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Executives

David E. Wallace - Chief Executive Officer and Chairman

Thomas W. Stoelk - Vice President and Chief Financial Officer

Analysts

John Daniel - Simmons & Company

Stephen Gengaro - Jefferies & Company

Victor Marchon - RBC Capital Markets

Jack Aydin - KeyBanc Capital Markets

Michael Mazar - BMO Capital Markets

Joe Agular - Johnson Rice & Company

Sean Boyd - West Cliff Capital Management

Superior Well Services, Inc. (SWSI) Q4 2008 Earnings Call March 3, 2009 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Superior Wells Services Incorporated Earnings Conference Call. My name is Dimali (ph), and I will be your operator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Dave Wallace, Chairman and CEO. Please proceed, sir.

David E. Wallace

Thanks Dimali. Good morning, everyone, and welcome to the Superior Well Services fourth quarter and year-end 2008 earnings call. Joining me today is Tom Stoelk, our CFO.

I would like to remind all those participating on the call today that a replay of our conference call will be available to listen to through March 18, 2009 by dialing 888-286-8010 and referencing the conference ID number 80522467. The webcast will be archived for replay on the company's website for 15 days.

Before I begin with comments on our operating performance, I would like to make the following disclaimer regarding our call today. Except for historical information, statements made in this presentation, including those relating to acquisition or expansion opportunity, future earnings, cash flow, and capital expenditures are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934.

All statements, other than statements of historical facts, included in this presentation that address activities, events, or developments that Superior expects, believes, or anticipates will, or may occur in the future, are forward-looking statements. These statements are based on certain assumptions made by Superior based on management's experience and reception of historical trends, current condition, expected future developments and other factors that are believed appropriate in the circumstances.

Such statements are subject to a number of assumptions, risk and uncertainty, many of which are beyond Superior's control, which may cause Superior's actual results to differ materially from those implied or expressed by the forward-looking statements. These risks are detailed in Superior's Securities and Exchange Commission filing. The company undertakes no obligation to publicly update or review any forward-looking statements.

Our call agenda is simple. I will first provide an overview of our operations and then turn the call over to Tom, who will review our financial results. After Tom's review, I'll provide some closing remarks and open up the call to Q and A. I'll now provide an overview of our operations.

Revenues in 2008 increased 49% over the prior year to 520.9 million marking our 11th consecutive year of revenue growth. Operating income also increased rising 12% over 2007 to 69.1 million. Net income was 38.8 million, a 1.1 million increase compared to 2007.

Revenue increases were primarily driven by increases in activity, particularly in the mid-continent and Rocky mountain regions.

Before moving on, I'd like to take a few minutes to discuss our acquisition of assets from Diamondback Holdings. We announced this transaction in September and provided color on the purchase price and financing in mid-November. In the time between the initial announcement and the closing, much had changed both in the completive landscape and the capital markets.

Let me explain the strategic rationale behind the acquisition and why we believe it was a good purchase for us. As we've grown our national presence, we consistently experienced startup periods of about two years before our new service center ramps up to profitability and begins contributing positive cash flow.

What we saw in Diamondback was a company that has been around for a few years and was beginning to get past the growing pains of a startup company. We also viewed the Diamondback acquisition as a means with which to create cost saving efficiency such as in our sand contracts, supplier business processes, and expand our geographic reach.

We intend to leverage Diamondback's fluid logistics and rental tool businesses into some of their shale plays where we currently have existing service lenders, further enhancing our product offering. Several of these new Shale plays the Marcellus in particular have fluid logistic issues and we can see where that business is expandable and a good bolt-on to our existing operations in our home market. Rental tools in a logical fit for us, and we've already begun adding this product line to additional markets.

From a strategic perspective, the Diamondback acquisition, strengthens our competitive position in key markets and enables us to quickly extend our range of services. In his financial review, Tom will provide more detail on the financing package.

We have seen tremendous volatility in commodity prices over the past 12 months. This time last year, the natural gas prices were about $9 per M (ph) and reached a peak during the summer of $15.38 per M on July 3rd, 2008, after which commodity prices began to fall.

Now, natural gas is priced in the low $4 range and operators have been aggressively laying down rigs as a result of deteriorating wealth economics in all but the most profitable plays.

In fact, the rig count is down nearly 40% from its peak in the third quarter of 2008. Consequently pressure pumping and other well completion services had to lower prices in order to maintain utilization driving discounts higher and margins lower.

We are not immune to these macro fast -- forces. However, we've prepared for a downturn and believe we are well positioned to endure this current down-cycle and emerge a strong -- stronger company.

