Willbros Group, Inc. Q3 2008 Earnings Call Transcript

Willbros Group, Inc. (WG)

Q3 2008 Earnings Call Transcript

November 6, 2008, 9:00 am ET

Executives

Mike Collier – VP, IR

Randy Harl – President, CEO and COO

Van Welch – SVP and CFO

Analysts

Jamie Cook – Credit Suisse

Roger Read – Natixis Bleichroeder

Stephen Gengaro – Jefferies and Company

Martin Malloy – Johnson Rice

Joe Gibney – Capital One Southcoast

John Rogers – D.A. Davidson

Philip Dodge – Standford Group

Andrew Carter [ph] – Harbert Management [ph]

Graham Mattison – Lazard Capital Markets

Karen David-Green – Oppenheimer & Co.

Matt Duncan – Stephens Inc.

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the Willbros Group, Inc. third quarter 2008 earnings conference call. Today’s call is being recorded. I would now like to turn the meeting over to Mike Collier, Vice President of Investor Relations. Mr. Collier, please go ahead.

Mike Collier

Thank you, Leslie. Welcome everyone to the Willbros earnings conference call for the third quarter. Today’s management participants are Randy Harl, President & Chief Executive Officer; Van Welch, Chief Financial Officer; and myself.

This conference call is being broadcast live over the Internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website www.willbros.com and will be accessible for 12 months. A replay will also be available through the phone number provided by the company in yesterday’s press release.

Information reported on this call speaks only as of today, November 6, 2008 and therefore you are advised that time sensitive information may no longer be accurate at the time of any replay. Comments today contain forward-looking statements.

All statements other than statements of historical facts which address activities, events or developments the company expects or anticipates will or may occur in the future are forward-looking statements. A number of risks and uncertainties could cause actual results to differ materially from these statements. These risks factors are described in the company’s documents and reports filed with the SEC.

The company assumes no obligation to update publicly such forward-looking statements whether as a result of new information, future events or otherwise. This presentation contains non-GAAP numbers, reconciliations and related information in our press release of November 5, 2008 and on our website.

Now, I’d like to turn the conference over to Randy Harl, President and Chief Executive Officer.

Randy Harl

Thanks, Mike. Good morning everyone and thank you for joining us. Willbros had another profitable quarter, one which we had expected to be less robust than either of the first two quarters of this year. This past quarter, we have seen unprecedented disruptions in the financial sector, including the credit process and indications of a global slowdown in economic activity.

With oil and gas process off their summer peaks by 50%, we are in a different environment than we envisioned at our last call. Crude and natural gas process have declined and capital budgets have been reduced by E&P players whose drilling programs lead to the production which drives the demand for new pipelines.

In spite of this change in the business environment, we believe our business model is sound and that the long term fundamentals of our business are intact. This management team has worked hard to diversify the company to reduce the volatility which comes from changes like we have seen in the past few months.

We continue to shift our business from being primarily a construction company to a company that provides more services. Our model benefits from the recurring maintenance spend and life cycle improvement necessary to maintain and operate complex hydrocarbon transportation and processing facilities.

Before I discuss each of our business segments, I would like to focus on the strengths of our business. Although we are not immune to the current financial and economic events, we are well-positioned with our service offerings and geographic locations to take advantage of our market.

First, our US mainline pipeline and facilities construction businesses are well-positioned to take advantage of the development of new sources of natural gas supply which required new infrastructure to monetize these investments. These new sources of supply include the new shale plays such as Haynesville, Fayetteville, Marcellus and others.

Second, we are positioned to build the takeaway pipelines from the massive investments in the Canadian oil sands. Third, our maintenance and fabrication businesses are service offering to the Canadian oil sands that are required to operate the facilities regardless of the financial environment at any point in time.

Fourth, our diversified downstream service offering is focused on maintenance and life extension to the process industries which can be robust in any business environment. Fifth, our EPC offering is unique to our space and allows us to earn more revenue for engineer and to qualify for larger projects, leveraging more revenue and earnings opportunities for our business.

Sixth, our experience in brand name provides access to international markets. And finally, we have turned around the financial condition of the company and this, together with our strong balance sheet and operating cash flow, should allow us to effectively operate our business and to take advantage of the opportunities that always come during a period of change like we are currently experiencing.

We saw continued operating margin percentage dilution in our upstream business due to additional costs with no additional fee on the Southeast Supply Header or SESH project, and the transition from SESH to the Midcontinent Express Pipeline which was delayed by changes in scope and schedule related to permitting and right of way access.

Responsibility for obtaining the right of way and all permits associated with this project is the responsibility of our customer who covered our standby cost of personnel and equipment according to the terms of our cost reimbursable contract. Being reimbursed for standby protects us from the costs associated with these types of delays, but this does not generate the same levels of revenue and income as performing work on the project.

We are underway now with one spread on Midcontinent Express and anticipate the other two spreads to be released to work some time later this month. These delays and changes cost our customer to reschedule the project which presented the opportunity for us to increase the amount of work available to us on the Midcontinent Express project.

To remind you, we added our $50 million of backlog resulting from this additional work which utilizes two of our large diameter pipeline construction spreads into the third quarter of 2009 where previously we had expected completion of our portion of the work near the end of the first quarter.

Just to put this in easier to understand terms, under our original scope, Midcontinent Express represented nine spread months of work for us in 2009 and our new scope gives us 15 spread months in 2009 increasing our visibility of work in our US pipeline construction business next year.

In Canada, our mainline pipeline construction business is performing as expected. Our major project, the Alberta Clipper, started in the third quarter and it is expected to complete next year as scheduled. We expect the Canadian pipeline construction market in 2009 to follow its traditional cycle of Q1 bidding or work in Q3 and Q4 and the annual spring breakup impacting Q2. We have told you the ramp up in Canadian pipeline construction market was lagging the US by 18 to 24 months and our current forecast indicates that 2010 will be a year of greater demand as a result of crude takeaway pipelines from the oil sands to the US.

Oman had another great quarter and continues to be one of our best performing businesses despite the small size of the Omani market. Internationally, we are staying focused on the implementation of the growth plans that we have been discussing during previous calls, namely, continue to grow our business on Oman and introducing that business model into a larger market in other Middle East countries and North Africa. We remain optimistic and are on track to obtain new business in both Libya and the UAE.

