Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Joseph C. Winkler III – Chairman and Chief Executive Officer

Brian K. Moore – President and Chief Operating Officer

Jose Bayardo – Chief Financial Officer and VP

Analysts

James Rollyson – Raymond James

Douglas Becker – Banc of America Securities

Arun Jayaram – Credit Suisse

Dan Pickering – Tudor Pickering & Co. Sec

Kevin Pollard – J.P. Morgan

Ken [Sill]

John Daniel – Simmons & Company, Intl.

Pierre Conner – Capital One Southcoast, Inc.

[Eric Calamarus]

J. David Anderson – UBS

[Jim Saniguey]

Stephen Gengaro – Jefferies & Co.

Complete Production Services Inc. (CPX) Q3 2008 Earnings Call October 24, 2008 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the third quarter 2008 Complete Production Services, Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call Mr. Joe Winkler, Chairman and CEO, Jose Bayardo, Vice President and CFO, and Brian Moore, President and COO. You may proceed.

Jose Bayardo

Thank you, [Jasmine]. Good morning. Thank you for joining us this morning as we host our third quarter 2008 earnings conference call. Before we begin the discussion of our financial results please note that some of the statements we make during this call may contain projections and estimates, including comments about our outlook for the company's business, which are forward-looking statements within the meaning of the Securities Acts of 1933 and 1934.

These forward-looking statements are based on the limited information as of today, which is subject to change. These forward-looking statements are further subject to risks and uncertainties and actual results may differ materially. You should not assume that these forward-looking statements remain valid beyond the current quarter. I refer you to our various document files with the Securities and Exchange Commission for a more detailed discussion of some of the risk factors that might impact our business.

With that I now turn it over to Joe Winkler.

Joseph Winkler III

Thanks, Jose, good morning and thank you for taking the time to join us on our call. Quarter three's performance was outstanding thanks to the hard work and efforts of our people. Activity levels across our markets are strong as the first half momentum continued through the quarter. Reviewing our performance we reported revenue of $493.2 million, net income from continuing operations of $52.3 million, and fully diluted earnings per share of $0.70.

First, from a sequential perspective revenue was up 12%, or $52.1 million. EBITDA of $143.7 million was up $25.5 million, and EBITDA margins were 29%, resulting in an incremental contribution of almost 50%. Within our completion and production segment revenue was up $49.1 million, or approximately 13% as a result of a full quarter impact of our quarter two pressure pumping acquisitions, investment in growth CapEx, the seasonal recovery in Canada, and improved utilization and pricing of several of our service lines.

EBITDA margins increased to 31.9%, resulting in an incremental contribution of 53%. A number of factors contributed to this excellent performance. Our pressure pumping business turned in an outstanding quarter. We benefited from the full quarter impact of the assets acquired in Q2, a smooth integration of that acquisition, and our successful expansion into the [Balkan].

Our coil tubing operations in both the U.S. and Mexico performed very well. Our coil tubing-drilling project has been very successful, and along with other areas more than overcame the interruptions in our Gulf Coast business. Our well service business also turned in another good quarter, benefiting from slightly higher pricing and activity levels. Fluid handling volume was up significantly on higher utilization and slightly higher pricing.

Drilling services segment performance improved with increases in revenue, EBITDA and margins. Our drilling rig business volume continues to steadily increase due to higher utilization and an additional unit working, and our rig logistics business also generated higher revenues and margins due to higher activity levels and operating efficiencies.

Now to the year-over-year review. Revenue increased 32%, or $119.8 million, as compared to the growth in the North American rig count of 13%. EBITDA increased $37.4 million, with incremental margins of 31%. Completion in production segment revenue increased $105.8 million, or 34%. Approximately 75% of the growth is attributable to organic efforts with the remainder to acquisitions. EBITDA of $133.2 million was up 40%, resulting in a 31.9% margin.

The force is impacting the completion and production segment year-over-year revenue growth and margin performance can generally be described as follows. Increased volume due to higher activity levels; investments in organic growth capital, including four to five coil tubing units; deployment of our pressure pumping equipment to the [Balkan]s; 27 well service units, which include the four acquired in Q2 and many of which were deployed to the [Balkan]; our pressure pumping acquisition during Q2 2008, and improved performance within our Canadian operations; slightly higher pricing in some service lines offset somewhat by inflationary forces in our well service, fluid handling, and coil tubing businesses.

Drilling services revenues was up $9.3 million, or 18%, and EBITDA was up $2.8 million, with an EBITDA margin of 27.3% versus 26.9%. Higher volumes in our drilling rig business due to better utilization and additional rigs were offset slightly by lower pricing, and our rig logistics business continued its improvement.

On the strategic front, we successfully deployed the third frac fleet in the Barnett associated with our quarter two acquisition, continued our expansion in the [Balkan] Shale. Our first hydraulic frac job was completed in mid-July and our team has continued working successfully in this market. We expect our equipment in this market to be at a full run rate in Q4. Within this market we have also expanded our presence in other service lines, coil tubing, sea line, and well service.

First delivery of our first open-hole formation evaluation tool under our [Fondex] agreement, and are finalizing our fuel testing. We expect to be deployed during Q4. Successfully completed our coil tubing-drilling projects; this unit has redeployed to the Haynesville to participate in the high-pressure drill-out, along with our previously deployed units to this market. Shortly after quarter end we acquired a platform in the Appalachia to establish a presence in the Marcellus Shale and acquired a platform in the Haynesville Shale to accelerate out growth in that market.

