BJ Services Company F3Q09 (Qtr End 06/30/09) Earnings Call Transcript

| About: BJ Services (BJS)

BJ Services Company (BJS) F3Q09 Earnings Call July 21, 2009 10:00 AM ET

Executives

Bill Stewart - Chairman of the Board, President & Chief Executive Officer

Jeff Smith - Chief Financial Officer

Dave Dunlap - Chief Operating Officer

Analysts

Dan Pickering - Tudor Pickering Holt

Bill Herbert - Simmons & Company

Geoff Kieburtz - Weeden

Jim Crandell - Barclays

Bill Sanchez - Howard Weil

Kurt Hallead - RBC Capital Markets

Robin Shoemaker - Citigroup

Pierre Conner - Capital One Southcoast

Tom Curran - Wells Fargo

Mark Brown - Pritchard Capital

Operator

Greetings, and welcome to the 2009 third quarter BJ Services Company earnings conference call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host Bill Stewart, Chairman of the Board, President and CEO for BJ Services Company. Thank you Mr. Stewart, you may begin.

Bill Stewart

Thank you all for joining us today. I’m joined here with Jeff Smith, our CFO and Dave Dunlap, our Chief Operating Officer, and before we start the conference I’ll mention that some of the statements that we made 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 will refer you to the latest Form 10-K on file with the SEC where you’ll find a discussion of the risk factors relating to the company’s business.

These factors and other factors mentioned on the call could cause actual results to differ materially. This has been a very difficult period for us in a rapidly changing market environment. Virtually all of our business units have been faced with difficult and challenging decisions on a broad range of issues involving all the areas of our business.

For example, since the beginning of the year, US rig activity is down 44% through the current date, significant drop in activity and when you add the Canada breakup to the picture, the last three months the challenges have become even greater. However, we have seen these low activity levels before and I’m very encouraged about where we are today at this point in the business cycle.

Up until now the collapse of the market has been the controlling factor as we managed our business. We have implemented cost reductions, internal consolidations, capital spending reductions and working capital reductions. We’ve made substantial progress on all these issues, thanks to the fine efforts of our employees throughout the world. We will continue to find ways to drive efficiencies in our business without sacrificing quality in our field operations.

Now, the markets in the US and Canada are getting close to bottoming we believe, and service pricing is starting to stabilize. There are a few areas in the US where we are actually beginning to hire back employees because of the renewed activity in those areas, this is I believe a good leading indicator. I feel we have effectively restructured the company to address the current market conditions. I believe the worst is behind us and I’m quite encouraged about the future prospects, which I’ll discuss in more detail as we get further into the call.

This morning we reported a net loss for our third fiscal quarter of $32 million or $0.11 per diluted share. Revenue for the quarter was $787 million, down 41% compared to the same period last year and down 25% sequentially.

Operating loss of $42 million, compared to operating income of $207 million in the same quarter last year and $58 million sequentially. Our revenue performance for the quarter generally mirrored the changes and average drilling activity. Year-over-year our total revenue decline was 41% while average worldwide drilling activity declined 36%.

Sequentially, our total revenue and average worldwide drilling activity declined 25%. When you consider the significant price decrease from both comparable periods, our revenue results for the quarter are quite respectable. During our fiscal third quarter, we continued to he see declines in North America drilling activity as our customers respond to lower oil and natural gas prices.

The lower drilling activity has led to intensive price competition for services and products we provide, average drilling activity in the US declined 29% sequentially and 50% compared to the third quarter of last year. Canada was in its seasonal breakup period throughout most of the quarter which also significantly impact our results.

Our results included a number of charges of infrequent nature, including inventory write-downs totaling $10 million, fixed asset impairment charges of $7.2 million, and employee severance costs totaling $6.4 million. We continue to manage our global cost structure to keep it inline with business activity levels.

We have reduced our global workforce by approximately 20% since the first of the calendar year. We have retired some of our old equipment, less efficient Pressure Pumping equipment that is more costly to run and maintain than our newer units, thus improving our operation’s efficiency.

Despite the difficult operating environment we have managed to generate significant operating cash flow during the quarter, as we intentionally focused on working capital management. Receivable collections are high, we reduced inventory levels by about $30 million worldwide, that’s $20 million net of inventory write-downs.

Capital spending for the quarter was $76 million, bringing our total year-to-date capital spending to $314 million. With the current market environment, we are scrutinizing capital spending very closely. Since the last fall, we have also implemented numerous cost reduction initiatives, including personnel expense reduction, discretionary expense reductions, efficiency measures, supply chain cost reductions and internal district and operating base consolidations.

Much of this was put in place over the past six months and will be fully reflected in our operating results in the September quarter. We estimate cost reductions to total about $350 million on an annual basis and we are working on additional cost reduction measures to be implemented in the next few quarters.

Now looking at our operating results by segment, starting with U.S./Mexico Pressure Pumping; revenues totaled $314 million for the quarter, a 34% decline from the previous quarter, while average drill rig count declined 27%. Activity declines and price competition continue throughout the US. Mexico was a bright spot sequentially as activity levels and awarded new projects began picking up.

Year-over-year, our U.S./Mexico Pressure Pumping service revenue decreased 55% while average drilling activity declined 46%. Our revenue decline reflects lower volume of activity and lower pricing. Our Canada Pressure Pumping revenues of $23 million for the quarter decreased 76% sequentially with average drilling rigs down 72%. Majority of the decline was a function of the seasonal breakup period.

