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BJ Services Company F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

January 27, 2009 | about: BJS

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BJ Services Company (BJS)

F1Q09 (Qtr End 12/31/08) Earnings Call

January 27, 2009 10:00 am ET

Executives

Bill Stewart - Chairman of the Board, President and CEO

Jeff Smith - CFO

Dave Dunlap - COO

Analysts

Pierre Conner - Capital One

Geoff Kieburtz - Weeden

Kurt Hallead - RBC Capital Markets

Dan Pickering - Tudor Pickering & Co

Bill Sanchez - Howard Weil

Bill Herbert - Simmons & Company

Collin Gerry - Raymond James

Alan Laws - Banc of America

Presentation

Operator

Good day, everyone and welcome to the BJ Services 2009 first quarter earnings conference call. Today’s call is being recorded. At this time for opening remarks, I would like to turn the call over to the Chairman of the Board, President and Chief Executive Officer, Mr. Bill Stewart. Please go ahead, sir.

Bill Stewart

Thank you and thank you all for joining us. I am joined here today with Jeff Smith our CFO, and Dave Dunlap our Chief Operating Officer. Before we start the conference call, I will mention that some of the statements that we make during the call may include projections, estimates and other forward-looking information. This would include any discussion of the company's business outlook.

These types of forward-looking statements are subject to a number of risks and uncertainties that could affect our outcome. I refer each of you to our latest 10-K on filed with the SEC, where you will find a discussion of the risk factors relating to the company's business. These factors and other factors mentioned on the call could cause actual results to differ materially.

I think that we had a very good quarter in the face of difficult market conditions. There were a number of positives that occurred during the quarter and I like to mention those at this time. The Blue Marlin, our stimulation vessel in Brazil started working during the quarter in the Brazilian waters. In Europe, we began fracturing operations on the continent that our first fracturing fleet position in that market. Good hopes for additional businesses, the future unfolds there.

We had a large offshore cementing contract for offshore UK awarded during the quarter and we will be awarded a large contract for land work in India during the quarter. There are some very good positives occurring in the international business during the course of the quarter, which we are just discussing.

Now, as we go through the review you will notice the revenue results from our segments. There are a number of segments for foreign exchange differences which had an effect on revenue comparisons about $36 million sequentially. Even though our revenue was affected by foreign exchange the difference, the effect on operating income was minimum, as our local currency expenses were in balance with the local currency denominated contracts for the quarter.

Now, this morning we reported net income for our first fiscal quarter 2009 of $149 million, $0.51 per diluted share. These results include a non-cash $21.7 million charge, about $0.05 per share related to the settlement of a US defined benefit pension plan and Jeff will get more involved in the details later in our discussion.

Review of the quarter, revenue for the quarter was $1.43 billion, up 11% compared to the same period last year and was down 6% sequentially. On a GAAP basis, operating income was $220 million, down 13% compared to the same quarter last year and down 16% sequentially. If you exclude the pension settlement charge, operating income was down 4% year-over-year and down 7% sequentially. Year-over-year, all of our reporting segments showed meaningful revenue growth, ranging from 9% to 14% with an increase in worldwide rig count of 7%.

US operations have benefited early in the quarter from projects that were delayed in the previous quarter because of the tropical storms and the hurricanes in the Gulf of Mexico. Canadian activity and our operating results exceeded our earlier expectation primarily as a result of higher than expected fracturing activity and generally larger jobs are occurred in that operation.

International Pressure Pumping growth year-over-year reflects market improvement and new contracts procured during 2008, particularly in Asia Pacific, Latin America and the Middle East.

Our Oilfield service business grew significantly year-over-year as well, capitalizing on market growth and expansion of these businesses through the BJ global footprint in the international marketplace. Sequentially revenues were lower in all operating segments in part due to seasonal activity slowdown due to holidays and weather issues in those markets. Also partly due to market-driven project delays or cancellations that occurred during the quarter.

Capital spending for the quarter was $114 million, and with the current market environment we are scrutinizing capital spending very carefully. We currently anticipate total fiscal 2009 capital spending will be in the $450 million which is about 25% lower than fiscal '08 capital spending at about $100 million lower than we projected and disclosed this time last quarter.

