Superior Energy Services Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.27.13 | About: Superior Energy (SPN)

Superior Energy Services (NYSE:SPN)

Q4 2012 Earnings Call

February 27, 2013 11:00 am ET

Executives

Greg A. Rosenstein - Executive Vice President of Investor Relations & Corporate Development

David D. Dunlap - Chief Executive Officer, President and Director

Robert S. Taylor - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Jonathan Sisto - Crédit Suisse AG, Research Division

James C. West - Barclays Capital, Research Division

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Michael R. Marino - Stephens Inc., Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Brad Handler - Jefferies & Company, Inc., Research Division

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Superior Energy's Fourth Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, February 27, 2013. I'd now like to turn the call over to Greg Rosenstein. Please go ahead, sir.

Greg A. Rosenstein

All right. Thank you and good morning, everyone. Thanks for joining today's conference call. Joining me today are Superior's President and CEO, David Dunlap; and Chief Financial Officer, Robert Taylor.

Let me remind everyone that during this conference call, management may make forward-looking statements regarding future expectations about the company's business management plans for future operations or similar matters. The company's actual results could differ materially due to several important factors, including those described in the company's filings with the Securities and Exchange Commission.

Also during the call, management will refer to non-GAAP financial measures. And in accordance with Regulation G, the company provides a reconciliation of these non-GAAP financial measures on its website.

With that, I'll now turn the call over to David Dunlap

David D. Dunlap

Thank you, Greg, and good morning to everyone. We reported quarterly revenue last night of $1.2 billion, EBITDA of $290 million and adjusted net income from continuing operations of $77.6 million or $0.49 per diluted share.

The last half of 2012 and the fourth quarter in particular played out as we expected with lower completions activity in the U.S., strong growth in the Gulf of Mexico and continued expansion in the international markets.

In the U.S. land market during the fourth quarter, our pressure pumping revenue and profitability increased from the third quarter as we had one additional frac fleet that resumed to 7-day work schedule. However, our other completions related in coiled tubing services saw revenue and profits declined during the fourth quarter. Collectively, the rate of decline was less severe than we experienced during the third quarter.

While U.S. land revenue declined 7%, international revenue increased 16% and Gulf of Mexico grew 12%. The increase in Gulf of Mexico was particularly noteworthy as the fourth quarter usually has some seasonality.

In the international markets, Latin America and Africa experienced the most growth. This is the first quarter in which we are reporting to you in our new segment format. One of the benefits of this new format is the ability to isolate our performance in the U.S. completions market. We've talked in the past about how our contracted pressure pumping model coupled with our diverse product line and basin exposure should produce solid margin performance throughout the cycle. You can see now at our onshore work-over and completion services segment that our operating margin declined just 120 basis points from the third quarter and is down less than 700 basis points from our peak in Q2 this year. The same type of progression has taken place in the production services segment, where Q4 operating margins were down about 400 basis points from Q3. It is less of a decline than the 600-basis point dropping from Q3 to Q2 -- or from -- in Q3 from Q2.

The largest component of this segment is coiled tubing, which has probably been impacted by pricing declines more than any of our other U.S. services. After Robert walks you through some of the financial details of the quarter, I will discuss our guidance and outlook.

And with that, I'll now turn the call over to Robert Taylor.

Robert S. Taylor

Thank you, Dave. As we go through each segment, I'll make comparisons to the third quarter of 2012. In the Drilling Products and Service segment, revenue was $193 million and income from operations was $57 million, which represents a 1% sequential decline in revenue and a 9% sequential decline in operating income. The decrease in revenue and operating margins were primarily due to a decline in U.S. land activity, where revenue was off by 11% to $76 million. We experienced lower demand for accommodations. Rentals of premium pipes were also down primarily in the Bakken and Rockies.

Gulf of Mexico revenue increased 12% to $69 million primarily due to an increase in premium drill pipe and specialty rental.

International revenue was unchanged at $48 million.

In the Onshore Completion and work-over Services segment, revenue was $418 million, and income from operations was $47 million, which represents a 1% sequential decrease in revenue and a 10% sequential decline in income from operation. Virtually all the revenue comes from the U.S. land market.

Our pressure pumping revenue increased 2%, which was more than offset by declines in fluid management services and well service rigs. The increase in pressure pumping activity came from both the Permian and the Bakken.

In the fluid management business, transportation and storage were impacted by lower utilization and pricing. The lower pricing was more prevalent on the storage side of the business. The disposal well business remains solid.

Our well service rig business saw a change in business mix due to more production-related work and reduced activity for third-party rentals of accessories that support well service operation. All of these factors combined to reduce our operating margin in this segment by about 10%.

Production services revenue decreased 1% to $369 million, and operating income decreased 35% to $32 million. The U.S. land market was the biggest factor driving the decline in both revenue and profitability. Revenue was $222 million, down 16% from the third quarter. Coiled tubing, wireline, snubbing and remedial pumping were all lower.

Coiled tubing, which is the largest contributor in this segment, saw both pricing and utilization declines as the market still seeks to hit bottom. Given the largely fixed cost nature of this business, much of the lower revenue impacted our margin.

Gulf of Mexico revenue increased 46% to $57 million, primarily related to cased hole wireline work. We also experienced increases in snubbing and pressure control tools.