During the last call, we told you that we were expecting the downstream business to be impacted by how we expected our customers to conduct their business in the third and fourth quarters of this year. We have seen some turnarounds delayed and some projects pushed back until next year. However, more recently, we have seen projects moved back into this year and we are now seeing the market for US downstream services improving over what we saw three months ago.

We are well positioned to serve the hydrocarbon processing industry with our life extension and maintenance services. While we had a good year in 2008, everything we see indicates that our downstream business will have a better year in 2009. In Canada, we have reported that we are actively pursuing the market for tanks and heaters.

We’ve been successful in qualifying and getting on the bid list and submitting proposals for a number of tank projects and are optimistic that we will be awarded our first substantial project in this market. We are preparing ourselves to pursue both the heater and tank markets by securing personnel and other resources needed to qualify for this business.

Our engineering business had another great quarter. However, if you’ve been following this business, our backlog has been decreasing since Q1 of this year. We had expected awards of significant EPC projects that would have increased our backlog during Q3 and Q4 of this year. It now appears these projects had been delayed by the current financial climate. This situation coincides with the completion of some very large EPC projects in 2008. EPC, although a differentiator in our business, is more susceptible to the current financial crisis due to the longer development cycle required to secure an EPC project versus discrete services.

As we have told you in the past, we are bullish on the manage-and-maintain market for services for the pipeline industry and we continue to see a business opportunity of scale in this area. During the quarter, we progressed in our last relationship with a customer who is a large owner of pipelines and related facilities.

The scope of this alliance will include a number of services that will provide life extension and maintenance for these facilities. In addition to advancing our manage-and-maintain strategy, this alliance will provide additional opportunities for our traditional engineering, construction and EPC businesses. This alliance will provide a recurring revenue stream for our engineering and upstream segments.

Additionally, our tax and financial professionals that worked hard to improve our tax position and the reduction to our expected tax rate benefited from their successes which Van will discuss along with our third quarter 2008 financial results. Van?

Van Welch

Thanks, Randy, and good morning. Yesterday, we reported another profitable quarter as we continue to improve the visibility and predictability of our business. In continuing operations, we reported net income of $19.1 million or $0.46 per diluted share compared to net income of $10.3 million or $0.32 per diluted share in the third quarter of last year, and net income of $20.1 million or $0.49 per diluted share in the second quarter of this year. Including discontinued operation, we reported net income of $20.3 million or $0.49 per diluted share for the 2008 third quarter.

Now, I would like to discuss the financial results from our continuing operation. For the third quarter of 2008, we reported revenue from continuing operations of $490.7 million, up almost twice that reported in the 2007 third quarter and up about 5% compared to the second quarter of this year.

The strong revenue growth over third quarter last year is due primarily to high utilization of our increased large diameter pipeline construction capacity in the US and from the addition of the downstream services unit, InServ, which was acquired in late November last year. Operating income in the 2008 third quarter was $28.7 million compared to $18.7 million in the 2007 third quarter and $35.9 million in the second quarter of this year.

I will discuss the factors impacting operating income as I discuss each of our operating segment, starting with our upstream oil & gas segment. In upstream, we reported operating income of $17 million on revenue of $342.1 million for the third quarter of 2008 compared to operating income of $17.6 million on revenue of $296.3 million in the second quarter of 2008.

As Randy discussed, we saw some schedule delays and scope changes with our two largest projects, SESH and Mid-Continent Express, both of which are cost-reimbursable, fixed-fee contracts. We are able to recover the increased costs associated with these changes in revenue. However, the fee is fixed, so it doesn’t increase with the increase in the revenue. Therefore, the increased SESH revenue in the 2008 third quarter diluted our operating income as a percentage of revenue during the third quarter of this year.

The SESH project is virtually complete at this time with only some clean-up remaining and we are now underway with one spread on the Mid-Continent Express project and anticipate the other two spreads to be released for work later this month.

Also contributing to revenue and operating income of the Upstream segment was the Alberta Clipper pipeline project in Canada which is progressing as planned and our Oman operation which is one of the best performing and most consistent businesses despite the size of the Omani market.

Our Downstream segment performed as expected with $4.7 million of operating income from $86.2 million of revenue in the 2008 third quarter compared to $11.1 million of operating income from $112 million of revenue in the second quarter of this year.

The seasonal nature of our Downstream operation generally causes the second quarter to be the strongest quarter for this segment, as the spring turnaround [ph] season generally provides more work for construction and turnaround services. Remember, this segment is bearing the amortization charges associated with customer relationship and backlog intangible resulting from the InServ acquisition. Amortization expense for these items for the third quarter was $2.6 million which will diminish after second quarter of 2009 to approximately $800,000 per quarter through the end of 2019.

Third quarter 2008 results from our engineering segment continue to be strong with operating income of $7 million from revenue at $62.3 million. However, we do expect the engineering’s revenue to decline during the last quarter of the year as a result of the work off with major EPC projects currently in backlog and new EPC projects being delayed by the current financial climate.

General and administrative costs were $29.1 million or 5.9% of revenue in the third quarter of 2008 representing a slight increase from $28.4 million reported in the second quarter of this year. G&A cost was $17.8 million or 7.2% of revenue in the third quarter of 2007. While we will remain focused on continuous improvements to our business processes, systems and resources, we will also diligently monitor our cost in this uncertain economic environment.

During the third quarter of 2008, we revised our annual estimated effective income tax rate from 42% to 38.5%. The reduction in effective income tax rate is primarily attributable to implementation of certain tax strategies and the reconciliation of the tax liability recorded in the company’s 2007 year-end financial statement to the income tax returns the company has filed this year.

We continue to refine our corporate structure which includes possibly changing our corporate (inaudible) from Panama to Delaware and also completing other internal restructuring transaction. Thus changes in corporate structure should assist the company in maximizing the execution of this global business strategy for the future and shall include a comprehensive tax plan.

With respect to financial results from our discontinued operation, net income in the third quarter of 2008 was $1.2 million as a result of the release of reserves taken at the day of the sale of the Nigerian operation related to lower credit.

I will now discuss liquidity. Tightening credit markets have resulted in a worldwide financial crisis and a loss of confident in some of the most respected financial institutions. I’m pleased to report that in these turbulent times, our balance sheet remains strong and our cash flow continued to improve during the third quarter of this year.