I will now turn it over to Jose, then come back for outlook, Jose.

Jose Bayardo

Thanks, Joe. Our capital expenditures for the quarter totaled approximately $59 million, bringing our year-to-date total up to $193 million. We anticipate capital expenditures for the fourth quarter to be approximately $59 million again, and our CapEx for the year should total into the $245 million range.

Our depreciation and amortization expense for the quarter was $47.7 million, up approximately $4.7 million over the prior quarter, primarily due to the full quarter of results from the pressure pumping acquisition completed in the second quarter of 2008 and investments in growth capital. During the quarter we generated cash flow from operations of approximately $85.5 million and we were able to utilize our cash flows to continue strengthening our balance sheet.

We reduced our total net debt by $27 million and brought our leverage ratio down to 1.5 times, down from 1.7 times in the prior quarter. Our debt-to-capital ratio at the end of the quarter was 41.1%, down from 43.5% at the end of the second quarter of 2008. Our reduced debt level during the quarter contributed to an $870,000 reduction in our interest expense versus the prior quarter.

As we previously announced, we completed two acquisitions in early October, which established strong platforms for us in the Haynesville and Marcellus Shales. To fund the acquisitions we drew down an additional $106 million from our revolver. As a reminder, we have a $400 million revolver. We currently have $209 million drawn on the revolver, and additionally have letters of credit outstanding, which total approximately $38 million, leaving us with about $153 million of availability on our credit facility.

Our credit facility runs through December 6, 2011, and our $650 million bonds mature in 2016. As we mentioned in our earnings release, we are very comfortable with our liquidity, capital structure and our lending group.

Lastly, the effective tax rate for the quarter was 36.2% and 35.5% for the nine-months ended September 30, 2008. The increase in effective tax rate for the quarter was due to additional income in higher tax rate areas.

With that I will now turn it back to Joe.

Joseph Winkler III

Okay, thanks, here's the outlook. Although momentum from Q3 activity carried over to the start of Q4, we do not expect that to continue. Our customers are very concerned about the future price of natural gas, whether it be related to growing production levels or reduced demand from a potentially weakening economy. This along with concerns about access to an availability of credit have them adjusting downward their 2009 CapEx plans.

Although not meaningfully visible in our business quarter to date, we expect to see activity levels declining over the remainder of Q4 and into 2009. It is difficult to predict the magnitude and duration of this reduction and the affect it will have on our business; however, we believe that a significant drop in activity will be relatively short-lived and could result in a strong recovery.

We also believe that we are positioned to be opportunistic. Our balance sheet is well structured to withstand a downturn and our operations are positioned in unconventional resource basins that we believe will be less susceptible to significant declines in activity levels. These unconventional basins should also have a stronger than average growth in a recovery.

As we begin to finalize our plans for 2009 we will take an approach very similar to last year, or 2008. Our preliminary CapEx starts off with spending less than $150 million. Our growth capital will be aimed at the expected growth basins – Haynesville, Bakkan, Marcellus. We will have identified and prioritized opportunity sets. We'll monitor the market, and if the opportunity presents itself in a timely manner we will take advantage. If the market should recover quickly, we believe we have very good growth built into our business due to the actions we took during 2008. If market conditions require it, we will be able to reduce our CapEx spending further.

Overall our fleets are very new and we would not require a significant amount of CapEx, maintenance CapEx, in a difficult market. We do not expect all markets to be impacted the same. The Haynesville, Bakkan, and Marcellus will likely continue to expand, but perhaps not at the near-term rate previously expected.

Other basins will be impacted depending upon a multitude of factors including lease terms, access to markets, customer cash flow, customer hedge position, counterparty risks, access to credit, drill bit versus acquisitions philosophy; a number of factors go into that. Not only do customer activity levels impact our business, but capacity, current fleets and future additions also will likely impact utilization and pricing levels. Although, we expect there to be lower utilization and some pricing pressure, it is way too early to estimate the impact.

Normally at this time we give an EPS range for the next quarter. Given the uncertainty in the near-term, we will not be giving guidance for Q4. There are way too many variables, most of which are outside our control. Before we open it up for Q&A I want to be sure we are being very clear.

We think we will see a reduction in customer activity in the very near term. Duration and magnitude is very difficult to predict but the direction is clear. Our balance sheet is well structured to handle this opportunity and we will strengthen it further in 2009. If the market recovers quickly we will be responsive, just like we did in 2008, to take advantage. If the downturn continues for a protracted time there may be some very good opportunities.

We firmly believe the long-term fundamentals in North America now to grasp are sound, and that will capitalize on the opportunity. We will continue with our strategy of sequential services focused on completing resource-play wells, particularly the horizontal wells that are more service intentions. We believe a difficult market will give us the opportunity to once again demonstrate our ability to execute and differentiate.

[Jasmine], with that we will now turn it over to Q&A, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Rollyson – Raymond James.

James Rollyson – Raymond James

Hey, Joe, will you spend a minute, I guess, starting out just looking at this quarter, you had a pretty nice sequential jump in the completion and production services, and could you maybe kind of give us some thoughts about how much of that was tied to acquisition growth versus organic growth, and maybe versus the Canadian seasonal bounce?

