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Edited Transcript of PES earnings conference call or presentation 19-Feb-19 4:00pm GMT

Q4 2018 Pioneer Energy Services Corp Earnings Call

SAN ANTONIO Mar 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Pioneer Energy Services Corp earnings conference call or presentation Tuesday, February 19, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian L. Tucker

Pioneer Energy Services Corp. - Executive VP & COO

* 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

* Jason Andrew Wangler

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

* John Matthew Daniel

Piper Jaffray Companies, Research Division - Research Analyst

* Michael William Urban

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

* Praveen Narra

Raymond James & Associates, Inc., Research Division - Analyst

* Thomas Patrick Curran

B. Riley FBR, Inc., Research Division - Senior VP & Equity 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 Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce our host, Anne Pearson of Dennard Lascar Investor Relations. Thank you. 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, Matt, and good morning, everyone. Before I call the -- turn the call over to Pioneer CEO, Stacy Locke; and CFO, Lorne Phillips, for their formal introductory 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 by telephone replay. You can find information for both in this morning's news release. Also just as a reminder, information reported on this call speaks only as of today, February 19, 2019, so any time-sensitive information may be not accurate at 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 to be reasonable, they can give no assurance 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, their actual results may differ materially.

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

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

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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. Appreciate everybody joining the call this morning. Joining me here in San Antonio is Brian Tucker, our Chief Operating Officer; and of course, Lorne Phillips, our Chief Financial Officer.

Really in the fourth quarter, every business was solid and performed well, of course, recognizing the normal seasonality items of holidays and a little bit more weather and less daylight hours. But all the businesses performed well except for our wireline services business. That business suffered its second back-to-back decline in revenue of about 15% Q2 to Q3, Q3 to Q4. So it was hit hard, much harder than the other businesses, and also suffered a little bit of margin contraction during those quarters.

The good news is, though, that that business has started to firm back up in the new year, particularly in February. So weather permitting, we believe that wireline business could begin normalizing here in the second half of the first quarter. And I would say the outlook for the second and third quarters, based on conversations we're having with our clients, is much more favorable. So that's the good news.

Looking now at each of our businesses. I'll first start with one of our standout successes in the quarter was international drilling down in Colombia. We just had a standout quarter there, exceptionally strong margin, averaged $12,590 a day. Granted, we did have some extra benefits in that margin for the quarter. But even when you adjust those benefits out, that average margin would exceed over $10,000 a day, which, as you may recall from prior calls, we always had been optimistic that Colombian margins over time would gravitate towards our U.S. margins. And I think we're now beginning to see that.

7 of our 8 rigs there in the country are capable of working. 5 to 7 did work in the fourth quarter for 5 different clients, very good clients. And we expect more or less the same in the first quarter, it'll be 5 to 7 rigs. When they're not working, they're just mobing or waiting on something to occur, but they're all pretty much contracted.

Day rates in the fourth quarter also improved on 3 to 4 of the rigs that will affect go-forward average margins. They took effect, a couple of them in the fourth quarter, a couple more in the beginning of this year. We also saw an increase in more of the use of oil-based mud, which, in Colombia, we get paid additional margin on for that, which is great. So we're seeing an increase in that type of activity. And we're also seeing a little bit more propensity to do pad work, which greatly will help us stay on day rate as opposed to mobe rate, which, as we've talked about in calls in the past, the mobes can be anywhere from 2 weeks to 4 weeks, depending on where you're going, just because it's a hard place to mobilize rigs.

But all of that is really shaping up for a very positive outlook. The demand in Colombia for 1,500-horsepower rigs, walking rigs in particular, exactly our class of rig, is high. It's improved materially over the last year. We're absolutely in the sweet spot in terms of that demand. And so our outlook for keeping utilization and margin is very, very positive. As you know, in Colombia, sub-$50 oil works, and now we're at a robust $55-plus WTI, so it really looks like a strong market for us.

Equally as good is our U.S. drilling market. It's been very, very stable through the year. Again, in the fourth quarter, 100% utilized. Outlook for Q1, basically the same. Very, very steady, solid performance by that group and very -- a lot of very happy clients.