In addition, some operators in Canada were slow to return to drilling activity coming out of breakup in the current market environment. Year-over-year, revenue in Canada decreased 52% and average drilling rig activity decreased 46%. Revenue in our international Pressure Pumping operations of $265 million decreased 4% from the prior quarter and 16% from the same quarter a year ago.

Latin America region, revenue decreased 13% sequentially and on a 9% decline in average drilling activity. Revenue decline in the region was largely attributable to lower activity in a number of countries including Argentina, Venezuela and Columbia. In Argentina we experienced industry wide labor strikes in a number of areas causing delays in drilling programs.

Year-over-year revenue for the region declined 18%, while average rig activity declined 20%. Activity improved in Brazil with the addition of our new stimulation vessel, the Blue Marlin, but this increase was offset by the impact of lower activity in Argentina, Venezuela and Peru.

Moving to the Middle East; Middle East region revenue increased 3% sequentially, primarily the result of increased activity in India and Algeria, partially offset by lower rig activity in Libya, Egypt and Saudi Arabia. Year-over-year Middle East revenue was down 11% as a result of lower activity in Saudi Arabia, Libya, Egypt and Kazakhstan offset by increases in India, Kuwait and Algeria.

Revenue from our Asia Pacific region increased 2% from the previous quarter, primarily a result of increased activity in Malaysia, Vietnam, Australia partially offset by declines in Thailand and China. Year-over-year revenue for Asia Pacific region decreased 5% primarily results of activity declines in New Zealand, China partially offset by increases in Malaysia and Vietnam.

Revenue from our European segment was down 4% sequentially, as we completed a fairly large service related project in the UK in the previous quarter. Revenue was down 23% compared to the same quarter last year as activity was down throughout the North Sea and Continental Europe area. In Russia, our revenue declined significantly sequentially and year-over-year as we continued to wind down commitments on our final contract there.

Our contractual commitment will end of this month and we are already beginning to execute our exit plan out of Russia. We intend to classify our Russian Pressure Pumping business as a discontinued operation in the fourth quarter of this year. Revenue from the oil field service group of $185 million decreased 11% from the prior quarter and 30% year-over-year. Oil field service group derives about half of its revenue from North America markets and half outside. So, geographic mix had an impact on revenue in this segment.

Due to services, revenue was down 3% sequentially and down 25% year-over-year. Sequential decline was mostly due to lower activity in the North Sea and Africa markets. Year-over-year, decline was primarily the result of lower activity in most of the international markets and in the Gulf of Mexico.

Process pipeline services revenues increased 1% sequentially and decreased 28% year-over-year. Sequentially seasonal activity was strong in North America, was mostly offset by delayed or canceled projects in most of the eastern hemisphere markets. The results were also impact by the completion of some large international projects that did not repeat in the reported quarter.

Chemical services revenues were down 12% sequentially and 21% year-over-year, primarily it was as a result of lower activity in North America. Completion tools revenue decreased 33% sequentially as solid revenue growth in Asia Pacific was more than offset by lower activity in the Gulf of Mexico and a large international project orient sale in the second quarter that did not repeat in the third.

Also impacting sequential performance was spring breakup in Canada resulting in lower tool service revenue. Completion Fluids revenue decreased 16% sequentially and 49% year-over-year, primarily due to activity declines in US, Gulf of Mexico partially offset by the addition of new contracts in Mexico.

At this point, I’ll pass to the Jeff.

Jeff Smith

Okay, thank you Bill and good morning. What I plan to do this morning is to address our operating income margin with my prepared remarks that will mostly be addressing the sequential performance and then I’ll turn the call back over to Bill for closing remarks on our outlook.

For the quarter, we reported a negative operating income margin of 5.4% on revenue of $787 million. This compares to positive operating income margin of 5.5% in the previous quarter and 15.6% in the same quarter last year. The quarter was not only negatively impacted by price erosion but was also by the charges totaling $22.6 million described by Bill earlier.

Most of our reporting segments were impact by these charges, so I’ll provide details as I go through the segments. So, starting with the U.S./Mexico Pressure Pumping segment on revenue of $314 million for the quarter, we reported an operating loss of $38.5 million or 12% of revenue. This compares with positive operating income margin of 5.4% reported in the previous quarter.

The sequential operating income margin decline was primarily attributable to lower drilling activity and a highly competitive pricing environment. For the quarter, average pricing environment.

For the quarter, average pricing for our products and services compared to the previous quarter was down approximately 20%. Also impacting operating income margin for the quarter in this segment was $10.4 million non-cash charge related to the impairment of fixed assets and inventory in addition to $2.6 million of employee severance costs.

Business conditions, as pointed out by Bill continued to deteriorate throughout the quarter and aggressive cost reduction measures continue during the quarter as we further align our cost structure with market conditions. We reduced our workforce in this segment by approximately 14% during the quarter with total reductions of 34% in the beginning of the year.

As previously mentioned by Bill, discretionary spending has being very closely monitored. Supplier negotiations continue for price concessions and we are carrying out our strategy to remove lower horsepower less-efficient equipment from the field. On the Canadian front, our Canadian Pressure Pumping business was in spring breakup during the quarter so as the sequential operating income comparisons are not particularly meaningful, but in the third quarter our Canadian operations lost $16 million on $23 million of revenue after earning $6 million on $95 million of revenue in the previous quarter.