Some of the things we have done to maintain competitive advantage and cope with the current cycle include: negotiate a better pricing for material and transportation, mobilized equipment from service centers with declining demand to areas where demand is stronger to optimize utilization and retain our best people, committed to a long-term frac sand supply agreement providing us with substantial cost savings for this important material, established four specialized sales teams, each with specific expertise, and developing completion solutions for some of the most attractive plays in the country.

These teams have enabled us to differentiate Superior Well Services as a true solutions provider for maximizing the economic value of each well, further distancing ourselves from our low-tech competitors.

I will talk more about these teams in the overview of each region. We've also invested in technology and innovations to maintain and build on our technical fluid expertise, which I will focus on later in the call also. Strategically aligned ourselves with core customers that intend to remain active throughout the downturn.

Now, let's turn the focus to our five operational regions. Our Appalachia service centers support the Marcellus, Huron, and Chattanooga shale plays. Revenues in the Appalachian region are down 4% for the quarter year-over-year and down 18% sequentially.

Seasonality always factors into this region and we witnessed a typical drop in rig count through November and December. However, the rig count has continued to fall into the New Year. Natural gas prices settled down near 450 per M level despite a cold winter in the northeast, which is below economic levels for E&P operators without hedge positions.

Several large producers are still talking about large projects involving shallow development even with prices at current levels. We expect the Marcellus to have a good year in 2009 due to strong economics in that play, but our margins will be softer due to higher discounts.

During 2008, we established our Marcellus shale team, make customer presentations throughout the year -- the US, and they favorably impressed everyone they meet. This team has specific experience in the play and can help our customers maximize recoveries and ensure that they're getting the highest rate of return on their investment.

Revenues in the southeast region were up 72% for the quarter year-over-year and 28% sequentially as a result of increased activity in the Haynesville, Cotton Valley, and Ford -- Floyd shale plays.

In December we completed our first Haynesville frac job with excellent results and we expect the operator to provide us with additional work. The supply of ceramic proppant is still inconsistent, but we've seen improvements over last quarter as new supplies enter the market and as operators experiment with other materials. In fact, we are currently working with a Europe suppliers to bring in proppant from China.

With our Diamondback acquisition, we acquired a few new business lines, and will be adding rental tools and a water transfer business, to the southeast region in 2009. We've seen the big three downsize our close operation in a couple of small markets in this region, which should boost 2009 activity a bit in those markets, in addition to the increasing activity in the Haynesville.

We have also organized a Haynesville technical sales team to demonstrate our proficiency of performing high quality completion and high pressure, high temperature down-hole environment like those found in the Haynesville. These are expensive wells to drill and complete, and our expertise is an excellent fit with the requirements, which means better well performance, and preservation of economic returns to the customer.

Revenue from the South-West region are up 216% for the quarter year-over-year, and 55% sequentially. This region includes the Barnett Shale. The Diamondback acquisition added two new service centers in this region; Tolar and Cresson, Texas.

Cresson was the best performing location for Diamondback. As the rig count drops in the Barnett, we expect utilization and pricing will continue to soften. We will continue to monitor the situation and mobilize cruise and equipment to stronger markets if necessary.

Ours is a cyclical business and we'll make adjustments to position our people and assets not only for the downturn, but also with an eye towards making the most of the eventual recovery.

Our Artesia, New Mexico service center has continued to show improvement and had a profitable fourth quarter. We expect this location to continue to improve despite a softer environment in 2009.

The year and the fourth quarter were very strong in the mid-continent region. Although we expect 2009 to be difficult with the heavy drop in rig count in the region, revenues in the mid-Con region increased 162% for the quarter year-over-year and 34% sequentially. Most of our work in the quarter was from the Anadarko, Woodford and Arkoma Basin, although we did some work in the Fayetteville.

We recently leased a staging area in the Fayetteville at the request of several large customers in order to get our resources closer to the field. With the Diamondback acquisition, we added new service centers in Marlow, Elk City and Countyline, Oklahoma and that makes us the second largest cementing fleet in the mid-continent region. With the addition of the new service centers as part of the Diamondback purchase we decided to close down Enid Wireline operations and consolidate crew from Enid to another pressure pumping location in the region.

We also established an Anadarko Basin technical sales team to raise awareness of our expertise in the deep Woodford and other high temperature high pressure plays.

Revenues in the Rocky mountain region have increased 149% for the quarter year-over-year and are down 10% sequentially. Operating income improved substantially in this region as we saw better results from our Brighton and Bertl (ph) service centers.