Looking beyond 2009, I would expect capital spending for fiscal 2010 to be significantly lower as we work down our current capital commitments.

Looking at the operating results by segment, starting with U.S./Mexico Pressure Pumping; revenues totaled $722 million for the quarter. This was a 4% decline from the previous quarter and our average drilling rig count declined about 4% as well.

As I mentioned earlier, our Gulf Coast activity improved sequentially, as the area recovered from project delays caused by the tropical storms and the hurricane in the previous quarter. This improvement was offset by activity declines in the Rocky Mountains and in the Permian Basin area.

Year-over-year, our U.S./Mexico Pressure Pumping revenue increased 10% with the Rocky Mountains, the Mid-continent, and Northeast regions contributing a majority of the increase.

Canadian Pressure Pumping, revenue of $132 million for the quarter, that was a decrease of 1% sequentially with average rigs down 6%. Now the revenue decrease was attributable to the weaker Canadian dollar reducing the US dollar equivalent revenues generated in the market.

Our average US dollar exchange rates strengthened about 16% compared to the previous quarter. Strong submitting and fracturing activity and some degree of pricing improvement mostly offset the currency exchange impact.

Year-over-year, revenue in Canada increased 9% with average drilling activity increasing 15%. Pricing declines year-over-year were the primary reason why revenue growth was less than the rig count activity growth.

International Pressure Pumping, revenue was $329 million, that was a decrease of 7% from the prior quarter, was up 14%, $40 million from the same quarter a year ago.

US dollar strengthened considerably against most foreign currencies during the quarter which affected revenue comparability by about $12 million from the previous quarter.

In Latin America, this region's revenue decreased 3% sequentially on a 3% increase in average drilling activity. Revenue decrease was primarily attributable to the stronger dollar, reducing the value of sales invoiced in the Brazilian currency, and as a result of lower activity in a couple of other countries.

Year-over-year revenue from the region improved 20%, primarily the result of increased stimulation activity in Venezuela, Brazil and Argentina. Revenue from Middle East region decreased 8% sequentially, primarily due to project delays and lower rig activity in Saudi Arabia, North Africa and Kazakhstan.

Year-over-year Middle East revenue increased 9%, benefiting from product sales in Oman and new service contracts in North Africa. Revenue from the Asia Pacific region for the quarter was another record for that operation, doing great in Asia Pacific with an increase of 1% sequentially despite 8% decline in active drilling rigs.

Increased revenue in Indonesia, Australia, which had suffered some weather-related delays in the previous quarter were partially offset by lower activity in China and Malaysia. Year-over-year revenue for Asia Pacific region increased 29%, with China, Malaysia and Thailand providing majority of the increase.

Revenue from the Europe segment was down 21% sequentially with almost half the decline resulting from foreign exchange rate differences. The remainder of the decrease was primarily attributable to weather-related activity declines in the North Sea and continental Europe. Revenue was 7% lower than the same quarter last year, a result of foreign exchange rate differences and a slightly lower activity.

In Russia, revenue decreased 23% sequentially on lower activity and increased 11% year-over-year. Revenue from the Oilfield Services Group, $249 million that was a decrease of 13% from the prior quarter and an improvement of 13% year-over-year. Currency exchange rates are also an issue in this segment, impacting revenues approximately $8 million compared to the previous quarter.

Tubular Services were down 11% sequentially and down 2% year-over-year primarily due to lower international activity. PPS revenue decreased 20% sequentially and 2% year-over-year, as this business has entered into the seasonally low point for its business operations.

Chemical Services revenue, it was down 2% sequentially and up 16% year-over-year, with the year-over-year increase primarily resulting from increased activity in its US business. Completion Tools revenue decreased 24% sequentially, as a result of lower Gulf of Mexico activity and large project-oriented sales into Latin America in the previous quarter, which did not repeat.

Year-over-year revenue increased 38%, reflecting the inclusion of Innicor Subsurface Technology in the business, which was acquired in May of 2008. Completion Fluids had a great quarter. Their revenue increased 18% sequentially and was up 38% year-over-year and the increase is primarily as a result of increased fluid sales in our Mexico area.

At this point, I would like to pass it over to Jeff.