Sliding over to the International Pressure Pumping, operating income margin for the quarter was 9.2% of revenue, that’s up 140 basis points from the previous quarter. Most of the sequential margin improvement was from our Asia Pacific region due to a couple of things; one was favorable business mix in Thailand and Malaysia, coupled with the fact that the prior quarter results did include a $4.2 million loss on the unfavorable resolution of a VAT refund claim in Indonesia.

Partially offsetting the Asia Pacific performance was lower margins in the North Sea due to lower service related activity that, coupled with lower activity in Argentina, Venezuela, Columbia as well as Russia. Now on Russia, reported a loss for the quarter which negatively impacted the current quarter margin for this segment by about a 150 basis points.

Our final contract in Russia expires at the end of this month and we will close our operations shortly there after. Accordingly, future quarters will have Russia reported as discontinued operations. We are presently finalizing our shutdown plan and expect to record a one-time charge of approximately $8 million to $10 million in the fourth quarter to complete that plan.

Now, about 50% of that charge that I mentioned, the $8 million to $10 million will be cash costs. Finally, on the international operating income margin for the quarter, it was negatively impacted by a $3 million non-cash charge related to fixed asset and inventory impairment in addition to $2 million in employee severance costs.

Moving to our Oilfield Services group on revenue of $185 million for the quarter, operating income margin was just under 6%, and that’s down 400 basis points from the previous quarter. Our Chemical Services business reported lower margins due to revenue from completion related chemicals in addition to competitive pricing. On our completion tool side, the margins declined as the division was negatively impacted by Canada’s spring breakup which resulted in lower revenue and margin from our service tools product offering, firmly known as Innicor.

Our margins in that business line were also impacted by lower activity in the Gulf of Mexico. Our Completion Fluids operations income was down sequentially due to lower activity in the Gulf of Mexico coupled with some high start-up costs associated with some projects in Mexico. Also impacting operating income margin for the Oilfield Services segment was a $1.2 million charge attributable to employee severance costs.

On the Corporate side, the corporate operating loss of $23.6 million for the quarter was $7.9 million higher than previous quarter. That increase reflects the net lowering of our annual incentive accruals between the quarters, and with this accrual adjustment it’s based on the current company performance estimates. Corporate also included a $3.8 million non-cash charge associated with the write-down of obsolete inventory at our central warehouse here in Tomball.

On the tax rate side, the effective tax rate for the quarter was a benefit of 39.8% that compares to the 14% tax rate that was reported in the previous quarter. In Q2, we had estimated that the fiscal year effective rate would be approximately 28% and we accrued the tax expense based on that estimate.

As a result of the precipitous decline in the company’s earnings in the higher tax jurisdictions, particularly in the United States and Canada, the company now expects that it will earn greater percentage of its fiscal year earnings in lower tax jurisdictions. As a result of that, we currently estimate that the full tax year rate is likely to be 25% instead of the 28% we project in the previous quarter. So as you look at Q4 we estimate that perfective rate in Q4 will be 25%.

On the balance sheet side remains quite strong, we ended the quarter with $520 million of debt and that’s down $42 million from the previous quarter. We did payoffs of short term debt during the quarter. Cash on hand at the end of June was $231 million, notable uses of cash include $76 million of capital spending and dividends paid to our shareholders of just under $15 million. At the end of the quarter our debt-to-cap was 12.8% with net debt-to-cap right at 7.5%.

I will now turn it over to Bill for his outlook.

Bill Stewart

Thank you, Jeff. The September quarter should result in improved margins in each of our reporting segments, and the company results overall are expected to returned profitability in the quarter. This was also said in our press release. I believe the worst is behind us and we expect improvement from here forward. Talking a little about the segments, US market standpoint, drilling rig count has been relatively stable since mid-May, running within the range 880 rigs to 930 rigs.

Over that period the number of rigs drilling for gas is down 60 rigs, while the oil rig count is up 60 so, we’ve had a switch between the two. We expect gas drilling to further decline in the quarter. As gas production levels and gas storage nearing capacity will continue to put downward the pressure on gas prices, we expect oil drilling to stay at current levels or maybe slightly increase in the quarter, as activity responds to changes in the oil prices.

Although we expect a slight decrease in total US rig count in the quarter, we believe our profitability in US Pressure Pumping segment will improve as we realize full benefit of the cost reduction measures we have put in place in recent months. In addition, we believe that we may be approaching a bottom in US pricing, which is good.

We are encouraged by the number of recent sizable contract awards in the US that we’ve achieved, some of which represent market share gains for BJ. Many of these awards are pressuring contracts in the Haynesville, Fayetteville, Marcellus and Balkan areas. We are also encouraged that we exited Q3 in June with higher US Pumping revenues than in the month of May and our expectation is that July US Pumping revenues will exceed June results.

Moving to Canada, we expect Canadian Pressure Pumping results to improve significantly in the fourth quarter coming out of seasonal breakup period. We’re encouraged by market growth in certain areas such as the Horn River and Montney gas plants in the Balkan oil shale. However year-over-year drilling activity in Canada is still expected to be overall lower with lower pricing.

Our objectives in the US and Canadian markets is to continue to remain price competitive in those markets, generate positive operating cash flow and continue to focus on operating efficiency without sacrificing field, job quality, safety and equipment maintenance. We expect international Pressure Pumping activity to be fairly stable in Q4 compared to Q3.

