BJ Services Company F4Q08 (Qtr End 09/30/08) Earnings Call Transcript

BJ Services Company (BJS)

F4Q08 (Qtr End 09/30/08) Earnings Call Transcript

October 30, 2008, 10:00 am ET

Executives

Bill Stewart – Chairman, President and CEO

Jeff Smith – SVP of Finance and CFO

Analysts

Brad Handler – Credit Suisse

Dan Pickering – Tudor, Pickering, and Holt

Geoff Kieburtz – Weeden Investment

Mike Urban – Deutsche Bank

Pierre Conner – Capital One

Robin Shoemaker – Citigroup

Chuck Minervino – Goldman Sachs

Jim Crandell – Barclays

Kurt Hallead – RBC Capital Markets

Alan Laws – Merrill Lynch

Presentation

Operator

Good day, everyone, and welcome to the BJ Services’ fourth fiscal 2008 conference. Today’s call is being recorded. At this time, for opening remarks, I’d like to turn the conference over to Chairman of the Board, President, and Chief Executive Officer, Mr. Bill Stewart. Please go ahead, sir.

Bill Stewart

Thank you. Thank you all for joining us today. I’m joined here with Jeff Smith, our CFO; and Dave Dunlap, our Executive VP of Operations.

Now before we start the conference call, I’ll mention that some of the statements we make during the call may include projections, estimates, and other forward-looking information. This would include any discussion of the company’s business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties that could affect their outcome. I’ll refer you to our latest Form 10-K on file with the SEC where you’ll find a discussion of the risk factors relating to the company’s business. These factors and other factors mentioned on the call could cause actual results to differ materially.

Now this morning, we reported net income for our fourth fiscal quarter of $168 million. This is $0.57 per diluted share, a 90% increase from the previous quarter. Consolidated revenue for the quarter was $1.53 billion, up 15% sequentially, and surpassing the highest quarterly revenue figure in the history of the company. Operating income was $261 million, and this is a 26% improvement from the previous quarter.

All our reporting segments showed sequential revenue improvement in the quarter despite two hurricanes that occurred in the Gulf of Mexico. Revenues from our US businesses, and these includes pressure pumping and the oilfield services group, would have been about $18 million to $20 million higher in the fourth quarter were it not for the delays and cancellation of Gulf Coast projects as a result of the two hurricanes in the region.

Lost revenue combined with the actual cost of repairing occurred during the quarter impacted our quarterly results by approximately $0.02 per share. Our Canadian pressure pumping business made a nice rebound from the seasonal spring break-up period in the third quarter. International pressure pumping operations also improved, both in terms of revenue growth and operating margin improvement. This has been a big focus with the company as, hopefully, you will recall.

Continued strong activity and new contracts in the Middle East, Latin America, Asia Pacific, coupled with more favorable weather conditions in most international markets led to the improvement in the international area. We also serviced – the indices also reported strong results benefiting from the acquisition of Intracorp [ph] in May, and higher international sales in completion tools operations.

Year-over-year consolidated revenue increased 20%, with operating income decreasing 9%, and earnings per share down 11%. While all our reporting segments show revenue improvement from the previous year, price declines since last year’s fourth quarter negatively impacted operating income for our US and Canadian pressure pumping operations.

While pricing has generally leveled in the past two quarters, current pricing levels remain lower than they were in the fourth quarter of last year. Operating income in the oilfield services group were also lower year-over-year, primarily as a result of lower Gulf Coast completion rigs activity impacted by the hurricanes during the quarter.

Capital spending for the quarter was $181 million, bringing the total of fiscal ’08 capital spending to $600 million, which is about $40 million lower than we’ve planned for at the beginning of the year. Much of the shortfall is due to facility spending that was actually postponed or not completed in the quarter, which will be spent during ’09. Approximately $15 million of the shortfall relates to equipment shipments that we expected to be shipped out in Q4, but will now be shipped in Q1 of fiscal ’09. We’re evaluating fiscal ’09 capital spending very closely, as you can appreciate. And however, at this point, we expect capital spending to be in the range of $550 million to $575 million for the year, down somewhat from the prior year.

Now looking at the operating results of our segments, starting with US/Mexico pressure pumping, US pricing was – has remained fairly stable throughout the second half of the fiscal year. Revenue from the segment increased 8% in the fourth quarter, compared to the third. And the average active drilling rigs increased 6%.

Our Rocky Mountain operations had an outstanding quarter leading the revenue growth for regions within the US/Mexico operations. Revenues improved sequentially in most of the US regions, particularly in the Barnett and Marcellus shale areas. Revenue from the Gulf Coast and East Texas regions were down sequentially, primarily as a result of the hurricane interruptions.

Year-over-year, US/Mexico pressure pumping services revenue increased 19%, again, with the Rocky Mountains leading the way. Mid continent contributed. East Texas regions also contributing to the majority of the revenue increase.

The Canadian pressure pumping revenue was $134 million for the fourth fiscal quarter. It was an increase of 175% sequentially, with rig activity up 156%. Strong submitting and fracturing revenue for the quarter reflects the recovery of drilling activity from the previous quarter’s spring break-up period. Year-over-year, revenue in Canada increased 14%, with average drilling rate activity increasing 24%. Pricing declines year-over-year are primarily reason for our revenue growth being less in the growth and the recount.

Revenue in the international pressure pumping operations increased 12% from the prior quarter to $355 million, and was up 20% or $60 million from the same quarter a year ago.

Talking about the various regions, Latin America region, revenue increased 11% sequentially, on a 3% increase in average drilling activity. Increased in relation activity in Venezuela, Brazil, and Argentina provided for a majority of the increase. Year-over-year revenue for the region improved 17%, led by these same countries, on an 8% increase on average active drilling rig activity.

Revenue from the Middle East region increased 16% sequentially. So that’s from stimulation vessel operating offshore in India, was in operation for the entire quarter after being drawn out for most of the previous quarter. Increased activity in Algeria, of Saudi Arabia, and Azerbaijan also contributed to the revenue increase. On a year-over-year basis, Middle East revenue was up 21%, benefiting, again, from the contracts in Algeria, Kazakhstan, and Azerbaijan.

