Superior Energy Services Inc. Q3 2008 Earnings Conference Call Transcript

Superior Energy Services, Inc. (SPN)

Q3 FY08 Earnings Call

October 31, 2008, 12:00 PM ET

Executives

Greg Rosenstein - VP of IR

Terry Hall - Chairman and CEO

Analysts

James West - Lehman Brothers

William Sanchez - Howard Weil

James Rollyson - Raymond James

Robin Shoemaker - Citigroup

Byron Pope - Pickering Energy Partners

Mark Brown - Pritchard Capital Partners

David Nierenberg - Nierenberg Investment Management

David Grumhaus - Copia Capital

Thad Strobach - Quattro Global Capital

Joe Agular - Johnson Rice

Gregory Macosko - Lord Abbett

Presentation

Operator

Good morning and ladies and gentlemen, thank you for standing by. Welcome to the Superior Energy Services Third Quarter 2008 Earnings Conference Call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. This conference is being recorded today, Friday, October 31st of 2008.

At this time, I would like to turn the conference over to Mr. Greg Rosenstein, Vice President, Investor Relations. Please go ahead, sir.

Greg Rosenstein - Vice President of Investor Relations

All right. Thank you Vince and thank you everyone for joining today's conference call.

Joining me today are Chairman and CEO, Terry Hall; President and Chief Operating Officer, Ken Blanchard; and Chief Financial Officer, Robert Taylor.

Before I turn it over to Terry, let me remind, everyone that during the call management may make forward-looking statements regarding future expectations about the company's business, management's plans for the future and other similar matters. The company's actual results could differ materially due to several important factors including those described in the company's filings with the Securities and Exchange Commission.

During the call, management will refer to EBITDA, which is a non-GAAP financial measure and in accordance with Regulation G, the company provides a reconciliation between net income and EBITDA on its website.

Now with that, I will now turn the call over to Terry Hall.

Terry Hall - Chairman and Chief Executive Officer

Good morning.

To recap our third quarter, revenue is $490 million, EBITDA was $208 million, net income was $99.9 million equating to a $1.22 per diluted share. Net income was $87 million or $1.07 on a diluted basis when you exclude the net earnings from the hedging contracts at SPN resources.

However as the press release states, the earnings impact from downtime related to hurricane was in the range of $0.12 to $0.15 of that loss about a $0.05 came from shutting oil and gas production at SPN resources and Beryl Oil and Gas. Overall we had an extremely strong quarter. July and August were the best months in our history by far. Some of the factors that led to our record performance are as follows. Gulf of Mexico revenues grew 10% over the second quarter despite the weather downtime as we saw a 30% increase in marine revenue and an 11% increase in well intervention revenue.

Operating margins increase in both the well intervention and marine segments due to increased activity levels. Our domestic land and tip activity increased 7% as revenues in both Well Intervention and Rental Tool segments increased 7%. Demand grew for production related services such as coiled tubing, case to wire line are well controlled. Rental Tools, the primary drivers for an increase in revenue for accommodations and stabilization equipment. Lastly, we continued to execute well on the wreck removal contract.

I will now review the operating highlights by segment and their comparisons to the second quarter of '08. In the Well Intervention segment revenue was $319 million, an income from ops was $90 million representing growth of 8% and 16% respectively as compared to the second quarter. In addition to executing on the wreck removal projects some of the other primary factors driving our growth were increases for several of our production related services highlighted by coiled tubing, cased hole wireline, hydraulic workover, snubbing, and well control services. Increased operating margins primarily reflects utilization increases for many of our services. To some extent, this is offset by downtime in the Gulf and Mexico due to hurricane.

In our Rental Tool segment, revenue was $136 million, and income from ops was $45.6 million. This represents the 1% in revenue and 8% decrease in income from ops. Rentals with some of the higher margin drill pipe and specialty tubulars, which carry incremental margins were lower in the Gulf of Mexico and adversely impacted the segment's operating margin. In fact the Gulf of Mexico is the only real geographic market showing a decrease. Revenue in domestic land markets increased 7% primarily due to increase in the rental tool accommodation and stabilization. Also, international revenue increased 1% due to an increased in drill pipe rentals in South America.

The mix of lower revenue from higher margins drill pipe and specialty tubular coupled with an increase in revenue from lower margin accommodation led to the decrease in the segment's operating margin. In our marine segment revenue, it was $33.9 million, an income from operations of $6.5 million. Revenue was up 30% and income from operations is up 3.5 times in the second quarter. This shows you the leverage in that business.

On the activity side, utilization increased to 81% and 57% in the second quarter. Our average daily revenue of $368,000 was at its highest levels since the second quarter of '07. The average day rate increased 16% in the second quarter, but that was largely due to several days of charging standby rate at the end of August and in early September as a result of whether related downtime.