Now having said that, rigs around the country are being released. And this will begin over time, as more and more are released, to put pressure on day rates and, maybe to some extent, even utilization. Probably more later in the year, more probably third quarter, fourth quarter, but that is very real. It's happening. We will not be immune from it. Although I'm pretty confident that the ultra high-spec rigs that perform well, like ours, will fare better in this slightly weakened market going forward. And I don't believe that -- as the oil prices are beginning to firm, I think it's a shorter-term phenomenon, but I do think rig count is coming down, and we need to be prepared for it.

Turning now to the production services businesses. Kind of like drilling, well servicing is very stable. It's been stable throughout the year of 2018. It's continued stable into the new year. In fact, it's actually picked up 1% or 2% in utilization as we move into the new year, which gives us some hope that we may see the beginnings of a little bit more of a steady recovery in our well servicing business.

Hourly -- we were about 50% utilized in Q4. We're seeing 51%, 52% kind of now. Hourly rates still were solid at $570 an hour. That looks firm. We are benefiting from a little bit of transitioning to more drill-out work, which is somewhat new for us. So that -- and that's -- a lot of that's taking place in the Permian. So our expansion into the Permian is going well. Our expansion into the Rockies is doing better as well. And anyway, so we have reason for some optimism there. We're going to continue to try to expand our client base in the drill-out market. And we don't have much equipment that we could utilize there, but we are utilizing rigs and what equipment we do have. And we have some steps that we will be taking that will bring -- work a little bit more equipment we can market with the drill-out packages. So that outlook is positive.

Coiled tubing, throughout 2018, was a work in progress. We basically, from second half of '17 throughout '18, have been retooling and redirecting that business to be consistent with the direction of the market, which has gravitated rather quickly to a large pipe market. And so we had to play catch-up on that effort. Plus, we had to bring in more capable pumping capacity because the pumps that we had originally were not really designed to do the lateral lengths that we're doing today. So we've just been on a catch-up mode and repositioning throughout '18.

Finally, by the end of the year, we had what we need to serve our 2 markets, which is the Eagle Ford and the Rockies. We have 9 total marketed units. 5 of the 9 are large pipe units: 4, 2 3/8; and 1, 2 5/8. And we still have some 2-inch and then one small 1.5-inch bobtail unit. So we really kind of have a nice mix of assets. We have what we need in terms of the large pipe in order to adequately serve those 2 markets finally for the first time.

Sadly in the Rockies, we got that last unit in December and just in time for the wonderful winter weather we've had there. So we unfortunately got it there and have been caught with some pretty healthy storms. So it's been less effective. And also, I think we -- between the storms, we're seeing a little softness in the Rockies, still a little hard to substantiate that.

But the good news is we have what we need in those 2 markets. We definitely think 2019 is going to be our breakout year in coil, especially as we move out of the winter months. And of course, in the Rockies, we have some birding nesting issues there that we'll have to get beyond. And so starting around May, June and beyond, we really are hopeful for our coiled tubing business.

And I'll kind of end with the wireline business. You know it's been historically an outstanding business for the company. We were active throughout the downturn. We were very quick to recover. It's been a great new story for the company, very high return-on-investment business for us. But we're in a trough right now. It hit us hard in the third quarter, fourth quarter, and we're starting to come out of it. It's -- traditionally, the first quarter is the toughest quarter in the production businesses as a whole. No different for wireline. It was soft in January, but as we've seen in the past, it's coming on stronger in February.

The -- our key clients are starting to get active again. We're pretty optimistic there. Certain markets haven't healed, but we're doing everything we can to reposition ourselves and reallocate assets to markets that we feel are going to be more favorable. And so we're optimistic that that is getting back on track. And we think that the outlook there is going to be much more favorable. I think first quarter will be a little softer just due to the start, but second quarter looks good there.

So anyway, those are my kind of summary remarks. I'll turn it over to Lorne and then come back for some closing comments on outlook.

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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 $141.5 million and adjusted EBITDA of $20.8 million as compared to the previous quarter of $149.3 million in revenue and adjusted EBITDA of $28.6 million. Reported net loss was $14.5 million or $0.19 per share, and our adjusted net loss was $13.6 million or $0.17 per share.

