one client there in wireline. And we've now taken additional equipment there and are making inroads to new clients. And we developed another very good client, and we have some strong prospects. So we see both wireline and well servicing penetration increasing there in the Permian. So we're excited about that. We wouldn't go there if -- and the reason we hadn't been there historically is because of the margin differential. We couldn't make the margins we were making in other markets. And we're seeing that change for us. And so that's what we're pursuing.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [17]

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Got you so some Pioneer-specific opportunities. And then, again, kind of sticking with the guidance question. What's your level of visibility into the quarter at this point? I mean, we've got almost a month behind us at this point. I know you would have closed the books at this point. But to kind of give you confidence about that level of revenue or kind of fairly modest decline, I mean, how -- what's kind of your first look at October? I mean, presumably, it's got to be up versus September or -- just given the customer issues you had, the weather issues you had, was --is October kind of looking up, and that makes you feel a little bit better about hitting that kind of full-quarter number?

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [18]

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Yes, I think that's true. Our -- To be clear, the visibility in production service is always challenging, and it's very dynamic as we've seen over the last couple of quarters. But yes, October revenue levels have looked stronger, and that's given us some confidence. As we always do, we've done deep dives with each business line, trying to go really customer by customer, location by location to understand what we think is occurring. But I would say our buildup to how we get to the top line guidance is a pretty strong October, a strong November, although falling off around Thanksgiving. And then not a December being quite a bit weaker just given budget exhaustion and the holidays and weather. And so it's -- I guess the risk is that the budget exhaustion is greater than we think or that some of the customers that are talking to us about their plans alter their plans. But the -- I guess the upside is that there's more activity over the holidays or in the December time frame than we had anticipated. And I would say that's where the -- December could be the month that gives us -- whether we're on the upper end of the range or lower end or what, but that's kind of a look at it.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [19]

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And I might add, just Initiative 97 in Colorado is just a wildcard. We tend to think it won't pass, but if it did, it would have ramifications because we have activity in that market. So we're just watching that closely as others are.

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Operator [20]

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Our next question comes from the line of Marshall Adkins with Raymond James.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [21]

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Stacy, you have a bit of a unique insight into many different subsegments of the oil services market. It seems like, in your commentary, that pricing almost across the board seems to be moving up. And you gave us good guidance on Q4, appreciate that, but I'm more curious as to where -- how you see the market evolving next year in each of the subsegments, particularly as it relates to pricing for 2019. And let's just assume oil prices stay in the general neighborhood where they are now.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [22]

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Well, just to comment on that. Oil prices might stay here. I tend to believe they're going to firm up, but I'm a little prejudice that way. But if they stay in the mid, upper $60s, I think U.S. drilling is solid with an upward bias on pricing. I think Colombia, we just implemented price increases there. The market is telling us that, that market is solid and has an upward bias. Well servicing, I think, is going to stay on its trajectory of just slight upward slope, so I think that's positive. The bigger unknowns are coil and wireline. I would say I'm confident that our activity levels are going to be good in those 2 businesses. As I mentioned in the -- at the end of third quarter, early fourth quarter, that in coil, we're trying to push pricing always in all of our businesses.

And just a quick side comment on well servicing. Finally, we're seeing our competitors starting to push pricing more in the well servicing front, which has been great. We've been kind of out on that limb alone for '17 and early part of '18, and now we're seeing a little peer pricing push, which is really, really helpful. In coil, it's very competitive, and I think we got a little far afield on our pricing and, we could see a little bit of a util effect. We corrected that modestly, and we're picking up util again. So I think it's hard to say. On coil, I would say -- anybody chime in, but I would say flattish. And in wireline, I would lean towards flattish if this oil price stays where it is. If it heads upward back into the $70s, I would probably put an upward bias on both those businesses. And I think that's where the price is heading. But so -- but if you stick to the mid-$60s type pricing range, I think I'd call those flattish.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [23]

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That's very helpful. And then shifting gears over to Colombia. You've done a remarkable job of diversifying your client base there. Looking out to next year, I know you have a lot of mobe and demobe things going on. Maybe utilization under the multiclient, I guess, model causes more mobes than what we've seen in the past. But is it realistic to assume most all of your assets are working next year down there, given how hot the market is?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [24]

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I'd say that's highly likely. I think our thinking is that the eighth rig would be contributing by the start of the third quarter. We're not in a great rush because it will take some capital, and we're -- we really can't commit to any more discretionary capital spending at this point. And so we're kind of deferring that. The opportunity is there if we wanted to spend the money. And Brian, I think we're looking at $3-or-so million of CapEx here. It's not a huge amount, but we've committed, as Lorne pointed out, to a certain amount of CapEx that we just felt like we needed to commit to, but we're not going to be committing to anymore because some of that spend will fall into next year. But we definitely could put that rig out, and we'll look at it in the new year closely. We've got clients already trying to talk to us about it. We're trying to defer that. But I would say by the second part of the year. And we should -- when you do the run rate, we should have very, very significant and healthy EBITDA. Just to put a floor under, I'd say, it will be well above $20 million of EBITDA there in Colombia, we feel like. So it's going to be a significant contributor in 2019.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [25]

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That leaves...