International revenue increased 27% to $90 million, primarily due to increased coiled tubing work in Mexico, snubbing in Saudi Arabia and Thailand and cased hole wireline in Argentina.

In the Subsea and Technical Solution segment, revenue was $198 million, and income from operations was $10 million, which represents a 5% sequential increase in revenue and a 33% sequential decline in income from operation. The primary factor driving the lower operating margin is the expected increase in DD&A. You may recall that in the third quarter, we had a lower than normal DD&A due to an adjustment to the completion rate at Bullwinkle. Both our gross profit margin and EBITDA margin in this segment improved slightly from the third quarter.

International revenue increased 16% to $96 million, primarily due to an increase in well control services and higher demand for subsea construction services in the Asia Pacific market. The Gulf of Mexico revenue declined 2% to $87 million as increased completion tools and services revenue was more than offset by a decline in well control service revenue and activity at Bullwinkle.

Turning to the balance sheet. As of the end of the fourth quarter, our debt was $1.8 billion. Debt to EBITDA as of the end of the quarter was 1.5x, essentially unchanged from the end of the third quarter. Debt to total capital was 30%, down from about 32% at the end of the third quarter.

Capital expenditures during the fourth quarter were about $227 million for the year. Capital expenditures came in at $1,170,000,000.

From a modeling perspective in the first quarter, we think you should model G&A in the range of $163 million to $166 million. With respect to DD&A, we think you should model the range of $143 million to $146 million. We anticipate net interest expense to be in the range of $28 million to $30 million.

Weighted average share count should be approximately 160 million.

I will now turn the call back over to Dave who will discuss our earnings guidance and outlook.

David D. Dunlap

Okay. Thank you, Robert. As we mentioned in our earnings release, earnings for 2013 is expected to be in the range of $1.85 to $2.35 per share. As is frequently the case, we believe the first quarter will be the low point for the year with earnings migrating higher over the remaining 3 quarters. In fact, we anticipate first quarter will be in the range of $0.37 to $0.42. Keep in mind that we do have seasonality in that first quarter in the Gulf of Mexico and in Asia.

In terms of drivers of our annual guidance, much depends on the pace of activity in the U.S. land market. The first quarter began as we anticipated, which is not very different from where we exited the fourth quarter. We anticipate activity will start to improve from current levels either late in Q1 or early Q2. For -- our logic for this expectation is that if U.S. customers' budgets in 2013 are at the same levels that they were in 2012, then they have about 9 or 10 months with which to become more active. As activity increases, we would anticipate higher utilization for completions activity and coiled tubing. In addition, demand for premium drill pipe and other drilling-related rentals will likely improve from current levels.

In the Gulf of Mexico, we anticipate revenue to increase by more than 30% over 2012. Gulf of Mexico drivers and assumptions include a slight uptick in the number of drilling rigs working in the deepwater, a more active completion cycle which has already started and an increase in shallow water intervention and end-of-life service work.

International revenue is anticipated to increase by more than 25% over 2012. Some of the drivers and assumptions for international include a ramp up in contracted service and rental tools work in Brazil, a full year contracted reinspection and snubbing work in Saudi Arabia, additional snubbing and end-of-life service work in Asia-Pacific and a full year of cased hole wireline work in Argentina.

We continue to realize very good traction in our international expansion efforts. Our recent acquisition in Argentina is producing better than we anticipated. We have pressure pumping and rental tools contracts that begin during 2013 in Brazil. We recently completed our first coiled tubing job in Australia, and all of our target markets have other near-term growth initiatives which offer further upside to our international results. Of note, international revenue in 2013 should represent more than 20% of the company's overall revenue mix.

Our visibility and confidence levels for the anticipated market outcomes are clearly greater in the Gulf of Mexico and international areas than in the U.S. land markets. The midpoint of our guidance does not anticipate any pricing improvement, so margins are not forecast to approach where they were in Q1 and Q2 of 2012. In fact, we would anticipate that our midpoint operating margin for 2013 will be closer to where we were in the fourth quarter of 2012. This would imply that our operating margin bottoms in the first quarter and then migrates up during the last 3 quarters of the year.

From a capital expenditure standpoint, our plan calls for a range of $600 million to $700 million. We will maintain flexibility so we can adjust our spending as the year progresses, depending on market conditions.

Looking at the CapEx plan from a segment standpoint, drilling products and services is allocated about 40% of the total CapEx. Onshore completion work-over services is allocated about 15%. Production services is allocated about 20% and subsea and technical solutions is allocated about 25%.

If you look at this from a geographic standpoint, the U.S. land markets allocated about 40% of the total CapEx, most of which is maintenance. The Gulf of Mexico is allocated about 20% and international is receiving a total of 40% of our overall CapEx in 2013.

Growth CapEx should be in the range of $375 million to $425 million. The CapEx plan matches our expectations for activity, with most of the growth CapEx slated for international and Gulf of Mexico markets.

Our goal this year is to manage our business to generate free cash flow. So I do not anticipate increasing capital expenditure plans beyond the range that we've reported to you here, unless we see a meaningful uptick in activity beyond our earnings guidance range.

And that concludes our prepared comments. I think we'll now open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Jim Wicklund with Crédit Suisse.

Jonathan Sisto - Crédit Suisse AG, Research Division

It's actually Jonathan. David, are you a little bit disappointed with the cadence of the return in activity in North America year-to-date?