Joe Winkler III

Sure. We'll give you a pretty good sense of that. From quarter two to quarter three, as you guys recall, Canada began to pick up. And ballpark, that was, oh, revenue of $7 million or there about; something in that range. In returns of the rest, you recall that we acquired position in the Barnett in Q2, we get the full quarter impact of that rolling into Q3, and some of that organically. That's probably another $8 million give or take. Expansion in the Bakkan for the rest of it is going to be principally organic growth, right?

Jose Bayardo

Right.

Joe Winkler III

So you get Canada, impact of the Q2 pressure pumping acquisition, and the rest of it's organic. Organic being from greater utilization due to higher activity, a little better pricing, and then also the impact of some of the additional kit that was deployed, either partially in Q2 or partially in Q3.

James Rollyson – Raymond James

Understood, and as far as looking forward into Q4, obviously, you'll get the benefits of the acquisitions you've made here in this quarter. Thoughts on revenue and EBITDA, kind of on the new acquisitions?

Joe Winkler III

You're right. We'll give you the major forces in play Q3 to Q4. We start, obviously, with where we ended Q3. We get Canada, and typically we would recover. Not as confident about that recovery this year as in prior times. We do get the impact of the acquisitions almost a full quarter and then the impact of some additional kit that came in Q3 and get a full impact in Q4.

We get some seasonality in the business in certain parts of the market that we participate up in the Mesa. And the real issue, Jim, is what happens from this point forward. A lot of chatter, lot of talk by our customers about laying rigs down, and as I said, we haven't seen it meaningfully in our business yet, but we're pretty sure it's coming. We get into the holiday period it's just way difficult to predict what's going to happen here for the remainder of Q4.

Ballpark numbers, what do we have? We figured about four times forward on the deals?

Jose Bayardo

Right.

Joe Winkler III

So starting off, out of maybe $5 million in the quarter, building into a little higher number as the year plays out, depending market conditions.

James Rollyson – Raymond James

And last question for me, you guys are obviously focused – have been focused – in a lot of the shale plays, which has fortunately been a lot of the growth plays, and it sounds like that's still the strategy going forward. Thoughts on how if the market slows down, as you're talking about happening, obviously, we're predicting, how capacity shifts might take place? Are you worried about guys bringing capacity into the markets where you're strong in and that kind of impacting your business?

Joe Winkler III

No different than happened last go around. Things do move around and whether it does or not is the function of a lot of things, not the least of which is one view of how long the downturn in an area might take, or might last. We go back to – it will put pressure perhaps on the market, but we're in an environment where you need to be able to do the job and do it very, very well, and so we think that that will give us the opportunity to continue to differentiate in the market. But depending upon one's view of the magnitude and length of the downturn in their market, yes, you could see stuff moving around.

Operator

Your next call comes from Douglas Becker – Banc of America Securities.

Douglas Becker – Banc of America Securities

Joe, guidance had been for $0.61 to $0.63. You highlighted a number of things that were positive during the quarter. I just want to get a sense of what the biggest surprise for you was internally.

Joe Winkler III

For me, we had a great performance across all of our service lines. Our team really delivered in the quarter. I think the strength of the momentum throughout that quarter. I think our people, we came out of Q2, as you guys recall from that one, we were a little behind the eight ball on fuel, and we were wanting to catch up some of that and we did. I was pleased with our people's ability to get that done.

The smooth integration of our pressure pumping acquisition. Our team pulled off a great integration there. The expansion within the Bakkan and I might say I was surprised by that, no, to the contrary, very pleased. I think they did a bang up job. Our coil performance sequentially, we had very good performance by that business, overcoming some struggles and hurdles and they did well so, pretty much across the board, Doug. Very pleased, delighted with it.

Douglas Becker – Banc of America Securities

That is great. In terms of the relief on fuel prices, is that coming through surcharges or is it coming through higher pricing that might actually stick as we come into the fourth quarter?

Joe Winkler III

A little bit of both, we talked about that in quarter two’s call that we would be getting it a little bit of both ways and then that is exactly what we did. Whether it sticks either way as we go forward is to be determined, but we were able to get some both ways.

Douglas Becker – Banc of America Securities

You highlighted that you believe [uncommissioned] resource plays will be less susceptible to a decline. What are your customers saying specifically about the basins that you are at as they think about activity going forth?

Joe Winkler III

I won’t get into specific customer commentary, but generally speaking, every sign we see, everything we can hear or we hear regarding the Haynesville, the Bakkan and the Marcellus is, we would expect those to grow year-over-year, and guys, any thoughts on that? The rest of them, Barnett I think is steady as she goes, although, we have had a couple of rigs come down in that market.

I don’t know whether that is due to the market – the market being the basin or whether that is due to customer specific issues that require that they do that. What about the others? Rockies, probably the seasonality issue there –

Unidentified Corporate Participant

A little bit of seasonality in the [DJ], but as you said strong activity in the deeper horizontal higher-pressure plays.

Joe Winkler III

In Canada we sense that that is going to be a little slower in Q4 than perhaps it would be in other periods.

Unidentified Corporate Participant

Correct

Douglas Becker – Banc of America Securities

Okay, and then one last one. I guess margins have been for completion and production in the low 20s, as we think about decremental margins, at least for working purposes something around 30%, is that a reasonable starting point?

Joe Winkler III

I think the margins are in the low 30s, correct?

