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Complete Production Services (NYSE:CPX)

Q4 2008 Earnings Call

February 03, 2009 11:00 AM ET

Executives

Jose A. Bayardo - Vice President and Chief Financial Officer

Joseph C. Winkler - Chairman and Chief Executive Officer

Brian K. Moore - President and Chief Operating Officer

Analysts

Marshall Adkins - Raymond James

Stephen Gengaro - Jefferies & Co.

Jeff Tillery - Tudor, Pickering, Holt

Pierre Conner - Capital One Southcoast, Inc.

Michael Drickamer - Morgan, Keegan and Company

Kevin Pollard - JP Morgan

Teresa Fox - Stone Harbor

John Daniel - Simmons & Company, Intl.

Operator

Ladies and gentlemen, welcome to the Fourth Quarter 2008 Complete Production Services Earnings Conference Call. My name is Tanya, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Jose Bayardo, Chief Financial Officer. Mr. Bayardo. Please proceed.

Jose A. Bayardo

Thanks Tanya. Good morning, and thank you for joining us as we host our third quarter 2008 earnings conference call. With me here today are Joe Winkler, Chairman and CEO and Brian Moore, President and Chief Operating Officer.

Before we begin the discussion of our financial results, please note that some of the statements we make during this call may contain projections and estimates, including comments about our outlook for the company's business, which are forward-looking statements within the meaning of the Securities Acts of 1933 and 1934.

These forward-looking statements are based on limited information as of today, which is subject to change. These forward-looking statements are further subject to risks and uncertainties and actual results may differ materially. You should not assume that these forward-looking statements remain valid beyond the current quarter. I'll refer you to our various documents filed with SEC for a more detailed discussion of some of the risk factors that might impact our business.

With that I'll now turn it over to Joe Winkler.

Joseph C. Winkler

Thanks, Jose and good morning to all on the call. We appreciate you've taken the time to join us this morning. 2008 was an excellent year for Complete Production Services. My thanks to all of our dedicated and hardworking people for their efforts and contributions to our success. 2008 revenue $1.839 billion grew $384 million or 23%, EBITDA $507 million was up 15%. EBITDA margins were 27.5 % and earnings per share from continuing operations were $2.30 per share.

Our growth was balanced in discipline with approximately 75% organic and 25% from acquisitions. Our incremental EBITDA margins were 19 % lower than we would expect, but influenced by the negative forces in play in Q4 2008.

During the year, we invested approximately $254 million in CapEx of which approximately 60% was growth and invested approximately $190 million in some very selective strategic acquisitions.

We successfully completed our coil tubing-drilling project, expanded our pressure pumping operations in the Barnett, expanded our service offerings in the Bakken including pressure pumping, expanded our presence in the rapidly growing Haynesville Shale and acquired a platform in the Appalachian region in Marcellus Shale. We grew and strengthened our balance sheet by lowering our year end leverage ratio.

Activity levels through the first 10 months of the year were very good, but dropped off rapidly during November and December.

Looking at our quarterly performance on a sequential basis, revenue of $487.1 million was $6.1 million less than Q3. Momentum from Q3 carried into October which fell rapidly starting in mid November, offsetting the benefit of our Q4 quarter acquisitions.

Margins were significantly impacted due to lower utilization and some pricing pressure declining to 25.6% from 29.1%. This resulted in an EBITDA decrease of $18.8 million. Activity declined so swiftly we could not outrun with cost adjustments.

Completion and Production services revenue $407.3 million declined $10.5 million and EBITDA declined $12.8 million resulting in EBITDA margins of 29.6 %. The impact of two fourth quarter acquisitions and a strong performance in our Mexico coil tubing operation was more than offset business by weak performance in the remaining service lines in the segment.

Our U.S. coil tubing rental well service, fluid handling and too much lesser extent pressure pumping were negatively impacted by the swift negative shift in activity mid quarter and related pricing pressure.

Drilling service revenue of $61.4 million was down slightly from Q3, however, EBITDA was down $3 million due to the impact of lower pricing and lower utilization in our contract drilling business. The message for the quarter is lower utilization with some pricing pressure.

I'll now turn it to Jose and come back for our outlook.

Jose A. Bayardo

It means depreciation and amortization expense increased $3.4 million over the prior quarter to $51.1 million and net interest expense increased $1.5 million sequentially to $15.4 million. Full year 2008 CapEx totaled approximately $254 million and cash paid for acquisitions totaled $180 million.