Standby rate is typically 50% of our full day rate. In addition, we experienced lower rate in the liftboat fleet. As you might expect, liftboat activity strong following this active hurricane season. They are also in the process of increasing day rates anywhere from 7% to 10% on all liftboats.

In fact, for October, our daily average revenue was increased to about 405,000 due to high utilization, which is the 83% in the market as well as some rate increases that we put into effect. We expect with those demand to remain at elevated levels in the first half of '09. This should result a reduce risk of seasonal weakness and typically impact some marine segment during the fourth and first quarters.

Turning to our equity method investments and SPN resources in Beryl Oil and Gas recorded equity income of $23.2 million of which $19.2 million from the earnings related to the change in mark-to-market value of hedge contract I mentioned earlier.

Production to SPN resources in barrel was about 2,200 boe per day and 3,600 boe per day respectively net to superior through August. Production was shut in for most of September because of the hurricanes. Approximately 50% of production remains shut in and will resume once third party pipelines have been inspected and required repairs made. We expect full production to resume by year end.

On the CapEx front, expenditures during the third quarter were $115 million, expansion CapEx represented about 75% of the expenditures. We expect capital expenditures in the fourth quarter to be about $130 million. It's quite conceivable we can delve some of the aspects significantly if we deem it prudent or appropriate. For the year, our capital expenditures will have been between $450 million and $460 million.

We expect fourth quarter G&A to be in the range of $68 million to $70 million. We believe DD&A of 46 to 48 is a good run rate for the fourth quarter due to higher liftboat utilization capital expenditures. On the share count front during the quarter, we re-purchased 1.52 million shares of our common stock at an average price of $36.45 costing us $55.4 million.

In October we purchased another 1.95 million shares of stock at an average price of $20.33 or a total expenditure of $39.6 million. Since we announced our re-purchase plan of September '07, we have re-purchased a $137.6 million worth of common stock. We think 78.5 to 79 million shares is a good weighted diluted share count to use for the fourth quarter.

Looking at the balance sheet, we had approximately $715 million of debt at the end of the quarter. The debt breakdown is as follows. $400 million convertible notes, $300 million in senior notes, mirror debt [ph] of 15. Our debt to EBITDA at the end of the quarter was 1.01. Debt to capital is 37.4%.

From an outlook standpoint, clearly there is a lot of uncertainties, speculations as to what the all service markets would look like in '09 given the recent volatility in the financial markets. We are in the process of budgeting and are not prepared to give guidance for next year. You've already heard a lot of opinions from others, who have greater visibility than we do regarding the macro outlook or at least they will have you believe so.

I can tell you why I think Superior Energy is well positioned and let you draw your own conclusions from there. Our balance sheet is very strong. At the end of the quarter, we had $128 million in cash on hand as well as a $250 million revolver with nothing drawn. As I mentioned earlier, our debt to EBITDA is below 1.01. We were well within all of our financial covenants.

We continue to fund capital expenditures with our cash flow. We are in the process of building our tool 2009 budgets. But as of now, we expect our capital expenditures to be in the range of $300 million to $350 million significantly lower than '08. Our maintenance CapEx is typically $50 million to $60 million.

In addition, we have a flexibility to reduce our capital expenditures further based on market conditions. As an example, we scale back to building cased hole wireline trucks from 13 to 6. We build these units ourselves and it takes 30 days to build. As a result, we have greater flexibility n our competition. It typically takes six to nine months to receive the cased hole wireline truck in the third party. As we assess the market, we can quickly increase or decrease the number of units. And this is fairly typical in many of our product launch, where we have the ability to build our own equipment.

Secondly, portions of our business are insulated from drop in commodity prices and rig counts. The wreck removal project will continue regardless of commodity price or rig count counts. In addition, we anticipate an active year for additional platform recovery work due to the new damage caused by the most hurricane season. Our liftboats should be working consistently during the next couple of quarters assisting customers with the storm recovery projects.

As we discussed earlier, liftboat rates are increasing. In addition, some of our well interventions are also working with storm restoration projects, once the initial damage assessment and platform repair phase is completed. Keep in mind the most of our well intervention services are focused on production related work with services such as coiled tubing, cased hole wireline, and mechanical wireline are not tied to the drilling rate count.

We do have new assets coming online and contribute to our '09 earnings. We are taking delivery of our secondary board at this quarter, and we were close to securing work for it in West Africa. Also during the first quarter of '09, we will take deliveries two of our new 265 foot class liftboats. Given the demand in liftboats markets, those boats should contribute as soon as they are delivered.

We also have assets in Landmark as we think will continue to grow in '09. We have more than ten coiled tubing spreads and more than spreads and more than 20 cased hole wireline trucks in the Haynesville play for example. We've long been in North Louisiana. We considered one of our strongest regions. We're well positioned to participate in the activity that we are quite confident we'll continue there.