In the fourth quarter, the cement bulk plant we installed in Rock Springs, as part of our cost control efforts, became operational. Our Bakken activity has held up despite weak oil prices, but as prices stay below $50 per barrel for an extended period, we anticipate activity will soften in 2009. Our plan is to continue to preparing our infrastructure in Williston, North Dakota where sand and cement handling as we see the Bakken as a strategic long-term opportunity for us. We plan to keep our presence in the basin low until our activity begins building once again.

I'll now turn the call over to Tom, for a review of our financial results.

Thomas W. Stoelk

Thanks Dave. As previously mentioned, net income for the year was 38.8 million or $1.64 per diluted share. Full year revenues were up 49% in 2008 to 520.9 million marking the 11th consecutive year of revenue growth. Approximately 26 million or 5% of the increase over 2007 amounts was contributed by the Diamondback acquisition. Comparing a full year revenues for 2008 versus 2007, revenue by operating region increased by 20.3 million in Appalachia, 26.3 million in the southeast region, 45.3 million in the southwest region, 49.5 million in the mid-continent region, and 28.7 million in the Rocky Mountain region.

Revenues from our technical pumping services, that's stimulation, nitrogen, and cementing accounted for 89% or 463.3 million of our total revenue. Down-hole surveying services, completion services and fluid logistics were responsible for the 9.4, 0.4 and 1.2% of 2008 revenues respectively. Gross profit for the year was 114.8 million, that's up 17% from 2007. Discounts are greater than they were in 2007 due to lower utilization caused by poor weather during the first quarter of 2008 in Appalachian region as well as increased cost during 2008 for materials and fuel that could not be passed on to our customers via price increases because of the current competitive environment, which has affected our margins.

EBITDA reached 113.3 million in 2008, that's a 26% increase over 2007. SG&A expenses were 45.7 million in 2008 compared with 36.4 million in 2007, an increase of 26%. As a percentage of revenues, SG&A was down 9% or approximately 160 basis points from last year as we were able to leverage the fixed cost component over a higher revenue base.

Cost of revenues was up 61% to 406 million. As a percentage of revenues, cost of revenues increased 78% for 2008 as compared to 72% in 2007. This percentage increase between periods is primarily due to cost increases in material. We paid higher cost for sand, chemicals and cement as well as transportation expenses deliver those materials, and additionally our mix changed during the year where we started performing more jobs out in the mid-continent and the west where we have higher material content.

Fourth quarter revenues were up 70% year-over-year to 161.7 million and up 11% sequentially. Without the Diamondback acquisition fourth quarter revenues would have been down sequentially which was not unexpected given the seasonal slowdown, weak commodity prices and a difficult capital markets environment for our customers.

Revenue by operating region in the fourth quarter was 43.8 million in Appalachia, 30 million in the southeast region 17.5 million in the Rocky Mountain region, 32.7 million in the southwest region and 37.7 million in the mid-continent region. As of the fourth quarter 2007 fourth quarter revenues in 2008 were down 4% in Appalachia, up 72% in the southeast region, up 149% in the Rocky Mountain region, up 216% in the southwest region and up 162% in the mid-continent region.

Sequentially fourth quarter revenues were down 18% in the Appalachia region, up 28% in southeast region, down 10% in the Rocky Mountain region, up 54.5% in the southwest region, and up 34% in the Mid-Continent region. Revenue from technical services was up 68% over the fourth quarter of 2007 and up 8% sequentially to 142.4 million.

Down-hole surveying revenues for the quarter were up 6% year-over-year and down 26% sequentially to 10.9 million. For the fourth quarter completion services was approximately 2.2 million and fluid logistics revenues was approximately 6.3 million.

Operating income for the fourth quarter came in at 22.5 million compared to 12.2 million a year ago and 24.9 million sequentially. That translates into an increase of 84% over the same period last year and a decrease of 10% as compared to the most recently completed sequential quarter.

Margins were again compressed by competitive pricing environment as pressure pumpers sought to maximize utilization to the point of breakeven in some cases. EBITDA was 36.4 million in the fourth quarter of 2008, that's an increase of 79% over the same period in 2007, and was 3. -- 3% increase sequentially.

SG&A expenses increased to 14.1 million, that's up 44% compared to the fourth quarter 2007 and was up 24% sequentially. A large portion of that increase was the Diamondback acquisition. As a percentage of the revenue, SG&A expenses decreased to 9% for the fourth quarter of 2008, down from 10% in the fourth quarter of 2007 and up from 8% revenue sequentially.