In the first nine months of this year, we generated over $96 million of operating cash flow from continuing operations compared to using cash of $23 million in operations for the same period last year.

Our cash balance at the end of September was $127.6 million and we expect this together with our $50 million borrowing capacity and our revolving credit agreement to be sufficient to finance future working capital and capital expenditures. We also have sufficient capacity for financial instruments required in our business such as letters of credit and performance bonds.

During the first nine months of 2008, we acquired $46 million of capital equipment to support performing our existing backlog and to increase our mainline pipeline construction capacity. We are now purchasing most of our capital equipment with cash. Our remaining capital budget for 2008 is approximately $17 million.

Now, turning to backlog, backlog from continuing operations to September 30, 2008 was $1 billion compared to $1.3 billion at the end of last year. The additional work on the Mid-Continent Express Pipeline, as Randy described earlier, improved visibility for our US pipeline construction unit into the third quarter 2009. We believe with the more uncertain business environment that a more normal pattern of word awards in our US pipeline construction unit will prevail with a shorter lead time from project awards to the generation of revenue.

Also, as our business model continues to shift to more service oriented revenue, we expect the lead time between project award and recognition of revenue to decrease. In the Downstream segment, we are highly confident that our backlog will grow in the fourth quarter. At September 30, 2008, approximately 88% of our total contract backlog was cost reimbursed.

Now, I will discuss annual guidance for 2008. We are refining our annual guidance for 2008 as follows. Revenue to be approximately $1.9 billion; this is nearly twice our 2007 revenue. G&A to be approximately 6% of revenue. EPS to be in the range of $1.85 to $1.95 per diluted share based on an average share account of approximately 43.8 million share, and our expected tax rate to be 38.5%.

As we have discussed, the delayed start on the Mid-Continent Express Project which has led to more reimbursed standby time has shifted some revenue and income anticipating the fourth quarter into 2009.

We will now take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from Jamie Cook of Credit Suisse. Please proceed with your question.

Jamie Cook – Credit Suisse

– you’re bidding on, are all of them being pushed out, is it one or two projects pushed out and any magnitude on the potential time – how long the delays last, I guess?

Mike Collier

Jamie, we didn’t catch the first part of your question, would you mind repeating it?

Jamie Cook – Credit Suisse

Just on the delays on the pipeline business, I’m just trying to get a feel for the magnitude of the delays in terms of the number of projects that you’re bidding on, is everyone pushing everything out to the right, is it just a handful of them, is it one or two? I’m just trying to get a feel for the magnitude of this impact on your business.

Mike Collier

Jamie, this is Mike. We’ve been looking at that pretty closely. And for the second and third quarters of ’09, we have about 30 qualified prospects that we have been in dialog with our customers viewing the status. With the information that we have right now, it looks like about two-thirds of them are still on track to come about as they indicated. But I will caution you that this information is from the end of September and we’re updating that as we can, but we don’t have any indication or evidence right now that any of that has changed. So, we feel like we’ve got good prospects, qualified prospects that we’ll lay out in next year like we have anticipated.

Randy Harl

And I think, Jamie, that you’re referring to what we said about the engineering business to the EPC projects that we thought we were going to book in the third and fourth quarter. Just to recalibrate that a bit, the lead time for developing an EPC project is long. We have been working for the past 12 months on the – it’s a couple of projects. They have not been cancelled. The current environment has caused our customers to take a deep breath. I think some people see some opportunities in the reduction of steel process that could affect the capital cost pretty significantly and a bit of wait and see situation. So, these projects I think – the way to think about that is shortly after the first of the year, people will be thinking through them again, and looking at what their opportunities might be. For sure, the production that these projects are based on, the need to move the oil and gas around remains firm, and I think it’s just a question of timing.

Jamie Cook – Credit Suisse

Okay. And then the other interesting comment you made with on the downstream side, you were talking about delays last quarter and it seems like that business has picked back up. Is that a function of the market picking up, is that a function – the customers getting back some more turnaround maintenance type work, or are you guys gaining share?

Randy Harl

It is, Jamie, just a function of how that business works. What we’re seeing toward the end of the second quarter was people moving things around a bit. We’ve just seen that same kind of movement now going forward, but is moving back into the fourth quarter, back toward the first quarter. But I think the way to think about that is that the market for these life extension and maintenance services move around from year to year. And like I said, 2008 was a good year for us.

If you think about what we do, we work in about half of the operating refineries in the US; all of them don’t do a turnaround the same year. So, you would just naturally have differences in years, based on what your customers are doing, and it looks like 2009 is going to be a year where our customers are doing more work than they did in 2008. It's really not got anything to do with the market, it's the nature of these services are required for people to operate their facilities.

Jamie Cook – Credit Suisse

But I guess you guys get concerned, I mean this is always a great little market for you guys, because there’s a number of smaller projects out there that you guys could win that the big guys wouldn’t go after, because they are focused chasing the big elephant projects. Now with those markets drying up a bit, are you seeing the big guys coming in and the market essentially becoming more competitive, are you concerned about that?

Randy Harl

No, we’re not seeing that Jamie. I think what we see is, the competitors that we face are set up to deal with these smaller projects. It is very difficult for the bigger guys to scale down to deal with this, when they deal with the very large projects. So, we’re not feeling pressure from that, and we still are very bullish on our ability to go out, especially in the smaller to mid-sized EPC projects, and have a offering that is very competitive and we still have a number of opportunities on the radar screen for those kinds of projects.

Jamie Cook – Credit Suisse

One last question, I think before you guys had given color, when you’re talking to the pipe mills, they experienced record demand and they were booked out for 2011, 2012, which is a pretty good indicator for your business. Have you had any conversations with them, have you seen any customers cancel orders or push orders back, based on your conversations with them – with the pipe mill?

Randy Harl

Jamie, actually I had a conversation just a couple of days ago with one of the big mills, and they indicate that while steel and coal prices are coming down, the large diameter line pipe is holding up very well, and they don’t see in their business or others, any cancellations or weakness out into the first part of 2009. And as we indicated, our visibility and theirs is a bit more limited than it has been because of this turmoil. But right now, there’s no evidence that that line pipe market has weakened.

Jamie Cook – Credit Suisse

Thanks guys, I’ll get back in to you.