We have couple of coiled tubing spreads in Pennsylvania to support the customers in the Marcellus play. We also move cased hole wireline trucks in North Dakota during the third quarter. And we opened the facility Victoria Texas for coiled tubing and pressure control services. Third, while 75% of our rental revenues related to drilling, we had geographic balance in this segment. About a third of our revenue comes from the international market, a third from the Gulf of Mexico and a third from the domestic U.S. markets. About 60% of the Gulf of Mexico revenue comes from the deep water region, which tends to be less volatile as it relates to rig count.

In addition, much of our domestic land revenue from Rental Tools is related to horizontal and directional drilling. Currently a decrease in capital spending and activity on the part of the E&P companies will have an impact on our overall business. However, based on the items I've just outlined, I believe we are well positioned to manage our way to the current uncertainty. We've done so in the past. We feel confident that we can do so in the future.

I'll now open the lines up to any questions.

Question And Answer

Operator

Thank you sir. We'll now begin the question-and-answer session. [Operator Instructions]. And our first question comes in the line of James West with Barclays Capital. Please go ahead.

James West - Lehman Brothers

Hey good morning Terry.

Terry Hall - Chairman and Chief Executive Officer

Good morning James.

James West - Lehman Brothers

Terry, please look at the damage platforms in the Gulf and no doubt there is a lot of opportunity out there, you had mentioned that there is lot of... I guess right now more of an assessment period. What do you think is the timeline from oil companies assessing their damage doing the repairs they can do to production platforms that are still up and running, and then awarding more large scale or at least initial platform removal projects?

Terry Hall - Chairman and Chief Executive Officer

James, clearly that depends on the severity of the damage. But experience shows that it takes a minimum of two or three months for people to get through the initial damage phase and to take care of may be some more minor problems. Once you get passed say 90 days and you've repaired the things that you can repair quickly, I think people then become more focused on planning and engineering whatever restorative type work needs to be under taken. So, we are quite busy now looking at many potential projects. And we are in the planning phase for several already. So, if the sense of your question is do we think we're going to get some more damage recovery work? Yes, we do, we are quite confident that we are going to get a significant amount of it as a matter of fact. But it will start showing up in '09. Actually, I don't think we are going to see much of it. We are already working on some now, but nothing of significance, none of the bigger things are going to really get started probably until '09.

James West - Lehman Brothers

Okay. And then with the wired well control given that there is still heading the project for BP. I mean other projects that are in the mix right now. How much more capacity do you think that you have to take on additional removal jobs?

Terry Hall - Chairman and Chief Executive Officer

Well, we are building capacity all the time, James. We are adding assets that can help us in that regard and we will build capacity as required.

James West - Lehman Brothers

Okay.

Terry Hall - Chairman and Chief Executive Officer

We are expecting to have significantly more capacity in '09 than we've had in '07 or '08.

James West - Lehman Brothers

Okay, fair enough. Terry, given the economic uncertainty out there you've been acquisitive in the past or acquisitions becoming more attractively priced?

Terry Hall - Chairman and Chief Executive Officer

Yes, I think they are. I think there is a little flexibility there. Clearly, there is a lot of private equity money out there that is a little nervous right now. And those that have made investments, they are not looking too good. And then the prospect of competing with private equity right now is nearly as challenging as it was in the past. And I think they've got... they are going to have some issues trying to lever up their acquisition. So in that sense, I think the market has improved for us quite a bit.

James West - Lehman Brothers

Okay, that's helpful. Thanks Terry.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Bill Sanchez with Howard Weil. Please go ahead.

William Sanchez - Howard Weil

Good morning.

Terry Hall - Chairman and Chief Executive Officer

Good morning Bill.

William Sanchez - Howard Weil

Terry, you had a significant impact in the third quarter to your earnings stream from the from hurricanes. Just curious if you are able talk about how much kind of hangover we could see in the fourth quarter as it relates to the Gulf of Mexico operations in total for the company.

Terry Hall - Chairman and Chief Executive Officer

I am not prepared Bill, to tell you what the impact would be on a earnings per share basis. But I've seen the term hangover turn around quite a bit. And clearly there is a hangover there primarily because you've got lot of your boats and assts tied up doing inspection work, repaid work. And so, the Well Intervention work that we would normally be doing at this time has really been deferred. So we are still think some issues there. We are not nearly as busy as we were in those segments, but please don't... and it's all set a little bit I guess, but liftboats rates going up and other things. But really things are not back to where they were in the Gulf of Mexico from the Well Intervention standpoint as yet.

William Sanchez - Howard Weil

Okay.

Terry Hall - Chairman and Chief Executive Officer

And that it gets better, I don't know. It will happen slowly. I would suspect that it may take the whole quarter to get things back to a little bit more normalcy there.

William Sanchez - Howard Weil

Only thanks for the call on that. You've mentioned in the past your stabilizer business is a pretty good leading indicator for you in terms of kind of activity in pricing trends. Can you tell us what you're seeing there and talk about kind of your onshore applications as to how we should be thinking about that business and maybe growth levels in '09 versus '08 at this point?