Cost of revenue increased to 125.1 million, up 72% for the fourth quarter of 2007 and up 14% sequentially. The increase was primarily due to the acquisitions that we made obviously as well as increased cost for materials and labor.

For the quarter, cost of materials or cost of revenues, labor expenses as a percentage of revenues decreased 290 basis points year-over-year to 18.5%.

Turning to the balance sheet, we ended the year in a strong financial position with approximately 87.8 million of working capital. Total long-term debt at the end of year was approximately 208.2 million. Our capital expenditures for new bill equipment for 2008 was approximately 90.4 million, which was invested to equip new service centers, to add equipment to existing service centers, and for general maintenance.

During 2008, we also purchased certain assets of Nuex Wireline and Diamondback Energy Holdings LLC, for a preliminary purchase price that totaled approximately $241 million.

Our capital expenditure budget for 2009 is significantly scaled back from 2008. We're keeping an eye on our commitments -- we're keeping our commitments as light as possible to maximize liquidity, and we have the ability to cancel or push back several of orders into the late quarters. With a current outlook, we expect to build CapEx somewhere in the neighborhood of approximately 20 million and maintenance CapEx is expected to add another 10 to 15 million on top of that number.

Turning briefly to the Diamondback acquisition, we were able to put together an attractive financing package, despite kind of the chaos in the capital markets. The Diamondback transaction was announced at 225 million. The components of that was 70 million in cash, which we drew from a -- our credit facility, 80 million and five-year notes, which have an initial interest rate at 7%. It escalates 1% a year as a five-year note is pre-payable without penalty. And the last component of that was 75 million of our convertible preferred notes than are perceptual with a conversion price of $25.

Given the recent debt deals in the industry had been quite a bit higher, we felt very comfortable with the terms of composition of the financing to support this strategic acquisition. At this point I would like to turn the call back over to Dave for some additional comments.

David E. Wallace

Thanks Tom. We've built Superior Well Services into the fifth largest pressure pumper in the U.S. and even in this downturn, we are actively working to improve our competitive position. Creating our three-basin specific technical sales teams has positioned us as one of the leading high-tech players in the most profitable and active basins.

In addition, we are actively targeting the major oil companies with our newly formed strategic corporate sales team to focus exclusively on securing more business from the majors. By the end of 2008 we have performed what we classify as super high-tech work in four out of our five regions and there isn't a job on shore for which we can't compete.

Our geographic reach and ability to deploy high-quality crews to any location in the onshore U.S. along with supporting them with the technical fluid experts help us establish a position in this market. Even in this challenging market we're not standing still and we continue to see opportunities for growth. For example the new service centers opened in 2007 are now beginning to contribute cash flow right on time as expected.

In the third quarter of 2008, 18% of our operating income came from these centers and that percentage grew to 26% in the fourth quarter. As these centers mature and earn customer acceptance their activity levels continue to increase. In addition we're adding new offerings to our existing service centers including tubing conveyed perforating, rental tools and fluid handling.

In a downturn, these offerings become more important as operators turn their emphasis from drilling new wells to re-completions and workovers. These new offerings diversify our business and give us new ways to grow even in the current market environment.

Our expanded geographic reach enables us to ship resources from low demand to high demand area allowing us to optimize utilization and retain the best and most qualified personnel. Our capital structure is built for durability and flexibility during the market cycles. We will continue to focus on maintaining and improving operational efficiencies from our investments and infrastructure and other initiatives. One focus in 2009 will be on making improvements in fuel, freight and material cost.

Material costs have begun to fall with the exception of high strength proppant which we have discussed earlier in the call. Although we haven't discussed this much in the past, technology is a vital element in maintaining and building our competitive advantage in technical fluids expertise, safety and performance. We have some four cement testing labs in proximity to our most active technical plays to ensure quality and performance.

We hold two patents for specialized frac fluid used in high-tech and super high-tech jobs. Our team has developed and refined specialized chemicals for reusing frac flow back and acid mine drainage water which is increasingly important in the Marcellus Shale play. Our satellite communications network enable us to bring the oil field to our customers' offices by streaming live data and images thereby increasing the productivity and quality for large multi-well programs over an expanded geographic region. These technologies and innovations separate us from the competition and we have no plans to slowdown our efforts in developing new solutions for improving service quality and performance.

Our crews built a reputation one job at a time and I like to take this opportunity to thank our people for all the hard work during the quarter.

We expect 2009 will hold challenges for our industry, however, I believe, we have the great strategy, assets and people to both weather this downturn and emerge a stronger company.