David D. Dunlap

Jonathan, if you've heard me -- you've heard us talk about expectations for return of activity in 2013. It really is so far performing exactly as we thought it would. I did not believe that we would see any uptick in activity in January and February. I thought if we saw some activity increase in this quarter, it would not be evident until March and really it felt for some time that it will not really be evident and you wouldn't see that inflection point in activity until the second quarter. And so, it's really performed as we thought it would. So I can't say I'm upset. I mean, I wish it was busier, but we didn't expect it to be busier.

Jonathan Sisto - Crédit Suisse AG, Research Division

Okay. And so I guess that's kind of a slight delta why 1Q comes down a little bit off of 4Q? With the Timing. Timing.

David D. Dunlap

If you think of it this way, in the fourth quarter, our busiest month was October. And I think, when I say us, I think I'm speaking general industry and activity-wise. October levels were busiest, began to fall in November and December was very low. When we entered January at that same level as December, and January looked a lot like December and February has not been a lot better. And of course, you've got fewer days in February too. So it's been a start to the year that we anticipated, but as I looked out there in kind of consensus numbers for Q1, it's was kind of clear that there were more people that were expecting a bit more of an upturn in February and maybe even in January. So I heard people talking about an expected upturn in January back in November, so...

Jonathan Sisto - Crédit Suisse AG, Research Division

I think that's a little bit of the disconnect between Wall Street and companies such as yourselves, timing.

David D. Dunlap

Seldom -- there is so seldom that disconnect, but in this case, it's there.

Jonathan Sisto - Crédit Suisse AG, Research Division

One quick follow-up. It looks like P10 and a couple others have unidled horsepower in the fourth quarter and early part of this year. Is that something you would do over the course of '13? I think you've got 4 fleets stacked now?

David D. Dunlap

We do have 4 fleets stacked and I'd love to have an opportunity to take these fleets off the shelf. We've been pretty specific in what we require in order to do that. We don't want to put those fleets out there working on a call-out basis at low margins. And so we require a reasonable opportunity, and whether that's contracted or call out, we want to preserve the kind of margins in that business that we have today. So let me answer your question, I'd love to put those fleets out, we're not budgeting to. Our guidance does not anticipate stacked frac fleets pouring out into the operations during the course of the year. If that happens, it'll be a positive for us.

Operator

And our next question is from the line of James West with Barclays.

James C. West - Barclays Capital, Research Division

As this activity in North America does come back, I mean, I think the -- you're obviously expecting it and your customers are certainly suggesting that, I know we haven't seen a lot to date, but what is your revenue capacity before that you could get to from here before you would start to put more capital on the business to grow? So I guess where is your utilization level and where it could -- how much underutilized are you?

David D. Dunlap

Okay. So a good benchmark for you will be Q2 of 2012, which was peak quarter for us. And if you consider that we probably have because of asset additions that occurred during the quarter and later in the year, assets that are clearly not being utilized today such as some of the stacked frac fleets, we've probably got revenue-generating capacity that's on the order of 15% higher than what we did in Q2 of 2012.

Robert S. Taylor

Okay. Okay, that's very helpful.

David D. Dunlap

I don't know we've looked at it specifically that way, but I would expect it at least 15% revenue addition above the second quarter of 2012 was what we'd have.

James C. West - Barclays Capital, Research Division

Okay. And then you don't really have the idle capacity in the international markets, do you?

David D. Dunlap

No. In fact, we are -- we're looking at some of the underutilized assets that we have across the product lines in the U.S. to see if there are some of those that perhaps will be transferred to international markets in the near-term and put to work. Because our international service business is still in the very early stages and the places that we operate, generally we'd put equipment in those places that's based on a certain activity level and we've got opportunities beyond that obviously. So we may get some opportunities to transfer a few assets. I don't think that's going to be a needle mover as far as our 2013 earnings go, but moving underutilized assets is, in a lot of cases, a great way to grow international business.

James C. West - Barclays Capital, Research Division

Sure, sure. And then just last question for me. I mean, On the international side, Saudi, we got some good news over the weekend that we have increased the rig count further than we originally thought this year. Is that one of those markets where you would look to move underutilized assets, and can maybe provide color on kind of where you sit in terms of your buildout there?

David D. Dunlap

Yes, sure. So I mean, it certainly is a market where we would consider spending our realized assets. There'll be a lot of competition for those, because there's probably, I can name 4 or 5 countries that I know the managers there would be able to put coil tubing units or pumping units or cased hole wireline units to work right away. So back to your question on Saudi. Today, we've got our pressure control and well control contracts, which involve a lot of elements and of rig inspection and training, which are ongoing and have been since January of 2012. Our snubbing operations started up in Saudi in the third quarter, and it's really just gotten up the full stride in the fourth quarter. They're doing a lot of work on land right now. Saudi Aramco has a big program for them to carry out. I expect that snubbing unit to be there for a long, long time. In fact, it wouldn't surprise me if there's some point in time later in 2013 where we have an opportunity to put a second snubbing unit in place. Those are the product lines that we have in place there now. Now we're in the market and we've kind of got our shingle out and clearly in business and developing that execution reputation with Aramco, there will certainly be others of our service lines that we'll have opportunities with. And the fact that they were ramping up rig counts makes those opportunities maybe a little bit easier to grab. Nothing specific at this point, but it is encouraging that they're going to pick up activity.