Douglas Becker – Banc of America Securities

Oh I’m sorry, I was looking at EBIT margins as opposed to – yes, so –

Joe Winkler III

Okay, decremental, that is to be determined, Doug. If it is pricing related, it is dollar for dollar. If it is just volume, oh I suspect it – variable cost on there, we are probably looking at, what do you think, $0.35, $0.40 on the variable margin basis, something in that range? It just depends on where it comes from.

Operator

The next question comes from Arun Jayaram – Credit Suisse.

Arun Jayaram – Credit Suisse

I was trying to get a little bit of a feel; you have been making some acquisitions in the completion and production. What the revenue mix is, you generate about $418 million of revenue, just trying to get a sense of what the mix is between pressure pumping, coil tubing, fluids handling and servicing?

Joe Winkler III

I think in general we don't –

Arun Jayaram – Credit Suisse

Just trying to get a gauge given the –

Joe Winkler III

You are looking at, we have several service lines that are in the 10% to 15% range and that would include coil, well servicing, pressure pumping and the like. Let me just see, yes, coil, between the low 10% to 15%, pressure pumping, maybe a little – 15% or slightly above, well services right there with it. Fluid handling is about 25%. That gives you order of magnitude of the total, not of the –

Arun Jayaram – Credit Suisse

Not of that segment of the total, okay.

Joe Winkler III

Of the total, and that will vary quarter-to-quarter, but ballpark.

Arun Jayaram – Credit Suisse

Okay. You talked about the Haynesville, Marcellus and Bakkan; can you just remind me of what service lines you've deployed into each of those plays at this point?

Joe Winkler III

You want to cover that?

Brian C. Moore

Sure. In the Bakkan we've got well [inaudible] recruit and fluid handling ahead of established operations there. We have deployed pressure pumping into the Bakkan, along with coil tubing and [e-line], certainly that will occur this year.

Joseph C. Winkler III

That’s where it gets difficult to really read the trend because you get into seasonal declines at a period of time when things are not looking very good, and it’s hard to tell whether that's purely seasonal decline or that is a trend that is going to continue for the remainder of the year. Where else? I guess the western Oklahoma, Texas panhandle area concerns us a little bit. We saw that one go down a bit in late '07 as I recall.

There has been a couple of announcements by players in the Barnett about, perhaps declines in activity, so while it has been a very good basin, we, as I mentioned are expected to be steady, we are watching it very carefully. We could see some declines in activity there.

Arun Jayaram – Credit Suisse

You listened to any of the conference calls yesterday a lot of the offshore drillers were talking about the acquisition opportunities they are seeing because of the credit crunch. In your niche the oil field services space, can you talk about the acquisition opportunities you are seeing now? Is it because of the credit crunch? What are you seeing as far as pricing and number of opportunities out there?

Joseph C. Winkler III

We expect there to be those kinds of opportunities. It is not something that has bubbled up to the surface as yet. I think need them to go through a little bit of time, as we mentioned, I am sure others as well have experienced a pretty good Q3 and a likely fairly decent start to Q4. I think it is going to take a little bit of time for that to work through, but given what's likely on the horizon activity-wise, and if one is not well capitalized or had access to credit, it could be tough and thus there could be some things pop out as a result of that.

So one of our strategies for it is to play that and be opportunistic to participate should that occur; cannot tell you that we have seen it to this point yet.

Arun Jayaram – Credit Suisse

Okay guys. That is it for me.

Operator

The next question comes from Dan Pickering – Tudor Pickering & Co. Sec.

Dan Pickering – Tudor Pickering & Co. Sec

Jeff Tillery is here with me, we have got a couple of questions. Joe, can you walk us through the process as you have completed a couple of acquisitions here earlier in the fourth quarter? There have been a lot of people spooked about credit and the ability to draw down on revolvers and the like. Just walk us through the process as it worked for you guys. Was it smooth? Was it rocky and do you think that would change if you move forward with another acquisition?

Joseph C. Winkler III

I would describe it, all things being considered, I thought it was rather smooth. We had been communicating on a very regular basis with our bank group, been watching our cash flow and receivables very, very carefully for some time.

And as we thought about the transactions and we looked at our balance sheet, our expected cash flow due to sensitivity analysis etc., we felt very good about our ability to execute on those transactions and still be within very sensible guidelines; had absolutely, that I am aware of, no issues at all drawing down with our bank group. We have got ten or eleven banks in our deals. All of them, to my knowledge are rock solid, had no difficulties at all then. Jose would you agree? Mike, handled some of that but I –

Jose Bayardo

I completely agree. We had no issues at all.

Dan Pickering – Tudor Pickering & Co. Sec

As you look at your, I think you talked about $150 million of current credit availability, and obviously in a slower scenario you will generate free cash next year at $150 million CapEx levels, talk to us just a little bit about how much cushion you need in that $150 million or as you think about potential transaction sizes, what would you be comfortable looking at? Is a couple $100 million deal out of the question or is it in the ballpark?

Joseph C. Winkler III

I wouldn’t say it is out of the question, Dan, but whether we would execute on one of that size would depend upon a lot of things. Not the least of which is our then outlook for either the credit markets and or operational markets. We, in terms of where we stand today, we were very excited about the opportunity to acquire platforms in the Haynesville which we viewed as a very, very important growth market and the Marcellus, same thing.