Strong cash flows from operations during 2008 combined with the proceeds from the divesture of non-core businesses earlier in the year enabled us to make these investments while reducing our leverage ratio to 1.6 times at 1231 '08 from 1.8 at December 31, 2007.

As of December 31, 2008 we had net debt of approximately 828.6 million and cash balance was 19.1 million, and we had 193.5 million drawn on our $400 million revolver.

Additionally, we have letters of credit outstanding which totaled approximately 37.7 million, leaving us with about 168.8 million of availability. Our credit facility runs through December 6, 2011 and our 650 million bonds mature in 2016.

As mentioned in the earnings release, we took 272 million pre-tax non-cash goodwill impairment charge, pursuant to SFAS No.142. Charge affected all three of our reporting segments and our view is largely attributed to the currently depressed valuations in both equity and debt markets, as well as the weaken near-term market outlook.

The 272 million had a limited tax basis resulting in a tax benefit of 19.9 million, excluding the impairment our effective tax rate for the quarter would have been 35.6% and our full year rate would have been 35.5%.

With that, I'll turn it back over to Joe.

Joseph C. Winkler

Thanks. Last quarter, we indicated that in spite of a good start to Q4 we expect that activity levels to decline over the remainder of Q4 into 2009. Visibility of activity for 2009 is still not clear and we expect further declines from current levels along with continued pressure on pricing. Based on the science we see today, it is difficult to imagine a meaningful pickup in activity before the end of the year.

However, we are of the opinion that the deeper and longer of the decline the greater the recovery. The question is when and when will be influenced by decline rates, demand be it whether economy related and L&G imports. And we do not know when this will occur although we believe it to be relatively short-term in duration, perhaps a year to a year and half. We believe the effect of decline rates are real and we'll begin to show up in production.

Our plans for 2009 will be as follows: monitory market activity in our area of operations and adjust accordingly, protect and enhance our market position, focus on improving execution at the field level, where and when appropriate adjust our cost structure to the anticipated activity level, significantly reduce our CapEx, last quarter we said less than 150, current thinking is less than 125 and it may go lower.

No bolt on type acquisitions until market stability, both in operations and capital markets. Pay down debt and our billed cash to be prudent an opportunistic, identify opportunities assess, organic and acquisitions, monitor market and when appropriate to move on them.

We believe 2009 will be a very difficult year, duration of the downturn is difficult to predict. Our balance sheet is well structured to handle this market, as a reminder 650 million of that debt bonds due 2016.

We expect to pay down some additional short-term debt and our billed cash. We have solid market position in the resource plays and we will protect and enhance our position during this period.

We will benefit from our experience local personnel with base and level expertise and knowledge. Long-term fundamentals North America gas are sound with near-term challenged. Resource plays in horizontal wells with their more intent services were likely to lead recovery.

Although a difficult market, it is a unique time to create value for execution and be an opportunistic, and you will hear similar comments from almost everyone, but only those who execute will prevail, this market will differentiate. Tanya, with that we'll open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question will come from the line Marshall Adkins with Raymond James. Please proceed.

Marshall Adkins - Raymond James

Good morning, Joe.

Joseph Winkler

Hi, Marshall. Good morning.

Marshall Adkins - Raymond James

I wanted to drill down if you will.

Joseph Winkler

Great.

Marshall Adkins - Raymond James

Little more into this specific side...

Joseph Winkler

So I'd want people to be drilling down, so go ahead.

Marshall Adkins - Raymond James

More specifics on your plans for down term, you've mentioned in the past that you guys have been planning for this and preparing for this. I want to gets some more specifics, specifically you mentioned maybe you take CapEx down to 125, what's your maintenance CapEx and then talk about labor cost and may be other input cost that you see moving lower?

Joseph Winkler

Sure, just as a general statement and backdrop our fleets are fairly new, so we won't have the same degree of maintenance CapEx as perhaps some others might and the degree of maintenance will clear degree of activity. Out of 525 EBITDA clip, that's one maintenance level, that is something's significantly less than that it's a another. Of the 125 Brian, what is it growth is probably what I've ever made --

Brian Moore

About 70 --

Joseph Winkler

So we've got some latitude to bring down that number Marshall and of the 125 ballpark, where we committed $40 million to $60 million.

Brian Moore

Not more than $50 million.

Joseph Winkler

Something in that range. So as we go forward depending upon activity levels, we can bring the maintenance down to 65, 50 something along those lines depending upon where we are at activity level.