Operator

And our next question is from the line of Marshall Adkins with Raymond James.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Can we get a little more clarity on some of your rig count assumptions? You mentioned bottoming in the first quarter and then gently moving up over the year. But when we look at kind of year-over-year comparisons, are we talking down 3% to 5%? And/or are you going to see a well count separation between the rig count, I know we've been seeing a little bit of that and that affects pressure pumping a little more than others. Just give us a little more color on what you're looking for there.

David D. Dunlap

Yes. So I mean, general expectations, instead of referencing year-over-year, which I'm not sure really tells us a whole lot, let me kind of talk about it from where we are today. I expect that we will see a general upward tug on rig count as we proceed through the year. I don't expect it to rebound to the peak levels that we saw, which I guess really were kind of in the summer of 2012. I'm not sure we exit the year at that point, but it may be approaching that point. It's a slight upward pull on rig count as the year goes forward. I think more importantly, though, where we saw operators really deliberately slowed down their completions progress during the second half of 2012, I think they get back up to a much higher pace as we get into Q2 and Q3 and Q4. Essentially, what's happened, we've got a few rigs that have laid down, but it's really -- it really is not very representative of the overall activity decline. And if you looked at overall completions count, which I know there's not a perfectly reliable statistic for that, completions count was down during the second half of 2013 -- 2012. I expect that we catch up a little bit of that in 2013. I've been asked the question, does that represent an inventory of wells that are waiting to be frac-ed? Yes. Think of it this way. I mean, we're at optimum pace, an operator may have a frac fleet that's following a rig by 2 weeks. They slowed that down to a point where maybe that frac fleets following the rig by 5 or 6 weeks, and of course, what builds in that process is an inventory of wells that are waiting to be frac-ed. That's what we begin to work our way through that causes the uptick we think we'll see in the second quarter.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

So the obvious follow-up to that is, it does seem from your earlier commentary that the pressure pumping side in the U.S. seems to have reached some kind of activity bottom. Not that we're expecting immediate turnaround in pricing, but at least from the activity standpoint, we're ramping up and what you just said confirms that should be directionally an improving market, is that fair?

David D. Dunlap

That's absolutely a fair comparison, a fair characterization. I'll add this as well. I mean, as this -- as we begin to see a little bit better utilization in fracturing, you're probably going to hear different things from different companies about how they are seeing that, because it's very customer-specific and in certain cases it's to be very basin-specific as well. And so, you may have one company that is their best customer is getting busier the last week of February, but another customer that's not getting busier until the end of March. And so the commentary from one company to the next could be -- there could be a lot of variability in that.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

Yes, we're seeing that already. Does that translate to coil tubing, as well, I mean, kind of same directional move?

David D. Dunlap

Yes, I think generally so. I mean, it will be customer-specific and it will be basin-specific. But overall, I do expect that we'll see higher coiled tubing utilization that goes along with this drive get wells completed.

Operator

And our next question is from the line of Michael Marino with Stephens.

Michael R. Marino - Stephens Inc., Research Division

Dave, just wanted to clarify on the Q1 guidance because it sounds like, I guess, the U.S. business is kind of moving sideways in Q1 for you guys with coil maybe drifting a little lower and pumping maybe even a little higher. Not to put words in your mouth, but is the guidance purely -- or the delta from Q4, is that purely seasonal? Or maybe is there something else you want to hone in on?

David D. Dunlap

No, I mean, there is a seasonality in Q1 we always see. And we generally see some seasonality in Q4. We went through the fourth quarter in the Gulf of Mexico with pretty good weather patterns. These weather patterns have changed since the start of the year and we're seeing more fronts that have blown through. And what that means to us is the optional work, remedial work, plug-in abandonment work, decommissioning work is not going to be very active as a result of seasonality. But I think more than anything, what you're seeing in Q4 is a reflection of a couple of months of activity that are at December levels as opposed to in Q4, we only have one month of that type of low activity. You see what I'm saying? We did not see a rebound in activity after the first of the year. We saw a drop-off during December and we kind of stayed at those low levels really well into February. And so it's just an extension of that month, if you will.

Michael R. Marino - Stephens Inc., Research Division

That's helpful. And I wanted to follow up on, you mentioned you'd love to reactivate some of frac fleets. Are you having any discussions right now?

David D. Dunlap

Well, I mean, I think we're constantly having discussions. And I don't know that those would necessarily materialize anytime soon. I mean, we've got -- we do have a relatively high standard, I guess, for what our expectations are in margin generation from one of those stacked frac fleets. And we've been pretty consistent in this message. We don't think that we have to do anything in the way of equipment activation in order to hold the market share position. Market share does not drive us in fracturing. Instead, margins do. And so, we would really like to put that equipment to work, but we're not going to put it to work if it means a substandard margin. And there's still a lot of capacity out there right now. It's not been an incredibly busy market. So when there's an opportunity to put a call-out fleet, we really have to be in a position where we have demonstrated to the customer how good our execution is relative to somebody else for them to accept our price.

Operator

And our next question is from the line of Robin Shoemaker with Citigroup.

Robin E. Shoemaker - Citigroup Inc, Research Division

I wanted to just hone in on the Gulf of Mexico for a minute. You indicated up 30% this year over '12. Are you back to, or perhaps beyond pre-Macondo levels of activity? And how has your business changed from the pre-Macondo period?