Jeff Smith

Okay. Thank you, Bill. Let me just make a few quick comments with regard to our margin performance. Consolidated operating income margin for the quarter was 15.4% on revenue of $1.4 billion. The operating income margin was down from 17.1% in the previous quarter, and down from 19.7% reported for the same quarter last year.

The 15.4% operating income margin reported in the quarter includes a non-cash one time charge of $21.7 million related to the settlement of our US pension plans that negatively impacted the margins for the quarter by approximately 150 basis points.

Breaking down the results by segment on revenue of $722 million for the quarter, our U.S./Mexico Pressure Pumping operations reported operating income of 21%, that's up 140 basis points from the previous quarter. The margin improvement was the result of the Gulf of Mexico performance recovering from the prior quarter's hurricane and tropical storm declines, also a favorable business mix and lower fuel cost in the quarter.

Year-over-year, operating income margin for the quarter was 650 basis points below the 27.5% reported in the first quarter of last year, and that was primarily due to the lower pricing that we'd expect between the two periods.

Moving on to Canada, in the first quarter, our Canadian operations generated $29 million of operating income for an operating income margin of 21.9%. This compares quite favorably to the 14.6% operating income margin that was reported in the previous quarter, and as a result of higher underlying revenue volume, favorable pricing comparisons in addition to lower equipment and fuel costs that contributed to that improvement.

Year-over-year, operating income margin was up 790 basis points, primarily due to larger jobs and lower operational-related expenses. For International Pressure Pumping, operating income margin for the quarter was 13.8%, that's down 220 basis points from the previous quarter, and up 130 basis points from the same quarter last year.

Sequentially, margins were down due to the lower revenue levels, coupled with lower service-related type work in the UK and parts of our Middle East region. Year-over-year with the exception of the Middle East, all of our operating regions experienced margin improvement due to higher revenue volume.

Moving to our Oilfield Services Group, on revenue of $249 million for the quarter, operating income margin was 17.9%, that's down 270 basis points from the previous quarter. Most of the decline was due to seasonally lower activity levels that are associated with our Process and Pipeline business. Higher operating expenses with Completion Tools and project delays experienced with the Tubular Services were also contributors to the lower margin performance in the quarter.

Moving to the corporate segment piece, operating loss was abnormally high in the first quarter, again, due to the $21.7 million non-cash one time charge that was associated with our benefit plan. Let me provide a little bit of color on that charge here.

Back in September of 2006, we had purchased an insurance annuity contract and entered into an agreement to settle our obligation with respect to that pension plan. The settlement agreement was subject to the approval of the US Pension Benefit Guaranty Corporation, as well as the Internal Revenue Service.

We obtained a necessary approval for that in December, which triggered recognition of the charge and essentially, the $21 million represents the supplemental pension funding that occurred prior to 2006.

Moving away from the segments for a minute, we did report on our statement of operations for the quarter, other net income of $1.5 million which represents a favorable improvement of $9.4 million from the previous quarter.

I would like to take a minute here just to brief that for you. As a reminder, the unusual activity in the previous quarter drove quite a bit of this and can be broken down into three different areas.

First of all, we had fully impaired goodwill of $6.1 million. That was associated with our Russian business in the previous quarter. Secondly, we sold our interest in a small joint venture operation in Hungary and recorded the non-cash pre-tax loss of $2.9 million. Finally, in the previous quarter, we received a favorable cash legal settlement of $4 million of a non-operational nature.

In the recent quarter, we have recognized a $3.6 million benefit that was associated with a favorable legal settlement and a case that has been outstanding for a number of years.

Now, moving to the balance sheet, we ended the quarter with $553 million of debt, down $4 million from the previous quarter. Cash on hand at the end of December was $172 million and notable uses of cash during the quarter included capital spending of $114 million, treasury share purchases of $44.2 million, where we acquired just under 3.5 million shares and dividends of just under $15 million. Our debt to cap at quarter end was 13.6%, with net debt to cap of just under 10%.

And at this time, I will turn the call back over to Bill for comments on our outlook.

Bill Stewart

Thanks, Jeff. Now as we think about the current quarter and beyond, need to understand the December quarter and how it played out of late. We started the quarter with significant revenue and operating income over achievement in October and ended the quarter with revenue and operating income under achievement as the holidays and low commodity prices basically sapped the energy out of the marketplace.