Boy, we were confident in those that is consistent with our long term strategy and that is why we pulled the trigger. We would do the same thing in something else. It would have to be a great fit, consistent with our strategy, would have to be comfortable with the credit markets then as well with the trajectory on the operational front due to that market.

Dan Pickering – Tudor Pickering & Co. Sec

I am going to put words in your mouth here, Joe. It sounds like given the things that you see today, if they play out, a couple $100 million deal would be – it would have to be a great deal to want to do it.

Joseph C. Winkler III

Yes, at this stage as we see the market today and a lot of it then is going to be hinged upon our view and what’s going on in the credit market.

Dan Pickering – Tudor Pickering & Co. Sec

Okay, so for debt related than outlook related.

Joseph C. Winkler III

Yes, I think we can, with our experience and knowledge, we can assess the operational markets we’re in and how things may play out there. The big one is so overshadowing everything at the moment as access to credit and what that may do to us and so on. So we’re not going to run away from opportunity. This is the time to be opportunistic.

Dan Pickering – Tudor Pickering & Co. Sec

Okay. And Joe or Jose, can you give us a feel for our third quarter what your revenue was kind of on a regional basis? How we can add in what we think the acquisitions are at? I guess a feel of kind of Rockies versus Barnett versus mid-Continent or?

Jose Bayardo

I think during the third quarter is consistent with what we’ve been lying out before which is about a third from the Barnett quarter from the Rockies, 11, 12% mid-Continent and about 7% from Woodford and Fayetteville. We’ll take up in Canada obviously, but otherwise it's been pretty consistent. As well, the pick up in the Bakkan is reflected in our Rockies revenue percentage, but it’s been pretty consistent. Obviously that’ll shift a little bit with our two acquisitions here with the new presence in the northeast as well as that’s a good platform in the northern Louisiana area.

Dan Pickering – Tudor Pickering & Co. Sec

And last question we have is just from an asset allocation standpoint, you guys run fairly decentralized, so Rockies was kind of it’s own business, Barnett, it’s own business. How flexible and comfortable are you in terms of being able to move around assets among the regions if you see particular weakness or strength in one region or the other?

Joseph C. Winkler III

Well, we’re very confident and comfortable and in fact have done some of that. Brian, you want to add anything to it?

Brian K. Moore

Absolutely, I mean, we get together regularly and look at what the assets and opportunities are and the guys that are running those regions also have a view of what’s in the best interest for the company, so I feel very good about us being able to move stuff around to take advantage of better opportunities.

Dan Pickering – Tudor Pickering & Co. Sec

Other than the pressure pumping equipment going to the Bakkan and there hasn't been any significant kind of regenerating of assets over the past couple quarters?

Joseph C. Winkler III

Not significant. We’ve had some movement with the coil tube and drilling, a package that’s moving from the panhandle to north Louisiana. A little bit of shift in the coil from the southern Gulf Coast areas into mid-Continent areas, but, other than that nothing significant.

Operator

Your next question comes from the line of Kevin Pollard – JP Morgan.

Kevin Pollard – JP Morgan

I just had a sort of a bigger picture question. I understand your concern about why things slowing down, make sure, I think, we all agree with that. My question is you’ve added a lot of things on the plus side this year, three acquisitions with these two [inaudible] and a couple of frac spreads and some other equipment, and so I guess my question is in the course of doing that sort of your quarterly annualized revenue run rate's about 17% from the beginning of the year. And it’ll increase probably some more in Q4 with these two recent acquisitions.

I guess, where I’m going with this is even if we lay down 300 or 400 rigs when we consider all the plusses that you’ll have a full-year benefit from in ’09 is it conceivable that your, particularly in your completion production segment that revenue is actually flat to slightly up? Or is that unrealistic in that scenario?

Joseph C. Winkler III

That is a very, very difficult one to answer at this point without knowing more about the expected activity levels in the market. But you’re absolutely right and what we’re making is last year we were entering into an environment not exactly the same as what we have but a lot of caution and concern. And what we said to the market is that we’ll approach it in a measured manner, and if it gives us the opportunity we will respond and take advantage.

And that’s exactly what we did. We executed on, what, between the, what, $160, $170 million worth of acquisitions? Is that about right? We upped our CapEx from 150 to, what’d we say, $245 to $250, and all of that while reducing our leverage ratio. What were we at the end of last year, 1.8 times, or something in that range? Or was it – what are we now, 1.5, 1.6, something in that range? So we were opportunistic and that’s the tack we’ll take. And you start layering that in depending upon the activity could we from a revenue standpoint? Yes, sure we could. We could be greater. Absolutely.

We’ll take the same approach this year. We’ll have it laid out. We’ll have our base line, and we’ll know what we’ll be able to do at certain points in the Q, and we’ll be able to go, no go depending on our outlook at the moment, so. So, yes, we could.

Kevin Pollard – JP Morgan

And if I could touch on the acquisition front once more. Just real quickly, a lot of the – obviously the public players are well capitalized for the most part but when you look at the small private company that you typically target, how levered are those companies in general? Are those sort of operating under a fairly high debt burden that could?

Joseph C. Winkler III

I would assume that to be the case. I don’t know that for sure, but based upon my years of experience I would assume that to be the case and would be very surprised if that were not. And the other issue there is not only is it the amount of leverage, but it’s also the scale of their operation. And so it may be that they’re in there without a big enough scale you can do the ratios but, man, you get a big hit in your market that can be a real problem no matter the leverage. And so it’s a combination of both leverage and scale, but I think, unfortunately, for some of them it may work against them.

