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Pioneer Drilling Co (PDC)Stock (Energy Industry, Oil & Gas Drilling & Exploration Industry, Oilfield Services Industry)
 Technological developments in the gas drilling industry, such as horizontal drilling and hydraulic fracturing, have opened up 842 trillion cubic feet of previously inaccessible shale natural gas in the last two years. [2] The sudden availability of enormous, untapped natural gas reserves has driven exploration and production (E&P) companies to ramp up drilling between 2006 and 2008, consequently increasing demand for Pioneer rigs and services. For instance, U.S. gas production grew 8.8% year-over-year between the first five months of 2007 and 2008 – the largest rate of increase since 1959. [3] Pioneer’s revenue, which grew 48% year-over-year between Q2 2007 and 2008, reflects this increasing demand. [4] Between July and August 2008, however, the price of natural gas dropped 42%. [5] As gas prices fall, drilling activity slows, which ultimately hurts demand for Pioneer rigs. It remains unclear whether gas prices have been falling because of the larger economic crisis or due to fears of a natural gas supply glut.[6]
[edit] Business OverviewPioneer Drilling Company is an oilfield services business that contracts land drilling rigs, crews, and maintenance equipment to oil and gas exploration and production companies. With the acquisition of WEDGE Companies and Competition Wireline in March 2008, Pioneer Drilling Company began to offer workover rigs and wireline units to accompany its established line-up of drilling rigs.[7] While drilling rigs create new wells, workover rigs and wireline units help maintain existing ones. As a general note, starting 2008, Pioneer will close its fiscal year on December 31, rather than March 31. In order to facilitate the transition, Pioneer released financial data in an SEC filing for March to December 2007, in addition to its regular filing for March 31, 2007. [edit] Business and Financial MetricsPioneer Drilling Company’s revenue and operating income have increased steadily over the last three years. Revenue grew 125% from FY 2005 to FY 2007,[8] reflecting a 50% increase in rig count and 171% higher drilling margin per revenue day.[9] Revenue has been growing more recently as well: Q2 revenue rose 48% year-over-year between 2007 and 2008, from $102.7 million to $152.5 million. [10] Rig count, revenue days, and utilization rates are also valuable indicators of business potential and performance in the drilling industry. Pioneer’s 69-rig fleet is small by industry standards, but the company has opted to keep its rigs up-to-date with the latest technology, rather than rapidly add machines to its fleet.[11] The company has built or upgraded 80% of its drilling fleet within the last 6 years. [12] For the fiscal year ending March 31, 2007, the company spent approximately $15.7 million upgrading 15 rigs over the course of 391 potential revenue days. [13] 60% of its rigs have been fitted with iron roughnecks, which help to mechanize and automate the drilling process. [14] This level of capital investment lets Pioneer charge its customers $600/hour on average,[15] compared to the $400/hour charged by larger competitors. Despite its high prices, Pioneer has maintained high rig utilization levels for its premium quality fleet. 
[edit] Business SegmentsWith the acquisition of WEDGE Companies and Competition Wireline in March 2008, Pioneer added a Production Services segment to accompany its traditional Drilling Services business. (As a result, segment revenue data only reflects the first half of 2008, not an entire fiscal year.) [edit] Drilling Services accounted for 79% revenue for the first half of 2008.[18]The Drilling Services segment offers 69 drilling rigs and crews to natural gas and oil exploration and production companies.[19] Pioneer rigs, with a drilling capacity of 6,000 to 18,000 feet, are primarily used for natural gas production.[20] [edit] Production Services made up 21% of revenue for the first half of 2008.[21]This segment contracts 66 workover rigs, 54 wireline units, and $14 million of fishing and rental tools for oil and natural gas production.[22] Oil and gas E&P companies rent production services equipment to aid with maintenance and production at existing wells. For instance, workover rigs replace well tubing, while wireline units help lower equipment into open wells. [edit] Geographic DistributionPioneer generally contracts its rigs to companies throughout Texas and the American Midwest, but the company stepped into international markets in 2008 by deploying 5 rigs to Colombia.
[edit] Trends and Forces[edit] Pioneer stands to benefit from the unconventional gas production boom occurring in the Texas Barnett Shale.Domestic natural gas production has risen dramatically since 2006,[24] as the new combination of horizontal drilling and hydraulic fracturing lets companies access gas stored in shale beds.[25] In the first five months of 2008, natural gas production in the U.S. grew 8.8% year-over-year, the biggest rate of increase in the last 50 years.[26] Pioneer Drilling benefits from unconventional gas production due to its proximity to the Barnett Shale in North Texas, where production has jumped over 3000% since 1998.[27] In fact, two of Pioneer Drilling Company’s largest customers, EOG (9.7% of 2007 revenue[28]) and Chesapeake (9.1% of 2007 revenue[29]), drill extensively in the Barnett Shale.[30] Pioneer offers the horizontal rigs that E&P companies, like EOP and Chesapeake, need to access shale gas. [edit] Demand for Pioneer drilling rigs fluctuates with natural gas prices.Natural gas prices, like oil prices, dropped dramatically through August and September 2008, though it is unclear whether this drop reflects an excess of supply due to booming shale oil production or insufficient demand due to the growing U.S. economic crisis.[31] Natural gas prices slipped to $7.35 per 1000 cubic feet in early September, down from a high of $13 in July.[32] Falling natural gas prices have been accompanied by a reduced active rig count. During the week of 9/15, drilling activity declined by 13 rigs.[33] Low gas prices, and accompanying long-term production cutbacks, will drive exploration and production companies away from premium drill rig contractors like Pioneer Drilling Company. [edit] Pioneer production services are moderately counter cyclical.Production services help insulate the company from the substantial fluctuations of the drilling business. Even when oil and gas companies cut back on production, existing wells require workover and wireline rigs for regular maintenance. As E&P companies drill fewer wells, existing wells need more regular maintenance to keep up production levels.[34] [edit] CompetitionPioneer Drilling Company competes with onshore drilling rig and workover rig contractors, particularly those dealing with natural gas exploration and production companies in Texas.
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