Executives
R. Scott Amann - VP, IR
Jack B. Moore - President and CEO
Charles M. Sledge - VP and CFO
J. Scott Amann - VP, IR
Analysts
James Crandell - Barclays Capital
William Herbert - Simmons & Company
Brad Handler - Credit Suisse
Jeffrey Spittel - Natixis Bleichroeder
Marshall Adkins - Raymond James
Geoff Kieburtz - Weeden & Company
Dan Pickering - Tudor Pickering
Joseph Gibney - Capital One Southcoast
Kurt Hallead - RBC Capital Markets
Charles Minervino - Goldman Sachs
Kevin Simpson - Miller Tebak
Robin Shoemaker - Citigroup
Michael LaMotte - JPMorgan
Cameron International Corporation (CAM) Q3 FY08 Earnings Call October 30, 2008 8:30 AM ET
Operator
Greetings, ladies and gentlemen and welcome to the Cameron's Third Quarter Earnings Release Conference. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Scott Amann, Vice President of Investor Relations for Cameron. Thank you. Mr. Amann, you may begin.
R. Scott Amann - Vice President, Investor Relations
Thank you, Rob. Good morning and thanks to all of you for joining us today. This morning you'll hear from Jack Moore, President and Chief Executive Officer of Cameron and Chuck Sledge, Vice President and Chief Financial Officer. Jack and Chuck will offer some commentary on the results for the quarter and we'll then take time to field your questions.
In accordance with the Safe Harbor provisions of the securities laws, we caution you that some of the statements made on this call may be forward-looking in nature and as such, are subject to various factors not under the control of the company. For a more complete description of these factors and the related risks and uncertainties, please refer to Cameron's annual report on Form 10-K, the company's most recent Form 10-Q and the associated news release.
With that, I will now turn things over to Jack.
Jack B. Moore - President and Chief Executive Officer
Thank you, Scott. Good morning everyone. As you have seen Cameron had another record quarter. Earnings came in at $0.73 a share, up 30% versus last year. Revenues over $1.5 billion which were up 27% versus Q3 of '07 and our backlog is at a record $6.2 billion driven by record bookings in subsea, drilling and valve.
Now let's move on to the question that most of all of you have on your mind and that is how current environments in our global economy are going to impact Cameron going forward. And the answer to that requires a bit of dissection into our backlog as well as trying to predict the certainty of customer's conviction to spending on Cameron's products and services.
Let me address the first as this has more visibility. As stated our backlog is at a record $6.2 billion at the end of quarter three. Of this total $4.3 billion or 70% supports projects targeted for deepwater subsea development. Most of you might think that this number seems high relative to what you know about our subsea business. But embedded in this backlog is not only subsea tree system and the equipment we provide for deepwater rigs, but we also provide subsea valves managing and valve division, subsea chokes and actuation from flow control and top side equipment for FPSO from our separation and process valve divisions.
As for our Subsea systems business unit Cameron booked its largest project ever in quarter three for BP Angola for $850 million. This is a first of four identified projects to be awarded under a frame agreement for the Block 31 development. Worldwide we have booked a total of 144 trees to the third quarter and we continue to see great opportunities for projects going forward.
As for the quality this backlog, less then 10% has been identified to rigs without existing contracts. So could we see some of this backlog at risk going forward and the answer is yes. In fact, we have been approached by one of our drilling contractors regarding a possible cancellation. But that is why we have solid contract terms in place, terms that will keep us at a minimum cash neutral.
I wanted to note Cameron customer base that supports the vast majority of our current subsea backlog of companies like Total, BP, Petrobras, BHP, Noble, Apache, British Gas, customers that take a long term view of this industry.
Now for the remaining 1.9 billion, it is spread across our Surface Systems, Valves, Measurement and Compression businesses, with the majority of this backlog supporting requirements for international customers and projects. Approximately one third of this backlog resides within our Surface systems business unit and more than 50% of our Surface wellhead business is with 10 customers, names like ExxonMobil, BP, Shell, Total, PEMEX, Saudi Aramco and Chevron are at the top of the list.
We see no risk with the current backlog for Valves and Measurement which comprise $700 million of the $1.9 billion as well. However after coming off the records booking quarter in Q3, we've begun to see a decline in our short cycle distributed valve bookings business as rig activities corrected downward over the past several weeks.
This is not unexpected, and as you would probably expect we will began to see the impact of the credit crisis on several of our customers spinning plans within our compression markets, especially within our centrifugal product lines which are primarily GDP driven.
However our investment over the past several years in broadening the product line to serve the API, FPSO fuel gas, boosting and process gas markets should dampen the impact on compression order rates going forward. Now, predicting the ultimate impact, global economic crises will have on Cameron's customers, that is difficult to predict at this time, as many of them are still trying to figure this one out as well.
We have seen a good number of independent operators announce CapEx cuts. Most of them, we provide very little product too. But we understand the pressures that reduced activity will place on the service industry margins and their own investment decisions in both technology and infrastructure. So you can expect us to keep a tight reign on spending, work closely with our suppliers to take advantage of lower steel and transportation cost and stay very, very close to our customers.
Let me leave you with one of these points as we entered these uncertain markets before I turn it over the Chuck. We have a record backlog, our customers have been long term view of the industry, 70% of our backlog is outside of North America, our balance sheet and cash position has never been stronger, a great breadth of product systems and service capabilities that customers value, and finally, our people who have managed through times of uncertainty before. Chuck?
Charles M. Sledge - Vice President and Chief Financial Officer
Thanks, Jack. A few additional comments on our results and expectations. We ended the quarter with $1.4 billion in cash, which exceeded our outstanding debt. As Jack mentioned, this financial flexibility positions us well to take advantage of opportunities as they come up in this period of uncertainty. During the quarter we generated $263 million of cash from our operations, $512 million year-to-date. That's up from $167 million through the first nine months of 2007. This increase was driven primarily by a moderation of working capital requirements, particularly inventory.