Looking at production services. Revenues in the fourth quarter were $82.3 million, down 8% from the prior quarter as operators reacted quickly to the decrease in commodity prices and reduced activity levels accordingly. Gross margin for the production services business was 19% as compared to 24% in the prior quarter.

Switching to consolidated drilling services. Revenues were $59.2 million and utilization was 90%, both of which were roughly flat with the prior quarter. Consolidated drilling margin per day was $10,872, up from $9,428 in the prior quarter. Domestic drilling utilization was fully utilized, and the average margin per day was $10,252, up slightly from the prior quarter.

During the quarter, several rigs did reprice upwards anywhere from $1,000 to $4,000 per day, while our last remaining legacy contract repriced downwards approximately $5,000 per day.

International drilling utilization was 71%, and average margin per day was $12,590, up significantly from the $7,327 in the prior quarter. This is -- we had some dayrate increases in Colombia, as Stacy mentioned, and we also recognized revenue of approximately $1.3 million or $2,500 per day related to some reimbursements for operating costs as well as some demobilization revenue that related to one specific contract.

Currently, all 16 of our AC rigs in the U.S. and 6 of our rigs in Colombia are earning revenues. Of the 16 rigs earning revenues in the U.S., 13 are under term contracts. The roll-off on those contracts is as follows: 2 in the second quarter of 2019; 4 in the third quarter 2019, 5 in the fourth quarter 2019, one in the first quarter of 2020 and one in the fourth quarter of 2020. Also, in addition to those contracts, we will be delivering the new-build rig and expect it to begin its 3-year term contract in March of this year.

Turning to company-wide expense items. G&A expense was $16.1 million, which includes a $2.8 million benefit during the current quarter associated with the decrease in fair value of our phantom stock unit awards. For Q1, we expect G&A expense to be approximately $20 million to $21 million, which, with respect to future fair value changes for phantom stock, is based on a December 31 stock price of $1.23. With respect to the phantom stock expense, an increase or decrease of $1 in the stock price from the December 31 price would result -- is expected to result in a change in cost of approximately $0.4 million.

Depreciation and amortization was $23 million in the fourth quarter and is expected to be flat in the first quarter. Interest expense was $9.8 million in the fourth quarter and is expected to be approximately $10 million in the first 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 in the 21% to 23% range.

We had $9.7 million in committed letters of credit and $49 million available under our $75 million lending facility at the end of the quarter. The facility remains undrawn, and the available capacity is determined based on accounts receivable and inventory.

At the end of the quarter, our reported cash balance was $54.6 million, which includes $1 million of restricted cash. Cash capital expenditures in the fourth quarter were $18.4 million. We estimate 2019 capital expenditures to be approximately $55 million to $60 million, which includes approximately $7 million for final payments on the construction of the new-build drilling rig that will begin operations, as mentioned, in the first quarter and previous commitments on high-pressure pump packages for coiled tubing completion operations.

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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Thank you, Lorne. Relating a bit to Lorne's comments on the cash capital expenditures, that number is pulled in pretty tight to keep our 2019 outlook operating within cash flow. We are going to not outspend our cash flow. And we do see great growth opportunities in several of the businesses, but we're just not able to spend that capital at this point. We're going to run it very tight, keep a good cost control for this year and let the market heal up.

Our outlook is more positive. We're looking, I think, at a $55 to $60 WTI world here going forward, which is much more favorable than a $45 to $50 market. So we see work as stable. And we -- even within our tight capital budget, we do have ways we can differentiate and stay utilized and, we believe, improve our margins. We would like to do some more things, but we're not going to do it at this point until something changes. But we're pretty optimistic about the equipment that we have and the ways that we can differentiate within our equipment.

Having said that, for our production services segment, we're going to guide fairly modestly for the first quarter because, as I previously mentioned, Q1 is typically the weakest quarter. It takes a while to get kicked off in the new year. You've got the weather like we're seeing in the Rockies now, and of course, daylight hours are less. So we'll guide accordingly. Revenues, based on all of that, could be down a little bit relative to Q4, or up a little bit. Margin, likewise, could be down just a hair or up a little bit.

On the drilling side, it's -- things are a little more stable. We fully expect to be 100% utilized in U.S. drilling going forward and still maintaining a very strong margin of $9,700 to $10,200, in that range.

