BJ Services Company F2Q09 (Qtr End 3/31/09) Earnings Call Transcript

BJ Services Company (BJS)

F2Q09 (Qtr End 3/31/09) Earnings Call Transcript

April 21, 2009 10:00 am ET

Executives

Bill Stewart – Chairman, President and CEO

Jeff Smith – EVP, Finance and CFO

Analysts

Pierre Conner – Capital One

Marshall Adkins – Raymond James and Associates

Dan Pickering – Tudor, Pickering, Holt

Geoff Kieburtz – Weeden

Bill Sanchez – Howard Weil

Mike Urban – Deutsche Bank

Bill Herbert – Simmons & Company

Tom Curran – Wachovia Securities

Presentation

Operator

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

Bill Stewart

Thank you, and thank you all for joining us today. Before we start the conference call I’ll mention that some of the statements we make during the call may include projections, estimates, and other forward-looking information. This would include any discussion of the Company’s business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties that could affect their outcome. I refer each of you to the latest Form 10-K on file with the SEC where you will find a discussion of the risk factors relating to the Company’s business. These factors and other factors mentioned on the call could cause results to differ materially.

This second fiscal quarter I think can be characterized by – as one of the most precipitous declines in U.S. drilling activity over a three-month period. The current U.S. drilling rig count stands at 975 rigs. That’s 43% lower than the 1721 rigs working when our fiscal second quarter began. Reduced demand for oil and gas largely attributable to the global economic downturn has led to lower drilling activity and intense price competition for the services and products that we provide. We experienced average price declines in the mid-teens in our U.S. Pressure Pumping business in the quarter compared to the previous quarter.

Our operational strategy during this very difficult is to aggressively reduce our cost structure to keep it in line with business activity levels and to maintain or increase market share while generating positive cash flow from operations. Among the measures we have taken during the quarter many of which will not be fully reflected in our financial results into the third fiscal quarter include reducing our global workforce by approximately 11%. We’ve instituted a temporary global wage freeze and introduced other measures aimed at reducing overall labor cost and improving labor efficiency throughout the operations worldwide.

We have a significant effort ongoing to reduce working capital. Receivables I think are in very good condition and will be worked down as revenues decline. There is a Companywide initiative to reduce inventory levels and we should see inventory reductions over the course of the next four quarters. We are negotiating aggressively new pricing agreements with our materials, parts, and chemicals suppliers to reduce costs and create other efficiencies in our supply chain and we expect significant efficiency contribution from this initiative as we move into the subsequent quarters.

We have reduced our capital spending targets for the current year and also for fiscal 2010 and we project 2010 capital spending to be in the range of $180 million approximating maintenance level capital spending. This level would be about a 70% reduction from 2008 capital spending levels. We are closing our satellite manufacturing facilities in Canada and in Singapore and in transferring that function back to our central manufacturing location in Tomball, Texas.

We believe that these initiatives and others will strengthen our position in the marketplace in the short term and in the long term and as we navigate this very challenging business cycle. At the same time we are being diligent to preserve high standards of job quality and safety and corporate governance throughout our worldwide operations.

This morning we reported net income for our second fiscal quarter of $43 million, $0.17 per diluted share. Revenue for the quarter was $1.05 billion, down 18% compared to the same to the same quarter last year and down 26% sequentially. Operating income was $58 million, down 69% compared to the same quarter last year and down 73% sequentially. Revenue performance for the quarter generally mirrored the changes in average drilling activity. Year-over-year, our total revenues declined 18% while average worldwide drilling rig count declined 19%. Sequentially, revenues declined 26% while average worldwide drilling activity declined 21%.

Capital spending for the quarter was $121 million and this brings our total year-to-date capital spending to $238 million. With the current market environment, we are scrutinizing capital spending very carefully and canceling projects as we deem to be appropriate. We currently anticipate fiscal 2009 capital spending to be in the range of $400 million to $425 million.

Now, moving through the various reporting segments, starting with U.S./Mexico Pressure Pumping, revenues totaled $476 million for the quarter, a 34% decline from the previous quarter while average rig – drilling rig count declined 27%. Rapidly declining activity and intense price competition were prevalent throughout the U.S. Mexico was a bright spot and will become more significant fees for our business going forward as we begin to work on new contracts there, both offshore and onshore. Year-over-year our U.S./Mexico Pressure Pumping Services revenue decreased 25% while average drilling rig activity declined 22%

Moving to Canadian Pressure Pumping, revenue of $95 million for the quarter decreased 28% sequentially with average drilling rig activity down 19%. Revenue decline in Canada was a function of the activity decline and increased pricing pressure in most areas. Activity was negatively impacted in March as spring breakup season began in several areas during that month. Year-over-year revenue in Canada decreased 31% and average drilling rig activity decreased 35%. In addition to activity declines, the weakening Canadian dollar also contributed to year-over-year revenue declines in Canada.

Revenue on our International Pressure Pumping operations of $277 million decreased 16% from the prior quarter and decreased 5% from the same quarter a year ago. International rig count declined 9% from the prior quarter and declined 6% year-over-year.