The Asia/Pacific region achieved a record high revenue level. Revenues there increased 7% to 14% sequentially on a 1% increase on average active drilling rigs. Increased revenue from China, Malaysia, and Thailand provided a majority increase. On a year-over-year basis, from Asia/Pacific region, revenues increased 27%. Again, Malaysia, Thailand, China provided a majority of the increase.

Revenue from our Europe segment was up 1% sequentially, with increased activity and less (inaudible) offset somewhat by the continental Europe, which was down. Revenue was 20% higher in the same – than the same quarter last year for the Europe segment, primarily as a result of increased revenue from the Netherlands and the UK. In Russia, revenue increased 12% sequentially, and also 12% year-over-year. During the quarter, which fully impaired $6 million of goodwill associated with the Russia operations, as challenging market conditions and casual projections indicate that goodwill might not be recoverable.

Revenue from our oilfield service group increased 8% from the prior quarter, and about 23% year-over-year.

Tubular services were up 3% sequentially, and 16% year-over-year, primarily resulting from increased activity in West Africa and Latin America.

Processed pipeline services revenue increased 2% sequentially, and 7% year-over-year, closing out another record year of revenue and operating income from (inaudible) and a great, great year.

Chemical services revenues were up 1% sequentially, and 31% year-over-year, with year-over-year increases primarily resulting from increased activity in the US market.

Completion tool revenue was increased 81% sequentially, and 110% year-over-year, reflecting the inclusion of Intracorp for the entire fourth quarter, and also reflecting increased project related sales in Latin America. Within our oilfield service group, our completion tools business suffered the most from hurricane-related delays and damage. Revenue from completion tool is decreased 25% sequentially, and 8% year-over-year, primarily as a result of lower business in the Gulf of Mexico area.

At this point, I’ll pass it over to Jeff.

Jeff Smith

Okay. Thank you, Bill. Let me just spend a few minutes to speak about the margin performances in the quarter. Consolidated operating income margin for the quarter was 17.1% on revenue of just over $1.5 billion. The operating income margin includes from 15.6% in the previous quarter, and was down from 22.4% reported for the same quarter last year.

Switching over to the segments, on revenue of $765 million for the quarter, our US/Mexico pressure pumping operations reported operating income margins of 19.6%. That’s down slightly from 20.8% reported in the previous quarter. Although approximately stable from the previous quarter, margins were somewhat impacted by hurricane and tropical storm activity in the Gulf of Mexico as well as some (inaudible) expense items over recorded during the quarter in that segment.

Year-over-year, operating margins for the quarter were below the 30.1% that we reported in the fourth quarter of last year. That was primarily due to lower pricing that we’ve experienced between the two periods.

Moving on to Canada, revenues in Canada emerged from the annual spring break-up during the quarter, in the fourth quarter, our Canadian operations has generated $19 million of operating income. That’s 14% of revenue. That’s just after reporting a $17 million operating loss on $49 million of revenue in the previous quarter. Year-over-year, operating income margins for Canada were down 400 basis points, and that was primarily due to lower pricing between these two periods as well as higher material and labor costs that we experienced.

International pressure pumping that was a bright spot for the quarter. Operating income margin for international pumping business improved to 16% in the fourth quarter on record quarterly revenues of $355 million. Operating income margin was up from 14.3% in the previous quarter. That’s up from 13.8% in the same quarter last year.

The margin performance for the quarter reflects new service contracts that we have in the Middle East as well as Asia/Pacific, and also the impact, as though mentioned, with regard to our utilization of the best volume stimulation vessel and service for the entire quarter. Also, a favorable geographic mix and generally favorable weather conditions experienced in the international business in most areas also contributed to overall margin improvement.

Moving to our oilfield services group, revenues for the quarter increased to $276 million, with operating income margin of 20.5%. That’s up from 19.4% in the previous quarter. But that’s down from 23.3% in the fourth quarter of last year.

Sequentially, higher sales in the service activity led to improved operating margins in tubular services, processed and pipeline services as well as completion tools. Operating income margin in the completion tools business and to, a lesser extent, in our chemical services business was sequentially lower due to lower Gulf of Mexico activity. Year-over-year, the decrease in oilfield services margin is probably attributable to lower US activity and margin in our completion tools business.

Now, moving away from the segments for a minute, we reported our statement of operation for the quarter, other net expense of $7.9 million, which includes some items that warrant a little discussion here. As Bill mentioned, we made the decision to fully impair goodwill of $6.1 million associated with our Russia business. That goodwill amount was allocated to our Russia operations in connection with the NASCO transaction back since 1996. The decision to impair Russia goodwill based on deteriorating market conditions and the uncertainty today is to fully realizing the asset value.

We also sold our interest in a small joint venture in Hungary, and recorded a non-cash pretax loss of $2.9 million. This is primarily the result of recognizing to the income statement the Q1-ended translation adjustment related to that joint venture and its operations. In filing, we received a favorable cash legal settlement of $4 million for a non-operating venture-type event during the quarter. Although some of these transactions resulted in a net loss of approximately $0.02 per diluted share.

Moving to income tax, our effective tax rate was 32% for the quarter, which was slightly higher than what we have projected from the onset. The rate for Q4 was also higher than the 28.3% in the previous quarter as a result of the non-detectable goodwill impairment charge. And also because in the previous quarter, it included a favorable resolution of a number of tax exposures, as primarily resulting from audit settlements and expiry statutes.

We anticipate that, going forward, our tax rate in FY 2009 will be around 31.5%.

Switching to the balance sheet, we ended the quarter with $556 million of debt. That’s down $45 million from the previous quarter. Cash on hand at September was $150 million. And notable uses of cash during the quarter include capital spending of $181 million, and dividends of just under $15 million.

Our debt to cap at quarter-end was 13.9%, with net debt to cap at 10.5%. (inaudible) to September 30, we purchased $3.5 million shares of our common stock for a price of $44.2 million, or an average price of $12.75 per share. We have remaining authorization to purchase up to an additional $348 million in treasury stock.