Colombia utilization, 80 -- let's see, I put 80% to 80%. I must have missed a number.

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [6]

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80% to 83%.

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

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80% to 83%, that sounds more logical. And an improving guide there of $9,000 to $10,000 a day in margin. So we're pretty optimistic. We have some room to outperform in some of this, but it's hard to say. There's a lot of choppiness in the market, and we'll just have to keep monitoring it.

But with that, we'll end our prepared remarks and take any questions you have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question here is from Mike Urban from Seaport Global.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [2]

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So great performance out of the international business, and seems like the outlook, if anything there, is getting a little better, and the commodity price stability certainly helped. That's a business that you've identified as a potential monetization candidate. Does improved performance there and the improved profitability change your view on that? Or does it hopefully just make that fleet more marketable and desirable from the perspective of a buyer?

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

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Well, I would say the choppiness that we've had in oil prices, particularly in the huge decline from $75 to $45 in the fourth quarter, makes that kind of M&A market challengeable for any business really, I would say. But Colombia has done extremely well. It's going to be one of our highest cash-generating businesses, we believe, this year. We've got -- we're able to operate it, under Brian's leadership, at much, much tighter capital cost to keep it running than we've done historically. Rigs are in very good shape.

We're going to see these margins roll in as we go forward. And so we're just going to monitor that and see, but it's a surprisingly good business, and we think it's going to remain strong and could get stronger. And if we had the capital, there's no question we could activate the eighth rig for just a little bit of capital, $3 million, $4 million, and have that rig contributing. That would be a payback in probably less than a year of that additional expenditure. So we're pretty bullish on it, and we'll just see how it progresses.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [4]

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Great. And then shifting back to the U.S. and the production services business, can you remind us how much of that business today -- I mean, you've talked about some of the shifts there that have taken place. How much of that is driven by completions today versus the traditional production maintenance and remedial-type work?

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

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In the production service generally, was that...

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [6]

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Yes.

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

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Well, coiled tubing is pretty much all completion, for the most part. The wireline, other than the last couple of quarters, was -- a lot of that growth has been completion work. We've always done the remedial maintenance type work. We did that really throughout the downturn. That's what kept our trucks moving. And as I've mentioned before, we were probably one of the most active wireline providers during '15 and '16, doing all that maintenance or remedial work, and we've continued doing that today. But the big growth that we had, particularly last year in the first half and the year before, has been from doing more plug-and-perf work. That is going to come back. That's what we're seeing happen now is it's starting to come back. The actual percent is going to be volatile. Do you have a...

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

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Well, it varies obviously, depending on the situation. But it's -- for wireline, you just think of it as the majority is completion related. Probably range might be 65 to 75, maybe 80 on the high end, I think. And -- but well servicing is kind of the flip -- reverse of that or has been. As we've added some of these drill-out packages, that's going to begin over time to increase the completion component of it. But it's kind of the reverse of wireline on that. Brian, anything to add?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [9]

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Nothing. I agree.

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Operator [10]

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Our next question is from Daniel Burke from Johnson Rice.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [11]

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Stacy, wanted to go back to your comments on U.S. drilling market. I think what I heard you say is that there will be rate pressures in the market, but predominantly, those would have an impact on lower-tier rigs. But wanted to make sure I had that interpretation correct and ask you more directly what you see in terms of rates for your high-spec fleet.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [12]

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Well, I think there's going -- even for our high-spec fleet, when rigs are being dropped, quite honestly, it's just simply hard to renew without taking a little adjustment. All the operators are asking for it and will be asking for it. In our case as compared to maybe a larger provider, we need to work our rigs. Others might say, "Hey, if you're not going to pay me the full rate, I'm going to stack it." But we need to work our rigs and want to work our rigs. So I think you're going to see pressure to lower rates, maybe not on every renewal but on the majority of the renewals. And it could range anywhere from $1,000 a day to $2,000 a day, I would say, at this point based on what we know today.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [13]

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Great, that's very helpful. And are we seeing that in your Q1 guide? I mean, you guys have a pretty limited rollover schedule right now. I'd assume the margin guide being a touch lower than Q4 is probably more around payroll tax impacts in Q1. Is that right?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [14]

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Right, that is exactly right. Yes, I would say for the Q1 and probably even Q2, we're probably okay. It's more, I think, you're going to -- we would see it more in Q3, Q4, if it's going to affect us.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [15]

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Okay, got it. And then maybe one on the well service side. Encouraging to see the progress on the 24-hour drill-out packages. But in the context of the constraints you have on capital, was just curious, how much further growth can you support in the well service drill-out business?