This concludes our prepared remarks. I'll now open the call. Dimali, I'll give it you -- turn it over to you.

Question-and-Answer Session

Operator: Sure. (Operator Instructions). Your first question comes from the line of John Daniel with Simmons & Company. Please proceed.

John Daniel - Simmons & Company

Good morning, guys.

David Wallace

Good morning John.

John Daniel - Simmons & Company

Couple of questions on -- the first one on proppant. I think you mentioned that you're looking at some experimental types of proppants, can you elaborate on that. And then you also -- I think you mentioned you're starting to use Chinese proppant from a U.S. supplier. Can you tell us who that supplier is?

David Wallace

I probably won't give you that information but one thing we're seeing is proppant is definitely starting to loosen up.

John Daniel - Simmons & Company

Okay.

David Wallace

And there's a combination of more ceramic, higher-strength material coming online and also a shift maybe from part of these materials to more of a resin base type material also. But one thing we've seen just like with frac sand in the past is we've been able to build our position there and we're very confident we can build our position with the high-strength materials.

John Daniel - Simmons & Company

Have the proppant vendors at this point started lowering price?

David Wallace

We are definitely seeing a lot more availability which is the first line of being a little more inflexible on pricing.

John Daniel - Simmons & Company

Okay.

David Wallace

So, we can say that we are starting to see some improvement there.

John Daniel - Simmons & Company

Okay, well good. Question on the fluid services, you mentioned a desire to take trucks up to Appalachia. What would be the timing on that and doing so you need to drill a disposal well or how'll you dispose the fluids?

David Wallace

Currently, there's no disposal wells in Pennsylvania, they go through treatment plants or they hole it across the border into other states. But we would utilize the other resources that are currently in place and just use the transportation part to help support that.

John Daniel - Simmons & Company

Okay. Just one final if I may. You talked about moving some of your assets to stronger markets and maintaining the utilization, and doing so is there any reason to expect that there might be some facility closures in 2009?

David Wallace

We continue to look at that and we talked about the Enid closure. And one thing we didn't mentioned on the call is that we have adjusted crews in some of the multi-service locations, we've been able to ship some resources out of that. But we picked these locations on the long-term basin -- basis.

John Daniel - Simmons & Company

Okay.

David Wallace

We've basically identified some strong markets that have long-term background and therefore our goal at this point is to maintain a presence in those regions.

John Daniel - Simmons & Company

Okay, great, that's it for me. Thanks guys.

David Wallace

Thanks John.

Thomas Stoelk

Thanks John.

Operator

Your next question comes from the line of Stephen Gengaro with Jefferies. Please proceed.

Stephen Gengaro - Jefferies & Company

Thanks, good morning gentlemen.

David Wallace

Hi Stephen.

Thomas Stoelk

Good morning Stephen.

Stephen Gengaro - Jefferies & Company

A couple of things. I guess I'll start with -- as you look at the -- you look at the various regions, can you give us any kind of a trip around the U.S. as far as what you're seeing as far as pricing and the severity of pricing declines, maybe even if it's on a relative basis by region as opposed to absolute, if you could?

David Wallace

Yeah we're definitely seeing pricing reductions in most of the basins and lot of that goes with the intensity of the rig count reduction. So we're looking at that as kind of a barometer and how we fit into certain area. Tom, I think you have some specific information.

Thomas Stoelk

Yeah, I mean, I think, the -- from a pricing perspective Stephen the region that has been least affected has really been Appalachia followed by -- really by the Southeast. We had strong revenue -- have strong markets in both of those. We're seeing kind of the mid-con and the Rockies with a fairly dramatic decline with -- in the rigs with pricing kind of following, and that's been the markets that have been most dramatically impacted. And in the Barnett, as -- you've heard in, I think, a number of calls, this earning season has been impacted by the softness as they continue to lay down rigs there.

David Wallace

The other thing just to add to that is we are very focused on the value based pricing and again that's part of the initiative of these strategic sales teams, we're seeing particularly like in the Marcellus, we have a fluid system that we can reuse, a high percentage of frac fluid. Therefore, there's a value benefit there other than just a straight job cost. So taking advantage of this fluid system where they can save a lot of money, because that's a big cost in these wells. When you start looking at fluids disposal, things like that, that reusing this frac fluid has had a big economic improvement that our customers can take advantage of.

Stephen Gengaro - Jefferies & Company

So you think it's -- I know it's tough to say, but you think it's reasonable to think that in some of the higher end areas, you actually -- there is some value to your expertise versus some of the commoditized services which are out there?