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP and President of Drilling & Well Servicing [26]

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I'll just add that -- Marshall, you mentioned it, but diversifying that client base has been a real success story for our team out there and has allowed us to keep our utilization up. The -- We had a couple of clients there in third quarter and early fourth quarter now that are reducing rig lines in certain areas. And the reason we're able to exit fourth quarter -- we believe, able to exit fourth quarter with 7 rigs working is one of those rigs is going to go to a new client, which will give us a lot of opportunities, we think, going forward, and one is going to go to an existing client. So that strategy has paid off. Our team's done an excellent job. And we are, I think we're very, very bullish on '19 in Colombia.

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James Marshall Adkins, Raymond James & Associates, Inc., Research Division - MD of Equity Research and Director of Energy Research [27]

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Terrific. Last part of that is, what's the end goal there in Colombia? I mean, you've gotten it ramped up. You've gotten utilization up. Do you build that business, or do you just keep it where it is and milk it, or is there a chance you'd sell it all? What's the end goal with that business?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [28]

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Well, I would say, Marshall, we're -- we always evaluate all of our businesses kind of as an ongoing process. We -- The reason that we went to Colombia were because all of our -- at the time we went there, we were a pure play drilling contractor, and we had 70-plus rigs in the U.S. But we were drilling pretty much all natural gas, except for 3 or 4 rigs in the Bakken that were drilling vertical Bakken. And we didn't like having all our eggs in one basket from a commodity perspective, so we went there to have oil diversity and geographic diversity. Well, now with all of our production services businesses, we don't -- we've got plenty of diversity both geographically and business line-wise. And of course, now the U.S. is an oil-based economy. So that didn't exist back in '06 when we were evaluating Colombia. So strategically, I would say it's less important to our U.S. shale play-oriented strategy. So we're constantly evaluating it. It's -- Brian and the team in Colombia have done an outstanding job. One of our strategies coming out of the downturn, when all 8 rigs were stacked, was when we came back up to have great client diversity because we had all the 8 rigs working for one operator. And while we wouldn't mind working for that operator, our focus, since we were there for some years and did not bid other operators, really weren't allowed to bid other operators, we wanted to change that going forward. We didn't think we would have this level of success. Once we open that door, we've had just open arms from most of the Canadian public companies, and they're just a delight to work with. So we're going to stick with these clients. We really find a very good working relationship there, but we'll continue to evaluate that. I think there's no secret that we want to -- we need liquidity that we want to delever and are going to delever. And so we evaluate all these businesses and probably an emphasis would be on promoting our core strategic businesses.

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Operator [29]

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Our next question comes from the line of Jason Wangler with Imperial Capital.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [30]

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Wanted to just ask, you kind of hit it a couple of times, but the work that you're picking up in production services, particularly around the completion side of it, are you seeing that -- are you taking market share from others? Are you moving some other folks off of that? It would seem like, obviously, it's getting tighter there. Or is it just -- as I think somebody had mentioned before, just -- that kind of your customer [bid is getting more active]?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [31]

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Well, we're in a commodity service for the most part. And what really differentiates competitors in this market is safe, consistent, high-quality service. And that's where we shine. We strive for that in all of our businesses. And we've been successful with that strategy. It gives us pricing power as well as activity, higher activity levels. And I think that's really what's behind our ability to move into those markets. We do a lot of training. For a company our size, I'm sure our training budget is double or triple other peers of the same size. As I mentioned earlier, we're really 2 months out from starting to get a little more aggressive on drill-outs with the well servicing rigs, but we're already training these people. Get them in our culture, get the safety around them and the performance. And that really is what differentiates, and that's how you go get that business. Getting in the Permian, as you know, is spread thin. And if you can come and hold your crews and have them well-trained, deliver a good, safe service, you're going to get repeat business. Because all the operators that we've tried to work for are the bigger, publicly traded companies that have big investments. And they're very -- they just -- their biggest, really, want is good people. And if we can bring good people, we'll get the work, keep the work.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [32]

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That's helpful. And maybe on that, I mean, it seems like the labor side would still be probably difficult. You guys are obviously doing a great job getting those crews well-trained.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [33]

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It is very difficult. We're doing well, I would say. It's always going to be a challenge. We're constantly hiring and training. But yes, I think we do a good job. We have a good culture. Once people get inside the company, we take care of them and try to keep them safe, and they appreciate that.