In light of the current global financial crisis, I’d like to take a minute to make a few comments on our capital structure. As I mentioned before, we have $556 million of debt at quarter-end. Most of the outstanding debt includes $250 million of fixed senior notes with a coupon of 5.75%, which is due in 2011. Also, we have a $250 million trans [ph] of fixed rate senior notes with a coupon of 6%, which is due in 2019. We have cash, as I mentioned, on hand at quarter-end of $150 million, with a portion used for share buybacks after quarter-end. And finally, we have a $400 million revolving credit facility only available with no outstanding borrowings.

So our balance sheet is in good shape from a liquidity standpoint. At this time, I’ll turn the call back over to Bill for his comments on outlook.

Bill Stewart

Okay, thanks. Yes. I’ll spend a few minutes here on what we see in terms of the outlook for this first fiscal quarter. The current commodity pricing current environment is causing oil and gas producers to re-evaluate their North America drilling and spending plans for 2009. I’m sure all of you are monitoring that as we are. We’ve been monitoring this very closely.

Until a great number of the producers firm up their 2009 AMP spending plans, we believe that any guidance that we might convey for our projected earnings for the whole fiscal year of 2009 would be speculative at best. We do have a plan. We have an idea of what we think the year will probably ought to be, but we do need this feedback from our customers to really get it to where we feel more comfortable with it.

We hope to be able to extend some guidance for (inaudible) at our next earnings conference call. But for now, we’re going to restrict our guidance and outlook to the first fiscal year of the company ending December 31. Now, in the US market, we expect the average drilling activity to decline in the range of 3% to 4%, compared to the fourth fiscal quarter of ’08. That’s about 60 to 75 rigs from the current levels.

We haven’t experienced any meaningful slowdown thus far, let me emphasize that. We’re very busy. And again, we haven’t experienced any meaningful slowdown thus far for October. October will be a strong month. But our projections are largely based on the expectation that drilling activity will decline during the holiday season, this is Thanksgiving, and also Christmas and New Year’s. And so that’s kind of where we’re coming from.

We expect US pricing in the quarter to remain generally comparable to what we experienced in the last couple of quarters. So pricing is pretty good. We expect it to prevail over the quarter as I indicated.

We think Canada drilling activity will decline slightly as well in the quarter for basically the same reasons. Our forecast also takes into account the negative impact from the strengthening of the US dollar relative to the Canadian dollar, particularly if the exchange rate movement that occurred in October continues throughout the remainder of the quarter.

Our revenue from international pressure pumping is expected to be slightly lower in the first quarter, compared to a record level of revenue we just reported as certain projects in Europe and Asia/Pacific are completed during the fourth quarter – that were completed during the fourth quarter, and really are not expected to repeat themselves. We also typically experience some inclement weather in certain international sectors during our first fiscal quarter, which could negatively impact revenues and operating income. And we’re assuming that some of that will occur during the quarter.

Our oilfield service group, we expect revenue this quarter to be down 6%, 7% from what we reported in the fourth fiscal quarter. This projected decrease is primarily due to normal seasonal activity declines for the processed pipeline serviced business. That business also had a significant amount of project work that concluded in the fourth quarter that is not expected to repeat in the current or first fiscal quarter. Now, excluding processed and pipeline services, the revenue from the oilfield service group is expected to be up 3% to 4% for the first fiscal quarter, whereas operating income margin is expected to hold pretty steady with what occurred in the fourth fiscal quarter.

Now with these assumptions, we’re currently projecting diluted earnings for the first fiscal quarter of ’09 to be in the range of $0.48 to $0.51 per share. Now, venturing off and attempting to look somewhat beyond the first quarter, with the current market price and credit environment, we anticipate that North America drilling activity will be lower in ’09 compared to ’08. The extent and duration of the projected decline is somewhat uncertain at this time. But we’re prepared to implement necessary and prudent cost adjustment and measures to reflect drilling activity levels as they’re experienced.

On the other hand, historically, international drilling programs seem to be longer term in nature, and therefore, less affected by short term swings and volatile gas prices. Consequently, we expect to see our year-over-year revenue growth in our international pressure pumping operations based on contracts in place and current prospects. So we’re expecting revenue growth in our international operations to prevail.

Our oilfield service business reported solid growth in fiscal ’08, as expected to continue this growth trend in ’09, particularly outside of North America as these product lines are further expanded and to the established international footprint that BJ has in place. With our strong balance sheet and experience in management, we believe we’re well positioned to navigate through this next fiscal year. We continue to believe in our strategy and the long current fundamental outlook for the industry.

In closing, I’d like to remind everybody that any reduction in drilling activity will result in the corresponding reduction in oil and gas production. And with declining rates as they are in the US and Canada, there will be a quick rebalancing of oil and gas supply and demand leading to the need for more drilling to be – maintain the balance. I expect any drilling activity reduction that we’re confronted with to be a fairly short duration at this time.

Now, we’ll open it up for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Our first question will come from Brad Handler with Credit Suisse.

Brad Handler – Credit Suisse

Thanks. Good morning.

Bill Stewart

Good morning.

Jeff Smith

Good morning.

Brad Handler – Credit Suisse

Thank you, by the way, for the very thorough color on the guidance. I appreciated that very much. I’m sure others did too. Can you speak a little more to some of the trends that I know there’s a lot of conversation about with respect to the kind of the service intensity mix rising, and how that is an essential offset to recount declines. We think about the Haynesville and some of the other developing shale place. How are you guys thinking about that, maybe specifically, you can address capacity moves into the Haynesville and some of these other places in place now? So how that affects your revenues for the current fiscal quarter one versus what you had last quarter?

Bill Stewart

Well, for the first fiscal quarter one, we’ve seen very minimum activity reduction occurring, so. The envisioned, any adjustment in capacity whatsoever, these – you may see some shifting of facet over time out of some of the regions that are more mature, and to some of the regions such as the Haynesville, Lafayette Ville, Marcellus place where there are some expensive leases in place that need to drilled to maintain. And the potential for production is quite significant. But that’s going to play out, if in fact it does, beyond this current fiscal Q1.

Brad Handler – Credit Suisse

Could you speak – let me pull back then, more broadly, maybe thinking fiscal ’09 versus fiscal ’08, just how do you see that, some of the service intensity trends playing out? How important a mitigating factor is it likely to prove to be relative to potential recount reduction?