For the year, free cash flow should be closer to$ 400 million, that's up from last quarter's guidance of $350 million. Our CapEx for the quarter was 64 million. For the year we expect CapEx of about 260.
During the quarter, a $106 million of our 1.5% of convertible debentures were redeemed, or 44% of the total. In addition to repaying the principal amount in cash, we issued 4 million shares to redeem these debentures. Now, these shares were already in our diluted share count.
Before I cover our fourth quarter guidance, a few additional comments on our backlog; all of our backlog represents firm contracts from our customers. We do not book backlog based on Letters of Intent. We are protected by strong cancellation provisions in our project related backlog and we are cash ahead on this backlog. While we can't ignore the risk of cancellation, we believe our backlog should hold up well overall.
Moving on to our fourth quarter guidance; we expect earnings per share of between $0.74 and $0.76. Embedded within this guidance is a 32% tax rate, D&A of $34 million and a share count of $227 million. This guidance does not include any non-cash charges from terminating our U.S. pension plan during the fourth quarter. This non-cash charge should approximate $0.09 per share.
With that Scott, let's open it up for questions.
J. Scott Amann - Vice President, Investor Relations
Okay Rob, we can open up for Q&A please.
Question And Answer
Operator
Thank you sir. Ladies and gentlemen, we will now be conducting the question-and-answer session. [Operator Instructions]. Our first question is coming from the line of Jim Crandell with Barclays Capital. Please proceed with your question.
James Crandell - Barclays Capital
Good morning, guys.
Jack B. Moore - President and Chief Executive Officer
Good morning, Jim.
Charles M. Sledge - Vice President and Chief Financial Officer
Good morning, Jim.
James Crandell - Barclays Capital
Jack, could you elaborate a bit on other items that went into the order rate in the fourth quarter and the drilling and production side. And then could you give us your thought on what you would expect at this point in time in subsea tree orders sort of industry wide '09 versus '08?
Jack B. Moore - President and Chief Executive Officer
Well, let me address the first question regarding the Drilling and Production System orders in the fourth quarter... in the third quarter, excuse me. We had record bookings for Subsea Systems as you have seen. We had over $950 million that came into the quarter from Subsea Systems, and a lot of it driven by the BP Block 31 orders as you have all read about.
On the side with our Drilling Systems, it was another record bookings quarter. Drilling Systems came in at over $570 million for the year... for the quarter, that consisted of 6 deepwater stacks and various other equipment, risers and so forth that supported that work. Again, a record quarter for Drilling Systems.
And on the Surface Systems side, again it was another great quarter for Surface. Surface came in a little over,
Charles M. Sledge - Vice President and Chief Financial Officer
About 290 million, yes.
Jack B. Moore - President and Chief Executive Officer
And the balance would be Flow Control, it'd be Petreco, also the overall order input for Drilling and Production Systems is almost $2 billion for the quarter.
Now for the subsea orders going forward, Jim, we somewhere this year I think Quest numbers are somewhere in the 420 to 450 range. Cameron's as I have said booked 144 trees so far quarter... through the first three quarters. The outlook for next year, I have not seen Quest latest numbers, and I don't think they have actually come out with any. Our number would probably be somewhere around 500. It's not a Cameron number, that's the total number that Cameron has looked at. And that range probably is plus or minus 10%.
James Crandell - Barclays Capital
Okay Jack would you then it sounds like you don't expect any delays as a result of the credit crisis in the subsea tree side and if you do may be you could correct me. And then secondly could you talk about the impact that, that might have on deepwater rig orders then in 2009?
Jack B. Moore - President and Chief Executive Officer
Well we don't see any impact on the subsea development side. There is so much momentum going on there, Jim that... our customers and we talked to most of everyone of them here in the last several weeks are moving forward with all of those plans. Would we see some of the rigs that have been talked about as... where slot are being held where they do not have firm contracts slot and continue to vacillate, I would think you would.
Now saying that Petrobras, I think as most everyone knows has recently put four packages together, seven rigs per package. Their intent is to get those packages out to tender at the end of year, at least two of those packages from what I understand. And their intent is to move forward with building those rigs in country and awarding those some time in '09.
So that will be a big deal. And I would tell you Cameron has over 50% of the installed base on the block containers and control systems in Brazil today. We have the premiere aftermarket facility in Brazil today. So I would say we're pretty well positioned to participate in that activity.
James Crandell - Barclays Capital
Okay and one quick final question. Could you elaborate a little bit on the strength in valve margins in the quarter, that was one area that was better than what I would have expected?
Jack B. Moore - President and Chief Executive Officer
Well, we got beat upward a little bit last quarter. And we told you we are working on it. So I will let Chuck elaborate on that.
Charles M. Sledge - Vice President and Chief Financial Officer
I think, Jim you saw improvements in pretty much all of our different business within there. We did increase our prices, as we said we would and that has taken effect and businesses that performed well. And so I think you can congratulate him on a good job.
James Crandell - Barclays Capital
Okay, that does it for me. Thank you.
Jack B. Moore - President and Chief Executive Officer
Thank you, Jim.
Operator
Thank you. Our next question comes from line of Bill Herbert with Simmons & Company. Please go ahead with your question.
William Herbert - Simmons & Company
Thanks, good morning guys.
Jack B. Moore - President and Chief Executive Officer
Hi, Bill.
William Herbert - Simmons & Company
Just to probe a little bit more deeply with regard to what you are hearing from customers and what your expectations are. And let me put this forward as a thesis here and let you sort of react to it. My understanding is that with regard to set of very consequential ultra deepwater projects such as Pazflor and Usan. Total that used $65 oil price assumption in order to sanction the project and under that scenario they would get sort of 12% internal rate of return on that project. Don't you think that at a minimum while the structural subsea story has long term legs to it, that the slope of ascent and the sense of urgency on the part of your customers is going to moderate here?