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

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Well, it's -- we could support more because we have the right rigs that can do it. And we are increasing the number of rigs doing the drill-out with no ancillary kind of wrap equipment, so to speak, pumps and swivels. But we do have 4 swivels and 2 pumps. We have a means to utilize a couple of more pumps we could add to that. I guess we have more than that. We've got 2 new pumps, but we're also utilizing -- I think there's 2 or 3 existing pumps that we had. We're going to transfer a couple of pumps out of coil that are less attractive there and move that in. So we'll have maybe a half a dozen of pumps that we can put out on a rental basis. We have the 4 swivels. We are innovating a couple of other things related to that, but that will be a little down the road, and we won't be really seeing that contributing anything this particular year. But we can put more rigs as long as operators are willing to rent all the ancillary equipment, which is what we're doing in several cases today.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [17]

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Got it, okay. And then maybe just a quick last one for Lorne. Thinking about managing the free cash neutrality in 2019, any thoughts on working capital trends and the ability to restrain or to prevent working capital from using funds?

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

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Yes. Daniel, we would expect that we're -- it's actually some opportunity to hopefully outperform on the free cash flow a little bit because as typically happens in Colombia at the end of the year, it kind of builds. And so we've put some things in place in Colombia and, likewise, looking in the U.S. to continue to improve on working capital. And so I think on the AR side, we'll definitely see some improvement throughout the year for the whole year. And hopefully, in the first quarter, with Colombia, certainly we do expect in the first half to see some help there on the collection side.

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Operator [19]

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Our next question is from John Daniel from Simmons Energy.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [20]

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Stacy, I don't know if you said this on the call earlier, I had to step outside, I apologize. But how many 24-hour rigs do you have running today?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [21]

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Oh, it varies. I would say anywhere from 4 to 8.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [22]

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Okay.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [23]

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It's up and down. Does that sound about right to you? I mean, kind of in that range. Some days we have 7 or 8 running, then it will drop. But it -- the trend has been on the gradual increase there as we're doing more of the Permian drill-out. Even if it doesn't have a full wrap package, it's just rigs that we're -- since we're now entering that market, the clients like us and like our rigs. And even though they have to rent all the equipment, it's just -- we're seeing that pick up a little bit. So I would say that going forward, that could trend higher, maybe more 5 to 10 as we go forward into the second, third, fourth quarters.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [24]

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Okay. And I don't know if you're able or want to answer this one, but can you speak to the margin differential between what you get on 24-hour packages versus just the traditional production work?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [25]

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Well, if it's without any ancillary equipment and wrap, it's like other 24-hour work. Where it becomes really attractive from a margin standpoint is when you can replace some of the rental items, like the pumps in particular, swivels. And we're doing that where we can do that. And that is a pretty, pretty significant margin improvement. That would be some of the low-hanging fruit that is out there for us. And as we -- if we feel like we can spend a little here and a little there, that's obviously an area that we would spend a little bit. And it's not large sums of money.

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [26]

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Yes. And just to add a little color, you would -- typically on the 24-hour work site, like Stacy mentioned, is where you're going to see the rental items, so you're going to get higher revenue off of that. But you do have to manage your labor there. Labor is going to be higher on the 24-hour work with the overtime, so -- versus a production rig that's going to have a little less overtime on a weekly basis.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [27]

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Fair enough, okay. Turning to the drilling business. I mean, I'm sure you guys are watching what we're watching which is the number of the public E&Ps talking about dropping rigs. But we've also seen a pretty sharp recovery here in WTI. And I'm just curious if you could characterize quoting activity as it might relate to private E&P companies versus what you see from the larger public ones. Just any insight there would be appreciated.