Jeff Smith

You know that’s a – Well, I mean it’s fairly clear that these gas shale areas are more service intensive. And speaking to our primary product lines in those areas, from a fracturing standpoint, they’re quite a bit more intensive. And even the unconventional type gas that we’ve been developing in North America for the last 15 or 20 years.

And they’re not all the same. They Haynesville probably would be in the most service intensive. And it’s a result of the depth of the formation and the multiple zones that are being completed in those wells. I think what we don’t know at this point is exactly how operators are going to be moving their budgets around. And as Bill said, we think if there are going to be some of our customers that continue with their activity plans in the Haynesville because of their need to hold on the leases. But that’s really not perfectly clear to us.

What I can tell you is that our assets that they are highly mobile. And it’s not a – it’s not real difficult for us to respond to changes in activity around North America as we see our customers move bridge around.

Brad Handler – Credit Suisse

That certainly all makes sense. Perhaps I could – I’m sure others would come back to that idea or something like it. But perhaps, I could turn to the CapEx budget of $550 million. How are you all envisioning how that gets allocated within your divisions, equipment domestically versus internationally? How much might prove to be retirement or in – allowing you to retire some older assets that you’ve been working for a long time versus incremental growth?

Bill Stewart

Today, we are very still busy. Utilization is quite strong. And this budget will be more directed to the oilfield service group that we have in the past. It’ll be more directed to the international growth opportunities. And there are some significant opportunities in the US marketplace we’ll have capital directed. We have some – a number of our base locations are just stretched at the seams. And we need to add facilities in a few places. We’re building a place in the Lafayette Ville. We don’t even have a base at that location now, temporary base, as a matter of fact.

And we feel like we need a little better base for the Haynesville area. We have two bases in that area right now. Well consumed some of that in the US marketplace, and some fracturing capacity in these highly intensive areas like Lafayette Ville, Marcellus, and Brakken. We’ll be taking some additional capacity to fill our needs in the currently existing.

Now, all that will be fully utilized in Q1. And we expect it to be fully utilized all throughout the year. But BJ does have a situation that is – we do have capacity that’s split in the US marketplace. That’s a little more than what we need. And we have about 25% of our fleet today that is lower horsepower, and basically, needs to be replaced. And we started our replacement effort back in ’06 or ’07, or eight years ago. And the market (inaudible) that we were not able to replace the capacity. We’ve upgraded more efficient automated equipment.

So anything that we feel that’s maybe slightly in excess of what the need is over the course of the year, forward, or beyond, will go to replace this aged capacity making us much more efficient as a consequence.

Brad Handler – Credit Suisse

Fair enough. One last one for me please. Can you comment on the flexibility that you have within the budget to go – well, presumably to go up, but maybe up and down? And another way of asking it is what are lead times on frac leads at this point or some of the other long lead items on your– ?

Bill Stewart

Yes. Lead times are coming down. Yes, I’ve heard some key pieces of equipment now and the required three months, looks like six months, maybe slightly more than that is hard today. And assuming that we, I don’t if you’re going in this direction or not, but if we had to come back – what you would do in a cutback situation is you’d probably just let the current orders float through and complete that equipment. And then stop adding to the list that would be built six months to nine months down the road, so.

Yes. We’re speaking probably a six-month period before you could really make some significant reduction of the capital spending. But thereafter, there could be some decisions to reduce and effectively bring spending in an overall basis. The real impact for a significant capital budget reduction will be in ’10.

Brad Handler – Credit Suisse

Makes sense, makes sense. Thanks, guys. I appreciate the answers.

Operator

And our next question will come from Dan Pickering with Tudor, Pickering, and Holt.

Dan Pickering – Tudor, Pickering, and Holt

Good morning, guys.

Jeff Smith

Good morning.

Bill Stewart

Good morning.

Dan Pickering – Tudor, Pickering, and Holt

Jeff and Bill, I’m just looking at your guidance for the first fiscal quarter. I guess I’m hoping for a little bit more color here. If I think about where we were in the quarter just reported, $0.57. We had a couple of pennies to hurricane damage. We had a couple of pennies of non-recurring. So let’s call that round number $0.60 to $0.61. So you’ve got a fairly substantial drop off from an EPS perspective. When I heard you talk about your Q1 guidance around the segments, I guess I’m having a tough time finding $0.10 of earnings decline there. What am I missing?

Jeff Smith

Well, I think what you have to do, Dan, is consider the assumptions that we have, particularly from North America. I mean that’s going to be the lion’s share of it. Also, with the – we’ve kind of put a cautionary note out there with regard to the transaction tax for Canada. That’s a local currency functional operation there. And I think, as Bill mentioned earlier, that if we do have some projects that are not repeating in an international market, so the expectations would be slightly down from the earnings front, on the international pumping side.

And then, our oilfield services group, beneath our processed and pipeline businesses, particularly as we get in this seasonal top period for that division, continues to grow. But because of the seasonal decline, we had a rather sizeable project that closed out this last quarter in processed and pipeline that’s going to not repeat this quarter. So you’re probably underestimating the oilfield services side.

And then on the corporate front, we probably have a couple of pennies that we have to give back, driven primarily by – we will begin to start occurring up for the annual incentive, which is going to be at an accrual rate higher than the exit rate that we had. And so that will come into play as well.

Dan Pickering – Tudor, Pickering, and Holt

Okay. So it sounds like, generally, on the operations side, the detrimentals here are going to be pretty high on the down take on revenue.

Jeff Smith

Well, I think on the detrimental side, you can assume the opposite swing as we do on the incrementals. That’s about 30% to 35%.

Dan Pickering – Tudor, Pickering, and Holt

Okay. And switching gears, I guess the other question is, I mean I was (inaudible) to you guys buying stock. Obviously, you got a good price there. I guess the question is, you have a fairly substantial share repurchase authorization remaining. Should we consider you guys as more aggressive purchasers now than we’ve seen you in the past? And how do you compare that against acquisition opportunities?

Bill Stewart

I think acquisition opportunities are still top on the list. I think it’s good to have a little trump power for that possibility.