Jack B. Moore - President and Chief Executive Officer
Bill, that's a great question. But I think there maybe one better served to ask the operators. We haven't seen any indication. We haven't seen any feedback coming up that these guys want to slow down. And we think, we meet with them very, very routinely. I think for project like Usan and Block 31 with how much investment they already have in place. Their production sharing agreement is also going to drive their need to complete this project's great commitments?
William Herbert - Simmons & Company
Yes. See, I think if the project is sanctioned then, no that's a different question. I am talking about with regard to the actual evaluation of the project and leading up to the sanctioning of it. I would suspect, and frankly based upon feedback that we've heard directly from them that yes, longer-terms, they see these projects going forward. But, again, sort our favorite anecdote coming from one of them is, past two or three years, we've been compelled to build a house in year, and now we're taking four years to do it. There is no reason to rush as much as we have. That's the takeaway that we have received, and I was just curious at your, sort of reaction to that?
Jack B. Moore - President and Chief Executive Officer
We haven't seen it.
William Herbert - Simmons & Company
Okay. And so, let's sort of push that ball further down the road a little bit. In the event, that let's say, the story necessarily isn't structurally impaired. But there is a more moderating tone to the cycle. What does that do with respect to your capacity expansion plans and your capital spending plans?
Jack B. Moore - President and Chief Executive Officer
Well, I think we've been pretty forthright in saying that our need to move capacity into not only build our capacity to deliver subsea equipment. But also move it to lower cost areas that we can operate in. And, so it has the... it's a twofold... our reason is two fold in that respect. If we see demand contract, we feel we have opportunities and flexibility in which to contract to and be as cost competitive business as we need to be to maintain our competitive position in the marketplace.
William Herbert - Simmons & Company
Okay. And then shifting gears...
Charles M. Sledge - Vice President and Chief Financial Officer
Those investments still make sense based on our overall strategy of positioning ourselves to be a lower cost producer.
William Herbert - Simmons & Company
Yes. Shifting gears from sort of defense to offense, given the sort of catharsis over the past two months. Are you finding with respect to deal flow and acquisition opportunities, are they more savory now, more plentiful or what's the overall environment from that standpoint?
Jack B. Moore - President and Chief Executive Officer
I'd like Chuck answer them.
Charles M. Sledge - Vice President and Chief Financial Officer
I think its going to get better. I don't think that sellers and buyers deal value have converged yet.
William Herbert - Simmons & Company
Yes.
Charles M. Sledge - Vice President and Chief Financial Officer
I think most of the deals that were being talked about two months ago have been put on hold with the valuations concerns. But I do see that in this period of uncertainly, at some point the sellers and buyers converge on value and at that point, I think you'll see a pretty robust market.
William Herbert - Simmons & Company
Okay guys.
Jack B. Moore - President and Chief Executive Officer
We like our position with our cash.
William Herbert - Simmons & Company
Oh yes, absolutely. There is no doubt about that. Thank you.
Jack B. Moore - President and Chief Executive Officer
Thanks Bill.
Charles M. Sledge - Vice President and Chief Financial Officer
Thanks Bill.
Operator
Our next question is coming from the line of Brad Handler of Credit Suisse. Please go ahead with your question.
Brad Handler - Credit Suisse
Thanks, good morning.
Jack B. Moore - President and Chief Executive Officer
Hey Brad.
Charles M. Sledge - Vice President and Chief Financial Officer
Good morning Brad.
Brad Handler - Credit Suisse
I guess maybe I'll come back to couple of things of the first questions questioners have gotten to, just cycle back with it, first on the valve side in the quarter. I guess pricing sounds sustainable if you will, but if you could just sort of speak to where you got your pricing gains, your view of sustainability. How much of it was related to the short cycle business versus some of the other areas, some of the other side?
Charles M. Sledge - Vice President and Chief Financial Officer
The Valve group has two short cycle businesses within it, the Measurement and Distributed and we were very successful in getting price there. While Jack did mention, the order flow was down, it is not down to such a level that concerns us on pricing at this point in time.
And what the future holds depends on where the North American rig count gets to. So I think when you look at sustainability of that margin, unless the correction in North American gas gets so severe that some of our competitors do crazy things, I think within a range, we should be able to sustain our margins.
Brad Handler - Credit Suisse
That's encouraging, but I guess... okay, let me follow-up on that. Just if you could put some parameters about what severity is, I suppose. And then if you can calibrate in terms of rig count or if it's your thinking about within percentage range is there something?
Jack B. Moore - President and Chief Executive Officer
That's a tough one, we... I mean, we obviously have seen a number of the independent announce some pretty significant cuts. How that equates to actual rigs that come down and actual rigs that stay down. It's way too early for us to put that number out there. And it would strictly be a wild guess.
Charles M. Sledge - Vice President and Chief Financial Officer
The other wild card in this Brad is the raw material cost. And that's what we got behind the wall earlier in the years. We told you we've got to make up for... got where we needed to be in the third quarter. And so, you have this balancing of how much does your cost come down versus how much... if you get some market pricing pressure do you have come down? So, that why we feel relatively comfortable at some things going on out there that could offset each other.
Brad Handler - Credit Suisse
Yes, that makes sense. But just...
Charles M. Sledge - Vice President and Chief Financial Officer
And would that really be at 24%, I don't know, but within a range, they should be fairly good.
Brad Handler - Credit Suisse
Okay. Just to throw one other thing into the mix, I don't know if it will help us. The notion of how much is now being outsourced versus insourced? Obviously, you had your big initiatives in Italy as in the in sourcing. But, is that... is there a flexibility within your supply chain, now to in source that much more if there is a bit of a turndown, does that offer some support potentially as well?
Jack B. Moore - President and Chief Executive Officer
Absolutely, that's one of the driving initiatives for us in Romania with our Surface Systems business.
Brad Handler - Credit Suisse
Right. [Indiscernible], actually I guess. I would like to put in one more on the CapEx question, can you give us preliminary thoughts on CapEx for 2009 and where it would be directed?