Kevin Pollard – JP Morgan

Okay. And this last question real quickly, in your drilling services, how many of your rigs are you running today?

Joseph C. Winkler III

23.

Operator

Your next question comes from the line of Ken [Sill].

Ken [Sill]

Good morning. You know, markets tell us dooms day’s out there whether it’s right or not remains to be seen. But I just wanted to kind of talk about big picture items. So, you’re saying $150 million in CapEx for next year? What would the maintenance or sustaining CapEx be for you guys after the most recent acquisition?

Joseph C. Winkler III

Well in terms of – it depends on the market. But of that, I’d say what we’d see about 40%, so $60 million, $70 million, something like that depending at the starting point.

Jose Bayardo

It could go either way.

Ken [Sill]

Yes. And then just kind of follow-up on Arun’s question but in a different way, out of your revenues, obviously the drilling segment tied to drilling, but if we see the rig count come back about how much of your revenues do you estimate kind of relate to sustaining production versus adding or growth from your customer base?

Joseph C. Winkler III

I’m not sure we’ve got a specific – substantially all of what we do is going to be completion oriented.

Ken [Sill]

Yes, so that’s tied to drilling new wells, I mean, but you don’t go in and work over will continue and you’re seeing fracking with the shales being pretty strong.

Joseph C. Winkler III

Yes, we’ll see. We do some of that already. Some of our other businesses we do participate in the production end of the game and

Ken [Sill]

And the fluid business would stay, right?

Joseph C. Winkler III

Fluid handling is a big part of that. Some of our other businesses would be that as well. So, your question is if you – I think is what you’re getting to, Ken, is if we see a significant slow down in drilling and completion will our customers shift activity to maintenance and workover in the light?

Ken [Sill]

Well that main is will that activity be kind of a sustaining business or would that?

Joseph C. Winkler III

Yes, and some element of that would be as for us; exactly how much is hard to say because a lot of what we do is geared upon the completion of the wells.

Ken [Sill]

And then one final question, right? If we assume that activity’s got to come back and it’s maybe a little bit worse than what we’re thinking right now, what’s the average asset life for some of your major stuff? Rigs, for instance, can last infinitely from an infinite perspective considering where we are today.

Joseph C. Winkler III

There’s a lot of those out there.

Ken [Sill]

Yes, yes, well they may finally go away. Who knows? But on the coil tubing and on the fluid handling and the partial pumping side, I mean if the people kind of eliminate their CapEx how fast go capacity go away?

Joseph C. Winkler III

Yes, no I think in many things you’re looking at ten plus years. As well service unit's got to be 20, 25 years and various rental items are going to depend upon the application, but

Ken [Sill]

About 5% decline and workover the rest of them closer to 10%, six to ten?

Joseph C. Winkler III

I’m sorry, say that again, Ken.

Ken [Sill]

You’re looking at for me, if people just stop the CapEx train, you’re going to reduce capacity by kind of 5 to 10% across your product line as an industry if people stop adding capacity.

Joseph C. Winkler III

I’d have to think about that a little bit. That does not sound out of line to me.

Brian C. Moore

It might not be linear.

Joseph C. Winkler III

People will attempt to work things that perhaps shouldn’t be, but then that gets back to the issue from a customer perspective and you’ve got to make sure you've got the right equipment and the right people doing the job. Not just anybody’s going to get the opportunity to play, which then leads to some things getting flushed out.

Ken [Sill]

Okay. Yes, I’m just trying to get rid of some – kind of looking at down side scenarios here. So, I’m trying to kind of gauge.

Joseph C. Winkler III

There’s no question in my mind that if we get into a real big cutback on additional capital coming in it will, for some of that stuff to get laid, you get a net reduction as a result of that. How much? That’s hard to say.

Ken [Sill]

Okay, and have you guys seen – obviously things are deteriorating pretty rapidly here on the oil and gas front and you’re keeping your powder dry, but have you seen any real change in what the asking price for assets is?

Joseph C. Winkler III

Too early to tell.

Ken [Sill]

Too early? Okay.

Joseph C. Winkler III

Wouldn't you agree, Jose? Way too early.

Operator

Your next question comes from the line of[John Daniel – Simmons & Co., Intl.

John Daniel – Simmons & Co. Intl.

Good morning. Quick question on the frac business, how much of those assets are tied up under long-term price agreements?

Joseph C. Winkler III

Brian, why don’t you handle that?

Brian K. Moore

We have got three fleets that are secured on three-year term take or pay agreements. We have a fourth fleet that is on a pricing agreement that’s firm through 2009 and so four of the ten are on long-term structured agreements.

John Daniel – Simmons & Co. Intl.

Okay. All right. Moving over to the Appalachian well service transaction, presumably you guys will seek to bring workover rigs to that market at some point. If I’m right, how many do you think you need to add to that market to build up a good business out there?

Joseph C. Winkler III

You’re right. The question is we’re – to be determined yet. But we didn’t get in to that platform. It’s a great platform with very quality people associated with it. We’re delighted and excited about getting up there. Too early to tell exactly how much, but we didn’t get into that to maintain.

John Daniel – Simmons & Co. Intl.