The March quarter is getting off to a slow activity start and our plans have been developed with that as the starting point. We expect US drilling activities to continue its rapid decline over the next four quarters, with activity adjusting to lower demand and surplus natural gas supplies.

We expect rig activity to be down 27% sequentially in the first calendar quarter of 2009 and then to experience declines in the range of 10% for each of the subsequent quarters for the remainder of the year. These projections are based on the number of rigs needed to exit the market to bring gas, natural gas supply and demand close to being in balance. The wild card here, as we all know, is the recession and how much demand destruction will result, as a consequence of that.

We expect service and product pricing pressures to escalate in most of our US markets. We are monitoring our customer activity closely at a local and corporate level and taking the steps to right size our organization without sacrificing job quality, safety and long-term commitment to our customers. In addition, we are taking steps to improve the efficiencies throughout the organization and to reduce costs.

We think the Canadian drilling activity will begin to decline from current levels late in the second quarter and late in this current quarter, second fiscal quarter, as the market enters the seasonal strength breakup period resulting in a sequential activity decline in the range of 20%.

Our revenue for International Pressure Pumping is expected to be lower in the second quarter compared to the first quarter on the order of about 8% to 10%, as a result of projects being delayed and our indefinitely deferred in certain markets.

In The Oilfield Service Group, we expect the normal seasonal activity decline for our Process and Pipeline Services business to continue through the quarter. Other than that, we anticipate a modest decline in the quarter for the segment.

Our balance sheet remained very strong with significant volume capacity and net debt-to-cap ratio in excess of less than 10%. I believe we're very well positioned to execute our plans and emerge at the end of the downturn as a much stronger company.

This is the kind of market that presents buying opportunities, and I expect us to be active on that front as well as continuing to expand our existing businesses in the world markets.

In light of the volatility of the market and lack of clarity on a number of key issues, we've decided to defer making earnings projections for the March quarter.

And at this point, I'd like to open it up for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Pierre Conner with Capital One. Please go ahead.

Pierre Conner - Capital One

Good morning, gentlemen.

Bill Stewart

Good morning.

Jeff Smith

Good morning.

Pierre Conner - Capital One

Some good results in the margins in US, [seems] in a quarter, but I know the outlook is the most important thing. Relative to that, Bill, you spoke of CapEx adjustments and a lot of other companies are speaking of headcount reductions as well and permanent cost structure reductions. What else can you tell us about specifics on other cost reductions that you might be undertaking?

Bill Stewart

As I mentioned, we're monitoring the marketplace very closely and we've always been one to aggressively adjust our cost phase as the market presents itself to us. So, I think that's enough said. We'll do a good job at resizing the company when the occasions develop themselves for the need.

Pierre Conner - Capital One

Okay.

Bill Stewart

CapEx, actually we probably would have brought CapEx down just maybe a little more, but with the current commitments we have out there that needs to work itself out of the system and 2010 at this point is viewed to be a year of significantly lower capital spending.

Pierre Conner - Capital One

Okay. On a big picture, there has been some comment about an inventory of drilled and cased but not yet completed wells onshore. Do you have a perspective on that? Will that, in the short-term mute some of the rig count decline relative to the completion activity from your perspective?

Bill Stewart

We've heard about that occurring, but it's really not to any significant extent. I think it's more a nice conversation piece as opposed to any material event happening in the marketplace.

Pierre Conner - Capital One

Okay. And then my last one, either you or Dave, but in the past you've spoken about a turndowns in the last quarter there was a comment that a lot of that turndown was due to a lack of availability of province in some particular regions, Haynesville, I guess particular. You anticipated those things working themselves out, I'm sure they are.

And so my question are they worked out? Are we still seeing some impact of delay and turndown due to a [province] or is that basically behind us now?

Bill Stewart

The situation as we see it today is that's largely behind us. There are a couple of (Inaudible) that are still in a little short supply, but generally speaking the proper scarcity issue is doesn't prevail anywhere to the extent that it did in previous quarters.

Pierre Conner - Capital One

All right. I'm let some other folks jump in and cycle back if I have anything else. Thank you, gentlemen.

Bill Stewart

That's good. Thank you.

Operator

We will take our next question from Geoff Kieburtz of Weeden. Please go ahead.

