(NASDAQ: UDRL) Lehman Brothers CEO Energy Conference. Chris Strong President & Chief Executive Officer

Transcription

1 (NASDAQ: UDRL) Lehman Brothers CEO Energy Conference September 6, 2007 Chris Strong President & Chief Executive Officer A.J. Verdecchia Vice President & Chief Financial Officer 0

2 SAFE HARBOR STATEMENT Statements made during this presentation may contain forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions, including, among other matters: general and regional economic conditions and industry trends; the continued strength or weakness of the contract land drilling industry in the geographic areas where the Company operates; decisions about onshore exploration and development projects to be made by oil and gas companies; the highly competitive nature of the contract land drilling business; the Company s future financial performance, including availability, terms and deployment of capital; the continued availability of qualified personnel; and changes in governmental regulations, including those relating to the environment. Should one or more of these risks materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected. These risks, as well as others, are discussed in greater detail in the Company s filings with the Securities and Exchange Commission, including the Company s 10-K. 1

3 COMPANY OVERVIEW UDI is a US land driller with operations that primarily support natural gas production UDI has a fleet of 71 marketed rigs as of 9/6/2007 UDI focuses on unconventional natural gas drilling in tight sands, shales and CBM Most of our rigs are equipped for horizontal drilling, which increases wellbore contact with the formation, resulting in higher drainage rates Most of our rigs also are equipped for underbalanced air drilling to achieve higher penetration rates in hard rock formations UDI operates in regions with large unconventional natural gas deposits Appalachian Basin 32 marketed rigs Arkoma Basin, Fayetteville and Caney Shale 19 marketed rigs Northern Texas, Barnett Shale 20 marketed rigs 2

4 CORPORATE HISTORY Founded in 1997 by industry veterans (Tom O Neill, Bill Ziegler and Steve Webster) and Morgan Stanley Capital Partners (now Metalmark Capital) with the acquisition of the assets of Union Drilling from Equitable Resources Energy Co., establishing a business platform in the Appalachian Basin Predecessor owners operated under the name Union Drilling in the Appalachian Basin since the 1950s UDI has used acquisitions and rig redeployments to expand into new markets, including the Arkoma Basin and the Barnett Shale Acquisitions in the Arkoma Basin and Barnett Shale, completed in April 2005, were the most significant fleet expansion initiatives in its corporate history, adding 20 rigs to the fleet UDI has exited both the Rocky Mountains and the shallow vertical drilling market in the Appalachian Basin to pursue more profitable work 3

5 INVESTMENT CONSIDERATIONS 4

6 Rig fleet configured to drill for unconventional natural gas reserves, the fastest growing component of U.S. natural gas production 5

7 Focus On Unconventional Gas Markets U.S. Dry Natural Gas Production 12 Historical Projected 10 Trillion Cubic Feet Onshore Unconventional Onshore Conventional Offshore Associated/Dissolved Alaska Sources: EIA Annual Energy Outlook

8 Focus On Unconventional Gas Markets CERA / IHS 2007 gas supply study Survey of all 50 US and Canadian gas basins 12 of 15 basins with the largest projected capacity increases to 2010 are unconventional 13 of 15 basins with either decline or smallest increase to 2010 are conventional The shift toward unconventional gas production was prompted by the clear inability of conventional gas resources to keep pace with gas consumption. The most significant driver of the rise in the cost to produce gas has been and will continue to be declining production on a per well basis, not costs for equipment... 7

9 Focus On Unconventional Gas Markets Unconventional gas is found in continuous accumulations trapped within the reservoir rock Unconventional deposits account for a substantial share of undiscovered natural gas reserves in the U.S. Nearly 100% in the Arkoma Basin, Barnett and Fayetteville Shale Land surface Coalbed gas Conventional stratigraphic gas accumulation Transition zones Conventional stratigraphic oil accumulation Water Horizontal drilling into unconventional formations yields greater reserves per well and faster drainage rates Unconventional gas accumulation Tens of miles 8

10 Focus On Unconventional Gas Markets The horizontal drilling rig count has grown at a faster rate than the vertical drilling rig count Unconventional resource plays are more rapidly developed utilizing underbalanced drilling techniques UDI is well-positioned to benefit from these trends 69% of rig fleet equipped to drill horizontally 61% of rig fleet equipped for underbalanced drilling 260% 240% 220% 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% Source: Drilling Contractor Magazine Vertical vs. Horizontal Rig Counts Vertical Horizontal Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Source: Baker Hughes, Inc. 243% 24% 9