Operator

Our next question comes from Roger Read of Natixis. Please proceed with your question.

Roger Read – Natixis Bleichroeder

Good morning gentlemen.

Randy Harl

Good morning Roger.

Roger Read – Natixis Bleichroeder

I guess since you mentioned it, if I looked at it in the queue or was it in the press release, cancellation provisions, can you give us an idea of what would be maybe a typical cancellation provision or how you might work with your customers if they came up and said, we want to do this, but can we wait three months, six months whatever, so maybe not a cancellation but a deferral, just how maybe that is structured in the contracts, and maybe the differences between say the US and Canada in the upstream business?

Randy Harl

Roger, we have a variety of different provisions in our contracts that deal with that. We have some cost reimbursable contracts that were defined very well in terms of giving us protection from that revenue moving or going away. We have other contracts where that’s just left to negotiation. And so it would be a function of sitting down with the customer and seeing if you could strike a deal that made sense for both of you going forward.

So I mean it’s a mixture of things that we have in our contracts. You seldom have guarantees to work. It's usually the ability of either party to escape from these contracts, if that’s something that they need to do, but the practical matter is that there are still a lot of competition for resources in our industry, and I believe that if somebody were to decide that it was to their advantage to change the timing of the execution of a project, that we would have good opportunity to sit down and try to reach an agreement that was mutually beneficial.

The negotiation that we had with Kinder Morgan on Mid-Continent Express is a good example of things changing, where the customer through no fault of their own saw a timing change for the implementation of their project. They needed to change the way resources were deployed, to execute their project, and the bottom line is we came out with something we think that was a win-win. We were able to facilitate and help them execute the project faster and we ended up with more work. So, each one of these is in negotiation, and I’m sorry but I really can’t give you an answer that would cover the hundreds of contracts that we have, but that’s in general what will happen.

Roger Read – Natixis Bleichroeder

I think that’s helpful, that’s all I’m trying to understand is what kind of maybe just plain walk away opportunities there would be. It doesn’t sound like there would be very many if any.

Randy Harl

I don’t believe there would be Roger.

Roger Read – Natixis Bleichroeder

Okay. And then Van, a question I think a little more for you, can you help me understand on the balance sheet, as I look at the $81.8 million in the contract cost and recognized income not yet billed, how that number I guess maybe balanced against the liability would ultimately translate into cash and I’m just trying to understand your cash position today? I figure you’re all right for the next two to three quarters given the project backlog et cetera. But how that ultimately would translate into cash and what kind of position you might be in say June 30th of next year.

Van Welch

Roger, I think if you look at that, obviously the unbilled portion or items that have been earned in the contract at the date of the balance sheet of which the invoice or the billing would be forthcoming. I think if you look forward in terms of our cash flows, we assume or we certainly are anticipating that our cash flows are still going to be positive as we go forward. We’d like to remind you and we said it before that all the projects that we are bidding today, we do work within a positive cash flow environment, and our payment stream protects us in that. Also we are working in advance funding type of arrangements with some of our contracts, some of our larger contract that we would be funded in advance for – in a cash standpoint and then the billing would follow from that advance fund.

Roger Read – Natixis Bleichroeder

Okay. Is there a cash percentage of that $81.8 million, or is there any way to think about that?

Van Welch

All of it is going to turn into cash receipts, some of that will be net of cost, obviously.

Roger Read – Natixis Bleichroeder

Right. I mean, that’s my question, is there an implied margin in that kind of a number?

Van Welch

Well, the implied margin is whatever contract margins we’re going to earn on the project at the end of the day, but certainly it’s implied that it is a positive cash type of environment.

Roger Read – Natixis Bleichroeder

Okay, that’s helpful, thank you.

Van Welch

Thanks Roger.

Operator

Thank you. And our next question comes from Stephen Gengaro of Jefferies and Company. Please proceed with your question.

Stephen Gengaro – Jefferies and Company

Thank you, good morning gentlemen.

Mike Collier

Hi Stephen.

Stephen Gengaro – Jefferies and Company

To follow up on something you said at the beginning about sort of building kind of a, for lack of a better word, a level of recurring revenue base from the InServ side, do you have any strategic objectives on expanding sort of the recurring revenue side of your business over the next one to three years that you can share with us?

Randy Harl

We, Steven, absolutely do. Look at the move to the Downstream with InServ is certainly trying to accomplish that as most of that revenue stream is those recurring kinds of projects, but if you look inside of engineering, that business is really driven by a lot of frame agreements that are recurring. When you look at Canada, the field service has worked, the fabrication worked, and other things that we have in Canada there is also that kind of work and in Oman.

Remember, we have Oman LNG, we’re working inside the fence. We have all the work that we do for Occidental, assisting them with the movement of materials inside of the country, and other maintenance kinds of activities that we have – are also characterized as that kind of work. So, we’ve been working to expand how much we have out of the services arena.

Right now, if you look at the total revenues for the company this year, we’re going to be around 40% of those revenues coming from maintenance, life extension, recurring kinds of services, and when you look at what we’re trying to do with things like this alliance agreement that I’ve described during my remarks, we’re trying to move that to the 60%, 70% range over the next two or three years. So, from a long term strategic finding standpoint, we plant to add a lot more of those kinds of services.

We’re going to continue to be strong in the construction and in the project business. But we believe that it’s smart to have more of these kinds of services that will allow us to be more selective, and take on really the projects with the best margin and the best terms and conditions, and that we don’t feel as much pressure to go out there and take on more marginal kinds of contracts.

Stephen Gengaro – Jefferies and Company

Thank you. That actually leads pretty nicely into my next question which was, since the new team has been in placed at Willbros, you guys have obviously done a very good job returning to profitability, getting the margins up and really getting the company back on track. My question is really, as you see a softer market with project delays and the like, what kind of checks and balances, and how do you remain very disciplined about not taking on work which is sort of below standards? We’ve seen a lot of the E&P companies even after recoveries kind of slip up and I just want to get a sense for what you have in place and how you’re going to approach this to protect against these jobs which can obviously linger and be a disaster for quarter-after-quarter.