Specific areas that should improve in Q4 include Latin America and the European markets. Within our Oilfield Service Group, record revenue is expected from our completion tool business in the September quarter as a number of international sales are likely to be completed, and very interesting we are beginning to see increased international growth opportunities develop for this segment, particularly in chemical services, completion fluids and completion tools.

During the fiscal third quarter, we recognized revenue from a number of new technologies and I’ll comment on a few of those, starting with our inject safety valve.

This is a well intervention safety valve allowing for the continuous chemical treatment of an oil or gas well through our patented safety valve.

The first North Sea installation was done in the third quarter and three additional installations are scheduled for the Asia Pacific region in the near future. This is a product and service provided by Chemical Services Group. Chemical Services is also recently commercialized our Echo Wave Service.

Echo Wave is an environmentally friendly method of breaking down paraffin buildup and oil and gas wells for use of radio and microwaves beamed down into the well bore converting non-producing or low producing wells into economically producing wells.

This service is a significant value enhancing service for our customers, and we expect it to the contribute revenues and profit in the current quarter. Long term this could be a significant revenue profit generator for the company. We also recently introduced our Telecoil Service.

Telecoil is a new service provider with Coil Tubing. It allows for real-time monitoring of down hole pressure, temperature and well depth verification during a Coil Tubing intervention and has been introduced in the U.S. and some of our international markets.

This service provides the ability to modify treatment design during job execution, job optimize, job effectiveness. This is a nice add to the many technologies we deliver with our Coil Tubing Services throughout the world and last I’d like to mention our direct stemming service.

Direct stem was a new multi-fracturing completion system capable of allowing up to 15 fracturing completions. A 20-stage system is currently being prototyped by our Tool Services Group, and we expect to be in the market with that by year end.

This is a bit of vertical integration of the company, we’ve been successful so far penetrating the market with direct stem both in the U.S. and Canadian markets, and it’s got capable to be further expanded to the international markets.

Finally, I’d just like to say that I’m encouraged about where the company is positioned, in this very challenging market environment. The company has been restructured from a cost perspective and is operating at a high level of efficiency. The company’s balance sheet is very strong and we are confronted with minimal of debt repayment obligations in the next 12 month period. I think we’re well positioned for the future.

At this point I’ll turn it over to Q-&-A.

Question-and-Answer Session

Operator

(Operator Instructions)Your first question comes from Dan Pickering - Tudor Pickering Holt.

Dan Pickering - Tudor Pickering Holt

Bill, I want to make sure I heard your statement correctly. Better margins in each of your divisions in the fourth quarter. Is that excluding the impact of charges or would that be kind of the fully loaded Q3 stepping into Q4?

Bill Stewart

Dan, I would be excluding those charges.

Dan Pickering - Tudor Pickering Holt

So take the charges out like you helped us with Jeff, and from that level, improvement from there? Okay and then as we look across both the U.S. and Canada, do we get back to breakeven profitability in those businesses. I guess, Jeff help us with how you’re thinking about quarter-to-quarter cost improvements in those two areas on a dollar basis?

Jeff Smith

On the Canadian front, let’s start there; on a sequential basis from Q2 to Q3, looks like about the nickel was impacting on a sequential basis, down a nickel. Our expectations, although activity has been a bit slow to recover, is that we will get that nickel back in Q4. So to answer your question on Canada is, yes, we’d expect that to get back to profitability.

On the U.S./Mexico side as Bill mentioned, pricing would appear to possibly be stabilizing. Of course that can change in a moments notice. So we’re cautiously optimistic on that front. In terms of getting back to profitability in that segment, it’s going to be difficult.

Dan Pickering - Tudor Pickering Holt

Roughly cost savings quarter-to-quarter, you think in Q3 to Q4?

Jeff Smith

Well, it’s difficult to determine, particularly as you look at some of the material cost assumptions that we have going into the plan. We recognize probably $30 million, $35 million from Q2 to Q3 and I would hope to see maybe half of that into Q4, but it’s a difficult number, because you’re chasing a number of different dynamics.

Operator

Your next question comes from Bill Herbert - Simmons & Company.

Bill Herbert - Simmons & Company

Bill and Jeff, you mentioned that we were rationalizing capacity in the U.S. Could you quantify that as a percentage of your fleet?

Bill Stewart

No, we have talked a number of times that we had about 18% of our fleet that was still old and needed replacement that has been operating in the last eight or so years. We have not been able to get that replaced because of the rapid growth in the market. With the decline that we’ve experienced, basically that equipment will be retired. So, if you want to quantify what’s not operating today compared to year or so ago, it would be about 18% of our equipment.

Bill Herbert - Simmons & Company

With regard to rationalizing your capacity, do you envision taking more capacity out of the market as the year unfolds?

Bill Stewart

Not at this point, no.

Bill Herbert - Simmons & Company

Okay and you mentioned contract awards in various different places, Haynesville, Balkan, Marcellus, etc. Can you give us a rough order of magnitude as to what that represents and with which customers?

Bill Stewart

Actually no, we have typically not done that and just for competitive reasons I think we’d prefer not, but we are making some inroads I have to say, with our success.

Bill Herbert - Simmons & Company

Last question from me is, you mentioned that you were rehiring certain regions. Is it safe to say that it’s pretty much in those regions?