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [28]

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We're not working with a lot of private E&Ps on the drilling side. I would say some of the smaller publics have reacted very quickly early in this year, and we're hearing some major significant reductions out of that group. But we don't have a lot of exposure to the private E&Ps.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [29]

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Okay. That -- would you suspect that they would be ramping or holding, showing discipline as well?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [30]

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If they were the private...

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

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I think they're showing discipline. I think that may change with the improved oil, but the public -- the bigger public guys that we work for primarily are generally letting rigs go. And so they're trying to strengthen the balance sheet, give more back to the shareholder, et cetera. And now that -- if oil continues to strengthen, then like -- as I mentioned in my remarks, you may have been out of the room, we don't think this is a long-lived situation. We think it's -- I'd call it a subtle dip in rig activity and, if the price strengthens closer to $60, that you're not going to see it last too long. And so I don't think it'll affect utilization for high-end rigs like ours, but it probably will affect pricing a little bit until things strengthen again. And then we'll get our pricing right back again if we have to give it up.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [32]

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Okay. And hopefully you don't, but maybe we just looking -- the last one for me. Using your crystal ball, which I'm sure is very good, do you think industry rig count bottoms Q1 or Q2?

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

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Oh, boy, I'd say maybe even Q3. I'd say 2 to 3 would be my guess. Would you agree, Brian?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [34]

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I agree, yes.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [35]

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Yes. It's just catching on now. It's like the flu, it's kind of spreading. And you know they love it because they -- it pressures and spooks all the drillers, so they get a little buying power, and they love that. And -- but at the end of the day, $60 oil, they're going to want to drill, too. So it won't last too long.

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Operator [36]

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Our next question is from Praveen Narra from Raymond James.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [37]

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I guess I just want to follow up on Daniel's question on working capital just to clarify a little bit. So do you guys expect working capital will actually be a source of cash in 2019? Or should we just think of it as less of a draw or neutral? How do we think of it?

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [38]

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Yes. I'd think of it as neutral to maybe a benefit of up to $5 million, something like that. We're aiming for a greater benefit, but that's -- I think I'd just plan on it around that for now.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [39]

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Okay, perfect. So then I guess if we think about the free cash flow neutral guide, which is great, it seems like it implies a pretty significant second half ramp, I guess, and clearly, you get a benefit from margins on Q1 drilling, just the seasonal impact. Is it fair to assume that we'd get a better margin impact or margin tailwind for the production services side as we get into the second half and we can think of 1Q as kind of being a bottom for those services? Or how do we think of it?

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Lorne E. Phillips, Pioneer Energy Services Corp. - Executive VP & CFO [40]

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Typically, that is how a normal year -- which often, you don't have normal years, but that Q1 is typically the lowest margin, often because of just the reduced activity and revenue being a little lower. So yes, we do expect some recovery there. I think when you think about free cash flow, it's -- we've got cash interest of $36 million, $37 million a year. You've got our CapEx guide, $55 million to $60 million, and that's your primary outflows of cash. And I think -- embedded in our EBITDA is about $3 million to $4 million a year in stock comp expense. So you add that back, I guess, to the EBITDA.

And then we -- yes, we do feel like we can be free cash flow neutral. And I don't want to make it sound like we don't -- I mean, I just want to be conservative on the working capital because yes, I mean, we think there's more opportunity than $5 million, and we're working hard to get it. But just from an accounting audit perspective, I want to be -- I just want to be cautious on that right now until we see it, because a lot of it would come from Colombia, and we're working hard at doing that. We always do get paid there. We're just trying to speed it up and pull some out of the process.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [41]

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Yes, absolutely. Leaving some room for upside is great. I guess one more question for me, to follow on to John's question. In terms of the rig contracts you guys have, can you talk to us about how repricing works for your contracts through the year? And have you got -- have any customers requested releases for down the road?