As too labor cost, we were monitoring what was going on in the fourth quarter that we could not run it. It's always difficult on the front-end to do that, but we have been adjusting our variable workforce consistent with what we've seen activity wise. Overtime, I was coming down not eliminated, but coming down. And so that will have a positive bearing on our labor cost as we reduce the waiting of overtime of the total. Those are the kinds of things we're doing, so that does give you a range Marshall on the maintenance.

Marshall Adkins - Raymond James

Very helpful. Kind of as an add-on to that theme, on your debt side, you're relatively levered here, are you close to any covenants or do you see any issues arising near-term. Obviously, looking out you're too nervous, really know, but near-term any issues you see out there?

Joseph Winkler

Jose.

Jose Bayardo

No, no issues whatsoever near-term.

Marshall Adkins - Raymond James

Okay. Last question. I'll turn over to someone else, geographic and product line trends, any specific regions in your product lines holding up better than others. So could you just briefly touch on some of the more meaningful product lines in geographic region.

Joseph Winkler

This will be relative, I think. But let me say in quarter four pressure pumping held up reasonably well on relative basis. As the quarter played out, we began to see weakness in many of the markets, some sooner than others. I think in the last call, we talked about portions of the Western Oklahoma Panhandle coming down sooner than some other areas. We started seeing as the quarter played out some weakness in the Rockies, the Barnett, where else guys, Canada was weaker than we had anticipated last time, last quarter.

I don't think any areas are immune to it Marshall, activity levels in the Haynesville are still good. Not quite at the pace, perhaps as people anticipated it might be 90 days ago, but nonetheless still good. And I think the same can be said for the Appalachian and currently it's still good, seasonality issues up there at the moment. It may not have the same sense of urgency today as it did 90 days ago. But nonetheless plan out reasonably well.

What about in terms of the quarter, mid November, we saw a utilization come down. Just about a across the Board, Marshall. I think there was any area that was immune to that and pressure pumping held up better than some of the others. But nothing was immune. Mexico, turned and bang our performance force in Q4, it did very, very well.

Marshall Adkins - Raymond James

And you still think you're pretty well situated for and let's just assume the shale play is hold up a little bit better than some of these other regions still well positioned in those areas?

Joseph Winkler

We think so and that's certainly is our intent and our strategy for 2009 is to be well positioned in those areas as we bring, they will lead to recovery.

Marshall Adkins - Raymond James

Terrific. Thanks guys.

Joseph Winkler

Thanks, Marshall.

Operator

And your next question will come from the line of Stephen Gengaro with Jefferies & Company. Please proceed.

Stephen Gengaro - Jefferies & Co.

Yeah, thanks. Good morning gentlemen.

Joseph Winkler

Steve, good morning.

Stephen Gengaro - Jefferies & Co.

A couple things, but first can you give us a sense for December versus October?

Joseph Winkler

December, in terms of --

Stephen Gengaro - Jefferies & Co.

In terms of how bad the month of December was relative to the first month of the quarter?

Joseph Winkler

We have that - well -- in terms of October was a very good month relative to the average of November and December, the holidays get in there and they've got holidays at the end of November and December.

Its relative, hang on just a minute, Stephen. So, let us get back to you on that one, if you don't mind?

Stephen Gengaro - Jefferies & Co.

No that's fine, that's fine, and then as a follow-up, when we think about you mentioned in '08 the incrementals. When we look at '09, can you have sort of guess as to what kind of detrimental we should expect, I know its going pretend on your ability to kind of lower the cost structure et cetera, but any sense as we head into beginning this year here.

Joseph Winkler

As you'd noticed, we did not give guidance for the year because of the uncertainty in the markets. And pricing is dollar-per-dollar and on the front-end you're going to try outrun the cost, it's always good prepared. I guess, but perhaps the way to get there is what kind of margins would we expect perhaps in this environment, what do we have for the year 27.5% and the question is how low will that come. Can you get down into the teams, of course it can.

Don't know that it will, but of course it can, depending upon pricing pressure and activity levels. So I'd rather answer the question that way to give you a frame a reference than get into the specific detrimentals because that'll vary by service line and by region.

Stephen Gengaro - Jefferies & Co.

Okay. Thanks. And then finally, when we look at sort of our rig count assumptions for North America. Where would you put any pluses and minuses kind of year performance relative to three year in the rig count? Those with your outperform or under perform rig count changes, I know you take price out of the mix for a second if that helps?