Bill Stewart

It’s where we have run short and we’ve had a little burst of activity. It’s spotty here and there, some in those regions, some in other places.

Operator

Your next question comes from Geoff Kieburtz - Weeden.

Geoff Kieburtz - Weeden

Just quick, Jeff on the tax rate on the charges we just used the 39.8% if we’re backing them out?

Jeff Smith

It’s effective rate about 35%, Geoff.

Geoff Kieburtz - Weeden

Bill, you talked about BJ’s capacity reductions at 18%. Do you feel like others in the market are retiring capacity in a disciplined manner or are you kind of leading the way here?

Bill Stewart

Well, we heard yesterday, I think we heard, somebody told me we heard that Halliburton had plans to exit about 20% of their capacity, so I know that to be the case. Some of the smaller players, we hear they’re having difficulty actually completing some of the jobs in the Haynesville area and having a severe detrimental effect on their capacity, because of inadequacy of design. So, that’s being retired.

We suspect that some of the smaller players are not as aggressive as we are on maintenance and using some of their equipment that’s idle to be cannibalized, if will you, to keep costs down. So that’s having an effect on overall capacity, no doubt. They don’t have any place for that equipment to go, so that’s how that will occur. That’s kind of what I’ve heard.

Geoff Kieburtz - Weeden

As you kind of look into your crystal ball in regards to your drilling activity and so on, taking into account these capacity retirements, when do you think the market gets into balance here?

Bill Stewart

Well, it’s not going to be this quarter. It just depends; I mean the rig count will tell you a little about when to expect that to occur, but we’ll be helped a little by capacity exits and retirement due to improper maintenance, no doubt about it.

Geoff Kieburtz - Weeden

Last question, do you think this is an environment that is fertile for consolidation in the sector?

Bill Stewart

Getting close.

Operator

Your next question comes from Jim Crandell - Barclays.

Jim Crandell - Barclays

A couple of strategic questions; number one, you think the extreme weakness that we see here in the North American markets, now North America according to our estimates now accounting for probably only about 20% of worldwide E&P spending and given your mix of business more towards North America, does that make it in your opinion even more imperative to make an acquisition of a company that’s focused internationally to alter the geographic exposure of the company?

Bill Stewart

Well about more imperative, but it would be very nice if we could make such an acquisition. The only problem that one is confronted with in achieving their goal is availability. Just the options aren’t all that plentiful.

Jim Crandell - Barclays

Do you think that through internal growth that you can materially alter the composition of the company over time?

Bill Stewart

That’s our objective. We’ve done a pretty good job in growing the Oilfield Service Group and I think a reasonably good job in growing our international Pressure Pumping; we’ve got some good positions in the world markets. They’re not as large as we’d like. We’re starting to realize some successes in our expansion efforts and we’re working at it diligently.

I would like to have grown those businesses faster, but it just so happened that the last eight years or so, most of the market growth was in North America and that’s where we excelled. With international being the place that will experience probably more growth than North America, I think we’ll do well.

If as we pursue those objectives, a nice add-on acquisition, whether it be a North American company or an international company, will be something that we will pursue if it’s a good fit and if the price is right. If it’s a US or North American company, then it would have to be something that we felt like; number one, the price was good and number two, we could take it and expand into it the international markets, like we’ve done our Oilfield Service Group.

Jim Crandell - Barclays

Second question is, some people in the industry think that Iraq could turn into a $5 billion to $10 billion oil services market over the next three to four years. What is the BJ doing if anything, to sort of prepare themselves to participate in that market?

Bill Stewart

We have a representative in Iraq and we’re sorting through our opportunities. Up until now, the risk issues have been too high and I didn’t want to expose our people to that kind of risk. So once we get comfortable with the risk issues, then we’ll be a player in that market.

Jim Crandell - Barclays

Okay last question Bill is, how many new offshore rigs approximately that are on order, do you think have not ordered cementing units to go on those rigs and what is the sort revenue opportunity for BJ in that market going forward?

Bill Stewart

I’ll ask Dave to answer that one.

Dave Dunlap

Jim, there’s around 60 or 70 rigs that are either in the shipyard or plan to go in the shipyard that have not had the cement units order on them yet. The opportunity really depends on where the rigs goes to work, what type of well its drilling; is it deep water rig or is it a Jack up, a shelf rig, there’s a number of variables that go into how much revenue that cement unit will generate.

Jim Crandell - Barclays

Dave, Halliburton made a comment I believe, about a pretty high market share that they’ve gotten of cementing units year-to-date. I know that’s something you’ve been proud of, that you’ve done well so far. Can you update us on the success of BJ in that market here for 2009?

Bill Stewart

We’ve done real well. We got about 13, 14 being installed at the present time. We had done the best of anyone up until recently. So, I don’t want to give any numbers. You want to add to that?

Jeff Smith

I can tell you Jim, we’re pretty well on track with what our goal was five years ago when this exercise began, and our goal at that time was to improve our market position by about 25%. That’s not 25 market share points by the way, but we believe we got that opportunity available to us and so far we’re on track with it.

Jim Crandell - Barclays

Okay. Dave, if I could, just one more question. One of the things that BJ has done in the past is to move older U.S. equipment into international markets. I guess question is, are you going to move conventional pressure pumping equipment from the U.S. into international, and if you do, this time would you move older equipment or might you move even newer equipment into some international land markets?