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

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We have -- what we are seeing are some of the operators are starting to let rigs go, and it typically comes via whose contract ends the soonest. So as rigs roll off contract and they need to downsize their contracted rigs, they let the first one go. We've had that happen in one case in South Texas. We only had one rig working in the Eagle Ford, and that rig is going to be repositioned in the second quarter to the Permian, and we've already got it contracted. But that's typically how it goes. Yes, there'll be some pressure to let rigs go, and I've -- we've even had some try to farm out their contracted rigs to find somebody else to take it. But there's going to be a little wave of releases here in the latter part of the first quarter and into the second quarter, I would guess. And we're seeing it in the Permian. We're seeing it in Appalachia. We've already seen it in the Eagle Ford, although we don't have much exposure there. The safest market for us seems to be Colombia. That's where we're not seeing any weakness at all. In fact, as I mentioned earlier, we could activate our eighth rig. So it's going to be -- you'll see a wave of it amongst the E&Ps, I think, and it'll be the rigs that have the shortest contract or no contracts going first. And then that'll probably last for a couple of quarters, and then if oil continues to cooperate, we'll start seeing those pick back up. Sound right, Brian?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [43]

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I would just add, this feedback we've been receiving from our clients has really ramped up the last couple of weeks. So I think they're finally really positioning themselves to the rig count that they want to work through '19. I think from our perspective, yes, we're positioned well. We've got 2 rigs coming up in second quarter, like Stacy mentioned. One of those, we're going to reposition. We feel real good about that one. The other one, we hope and believe we'll be able to keep working and renew. And obviously, we hope that these rig reductions are made before third and fourth quarter, when we really have the majority of our rigs coming off.

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Operator [44]

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Our next question is from Jason Wangler from Imperial Capital.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [45]

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Appreciate the comments on the drilling services side and kind of the pricing you're seeing as well as what you were just talking about, utilization. How are you seeing kind of the -- maybe the last couple of months that's been so volatile, the pricing for the production services? Has that been equally volatile? Or maybe how do you kind of look at that?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [46]

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I think it varies by business. In the well servicing space, I would call it really flat. Doesn't seem to be any real pricing issues there for us. Wireline certainly was getting some competitive pressures there. That's -- util, margin went down. As activity starts coming back up, I would say probably not going to be an opportunity to raise prices. And coiled tubing is, I would say, flat to modest pricing pressure. But I think that's still yet to be determined on their pricing. And then drilling is probably going to be pretty strong pricing pressure in the -- through the second quarter, at least.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [47]

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And one of the first questions, it was mentioned the Colombia asset, and maybe looking at that from an asset sale perspective. But is there anything on the domestic side that you guys are targeting specifically? Or is it similar in that you're just kind of trying to figure out the market and see if there's some opportunities within the portfolio?

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [48]

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Well, I would say we're more trying to figure out the market. I think, as I've mentioned earlier, the general comment of any M&A is challenged when you have oil price fluctuations like we had in the fourth quarter. That just kind of puts everybody on the sidelines. And so I think we need a little more stability out of the market. We will continue to evaluate asset dispositions because we have a debt level that we're -- we want to address. So we will continue to explore what makes the most sense. But I would say until now, things have been pretty choppy, and now things are starting to stabilize a little bit. We have to see it a little further into the new year, but looks like it's getting a little more stable.

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Operator [49]

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(Operator Instructions) Our next question is from Tom Curran from B. Riley FBR.

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Thomas Patrick Curran, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [50]

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Just trying to cleanly tie all of the data points you've shared on the drill-out wrap packages. If I understand correctly, depending on how exactly you're defining a full wrap package, it sounds as if you exited the year with 6. So if you could just confirm or clarify that, and then tell us how many you expect to have by year-end and the CapEx associated with what you'll be spending on adding packages.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [51]

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Okay. Well, let me just kind of broadly define what we mean by wrap. In the most complete sense, a wrap around a basic tall-masted well-service rig would include a primary pump, maybe a backup pump, a power swivel, a pickup/laydown machine, a kind of the -- and BOPs. That would be kind of a customary full potential wrap type of service. It could even include snubbing in some cases. But the other extreme is just the tall-masted high-horsepower rig with no wrap still doing drill -- still drilling plugs for an operator. And -- but you're basically just charging them for a 24-hour rig from the perspective of the well service provider.