Terry Hall - Chairman and Chief Executive Officer

The demand has been flat for the last several months. So we really haven't seen a change there. We're hearing a lot about changes in the market going forward. We are hearing about some reductions in demand. But we really aren't seeing it yet. The market is talking it down pretty good. But I can't say that we are really experiencing a lot of it as yet.

And again, most of our work is production focus, Bill. And that's... I think our work demand... we are likely to not see nearly the decrease in demand and drilling related services may see if we see the drop off in activity that many people are predicting we will see. Thus far, stable drill; it doesn't really see a drop in demand. And I think that's a good sign for drilling related services. But remember, we're primarily in a production related service business. So, whatever it's worth, no drop on stabilization demand as of yet. And we are not terribly concerned about our production related services in the land markets.

William Sanchez - Howard Weil

Okay. Thank you Terry for the call.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Jim Rollyson with Raymond James. Please go ahead.

James Rollyson - Raymond James

Good morning Terry.

Terry Hall - Chairman and Chief Executive Officer

Good morning Jim.

James Rollyson - Raymond James

You've talked about kind of what's going on or maybe how you are prepared to deal with any type of slow down domestically. What are you seeing in the international market? You guys have had a pretty good growth record here in the last few quarters and maybe talk about opportunities and the service versus rental mix in that context?

Terry Hall - Chairman and Chief Executive Officer

Well, we expect the rental... the rental part to grow largely due to the CapEx, it will be spending. We've spent very recently, we will continue to spend. I think the service side in '09 we'll see significant growth. We've got several things going on right now at least maybe believe, we will make some pretty good a head way on the service side in '09. We've got a derrick barge that we anticipate will be working off the coast of Africa late in the first quarter, which would generate some significant revenue for us. We've got a few other initiatives that were fairly far long on. So we are thinking in '09, maybe the year that we make some significant headway there. We've got some new liftboats coming out that we really designed to go international and it's highly likely that they will go in the very near term.

James Rollyson - Raymond James

Okay. Just a quick follow up, what do you think today your oil versus gas mixes overall ballpark?

Terry Hall - Chairman and Chief Executive Officer

I don't know. It's probably 50-50; I don't think it's significantly tilted one way or the other.

James Rollyson - Raymond James

All right, great quarter.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Robin Shoemaker with Citigroup. Please go ahead.

Robin Shoemaker - Citigroup

Thank you. Good morning Terry. I wanted to ask about the derrick barge is coming in the Gulf of Mexico will that work in the platform decommissioning project?

Terry Hall - Chairman and Chief Executive Officer

Yes.

Robin Shoemaker - Citigroup

Okay. And in the third quarter was the level of revenue or activity related to that project similar to the second quarter. I think you had indicated that you expected activity on that project to kind of fluctuate from quarter-to-quarter, but was it similar to what you had in the second quarter?

Terry Hall - Chairman and Chief Executive Officer

Yes.

Robin Shoemaker - Citigroup

It was, okay. And is that project just given the your initial three year planning horizon, is it ahead of schedule at this point, or likely to finish early?

Terry Hall - Chairman and Chief Executive Officer

It maybe ahead of schedule right now that doesn't necessarily mean it will finish early. Because we can pull back on the thing at anytime. We could always counter delays or other things. But thus far as we said early on, we're only really going to tell you if it was on or ahead of schedule, and we are making the margins we anticipated at doing better. And we are clearly on schedule or ahead of schedule. And we are making margins equivalent to those that we predicted, if not better. And I really... I just kind of like to leave it at that, but the actuality is we are ahead of schedule at this time. But that does not necessarily mean we will finish it ahead of schedule.

Robin Shoemaker - Citigroup

Okay. In terms of the other sort of big commissioning opportunities that you thought might emerge either smaller or but at a substantial scale like this one... you've commented that you thought there was more of that. Is that still your belief that multiple platform decommissioning kind of turn key projects or likely to continue to be an opportunity for you?

Terry Hall - Chairman and Chief Executive Officer

I don't know how many turn keys there will be. I think it's highly likely that we're going to get or we have already been awarded several projects. None of which are size of $750 million, but they are significant projects that again we've been awarded or we anticipate will be awarded. So we are probably taking on new work at least as rapidly we are discharging the work on the BP contract. So I think our backlog is probably pretty stable, and it may increase. But by that, I mean, we've probably taken on many new jobs committed to us that are of equivalent value to whatever we completed on the BP project.

Robin Shoemaker - Citigroup

I see, Okay. Thank you.

Terry Hall - Chairman and Chief Executive Officer

Thank you

Operator

Thank you. Our next question comes from the line Byron Pope with Tudor, Pickering, Holt & Co. Please go ahead.

Byron Pope - Pickering Energy Partners

Good morning guys.

Terry Hall - Chairman and Chief Executive Officer

Good morning Byron.