Joseph Winkler

Yeah, as I said, its really gets into the welcome what's going on completion wise, we're so focused on the completion phase of its, I think we'll outperform in the -- I think in the Barnett. We'll see that although with the recent activity reductions and what's going on there it's difficult to say, our position I think the Haynesville will outperform the market there. What else guys.

Brian Moore

We'd prefer, well I think will do well in those markets relative to what maybe going on activity wise and perhaps the Bakken, that the Bakken with our positions there we might outperform the market, but any of that, the market will be down, so it's just a relative question.

Stephen Gengaro - Jefferies & Co.

Okay. And then just one final quick one, there was a... due to the sense out there from someone, not from others that there is a bit of a backlog of completion work. Do you see that, I mean it sounds like you do at least a bit here in some area?

Joseph Winkler

I think there is, there is some, it's hard to tell exactly how much and whether that's a big deal, Stephen, there is clearly some.

Stephen Gengaro - Jefferies & Co.

Okay. Thank you.

Joseph Winkler

Thanks.

Operator

Your next question will come from the line of Jeff Tillery with Tudor Pickering, Holt. Please proceed

Jeff Tillery - Tudor, Pickering, Holt

Hi, good morning.

Joseph Winkler

Good morning.

Jeff Tillery - Tudor, Pickering, Holt

Just wondering... I understand there hasn't (ph) to comment on 2009 just because of how much uncertainties are out there, but kind as you look at the first quarter knowing what you do today about for what pricing is today relatively to Q4, do think your revenues outperform with the reconciling.

Joseph Winkler

In Q1?

Jeff Tillery - Tudor, Pickering, Holt

Yes.

Joseph Winkler

That's a tough one to call at this stage, it's moving so quickly, I suspected it might.

Jeff Tillery - Tudor, Pickering, Holt

Okay.

Joseph Winkler

Given where we are, it will be down no question, and the question earlier was trajectory in quarter four, and it was clearly on its way down, and that continues into quarter one. So, I think we will, Jeff, but clearly quarter one will be below.

Jeff Tillery - Tudor, Pickering, Holt

Sure. And part of this, as you look at the balance sheet as we go through 2009, how much cash flow do you think working capital can drill off in '09, if I would say, revenues down 20% to 30%, just give a broad... given the broad range. How much working capital do you think... what's build over the cash.

Jose Bayardo

Probably looking at roughly, 60, 80.

Jeff Tillery - Tudor, Pickering, Holt

Okay.

Joseph Winkler

Yes.

Jeff Tillery - Tudor, Pickering, Holt

And then the last question, you touched on the Bakken, a second ago Jose, can you just give us an update on how you guys doing there, is that region behaving any differently for you guys and kind of the rest that you have (ph)?

Joseph Winkler

Oh, it's competitive in activity levels are off. The question was more related to the rig count activity in there and I think relative to that we will do reasonably well. But in aggregate, it is well as some of the other areas were down in activity

Jeff Tillery - Tudor, Pickering, Holt

You talked about what the free cash, you guys are going to generate either build cash or pay down debt looking for the point in time where you could reinvest in the business. What's going to give you kind of functional commodity price? What would you be looking for before you'd be willing to commit capital to work on the acquisition?

Joseph Winkler

That's the business judgment that gets into the equation and as we think about 2009 that really is the opportunity as to make the call at the right time. And the kinds of things we'll be looking for is degree of confidence and discussions with our customers as to what their spending patterns will be. It will be some confidence in the capital markets as to what the capital may be available if one were too needed. It will be the general overhang in the economy and the effect that that has on demand for natural gas and how all of it plays out.

Our positions in the markets, our financial strength that the time i.e. the amount of risk we can take, given the opportunities that that might be in front of us. So, it'll be a number of things, Jeff, it'll be all of that put into the equation and good business judgment applied.

Jeff Tillery - Tudor, Pickering, Holt

All right. Thank you very much.

Joseph Winkler

And we think 2009 is the time to be looking at those kinds of things and perhaps can create some significant value upon the recovery of the market and it will recover.

Jeff Tillery - Tudor, Pickering, Holt

All right, thank you Joe. That's all I have.

Operator

And your next question will come from the line of Pierre Conner with Capital One Southcoast. Please proceed

Pierre Conner - Capital One Southcoast, Inc.

Good morning, gentleman.

Joseph Winkler

Yeah, good morning.

Pierre Conner - Capital One Southcoast, Inc.

I know that the biggest drive of course the ability to work on your margins, but you did mention specifically the coil tubing-drilling program took two pieces of that. Can you quantify what that impact was sequentially and can you tell us is there... is that program really done for now, are there any opportunities on that?