11 Rig fleet configured to drill for unconventional natural gas reserves, the fastest growing component of U.S. natural gas production Track record of opportunistic and disciplined growth 10

12 Track Record of Opportunistic and Disciplined Growth Rigs Acquisition History ( ) % appraised value 12 Equitable 7 Lang Bros. 9 Grey Wolf 3 American Energy 5 IPSCO 1 Les Wilson 2 Twin Drilling 3 SW Jack Shuler % 171% 107% 111% 123% 112% 106% 131% 81% 85% 88% 90% 102% 122% 92% 102% 91% 102% Red Rock 2 Ralex 1 Warren 1 Fairman 12 Thornton 8 SPA 2 C&L 4 C&L #2 Total Average acquisition made at 102% of appraised value 11

13 Track Record of Opportunistic and Disciplined Growth Historically, the Company has acquired used rigs at or near appraised asset value When prices rose sharply on used rigs in , Union decided to buy new rigs, rather than pay new rig prices for 30 year old equipment. Short-term: No immediate accretion to earnings Long-term: Company has 6 new 1500hp National Oilwell Varco IDEAL rigs earning premium dayrates in the Barnett Shale Numerous rig deals in the market in mid-2007 Some owners are upside down but don t want to believe it Growth without return is someone else s opportunity 12

14 Model for Entering New Markets In 2005, Union Drilling bought two established drilling operations in new markets, with quality management teams already in place, and used these footprints to grow organically in these markets Acquisition of Thornton Drilling was 12 rigs in Arkoma 19 rigs operating today Union is now the #2 driller in the Arkoma Basin Acquisition of SPA Drilling was 8 rigs in North Texas 20 rigs operating today With a favorable capital structure, Union Drilling is well-positioned to take advantage of future opportunities to enter new markets using this model. 13

15 Rig fleet configured to drill for unconventional natural gas reserves, the fastest growing component of U.S. natural gas production Track record of opportunistic and disciplined growth Leading market share position in the Appalachian Basin, which is benefiting from increased upstream capital spending 14

16 Dominant Market Share Position in Resurging Appalachian Basin Over $6 Billion in M&A since 2003 New entrants are primarily public independent E&P companies or financial sponsor-backed private companies Attracted by: Premium price, high BTU gas Long life, shallow decline reserves Low F&D Opportunity to increase returns by implementing horizontal drilling UDI, as largest and only established public driller in the Appalachian Basin, is well-positioned to benefit from this trend Public E&P Financial Sponsor Integrated $MM $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 Utility Private E&P $

17 Pursuing Higher Return Opportunities In the Appalachian Basin Resources focused on deeper drilling activities in Appalachia Trenton Black River Clinton Medina Long reach horizontal drilling in CBM Emerging horizontal Devonian shale drilling Shallow vertical drilling issues Low barriers to entry Fragmented No pricing power Others 51% Market Share by Rated Drilling Depth <5,000 ft. >5,000 ft. UDI 15% #2 player 15% #1 player 19% Others 43% #3 player 12% UDI 30% #2 player 15% Smaller rigs diverted to P&A work for coal companies 16

18 Rig fleet configured to drill for unconventional natural gas reserves, the fastest growing component of U.S. natural gas production Track record as opportunistic and disciplined acquirer Leading market share position in the Appalachian Basin, which is benefiting from increased upstream capital spending Similarity of rigs permits mobilization between markets for more attractive returns 17

19 Mobilizing Rigs to Markets that Offer Higher Returns Other unconventional plays require similar equipment and expertise Appalachia Arkoma North Texas Higher utilization and dayrate opportunities in other markets 18

20 Rig fleet configured to drill for unconventional natural gas reserves, the fastest growing component of U.S. natural gas production Track record of opportunistic and disciplined growth Leading market share position in the Appalachian Basin, which is benefiting from increased upstream capital spending Similarity of rigs permits mobilization between markets for more attractive returns Hedged against market risk with term contract coverage 19

21 Hedged Against Market Risk with Term Contract Coverage 48% of remaining internally modeled 2007 cash flow associated with term contracts 25% of internally modeled 2008 cash flow associated with term contracts All 6 new Ideal rigs are covered by 2 or 3 year term contracts that should recover the original cost of these rigs. 20

22 Union Drilling Strategy Operate in high growth / high demand unconventional markets Focus on markets with lower F&D costs and adequate takeaway capacity Invest in equipment and crews to be a preferred provider Pursue multi-rig term relationships with larger operators Redeploy rigs as necessary to achieve higher returns Don t overpay for assets to achieve more rapid growth 21