David Wallace

Absolutely. When you start to looking at all over different factors that you can do to improve the total well cost, to improve the productivity that comes out of those wells, it's not just bottom-line job cost that customers are now starting to look at. And again this fits right into our expertise. We've now reached the national presence that customer recognized us as a solution person, as somebody that can improve their wells and bring other alternative methods to -- how to make them better wells at a lower cost than just being a regular pressure pumper.

Stephen Gengaro - Jefferies & Company

Great, that's helpful. Thank you.

David Wallace

Thanks.

Operator

(Operator Instructions). Your next question comes from the line of Victor Marchon with RBC Capital Markets. Please proceed.

Victor Marchon - RBC Capital Markets

Thank you all. Good morning.

David Wallace

Good morning Victor.

Victor Marchon - RBC Capital Markets

I just had a follow-up question on the pricing. I want to see if you guys could give us some order of magnitude as into what you have seen today on the pricing said relative to last year's high and also just put in context between the high-tech jobs versus the more commodity type of work.

David Wallace

Just trying to understand your question, Victor, you're asking for discounts, is that what you're -- from a high in last year to kind of where -- what we're seeing now. Is that --?

Victor Marchon - RBC Capital Markets

Yes.

David Wallace

Okay. Well kind of in order of magnitude, Appalachia as in -- I'm going to kind of give you low single-digits, high single-digits type stuff as -- is about all I'll be able to kind of give you. But Appalachia has been the region that has been least impacted with respect to that and that's low-single digits from kind of the highs that we've seen. Southeast is probably number two with respect to least amount of impact on conventional markets there in kind of the mid-single digits in that market. You get into the mid-con regions. Those are high single-digits, really mid-con, Rocky, southwest are really all pretty much high single-digit discount markets as far as percentage of increase year-over-year. And part of that are matching up with the heavier drop in rig count areas. And as we talked about our mix of services is -- we're seeing it more on the pressure pumping than we're on cementing and nitrogen and some of the other product lines.

So when you talk about a slick water job in some of the heavily competitive areas, discountings starting to get pretty aggressive in some of those basins.

Victor Marchon - RBC Capital Markets

So the numbers are -- that as you guys just walked through was more reflective on the stimulation side or is that sort of an average as into all the product lines.

David Wallace

The one I was giving you, Victor, is more of an average across all product lines.

Victor Marchon - RBC Capital Markets

Got you, okay.

David Wallace

The stimulation would be higher.

Victor Marchon - RBC Capital Markets

Okay. And the second one I have is just on the M&A side, just wanted to see if you guys can speak to what you are seeing as into the number of opportunities as well as your appetite here in '09. And as well as what you are seeing on the bid as spreads for the businesses that you are seeing available?

David Wallace

I think we're starting to see that there are opportunities pumping up. Again, when things were pretty strong, people enjoyed riding the upside. Now that things have started tightening up, when you starts seeing some companies that are really focused in some of the lower tax, high discount areas, now they're starting to really feel a lot of pressure. So, we're seeing the opportunities pop up that we could take advantage of some of these companies now becoming available.

Victor Marchon - RBC Capital Markets

So, the asking prices have come down to closer match, what the bid levels are, would you say a real pass two or three months?

David Wallace

I think that they're really starting to soften up.

Thomas Stoelk

That's true.

Victor Marchon - RBC Capital Markets

All right, great, thank you guys.

David Wallace

Thanks Victor.

Operator

Your next question comes from the line Jack Aydin with KeyBanc Capital Markets. Please proceed.

Jack Aydin - KeyBanc Capital Markets

Hey guys.

David Wallace

Good morning Jack.

Jack Aydin - KeyBanc Capital Markets

Utilization, can you give -- I don't know, I would apologize if you mentioned it. What is the utilization rate right now going on? What was in the fourth quarter and was is directionally what you're seeing in the first quarter?

David Wallace

When you look at fourth quarter -- I mean third quarter was probably our maximum utilization and we were really getting close to full utilization during that time period. It stayed at that level in to October and then we started seeing the Holiday seasonal dropdown, which you look. We were probably 75% to 80% third quarter and fourth quarter that probably dropped to 65% and I think we're going to see it along with our seasonality in first quarter. We're going to see that continue to our dip with the rig count dip and also just the seasonality in Appalachia and the Rockies.

Jack Aydin - KeyBanc Capital Markets

Okay. If you look at the fourth quarter revenue with growth in everything; if you strip out the acquisition, what was the growth on the basic without the acquisition?