Byron Pope - Pickering Energy Partners

Just one quick question for you in terms of the '09 CapEx, should we expect much of a mix a shift at all between Well Intervention and Rental Tools or are fairly consistent with what we've seen in prior years in terms of what you're thinking has it right now?

Terry Hall - Chairman and Chief Executive Officer

I think it maybe a little bit more tilted to the service side than the rental side then it has been in the past.

Byron Pope - Pickering Energy Partners

Okay. And fair to think maybe skewed towards international more so than domestic. Is it a fair way to think about it?

Terry Hall - Chairman and Chief Executive Officer

Yes.

Byron Pope - Pickering Energy Partners

Okay. Thanks, Terry.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line to Mark Thomas [ph] with Simmons & Company. Please go ahead.

Unidentified Analyst

Good morning guys.

Terry Hall - Chairman and Chief Executive Officer

Good morning.

Unidentified Analyst

I just have... circling back around on the wreck removal contract, given that it's fixed price, I was curious how much of an increase in contribution from the project was related to material and commodity prices coming down if any?

Terry Hall - Chairman and Chief Executive Officer

Not at all.

Unidentified Analyst

Not at all?

Terry Hall - Chairman and Chief Executive Officer

Or if it is, I'm not aware of it.

Unidentified Analyst

Okay. And then just shipping gears for a second, can you remind us of what your exposure is to the onshore unconventional basin, and do you see that growing next year?

Terry Hall - Chairman and Chief Executive Officer

Well, I think growth will depend in large part on what the market does. I don't know what that market is going to do. We are anticipating that the market will probably flat in the land markets going forward. And if that's the case, our business would be flat if not improving. We have been taking market share there, consistently for the last couple of years, and we've opened up several new facilities. So I think the market could stay flat and we could actually see an improvement there just due to market share.

Unidentified Analyst

Okay, thank you very much. Rest of my questions have been answered.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Robert Rosenson Shenkman Capital [ph]. Please go ahead.

Unidentified Analyst

Hey guys. There have been some talk about acquisitions and fair valuations. I was just wondering what type of size acquisitions you think or you would be interested in making obviously given the tight credit markets and everything else that is going on in the space?

Terry Hall - Chairman and Chief Executive Officer

Well. We found overtime that larger acquisitions are no more trouble to digest than smaller ones, sometimes they are easier. So our appetite would be to make larger... we would have an appetite for the larger type acquisition rather than the smaller. We always look at something that can move our needle. We've got a lot of dry powder. We generated a lot of cash; we haven't drawn anything on our credit facility. And I am quite confident if we needed additional credit, then we could get it. So, I think we still would prefer the larger acquisitions. And if you look back at the way we've done things in the past, we typically structure deals. So that there is a fair amount of payment on the back end of the deal as a result of earn outs. But we generally try to structure into these transactions. So we can make a fairly large deal without there being a huge capital commitment upfront.

Unidentified Analyst

All right, thank you. Also I guess what's your propensity to be using your free cash towards; I think your revolver towards acquisition or versus share buyback. Would you be considering using your revolver for buying back your own stock?

Terry Hall - Chairman and Chief Executive Officer

We have never done that, we haven't considered it. And while we've been tempted of late to use some of the cash that we have on hand to continue buying stock. We just decided that it was probably more prudent to hold on to our cash until we get little more visibility and what the credit market is going to be like, because we do think there is a lot of opportunity out there.

Unidentified Analyst

Okay. But you wouldn't be opposed to using your revolver for acquisitions or free cash for buying back stock?

Terry Hall - Chairman and Chief Executive Officer

Right.

Unidentified Analyst

Okay. All right, thank you very much.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Mark Brown with Pritchard Capital Partners. Please go ahead.

Mark Brown - Pritchard Capital Partners

Hi Terry. I wanted to check I know it's probably still early, but do you have a sense of sort of how many quarters of backlog for the liftboats you have as a result of the salvage and repair work from the hurricanes. I just wanted to get a sense of how many quarters of visibility you see?

Terry Hall - Chairman and Chief Executive Officer

Anyone in the liftboat business told you they had visibility beyond a couple of weeks, I will tell you, you need to go check them out little more carefully. It would appear to me right now based on what we are seeing and that fourth quarter should be fairly strong in terms of demand and so should the first quarter as compared to the normal seasonality we see in those businesses. I can't tell you how long this demand is going to hold up; it's storm related. But just remember that everyday the liftboats are involved doing storm related work, you are also deferring the normal production related work that goes on in the Gulf of Mexico. So, you give this thing one or two quarters of where your liftboats are primarily tied up doing repair type work or survey type work. That is generally followed by a few months, where you've got a fairly sharp spike in demand for production related service. So, I would think at this point that we are looking at a pretty good liftboat market for at least two quarters if not right up until next summer.