Randy Harl

They are not far enough away from our memory for us to forget those, Stephen. And as you know, having followed this for a long time, one of the things that Van and I have worked hard on here is to bring more system and process into the business and we really started working when we first got here on the Siddles [ph] process that allows us to have very good visibility into every prospect that’s being pursued. Before we pursue anything, we get some idea, we qualify it along multiple dimensions. It has to do with the risk that we’re likely to take, the type of contract, the experience that we have with the customer, whether or not we had been asked in the past or the customer has a history of asking for unreasonable terms, and those sorts of things.

So, I think we have much, much better process control of what we’re going after than we’ve had in the past. I think we’ve got a lot better project controls starting with estimating that allows us to vet each of these estimates as well as the proposal it goes with it, the terms and conditions, the cash flow that might come from that project, and all the way down the line, so that we’re looking at these things much closer than we ever have.

Now, we’re as a management team if we’re not diligent and if we don’t really keep the hammer down, then something could happen. But I can tell you, Van and I and the rest of the team are committed to making sure that we don’t step off into one of these projects that we’ll regret for several quarters to come. There’s always risk associated with being a contractor, and you can make a mistake.

But rest assured that if we make a mistake, that’s what it’ll be, it won’t be because we chose to move forward regardless of what the terms and conditions, the margin, the history, and those things were – those kinds of things that you ought to have recognized as warnings were in the beginning. So, I think we've just got lot tighter process, Stephen, around the whole bidding process inside the company.

Stephen Gengaro – Jefferies and Company

As a follow on, I mean it seems to me, and correct me if I’m wrong, it seems to me that with more work on a cost plus basis, even if you’re tempted to conceal a little margin, your are at least somewhat protected against disaster, for lack of a better word.

Van Welch

The way to look at it, Stephen, is that it’s all a matter of risk in cash flow, and we’ll give a bit on the margin if we got good cash flow and no risk. On the other hand, if we have to take more risk, then there has to be a much bigger upside to go out there and take it on. So, we’re constantly making those trade offs.

Stephen Gengaro – Jefferies and Company

Great, it’s very helpful, thank you.

Operator

Thank you and our next question comes from Martin Malloy of Johnson Rice. Please proceed with your question.

Martin Malloy – Johnson Rice

Good morning.

Van Welch

Good morning, Martin.

Randy Harl

Good morning, Martin.

Martin Malloy – Johnson Rice

A few quarters ago, you talked about the equipment needed for a new spread within a short supply that Caterpillar bulldozers and whatnot, has any change taken place there, or is it more available now?

Randy Harl

Well, there’s still a bit of a lead time, Marty. I think that like in all markets where there’s a shortage of anything, the equipment suppliers have worked hard to add additional lines so that they’ve ramped up the supply and so I think that’s loosened a bit. So, there is more equipment supply. The question is how much capital that people want to invest in that equipment in the marketplace and can they get the people to operate that equipment in this environment. So, I believe that there is more equipment availability. There is not more availability of labor that's kind [ph] and experienced in doing this work. And the labor supply has actually been the constraint. That’s the biggest constraint today on being able to grow this business.

Martin Malloy – Johnson Rice

Okay. And just in terms of the difficulties in the financial markets and the impact on some of maybe the smaller private competitors that you run up against, have you seen that in bidding processes where the LC or bonding requirement might be required or limiting the abilities of some of your competitors to meet those?

Randy Harl

Traditionally in the pipeline construction business, bonds have in the US and in Canada been required forever. And while we have seen some negotiation open to us and I assume to our competitors as things have become tighter, in general, everybody is required to bond. And I’m not aware of any situations where people weren’t able to do that. Most of our competition has long standing relationships with their surety companies and with their banks, and up to some point have been able to obtain the financial instruments they needed to do business.

I think our opinion is that going forward, one of our biggest strengths is our financial condition. And that because we’re a public company and especially in the pipeline construction market where we compete with mostly private guys, our financials are known to our customers. We are very transparent. People can look at us and see how strong we are. It’s not as easy to get that kind of handle on a private company. And we just, we believe that that’s going to be our strength. But specifically to answer your question, we haven’t seen anybody not being able to get work because of this situation yet, but we think that it could become a factor as we move forward.

Martin Malloy – Johnson Rice

Thank you.

Operator

Our next question comes from Joe Gibney of Capital One Southcoast. Please proceed with your question.

Joe Gibney – Capital One Southcoast

Good morning everybody.

Randy Harl

Good morning, Joe.

Joe Gibney – Capital One Southcoast

Randy, I'm wondering if you could comment a little bit on the smaller diameter outlook. You talked about a little about this on your last call. Give us a backdrop of where we are now. Obviously it’s pretty stronger on the large diameter side. This is the real driver of your business on the construction front. But curious, under the existing market now, how is smaller diameter looking, any opportunities near-term for you to pick up some incremental work and any color there will be appreciated?

Randy Harl

Yes, surely. A couple of things that we’re looking at Joe. Number one, from a strategic standpoint, really our US pipeline construction business got its life through repair and maintenance kinds of projects on smaller diameter pipe, mainly here on the Gulf Coast. In the environment where we’ve really ramped up the large diameter mainline business, that has become less of a focus for us. So, we’re actually looking at strategy where we really reenergized that. We’ll probably have to do it a little differently than we’ve done, the larger diameter pipe in terms of the way we think about the financial structure of that business but we are moving forward with it. We see a lot of opportunity, the market there we think is a bit unreserved. So that’s something that we’re doing.

Number two is that, in association with our engineering business, our EPC and manage and maintain, as we move out into the oil patch a little bit more, we’re seeing a lot of opportunities for the smaller diameter pipelines that take the oil and gas and liquids to the main lines. So that is beginning to be a big part of the focus that we have as we look for a little bit of geographic diversity in the service offering that we have. We think that the Western US is going to have a lot of opportunity for smaller diameter pipe albeit a lot more miles of it than in the large mainlines.

So we’re optimistic, focused, and looking at a number of strategies to grow that part of our business. It requires a different equipment lineup than we have in total, but most of it's available from the rental market so we won’t have to make a big capital investment. But we think from an income and revenue standpoint, that will become a bigger part of what we do as we go into 2009 and 2010.

Joe Gibney – Capital One Southcoast

Alright, that’s helpful. On the international front, just following up on Oman and just characterizing in terms of timing, is it still correct that kind of ‘08 is still a bit in the income bid proposal aggregation stage in ‘09 as you may constructively move forward from other initiatives with Shell, ExxonMobil [ph] and some of these markets that you’re targeting, is that a fair assessment?