Joseph Winkler

It's done in the near-term and yes there are opportunities in the future, but I don't think anything in the near-term. The economics change, price of oil and gas change, that opportunity comes again, magnitude of revenue couple million bucks, something like that.

Unidentified Analyst

Yeah, I don't know if you want to go into specific detail of that however, two issues associated with, one is the project coming to an end, which was a high dollar high margin project for coil tubing package and then two was the downtime for the unit that was reconfigured and is now redeployed, however, there is loss of time.

Joseph Winkler

So we have loss time and then the incurrence of cost during that loss time which then when you compare sequentially has in affect that upon the performance Q3 to Q4, but not a major force in the overall scheme of things, but certainly on the completion production within coil-tubing had an impact.

Pierre Conner - Capital One Southcoast, Inc.

Okay. Thanks, going back to regions again and understand, sort of maybe on Marshall's question little bit. You mentioned your ability outperform to get a good footprint in a couple of areas, but and you did mention potentially the Marcellus slow -- give us your sense of the relative changes. I know everything is slowing. But Haynesville can hold activity levels what is the sense in the Bakken, given the differentials such out there, is that going to go fall faster than rest of the market or is it in line?

Joseph Winkler

Yeah, that's... it's going to fall because of the current pricing peer. I don't that it'd be any faster or slower than the any other areas and lot of it depends on each customer's unique position, but its going to fall, and I'd be surprised if its way out of line with the rest of the market.

Pierre Conner - Capital One Southcoast, Inc.

No, that's all, maybe inline as through the general expectation.

Joseph Winkler

Yeah.

Pierre Conner - Capital One Southcoast, Inc.

Okay.

Joseph Winkler

We know the direction.

Pierre Conner - Capital One Southcoast, Inc.

Yeah right, right. I think we do, we're trying... okay. Maybe just a general, but not on that topic, how about the joint venture, the GE Syndics is there anything happening there, is there any potential bright spot or is that a higher cost and its going to be... customers are going to put that off for a while.

Joseph Winkler

Go ahead, Brian.

Brian Moore

On the GE Syndics we have got the option not the obligation to take their capacity in some open hole log and tools. We still see a market opportunity with the customers that would look for an alternative in some basic reservoir measurement. We're moving forward with our fuel testing, on those components and that's going well.

We've not deployed the open hole tools or set of tools that we have an option on under our agreement. So, that still remains to be same, but we think in tough markets there will still be some opportunity for customers that are looking for an alternative and basic reservoir measurements.

Pierre Conner - Capital One Southcoast, Inc.

Okay. All right. That is helpful. Gentlemen, thank you. I'll let some other guys to get.

Joseph Winkler

So good. Thank you.

Operator

Your next question will come from the line of Michael Drickamer with Morgan, Keegan. Please proceed.

Michael Drickamer - Morgan, Keegan and Company

Good morning, Joe.

Joseph Winkler

Hello.

Michael Drickamer - Morgan, Keegan and Company

You commented that you have about $50 million of CapEx already committed for 2009, what kind of equipments that are already committed to?

Joseph Winkler

Brain?

Brian Moore

Coil, coil tubing units, pressure pumping, a little bit pressure pumping and four well service rigs.

Michael Drickamer - Morgan, Keegan and Company

Okay. The outlook you provided for 2009, is kind of a... almost a bleak outlook. What's the different, what is going to take for you to go from 125 million CapEx plans spending down to the $50 million of CapEx. How much would you're outlook at the change from here?

Joseph Winkler

Well, not a whole lot, it's a degrees here, and we're moderate and launch in the market very carefully. As we go down the timeline, we'll be balancing our protection in the market, our cash-flow what we can and can't do, what we want to do. Clearly, if we see the market going worse then it is, we will bring that down. And I think a point to note is that within the less than 125 is some degree of growth capital to which we are committed which clearly, past the next couple of months, we are no longer obligated or required or desirous of doing that. So we have a lot flex in terms of how we bring that number down.

And what we want to do is as we want to make sure that, one; we continue to execute and execute well at the field level, it is ever more important to be good at what you do in the field with the customer that requires good people and good equipment, and we'll continue to do that. And so we won't make rash short-term decisions unless of course we have to because of putting the company at risk or something along those lines, but as long as we can see that we can stay within cash flow, pay down debt, weather the storm and be opportunistic, we've got some flex on what we do we're bringing down the capital spend.