Charles M. Sledge - Vice President and Chief Financial Officer
Yes, I think, when you looking at kind of CapEx, we spent the last couple of years. If you make the assumption that we are pretty much where we need to be on capacity given the outlook. You'll probably see the CapEx come down a little bit. How much, we're not through our planning process yet.
Brad Handler - Credit Suisse
Okay fair enough. Thanks. That's helpful. I appreciate it.
Operator
Thank you. Our next question is coming from the line of Jeff Spittel with Natixis Bleichroeder. Please go ahead with your question.
Jeffrey Spittel - Natixis Bleichroeder
Thanks, good morning guys.
Jack B. Moore - President and Chief Executive Officer
Good morning Jeff.
Charles M. Sledge - Vice President and Chief Financial Officer
Hi, Jeff.
Jeffrey Spittel - Natixis Bleichroeder
Just wanted to see if you could drill down a little bit for the short cycle businesses for Valves. I guess you had indicated in prior quarters that when you saw a little bit of a slowdown in North America in 2007, people had an opportunity to work down inventory levels, is are we getting to that point as of yet or is that sort of an early '09 event and then can you give us a general sense of how long that may take to work off with a pull back in North America?
Charles M. Sledge - Vice President and Chief Financial Officer
We noodled on that a lot as well and because it's... we had an amazingly strong quarter in Q3 with our distributed valve business. It was bookings that we quite honestly were amazed as to how strong it was. And it's still strong today, not as strong as it was. We see it coming down slightly.
We fully expect that the rig count will come down as Chuck said earlier in his comments is that we'll see that business impacted quicker and you make a good point Jeff. They will... our customers which are the Wilson's, [indiscernible] and these guys will work that inventory down. And we have a nice backlog that will continue to feed off and supply these guys over the course of that correction.
It will come back as quickly as it will go away. That's the one thing we've seen about that business.
Jack B. Moore - President and Chief Executive Officer
Jeff I'll also add that in late 2006, early 2007 when you saw that phenomenon, you never saw the revenue of distributed valves go down.
Because we were working off the elevated backlog. Will that happen this time, just depends on where the rig count goes?
Charles M. Sledge - Vice President and Chief Financial Officer
I tell you what too. I think one thing we did learn through that downturn we did see. We have a much better working relationship with our supply chain today and with our customers. We have good visibility to the inventory they have that is Cameron and they are managing their cash flows as aggressively as we do. So, it may not be as long as the protracted period to work those things... to work those inventories down in this environment. We will just have to wait and see how big of the correction there will be in rig activity.
Jeffrey Spittel - Natixis Bleichroeder
Okay, I appreciate that and then switching gears over to the engineered valve business. Understanding that it is typically pretty lumpy and project driven. Along the same lines of what Bill was asking you about in the subsea market, are you seeing any sort of moderation there in terms of customer appetites for these projects or are they at the same point where they have a lot of sunk costs invested in the project and they are kind of still keeping their foot on the accelerator at this point?
Jack B. Moore - President and Chief Executive Officer
Well, that business, I wish it would accelerate all the time. In the tap that breaks every now and then, because there are so many other variables that come into the play installing pipeline infrastructure, just all the installation requirements that are permitting and so forth. But when you think about customers wanting to get access to product and producers wanting to get their products to the customers, pipeline's becoming a necessity and something they really don't want to avoid putting in.
So we continue to see a lot of projects out there. We continue to see... we had a great quarter in Q3. And we see a lot of opportunities going forward. We see thing moving to the right as we do with subsea project sometimes as well. So this business is not always very... it's not easily predictable, but good opportunities out there still going forward.
Jeffrey Spittel - Natixis Bleichroeder
Thanks Jim and congrats on a great quarter, I will turn it back.
Jack B. Moore - President and Chief Executive Officer
Adam [ph], thank you for saying that. We felt we had a quarter too.
Jeffrey Spittel - Natixis Bleichroeder
Yes you did.
Operator
Thank you. [Operator Instructions]. Our next question is coming from the line of Marshall Adkins with Raymond James. Please proceed with your question.
Marshall Adkins - Raymond James
Good morning guys. Got a couple of quick ones here.
Jack B. Moore - President and Chief Executive Officer
Hi, Marshall.
Marshall Adkins - Raymond James
A lot of the guys have been discussing hurricane disruptions and you didn't mention a thing. Do you have any real impact from the hurricane?
Jack B. Moore - President and Chief Executive Officer
Rather we think that on the [indiscernible] we could watch play football that Sunday.
Jack B. Moore - President and Chief Executive Officer
Now actually good question Marshall. We did, we were I'd say our Gulf coast operations, our operations in our offices here in Houston but let me tell you the guys did one heck of the job, rallying around. We worked a lot overtime. They prepared well, we had other locations to pull things through. We did not feel it, our customers really didn't feel it that were counting on Cameron to perform.
And that goes across all of our businesses. Our drilling, subsea, valve businesses all the guys and we had a lot of families disrupted, lot of our work force disrupted, but the guys really rallied, but Gustav affected us more in Louisiana. Ike affected us obviously here in Houston, but we didn't mention it because the guys really did a great job of recovering from it and ended up being a non event at the end of day from a financial performance standpoint.
Marshall Adkins - Raymond James
Wow, that's impressive. One other...
Jack B. Moore - President and Chief Executive Officer
We're a good team of people.
Marshall Adkins - Raymond James
Chuck you might have mentioned this, but there was a big jump in the interest expense. So delve into that a little bit and tell us what happened there and again you may have already said it but I missed it.
Charles M. Sledge - Vice President and Chief Financial Officer
Marshall I didn't actually. It's the bond issue we did in the summer, during the summer. So we had a full quarter of interest on the $750 million of debt.
Marshall Adkins - Raymond James
So, we should expect that to continue going forward?
Charles M. Sledge - Vice President and Chief Financial Officer
That's pretty good run rate. Yes.
Marshall Adkins - Raymond James
Okay, great. Thanks guys.
Charles M. Sledge - Vice President and Chief Financial Officer
No problem.