Latin America region revenue decreased 12% sequentially on a 16% decline in drilling activity. Revenue decline in the region was largely attributable to labor strikes and poor weather and lower pricing in Argentina and lower stimulation activity in Venezuela. Year-over-year revenue for the region declined 5% while average rig activity declined 12% as increased activity in Brazil and Ecuador partially offset the impact of lower activity in Argentina and Columbia.

Revenue from the Middle East region decreased 19% sequentially primarily a result of lower rig activity in Saudi Arabia and Kazakhstan and lower product sales in Oman. Year-over-year Middle East revenue was down 10% as a result of lower activity in Saudi Arabia, India, and Kazakhstan. Revenue from the Asia-Pacific region for the quarter decreased 20% coming off a record high in the previous quarter primarily as a result of the completion of several large projects in the previous quarter in China, Australia, Indonesia, and Malaysia. Weather issues in Australia also hampered activity during the reported quarter.

Year-over-year revenue for the Asia-Pacific region increased 17% primarily a result of increased activity and new projects in Thailand and Malaysia and China. Revenue from the Europe segment was up 1% sequentially as higher activity in the Netherlands and the U.K. was substantially offset by lower activity in Norway. Revenue was flat compared to the same quarter last year as increased activity in the Netherlands, Nigeria, and Ghana was offset by lower activity in Norway.

In Russia, revenue declined significantly, sequentially and year-over-year as we completed one contract late in the quarter and closed one of our operating bases. We are now operating out of one base essentially servicing one contract, which we believe will conclude later in the year and as this contract is completed, we intend to orderly exit the Russian pressure pumping market as we have given notice of this earlier.

Revenue from our Oilfield Services Group of $207 million decreased 17% from the prior quarter and decreased 4% year-over-year. Tubular Services revenue was down 16% sequentially and down 10% year-over-year primarily a result of lower activity in most of the international markets in which they operate and also lower activity in the Gulf of Mexico.

Process and Pipeline Services revenue decreased 12% sequentially and 11% year-over-year, primarily the result of the completion of a large international market and the decline in U.S. and Canadian activity during the quarter.

Chemical Services revenue was down 10% sequentially, primarily the result of lower U.S. activity and up 6% year-over-year, primarily due to the expansion of their business in new markets and an increase in their industrial chemical service work.

Completion Tools revenue decreased 22% sequentially, primarily as a result of lower U.S. activity and a large international project oriented sale in the prior quarter not repeating. Year-over-year revenue increased 3%, reflecting the inclusion of Innicor Subsurface Technologies business, which was acquired in May 2008, offset by the impact of several large international tool sales in the prior year, which did not repeat.

Completion Fluids revenues decreased 31% sequentially and 3% year-over-year primarily due to the large product sale in Mexico in the first quarter that did not repeat and as a result of decreased activity in the Gulf of Mexico.

And now, I will pass it over to Jeff.

Jeff Smith

Okay, thank you, Bill, and good morning to everyone. Let me just take a few minutes to briefly talk about the margin performance for the quarter and my comments on the margins will be limited to the sequential performance from Q1 to Q2.

So, as a reminder, consolidated operating income was 5.5% on revenue just over a billion dollars. Operating income margin that was down from 15.4% in the previous quarter and down from 14.5% reported in the same quarter last year.

Now, jumping into the segments on a revenue of $476 million for the quarter, our U.S./Mexico Pressure Pumping operations reported operating income margin of 5.4% and that’s down from 21% reported in the previous quarter. Now the sequential operating income margin decline that was primarily due to lower drilling activity in a highly competitive pricing environment. To give a little detail behind that, for the quarter, average pricing for our products and services compared to the previous quarter was down in the 14% range. That’s an impact on earnings of roughly $0.16-$0.17 per share. Also impacting the operating income margins for the quarter was $8.1 million non-cash charge that was related to excess or idle fixed assets in that operation.

Business conditions in the U.S. deteriorated throughout the quarter and aggressive cost reduction measures began during the quarter to align our cost structure with market conditions. To be somewhat repetitive from Bill’s comments, I’ll give a little more specifics into our U.S. strategies on cost reductions. Thus far we had reduced our workforce by approximately 24% in this business and that includes removal of the high-cost flex crews and contract labor in that operation. Discretionary spending is being very closely monitored and our supplier negotiations for price concessions are in progress. We’ve also began, as we stated before, removing low horse-power, less-efficient equipment from the field. So, that’s being removed as we speak.

During the quarter, we estimate that we’ve taken approximately kind of the 8% to 9% of our horsepower capacity into a central location here in Texas with more to come as we go into the third quarter.

Moving to Canada Pressure Pumping, on revenue of $95 million operating income was just under $6 million or 6.2% of revenue. Operating income declined $23 million from the previous quarter. That was due to lower drilling activity, competitive pricing pressures, and lower service related revenues compared to the prior quarter. March was a particularly difficult months as operators completed a number of drilling projects ahead of spring break and of course as we moved into the spring break season.

Pointing out just the activity in the month alone, we had average rig count reduction of over 50% in the month of March alone. So, it was a very difficult month for the operations. Cost reduction measures, similar to the U.S. described earlier are underway, so I won't be repetitive there.