Mark Brown - Pritchard Capital Partners

Okay. And I was wondering if the two new built liftboats... if there is any consideration to moving those... deploying those to the Gulf of Mexico as opposed to international just given the amount of potential work that could be done in the Gulf?

Terry Hall - Chairman and Chief Executive Officer

We are clearly looking at that. And if possibly might keep them near for short period of time just to take advantage of the market. But our preference is to go ahead and move them overseas.

Mark Brown - Pritchard Capital Partners

Okay, well, thank you very much.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of David Nierenberg, Nierenberg Investment Management. Please go ahead.

David Nierenberg - Nierenberg Investment Management

Good morning, Terry, congratulations on a sparkling quarter.

Terry Hall - Chairman and Chief Executive Officer

Thank you, David.

David Nierenberg - Nierenberg Investment Management

It's notable, when one compares your annualized EBITDA run rate this quarter to what you say your CapEx range might be next year. It suggests a potential. And I realize we are not in forecasting mode. But it certainly suggests that a potential for an enormous amount free cash flow in the future.

Terry Hall - Chairman and Chief Executive Officer

Exactly.

David Nierenberg - Nierenberg Investment Management

So for that reason, if you're still awarding the Kewpie doll, I think your shareholders should give it back to you and your team for your performance.

Terry Hall - Chairman and Chief Executive Officer

Well, thank you David. We'll accept it if anyone was to get it back.

David Nierenberg - Nierenberg Investment Management

Okay, good job.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Bill Garrison with Iron Works Capital [ph]. Please go ahead.

Unidentified Analyst

Thank you. Wondered if you had the actual cash flow from operations number for the quarter?

Terry Hall - Chairman and Chief Executive Officer

I'm not sure that I can scrabble it. So, it looks like it's $123 million.

Unidentified Analyst

Okay, and...

Unidentified Company Representative

I am sorry; it's a $176 million.

Terry Hall - Chairman and Chief Executive Officer

I looked at the wrong column. It's $176 million for the third quarter.

Unidentified Analyst

Okay. And secondly could you expand it all in the CapEx dollars in the second half of the year kind of where those dollars are being spent?

Terry Hall - Chairman and Chief Executive Officer

In the second half of '08?

Unidentified Analyst

Yes.

Terry Hall - Chairman and Chief Executive Officer

We have to spend on the derrick barge and rental equipment, primarily just expansion CapEx in the rental fleet, some often liftboats.

Unidentified Analyst

Okay. And lastly when your liftboats are in stand by mode, are they... do they figure into your utilization rate. It seemed like there was a bigger difference this year... this quarter between the day that you provided and the overall revenue number that was reported.

Terry Hall - Chairman and Chief Executive Officer

Anytime we are getting paid, they are included in the utilization rate although on stand by we are normally getting paid half rate, but it does count as being utilized.

Unidentified Analyst

Okay, all right thank you.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of David Grumhaus with Copia Capital. Please go ahead.

David Grumhaus - Copia Capital

Hi guys. How are you?

Terry Hall - Chairman and Chief Executive Officer

Good morning Dave.

David Grumhaus - Copia Capital

Good morning. Terry in the past you've said that kind of the next product line you might want to get into [ph] pressure pumping and obviously there are a lot of kind of small private gangs backed by private equities. I don't know if you are starting to see more opportunities or having more discussions than maybe you had three months ago. And I am just wondering if you are interested Bill how you would essentially fund an acquisition. I don't know if you think it's a potential procedure back at the currency or if you prefer to do a deal for all cash?

Terry Hall - Chairman and Chief Executive Officer

We would certainly prefer a cash deal in this marketplace. Again we've got significant credit available to us. We're generating awful lot of cash flow, but sometimes you can necessarily dictate currencies that's going to be used in the transaction particularly if you're dealing with another public company or something. But our preference would be to use cash. And clearly we've got some assets dedicated to that market. And all likelihood, we will be more focused. We're trying to get a fresh pumping business. It's more likely that we would be wanting to do that over water. And possibly in conjunction with the utilization of some sort of new deep water well intervention type vessel that could provide among other things the pressure pumping services.

David Grumhaus - Copia Capital

Okay. And then as a follow up, I was going to ask you if you are seeing... what you are seeing in pricing trends and some of your land products like coiled tubing and cased hold wireline. Traditionally there's been a lot of capacity added in coiled tubing and cased hole wireline over the last couple of years. Just wondering how you think that those product lines in North America will weather a down turn?

Terry Hall - Chairman and Chief Executive Officer

Well, they going to do better than drilling related services. Thus far, they're doing fine. And as I look all my competitors' comments, they've all delivered some fairly strong results in those product lines for the quarter. I think everyone is sort of waiting to see what's really going to develop in terms of utilization in the market. But until the utilizations begin to fall off pretty good, I don't expect to see... pricing is not going to fall. That's so far so good, but there certainly is a lot talk out there mainly from the financial market slowdown. We haven't gotten a lot of that from our customers.