I agree. But when you move up there, presumably you have to buy new rigs as opposed to moving existing rigs. Is that a safe bet given the size of the rig needed?

Brian C. Moore

There will certainty be on several locations that trying to re-man workover rigs that we’ve got would be difficult. But we’ve got some trailer-mounted rigs on carriers that have got pretty small footprint that are working from some pad locations. I wouldn’t say those rigs would be excluded from participation in that market.

John Daniel – Simmons & Co. Intl.

And then just one final point, can you tell us what your cash position was as of the quarter end and what your revolver balance is today?

Jose Bayardo

The cash balance was $8.5 million at the end of the quarter and as we mentioned earlier, the revolver, we have $209 million drawn on that.

Operator

Your next question comes from the line of Pierre Conner – Capital One Southcoast, Inc

Pierre Conner

Hi. First a big picture and then discuss a couple little simple follow-ups probably mostly for Jose, so. Along these lines, Joe, on strategy and go forward where you are with 60% of this CapEx is growth related potentially and you’ve got balancing that with acquisition opportunities and maybe getting better, I think, is what you’re, maybe, hoping for I suppose. But I’m assuming that – two questions around that CapEx.

What’s your lead-time on that expenditure and granted it is probably a double-edged sword. The less people are doing it the quicker it comes, but just a tentative of a lead-time on that. And then my assumption would be the second half weighted on that, on the gross part of that.

Joseph C. Winkler III

Oh, it’s – in terms of the lead times I would say it is probably a nine-month average, nine to 12, something like you’re going – and as you point out, Pierre, as we walk on down the timeline that may come down. I don’t know that it’s necessarily backend-loaded for us because as we look we’ve done sorted some stuff in anticipation and we’re going to layer. And we did – it may be some of that front end-loaded as well. Now, whether we do a lot in the backend, we said less that 150, that will be a function of how the market, etc. plays out over time.

Pierre Conner – Capital One Southcoast, Inc.

On this question of how much sort of organic or carry through of contribution of growth you did during 2008 is probably very important, but one way to look at it might be where you ended '07 in terms of equipment and where we're starting '09. Just update us and remind us where we are in terms of particularly your bigger piece, frac fleets, maybe total rig count, so many units [inaudible].

Joseph C. Winkler III

We'll give you a pretty good stab at it. I don't that we can do it on all. Frac rigs, we were at the end of 100 some odd thousand of horsepower at the end of the year, 110, and we are now 340. So that gives you 115 to 240 order of magnitude in pressure pumping, coil units just in round numbers I think we were 48 at the end of the year and we're at 55 now.

Well service units we were 211 at the end of 2007 and we'll be 235, 240 at the end of 2008 order of magnitude. As we talked about a year ago at this time, what we were attempting to do is build at enough growth opportunity depending on market conditions to allow us to have growth year-over-year in spite of perhaps a down or difficult market and how it will play out will be primarily a function of the market, but we've certainly done the kinds of things that would allow us to grow without heavy expenditures so long as we don't have a disastrous market in front of us.

Pierre Conner – Capital One Southcoast, Inc.

The last two are some numbers things that may seem inconsequential relative to what you just pointed out about what the market gives us in 2009, but just a quick check you mentioned surcharges for fuel that you were able to pass through those obviously going off, was there any benefit in the quarter from surcharges that were really 2Q passed that really positively impacted that are just going to immediately drop right off? Somebody had mentioned that previously and quantified that there was a benefit in the quarter as a result of kind of getting those surcharges.

Joseph C. Winkler III

I don't think from our prospective. I think I understand a catch-up in Q3 for that which went up in Q2. I don't think we were able to do that. I think more it was us responding to what was going on at the time not necessarily a catch-up bill for that which occurred in Q2, not that I'm aware of, Brian.

Brian K. Moore

We had a few fuel surcharges that were implemented in Q3 but very spotty not significant.

Joseph C. Winkler III

I don't think that will affect us, Pierre.

Pierre Conner – Capital One Southcoast, Inc.

You mentioned disruptions in the Gulf Coast with weather, did that stop quantification potentially and then did that come back?

Joseph C. Winkler III

I think it is coming back, yes, and not huge to the overall impact on the company. Certainly a big deal for our people that battle it out in those markets both from a work prospective and on them personally, but not huge to the company. I think it's a credit to our operations personnel for taking actions and moving things and performing well elsewhere to overcome that, but not a big deal, other than to the people in the business they run it was a very big deal.

Operator

Your next question comes from [Eric Calamarus]

[Eric Calamarus]

You've done a good job of reallocating assets around and increasing utilization. Going forward, what specific product lines do you see the best pricing of margin advantage going forward and conversely where do you expect to see the most pressure going forward?

Joseph C. Winkler III

I think we said in the commentary it's a little early to be able to make that call as it's going to be a function of activity levels by basin and it's going to be a function of capacity either the sale or that may come into it. We are not prepared to get into a great deal of detail other than suffice it to say we expect there to be some pressure on utilization and pricing in the market as we now see it but exactly what we're at is hard to say.

[Eric Calamarus]

Joe, you had made mention that you are getting select price increases in your commentary. Where was that?

Joseph C. Winkler III

That was in quarter three and that was in coal, well servicing and fluid handling.

[Eric Calamarus]

So, it's fair enough to say that significant reservation on your part about any of that follow through coming in this quarter at all.