Michael Drickamer - Morgan, Keegan and Company

Now on the flipside of that, any thoughts on, perhaps some divestitures at this point or perhaps consolidating some yards, service more areas at a fewer yards?

Joseph Winkler

While, we're going through all of the process of that which makes sense at the field level to do the things that are required and but we won't get specific on what that is some... in some cases it may make some sense in other cases it may not, so it just depends. But we don't have any specific targets in that, we are monitoring the market and doing the things redeem appropriate for the market conditions as we see them.

Michael Drickamer - Morgan, Keegan and Company

Great. Thanks guys, that's it for me.

Operator

Your next question will come from the line of Kevin Pollard with JP Morgan. Please proceed.

Kevin Pollard - JP Morgan

Thanks. Good morning

Joseph Winkler

Kevin, good morning.

Kevin Pollard - JP Morgan

I was wondering if you could give us a sense of how much the two acquisition you completed in the fourth quarter contributed to the results?

Joseph Winkler

Revenue wise, ballpark... 15 to 20 million revenue give or take.

Kevin Pollard - JP Morgan

Okay. And with the utilization dropping off, so much in some of your existing markets that you've been, is there any opportunity to redeploy assets into these new footprints you just recently established?

Joseph Winkler

Yeah that was... the answer to that is yes and frankly, that was one of the reasons behind our strategy of Haynesville, Appalachian, Marcellus and even expansion of our presence into the Bakken, and we've done some of that and continue to do and anticipate doing some more, all subject to the market conditions at the time.

Kevin Pollard - JP Morgan

Okay. And, concerning to your land rig business, how many those rigs are running right now?

Joseph Winkler

I don't know what do we have. We have a fleet of 23...

Brian Moore

12ish 20.

Joseph Winkler

12, running something in that range.

Kevin Pollard - JP Morgan

And you call backing them out as they stop working?

Joseph Winkler

In some cases, I guess, yes and others will continue to look to work in stock as appropriate.

Kevin Pollard - JP Morgan

Okay, we're just exited that business, is it, you're seeing any benefit, obviously there is lot of rigs moving back to yards these days, is it trying catching temporarily list on that phenomenon?

Joseph Winkler

In terms of our rig moving.

Kevin Pollard - JP Morgan

Right

Joseph Winkler

I think we did. Yes, we had a pretty good idea as to where some of those rigs were going and I wouldn't say necessarily that at this stage it's getting a greater lift than it had, but it's pretty clear where these rigs are going.

Kevin Pollard - JP Morgan

Okay. Thanks Joe.

Joseph Winkler

It's the market rigs, it's not just --

Kevin Pollard - JP Morgan

Right, right, now I understand.

Operator

And your next question will come from the line of Teresa Fox with Stone Harbor. Please proceed.

Teresa Fox - Stone Harbor

Asked and answered. Thank you.

Joseph Winkler

Thank you very much.

Operator

And your question will come from the line of John Daniel with Simmons & Company. Please proceed.

John Daniel - Simmons & Company, Intl.

Hey, guys

Joseph Winkler

John, good morning.

John Daniel - Simmons & Company, Intl.

Good morning. Recognizing that your fleet is relatively new, but if activity continues to be weak, which I think we all expect, at what point you think we could see asset impairment charges. And is the timing of that within your control, or is that a function of your auditors?

Joseph Winkler

I have to be careful on it.

Brian Moore

May I take that?

Joseph Winkler

Yes.

Brian Moore

I guess it to some degree it depends on how long, what the ultimate outlook is. We're going through the calculation right now, really sort of went through simultaneously with our goodwill impairment calculations, but for broad based asset impairment testing you're taking the non-discounted cash flows that you anticipate generating in the future and comparing that versus the actual booked value and as of now, it doesn't look like there is any sort of issue on the asset impairment front and we don't anticipate there to be a significant issue that are down.

John Daniel - Simmons & Company, Intl.

Okay.

Joseph Winkler

These are very long lived assets and we know from the experience that there some very old units out earning revenue and unfortunately people are having to measure values at a very, very low point in the market, be it our markets for operations, be it capital markets, the impact to the economy so it's really being measured at a very, very low point in the cycle.

John Daniel - Simmons & Company, Intl.

Okay. Fair enough. One on the goodwill and then I got one operation question, I'll turn it back over, but the balance in goodwill 342, I understand FAS 142 is an annual calculation. Can they... can Grant Borton (ph) come in here and make you do a test before the 2009 audit work, are you free and clear for the next 12 months?

Brian Moore

I think we're free and clear John, this is an annual test.