David Grumhaus - Copia Capital

Great, thank you very much.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions]. And our next question from the line of Thad Strobach with Quattro Global Capital. Please go ahead sir.

Thad Strobach - Quattro Global Capital

Hi Terry, good afternoon. It was a very good quarter. Just with all this talk of honestly as a bond holder, I understand acquisitions and how attractive they be to the management team and what a good job you've done of managing assets. But in terms of share buybacks it strikes me that it would be more attractive if you were to purchase debt rather than equity in this current market. And more importantly to the previous question of issuing equity you prefer, any type of currency it was striking that the debt markets are fairly closed, and one of your advantages right now is your free cash flow and ability to use cash as currency, where some of your peers are unable to issue debt. And certainly you won't be able to issue a preferred given that those markets are clearly closed. Which... you look at when you look at acquisitions? What the minimum threshold hold of return when you are looking at an acquisition. Just kind of what holistically you're looking at it?

Terry Hall - Chairman and Chief Executive Officer

Well, we look at acquisitions probably a little bit different than... we look at them on a far greater basis than just financial drivers alone. We are always... we'd pay a lot of attention to our strategy in trying to grow the business long-term. We are not so focused on short-term in terms of capitalizing the financial opportunities when they be there. Lately we've been very focused on preserving our capital. It's certainly intriguing to go out and think about just buying your stock back, but some could argue that that's about as secretive thing that you can possibly do. But that won't be the case long-term. So rather than run out of the stock, total cash that we haven't credit, we have available, we just started to maintain that capital. If you look at our debt, clearly there are some wonderful returns implied in acquiring our debt just at the levels this trading it now. But could I really go out there and meaningfully change our company going forward by clients some of the debt. If I start buying a lot of it, all I am going to do is drive the debt off and then I am going to be stare in the face of a very type credit market potentially. So we do think about it a lot, we monitory... we run a lot of models on it. But we just have gone into a preserve capital mode right now. Because we think there will be some opportunities out there that long-term for us will be better than some of the short-term opportunities the market may present at the moment.

Thad Strobach - Quattro Global Capital

If you bought back the converts for example, are those... versus trend if I get 11... and then the straights are called on [ph] in 2010. That would certainly be a more as accretive as a share buyback if not more so because you would be reducing debt and you get rid of the share dilution. Just speaking holistically you are talking about.

Thad Strobach - Quattro Global Capital

I don't disagree with you, but the reality is trying to buy a meaningful amount of it is not as easy as it might theoretically assume and we are...

Thad Strobach - Quattro Global Capital

I just worry about a share buy back in this market given that one of your strengths is clearly cash in the balance sheet and free cash flow generation. And as a bond holder, I have no problem with you buying assets that have become very attractive and will give you long term competitive advantages, because that's what you've have done well.

Operator

Thank you. Our next question comes from the line of Joe Agular with Johnson Rice & Company. Please go ahead.

Joe Agular - Johnson Rice

Thank you. Terry, I think earlier in your remarks, you mentioned when you are going over kind of the Rental Tool and service outlook for 2009 that you said you had another initiative that you're fairly far along on. And I wasn't sure if that was referring to the liftboat going international if that was something else?

Terry Hall - Chairman and Chief Executive Officer

We are all sitting here scratching our head. We had a questioner on line, who suddenly disappeared and wanted to think that we cut him off I don't know how it happened. So I...

Joe Agular - Johnson Rice

Okay.

Terry Hall - Chairman and Chief Executive Officer

I need to repeat your question, I'm sorry.

Joe Agular - Johnson Rice

Okay. Well if you want to go back and respond to him first, that's fine. My question was in your remarks earlier I think you were explaining some of the capital spend that you've had in Rental Tools and how you expected that to help growth in '09 as well as some of the new equipment in the service do Well Intervention Group that would help the overall service revenue grow in '09. You mention the derrick barge working off West Africa. And then you said that you had another initiative that you were fairly far along on. And I was just wondering if that initiative, were you referring to the liftboat going international or was there something else there that you are referring to?

Terry Hall - Chairman and Chief Executive Officer

Joe, I don't recall things exactly what you just said. But...

Joe Agular - Johnson Rice

Okay.

Terry Hall - Chairman and Chief Executive Officer

Only respond by saying we've got several initiatives that we are fairly far long on. Someone include moving some liftboats overseas. Now we've got some potential acquisition targets that we are moving on fairly aggressively don't know what will happen there. But we've got some of those that we are working on. We've got a pretty full plate right now in terms of things that we are looking at the market, that's a good thing about a market like this. People tend to get very nervous. And at times, it's easier to make deals in this market than it is in the market we've seen six or eight months ago.

Joe Agular - Johnson Rice

So, do you have a preference international versus domestic or you just going to be opportunistic wherever it present itself?