Thomas Stoelk

The acquisition was roughly 26 million so that's the delta you basically kind of want to back out of that. And in the numbers that we reported Jack that acquisition would have been impacted primarily the Southwest and Mid-Con regions for us, if that's what you're looking for.

Jack Aydin - KeyBanc Capital Markets

Okay, yes. Thanks a lot.

Thomas Stoelk

Yes. Thanks Jack.

Operator

Your next question comes from the line of Mike Mazar with BMO Capital Markets. Please proceed.

Michael Mazar - BMO Capital Markets

Hey good morning guys. Most of mine have been answered here, just a quick question. Can you walk us through your debt covenants?

Thomas Stoelk

Primarily, we have two Mike. One is a kind of the maximum leverage ratio. Its essentially as defined by the agreements, kind of a three times EBITDA type coverage ratio. We were roughly in a 1.3 to 1 range, so we had a lot of room with respect to that. And then the other is a fixed charge covenant, which we have to have greater than 1.75 times coverage on that. Again, we were roughly around 2.95, 2.96 times so fairly good shape with respect to that so.

Michael Mazar - BMO Capital Markets

Perfect. Thanks very much.

Thomas Stoelk

Yes. Thanks Mike.

Operator

Your next question is a follow-up from the line of Stephen Gengaro with Jefferies. Please proceed.

Stephen Gengaro - Jefferies & Company

All right, thanks. Gentlemen, two follow-ups, one is back to the price. When you gave those numbers currently, are you seeing the pace of price erosion accelerate currently versus six to eight weeks ago. Is it about the same?

David Wallace

I think it's in that kind of aggressive time period right now. One, because when we look at it rig counts have gone pretty aggressive as far as how fast they've been dropping, but we think they're getting to the point that they may be getting ready to bottom out. So everybody is trying to take advantage of that negative downward energy and then trying to get the best price they can and locking some low pricing before the rig count actually starts bottoming out.

We look at the rig count. We've actually started seeing a few areas that we work starting to see increase plan an increase, which tells us that we may be getting ready to meet the bottom of the pricing and start seeing things go the other way.

Stephen Gengaro - Jefferies & Company

That's helpful, going?

David Wallace

No, I think that again its kind of you're hitting the window right now, we're trying to get the most out it, but we think its getting ready to turn. And again most of that as we've mentioned earlier have been on simulation in some of the slick water type areas. When you look at cementing and nitrogen, we're not seeing any erosion there that we are in some of the other stuff.

Stephen Gengaro - Jefferies & Company

Great. And then as a follow up, when we think about margins and, I take it if the market slows, you're goanna do your best to control costs. How should we think about your -- the impact or the timing of the impact of cost reductions, on margins if prices are falling. Is it take a couple of quarters before you see that impact? Will it be sooner? I am trying to get a sense for the potential pace of when how margins fall in maybe when they sort of stabilize?

Thomas Stoelk

Yes I think, one thing I would look at is we have a little bit of seasonality. If you take a look at fourth quarter last year '07 we had gross profit of around 23% and then in the first quarter we saw a drop we had some weather in Appalachia but we saw it drop almost 7.4 percentage points. So we're going to have some seasonality with respect to that Stephen.

The inner thing that we're going to have is that, that a lot of these cost reduction initiatives when we're looking and trying to right size the activities for current demand where David had commented about, moving equipment around to more active areas and things like that, those will impact more heavily I think your first quarter. And have some impact in the second quarter as we kind of continue to push those cost initiatives through.

But when you move equipment around you right size locations and things like that which we have been doing in the first quarter, its going to have much more margin of our expectation rather as we currently see it in this pretty fluid market. But it will be heavier I think in the first quarter and the second quarter and then I think you'll actually see it flatten a little bit in the third and fourth quarter.

David Wallace

Just adding to what Tom said, we didn't have a lot in the fourth quarter. We're trying to be responsive and not over reactive. We could see the rig count drops coming, but it was hard to get strong visibility on which areas we're going to see the biggest impact. So we have been slow to respond in fourth quarter, not more reactive in the first quarter.

And again when you start looking at shift in equipment around, just to move 30 pieces of equipment from the Rockies to Appalachia, you might be looking at $22,500 a unit just in transportation costs. So when we start shifting a lot of resources around it can get pretty expensive pretty quick. So we're trying to take a little longer term to look. We know some areas that we definitely want to beef up in the Marcellus; but some of the other areas we're trying to give it a little more realistic longer look to make sure we're making a long term correct decision?