John Daniel - Simmons & Company, Intl.

And then the last one, the Appalachian well service, when you guys bought that, you talked about having a flat fleet on order, did you guys take delivery of that equipment yet and if so did it work in the fourth quarter or is that something we'll see this quarter.

Joseph Winkler

We have taken delivery and it did not work in the fourth quarter, but we have worked in first quarter. So we'll see the effect of that in some form or fashion in quarter one.

John Daniel - Simmons & Company, Intl.

Okay. Thanks, guys.

Joseph Winkler

Okay. Thank you, John.

Operator

And your next question will come from the line of Jow Agulai with Johnson Rice (ph). Please proceed.

Unidentified Analyst

Thank you. Joe, earlier in the call you mentioned that the... I guess the EBITDA margins you were referring to were potentially head down into the teens for '09, just as a guess. I just want to make sure that you were referring to the entire company?

Joseph Winkler

Well, what I said was that it's not inconceivable, I could have and I was not saying that's what's going to happen, given the uncertainty in the market, I think the question was based upon pricing erosion and a significant reduction in activity, what we're looking for in detrimental in a better way to measure and might be where we end up margin wise and could we get down into the upper teens, yes, of course we could. Sure, we expect that, but yeah that's possibility.

Unidentified Analyst

No, I just wanted to clarify that that was total company, because obviously it would seem like the drilling services side would be the hardest hit.

Joseph Winkler

Yes. That were in and probably get a pretty good still we have, what's our margin in that business now, it's...

Brian Moore

Drilling service as fourth quarter was 22.8.

Joseph Winkler

Yeah. So it wouldn't take much, and as you heard obviously we have a number of rigs stack in that now so that wouldn't take much to get there.

Unidentified Analyst

Do you have any well service revenues flowing to that segment? All well servicing rigs go through the completion production services.

Joseph Winkler

That is correct.

Unidentified Analyst

Okay. And just on your efforts, just sort of catch up on the cost side. And I know this is a very difficult question, but what level of activity are you planning on say; a quarter or two out, I mean are you going to try and get ahead of this at some point or is it just going to be waiting until you kind of figure out region-by-region where activity ends up.

Joseph Winkler

The answer to the extent we can get ahead of it, we would like to do that. The question on the table... and this where the business judgment and the balance comes into play is, is that on the one hand you don't want to carry excess cost any longer than you have to on the other hand, you don't want to make the lower utilization self for feeling.

And so that'll be the balance and we'll work through that and it'll be area-by-area, week-by-week, month-by-month and so on, and what we're doing is we're adjusting in terms of the number of hours and some flex crews and those kinds of things and it won't be the same everywhere.

But answer to your question is, to the extent we know something for sure, than that's the action we're going to take. But where we don't know and where we can sustain and continue working without creating a big drain or a risk, we'll continue to do that because after all we want to be in the game and be positioned for when the recovery occurs. But we're not going to work at a loss and we're not going to work for free.

Unidentified Analyst

Okay. Now, given that and sort of a backdrop for 2009, is it possible that your margins well into pressure in the first, one, two, three quarters maybe of the year, that once you try to get to a level or pointing activity where things level off. You could get a slight bump up in margins again, once you're sort of cost structure catches up towards activity bottom?

Joseph Winkler

Yes, no question because, during this period of time, I think we will be less efficient then when things sort themselves out. And you guys can tell from the rig count slope that this thing is being declining and as we've said we're likely to continue to decline. And anytime you chasing that you going to be less efficient, if we all knew exactly where it was going to be, it'd be a whole lot easier to structure and get more efficient in that. So, I think you're right, I think we could see some improvement, simply due to checking the appropriate cost and getting efficient.

Unidentified Analyst

Excellent. Thank you very much. Thanks Joe.

Operator

(Operator Instructions). And your next question will come from the line of Mark Brawl with (inaudible). Please proceed.

Unidentified Analyst

Hi, I just wanted a follow-up on the last question. What sort of timing would you possibly see for your cost structure coming down and potentially enabling you to improve your margins, when would that potentially happen?

Joseph Winkler

Well, we are real-time adjusting it as we go down the time, we started some of this back in quarter four and continue through this point in time and to the extent that we need to continue doing that go forward it'll happen. As you've heard in the commentary, we are not sure where this markets going to end up, how deep its going to go, how long its going to last, so that's difficult to say. As of this quarter, no, I don't think so.