Dave Dunlap

Well, we hope to have some of those opportunities in the international markets to do just that. There is equipment that’s come out of the U.S. field or is underutilized in the U.S. Now as we get opportunities internationally for new contracts or expansion areas, we will take that equipment that’s available.

It’s not so important Jim in most of those international markets to go in with brand-new assets, the type of work, the frequency of work in the international markets is not what it is typically in the U.S., and so you don’t tax that equipment to the same degree. I think we’ve done pretty well taking units that have had some prior experience in the U.S. and going into those international markets, and we wouldn’t be afraid of doing that again.

Operator

Your next question comes from Bill Sanchez - Howard Weil.

Bill Sanchez - Howard Weil

Bill, you talked about retirements and gave us a percentage around that in the U.S. I was hoping maybe you could talk about just your effective utilization right now in your U.S. pressure pumping stimulation business and where you see that versus the industry right now as a whole in the U.S.?

Bill Stewart

I guess about 60% or somewhere in that range, maybe even lower. It would be the utilization, but utilization is a funny thing, and with lower utilization we’re not able to use 40% or 50% less equivalent, because the number of jobs per month are just reduced in many cases and you need that equipment in a particular base in order to do those reduced number of jobs, but it’s low enough to where we can exit about 18%, 20% of assets that we’re in the field a year ago.

Bill Sanchez - Howard Weil

Do you think the overall market utilization is less than yours right now?

Bill Stewart

Well, for some it is.

Bill Sanchez - Howard Weil

Okay. I take it the smaller probably lesser capitalized company you’d say?

Dave Dunlap

I don’t have any direct knowledge, but I suspect that we’ve been gaining some. I think all the big companies have gained some, particularly in these more demanding areas where the smaller guys aren’t really a competitive threat. They’re a competitive threat until they learn that they’re not.

Bill Sanchez - Howard Weil

Sure. Jeff, I guess just a question for you. If you’re adding headcount here into those regions, I guess where you’ve signed new contracts; that’s driving some of it. I guess if I heard correctly, we’re done right-sizing I guess headcount elsewhere, so there’s no reason to expect another charge in the September quarter as it relates to headcount rationalization?

Jeff Smith

Let me answer that this way. Don’t get too hyped up on the hiring practices here. There’s some pockets in the states to where we have found that we’ve cut a little bit too deep, and so we’re trying to make sure that we have the necessary personnel in there to cover the work and it’s not necessarily in the contracted areas that you mentioned.

The challenge is, is that rather than reduce in areas where you could probably do some further reduction is to take advantage of the underutilized personnel and move them over to the areas that need people. So, we do shuffle people around on a temporary basis from district to district and that’s what you want to do first, and then what we do is any area that we need to add a few people, we’ll do that.

In terms of the severance charge in the states, I would not expect to see anything meaningful in the fourth quarter.

Bill Stewart

Let me just add one thing. Right now we’re in a period of fine tuning. I don’t see any big personnel reductions on horizon at this point. The market changes dramatically from time-to-time and we have to continue to assess what’s appropriate, but I think the big reductions are behind us and it’s a matter of fine tuning what we need to have to execute the jobs effectively.

Operator

Your next question comes from Kurt Hallead - RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

A question for you guys. If we assume that the U.S. rig count remains at the current level through first quarter of next year, give or take. At that level of activity, are you operating at breakeven or do you think you can return to profitability?

Bill Stewart

I think Jeff just answer that earlier.

Jeff Smith

As we mentioned the next quarter, trying to make up…

Kurt Hallead - RBC Capital Markets

The next quarter, I got where you’re not going to be profitable. I’m talking about a couple quarters out. When you go through all the cost reduction efforts, are you going to be able to breakeven at 900 rig count?

Jeff Smith

That’s the visibility in the performance into this quarter that we just reported was quite difficult. So if you’d ask me three months ago what our performance would have been, I probably never would have told you that we had lost the amount that we did.

What I’m encouraged about is the employees that we have in the U.S. have been very aggressive at finding ways to reduce costs. I’m proud of all those guys out there for that. It’s difficult to chase a pricing environment, where you’re chasing pricing down 20% from quarter-to-quarter.

The ultimate question is, if pricing stays stable and rig count goes out, I’m encouraged by the direction of cost reductions that they have in the field. Whether in the first quarter of fiscal 2010 for us, that gets us to breakeven, it’s difficult to tell at this time, but I know that they’re working very hard to drive efficiencies both on the labor side, on the material cost front, as well as some operating efficiencies to lease our maintenance.

As Bill mentioned, we’ve obtained some nice wins for our marketing efforts and our sales group that we have to give us a little bump in our market share position. I think that’s going to help. So, I’m crossing that question until the end of Q1.

Kurt Hallead - RBC Capital Markets

Just you guys referenced average pricing in U.S., Mexico down 20% sequentially. I was wondering if you can kind of give us a year-on-year comparison for that, as well as the year-on-year comparison for the pricing pressures you’ve seen in Canada.

Jeff Smith

Year-over-year in the U.S., we’re down kind of in the 35%, 36%. In Canada we’re not down as much, it’s probably in the 15% range and that’s just kind of how the dynamics of that market is historically operating.

Kurt Hallead - RBC Capital Markets

Then there’s been a lot of discussion about the growth prospects in the Russian market over the next five years by varying other oil field services players. Clearly you guys have a different view on your opportunity set there.