Randy Harl

That’s a fair assessment of it, Joe. We’re real optimistic especially in Libya and the UAE that we will be able to get something under contract by the end of this year, and then start to really build on that and generate some revenue sometime in ’09.

Joe Gibney – Capital One Southcoast

Alright. And in terms of the heater and tank market, obviously see a lot of upside there and you guys have been targeting it for sometime up in Canada. You mentioned you’re optimistic on some bookings, just a little sense of timing there, what you’re thinking of that early’09, and kind of scope and kind of scale of some of these awards you’re looking at?

Randy Harl

Well, we have thought that it was sooner than later. But customers have lots of things that they’ve got to consider inside their organizations and we debated about whether to classify that tank work in Canada as highly probable according to our definition of what that is, because we’ve been told by the customers that we’re going to get to work in a couple of cases. But we weren’t prior [ph] to the point where we wanted to tell you it was highly confident. So, if that gives you a little bit of color on it, we’ve been through the bidding process, all of the signs are very positive, and I expect that sometime in the first half of next year that we will have a pretty significant amount of work that you ought to expect to get executed, maybe late second quarter, but for sure third quarter and fourth quarter of next year.

Joe Gibney – Capital One Southcoast

That’s helpful. And Van, just one last for you, CapEx I know it's little early, but I can refer it back – help us calibrate a little bit on next year, (inaudible) what we should be thinking about?

Van Welch

Well Joe, I think, certainly if you look at what we did in upsizing our spreads to three full spreads in the US, we’re going to complete that as we go through this year. We haven’t completed our strategic plan going into next year and I’ll give you more color in terms of the total CapEx no later than the fourth quarter call.

Joe Gibney – Capital One Southcoast

Alright, I appreciate it. I’ll turn it back.

Operator

Thank you. Our next question comes from John Rogers of D.A. Davidson. Please proceed with your question.

John Rogers – D.A. Davidson

Hi. Good morning.

Randy Harl

Good morning, John.

Van Welch

Good morning, John.

John Rogers – D.A. Davidson

Could you just talk a little bit more about the scheduling through ’09? You talked about the break up issued in the second quarter but you’ve got Alberta Express finishing off, you Midstream ramping up, where are you going to be in terms of capacity utilization through the year? It sounds like you’re pretty well committed through the third quarter. Is that the right way to think about it and service the same levels that you’re running at now and this is all in the upstream?

Randy Harl

Well, if I may, John, you want to talk about the pipeline business in North America?

John Rogers – D.A. Davidson

Yes, in all of North America.

Randy Harl

Okay. The way to think about the US business is that the Kinder Morgan Mid-Continent Express, we were going to finish about the end of the first quarter with three spreads. With the negotiation that we went through, we will finish – we’ll have three spreads in 2009 fully occupied on Midcontinent Express through most of the first quarter of next year. One of those spreads will become available about the end of the first quarter and we have prospects to be able to put that spread to work. We don’t have that work in backlog yet.

The other two spreads will continue on with more work on the Mid-Continent Express on into the third quarter of 2009 and we are currently pursuing, as Mike described, a number of projects that would be able to put them to work at that point in time. So that’s sort of our visibility in the US. We also have in the US in that same business, our repair and maintenance business, which is another spread of equipment that does that on a regular basis. I think the way to think about it, it will be pretty much fully occupied as it was this year in 2009.

John Rogers – D.A. Davidson

Okay.

Randy Harl

In Canada, we expect that the Alberta Clipper and the Line 4 Extension to really occupy all of our equipment and people in Canada through the first quarter and up to spring breakup with clean up coming next summer to finish those projects and that’s still pretty much the case. The exception was that we ended up having probably better luck, having more access to the line pipe and other equipment on those projects and we’ll probably do more work in 2008 than we had originally anticipated.

Now, we have a little bit of capacity in the first quarter of ’09. We’re out there actively bidding for projects right now that would allow us to have a bit more work than we thought we were going to have with that equipment and the people we have. We are also – we have a number of projects in Canada and that’s why the remarks about returning to a more traditional kind of environment apply, that we have always been in the position in Canada where we will bid for the work. It's going to happen in Q3 and Q4 during Q1 and into Q2 of next year.

So right now we don’t have backlog for that equipment in Canada for the back half of 2009, but that’s traditionally how it’s been. But what we're seeing as we get into 2010 is that it's another one of those situations because of the amount of pipe that has to get built out of the oil sands to deliver that crude to the markets that we will be in a much more robust market as we get into the end of next year and into 2010.

John Rogers – D.A. Davidson

Okay.

Randy Harl

The same thing, John, is true in the US is that, while there are plenty of projects for us to stay as busy in 2009 as we are in 2008, 2010 and 2011 look to be much more robust.

John Rogers – D.A. Davidson

And that '10 and '11 outlook has not been affected by some of the announcements about deferring upgraders mining projects? This is for pipelines that would take this thing or projects there underway?

Randy Harl

That seems probably right.

John Rogers – D.A. Davidson

Yes.

Randy Harl

That stuff, it’s already being built. The stuff has been deferred, there hasn't been a lot of investment in that yet.

John Rogers – D.A. Davidson

Right.

Randy Harl

We’re looking to fuel this growth in 2010 and 2011, is stuff that is already committed and well down the road.

John Rogers – D.A. Davidson

And is the big capital spending up there for the development project, it’s deferred a little. Does that just extend the pipeline FICO out further? In other words, just level it off over a longer period of time, is that how you think about it?

Randy Harl

That’s how I think about it. And one of the things that you know we’ve been interested in is the more major projects business in Canada and I think that just gives us a better opportunity and a little more time to get prepared to participate in that.

John Rogers – D.A. Davidson

Great, thank you.

Operator

Our next question comes from Philip Dodge of Stanford Group. Please proceed with your question.

Philip Dodge – Standford Group

Good morning. Thanks for the comments. On the shale gas, could you – the Haynesville, Marcellus, Fayetteville and so forth, could you elaborate a little bit more as much as you can or want to on the timing and sort of the size of the projects and what the timetable might be?