For the International Pressure Pumping, operating income margin for the quarter was just under 8%. That’s down 600 basis points from the previous quarter. Over half of the operating income decline can be explained in a couple of areas. First, we incurred, as reported in the press release, a $4.3 million loss on a an unfavorable resolution of a VAT refund claim in Indonesia during the quarter.

Secondly, Russia was a significant drain on margin performance sequentially. That’s due to the high cost structure that’s required to maintain operations on the single remaining contract that Bill mentioned earlier. That was coupled with statutory pay requirements on headcount reductions that we had in that operation previously. And as stated by Bill earlier that we do plan to exit the Russia Pressure market and we’ll be out most likely by the end of this summer.

The remaining portion of the market decline in International Pressure Pumping was due to certain project delays or cancellations in certain international markets where the cost structure was higher than the prevailing market. And this occurred most notably in certain countries in the Middle East and Asia-Pacific regions. Initiative, again, to align our cost structure with market conditions in those areas are in progress.

Moving to our Oil Services Group, on revenue of $207 million for the quarter operating income margin was slightly below 10%. That’s down from 16.5% reported in the previous quarter. Operating income margin was lower sequentially for all of the operating divisions with the exception of our Process and Pipeline business. Tubular Services margins declined primarily as a result of delays or cancellations of a number of international projects, most notably in Asia-Pacific area. Chemical Services margin was impacted by lower revenues from completion related chemicals sales, competitive pricing and slower capillary string activity.

Completion Tools margin declined primarily as a result of lower North America service tools sales as a result of lower drilling activity in the U.S. as well as Canada. In addition, the first quarter included a relatively large high margin sale of specialized completion tools into the international market.

Now, Completion Fluids’ operating income margin decline was mostly due to lower activity and job mix in the Gulf of Mexico as well as high product sales in Mexico in the previous quarter that did not repeat.

Switching over the corporate operating loss of $15.7 million for the quarter, that was $31 million below the previous quarter for a couple of reasons. First, the previous quarter included a $21.7 million non-cash charge that was associated with the obligation settlement of our U.S. defined benefit pension plan. By purchasing annuities for the pension plan, which occurred back in 2006, we have been able to avoid the market volatility on plan assets and have transferred the future obligation of the pension to a third party.

Also, contributing to the sequential decline in the corporate expenses was a $11 million benefit from the lowering of an annual incentive accruals based on current Company performance estimates.

Now, the tax rate no surprise there was quite a bit lower than what we experienced in the previous quarter. The tax rate for the quarter is 14%, down from 31% reported in Q1. In Q1, we had estimated that the fiscal year effective tax rate would be 31% and accrued tax expense based on that estimate at the time.

As a result of the precipitous decline in the Company’s earnings in the high tax jurisdictions of the United States and Canada, we now expect that we will earn a greater percentage of fiscal year earnings in lower tax jurisdictions. As a result, we currently estimate that the full year tax rate is likely to be in the 28% range instead of the originally projected 31% tax rate. So, the 14% tax rate in Q2 brings the year-to-date accrual tax expenses to 28% with respect to the Company’s year-to-date earnings. So, as we look forward into Q3 and Q4, the expected tax rate for those quarters is now 28%.

Switching to the balance sheet, we ended the quarter with $562 million of debt. That’s up $9 million from the previous quarter. Cash on hand, very strong at the end of March with $245 million. Notable uses of cash during the quarter include capital spending of $121 million and dividends of just $15 million. Our debt to cap at quarter-end was 13.7% with net debt to cap at just over 8%.

So, at this time, I will turn the call back to Bill for his comments on outlook.

Bill Stewart

Thanks, Jeff. Now, for the third fiscal quarter, our projections are that the U.S. drilling rig activity will further decline to the 800-850 rig range by the end of June, averaging roughly 30% below the second quarter average. Our further thoughts that U.S. rig activity will continue to decline in the July quarter to the 700 rig range and maintain that level of activity until natural gas supply and demand are more in balance. Much will depend on the economic growth in the U.S. economy at that time. With these market conditions, we anticipate some additional pricing decline to our operations and margin erosion in the third fiscal quarter.

Offsetting the impact of margin erosions in the U.S. operation somewhat will be the positive contribution from the cost reduction measures we mentioned previously. We will begin to see the full effect of personnel reductions and labor efficiency measures take place during – that took place during the second quarter show through in the third and subsequent quarters. We will also begin to see some meaningful material cost reduction in our – as our supply chain cost reduction initiatives begin to take hold. And we do expect some selected increase in activity in U.S. operations mainly at the Shale areas, the Haynesville, Fayetteville, Marcellus, and also the Balkan. And we also expect continued increased activity in Mexico.

Canada will go their annual spring breakup in the third quarter. So, revenues on our Canadian operation pressure pumping business will decline by more than 50% compared to the second quarter, resulting in an operating loss for the quarter. We expect revenues from our International Pressure Pumping business to be down slightly in the third quarter compared to the second. However, we expect our profitability in this segment to improve due to revenue improvement in some of our higher margin businesses, and as a result of the cost reduction initiatives we put in place during the second quarter.