Geoff Kieburtz - Weeden

Thanks. Good morning.

Bill Stewart

Good morning.

Geoff Kieburtz - Weeden

Bill, I wanted to come back to your comments about CapEx in 2010 and the idea of it being significantly lower. Are you intending that to be an indication of how long you think things are going to remain depressed?

Bill Stewart

Yes.

Geoff Kieburtz - Weeden

Okay.

Bill Stewart

I think that as we work out of this current activity reduction cycle, we think, as I mentioned in terms of what the rig count will do that you'll see substantial rig count reductions in the US marketplace between now and December.

Geoff Kieburtz - Weeden

Yes.

Bill Stewart

Hopefully at that point, the view will be a little more positive. But assuming that is a little more positive, I think that the activity reduction this year will free up a lot of capacity that will be excess to the needs in December and the need for aggressive tempo build in 2010 probably won't exist. But the visibility is pretty short these days.

Geoff Kieburtz - Weeden

I understand.

Bill Stewart

That's what the feeling is at this point. We'll probably bring capital spending down to more of a maintenance level for 2010, but that's the current view. These things are in a state of flux, as we move forward.

Geoff Kieburtz - Weeden

And what is that maintenance level, would you estimate?

Bill Stewart

I’d say it been about 250 or thereabouts.

Geoff Kieburtz - Weeden

Okay. I'm also inferring from your comment that in regards to the state of readiness and quality of the technology base and so on and so forth that you feel comfortable with what BJ has, that the long-term effort to recapitalize the fleet is completed at this point?

Bill Stewart

Pretty close.

Geoff Kieburtz - Weeden

Okay.

Bill Stewart

Technology was, yes, we're maintaining a very aggressive capital, I mean technology development effort. The focus still continues to be at a high level in that area. We're going to do all that we can maintain the quality of our equipment in the field. There is no compromise there. I think that as we move forward in this very difficult market, the larger pressure pumping companies will be the ones that are the winners and competing to our business over the course of the next year or two.

Geoff Kieburtz - Weeden

In terms of your fairly detailed forecast, I understand there is a lot of uncertainty about the rig count trajectory over the remainder of this year. Would you be willing to offer any historical context for what margins are likely to do?

Bill Stewart

Not really. I think there are so many variables; it depends on the rate of activity decline, depends on the swiftness that we and all the companies are able to get their size of company to the market as it declines. It depends on negotiating with your suppliers. It depends on negotiating with your customers. All those issues are pretty complex. So, I think that's our view on it at this point.

Geoff Kieburtz - Weeden

Do you think that looking at margin compression in the '01, '02 time period would be a reasonable starting point?

Bill Stewart

Jeff may have a view on that.

Jeff Smith

Directionally, clearly, Geoff, that's the place to look. The company is different from '01, '02.

Geoff Kieburtz - Weeden

Right.

Jeff Smith

Our Oilfield Services is a different metric for our business today. We've done a good job in expanding in the international pumping side. Although we expect activity to turn internationally, it's not as swift as what we seen in North America. And to Bill's point, all those factors do come into play, it's difficult to tell.

So without committing myself to say yes, we'd expect to see similar margin compression. Directionally I think, that's the right way to look at it.

Geoff Kieburtz - Weeden

And last question, have you made headcount reductions already?

Bill Stewart

We have stopped replacing attrition.

Geoff Kieburtz - Weeden

Okay.

Bill Stewart

And we are looking at all of our costs as we speak here today.

Geoff Kieburtz - Weeden

Okay. Great. Thank you very much.

Operator

We will take our next question from Kurt Hallead with RBC Capital Markets. Please go ahead.

Kurt Hallead - RBC Capital Markets

Good morning.

Bill Stewart

Good morning.

Kurt Hallead - RBC Capital Markets

Question I had for you is, looking at the big three players in the US who are in a very strong position to recapture some lost share over the last few years. What's your prognosis for BJ's position in Canada, specifically in the shale plays up there, Horn River, Montney etcetera? Do you see a similar opportunity to capture share up there, or is the focus still going to be on the US?

Bill Stewart

Well, the focus will be on all the markets that are key to us, and the Canadian market is the key. We have a very good position in that market. We view that area along with the Bakken area as being our growth opportunities. We will be adding some capacity up into that market to take advantage of those growth opportunities, and we expect to do pretty well in that market as we have in the past.