Randy Harl

Well, I mean the size of the projects are – if you look at what we’ve been doing and you’ve been following us for a long time, Phil, what we’ve done in the Barnett, building the big pipe out of there, the same kind of things has to happen for those other developments. The infrastructure doesn’t exist to get the volumes of gas that people expect to produce there to the pipelines that can take you to the market.

So I think the way to think about it is a bit like what we’ve seen happen out of the Barnett. The larger pipe, the 36 inch and the 42 inch, and while it may not be as far to market, they’re pretty significant pipelines. Some of the lines were looking at are in the 150 to 200 miles of 42 inch. So, they are projects of scale. The timing for those, I think that the one thing we don’t know is how much this financial crisis that we’re in is going to affect that timing.

There are a lot of factors here including that we expect steel process to come down a bit and maybe provide even more favorable economics for our customers in that they may delay a bit seeing how that shakes out. But for sure the drilling that we see taking place, even though there is some – there have been announcements of some reductions in the number of rigs that we’ll see working, is really a function of location and we think that we are very well positioned close to the shale plays and we have been through the geography that these pipelines will be laid through. I saw it to be in a great position to take advantage of the continued development in Arkansas, Texas, and Louisiana.

Philip Dodge – Standford Group

Sounds good. And then the other thing, I just wanted to confirm something and I think Mike Collier said that the effect that you had been looking at the 30 projects that would be awarded in 2009 and the two-thirds of those which I calculate is 20 are still on track.

Van Welch

What we know is that two-thirds of our own frac the other 10, we don’t know if they changed it or not. We're still trying to decipher that, so they get all 30 still be on that. But 20 of them, we have reconfirmed the status of.

Philip Dodge – Standford Group

Yes. Okay.

Randy Harl

Phil, we’ve been scrambling through to try to figure that out and we just hadn't gotten to those other 10.

Philip Dodge – Standford Group

You used to give us some help on US capacity in terms of FRUS or spreads and what you see as the demand? Has that changed compared with what you might have told us in the past?

Randy Harl

I think that if you go back to that graph that we had shown, Phil, what happened is, it never can be more than the capacity and so we saw the capacity in the US in 2008 reach close to 100% for the large diameter work. As we go into 2009, there is the demand we believe will be right at what supply is, a little bit less for the larger diameters. But if you take dropdown to the 24-inch, then all of the sudden again there is an awful lot of demand out there that the available players will be chasing. When we get into – if you look at 2010 and 2011, that situation – we never showed you anything on 2010 and 2011 because we just didn’t have that visibility. Today, if you plotted that again, it would look very similar to some of those graphs that we’ve shown you in the past where there are actually more projects than available spreads. We haven’t seen the prediction we made on the available spreads growing somewhere between 30 and 35, has been about right. The restraint on that has been more on the people side of it than equipment as it turned out. And that’s not – we don’t expect that over the next year or two to change very much.

Philip Dodge – Standford Group

Okay. Thanks, Randy.

Randy Harl

Welcome.

Operator

Our next question comes from Andrew Carter [ph] of Harbert Management [ph]. Please proceed with the question.

Andrew Carter – Harbert Management

Good morning guys.

Randy Harl

Good morning, Andrew.

Van Welch

Good morning, Andy.

Andrew Carter – Harbert Management

I was wondering, can you speak to specific potential opportunities in Libya? We saw an announcement – we noticed an announcement regarding a new refinery there in the past week or so. Thanks so much.

Randy Harl

Okay. Andy, I really can’t but I can characterize the kind of work that we want to do there.

Andrew Carter – Harbert Management

Thanks.

Randy Harl

A new refinery would not really be something that would probably be of a lot of interest to us, maybe some specific pieces to that might be of interest like the supply of the pipelines. We’re really looking more out in the oil patch where people are starting to increase drilling and I talked about the model we’d like to move from Oman into Libya. The kinds of things we’re talking to people about are things like rig moving. Occidental wants to drill 500 wells over the next fairly short period of time and we can help them with some of the kinds of things that we do. The National Oil Company and their partners in Waha are also looking at how they can increase production. That will involve an increased drilling program and our roustabout maintenance kinds of services and rig moving will be important there.

There are – the infrastructure that is there has not had a lot of technical help from the outside. The Libyans have done a good job to maintain their equipment in the oil fields. Now they have a little more access to both the Europe, US, and the rest of the world and so we’re looking at how we can bring in the technical services, the engineering, the project management, and those technical services that can help them upgrade that infrastructure that’s already in place. So we’re looking for projects that can happen sooner than later, that don’t take a long time to develop, and so we’re looking for those maintenance and support kinds of activities starting with engineering and rig moving, small capital construction later on into the pipelines that would deliver oil and gas to the final destination either for processing or export. So we’re really looking to find projects that can happen without the development of a major new project that helps.

Andrew Carter – Harbert Management

Certainly. Thanks very much, Randy.

Operator

And our next question comes from Graham Mattison of Lazard Capital Markets. Please proceed with your question.

Graham Mattison – Lazard Capital Markets

Great. Thanks very much for taking my call guys. Question, looking at the margins on the upstream side, I know this quarter was somewhat impacted by some stand-by time, what’s a more normalized margin looking at the upstream? Are you still looking at a scenario where, as new projects come on, they would be at higher margins than we’ve seen in prior quarters or has the outlook changed on that?

Van Welch

Hi, Graham, I think you’re exactly right. If you look at the impact on Q3, we’re being impacted by primarily the SESH project where we had additional cost where we’re not getting the additional fee. That weighed heavily on the margins in Q3 and even in past quarters as well. As we go forward, you’re going to see – you should see directionally those margins going up as we start on the – get started on the Midcontinent Express project where we don’t have and certainly are not expecting at this time, those types of increased costs. So the margins directionally should go up.

Graham Mattison – Lazard Capital Markets

Okay. Great. And then looking at some of the work on the downstream side up in Canada, how did the margins compare in Canada to the work you’re doing in the US?

Randy Harl

Well, we don’t know yet because we haven’t booked one of those projects. We think that they’re going to be pretty similar, is the way to think about that.

Graham Mattison – Lazard Capital Markets

Okay. And one last question if I could, just looking at – you mentioned that some projects have been postponed or your customers are taking closer looks at them. What do you see that could cause some of these projects, particularly the ones that have already been announced, to be cancelled?