Dan Pickering – Tudor, Pickering, and Holt

Bill, what do you think, looking at your balance sheet and the credit market as you see them today, could you borrow more money over and above your revolver. I’m just trying to understand if a big acquisition came up, can you do a $0.5 billion deal in today’s market? Can you do a $1 billion deal, and would you want to?

Bill Stewart

We want to if it’s the right sense, for sure, and to the (inaudible) way. And I think we probably could. Jeff might have views on that.

Jeff Smith

Yes. I’ll address that, Dan. We’ve talked to a lot of banks just trying to understand, number one, the risk that we have or the lack thereof today of the syndicate that we have in our credit facility existing and we’ll make sure that that’s in good shape. And thus far, it’s peaking with our bank’s net credit facility. We don’t have any budget seams to be in any kind of trouble.

Going beyond that, going out to get other debts, I’ve been watching very closely, of course, the spreads that wide and quite a bit. So there is debt that’s being issued in our range of credit rating. It’s a little bit more expensive than the five or three quarters, and the 6% of that quarter on their own at all. I think debt can be done. The question is, what window, at what point in time can you actually go in there and access the market. I’ve talked to a lot of my counterparts. And basically, they’re looking for an opportunity, looking for that small window. And apparently, it seems to be quite small.

But there is some debt issuance that is going on out there, but it’s the timing issue.

Dan Pickering – Tudor, Pickering, and Holt

Okay. Thank you.

Jeff Smith

One further thing, I think the better markets are improving from what they were a couple of weeks ago, so. The trend is right.

Dan Pickering – Tudor, Pickering, and Holt

Yes. I agree. Thanks. Thanks, Bill. Thanks, Jeff.

Operator

And our next question will come from Geoff Kieburtz with Weeden Investment.

Geoff Kieburtz – Weeden Investment

Good morning.

Bill Stewart

Good morning.

Geoff Kieburtz – Weeden Investment

Just to follow up on the acquisition front. Are you seeing improving landscape in terms of acquisition opportunities over the last month? Or some other folks have suggested that things are stalled before of the turmoil.

Bill Stewart

Well, I think that these last couple of weeks or three-week or so period, it’s not been long where it’s been extremely conducive to transactions occurring. But I think that as we come out of it, we’re kind of, I think, moving in that direction. I think that – I think that the possibility of transactions would be somewhat enhanced.

Geoff Kieburtz – Weeden Investment

On the CapEx side, you’re looking it next to your $5.55, $5.75, how much of that would you consider to be most mandatory, maintenance capital that you would have to spend under any circumstances.

Jeff Smith

Yes. Let me address that, Geoff. And I’ll give you a little more detail behind that, just the maintenance level. Based on that $5.50 to $5.75, approximately 35% of that is what we put in the maintenance count. And that’s for operations all around the world, including our processed and pipeline. Although they don’t – obviously, don’t have the level of maintenance that our pressure pumping business has.

As Bill mentioned earlier, we do have a need for facilities, to offer facilities along with some general support, CapEx, computers, light duty vehicles, cars. That’s about 15% of that. And that leads about 15% that is for organic growth. And that is spread, again, across all pipelines that BJ offers.

Geoff Kieburtz – Weeden Investment

And kind of a big picture question, Bill. I recognize that nobody really has a crystal ball to see what’s actually going to happen in North America market. But if we think about the last couple of downturns, in my recollection, in one of those you have chosen to protect, share, and prior one, you had chosen to protect margins. The experience in both, how would you approach a steep decline in North America if it were to occur this time?

Bill Stewart

Okay. That seems to be a consistent question on these conference calls. I think that – and it’s a good question, Geoff. It’s a very good question, but I think that it’s a little early for that to be something of – that you can really hang your head on as to have these managers who are addressing these because I don’t – we don’t see any real steep downturn. But we’ve through these things before and they’re not new to us.

As a matter of fact, over the last couple of years, when the market leveled off in North America, we probably were as challenged as any management team in North America to address deteriorating margins. And so we did a lot over that (inaudible) to try to recover and stabilize margins, which we were able to accomplish the last couple of quarters, and which we think will prevail in the current quarter.

But just to kind of address the question that if you have a steep downturn, you start the process letting personnel numbers come down just by attrition. And you go ensure you don’t hire any indirect personnel. And then, you don’t replace the direct personnel to the sense that you can still run your business, and let attrition take it – personnel down. You cut back on CapEx. As I mentioned, there’s about 20%, 25% of our fleet that needs to be replaced. So if you can’t get that CapEx reduced as quick as you’d like, you still have this opportunity that you can make the company more efficient with new capital.

You very aggressively manage your working capital. You make sure your inventories are the right level to your business. And you want those inventories down. You don’t replace them as the business comes down. You really focus on receivables. And we have one of the most effective and aggressive receivable management efforts, I think, of any company, days outstanding receivables are quite low. And you work on those patents. You wait until the last minute to write those checks.

You cut back on all spending, discretionary, even cut into non-discretionary spending. You aggressively negotiate lower prices from your suppliers, both parts and materials because as our capacity is not fully utilized, there’s surely won’t be either. And then, you consolidate or limit operating bases that don’t meet minimum performance criteria. So that’s kind of the one approach to downturn management as we know it.

Geoff Kieburtz – Weeden Investment

If I listen to the points you’ve just made, it sounds like margin and cash flow preservation would be the – would be the priority. Would you let market shares slip in order to achieve those? Or how do you address that margin versus share tradeoff.

Bill Stewart

Yes. Well you wouldn’t. You would want to preserve your market share as we have done over this period. And then, make the opportunities to gain to market share in the process. And we would attempt to approach market share gains with the differentiation, if you will, the capabilities that we have, the technology that we bring to the table that some of these other companies aren’t able to put forth, and distinguish ourselves that way. Try to maintain margins, but gain some business in the process.

And I think you’ll see that over the course of that playing out, if in fact it does, which again, let me say, there’s no sign that it will. But if it does, some of these little guys are going to get squeezed out and consolidated by others.

Geoff Kieburtz – Weeden Investment

Thanks very much.

Bill Stewart

Yes.

Operator

And next we’ll hear from Mike Urban with Deutsche Bank.