Kurt Hallead - RBC Capital Markets

Do you see from an M&A standpoint, I know you guys have always looked at the buy versus build decision. Can you update us on how, given the markets evolved here, where you guys are now viewing the market, buy versus build?

Do you think any sort of M&A that occurs within the industry, is it going to be more asset-based or do you think it could incorporate some smaller entity? Can you give us some color on that?

Bill Stewart

Our focus is going to be to build on our Oilfield Services Group. Highly complimentary to Pressure Pumping, adding to what we have, and adding other products and services that compliment Pressure Pumping, that we can push and pull out into these international markets, where we have an established position making for expansion very efficient.

Kurt Hallead - RBC Capital Markets

Okay and then just one last follow-up. Do you expect, in the US market the prospects here for some element of consolidation, at least what I've been able to pickup on in various conversations, was the Canadian market as fragmented and do you see there are some consolidation up in Canada as well?

Bill Stewart

It's a good possibility that there would be consolidation in both places.

Kurt Hallead - RBC Capital Markets

Okay. You have the bid-ask prices has that narrowed substantially in the last couple of weeks, or is it still too wide for any serious discussions to take place? Generally you don't have to get specific. I'm just trying to figure out whether or not the some of these other private companies have come to the new reality of the evaluation metric.

Jeff Smith

You just need to take a look at the stock prices and make your own view on that.

Dave Dunlap

Yes, Kurt, I could add a little bit to that as well on the private front. As we have spoken in the past, there has been a bit of disconnect between that bid-ask spread. I think part of that was that these private companies clearly are not priced every day. So they see this generous cash flow and look at our previous quarter.

It was very, very nice and I don't think that we're valued on four times, last quarter's earnings being a $2-plus. But what I'm starting to see is that, there is a little bit of a reality check because these private companies, their businesses are starting to be impacted. I don’t think we are quite there yet, but I think we will reach an inflection point to where that reality will come into check and it will be provide a good opportunity for us.

Kurt Hallead - RBC Capital Markets

All right. Thanks, I appreciate it.

Dave Dunlap

Sure.

Operator

We will take your next question from Dan Pickering with Tudor Pickering & Co. Please go ahead.

Dan Pickering - Tudor Pickering & Co

Good morning, guys.

Bill Stewart

Good morning.

Dan Pickering - Tudor Pickering & Co

Bill you talked about the larger players in the US and North American business being able to have some advantages going forward. Can you just give us a snapshot of what you are seeing out there competitively right now? I mean are the little guys losing share yet rig has down a bunch. Are they are competing on price aggressively at this point or they taking a wait and see attitude?

Bill Stewart

The little guys are doing pretty well. I don't see any material impact on some of those guys. I'm sure that, it just all depends on their financial health and all of us are feeding on a market that is less generous in terms of providing margins. So, we're all in the same boat there. So, I don't think there's anything that I can point to it says, hey, look at what's happening and verify our earlier comments.

Dan Pickering - Tudor Pickering & Co

Okay, but for the--

Bill Stewart

Just have to look at transactions. I think transactions might be the ones, where you get that feedback.

Dan Pickering - Tudor Pickering & Co

Okay. But I guess what I'm trying to understand is, if big players like BJ are going to take share, that implies that small players are going to lose share and, but it doesn't sound like yet that either that's one not happening, or two, they are not fighting back from a price perspective yet.

Bill Stewart

I haven't seen it happen. That's as far as I can go.

Dan Pickering - Tudor Pickering & Co

Okay. That's fine, thank you. Jeff, as we look at the December quarter results, you talked a little bit about the mix impact of Gulf of Mexico recovery, and also fuel cost declines. How big are component of the results for those two dynamics? I mean Gulf of Mexico recovery, I would assume is not recurring, are we holding up at those levels?

Jeff Smith

We're holding up those levels keeping in mind that the lack of efficiency that you create in the environment of the hurricanes and the tropical storms, so you've got a cost base and revenue less than what you would project, so impact there. And then the other side on the fuel cost.

Clearly, when you go to the gas pump, you're paying less and we're paying less as well. So, by metric about 4% of our revenue in the US, the cost is fuel cost. So we benefit from that tremendously coming out of the July summer time.