Stephen Gengaro - Jefferies & Company

Thank you for the details. It's very helpful.

Operator

Your next question comes from the line of Joe Agular with Johnson Rice. Please proceed.

Joe Agular - Johnson Rice & Company

Hi, thanks. Its Joe Agular with Johnson Rice. I guess you addressed a lot questions we had, but could you maybe help us on now that the acquisition is complete and you have referred a full quarter with your Q1? Some of the kind of movement there in stuff like depreciation, interest expense, SG&A which you expect that to look like the full quarter?

Thomas Stoelk

Well the rate on our credit facility and we had approximately 127 million outstanding at the end of year. We're probably about 10 million higher than that right now. As we had to fund out some of the Diamondback; we didn't get a lot of working capital with Diamondback. We got a little bit big we purchased assets. We got a little bit of inventory and incurred or assumed capital leases and ARO liabilities.

So effectively kind of their first 60 days of operations were pretty much funded, meaning funded by either our cash flow or working draws on a credit facility. But that is a LIBOR for us, LIBOR plus of about 1.75 right now Joe, to run a math or prime, so probably around three in a quarter. The $80 million note is an escalating note under GAAP what you do is you use the average rate. So it escalates from 7% to 11% over a five year term. So what you would want to do is model that at roughly around 9%.

Depreciation for the year based on our current run rate kind of layering in CapEx, and we're going to be fairly prudent with CapEx because we're looking at liquidity fairly strong; its probably somewhere in the neighborhood of around $68 to $69 million, that's going to include amortization of couple of hundred thousand bucks a month. So you've got about 2.5 million of amortization in there with the rest of it being depreciation. Does that help?

Joe Agular - Johnson Rice & Company

Yes, yes. SG&A, any guess on that?

Thomas Stoelk

We're still working with that. One of the things that the Diamondback transaction was down late in the year 1118 (ph), so we're fooling around but still a little bit with respect to redundancies. On the SG&A line, just on pure corporate, because of the elimination of the duplication of just charges like legal and professional, accounting and things like that, you're probably looking at $1.5 million to $2 million just pure corporate which doesn't count the SG&A from the redundancies at any of the operating levels and things like that. And,... that help?

Joe Agular - Johnson Rice & Company

Yes, yes okay. Thank you.

Operator

Your next question comes from the line of Sean Boyd with West Cliff Capital Management. Please proceed.

Sean Boyd - West Cliff Capital Management

Thank you. David. I just wanted to go back to little more on one of the questions... go back on terms of the pricing. You indicated that we were at a point where the customers are trying to get the maximum amount they can at the moment of the drop in the rig count, but you see some areas flattening and actually picking up just a little. Can you give us a little more detail on that?

David Wallace

Well, I think part of it is in other seasonality always in Appalachia and the Rockies. So part of the rig count, we see for first quarter is not just due to low gas prices, but also seasonality. And when we look at Appalachia, we're starting to see that in Pennsylvania, West Virginia rig counts actually bottom started coming up a little bit. Same way with Utah, it looks like its starting to come up a little bit.

Fayetteville, Bakken kind of flattening out, maybe getting ready to when we look at the Bakken it's definitely has a weather effect there. It may turn into more of a former weather type operation, where they operate six to eight months versus trying do it 12 months; just because it's just too intense in the winter season.

Sean Boyd - West Cliff Capital Management

Right.

David Wallace

So we're started to see a few of those areas that look like they've started kind of flattening up, trending up a little bit. So based on that, and again we'll monitor that to see how much they do jump, but based on that we can kind of determine that may be pricing may do the same thing.

Sean Boyd - West Cliff Capital Management

Sure. So right now given we're in the calendar in these particular areas could certainly be mostly seasonality but it could also be a little bit more of a bottom as well?

David Wallace

Yeah, there is two players out there, there is a check-book player that look at gas prices that are still little bit soft to start getting aggressive. But then you have some of the larger players that have nice hedge positions still can deliver gas in areas where they want to continue to expand the fields. And I think some of those guys are going to start shifting the other way. They have a lot of work to get done and they want to get into it when the weather is right.

Sean Boyd - West Cliff Capital Management

Got it. Thanks for the additional color.

David Wallace

Thanks.

Operator

And we have no further question. I would now like to turn the call back over to Dave Wallace for closing remarks. Please proceed.

David Wallace

Thanks Dimali. I appreciate everybody been on the call today. And we look forward to talking to you at the end of first quarter. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: Superior Well Services Q4 2008 Earnings Call Transcript
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