We expect revenues and profits from our Oilfield Service Group to improve in the third quarter as we begin work on a significant Completion Fluids contract in Mexico and we have a number of large international Completions Tools orders that we expect to complete during the quarter. In addition, our Process and Pipeline Services business enters its busier season, so we expect sequential improvement in that business as well.

Now, as dismal that this report may sound to the listener, I am actually encouraged by where the Company is headed throughout this very difficult period. We continue to develop new products by our research group that make us more competitive. The focus today no doubt is on less expensive products for our operations, making our business more competitive and efficient.

From a personnel perspective, we are gaining a level of efficiency that will enhance our competitiveness in the current declining market and also improve our competitiveness as the market recovers. We are no longer losing market share as occurred among all the major companies as the market grew faster than we could keep pace. And we expect to build market share as we move further into the recession later in the year. I expect that fair priced acquisition opportunities will develop, which has been elusive over the past two years, so that will be a plus.

And finally, the Company is very financially strong. We have $244 million in cash on the balance sheet. Our net debt-to-cap ratio is less than 10% and we have a $400 million unused bank credit line facility that’s available for use.

In our current 12-month plan, looking forward, we expect to build cash exclusive of an acquisition that may make use of accumulated cash. So the balance sheet strength in the year forward should continue to strengthen.

So, with those comments made, we’ll open it up for Q&A. Dillon, we are ready for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question will come from Pierre Conner with Capital One.

Pierre Conner – Capital One

Good morning gentlemen.

Bill Stewart

Good morning, Pierre.

Jeff Smith

Good morning.

Pierre Conner – Capital One

Hey. A couple of questions on North America of course, pressure pumping, on the price impact, Bill you spoke about I guess mid teens and then (inaudible) to 14%. Could you tell us sort of as you progress that into the subsequent quarter how much of the – you gave us some activity declines, but how much more pricing flow through so to speak – we heard anecdotally about severe price reductions at the end of the quarter. What would you – can you project what the pricing impact is in the next quarter?

Bill Stewart

Well, that’s a great question, but it comes with a difficult answer.

Pierre Conner – Capital One

Yes.

Bill Stewart

In terms of what pricing is going to do as we go April, May, June, that’s difficult to project, but what I can say is that from beginning to end pricing was down about 16.5%, so the kind of the mid teens number that I’ve quoted earlier, that’s an average quarter to quarter.

Pierre Conner – Capital One

Okay.

Bill Stewart

Actually it was 16.5% down.

Pierre Conner – Capital One

Got it. That’s helpful. Alright. On the cost side and lot of progress on the people as well as materials, can you give us a split of what is your cost structure in terms of labor and how much of the cost structure is fuel and consumables, et cetera.

Jeff Smith

Well, I can provide that but for competitive reasons I don’t want to get too granular there.

Pierre Conner – Capital One

Okay.

Jeff Smith

From a variable cost perspective, Pierre, it’s about 45% and that’s at the gross margin level.

Pierre Conner – Capital One

Okay.

Jeff Smith

Our labor cost has typically been and this is going to include fixed cost, this kind of been in the 25% to 30% range.

Pierre Conner – Capital One

Alright.

Jeff Smith

So, that’s about as detailed as I try to get.

Pierre Conner – Capital One

But let me make sure, the labor is only about 25%?

Jeff Smith

25% to 30%.

Pierre Conner – Capital One

Got it, okay. Alright. Last one, just understand your comments, Jeff, about you brought horse power into a central location in Texas. What was the implication here that is retired or you are centralizing some of the equipment in preparation for – I didn’t – I am sorry I didn’t follow completely.

Jeff Smith

Well, actually, we’ve had this effort ongoing for years to replace all of our equipment in the field over the course of time and we had at 18% equipment that was old and had not been replaced and most of that is what will be sent to LaGrange for the purpose of three things. One is to examine it to see if it’s still efficiently functional and if so it will be available for use in the international markets if that need arises. We’ll be scrapping out some of that equipment that needs to be scrapped and some of it that is able to be replaced at the appropriate time or able to be refurbished for appropriate time will be set aside and made available for that purpose in the event of a future need.

Pierre Conner – Capital One

Okay. Was there any of the Bill, the $8.4 million writedown, is that specifically some horsepower.

Bill Stewart

That, Pierre, that’s – part of it is horsepower, but among that older asset class there is more than just frac pumps.

Pierre Conner – Capital One

Got it. Okay. Alright. I am going to let some other guys ask. Thanks gentlemen.

Operator

And we’ll go to our next question. We’ll have Marshall Adkins with Raymond James and Associates.

Marshall Adkins – Raymond James and Associates

Good morning guys. Does it feel like ’87 yet?

Bill Stewart

Kind of pretty close, Marshall. Actually, it feels like ’86.

Marshall Adkins – Raymond James and Associates

Yes. A couple – I just want to drill down on margins. I think kind of one of the things we all want to try to get a better feel of – and I am not sure how much detail you can gives us here – is how much worser these margins going to deterioration and kind of when should we expect it to bottom and from your comments it seems like there is kind of three components we are looking at. You are chasing your revenues downward and trying to lower your cost as quick as possible and certainly you seem to have a more aggressive rig count assumption than most on that front. So, that will take a quarter or two to flow through. Your pricing is down and probably still falling for another quarter or two and then you have these unusual costs of severance, the asset writedowns, et cetera that probably – or like I would assume they are done this quarter. Can you kind of walk through those three things and give us a feel as best you can on how bad the margin is getting, when do we see the bottom?