Operator
Our next question is coming from the line of Geoff Kieburtz with Weeden & Company. Please go ahead with your question.
Geoff Kieburtz - Weeden & Company
Good morning.
Jack B. Moore - President and Chief Executive Officer
Hi, Geoff.
Charles M. Sledge - Vice President and Chief Financial Officer
Good morning, Jeff.
Geoff Kieburtz - Weeden & Company
Just wanted to, kind of get a little bit of calibration. Right now, as you look at next 12 months, how much of your business would you characterize as short cycle?
Charles M. Sledge - Vice President and Chief Financial Officer
About 25 to 30%.
Geoff Kieburtz - Weeden & Company
And as a short cycle business, how much is North America?
Charles M. Sledge - Vice President and Chief Financial Officer
North American gas is less than 20% of our total. I look at it that way.
Geoff Kieburtz - Weeden & Company
And is that 20% this North American gas overlap 25 to 30% as short cycle?
Charles M. Sledge - Vice President and Chief Financial Officer
Yes.
Jack B. Moore - President and Chief Executive Officer
Yes, Jeff.
Geoff Kieburtz - Weeden & Company
Alright.
Charles M. Sledge - Vice President and Chief Financial Officer
Yes, so most of our short cycle stuff is in North America.
Geoff Kieburtz - Weeden & Company
Right, okay.
Jack B. Moore - President and Chief Executive Officer
And Jeff I would say the other thing. You have to look at who we work for in North America. That was why I wanted to kind of reiterate in my opening comments about Cameron's customer base. A lot of the unconventional low pressure work that is really taken of in North America that Cameron touch it, but parts of Cameron business in North America does not touch it.
And we tend to focus on the high pressure deeper plays such as the Haynesville versus the some of the Marcellus, that's going on up in the North East. We would hang out more in that deeper structures and the half pressures structures. And we did... we would in the shallower lower pressure structures. That's where we generate more and more of our revenue stream.
Geoff Kieburtz - Weeden & Company
Yes, you've just anticipated my next question.
Jack B. Moore - President and Chief Executive Officer
Okay.
Geoff Kieburtz - Weeden & Company
All right. And then shifting to the backlog driven business, can you elaborate a little bit on your comments about your cancellations, is the cancellation risk in the backlog different on the subsea business versus the drilling business versus the other parts of the backlog?
Jack B. Moore - President and Chief Executive Officer
Well, the reason I wanted to highlight to you the fact that we do have some of our what I would call our deepwater focus backlog that is, for drilling contractors, they do not have contracts for their rigs. And if we want to handicap all of our backlog and say, what would be at risk. I mean, we look at our total backlog, and we've gone through this, and scrubbed it pretty hard. This is the area that you kind of start focusing on in looking there.
And then you start trying to dive into the quality of those customers and the ability of those customers if they are financing at risk is there any element of that... of that commitment that they made to us that could go south. Two days, we've had one customer approach us recently about canceling his agreement. Now, you've got to keep in mind that we've got a lot of their cash already. So, for them they walk away from this, it's a difficult decision from them as well.
So, I don't know where that's all going to come out. We highlighted the risks because we don't have total control over the customer, that says, okay, I don't have... I am not going to plan or buy for the rig. I don't have financing, only option is to cancel. But, contract terms keep us whole, and in fact keeps us ahead of the game in most cases
Geoff Kieburtz - Weeden & Company
Okay but the contracts do contain the allowance for a cancellation based on either financing or let's say for the better convenience?
Charles M. Sledge - Vice President and Chief Financial Officer
No.
Jack B. Moore - President and Chief Executive Officer
No. There is not cancellation provision for convenience. They can't cancel and there is a contractual obligation to us if they do to keep us whole, plus our margin.
Geoff Kieburtz - Weeden & Company
And does that, is that peculiar to the drilling products or does that also apply to subsea?
Jack B. Moore - President and Chief Executive Officer
Yes subsea, I am sure, they have the ability to cancel, but I just don't see any risk in that.
Geoff Kieburtz - Weeden & Company
I understand.
Jack B. Moore - President and Chief Executive Officer
In that backlog.
Geoff Kieburtz - Weeden & Company
You mean subsea at the same contract terms.
Jack B. Moore - President and Chief Executive Officer
They are quite... they're pretty much similar.
Geoff Kieburtz - Weeden & Company
They are similar. Okay, and then last question. You noted in the release, that you were buying the shares, the price adjusted that was just beginning in the quarter. What are your thoughts in terms of buybacks here?
Charles M. Sledge - Vice President and Chief Financial Officer
Yes, we follow a pretty disciplined approach. We're a weighted average buyer, obviously we put in 10b-5 letter before we entered our blackout period. That letter got filled in the first seven days of the quarter. So we if we were buying shares in the second quarter, third quarter, you will see continue to buy share in the fourth. We think it's a good use of some of our capital.
Geoff Kieburtz - Weeden & Company
Okay, great. Thank you.
Jack B. Moore - President and Chief Executive Officer
Thanks Geoff.
Operator
Our next question is coming from line of Dan Pickering with Tudor Pickering. Please go ahead with your question.
Dan Pickering - Tudor Pickering
Morning.
Jack B. Moore - President and Chief Executive Officer
Morning, Dan.
Charles M. Sledge - Vice President and Chief Financial Officer
Hey, Dan.
Dan Pickering - Tudor Pickering
On, Chuck, if you could just do us a favor here and walk us through the balance sheet. Really what I'm trying to get to is sort of the fire power and that variability question. But can you walk us through kind of maturities and structure of the $1.250 billion of long term debt?
Charles M. Sledge - Vice President and Chief Financial Officer
Yes, you have about $110 million left of the 1.5% converts that we can call in May '09. Then you have $500 million of this 2.5 converts that are callable in May of 2011... summer of 2011. And then you have, obviously the ten years and the 30 years, we went out for right before August, that's started happening with the credit markets. And we have our revolver that is a three year revolver from, so it'd be 2011 as well.