Dan Pickering - Tudor Pickering & Co

Were fuel costs down, maybe 50%?

Jeff Smith

June costs were down a little bit less than that.

Dan Pickering - Tudor Pickering & Co

Okay. Then, I guess trying to understand the inner play here between cost, focus and cost savings, and price and activity impacts, as you think about, we've typically modeled BJ showing 30%, 35% incremental margins as revenues improve?

Jeff Smith

Yes

Dan Pickering - Tudor Pickering & Co

We tend to think about numbers in the 50% decremented margins as revenues are falling. Can you cut costs fast enough to bring the decrementals back into that 30%, 35% range or should we be thinking bigger in the short-term?

Jeff Smith

Well, I think that as Bill pointed out earlier in the call, it's going to be a timing game.

Dan Pickering - Tudor Pickering & Co

Yeah.

Jeff Smith

Basically, you're chasing the market down. We're going to respond as quickly as we possibly can. So there may in the early stage be some inefficiencies, and we've experienced that in prior cycles as well. But we're going to push hard to get to that 30%, 35% decremental margin. And that number does not include any kind of pricing [erosion].

Dan Pickering - Tudor Pickering & Co

Yes.

Jeff Smith

So to combat any price, it would be quite difficult.

Dan Pickering - Tudor Pickering & Co

Okay. Last question for me, on a $450 million CapEx number for fiscal 2009, roughly is that an equal split between US and International? Is it more internationally focused? How do you think about that breakdown?

Bill Stewart

It's more weighted to International than to Oilfield Service guys.

Dan Pickering - Tudor Pickering & Co

Okay. Thank you, guys.

Bill Stewart

Thank you.

Operator

We will take our next question from Bill Sanchez with Howard Weil. Please go ahead.

Bill Sanchez - Howard Weil

Good morning.

Bill Stewart

Good morning.

Bill Sanchez - Howard Weil

I also now could talk a little bit more about the pricing improvements that you saw in Canada during the quarter? Also as I look at the margins, both sequentially and over year-over-year basis, they were up significantly here. I know that a lot of restructuring that went on in Canada last year; can you just talk about the year-over-year comparisons as we go forward through 2009? Should Canada be better on the margin line in 2008?

Bill Stewart

We took advantage of the opportunity to renegotiate pricing agreements with our customers in Canada just before the winter time, that happens year-after year-after-year. At the point where all of that took place, we were able to get a better price. This kind of prevailed over the course of the quarter, and will extend into the summer.

But in March, we go through the breakup period, activity gets very low and then in the summer, it picks back up again. What prevails in Canada will be more based on how things look in the summer as opposed to what kind of arrangements are in place at the current time.

So, it's a little early to say how Canada will develop. It depends on how fast the recount goes down in the states, what impact that has on gas production, how much gas is in storage in the summertime and all of those factors, which come into play to drive the psychology in favor of the oil and gas companies as opposed to the service companies.

Bill Sanchez - Howard Weil

Bill, your headcount is pretty much right sized as it needed to be in Canada at this point?

Bill Stewart

Yes.

Bill Sanchez - Howard Weil

Okay. One follow-up, there was discussions made as it relates to International Pressure Pumping revenue outlook. Jeff, I know if you could perhaps comment a little bit more just specifically on how we should be thinking about EBIT margins moving forward through the International Pressure Pumping business in '09?

Jeff Smith

Well, I think, as the previous caller was talking about, kind of 30% to 35% in the US. Typically in international market given dynamics, we kind of look more for a 25% up or down.

Bill Sanchez - Howard Weil

Okay. That's helpful. Thank you very much.

Jeff Smith

Okay.

Operator

We will take our next question from Bill Herbert with Simmons & Company. Please go ahead.

Bill Herbert - Simmons & Company

Thanks, good morning. Question for you with regards to US Pressure Pumping margins. Can you give us a sense as to what the exit rate margins were in the first quarter?

Bill Stewart

Well, directionally, I'll tell you that they were lower. October was a very strong month and the business decline from that clearly, because of the holiday season that we experienced. But Jeff, I’d rather not give month, because there is a lot of volatility from month-to-month in different costs come into different months and I’d just assume stay away from providing that.