In our case, we ended last year with 2 high-horsepower pumps for drill-outs and 4 swivels. So we would -- you could arguably say we could do, with one swivel and one primary pump, a drill-out and then have a second unit that could do a drill-out. But you still wouldn't have the pickup/laydown or BOP aspects of it. Operator would have to rent that. We also have some lower-horsepower pumps. And in certain applications, a 600- to 800-horsepower pump works fine even for drill-outs. And so we have a couple of those, and we're going to get a couple of more of those from our coiled tubing operation when -- they had ordered last year some high-horsepower pumps. And when those arrive, they'll become primary pumps, and we'll be able to pull off some of their lesser capable pumps that would actually work pretty ideally for well service.

So to answer your question, I'd say the way we're operating right now, which may be short term, is we're putting both high-horsepower pumps with a swivel on a job. So we only are capable of doing one with a quasi-complete wrap package. Over time, that will be a swivel and a pump probably separated, doing 2 different drill-outs. And then we have some operations going on with lesser capable pumps, 600 horsepower. So you could say we're probably doing on average 3 to 5 drill-outs, but maybe 3 of them aren't using any wrap equipment with them. We're just doing the drill-out. The operator rents all the ancillary equipment.

And then we have our complete -- our quasi-complete package with the pumps and the swivel, and then maybe another swivel operating with a lesser pump doing another. So we -- it's not like we can do a lot of this. Later in the year, we'll add a couple of more pumps. So in a perfect world, we would be doing 4 packages, and that would be more in the second quarter probably, second, third quarter.

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Thomas Patrick Curran, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [52]

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Very helpful. And just how much CapEx do you expect to spend to add those pumps?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [53]

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Yes. So we don't have a lot of CapEx in there for that. Like Stacy mentioned, we're going to move some equipment from our coiled that Lorne mentioned. We had some cash CapEx spend that was coming from coil pumps that were ordered in '18. When those come in here first -- well, second and third quarter, that's going to free up some pumps that we'll move over to well service to finish up wraps there. So like Stacy mentioned, we should have 4 wraps by third quarter, and we'll go forward there.

What we're seeing there, just the difference, these are coils going to -- really seeing a lot of pressure on high-horsepower pumps. We're upgrading those pumps to 2,250, underpowered by 1,500-horsepower motors. That's going to free up some dual-quint 1,000 horsepowers that we can move over to the well service business.

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Thomas Patrick Curran, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [54]

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Got it. Helpful. As a follow-up, on the drilling side, I know you guys have an ongoing R&D effort. When it comes to the next innovation you're hoping to introduce technologically, where are you focused right now? Is it software related? And if so, pertaining to automation? Is it robotics? Is it incremental improvements when it comes to the walking system? Could you just update us on where those R&D efforts are currently focused for drilling?

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Brian L. Tucker, Pioneer Energy Services Corp. - Executive VP & COO [55]

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Yes, not a problem. We're a very uniform fleet. 15 of our 16 rigs, soon to be 16 of our 17 rigs are run on the NOV Amphion platform. So that NOV Amphion platform allows us to have access to the NOV NOVOS system, which is going to allow for any interaction with third-party optimization or automation software. So that effort is there. We have not to date really seen a big demand out of our clients for the NOVOS platform. We're prepared to offer it when this -- when we're able to get compensated for it from our clients. And so we'll be able to participate in that as much as possible.

But from our standpoint, our biggest efforts are on the newest rig design that we've put out. It's been about 3 years now, but that one is -- it's more around the efficiencies, particularly around our pad-to-pad mobilizations for a rig capable of drilling 150 feet in one direction and 50 feet in the other. We've got the best designed moving rig in the market, and that's obviously what's helped us maintain industry-leading margins the last several years.

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Operator [56]

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This concludes the question-and-answer session. I'd like to turn the floor back to Mr. Locke for any closing comments.

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William Stacy Locke, Pioneer Energy Services Corp. - President, CEO & Executive Director [57]

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Great. Thank you all very much for participating on the call today. Some good questions. And I think as Brian mentioned, the change is pretty recent in the day rate, and letting rigs go in the U.S. drilling market, that's very proximate to this call. Last couple of weeks, new information. So like I said, hopefully that isn't going to last for more than a quarter or 2, but I think that's a trend that everybody will be observing here going forward. But anyway, we really appreciate the participation. You all have a great day. Thank you.

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Operator [58]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.