Dan Pickering - Tudor Pickering
Okay. And how much is left on the revolver?
Charles M. Sledge - Vice President and Chief Financial Officer
We have about $50 million, that we have $65 million drawn of $15 million or so direct borrowings and $50ish million of LCs
Dan Pickering - Tudor Pickering
And total capacity then?
Charles M. Sledge - Vice President and Chief Financial Officer
585.
Dan Pickering - Tudor Pickering
585.
Charles M. Sledge - Vice President and Chief Financial Officer
Yes.
Dan Pickering - Tudor Pickering
Okay. And I so guess that, where I am going with this is essentially no net debt. The acquisition market is kind of frozen. Your stock trades at somewhere between four and five times EBITDA. Jack, are deals are going to be four or five times EBITDA. How much fire power do you think you have given current credit markets? I mean, can you easily do $1 billion deal if you see a good one? What's your comfort level around using the balance sheet in the current market?
Jack B. Moore - President and Chief Executive Officer
I think question you raised in the beginning is, what is the valuation, what's the right multiple is the one that when, that we struggle with now. When you look at what's out there, is anyone willing to sell at the four, five times multiple. And, so that's why, Chuck I think made a good point, you look at Cameron, we are a pretty good buyer right now on your own stock. But are we compelled to do something, we're not under any urgency to do anything Dan, but I would tell you that we're in a position where we have the flexibility to look at lot of things. And we like the position we are in.
And there are some things that are out there that we still believe going forward with a long-term view in this market we feel very positive about our position and our deepwater markets, we feel very positive about our surface and valve markets and compression markets. Things that we think that can complement and be accretive to what we're doing going forward, technically. Our market position, expanding our product line are going to be things we're going to continue to look at. And we love the fact that we got a lot of firepower right now.
Dan Pickering - Tudor Pickering
Yes and do you care to quantify that pow pow [ph]?
Jack B. Moore - President and Chief Executive Officer
It depends on the day and which bank are you talking to.
Dan Pickering - Tudor Pickering
I guess that's a no right now?
Jack B. Moore - President and Chief Executive Officer
Yes.
Dan Pickering - Tudor Pickering
Okay. Second question would be, we've asked in the past and I'll continue that the question you've historically used the Plant Air business in Asia sort of an economic indicator.
Jack B. Moore - President and Chief Executive Officer
The canary in the coal mine as we say.
Dan Pickering - Tudor Pickering
That's right. What are you seeing from that business right now?
Jack B. Moore - President and Chief Executive Officer
The canary is still breathing. The great thing that our guys in compression have been able to do over the last several years is expand the product line. And we have product now that are targeted ATI, FPSO markets, the processor and gas boosting markets.
So it's not just focused on steel plants in auto factories. And if were to look at Cameron 10 years ago when we looked at our plan our business that's really where the markets we were kind of flooded into. So we sell a huge... when we sell that, recession hit us back in and we saw a huge downturn.
This year, we are going to see a downturn in that specific market. We expect to see if the credit crisis is impacting the capability of those folks to expand their footprint and so demand in those markets will fall off. But the other markets continue to be active and we see those opportunities has really been a great way to offset that the other piece of the business.
Charles M. Sledge - Vice President and Chief Financial Officer
Yes, Dan that is... I'll add, that's purely a GDP driven business. Jack pointed out that we have penetrated over the markets which help moderate the down fall, but what drives that business is GDP. The plant air business is really tough right now. The engineered air business is hanging on.
Dan Pickering - Tudor Pickering
So it sounds like it may be a less of initiative for Cameron, but the apples-to-apples Canary [ph] you are thinking that things are slowing in Asia?
Charles M. Sledge - Vice President and Chief Financial Officer
Yes, I think that's a fair comment.
Dan Pickering - Tudor Pickering
Yes, great. Okay, thank you guys.
Charles M. Sledge - Vice President and Chief Financial Officer
Yes.
Operator
Thank you. [Operator Instructions]. Our next question, gentleman will come from the line of Joe Gibney with Capital One Southcoast. Please proceed with your question, sir.
Joseph Gibney - Capital One Southcoast
Morning, everybody.
Jack B. Moore - President and Chief Executive Officer
Good morning, Joe.
Charles M. Sledge - Vice President and Chief Financial Officer
Good morning, Joe.
Joseph Gibney - Capital One Southcoast
Most of my questions have been answered. Just Chuck, just one for you, just following up on a relative to being cash ahead in terms of collected on your projects and backlog. Could you quantify it specifically how far you are ahead relative to cash collected versus cost incurred?
Charles M. Sledge - Vice President and Chief Financial Officer
It's probably a couple of hundred million dollars.
Joseph Gibney - Capital One Southcoast
Okay. And just one follow-up relative to the service market there. Appreciate the color that relative to 50% of your market being allocated to ten customers. North American gas being less than 20% of your total exposure, if I was to drill down on the surface side relative to that what would you characterize your surface exposure here relative to North America gas related activity?
Charles M. Sledge - Vice President and Chief Financial Officer
I would about 35% of our backlog in surface is North America. And it's not... we are unlike in any of the other businesses, about 80% of that is gas. But as I said, some of gas that Cameron is targeted in terms of its products and service and surface is going to be the high pressure deeper gas plays that are going to be the last thing our customers will walk away from.
Not saying that it is... none of it is that risk, even on how deep, or how far these rig counts fall in North America. But, as customers take their programs down, these will be some of the things that give impact of the last, just because some of internally, returns our most projects I think are much better than they are in some of unconventional.
Joseph Gibney - Capital One Southcoast
Okay, thanks. I just want to follow-up on Marshall's question, earlier relatively to the hurricane impact. I thought I missed some touch down passes from [indiscernible] over here, any lingering issues from the supply chain here in the Gulf Coast they're stretching into the fourth quarter that you are seeing, it sounds like that's the case, but you guys seem to be very well insulated it but, certainly that's a team here amongst other players within the group, is this what you're seeing on that front that's actually a non issue for you at this point?