David D. Dunlap

Yes, so -- and to answer the question, our pace of activity today is above pre-Macondo levels. We are generating more out of deepwater areas with the same product lines, if you do it on a comparative basis, than we did pre-Macondo. We've, of course, added completion services to the mix during Macondo. So I mean, overall, exposure in deepwater is considerably more than it was before Macondo. Some of the things that are driving better performance, in addition to just the rig count, the overall rental tool revenue is up per rig by on the order of 15% to 20%. And that is largely driven by requirements that operators have from BSEE now for, I think, a larger pipe sizes or more robust connections or whatever it may be in order to satisfy BSEE requirements for a permit compared to pre-Macondo. So that is the primary driver. I'll say this as well about the Gulf of Mexico that, I mean, we're seeing some nice uptick in activity and interest on the shelf, which was really unexpected on our part until, I don't know, probably within the last 3 or 4 months we've kind of been developing this thought that the shelf activity was going to increase. And it seems to be driven by mainly oil and driven by a lot of the legacy big operators in the Gulf of Mexico that since Macondo have not had an opportunity to go out and exploit a better oil price. And so I think we're going to see a nice uptick in activity on the shelf as the year progresses as well.

Robin E. Shoemaker - Citigroup Inc, Research Division

Yes. I noticed you also mentioned a little end-of-life field services in the Gulf and in Asia, I think, which I had heard you mentioned in a favorable way so much here recently. So the -- how -- are you having any discussions with operators about some of these big platform decommissioning projects, potentially others like the Bullwinkle or others you've done in the past, or is this more your basic business line?

David D. Dunlap

It's more the basic business. And we seem to constantly have a conversation going on with somebody about potentially a big decommissioning project or a big asset like Bullwinkle. We certainly are not budgeting on any of those to be part of this 30% increase in Gulf of Mexico year-over-year. If they happen, it'd be additive to that.

Robin E. Shoemaker - Citigroup Inc, Research Division

Right. And that sand control business, the vessels that you bought, how is that?

David D. Dunlap

Doing pretty good. We're down to one vessel. We decommissioned one of the stimulation vessels about this time last year. And we've got one vessel, the market for stimulation vessels in the Gulf is very tight right now. I think there are 5 boats compared to 11 that worked in the market pre-Macondo. So just compare activity levels to where we are today versus pre-Macondo, obviously, with less than 50% of pre-Macondo capacity. That market has tightened up. And so I can tell you for the first time since we've bought those assets, we're pretty pleased with the performance of the stimulation vessel.

Operator

And our next question is from the line of Byron Pope with Tudor, Pickering, Holt.

Next up is Jeffrey Spittel with Global Hunter Securities.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Maybe if we could start out talking about your assumptions. I think you spoke to your pricing assumption at the midpoint of guidance being basically flat, U.S. onshore. Is it safe to assume that the high-end of the range assumes maybe a little bit incremental pricing traction and the low end involves a little bit of deterioration from where we are today?

David D. Dunlap

It does not. We did not bake any price increase assumptions into the guidance we gave you. A better way to think about the range is think about when we really see inflection point on activity and how steep that activity increase is. And so, if we start to see a nice uptick in utilization activity in March, and that's what we see continue or continue to build as the year goes on, that probably defines the higher end of guidance. If it's an inflection point we don't see more obviously until late April or early May, then it's probably towards the lower end of guidance. Do you see what I'm saying?

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

No, that's very helpful.

David D. Dunlap

Let me tell you something, that inflection point in understanding the pace of that rate of that, or slope of that inflection point, I guess, is the most difficult part of guiding -- giving you guidance for 2013. It is really hard to see. And I'll draw you to the corollary to that, which was the downward decline that we witnessed during Q3, which we were out in front directionally of what was going to happen in Q3 of 2012, but it happened at a pace that was faster than we thought it was. And we've got just exactly the opposite challenged now in trying to predict this uptick.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Appreciate that clarification there. Switching over, I'm surprised we haven't gotten to this one yet but I'll fall on my sword and ask it. Could you rank order your priorities in terms of use of cash? I'm sure you've been getting plenty of questions about the potential dividend, et cetera, and what might the timing of the valuing of the option be?

David D. Dunlap

So that's a good question and you didn't need to fall on your sword for it. Debt repayment is at the top of the list. We've been very clear about that. We started paying down debt, buying in $300 million in 6 7/8 notes at par beginning about August of 2012. That will be the primary use of free cash really in the first half of the year. As we get out to the second half of the year, we do have an expectation that we'll begin to build cash at that point. And I'll continue to have conversations with the board about a share repurchase authorization, perhaps, or a dividend. What I know is this. I think it's really important for us to demonstrate to investors that we are going to be disciplined in our capital spend and acquisition strategy and disciplined to the point that we are free cash generators and return free cash to shareholders. It's important to me. I can't tell you exact timing on when that happens, but I think it is important for us. And when we get to a point where we're ready to do that, we will let you know.

Operator

And we now have Byron Pope.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just with regard to the 2013 growth CapEx, they've read a lot of the international markets where you guys have contracts lined up. I'm just wondering, is that 2013 international growth CapEx part of what's driving that international growth, or are you laying the footprint for, will there be infrastructure for growth beyond 2013...