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Operator [34]

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Our next question comes from the line of Stephen Gengaro with Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [35]

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Really, just 2 quick follow-ups. The first being, when we look at 2019, any guidance on the CapEx budget? And sort of the follow-on to that is, are there areas where you would think that any growth CapEx will be focused?

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [36]

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Yes, I think, from a routine perspective, I'd say $45 million to $50 million at these activity levels is reasonable. That includes some replacement capital of assets here and there. I mentioned earlier that we do have -- we estimate we'll have around $5 million that is already committed to on the new-build drilling rig that will spill over into the first quarter of '19. You've heard Brian and Stacy talk earlier about our desire to activate that eighth rig in Colombia, which we have not committed to, but if -- that'd be high on the list of potential spend were we to feel comfortable making more commitments. I think, from a priority perspective, were we to be comfortable making more commitments, we do have another new-build rig that we could put out where we have the long lead-time components already, and that would be another $11 million or $12 million were we to sign something up and get a term contract. And we could do that today, but we've chosen not to just to preserve cash. So there's really -- in every business, there's areas we can make investment that we feel like we would be interested in considering, but those are some of the top priorities. And as of right now, we know that we would plan on the $45 million to $50 million, the $5 million for the U.S. drilling rig. And then we're trying to hold CapEx because we plan to be free cash flow positive next year. And that is something that we want to maintain our focus.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [37]

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The only thing I would add to that is, we would try to complete out some more well servicing wrap packages for the drill-outs. We see some real potential there. We think we have some proprietary equipment that we could add that would really improve operators' efficiencies that we're exploring there. And then we also, in the wireline front, kind of have a green technology that we've been introduced, and we're working on currently testing some things. And we think that could be a nice rollout addition for the wireline front if we had the capital. So those aren't big numbers, either in the wrap or the -- on well servicing or the green technology in wireline. We could stage it in over time in '19 and '20 and just do it incrementally, but we're pretty excited about both of those opportunities.

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Operator [38]

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Our next question is a follow-up from John Daniel with Simmons & Company.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [39]

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Just 2 for me, Stacy. First is a follow-up on your Permian expansion. As you well know, each geographic market and its local workforce seem to have their own personalities. And I'm just curious if at this point, you've tried to hire a local West Texas person to manage the expansion. And if not, do you think a small sort of tuck-in acquisition may be warranted to sort of give you that beachhead to continue to put more assets in the basin?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [40]

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Well, we have a pretty big footprint, generally speaking, in the Permian through our drilling operations. So we've had a beachhead there, what are we, 8 rigs there?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP and President of Drilling & Well Servicing [41]

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Yes. [thereabouts]

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [42]

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Seven, 7 to 8, eighth rig going there. So we've been there a long, long time. And we -- Prior to that, we had all the vertical rigs working there. So we know the Permian really, really well. We brought to that market -- we have hired people and had great luck with it with local experience, particularly on the wireline front. And well servicing, we're doing some of the same, but we're also taking people out of other markets because crude quality is critically important. And you've got to have the crude quality to perform the work safely and to get the repeat business. So if we can't get it there, we're bringing it from other markets. And I'd say, on the well servicing front, we tend to have more people from other markets. On the wireline front, it's a mix, but we have a lot of local heavy crews there as well. And we've hired local management. So kind of a mix.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [43]

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Fair enough. No, I appreciate you guys are there on drilling. It's just I historically viewed the workover space and drillers just a little bit differently, but be that as it may. Okay. So obviously, business is pretty good right now, but the sector is a bit unpredictable. I'm just curious, as you look to 2019, and I know you don't have any near-term debt maturities. I guess nothing comes due till 2022, there's no rush, but how do you approach debt reduction over the course of next year?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [44]

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Well, we kind of around the barn referenced that in our discussion with Marshall earlier, but we're -- we do need to raise capital. And so we're evaluating businesses and segments. We probably will have to downsize some assets in order to raise the capital in the type of market that we're in currently. So we're exploring that, and that would be kind of step one. And that is a top priority for us. We do need to get that term loan leverage down. And we're -- that is, I would say, priority #1, currently.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [45]

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Got it. But I mean, as you look at -- I know you're probably still coming up with the 2019 budget. But based off of, call it, a $50 million CapEx level, just humor me, I assume that's directionally right. I mean, I assume you have some modeled free -- expectation of free cash flow for '19. Is that fair?

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [46]

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Yes, I mean, I think we can be -- yes, we expect to be free cash flow positive, but it's -- it will help. But like Stacy said, if viewed as a top priority, it's -- deleveraging isn't going to come from free cash flow.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [47]

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I can tell you one thing for sure, John, if our stock was $10, we would sell some equity. Okay.

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Operator [48]

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Mr. Locke, there are no further questions at this time. I would like to turn the call back over to you for any closing remarks.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [49]

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Great. Well, we really appreciate all the good questions today and the participation. And we look forward to reporting on the quarter early next year. Thank you very much.

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Operator [50]

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Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.