Jack B. Moore - President and Chief Executive Officer
We haven't really, we haven't seen it as an issue, and I wouldn't say that it had an impact to this, because I give a lot of credit to our guys who run businesses for working around these issues. And... but we haven't seen it and it hasn't really been visible to us in terms of the impact and what we see going forward.
Joseph Gibney - Capital One Southcoast
Okay. And, last one Chuck, just, I missed it earlier, what was your tax guidance again for next year, for the rest of this year?
Charles M. Sledge - Vice President and Chief Financial Officer
32% for the fourth quarter.
Joseph Gibney - Capital One Southcoast
All right. Thanks, guys I'll turn it back.
Charles M. Sledge - Vice President and Chief Financial Officer
Thank you.
Operator
Thank you. Our next question is coming from the line of Kurt Hallead with RBC Capital markets. Please go ahead with your question.
Kurt Hallead - RBC Capital Markets
Hey, good morning.
Jack B. Moore - President and Chief Executive Officer
Good morning, Kurt.
Charles M. Sledge - Vice President and Chief Financial Officer
Good morning, Kurt.
Kurt Hallead - RBC Capital Markets
Hey, question I have for you is the on the backlog, when we look at DPS, then we look overall, how much of that backlog is growing through in 2009?
Charles M. Sledge - Vice President and Chief Financial Officer
Typically about 65% of our ending backlog will roll in to the next year, our revenue stream.
Kurt Hallead - RBC Capital Markets
And, is it any higher or different for the DPS business?
Charles M. Sledge - Vice President and Chief Financial Officer
Probably it will be a little less for the DPS because of the booking on block 31.
Kurt Hallead - RBC Capital Markets
Okay.
Jack B. Moore - President and Chief Executive Officer
Andy [ph] we really won't deliver much on the BP Block 31 project to the latter half of '09. And most of that will be some of the early parts of the hit and as we always remind everyone, we're not on a PLC. So this is on project completion on components that we deliver.
Kurt Hallead - RBC Capital Markets
Okay. And is this customer who cancelled this rig deal with you, is that they speculative player, an existing player who is having trouble getting financing. Do you have any additional color on that if you don't want to provide the name?
Jack B. Moore - President and Chief Executive Officer
I really won't but I would tell you it hasn't been cancelled yet. So it's an enquiry.
Kurt Hallead - RBC Capital Markets
All right. And just for reference purposes, the market discounting and earning stream for you guys about $1.15 to $1.16. Here you go. Alright that's it for me. Thanks.
Jack B. Moore - President and Chief Executive Officer
Thanks, Kurt.
Operator
Thank you. Ladies and gentlemen our next question is coming from the line of Chuck Minervino with Goldman Sachs. Please go ahead with your question.
Charles Minervino - Goldman Sachs
Hi. Good morning.
Jack B. Moore - President and Chief Executive Officer
Hey Chuck what's up?
Charles Minervino - Goldman Sachs
I was wondering if you could first touch on... give us an update really on the other three top projects associated with Block 31, the potential announcements. Can you remind us what the time line is on that if you have it and if you still expect that to still continue to be on schedule with what you're thinking?
Jack B. Moore - President and Chief Executive Officer
Yes, good question Chuck. We've just recently met with the BP folks regarding the projects and moving forward. The intent is that every consecutive year and we booked this project in Q3, we would expect to see the next phase of Block 31, I would say in the second half of '09. I don't see any reason at this time and nor do they see any reason at this time if that would change.
And each consecutive project should look pretty much like the first one. So it's about a 150 to 65 well development over the course of these four projects. And that's... they are pretty consistent with what told us from day one when we started working with them on this project and they've stayed with that. Now BP and the partners want to... can make alter or change, pull things forward and so forth, who knows. But I am just telling you what we know today and everything seems to be us as we projected at the back win.
Charles Minervino - Goldman Sachs
Okay. That's helpful, thanks. And Chuck, you had mentioned a little earlier, I think you just mentioned briefly. But if you could just talk a little bit more about the cost side of business, how much of business right now of the COGS is steel right now?
Charles M. Sledge - Vice President and Chief Financial Officer
The majority of the COGS are steel related.
Charles Minervino - Goldman Sachs
And is there a lag affect between... are you already starting to capture the benefits of the lower steel prices and is there like a lag affect on your pricing, on your products going forward beyond that?
Charles M. Sledge - Vice President and Chief Financial Officer
We are a lagger, if you will and when we realize the savings on the steel. Because it's got to go through forge masters typically, first, and out philosophy is just to hold on to that price as long as we can. And so if we can get capture some of that savings before any potential price competitiveness comes into the market, that's just gravy for us.
Charles Minervino - Goldman Sachs
Okay, Okay. Thank you.
Charles M. Sledge - Vice President and Chief Financial Officer
Yes.
Operator
Thank you. Our next question is coming from the line Kevin Simpson with Miller Tebak. Please proceed with your question.
Kevin Simpson - Miller Tebak
Thanks and good morning.
Jack B. Moore - President and Chief Executive Officer
Good morning, Kevin.
Charles M. Sledge - Vice President and Chief Financial Officer
Good Morning.
Kevin Simpson - Miller Tebak
I just had a quick question on guidance. You have done a good job of comprehensively going over what we can talk about I guess about the future. But it just looks for the quarter you have... you would, I am going to presume normal seasonal strength, maybe more muted in compression and DPS usually stronger in 4Q. I would expect it to be.
So it just looks like to get the guidance that's you have to have a pretty good sized fall off in EBITDA in Valve. It sounded like margins we're going to still be okay, you compare relatively favorable for 3Q. So I am just... are you guys baking in a revenue drop and I guess more the relevance would be what it would mean for run rate for '09?
Charles M. Sledge - Vice President and Chief Financial Officer
We think fourth quarter revenues will be flat as to slightly up. We did kind of pull forward a few things in the third quarter because of good execution that would have otherwise gone out in the fourth. So we are thinking revenues are flattish in the fourth quarter, just slightly up.