23 INDUSTRY FUNDAMENTALS 22

24 INDUSTRY FUNDAMENTALS Out of 19 Tcf total domestic production, 6 Tcf produced from new wells is currently required to offset annual depletion Current average of 30% depletion per year will grow More new gas production is from unconventional wells, often with 50%+ first year decline rates Well productivity also is decreasing More rigs required to maintain domestic production However, gas is global sooner than many thought LNG is having a significant impact on storage and pricing 1 Bcf increase YOY US has only significant global storage system 23

25 Rig Count up but Production Remains Flat INDUSTRY FUNDAMENTALS U.S. Dry Natural Gas Production and Rotary Rigs 1, Number Gas Rotary Rigs 1,350 1,200 1, Trillion Cubic Feet Production Dry Natural Gas Production Average Annual Rig Count Sources: Baker Hughes Gas Rig Counts, EIA Short-Term Energy Outlook, March

26 FINANCIAL OVERVIEW 25

27 FINANCIAL OVERVIEW Financial Performance Revenue ($mm) EBITDA ($mm) % CAGR 78% CAGR TTM TTM 26

28 FINANCIAL OVERVIEW Fleet Expansion Coupled with Solid Utilization Marketed Rigs 1 : % 71 73% 62% 44% 50% 1 Marketed rigs at end of period TTM 27

29 FINANCIAL OVERVIEW Strengthening Performance Per Revenue Day Revenue/Day $14,252 $15,789 Margin/Day $5,648 $6,592 $10,616 $11,557 $2,777 $3, TTM TTM 28

30 FINANCIAL OVERVIEW Assets: Disciplined Capital Structure Union Drilling, Inc. Condensed Balance Sheets (in thousands) June 30, December 31, (unaudited) Cash and cash equivalents $ 20 $ 20 Accounts receivable 42,123 47,613 Other current assets 12,332 11,823 Total current assets 54,475 59,456 Long-term assets 227, ,962 Total assets $ 282,304 $ 257,418 Liabilities and Stockholders' Equity: Total current liabilities 29,653 32,443 Revolving credit facility 28,660 27,810 Long-term obligations 4,960 5,256 Deferred taxes 27,001 23,481 Other long-term liabilities 2, Total liabilities 92,415 89,818 Total stockholders' equity 189, ,600 Total liabilities and stockholders' equity $ 282,304 $ 257,418 29

31 FINANCIAL OVERVIEW Disciplined Capital Structure (in millions) $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 Total Debt Debt-to-Cap 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% $0 Q4 '05 Q1 '06 Q2 '06 Q3 '06 Q4 '06 Q1 '07 Q2 '07 0% Over $75 million available on credit line 30

32 Rig fleet configured to drill for unconventional natural gas reserves, the fastest growing component of U.S. natural gas production Track record of opportunistic and disciplined growth Leading market share position in the Appalachian Basin, which is benefiting from a increased upstream capital spending Similarity of rigs permits mobilization between markets for more attractive returns Hedged against market risk with term contract coverage 31

33 THANK YOU (NASDAQ: UDRL) 32

34 EXPERIENCED MANAGEMENT Management Bios Chris Strong Chief Executive Officer: Joined Union in May 1999 as VP and CFO. He has over 15 years experience in the oil and natural gas industry. From 1994 until he joined Union, he served in various capacities at Hvide Marine Inc., a marine oilfield service company, the most recent of which was Vice President Finance and Treasurer. From 1990 through 1994, Mr. Strong was Treasurer of Port Everglades, a seaport with one of the largest non-refinery petroleum tank farms in the country. He is a graduate of Vassar College, and received an M.A. from the University of Pennsylvania and an M.B.A in finance from the Wharton School of Business. Prior to his graduate studies, Mr. Strong served as an officer in the US Navy. A.J. Verdecchia Chief Financial Officer: Joined Union Drilling as Corporate Controller in May He has over 18 years of financial management experience and served in various accounting, treasury, and planning capacities. From November 2005 to May 2006, Mr. Verdecchia served as Director of Finance & Operations at Citrix Systems, Inc. From April 2004 to November 2005, Mr. Verdecchia served as a Controller at Coherent, Inc. From April 2001 to April 2004, Mr. Verdecchia served as Treasurer at Lumenis Inc. (formerly Coherent Medical Division). He also served as Manager - Finance at Hvide Marine, Inc. and Internal Auditor at General Motors Acceptance Corporation. Mr. Verdecchia holds a B.S. degree in Finance from the University of Maryland and an M.B.A. from Florida Atlantic University. He also obtained a C.P.A. certification. 33