So is the shutdown of the Russian operations, do you see greater opportunities in some of the European shale plays, is there more opportunity in places like Africa, the Middle East? Could you just give us some general sense as to where you may see better opportunities than Russia?

Bill Stewart

Well, we’re shutting down basically the fracturing business and the fracturing business in Russia was overburdened with competition and low pricing. I don’t see that in the short to medium term future improving much. So we were very focused and one service line company in Russia was that kind of competition.

For companies that have multiple services and multiple products and it makes a lot more sense and so the opportunity is probably better for those guys. We continue to have, our PPS division continues to have operations in Russia. We’ll have a corporate presence if you will.

There maybe opportunities for our Oilfield Service Group guys to get positioned in Russia and sometime down the road, we may evolve into a company with a substantial profitable position in Russia, similar to what we did in Canada. In ‘92 I believe we pulled out and we acquired [Nalsco] and we’ve done great since then. So, I wouldn’t rule Russia out in the long term future.

There are good prospects for the company in North Africa, West Africa, Eastern Europe where our European business is doing much better under new management. Recently we’ve got some frac campaigns ongoing on the European continent that could spread over into the eastern part of the continent. So I’m encouraged about what prospects we have, not only in those places, but in the Far East and parts of Latin America, particularly in Brazil.

Kurt Hallead - RBC Capital Markets

Do you think the European shale is a one to two year opportunity, or is it more a three to five year opportunity?

Jeff Smith

European shale, it’s probably a long term opportunity if it pans out from a commercial standpoint, the way that those operators that are working there today believe it will. So it’s like any other shale resource. Once it’s discovered, it’s a large volume resource that will probably have a long life.

Kurt Hallead - RBC Capital Markets

But not within the next one to two years.

Jeff Smith

I think there’ll be some activity in there over the next one to two years. I don’t think you will see it peak though for more like a three to five year time horizon.

Operator

Your next question comes from Robin Shoemaker - Citigroup.

Robin Shoemaker - Citigroup

I wanted to ask, in terms of your cost reduction efforts, is there some portion of that is a more permanent cost reduction? Could you comment on how you are approaching the fixed and variable aspects of your cost structure?

Bill Stewart

Yes. In terms of the labor front, let’s start with that. There’s a lot of different dynamics that come into that. From a field labor perspective, we’re about a 75/25, weighted obviously more towards the variable cost. So when we started reducing the costs, clearly it starts with that general activity levels and you bring down your variable costs and we’ve addressed that.

Then we further went in and found more fixed costs out in the district overhead. For example, there maybe some fixed costs that does have a variable component to it, but that goes away. Until the market comes back and reaches a certain plateau, that’s when some of that fixed cost could come back, but it’s not one-to-one.

We’ve addressed the corporate overhead side and that’s clearly fixed cost; reduced headcount there about 12% and I think there may be some ads as the market recovers, but I think the efficiencies that we’ve driven into the organization, a lot of that might not come back.

What we’ve also done in the US field is that we have done some district consolidations. For example, in a geographic area we will take one district that is relatively close to us, it’s kind of a sister district and reduce that down to a sub district, so you do eliminate that overhead and you can operate that for quite sometime. There will be a point as the market recovers, that you are going to want more of a solid overhead presence in that particular geographic area, but that’s not anytime soon right now.

So you just continue to whittle away at some of those fixed costs. Now the variable labor side is obviously going to be more activity driven, but we continue to whittle away at those fixed costs, particularly if the market were to stay flat, we’re going to continue to try to find ways to be more efficient.

Robin Shoemaker - Citigroup

I want to ask one other question. As you probably know yesterday, Halliburton anticipates or said that they anticipate a 300 to 500 basis point further decline in international margins from today by the end of 2010 and really citing just very competitive conditions in international tenders. I wonder if you see, as you participate in international tenders, the same kind of pricing pressures that they’ve obviously cited.

Jeff Smith

First of all, I can’t comment on what their business dynamics are and that’s the way they see the world. There are pockets in the international arena in which there’s some pricing pressure and as tenders come up, we are having to give up a little bit on the price front. In the near term, I’m not seeing that kind of margin erosion in our international business.

Bill Stewart

They maybe speaking to some of these integrated package project situations.

Robin Shoemaker - Citigroup

Yes, sure. It’s dynamic that spreads across multiple product lines, but I understand. So you are seeing competitive pressures, but not enough to anticipate a significant deterioration in the international margin?

Jeff Smith

Well, I think you can see some of that in the existing results today. We have seen some and it’s not just pricing, but some of that’s volume, because your incremental is in those high fixed cost structure that we have can be quite attractive, but that also gets you both ways. We have seen some margin deterioration, but we’re also addressing some cost issues in the international business as well.

Operator

Your next question comes from Pierre Conner - Capital One Southcoast.

Pierre Conner - Capital One Southcoast

Actually, the question Robin asked was kind of what I was curious about, may ask it a different way. You gave us Jeff your pricing impact in U.S./Mexico. Did you give us for international what the pricing impact was or did I miss it?

Jeff Smith

I didn’t give it, but make no mistake, the pricing pressures in international are not near as severe as what we see in North America nor have we. It’s difficult to track international on a month-to-month, quarter-to-quarter basis, because there’s so many contracts out there.

So we don’t really maintain a pricing index in the U.S. We just know that as tenders have come back up for re-bid, some of them have renewed at existing pricing and some of them, we’ve had to give up a little bit, but that’s the nature of the business.