Bill Stewart

Well, I can make a few comments, I will let Jeff comment following that. I think that the way we see it played out as I indicated in my earlier comments is that the September quarter will probably be the point where we get to the low point somewhere in the range of 700 rigs. It all depends really on how much gas production comes off stream as a result of lower drilling activity and what demand is in place at that time. My expectation is that they will see that low 700 rig level of activity that – and it may stay there for a little while. Margins will deteriorate from here to that point, I would suspect, and once we get down to the 700 rigs, you should see things over the course of a few months quarters stabilize in terms of pricing and that would be the low point.

Marshall Adkins – Raymond James and Associates

Okay, Jeff, anything to add?

Jeff Smith

Well, I will just say I mean I think you hit on the key points in terms of what to look for, of course. Everybody’s model would be quite easy then to do on the Company if volume was only the factor here. So, pricing is a big question mark in terms of where we go margin wise and that’s difficult to answer at this stage.

With respect to your comment on severance and write-offs, I am going to have to reserve the right to anything future down–

Marshall Adkins – Raymond James and Associates

Reserve the right to write them down more?

Jeff Smith

Well, the ones that we’ve addressed right now have been addressed and as you can appreciate, there is a lot of rolling stock that’s headed towards LaGrange, and each asset is being evaluated that point in time and when you have 18% of your horsepower that’s really slated to remove, some of it is operational, particularly in some of these international areas. So, I think that a big chunk of that is already behind us, but we are still evaluating it. It comes into to the field whether it makes sense to put it back out or not.

Marshall Adkins – Raymond James and Associates

That’s all very helpful. Last question from me. Bill, you got a great balance sheet, probably getting better here in the near term. Comment on industry consolidation and both timing and opportunities you think may arise.

Bill Stewart

Well, the first thing we’d like to do is add to the Oilfield Service Group and that’s where our focus is and I suspect that there will some things that will develop that will look interesting to us that we can pursue. At some point, as we get down to 700 rigs or so, pressure pumping businesses may come together in some sort of merger process. That’s not our primary area of interest, but if the price is right we should well sure take a look.

Marshall Adkins – Raymond James and Associates

Okay. Very helpful guys. Thank you.

Bill Stewart

Okay.

Operator

We’ll take our next question from Dan Pickering with Tudor, Pickering, Holt.

Dan Pickering – Tudor, Pickering, Holt

Good morning. Jeff, could you help us a little bit with quantifying the cost efforts. It sounds like we didn’t see a lot of the cost benefit in the March quarter. Any dollar figure you can help us with in terms of what the net-net of the facilities, the people, all of that’s going to roll into as we step forward?

Jeff Smith

Well, I am going to speak more in general terms, Dan, if I may. Part of that is that things are progressing as we speak and so in terms of the – let’s talk about the March quarter for a minute. We’ve talked about the strategy of implementing of flex crews and the cost associated with that. That’s been removed to the kind of mid quarter. Also, contract labor has been pretty much eliminated by mid quarter. So, really we have about half of the quarter that I would say that we had some labor inefficiencies not only on the cost side, but also the number of people. So, in terms of labor in general for the United States Pressure Pumping we’ve probably removed about $70 million of cost associated with that operation in the labor side. Now, that’s people, and there are some incremental cost to the tune of about $10 million-$15 million that’s more slated towards that specialized labor, if you will. And so that’s been removed. Now the key thing here, as Bill had mentioned is negotiating better price with our suppliers and that is underway today as we speak, so I am going to be a little bit reluctant to get anchored down on a solid number in terms of cost savings because we are not done.

Dan Pickering – Tudor, Pickering, Holt

And it sounds like the goal here is to keep the U.S. business at least breakeven at the operating income line.

Jeff Smith

That would be a good goal, yes.

Dan Pickering – Tudor, Pickering, Holt

And then when you look to Canada, obviously, breakup came fairly early and pretty hard. If we look back historically at your segment results in the June quarter in ’07, the business lost about $22 million in ’08. It was $17 million. I mean, how do we think about the current year compared to those years? Where is – do cost cuts help get us in the ballpark of prior years? How are we thinking about those comparisons?

Bill Stewart

You talk about as we go into our Q3?

Dan Pickering – Tudor, Pickering, Holt

That’s right, the June quarter.

Bill Stewart

Yes, I don’t anticipate it to be worse than the prior year. It’s going to be a difficult market, no question. Internally, we are thinking that the sequential impact is going to be kind of in the $0.05 or $0.06 range because we are starting at a lower base.

Dan Pickering – Tudor, Pickering, Holt

Yes, okay. $0.05 to $0.06 in Canada?

Bill Stewart

Yes, sir.

Dan Pickering – Tudor, Pickering, Holt

Okay, thank you. And then, last question driven off of your comment, Bill, around – I am not that interested in consolidating U.S. Pressure Pumping, but if the price was right – do you guys define the right price as earnings accretive, is it a return metric, is it a price per horsepower, how do you think about transactions in that business?