Mike Urban – Deutsche Bank

Guys, good morning. What if we revisit the M&A issue a little bit. You’ve expressed a clear preference and desire to do acquisitions. During the most recent off cycle, there are a lot of speculative capacity that came in at the North American pressure pumping frac market. Is that stuff at a price? Or can you anticipate it getting to a price where you’d be interested in acquiring some of those assets or would your preference be for – still be for out assets or companies outside of North America or in other product service line?

Bill Stewart

Currently, it’s for other service lines. Yes. If the price gets so cheap, it would be very tempting to approach another pressure pumping company with the price in play. The value of another pressure pumping company would be the assets. And they don’t bring much else to the table. They don’t bring new region stock rate down. They don’t bring generally new customers. They don’t bring new technology. But they have assets. And so a point in time when we need those assets or they get so cheap that they’re – it’s so tempting that we move forward in that direction, then we will.

Mike Urban – Deutsche Bank

So at this point it’s still cheaper to build versus buy?

Bill Stewart

Yes, it is.

Mike Urban – Deutsche Bank

Okay.

Bill Stewart

Plus –

Mike Urban – Deutsche Bank

Okay. That’s all for me. Thank you.

Bill Stewart

I was going to say, plus if you spend the money on a new service line, and if you spend that money on the new service line at a good price, then, yes, we get something that we can leave our international footprint on assuming that this something’s going to be a US operation or North American operation. With our footprint, we think we can most aggressively grow that business in the international market that continues to expand very efficiently without bill revenues.

Mike Urban – Deutsche Bank

Great. Thank you.

Bill Stewart

Okay.

Operator

And we’ll move on to Pierre Conner with Capital One.

Pierre Conner – Capital One

Good morning, gentlemen.

Bill Stewart

Good morning.

Pierre Conner – Capital One

I think you’ve been on a great question. You guys are on the macro issues, maybe a couple of other ones. Some of the things we’ve heard are that there are still some constraints in some of the ancillary products and services propping acid that were reasons for some of the delay. Is that an opportunity area albeit not a new product line for you that you might pursue, resources such as additional propping or something?

Bill Stewart

We never looked at that as a possible product line at this point. But I’ll have to say, we are kind of defending joint venture partners, if you will, not to the true definition of joint ventures. But we’re doing some things we haven’t done in the past to get propping supplies enhanced. Propping supplies have been negative over this past quarter for shareholders. But with some longer term commitments and more aggressive man expansion from the propping suppliers, our reliefs, (inaudible) probably call some man and better supplies available. In fact, we do some activity reduction. And that will relieve a tension point also.

Pierre Conner – Capital One

Okay. And then, I did tell you there’s a macro, but maybe just your perspective on – you have a plan and you’re waiting to see how it sort of plays out. The question might be, your perspective on how proactive on protecting additional – you did some cost cutting last quarter. Is there additional – how proactive, what’s the next indicator additional headlines on CapEx reduction, for example, from customers?

Bill Stewart

Well, we’re at least – we are monitoring the announcements of our customers and a number of them have announced. The biggest indicator is going to be rig count, permits, I guess, is an indicator. But sometimes it is a little fussy to interpret permit issuances month to month. The real thing is what happens to the rigs, and rig rates, and such as that. It is a leading indicator.

Pierre Conner – Capital One

Okay. One last and more of a mechanical one, probably Jeff, you had last quarter some cost recovery as fuel prices and you pushed through some surcharges, was there anything impacting these margins that were carry through of those surcharges, shot up afterwards as you were getting falling fuel cost or anything of that nature?

Jeff Smith

No. Keep in mind this is our year end. And so we have a – you almost flipped a switch into a new quarter, particularly, as you’re looking at some of your reserves and your accruals, and things like that. And the biggest piece that always hits us in this quarter is the incentive, long term incentive as well as the annual performance bonuses that we have to accrue for starting in Q1. So you kind of reset the – reset the slate, and obviously that’s an indicator that we did not quite reach the targets that we hoped for starting in 2008. So you basically think we talked about some reversals in the prior quarter, this is kind of a true up quarter. And then you reset for the next fiscal year.

Pierre Conner – Capital One

Okay, right. Thanks, gentlemen.

Bill Stewart

Okay. Thank you.

Operator

And now we’ll hear from Robin Shoemaker with Citigroup.

Robin Shoemaker – Citigroup

Thank you. Did you mention the level of job or the amount of job turndowns in the most recent quarter?

Jeff Smith

It was about $54 million compared to $29 million in the previous quarter. And over half of that turned down number had to do with the logistics surrounding the availability of proppings.

Robin Shoemaker – Citigroup

The availability of proppings?

Bill Stewart

Yes.

Robin Shoemaker – Citigroup

Okay. Is that a continuing issue?

Jeff Smith

The issue is relieving itself over time. We have a significant effort ongoing to make sure that the proppings that we’ve ordered get to the right place. We have got hundreds of railcars of proppings all over the country, and sometimes they don’t get there in time. Sometimes one railcar is needed elsewhere, and such as that. So we’re devoting ourselves on the logistics end of it. And we’re also devoting a lot of attention to working with the suppliers to increase their commitments, which they have done. We’ve got starting to – starting to benefit from our levels of commitments a lot as part of this quarter. And we are working on other sources outside of the traditional US and Brazilian marketplace for special proppings and such.

Robin Shoemaker – Citigroup

Okay so this is more of an industry-wide issue?

Bill Stewart

Yes, it is.

Robin Shoemaker – Citigroup

Okay. My other question had to do with whether you have a good read now on the winter drilling season in Canada, or whether it has – you feel that it will be impacted by the slowdown that you have been describing?

Bill Stewart

Canada market has really come back strong after the spring break-up. It had a great quarter last quarter. And today, they’re about where we thought they would be based on our earlier expectations. But as I mentioned, sometimes weather has an impact. It gets cold up there. And then, the holiday season possibly will have some impact. We maybe a little conservative on our Canadian projections.

Robin Shoemaker – Citigroup

Okay. Good. Thank you, that’s all I have.

Bill Stewart

Thank you.

Operator

Your next question will come from Chuck Minervino with Goldman Sachs.