David D. Dunlap

It's more adding equipment to infrastructure that we've already put in place. I mean, there is some infrastructure in that CapEx, but it's a fairly small percentage of it. When I think about the assets that are going in, they're primarily -- listen, your standard intervention and pumping and rental tool assets, and that is the dominant piece of that overall capital, growth capital in 2013.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then fair to think about growth capital for -- allocated for the U.S. Gulf being more skewed toward the downhole tool side?

David D. Dunlap

Yes, that's exactly right. I mean, we're in a very fortunate position in the Gulf of Mexico and end-of-life services and in intervention services. We've got a very mature and significant market share position in those services and they're assets that have been really largely underutilized since Macondo. And so, we are able to take that investment and put it to work. And the capital efficiency are primarily on the rental tools side, mainly associated with deepwater. And of course, our returns on those investment are extremely high. So that's the place we really like to make investments.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. Just a comment, the additional color on the business segments is incredibly helpful, guys, so appreciate you guys doing that.

Operator

And our next question is from the line of Blake Hutchinson with Howard Weil.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Just starting off, the success in pressure pumping that you indicated in the press release is largely based on, I guess, improvement in the already contracted fleet. Not a lot of commentary thus far with regard to the spot market. Just wanted to get your thoughts around that and as much as the spot market exists for superior right now and where that stands and the view here early in the year?

David D. Dunlap

Well, I mean, we've got -- we do have minimal exposure to the spot market. I always want to be cautious in advising the analyst investors here that we're talking to that when we make comments about the spot market, we are not a huge player in the spot market. We've got 6 fleets in total that participate in that spot market today. The concentration in Permian Basin and the Bakken. So we really aren't the best people in the world to talk to about the spot market from that standpoint. But I won't dodge your question.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

And, Dave, I guess, I only ask just gauging where we stand there, are there any even feelers out there for getting fleets back to work as it's been kind of rumored around the space? Is anybody actually seeking these levels to kind of term up fleet? What's the state of kind of the next crew in, if you will?

David D. Dunlap

Yes, not at this point. I mean, I think that -- I would be very surprised if we saw customers looking for contracted fleets over the course of the next few months. There's just too much capacity out there. And when you do a contracted fleet as we have in the past, I mean, in a lot of cases, operators are going to look at the price for that contracted fleet, and unless they are one of the absolute most efficient horizontal well factory type companies, they're going to see is a contracted fleet but on today, it may cost a little bit more than call out fleet does. And so I'd just be surprised if that happened. I mean, it could happen with one of our current contract type customers that they've got a different commitment level, I guess, to their activity than somebody else. But I don't want to lead you in the direction that I think it's going to happen. I don't believe it will.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Great, that's helpful. Dave, just kind of taking it back kind of a year here post combination, coiled tubing market fundamentals looked about as good as anywhere in the franchise, and you obviously have a leadership position there. So I just wanted to kind of get your reset as we go into '13. Has your feel towards that market changed at all? I mean, the fundamentals looked pretty impenetrable given the backlog of kind of remedial work and the whole kind of thesis you have laid out there. Just wanted to get your thoughts on coiled in general right now and the state of the market? I mean, a lot of superlatives for the quarter, but that really sticks out from Q3 to Q4 in terms of getting results.

David D. Dunlap

Yes, well, no, you're absolutely right about that. So let me give you a little bit of take on coiled tubing. We fully expect that coiled tubing will continue to be the tool of choice that the most efficient operators and most people drilling horizontal wells want to have on location in order to drill up plugs and clean out sand when they've got an early screen out. We saw a lot of operators in the second half of the year that pulled coiled tubing in its off location and put a well service rig out, which is a cheaper way for them to carry out that same operation. It takes longer though. It's less efficient. They're making up too much pipe as opposed to having a continuous reel that goes in and does the job for them. And so when they are intentionally slowing down, they moved off that tool of choice. It's clear to me that they will pick that tool of choice back up as they attempt to get more efficient in their operations during 2013 and beyond. So I think the future for coiled tubing as a horizontal completions technique, I think, is still solid. We have not done a lot of remedial work in the coiled tubing industry for -- really for the last 4 years. And one of the things that's going to have to happen industry-wide for us to do more remedial work is we've got to develop people to do it. And if that sounds strange to you, I'll tell you this, to be an operator on our coiled tubing unit that's working in conjunction with the horizontal well completion, it's not nearly as complicated a job as being a coiled tubing unit operator that goes into an existing wellbore to solve some type of remedial problem. They are almost completely different jobs. And most of our supervisors as an industry and most of our crews have been doing nothing for the last 4 years but completions work. But anybody new to the coiled tubing business in the last 4 years may have never seen a pressure job. And so it's clear to me that coiled tubing will become a much more dominant part of the remedial market as we have capacity to be available to address that market. But it's going to take a little bit of time for us as an industry to get people that are checked out to go do that.

Operator

And our next question is from the line of Daniel Burke with Johnson Rice.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Wanted to touch on the revenue guidance for both the Gulf of Mexico and international, and it has been this touched on before. But on the Gulf of Mexico side, Dave, can you remind me what sort of a revenue split looks like between deepwater and shallow? It's pretty easy to see line of sight growth on the deepwater side, but given the life of your nature of what you guys have evolved in, in shallow water, pretty impressed that the implied growth it looks like you're generating on shallow water. Will that rival the 30% you're going to see overall?