Randy Harl

Right now, we’re not seeing anybody even talk about that. I suppose that for the ones that are project financed, they could run into problems where they couldn’t get financing but the way we’re looking at that, Graham, is that these projects that we’re looking at make a lot of sense in that they make money and there's still plenty of strong players out there that if they think that – if the people that are developing them and have them can't get them done, our view is that somebody will. And we'll be able to step in there and that the work will go forward, you might see some delay in that transition. But so far, we're not hearing from our customers that they're running into those kinds of problems.

We do recognize though with the turbulence that's out there in these financial markets that that can happen and that's why we're cautious. That's why we think there's less visibility going forward in the projects that we have. But right now, we're not seeing it yet.

Graham Mattison – Lazard Capital Markets

Okay. Great. Thank you very much.

Randy Harl

Welcome.

Operator

Thank you. (Operator instructions) And our next question comes from Karen David-Green of Oppenheimer. Please proceed with your question.

Karen David-Green – Oppenheimer & Co.

Thanks and good morning. Most of my questions have been answered, but just wanting to touch on pricing a minute. Given what's going on in the landscape of the markets right now, and also from a competitive standpoint as well, what are your competitors doing in terms of pricing?

Randy Harl

Well, Karen, we're just not into a new round of bidding. So far, we haven't seen anything change. We had expected that we would enter into a period of time where there was a possibility that we might see some improving margins, but the bottom line is we've seen them level out a bit and my prediction is for this year that that would be the case, that it will be about level to maybe a little bit lower given that there's a bit more competition and less visibility which makes people nervous. But moving into 2010 and 2011, we ought to see that improve.

Karen David-Green – Oppenheimer & Co.

Great. Thank you.

Operator

And our next question comes from Matt Duncan of Stephens Inc. Please proceed with your question.

Matt Duncan – Stephens Inc.

Good morning guys.

Randy Harl

Hi, Matt.

Van Welch

Hi, Matt.

Matt Duncan – Stephens Inc.

First question I've got really is on the hurricanes. Did you guys see any impact in your business in the quarter from the hurricanes? Or was the delay on the economy [ph] really more getting permits and that sort of thing?

Randy Harl

I think it was more from permits (inaudible), Matt. Had we been in the middle of it, the hurricane might have impacted it but since we weren't working, it really didn't. We saw a bit of delay in some of the downstream projects that were over in South Louisiana. But it was not significant. We really haven't talked about it. It really didn't impact our ability at work. We suffered a few days of lack of power and communication, but with regards to the revenue and income generation capability of the company, really no impact plus or minus. A lot of people worried us about, is this going to be a great opportunity for downstream to get more work? It turned out that it really wasn't. So it was about a neutral effect on us.

Matt Duncan – Stephens Inc.

Okay. And as I look at your guidance, your full-year guidance now for '08, it looks like you're expecting the fourth quarter to be down a bit from the third quarter. If you take that $1.9 million that implies about $450 million in fourth quarter revenues. Does that sound about right?

Randy Harl

Matt, that sounds about right.

Matt Duncan – Stephens Inc.

And I guess the downtick would probably be more engineering with Upstream Oil & Gas because of the delays at Midcontinent.

Randy Harl

That's the way to look at it.

Matt Duncan – Stephens Inc.

Okay. And then as I look out to 2009, I know you're not done with your planning yet for the year, but just kind of broad strokes. If we look at the engineering piece with some of these EPC contracts getting delayed, would it be reasonable to expect engineering revenues could be down in '09?

Van Welch

Yes, I think depending on if we're successful on winning some additional engineering EPC, that would be the case.

Matt Duncan – Stephens Inc.

Okay. And then last thing here. Just looking at kind of demand in general, have you seen any sort of change in demand for your services or is it really the demand is still there but maybe the timing of when these things are going to go into backlog is just being changed a bit?

Randy Harl

Well, I think that's the way to characterize it. It's different for different parts of our businesses as I've talked about when I went through that. The engineering business is one where this EPC market is really what it's going to affect that. We believe that demand for the discrete services is going to be a bit weaker in 2009 for that business, but we see opportunities out there to be able to go out and secure those kinds of services as the EPC offering that we see move around a little bit, that makes us not as optimistic about that part of the business. But I would say everything else that we're looking at is just a return to a more normal situation where you have to bid and win the war in a shorter period of time where you just don't have the lead time that we've had.

We went into this year with Midcontinent Express and most of SESH in our backlog that gave us an unusual amount of visibility into 2008. And that hasn't happened I think in history before in this business. So I want people to understand that we're not worried about 2009 in that we are worried that the business won't be there. It's just going to come into backlog in a more normal way than we experienced between 2007 and 2008.

Matt Duncan – Stephens Inc.

Okay. And then one more housekeeping audit. Van, should we also use a 38.5% tax rate out to '09?

Van Welch

Yes, Matt. I would put that in.

Matt Duncan – Stephens Inc.

Okay. Thanks.

Randy Harl

And I think that we thought before we leave, Van, you might comment on the income side of the fourth quarter? We gave that guidance and we're going to be off a bit on the revenue side, but income, the margin will come up?

Van Welch

Yes, as we – another question that was asked earlier, our margins should pick up as we work off the SESH project and those lower margins in the third quarter moving into the Midcontinent Express project with those cost overruns not impacting those margins should have a favorable impact on margins going forward.

Operator

Thank you, gentlemen. At this time, there are no further questions.

Randy Harl

Okay. Thanks. Last year, when we reported our third quarter results, we characterized the third quarter as an inflection point in the transformation of Willbros into a business with more visibility and predictability. Now, a year later, we believe we have demonstrated a business model which delivers the results our shareholders expect and deserve. As we return to an environment for project planning and awards, which is more than norm for the pipeline construction business, we benefit from a business model which provides a greater component of services and generates work assignments from prime agreements and alliances with key customers. We are confident in our ability to book new work and our prospect list remains robust.

Clearly, we have entered a period of uncertainty and it is prudent to maintain our strong liquidity and balance sheet. In this uncertain environment, we are planning for various levels of activities and will be diligent in the control of our costs. We are financially strong and in these turbulent times, we should benefit from this strength. I'm confident that we have the team to prosper in these uncertain times and will move through 2009 and enter 2010 an even a stronger player in a market whose long-term fundamentals continue to be very positive.

Thank you for your support and for joining us today.

Operator

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect.

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