Chuck Minervino – Goldman Sachs

Hi, good morning.

Bill Stewart

Good morning.

Chuck Minervino – Goldman Sachs

I just wanted to touch on the down cycles historically versus now. Your US pressure pumping margins are around 20% now. If I look kind of back to it the past couple down cycles, it looks like it fell more like to the mid teens. And now, I was just curious if that looks like kind of an area where you think it could level off in a current down cycle. Things are different this time around, I guess, there is more pressure pumping supply, but also more horizontal drilling activity. If you could just kind of talk us through if that’s where you think it could level off, or could it be better than that, worse than that, in kind of a down cycle like you have seen historically?

Jeff Smith

It just all depends on how far down it goes. I mean it’s – that you have to assume where you are going for the answer to be available to us. I really can’t answer that until you tell us what the destination is.

Chuck Minervino – Goldman Sachs

Well I guess, maybe we can talk a little bit then about – maybe then I’ll ask you this, your pressure pumping, US pressure pumping margins were down from 30% a year ago to about 20% this year, would you say that the majority of that was price increases – price declines as opposed to higher costs?

Bill Stewart

There are some higher costs, but most of it is price, absolutely.

Chuck Minervino – Goldman Sachs

And so, would you– ?

Bill Stewart

Let me just say this then.

Chuck Minervino – Goldman Sachs

Yes.

Bill Stewart

And this is not – this is not absolute, but I think that the 20% margin level, operating income margins, is a level that a lot of companies will fight to maintain. Okay. It’s not that – it won’t go down if the margin goes down far enough. But it’s a margin level that gives a fair return, but not an extraordinarily great return. So I think the companies will try all they can to maintain a fair return. We all deserve it. We are out there doing all kinds of great things for our customers.

So there maybe some resistance level in the high teens to 20% margin levels. But if the margin goes down a huge amount, and you’ve got lots of excess capacity in the marketplace, it could very easily could go – I guess, go down further. It all depends on how far it goes down and how long you think it is going to be there. Just like in today’s marketplace where our recovery is going to be very quick because of the clear balance between you’ve got – between the supply of gas and the demand for gas, and the deflation rates.

There is huge deflation particularly in the Haynesville area where production is prolific, but decline rates are stagnant. And I don’t think the company or the country is headed to some super recession that means that demand is dramatically decreased for natural gas. I think that there’s a degree of elasticity in the gas demand that will maintain that demand at fairly high levels. So that’s just my view.

Chuck Minervino – Goldman Sachs

That’s very helpful. That’s all I had.

Operator

And our next question will come from Jim Crandell with Barclays.

Jim Crandell – Barclays

Good morning.

Bill Stewart

Hi, Jim.

Jeff Smith

Hey, Jim.

Jim Crandell – Barclays

Bill, Halliburton has said twice in the public forum that US stimulation is the highest return capital expenditure investment they can make at this point in any of their businesses. Would you say it is the same thing for you? And after you answer that, I have a follow-up about the US.

Bill Stewart

You want to address that?

Jeff Smith

Yes. Is it for us. You know Jim, if you look at our oilfield services group in today’s market, I mean I think the incremental investment return is very attractive in today’s market outside of what Chuck commented on the deep decline. We are investing our capital more aggressively in the oilfield services group for that very reason that our returns are higher. I know fully well that as we look into ’09, I think the sentiment is that the market is in decline. So we have, as Bill mentioned, some equipment that is slated to be removed out of the US. And we are trying to get as efficient as we can with our capital investment that we made with recap program, and get those returns up. Now, in terms of Halliburton, across all their product lines, obviously we don’t compete in all their product lines. So I can’t speak to their comment. But I think it’s a fair balance to look at across all product lines that you have and make sure you get the best return for your capital spent. And I think that’s what we’ve done in our $5.50 to $5.75.

Jim Crandell – Barclays

Do you think, Jeff, that the returns in your non-US stimulation businesses are better than US stimulation.

Jeff Smith

It depends on where you are, Jim. We –

Jim Crandell – Barclays

No, today. If you’re looking in making a capital investment.

Jeff Smith

Internationally?

Jim Crandell – Barclays

No. I’ve said it’s US stimulation, is that your highest return area where you can make an investment today?

Bill Stewart

Jim, it’s the highest revenue generating segment of our business. But as Jeff was saying, the returns you get from country to country varies dramatically. And we have countries that get much better returns than what we get in the US marketplace. And we have countries that get worse returns than what we get in the US. But the revenue volume per stimulation is, yes, it’s the highest for the region.

Jim Crandell – Barclays

It’s the highest as well. Okay. And a follow-up on that, Bill, is if the US rig count were to fall more than you expected, just take my scenario, where to fall to 1,600 or so, do you think it likely, under that scenario, you could see another 15% or more decline in US stimulation prices?

Bill Stewart

1,600 rigs?

Jim Crandell – Barclays

Yes. 1,600 rigs working in the US, then declines pretty much in conventional, non-conventional areas.

Bill Stewart

Prices could decline another 15%. I think that would be an extreme result.

Jim Crandell – Barclays

Okay. My second question is, were you saying looking forward that the extent of the weakness internationally you projected totally related to the weather and timing of projects? Or are there certain areas where you think that either the decline in oil prices to where we did – where we are today, our credit concerns, are going to impact activity?

Bill Stewart

I don’t think it’s credit concerns. But yes, we’ve seen a few little spotty places where our people think the activity is going to be down year-over-year.

Jim Crandell – Barclays

Which would those be, could you elaborate?

Bill Stewart

Most of it has to do with oil price. No, I’d rather not.

Jim Crandell – Barclays

Okay. And just to follow-up on a comment that you made in Russia, I think you said in the – one of the reasons for the write down was you talked about deteriorating market conditions. Are you talking about the Russian pressure pumping business in general or just about your business over there?

Bill Stewart

Well currently, I am talking about my business. And yes, I think the pressure pumping business is too much capacity and pricing is not very good at all leading to marginal margin production in the area.

Jim Crandell – Barclays

So getting worse in Russia at this point?

Bill Stewart

I would say it is getting worse.