David D. Dunlap

So on a percentage basis, deepwater exposure is climbing more in 2013 than 2012. Overall, on the mix, we're still more weighted to the shelf than we are deepwater. It's about 2/3 shelf, 1/3 deepwater, something like that. But deepwater is growing substantially more than shelf does. And what that is, Dan, that's rental tools and think about the way deepwater rigs ramped up during the course of the year, very much second half weighted. And so a light deepwater exposure in the first half of the year in 2012 is really what's making that comparison look so big. The other side of that, of course, is completions. And completions, which is both a shelf and deepwater exposure, but deepwater is a bigger revenue potential in total than the shelf on completions, and we had very poor completions activity in 2012. It's really only started to increase in the last couple of months. And the reason for that is really not too complicated. When the moratorium was lifted, some of the first work that we did post moratorium in the first rigs that went out were doing completions work. These were wells that have been drilled with TD, operators were forced to shut down as a result of the moratorium, and the first thing that they did when they came back out was complete. And so much of that work was carried out in late 2011. By the time those rigs reached 2012, they were drilling and not completing. And of course, any of the new rigs that came in during the course of 2012 are going to be drilling before they complete. And so, we kind of got out of cycle on completions work and are much more in cycle with completions work in 2013 than we were in 2012, and that benefits us both on the shelf and deepwater but primarily in deepwater.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay. That's great. That's a helpful answer. And then I guess the question on international would be, with regard to that growth rate, you've got to say phenomenal, and you're lapping friendly comps first half '12 versus first half '13. But the focus on international has appropriately been on the service lines. But on the rental side of the international business, are you deploying sufficient capital there to kind of break out of that $45 million to $50 million top line per quarter band looking into 2013?

David D. Dunlap

Yes, I mean, we are. We are a bit more focused now, if I compare and contrast our investments in rental tools on the international side today to maybe where they were 2 years ago, a lot more focus on premium drill pipe and stabilizers whereas 2 years ago we probably still had some accommodations to the mix. We've got some areas in accommodations that we've actually shrunk internationally a little bit over the course of the last year and expansion in some of the downhole wells is taking its place. But it's well funded. I've made this comment about rental tools for the last 3 years pretty consistently. It's hard to turn down the downhole rental guys when they get an expansion opportunity because the margin and returns are so good.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay. That's helpful. I'll cram one more on. I didn't hear this specifically on pressure pumping. You had the one crew step back up near end or during Q4. Have you stepped any other term contracted crews up from contract minimums as the calendar turned to 2013?

David D. Dunlap

The answer to that would be no. So maybe I'll set the stage here for anybody else who's listening that wants to understand that. We had -- our utilization on the contracting fleets impacted in the second half of the year as we went from 7-day utilization on 9 fleets to 5-day utilization on most of the fleets. And so we maxed out at 9 fleets on 7-day utilizations, dropped all the way to 3. By the end of fourth quarter, we had 4 and our expectation exiting the first quarter would be 5.

Operator

And our next question is from the line of Stephen Gengaro with Sterne Agee.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

I wondered -- and the breakout is very helpful. We appreciate you getting it to us a couple of days ago, too, Greg. But how much are you willing to share with us, if we look at the different segments obviously outside of onshore completions, how big a margin differential is there between the 3 geographies? Dave, can you give us some color on that for the other segments?

David D. Dunlap

I'll try. In rental tools, it's not very much. Rental tools tend to be very consistent, whether it's -- between the markets. I will say this, Gulf of Mexico margins and rental tools are probably always going to be a little bit better than the U.S. land or international simply because we're able to run a lot of revenue out of 1 base or 2 bases. Do you see what I'm saying? This is the way the business has worked. And so but in general, in general, the margins in rental tools are going to be fairly consistent. We don't have anything international in the completion segment, so I kind of skipped that one. On production, the production segment, overall, I would expect that margins, if you think about -- if you think about midpoint margins in the cycle, to be similar. They will vary from time to time. Right now international margins in that side of the business may be a little bit better than U.S. margins, just because of where we are in the cycle in the U.S. But if you thought about this comparing international to U.S., at kind of a midpoint normalized business model, they ought to be about the same. In the Subsea Technology segment, international is going to be hindered in that segment by Hallin Marine performance and the construction work in Asia, construction support work in Asia, until we see some improvement in that overall market. And so in that case, our Gulf of Mexico margins will be better than international margins.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

That's very helpful. And then the only other follow-up I have is when you look at it and you talk about free cash flow usage, are there geographic areas that you're either relatively small in or nonexisting in which you are looking at currently?

David D. Dunlap

The answer to that would be yes. I mean, there are still several international markets that are kind of on our radar screen from a surveillance standpoint. I mean, I'm happy to name a few those. Kuwait would be one of them. Indian would be one of them. These are places that we think offer near-term potential for us, but we're not operating today. And so those are on our map, and of course there's places as well that we have really just started that we're not generating a lot in the way of revenue or earnings in places like Malaysia, and I'd say even Indonesia is kind of in that category. So we're at different stages with each one of these expansions and there's more to come, I'm sure.

Operator

[Operator Instructions] Our next question is from the line of Brad Handler with Jefferies & Company.