Terry Hall - Chairman and Chief Executive Officer

I think I our preference is international. We've got pretty good exposure to domestic side, not to say we wouldn't do something domestically. But our preference would be to get more exposure to the international market and get closer to that split of really a third domestic third, Gulf of Mexico and a third international. We've got... we are pretty happy with the way the things are working out for us actually in land in North America. And it will be fairly easy for us to continue that build out by adding equipment opening new facilities. We've been pretty successful in doing that. So I don't know that we would have a need really to make a substantial acquisition to grow that business rather nicely whereas in international front I think we need an acquisition to gain significant service exposure there.

Joe Agular - Johnson Rice

Right, okay. Again just you all really had a great quarter, sort of recent market events have sort of made a lot things get lost in the shuffle, but the model is working for you guys. Thanks.

Terry Hall - Chairman and Chief Executive Officer

Thank you Joe.

Operator

Thank you. Our next question comes from the line of Thad Strobach with Quattro Global Capital. Please continue with your question sir. Mr. Strobach, if you're still on line, your line is now open. Moving on to our next question from the line of Gregory Macosko with Lord Abbett. Please go ahead.

Gregory Macosko - Lord Abbett

Yes, thank you. Forgive me if I ask some naïve questions, but with regard to the... your spending on rental and service equipment, what is the lead time on buying equipment at this point? And do you have options on additional equipment going further out?

Terry Hall - Chairman and Chief Executive Officer

We've got quite a bit of equipment that's going to order, which we could cancel if we wanted to. We are still holding on to those orders. There is no hard and fast rule on the equipment that we buy, I mean, the product line is so diverse. It's hard to really answer you. I mean it could be as little as 45 days or 60 days to as much as 18 months. But I think if I understand the sense of your question, we are always ordering equipment. But we always have a lot of orders in line. It's rare for us to cancel those orders or delay orders although we have in the past, and we certainly have the flexibility to do so. But we've got significant orders in the pipeline. It just was evidenced by on my comments on what I thought on the fourth quarter CapEx could be as well as CapEx in '09. Clearly we've dialed it back fair amount of '09, but it would not surprise me for the number to go up and get back to '08 levels

Gregory Macosko - Lord Abbett

And do you feel that there are others out there still or have those orders backed off from the equipments suppliers?

Terry Hall - Chairman and Chief Executive Officer

No, I'm not privy to that information. I noticed that it seems to be in vogue right now for everyone to say they're cutting back on their CapEx and they're doing all these things. And I heard those kind of comments before when it seemed to be in favor with the financial markets. And in reality I didn't see that happen. So, I don't really know if all the noise we are hearing is more, because people think that's what's the financial markets want to hear or is it because they really are cutting back. I think a lot of people have the ability to cut back just as we do. And I think we are all still in sort of a wait and see mode to see if we are really going to cut back.

Gregory Macosko - Lord Abbett

Right.

Terry Hall - Chairman and Chief Executive Officer

In terms of order flow, you'd have to... I'm not to guy to ask that question. The only piece of business we have that would involve a lot of order flow probably be stable drill and their order flow thus far are still flat.

Gregory Macosko - Lord Abbett

Okay. And you mentioned that you... it sounds as if you have plenty of demand for that new equipment coming on and I am sensing that from the repair work and the hurricanes that have occurred and then the work that you figure will come after. Is that a fair to way looking at it?

Terry Hall - Chairman and Chief Executive Officer

No, I don't think new equipment we have coming on is anything to do hurricane related work other than may be the new liftboats. The other equipment we have coming on is primarily directed international markets as rental equipment related to deep water projects and derrick barge working internationally.

Gregory Macosko - Lord Abbett

And then finally, if you would, with regard to well service you listed a long list of services that were very strong. Was there anything that had backed off or anything that didn't deliver up kind of as you had expected in the quarter or modestly off?

Terry Hall - Chairman and Chief Executive Officer

Well, the things that ended being... if you look at the business at the end of August, you would say everything was as close to fire on the eight cylinders as we've seen it in a while. Hurricanes came along, so a lot of the service activity in the Gulf of Mexico in particular and to some extent the land markets, for a week or so was all. Now you've got a situation, where at least I the Gulf of Mexico, everyone is focused on repair work and assessment work and a lot of service work is down. So, it's really hard to answer you based on today. It's hard to tell how of it the drop off in service sector is related to hurricanes et cetera. But I'd tell you that certainly in July and August, it's good as we've seen it in the long time.

Gregory Macosko - Lord Abbett

Thank you.

Terry Hall - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions]. And at this time, there are no additional questions. I would like to turn it back to management for any closing remarks.

Terry Hall - Chairman and Chief Executive Officer

Thank you very much. We appreciate your interest.

Operator

Ladies and gentlemen. That does concludes our conference for today. Thank you for your participation and for using ACT Teleconferencing. You may now disconnect. .

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Comments

[chat:]

hi
doktor ben begendim baska soze gerek yok
;)

2008 Nov 01 12:08 PM