Is it quarter two, perhaps maybe quarter three, it depends upon the slope and the magnitude. If it's not this quarter, don't know that its quarter two, perhaps its quarter three, but that's a pure guess at this point because we're not certain where activity levels are heading.

Unidentified Analyst

Okay, that's helpful. Just in the Marcellus, you've touched on this earlier, but what... where do you see that playing out going forward, how much equipment do you currently have there?

Joseph Winkler

What do we currently have out there, well we've got the Marcellus --

Jose Bayardo

Marcellus spread about 20,000 horsepower, up 17,000 horsepower.

Joseph Winkler

More traditional...

Jose Bayardo

Conventional...

Brian Moore

Shallow gas

Joseph Winkler

Wireline units.

Jose Bayardo

19 wireline units.

Joseph Winkler

And as we said I guess we're in seasonal issue up there. We're on the seasonal, seasonality issue up there, but our sense is based upon everyone we're seeing, thus far that activity has been steady. That while it will play out, I don't know that it will play out as quickly as perhaps people were thinking 90, 120 days ago because of all the issues we're all familiar with, so far I would describe it as stay.

Unidentified Analyst

How do you see repair and maintenance cost going forward, you see more activity or less?

Joseph Winkler

Well, less in terms of aggregate because of the fewer units that we'll be working or the fewer hours that we'll be working. In addition, we would anticipate that on a proportionate basis, our repair and maintenance would come down as a result... we like others will be laying down our older less efficient equipment. And we would also expect that in this market that our cost for third-party parts and the like will be lower than it was in the year we just exited. So in aggregate down, and on a proportionate basis, we would expect it to be down as well as we work newer kit, relative to the mix perform.

Unidentified Analyst

That's it for me. Thank you.

Joseph Winkler

Great. Thanks.

Operator

Your next question will come from the line of Hemline Thompson with Westfield Capital (ph). Please proceed.

Unidentified Analyst

Hi, Joe, thanks for taking the call. You said earlier, when you're talking about margins potentially going to the high-teens. You also suggested that, you didn't think we were getting there. Can you just add a little color on why you don't think we're getting there and you think the industry itself is less were shape in some of those foreseeable, do you think that EPX is better position, just why do you think that you don't end up in the teens?

Joseph Winkler

Well, clearly from our commentary, we think this is going to be... we said a very difficult year. We think that our position in certain areas of the market perhaps give us somewhat of an advantage. I don't know that, that's why it's called competition. We'll have to settle that on the playing field. I am not suggesting we won't go down in to the teens. I don't see that at the moment, but our visions not real clear. We're talking about monitoring our positions week-to-week, month-to-month, quarter-to-quarter.

Unidentified Analyst

And can you just educate me when I think about your end markets, new holes, versus servicing old holes, how would you plan the mix your business?

Joseph Winkler

We are going to be more heavily weighted towards service in the new wells completion. I don't know what the weighting is, but there is some element of production.

Brian Moore

Into this point that's been more shale...

Joseph Winkler

Core shale

Brian Moore

The equipment that we have is certainly configured for the rest of the market and that will increase in this market.

Joseph Winkler

I don't know what the exact weighting is, but we're weighted more heavily towards the completion as Brain indicated. It is by choice the equipment can do some of the maintenance and work over.

Unidentified Analyst

Thank you guys.

Joseph Winkler

Okay. Thanks.

Operator

And your next question is a follow-up question coming from the line of Pierre Conner with Capital One Southcoast. Please proceed.

Pierre Conner - Capital One Southcoast, Inc.

Thanks for the follow-up, maybe for Jose. I know your operating, we discussed operating cost, but what would you say about G&A levels, just trying to fine tune that? Can you guys give us any guidance there?

Jose Bayardo

Pierre, I'm sorry... all I heard was a question related to G&A.

Pierre Conner - Capital One Southcoast, Inc.

Yes. Thank you, Jose. Just a question about any guidance you could give us on that G&A?.

Jose Bayardo

We had some severance cost baked into Q4. G&A also came up from the two acquisitions completed in October. We do anticipate that'll come down a little bit over the coming quarters.

Pierre Conner - Capital One Southcoast, Inc.

Okay. All right, thanks. That was it.

Operator

We have no further questions at this time. This concludes our question-and-answer session. I will now like to turn the call over to Mr. Joe Winkler for closing remarks.

Joseph Winkler

Tanya, thank you very much and we want to thank all of you this morning we taken the time and we look forward to our next call in about one quarter Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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Source: Complete Production Services Q4 2008 Earnings Call Transcript

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