Jim Crandell – Barclays

It’s getting worse. Okay. And would you say that in Russia the volume of activity is relatively stable, and it is just more companies in there, and more capacity in there. Is that the problem or is actual business going down in Russia?

Bill Stewart

Well, from our perspective everybody is just – because of the credit crisis and because of the stock market collapse in Russia, everybody is closing. There are no big projects going on and whatever projects they’ve got are smaller as a consequence of trying to minimize their cash outflow. So, in the last couple of weeks it has been a more negative turn of events and even before the last couple of weeks it was very negative. Now, this is for us but you have some other companies that have modest pressure pumping operations in Russia which we do. We have a fairly modest pressure pumping operation. Those others will I believe give you the same answer.

Jim Crandell – Barclays

Okay, thank you.

Operator

Our next question will come from Kurt Hallead with RBC Capital Markets.

Kurt Hallead – RBC Capital Markets

Hi, good morning.

Bill Stewart

Hi Kurt.

Kurt Hallead – RBC Capital Markets

Just real quick and you may have addressed it in various responses here and if so you can be brief, it’s fine, we came into 2007 with a concern of rig count dropping fairly precipitously and I think on net reduction basis rigs coming in, rigs being laid up, I think you lost something around 300 to 400 rigs. It sounds like the market is centering around that same sort of issue again going into next year, it seems like there is less capacity coming into the market, fewer tertiary players. So, did ’09 turn out to be any different than 2007, is it going to worse, what is your view on that?

Bill Stewart

2007 was a fairly good year.

Kurt Hallead – RBC Capital Markets

Yes, that is my point. The fact that we are talking about 400 rig drop in the US that’s essentially what we lost in 2007 anyway, got fewer competitors, fewer capacity coming in, is there any reason to think that it is going to be substantially worse than it was in 2007?

Bill Stewart

My memory of 2007 is a little fussy but let me address it, it occurs to me that one thing that you need to take into account is that the experience of pricing erosion that we had particularly in our Q1 2008, so you really start off at a lower base and a lower margin. So, the momentum that was developed into our fiscal 2007, we had a very, very strong Q1 and then pricing erosion kicked in starting Q2. So, I am not sure if I will compare the landscape of our performance in 2007 [ph] with 2009 or that level of activity.

Kurt Hallead – RBC Capital Markets

Okay, alright. Just a reference point the market pricing in $0.50 to $1.00 in earnings for you guys, so is it going to be worse than that?

Bill Stewart

I don’t believe it will be worse than that.

Kurt Hallead – RBC Capital Markets

Alright, that’s it for me, thanks.

Bill Stewart

Thank you, we will do one more question and then conclude.

Operator

We do have a question comes Alan Laws with Merrill Lynch.

Alan Laws – Merrill Lynch

Good morning, I have got a couple of quick ones more follow-ups more than anything. In terms of the rig count in the US, I am just following Jim’s question, what level would you term a modest decline versus say a bad decline or a really, really bad decline? How is that for opening?

Bill Stewart

Modest decline, maybe 150 to 200 rigs something like that. A kind of a really big decline maybe 500 to 600 rigs and a real big decline rig count going down to about 600 rigs, how many is that, 1300 rigs.

Alan Laws – Merrill Lynch

Following that, what would you say the probability of the first two, I don’t want to get to the last one, it scares me.

Bill Stewart

You do a better job than I kind of in that.

Alan Laws – Merrill Lynch

Alright, that’s fair. The other follow-up was on Russia, your larger peers there remain pretty committed to the market, they all made that kind of noise in their calls, you seem a little less enamored, you have been restructuring there over the last year and I was wondering if you could talk about what your plans on the opportunities you see in the market or don’t see?

Bill Stewart

Yes, we have got two operations in Russia, one in (inaudible) deep process pipeline services that is doing extremely well there. I guess if you add their results to the pressure pumping results, they are okay. Then the other operation we have is in Western Siberia pressure pumping mainly stimulation and coiled tubing, small amount of coiled tubing and there is just too much capacity. Everybody under the sun brought frank leads [ph] into the market thinking it was going to be a hugely growing market which it has not and consequently pricing is down quite a bit for pressure pumping stimulation business. Now for companies that have in Russia a number of other service lines that sort of feed off of each other and complement each other, their business in Russia might be quite good but we don’t. We have just those two service lines, one doing great and one doing not so great in clearly different geographic areas of the market. So, that’s our situation in Russia.

Alan Laws – Merrill Lynch

Okay, so the damn Canadians have come in and got the price.

Bill Stewart

You said that.

Alan Laws – Merrill Lynch

I can say that, I am Canadian, I am allowed to say that. The last question is obviously on Canada, you mentioned in previous quarters the potential for moving equipment back up there to take part of the shale surge they have are potentially undersupply of pressure pumping equipment this winter, given the change in that gas prices in the macro, is that the one on the table or you are shelfing that for now?

Bill Stewart

We have to add some more capacity there to take care of all the work that we have we are seeing coming our way and we are building some. We took about 25% of our capacity out a couple of years ago and with these shale formations in the south and in the British Columbia area requiring larger, more higher rate frank leads and in both of those areas then additional capacity will be added not much but some.

Alan Laws – Merrill Lynch

How much horsepower, how many spreads do you anticipate and is that going to be in the next five months or –

Bill Stewart

No, it is going to be over the course of this winter season. I really don’t want to get into that.

Jeff Smith

If I can add a little bit to that Alan, one of the things is in the view of us now having a standardized fleet is that we have the flexibility to decide whether that is what we want to do as the equivalent at that point in time. So, if the market does not cooperate with our initial thinking then that fleet would replace some future capital down the road.

Alan Laws – Merrill Lynch

Okay. So, basically if it gets really tight up there you are going to put the stuff on the road, roll it up there and be available.

Bill Stewart

Well we want to take advantage of any opportunity that we have and that is winter drilling season.

Alan Laws – Merrill Lynch

Okay, sounds good, I’ll turn it back. Thank you.

Bill Stewart

Alright, thank you. Okay, I think we would like to conclude at this point.

Operator

Thank you, and again that does conclude today’s conference call. Thank you for your participation. Have a wonderful day.

Bill Stewart

Thanks, everyone, and we’ll see you in three months.

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