Kevin Simpson - Miller Tebak
For Valves.
Charles M. Sledge - Vice President and Chief Financial Officer
As a whole for Cameron and I think that's a fair expectation for Valves as well.
Kevin Simpson - Miller Tebak
Okay. And then one other question, it sounded like you're still favorable you know what's coming in large subsea related projects for deepwater developments. I guess I just wanted to comment on Nigeria specifically which has got a lot in the potential backlog ex items for yesterday that it was still asleep and I guess the cabinet is now going to be replaced. So with that, I guess how would you guys characterize that you've got a meaningful presence there?
Jack B. Moore - President and Chief Executive Officer
Right, with that all going on at Usan that we have recently booked, we have a pretty sizable presence in Nigeria. Exxon is going to continue to be... they have a project called Arrow North. Think you would continue to see them pursuing that. Total has the huge portfolio in Nigeria, as there is Shell, as there is Chevron. And I think all the operators would tell that Nigeria is probably one of the greatest potential assets they all have. Saying that, I think they all are very sensitive to the political issues there, and I think we have to ensure that frankly their contracts and the future investments they make are going to be protected. So, that's why I think you continue to see things not happening as quickly as we'd like to see. But there is so much potential in Nigeria, you're not going to see these guys back away.
Kevin Simpson - Miller Tebak
It's okay. Thanks, Jack, that's it for me.
Jack B. Moore - President and Chief Executive Officer
All right.
Operator
Thank you. Our next question is coming from the line of Robin Shoemaker with Citigroup. Please go for with your question.
Robin Shoemaker - Citigroup
Thank you. I just want to ask about the last time that we saw a meaningful downturn in North America. Did you see the impact in pricing as well as volume on your surface business, and or was it principally volume and what would your scenario be for a... if there was a similar, let's say 4 or 500 drop in the U.S rig count?
Jack B. Moore - President and Chief Executive Officer
I would tell you that there'll be some isolated pressure from certain operators that will want to drop price. And then, normally the more price sensitive customers that are out there that... and we have a few. We also have some that said look Cameron the reason we do work with you because we value the commitment to service and predictability and reliability which you deliver.
And we've had long-term relationships with all these customers and they're not going to drive us down and in nickel and dimes when things get tough. But we do have to be conscious of our cost and we have to be competitive and so we'll continue to do the things to keep our costs in line and ensure that we do not let any of the share that we worked hard to get, get away from us.
Robin Shoemaker - Citigroup
Okay. Just one other question, I haven't heard you mentioned... perhaps you did on the call but I didn't hear it, could you give us an update on the old electric subsea production system?
Jack B. Moore - President and Chief Executive Officer
Yes, we've got two or three running, producing gas in the North Sea. Things are going well, the customers are happy, we're happy. We have some additional step-outs that we are looking out with customer there which is Total. I think as we told everyone when we... the key to the all electric is getting it up and running and watching it and monitoring it and understanding, just all the capabilities a system can deliver in a live environment and that's what we're doing right now. It's early days but we like what we see.
Robin Shoemaker - Citigroup
Okay. That's all from me thank you.
Jack B. Moore - President and Chief Executive Officer
Thanks.
Operator
Thank you our final question is coming from the line of Michael LaMotte with JPMorgan. Please go ahead with your question.
Michael LaMotte - JPMorgan
Thanks. Good morning guys.
Jack B. Moore - President and Chief Executive Officer
Good morning.
Charles M. Sledge - Vice President and Chief Financial Officer
Hey Michael.
Michael LaMotte - JPMorgan
Couple of quick on from me, first can you comment about the direction of orders, obviously very strong orders... quarter but can you talk about the direction through the quarter. I guess I'm running under the assumption that often times our quarter 50% or more is down in the final month. I'm curious as to how July compared with September given the credit freezes that we experienced globally in September?
Jack B. Moore - President and Chief Executive Officer
I would tell you, we really didn't see any impact in the quarter relative to the credit crisis. That I think everyone at the end of September, were still trying to figure out just what does this mean. And we have record... as I've said we have record bookings for drilling and we see several drilling orders and purchase orders in September. Our biggest order, which was the Block 31 order though, we secured that in first few lot. It was pretty much spread across the entire quarter. We didn't really see any impact from the credit crisis at the end of the quarter.
Michael LaMotte - JPMorgan
Can you make any preliminary comments on October at this point on year-over-year basis?
Jack B. Moore - President and Chief Executive Officer
Yes, I think what we've characterized that we are seeing some softness in some of the compression business. It's related to GDP, to the GDP driven products. And we are seeing a little bit of correction in our order rates on the short cycle business for distributed. That would be the early indicators. But we're not really surprised by any of that.
I mean that's exactly what you would expect and what's going in the markets today. We still are very positive about our subsea and surface projects around the world. The engineered valve businesses, things that are going to drive the infrastructure to support projects that are on going. I don't see... we don't see anything at this point in time that would tell us those things are going to be deferred.
Michael LaMotte - JPMorgan
Okay. And then last one Chuck, do you have any comments on the change in accounting for converts and what that might mean to '09 earnings having that non-cash interest flow through the P&L?
Charles M. Sledge - Vice President and Chief Financial Officer
Yes, I will bite my tongue a little bit and not tell you philosophically what I think about it. But, we're going to give you guidance in January. And that we're still working through the numbers with our auditors and making sure that everybody signing off. It's a new standard. So everybody has got a different opinion on how to apply it. And we would just rather wait until we get our auditors to sign off on what we're doing on that.
Michael LaMotte - JPMorgan
All right. Fair enough. Thanks a lot, guys.
Jack B. Moore - President and Chief Executive Officer
Thanks again.
Operator
Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.
R. Scott Amann - Vice President, Investor Relations
Okay. That does end for us. Thank you, Rob and thanks to all of you for joining us today.
Operator
Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. .
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