Brad Handler - Jefferies & Company, Inc., Research Division

If I could come back to the overall guidance for '13, please, just to understand it further, and if you'll allow me to tee up the question. If you start with $0.40 of earnings and it's a low point because of various important seasonal reasons and you're growing the Gulf and international, it seems like the low-end of your range would imply kind of very little improvement in U.S. land. Is there some aspect I'm perhaps missing that we should be aware of just maybe on the rig side?

David D. Dunlap

Listen, Brad, you're not missing anything. I mean, I think it improves from Q1. We don't repeat the same earnings in Q1. Obviously, the low end of our guidance range is $1.85, not $1.60, right? I mean, it doesn't stay the same, but the range is dependent on when we begin to see this utilization and activity increase in the U.S. And it's hard to pinpoint when this will happen. And what we've tried to do in this range of guidance is to say, okay, well, if that increase begins and it begins at a pretty healthy pace in March, then we're probably at the higher end of our guidance. On the other hand, if it's an increase that we really don't see materialize until, say, April or May and it's not in a very rapid pace, then we would probably tell you that it's going to be lower end of the guidance. And the iterations between there is just that. I mean, do you see the increase in April or do you see it in May? And is there a rapid increase, or is it a slow increase? I mean, that's all what we try to consider as we put that range together.

Brad Handler - Jefferies & Company, Inc., Research Division

I understand, and I think I understand how you're approaching it in general. Perhaps I'll ask you or ask something a little bit just different. If the pace of increase is less dramatic than you might hope, is there that much more pricing pressure in some of the areas where there has been some, whether it's in segments of fluid handling or coiled tubing, if there's a sluggishness about getting back to the more efficient method, for example. I mean, is that part of what you might be embedding in on the risk side?

David D. Dunlap

The answer to that would be no. I mean, if we were to continue at current activity levels, say, through April, which -- or May, which I don't think happens, but if we were, there's probably some incremental downward pricing pressure in coiled tubing and maybe in storage assets and maybe a few other things. But remember, most of the price decline that we witnessed in those service lines happened in Q3. That was the biggest point. We saw a slight reduction then from Q3 into Q4. And so, I mean, that starts to define for you kind of a bottom and I'd be a bit surprised to see prices migrate substantially down from where they are now, particularly with the mindset that service companies have today, which we're about to get busier. And so when you're in that competitive pricing situation and at the back of your mind you're thinking, I'm about to get busier, you're not going to be as free to throw that additional discount out as you would be if you were of the frame of mind that, I'm about to get a lot slower.

Brad Handler - Jefferies & Company, Inc., Research Division

Okay. That makes sense.

David D. Dunlap

What we chose to do is to not bake any changes in the price into that guidance and make that assumption that we were at or near the bottom in all the product lines from a pricing standpoint.

Brad Handler - Jefferies & Company, Inc., Research Division

Got you. Maybe an unrelated follow-up, please. I appreciate all that. On the fluid handling side, perhaps you could remind us, presumably there's the strategic advantage of being a comprehensive supplier, you and others, I think, have suggested that. But given pressure in storage, for example, does that become -- is there a different logic that you might take in terms of how many tanks you would own and how compelling it needs to be that -- to be able to have that offering? Is it perceived to be as important as ever to be able to kind of offer all the pieces, if you can?

David D. Dunlap

It is as important as ever. And that doesn't mean with every single customer and every opportunity, but overall, to be the company that's hauling water, to be the company that stores the water and be the company that disposes the water, and in many cases be a company that supplies the water, from a source standpoint, we think that is important. We think that offers us a competitive advantage versus somebody that just owns frac tanks or just owns water haulers. And so back to your question on storage, specifically, I don't think it means that you want to have -- that we would be looking to get out of the storage business or sell storage, not at all. Are we making new investments in frac tank? Probably not. In the case that we saw completions activity significantly increase at sometime in the future, but that's not 2013.

Brad Handler - Jefferies & Company, Inc., Research Division

Understanding you're not focused on adding organic capacity to that business, but other M&A opportunities within that business that are attractive that maybe fall outside of what you've identified in terms of CapEx, but is there a consolidation move within that business that's interesting?

David D. Dunlap

So I'm going to answer -- I'm going to talk around your question and probably not answer it and I apologize in advance. But there are lot of strategic opportunities in the water business. And if you think about where this business has come from over the last 5 years and the importance that exist in the market on water sourcing, water storage, water disposal, all of those things, I mean, this is a business that from an important standpoint has migrated in a really, really short period of time to where it is today. And I think normally when you see any business that's like that, that is growing so quickly in importance that we hadn't reached an endpoint on what that business, optimum business model looks like yet. And I think one of the things that we spend a lot of time thinking about is, where directionally does this business go? What is the -- what does a water management company need to look like 3 years from now or 5 years from now? What capabilities do they need to have? What kinds of assets they need to have? And what kinds of places they need to operate? And so, when you think about that, maybe that involves some acquisitions, maybe that involves some new technology, maybe it involves some other things that we're not participating in right now that we need to either grow organically or acquire. So I mean, there's a lot of room for that business to grow. Acquisitions could be a part of that. They have been a part of it for complete and legacy complete organization to get that business where it is today. It could be in the future too.

Operator

And I'm showing there are no further questions. I'll turn the call back to management for closing remarks.

David D. Dunlap

Thank all of you for joining us today. We'll see you out on the road.

Operator

Ladies and gentlemen, this concludes our conference for today. We thank you for your participation. You may now disconnect.

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