Pierre Conner - Capital One Southcoast

Then let me ask you, back to U.S./Mexico, how much more you could breakdown Mexico for us relative to its increase on a percentage and contribution total and then some commentary Bill maybe on, is there some near term? Where does Mexico go for you?

Bill Stewart

Well Mexico has improved significantly this year over last. We expect it to continue to improve as those big integrated projects materialize. There’s a lot of bids outstanding that are yet to be completed or submitted and then won.

We are participating in a number of projects in Mexico that will cause revenue to ramp up some as they get more active, where as a subcontractor we’re also teamed up with Baker on an offshore project. We will be bidding with a number of different concepts as the leader, as the subcontractor, as these new bids are made.

So Mexico is doing real well, improved from last year and expect it to be further improve next year. It’s still a small percentage of overall U.S./Mexico revenue from that perspective, but it helped results. It’s a nice little profit generator for us.

Operator

Your next question comes from Tom Curran - Wells Fargo.

Tom Curran - Wells Fargo

I just wanted to clarify, excluding potential redeployment to foreign markets, looking at your U.S. fleet today, your U.S. pressure pumping fleet, when you’re done with all of these planned retirements, you expect your U.S. pressure pumping fleet net of growth CapEx to be 18% smaller, is that correct?

Dave Dunlap

That’s right.

Tom Curran - Wells Fargo

Okay. Around when would you expect to have those completed Jeff?

Jeff Smith

Those are out of the market today. We’ve talked previously about a idle facility that we have here in Texas, but what we have done for purposes of our U.S. operations, that equipment has already been identified in each of the districts and has been essentially pulled from operations and has been kind of parked-off in the corner of the yards and slated for delivery here into Texas, but from my perspective Tom, it doesn’t matter where it sits, as long as it’s sitting behind basically a tape that says do not use.

The District Managers, they recognize the cost of maintaining those assets and so they’re going to migrate more towards the higher horsepower, more efficient equipment than the older. So it’s easy for them to isolate the less efficient equipment and park it off them aside.

Dave Dunlap

We need to get that equipment out of the bases eventually, because it’s just not good for it to hang around and so we had an auction out at our LaGrange idle yard a few months ago, and it made room for further equipment coming in and being located there.

So we’re starting the process of getting it all into LaGrange, and at that point, we’ll take a look at that equipment and see what needs to be just scrapped. We will take a look at what needs major maintenance to keep functional and what needs to have less maintenance to be functional.

For the equipment that continues to be functional, it will be made available to other operations throughout the world that can use it to address certain project needs that they have or equipment needs they have over time. We’ve done this before, and that idle equipment in the right place can be a money saving investment for us and that’s what the intended objective will be.

Tom Curran - Wells Fargo

Okay. Just to be clear Bill, then all 18% of that horsepower won’t necessarily be destroyed?

Bill Stewart

That’s a good assessment, yes.

Tom Curran - Wells Fargo

About how much of it do you think may end up surviving?

Bill Stewart

Well, I can’t tell you at this point. We have to go through a process I just described. Let he me say this, it won’t be used in North America.

I’m doubtful it’ll be used in North America, because as I think we’ve talked about over the course of this call, most of that equipment is old, most of it is lower horsepower, and so the demands of the U.S./Canadian market is higher horsepower and intensive use.

So that equipment will find a home, if does it find a home, in lower demand markets, such as some of the selective international markets.

Tom Curran - Wells Fargo

Okay, that’s helpful. Of the 60% utilization stat you cited, does that include the 18% of the horsepower that’s currently being reevaluated?

Bill Stewart

No.

Tom Curran - Wells Fargo

It doesn’t include that?

Bill Stewart

No.

Tom Curran - Wells Fargo

Okay. Last question then, turning internationally just how much of a horsepower opportunity if you were to quantify, do you see for redeployment at the moment?

Jeff Smith

Well, I don’t really want to address that at this point. There are some places that need capacity, but we’ll tell you when we do it.

Tom Curran - Wells Fargo

Okay. Then I’ll just squeeze in one more here, sorry. What would you guys need to see in North America to resume investing in incremental horsepower expansion?

Dave Dunlap

Well, I’ll have to see high utilization and high profits.

Operator

Your final question comes from Mark Brown - Pritchard Capital.

Mark Brown - Pritchard Capital

I just wanted to ask about the fracturing regulations that have been proposed. What are you guys looking to do perhaps to educate people in Washington about that and what is your sense from talking with them about the chances of success of that or the implications for your business?

Bill Stewart

Yes, what’s coming out of Washington at this point is a little fuzzy, but we have an effort ongoing to educate the congressional staff of what cementing and fracturing is, what the importance, particularly of cementing is to protect the ground waters and just the importance of both services in the industry as a whole.

So we have embarked on an education process. We have dealt with these type issues before when the EPA was involved, in a matter really focused in Alabama two years ago, and it’s more of doing something similar to what we did then and we’ve been pretty effective.

We’re working with some of the industry organizations in Washington in that effort and we started this about a couple of months ago and as the situation in Washington changes, then we’ll address those changes as they develop, to try to be most effective. That’s about all I can say.

Operator

Thank you. I’ll turn the conference back over to management for any closing remarks.

Bill Stewart

Thank you very much. Thank you for joining us and we’ll see you in about three months.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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