Bill Stewart

The way you think about it is the price of the assets, is the price right and are the assets that you get worth that value. They don’t – there won't be any new market that an acquisition would bring us or no new customer that will bring us. There is no technical competency that an acquisition would provide. It’s all assets. So, you look at it on an asset type proposition.

Dan Pickering – Tudor, Pickering, Holt

Okay, and you would compare that to what it would cost you to build new again [ph]?

Bill Stewart

Yes.

Dan Pickering – Tudor, Pickering, Holt

Okay, great, thank you.

Operator

And we’ll take our next question from Geoff Kieburtz from Weeden.

Geoff Kieburtz – Weeden

Thanks, good morning.

Bill Stewart

Yes.

Geoff Kieburtz – Weeden

Bill, I’d just like to pick up on your last answer there. In thinking about consolidation in the U.S. Pressure Pumping business, how do you think about the benefits of consolidation? Do you think that you could consolidate enough to have a favorable impact on your pricing leverage?

Bill Stewart

Well, that wouldn’t be the sole objective, but the – it’s different than it was back in the 80s. I mean there is a lot of capacity there that would have to be acquired and it’s just a matter of whether the – whether after you’ve attempted to combine all of those businesses what the value of it after it was concluded, if the price was very low then there may be some value to try to harvest.

Geoff Kieburtz – Weeden

Okay. You alluded to market share losses during the past, but you didn’t really define a time period, but let’s say the last couple of quarters, but your expectation that you’d be able to turn that around before the end of the fiscal year. Can you elaborate a little bit on your thinking there?

Bill Stewart

Well, actually, it’s like going back to 2000 – year 2000 and 2002 when the market was low and we started this huge growth cycle in the business and the margins were quite nice. It attracted a lot of capacity into the marketplace, and that capacity moved into the marketplace at the rate of the market growth, but the large companies were not able to put enough capacity into address that growth and that spawned interest and brought others bringing that capacity into the market and a consequence the market grew so fast and everybody grew nicely over that period, but it was done under the circumstances of the major companies losing overall market shares. And that continued through 2008 although since about mid-2008 to today those market share loses have been abated. As a matter of fact, we either are neutral or somewhat positive in the last few quarters on market share issues. I think as the competition over the course of the next 12-month period gets more and more intensive, we are going to withstand toe to toe against the competition and use everything we have within our power, technology, execution competence, quality of our safety in the field, all those issues, and we feel like we’ll be gaining market share in the course of that process.

Geoff Kieburtz – Weeden

So, your sense is that you are gaining share today. The turn was in the middle of ’08 and that you and your two large competitors are net gaining market share at this point?

Bill Stewart

The last few quarters there has been I think a slight gain, yes.

Geoff Kieburtz – Weeden

Okay, okay. And just coming back to the idle equipment issue here, you are – it sounded like you got 8% or 9% of your U.S. capacity in LaGrange now. You are looking to double that in the current quarter to 18% of it?

Bill Stewart

Well, I don’t know if it’s going to be all in this current quarter, but as we are making room and setting up the valuation process for a larger volume coming there, it’s assets that will be slowly migrated that way, Geoff. Whether it happens all in Q3 or not it’s difficult to tell.

Geoff Kieburtz – Weeden

And when you finish that process do you feel like what you would have remaining in the field would be match to a 700 rig count?

Bill Stewart

Probably not. I mean part of it is evaluate the horsepower that fits into this older, less efficient category. That’s first and foremost. That gets sent in and that’s evaluated for any future usage. Then what we are doing is we are moving equipment around to right-size operations and make it more efficient with this higher horsepower. Now, that’s not to say that we won't have some equipment that will be parked in the district. What we are trying to do is remove the aged assets from the operations. That’s first and foremost. And then we eventually move some of the newer assets to a central location, provide an opportunity for international operations managers to tap into then we can do that.

Geoff Kieburtz – Weeden

Okay, alright –

Jeff Smith

Actually, Geoff, our district managers are charged with a capital charge for the assets they have in their operations. So, they are having an incentive to have efficient use of those assets and if they don’t then they can move that – those assets to LaGrange. Now, I don’t think that – I think we’ll have a better match to that activity level. Assets in the field probably won't be fully utilized, but there will be enough utilization to justify their being in the field operations. So, I don’t see a huge amount of new assets being moved to LaGrange.

Geoff Kieburtz – Weeden

Okay. And do you see the possibility with the combination of what you’ve already described as your outlook for activity levels, pricing, and your cost initiatives – once we find the bottom on the U.S. rig count and it stabilizes, do you believe margins can improve or do you need to have a rig count increase to actually achieve a margin expansion.

Bill Stewart

I think 700 rigs, once you get there for a short period of time, I don’t think there is going to be a great opportunity for a short term improvement, no.

Geoff Kieburtz – Weeden

Okay. So, you need to have an increase before margins would really expand again?

Bill Stewart

I would think short term, yes. It depends on how long it stays at 700.

Geoff Kieburtz – Weeden

Alright okay. Great. Thank you very much.

Operator

We’ll go next to Bill Sanchez with Howard Weil.

Bill Sanchez – Howard Weil

Good morning.

Bill Stewart

Good morning, Bill.

Bill Sanchez – Howard Weil

Bill, I was hoping maybe you can spend a little bit time Tom talking about pricing in general in the International Pressure Pumping markets and the impact that may have had on margins during the quarter. I didn’t see anything specifically mentioned about that in the press release. And also it seems like you are expecting margins to be up in the third quarter international but that’s due more to mix and cost savings. Can you talk a little bit about that?

Jeff Smith

Okay. This is Jeff. I’ll address that one. In terms of the pricing, Bill, there hasn’t been – clearly the domestic market is the one that gets the most pricing volatility. A lot of the international projects are contract based and so the pricing impact on international is quite a bit different than what we see here. So, in short there are certain pockets in the international markets where we are seeing some pricing pressure, but it’s not significant at this stage right now. So, that’s the international pricing side. Forgot the other part of your question, sorry.

Bill Sanchez – Howard Weil

Well, no just that the expansion margins expected in the third quarter internationally are strictly just mix and cost at this point, cost savings?

Jeff Smith

Yes. Well, we had some process delays in certain pockets of Asia-Pacific. Of course, I’m not going to have – hopefully not have another VAT issue that occurred this quarter. So, that gives me some of that back. But there’s been some delayed projects that are out there that have started up this quarter I think will support the margin increase for the – for Q3.

Bill Sanchez – Howard Weil

And I take it Russia is still net negative to margins given as you will probably not have exited by the end of your calendar year – your fiscal third quarter?

Jeff Smith

Yes. That’s a good point. Russia will be a net negative, but I don’t think that it get worse than what we experienced from Q1 to Q2.

Bill Sanchez – Howard Weil

Okay. Last question. Jeff, can you just outline for us may be your thought on the size of the charge to ultimately exit Russia at this point?

Jeff Smith

We are still evaluating that from a statutory perspective, let me give a little color there. We are having the key people on the payroll and pay them. And so I won’t get into the details of that. It’s a little bit cumbersome there, but that’s going to increase the cost there. We are graciously exiting. We have an opportunity to sell some of the inventory and some of the parts that are over there. So, I really don’t have a concrete number at this stage. But as we get into the next quarter, I’m hoping to have a pretty good number for you.

Bill Sanchez – Howard Weil

Okay. Thank you.

Jeff Smith

Okay.

Operator

We’ll go next to Mike Urban with Deutsche Bank.

Mike Urban – Deutsche Bank

Thanks. Good morning.

Jeff Smith

Good morning.

Mike Urban – Deutsche Bank

Wanted to spend a little more time on the international business as you just mentioned and as you’ve said a couple of times at this point, you plan to exit the Russian market. I was wondering more broadly as we have a little bit of a slowdown here and it takes time to reevaluate your market position in various international markets, are there markets that you might think about exiting, are there others h where you would like to enter to add more, just your international strategy at this point in general given the kind of the weak state of the North American markets right now?

Bill Stewart

No. Actually, international I think is going to hold up pretty nicely. Jeff mentioned the long-term contract commitments that prevail in that market. Latin America, Brazil is very strong. They have committed to increasing budgets, Petrobas has. So, we’ve got some positive things developing in that market. Hopefully, Argentina will come back to life. They had a bought of all kinds of various problems in the prior quarter. Traditionally Argentina has been a great market for us.

We’ve got some expansions ongoing in North Africa and they are doing quite well. We’ve got some things that are a little different in terms of strategy approach in Angola area. We have a new joint venture partner. We think that we can make some inroads through that arrangement in Angola. Some new things are developing there.

Asia-Pacific traditionally has been great for us and no reason to think otherwise. We are able – have been able to really expand the Oilfield Service Group product offering in that marketplace. So, it’s a plus both Pressure Pumping and Oilfield Service Group-wise.

Middle East had some adjustments this past quarter in Saudi Arabia as they’ve downscaled their activity. So, it will be a little soft. Kazakhstan was the same. But we don’t expect any long term further downward adjustments in that market. It’s – we’ve done well and should be good. We’ve got a new Manager in the U.K., European marketplace and they have really come up with some creative ideas and we are doing much better in that market. So, in sum total I think international will hold up well. Naturally, it depends on oil prices and what they do. But currently the thinking is fairly positive on International Pressure Pumping side.

Mike Urban – Deutsche Bank

And with you decision to go to more or less maintenance levels of CapEx next year, does that hinder the international growth opportunity or do have – do you think you have enough idle equipment that’s still in decent shape to be able to allocate that to the international markets and away from the U.S. and North America?

Bill Stewart

More of the capital budget will be dedicated to international than what traditionally is allocated to them in terms of the percentage of the budget. So, no, we are not going to short-change growth opportunities in any market.

Mike Urban – Deutsche Bank

But something – just to be clear that the CapEx number you gave for next year that’s maintenance levels in the U.S., but there is some growth capital internationally?

Bill Stewart

Yes.

Mike Urban – Deutsche Bank

Okay. Okay. Great. That’s all from me. Thank you.

Bill Stewart

Thank you.

Operator

And we will go to our next question from Bill Herbert with Simmons and Company.

Bill Herbert – Simmons & Company

Thanks. Good morning. Most of my questions have been answered, but I have few here. Jeff, with regard to U.S. Pressure Pumping margins, the exit rate from the March quarter, can you share that with us?

Jeff Smith

I can. I won’t be specific, but I will give you direction, how is that?

Bill Herbert – Simmons & Company

Thank you, sir.

Jeff Smith

As I mentioned before, I would say the first 45 days were the most inefficient within the quarter. But the trump card is pricing. So, pricing kept going down. In March, actually we saw margin improvement as we started to see pricing – I’m sorry, as we started to see our cost reductions come into play. Now, I’m going to say the word, once, twice if not three times pricing is the key here.

Bill Herbert – Simmons & Company

Yes.

Jeff Smith

And so pricing is at a lower deck coming into April. And so that’s going to be a big question mark in terms of how the U.S. Pressure Pumping division performs. But we did see a slight – I’m going to say slight uptick. It wasn’t a decline, but I think what we saw, as you say, (inaudible) amount of these cost reductions that we had come into play coupled with February being quite inefficient (inaudible) level of drilling activity.

Bill Herbert – Simmons & Company

Okay. I think that’s it from me. Thank you very much.

Jeff Smith

Good. Thank you.

Bill Stewart

Thank you. We’ll take two more questions.

Operator

And we’ll go to Dan Pickering with Tudor, Pickering, Holt.

Dan Pickering – Tudor, Pickering, Holt

Follow backup on this sequential kind of month on month progression. Jeff, it sounds like March was better, but I think Bill I heard you say that the outlook for margin is probably margin will continue to be under pressure until activity bottoms. So, I guess the implication is that the pricing impact is overwhelming the cost impact as we continue forward until rig count kind of bottom?

Jeff Smith

That’s a good assumption.

Dan Pickering – Tudor, Pickering, Holt

Okay. And then I guess just generally as we –– you talked a little bit about Russia – it sounds like we are going to carry those costs for a while. So, I think what I heard you say in the international business in general is although revenues will come down we may see some moderation or improvement in margins going forward just because some of these one-time issues are offset?

Jeff Smith

That is exactly how my math works.

Dan Pickering – Tudor, Pickering, Holt

Okay. All right, fantastic. And then last thing, working capital you talked about that as a target. Do you think about it in an absolute dollar terms or do you think about in terms of a – if revenue changes ‘x’ we want to get 10% of that or 20% of that or–?

Jeff Smith

Well, I look at it both ways, Dan. I’m looking at kind of the 15% range, try to set some pretty aggressive targets out there. Of course we were benefiting even this quarter as the balance sheet gets rolled out in the queue next week you are going to see the – they are impacting and we’ve built a good position during the quarter. And a lot of that is driven by relatively flat inventory and lower receivables.

Dan Pickering – Tudor, Pickering, Holt

Okay. And the 15% number you indicated, Jeff, is that if revenues were down $100 million you would expect to get $15 million back in receivable inventory?

Jeff Smith

That’s how I’m thinking about it, yes.

Dan Pickering – Tudor, Pickering, Holt

Okay. Great. Thank you very much.

Operator

And we’ll take our next question from Tom Curran with Wachovia Securities.

Tom Curran – Wachovia Securities

Good morning guys. I apologize if I missed this in the beginning, Bill but I’m sorry, could you repeat you rig count expectations and what specific count you were referring to with that total U.S. natural gas line, I didn’t catch that in the beginning?

Bill Stewart

No, that was U.S. was 800 to 850 next quarter and 700 or so thereabouts in the following quarter.

Tom Curran – Wachovia Securities

Okay. Great, thanks.

Bill Stewart

Yes, that 850 was the exit.

Tom Curran – Wachovia Securities

Okay.

Bill Stewart

Just for clarification.

Tom Curran – Wachovia Securities

And, Jeff, could you give us an update on the Seahawk cementing units? How many orders have you won in ’09 to-date? How many did you win in ’08? And then how many do you estimate remain to be awarded just marketwide?

Jeff Smith

We currently have about 30 Seahawks operating and one pending contract on a rig. And we have 13 or 14 Seahawks being installed currently on rigs all the way around the world. Out of – latest count that I recall – out of about 60 of the 150 or so rigs either built or being built, 60 of the 150 had announced (inaudible) company and we were selected on about 40. So, somewhere in that range. That’s not a full and complete update but that’s kind of the fairly a recent update.

Tom Curran – Wachovia Securities

Okay. And so in looking at those remaining 90 – without getting into how many might actually end up getting done and becoming operational. Would you expect to build or at least maintain the market share you’ve had of those new builds to-date?

Jeff Smith

Well, we should be trying very hard to do that, yes.

Tom Curran – Wachovia Securities

Okay. All right, thanks guys. I’ll turn it back.

Jeff Smith

Okay.

Operator

This concludes today’s question-and-answer session. At this time I would like to turn the conference back over to Mr. Bill Stewart for any additional comments.

Bill Stewart

Alright, well, thank you everyone for joining us and we’ll talk to you in about three months.

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