Joseph C. Winkler III

That is correct.

[Eric Calamarus]

If I can get a little further breakdown on [inaudible] by product line or business just generically, how are you thinking about that even as it relates to kind of the 60/40 growth means that's here now?

Joseph C. Winkler III

In terms of the big picture without getting very specific, what we'll be looking at is we'll invest in the coal business, we like that business. We'll invest a little bit in our well service business and some of the growth opportunities that we were talking about. We'll have some in our wire line business. There will be a continuum of the service and what we’re doing there. There'll be possibly some high pressure equipment for some opportunities in a pressure pumping business, some of which we touched on, the order of magnitude.

Your next question comes from David Anderson

J. David Anderson – UBS

I wanted to just talk about your customer base a little bit. Can you tell me, what percentage in customer base is of private operators?

Joseph C. Winkler III

Our top ten represents about 45%, so I'd say it's probably 10, 15% something in that range, order of magnitude, David.

J. David Anderson – UBS

Those private guys are they kind of a better customer to have now because maybe they're not quite as exposed to the credit issues? In other words, would you expect those guys to hold them maybe a little bit better maybe they're just kind of more in price and not so much of a concern to credit?

Joseph C. Winkler III

Some will, David, but there are two breeds there. One is going to be a breed that's going to be very, very conservative and operate out of cash flow, and those may continue to be steady as she goes. There'll be others that operate highly levered and will be unable to continue because of lack of access to credit and/or concerns about access to credit, so I don't think you can put them all in the same category. I would not say that in aggregate we would expect them to be steady and content. I think those would be at risk given the current state of the credit markets.

J. David Anderson – UBS

One last thing on pricing, I'd presume you probably see Barnett pricing weaken the earliest just because it's got the most capacity in there. What are you seeing right now. It seems like we were just at this inflection point and now obviously we have what's in front of us now. Have you seen any kind of change right now in pricing on the Barnett?

Joseph C. Winkler III

There's been talk about it, but have we seen it, no. It's coming.

J. David Anderson – UBS

Would you think that would probably be the first place you'd see it?

Joseph C. Winkler III

No, there may be some other places as well. In the south Texas area probably would be one of the first areas, perhaps west Texas.

Operator

Your next question comes from [Jim Saniguey].

[Jim Saniguey]

It's been said a couple of times and I'm just trying to get clarity on what the revolver balance is. You said it's 209 but I think it should be 109 unless I'm missing something big here in the availability net at ELC should be 253 and not 153.

Jose Bayardo

At the end of the quarter, yes, post quarter in the first week of October we drew down another $106 million to fund our acquisition.

Operator

Your next question comes from Steven Gengaro – Jeffries & Co.

Steven Gengaro – Jeffries & Co.

As we look at CapEx now for next year, you probably generate pretty good cash flow and you talked a lot about plenty of opportunities you have on the acquisition side. Can you talk a bit more about depending on what kind of comes with acquisitions or doesn't come with acquisitions, what's the potential uses of cash flow are?

Joseph C. Winkler III

We've always said all things being equal. We like to invest and grow and do that either organically or by acquiring platforms in markets that give us the next opportunity to fund our organic growth. We will be opportunistic and continue to do that. We will strengthen our balance sheet.

I think you're alluding to at some point in the future will we buy back shares and particularly given the current share price. I think for us strengthening our balance sheet to be sure that we can be opportunistic is number one priority. As we do that and if the conditions allow it then would we consider buying back shares? Sure, but it has to be the right time right opportunity. Meanwhile, cash would be to strengthen balance sheet and be ready for growth in the business should that growth come in a timely and affordable manner.

Stephen Gengaro – Jefferies & Co.

In strength and balance sheet what is the measure of how strong you want to be?

Joseph C. Winkler III

There are a couple of things that go into that equation. One is the nature of the debt. We are very, very comfortable with our ratio. It is the leverage ratio that we are very comfortable where we are. We are not at all uncomfortable in the 2 range and we would go above 2 at the appropriate time and the appropriate circumstances.

I don't think it's the appropriate time or appropriate circumstances to be doing that given some of the concerns in the credit markets and what may be facing us in the operational market. It's going to vary. Would be go above the 2 to 2.5ish or thereabouts for the right deal, right capital structure, right market? Sure we would but it's got to be the right circumstances and it's going to vary on a lot of things.

Stephen Gengaro – Jefferies & Co.

You talked about rig count and operations in general. Can you talk about how given the intensity of the work that are needed on the service side, how long it takes for you guys to really see a downturn versus the rig count and how good of a measure really is the rig count for your guys?

Joseph C. Winkler III

Rig count is a very visible indicator and it may or may not be real time depending upon where you are because for us it's really about well count. It's about well count and completions and that's going to vary by basin, plays, etc., but within each of the basins it's a pretty good indicator within an area as to what's going on. When you add it all together and you look at it as one number it gets a bit cloudy and skewed, but it's a good indicator.

Permits can indicate sometimes that can lead or lag, so it's a combination of things. It's rig counts in an area, it's well completions, it's talking to your customer about their activities and what they are going to be doing. It's all of that. There's no one magic barometer that tells us exactly what's going to be happening in a particular market.

Joseph C. Winkler III

Thank you very much, thanks for your time and we look forward to your participation in next quarter's calls.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Complete Production Services Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts