Superior Energy Services Inc. Q2 2009 Earnings Call Transcript

Superior Energy Services Inc. (SPN)

Q2 2009 Earnings Call

July 29, 2009 11:00 am ET

Executives

Greg Rosenstein – Vice President of Investor Relations

Terry Hall – Chairman and Chief Executive Officer

Ken Blanchard – President and Chief Operating Officer

Robert Taylor – Chief Financial Officer

Analysts

James West – Barclays Capital

Robin Shoemaker – Citigroup

Mark Thomas – Simmons & Company

Joe Hill – Tudor, Pickering, Holt & Co. Securities

Joe Gibney – Capital One Southcoast

William Sanchez – Howard Weil

David Nierenberg – Nierenberg Reinvestment Management

Joe Agular – Johnson Rice

Tom Escott – Pritchard Capital

Terese Fabian – Sidoti & Company

John Fitzgerald – Raymond James

Presentation

Operator

Welcome to the Superior Energy second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Greg Rosenstein.

Greg Rosenstein

Joining me today are Chairman and CEO Terry Hall, our President and Chief Operating Officer Ken Blanchard, and our Chief Financial Officer Robert Taylor.

Before I turn it over to Terry, let me remind everyone that during the call management may make forward-looking statements regarding future expectations about the company's business, management's plans for future operations or similar matters, and the company's actual results could differ materially due to several important factors, including those described in the company's filings with the Securities and Exchange Commission. During this call, management will refer to EBITDA, which is a non-GAAP financial measure, and in accordance with Regulation G the company provides a reconciliation between net income and EBITDA on its website.

With that, I will now turn the call over to Terry Hall.

Terry Hall

To recap the second quarter, our revenue was $361 million, EBITDA was $84.2 million, and exclusive of the equity method investment, it was $103 million. Excluding the charges we mentioned in our earnings release, our core earnings were $27.6 million or $0.35 per diluted share.

Before going into the details about the quarter, I want to make some points about our performance relative to the industry. Our management team is certainly not happy with these results. We're not happy with the market conditions we operate in, but the market is what the market is.

As a lot of people have reported in front of us, there will be some to report behind us. I think, in general, our employees have performed pretty well relative to those who have reported and relative to all the market indicators. Again, we're not happy with the results, but on a relative basis, we're still proud of our team and our employees for what they've done in a very, very difficult market.

Now, our geographic and product mix helped us out before the industry benchmarks. Domestic international rig counts decreased at a more rapid pace than our revenue. While most of our business comes from the domestic land and Gulf of Mexico markets, our core results were profitable and we generated in excess of $70 million in operating cash flow during the quarter, at a time when many service companies related to these markets are not as fortunate.

There was certainly a lot of noise in our earnings. I will run through these charges and then discuss the performance of the core business. Those of you following the industry know and understand that many companies have taken write-downs and charges for impairments during the past several quarters. That was what we did in the second quarter and it probably comes as little surprise.

The key takeaway is that these charges do not impact our liquidity, future cash flows or operations. None of the charges impacted our fixed or operating assets. We reduced the value of our long lived intangible assets by $92.7 million, due to the sharp decrease in activity in the domestic land markets.

At the end of the quarter, we also wrote off our remaining equity method investment in barrel oil and gas, which totaled $36.5 million. In addition, barrel incurred quarterly losses net to our interest to $15.7 million, most of which were due to impairment of its natural gas and oil properties, mark-to-market changes in hedging contracts, and costly professional fees incurred in an effort to restructure the company.

Issues with Beryl cost, [inaudible] oil and gas production following the '08 hurricane season, and the significant drop in oil and natural gas prices. As a result, Beryl defaulted on its credit agreement and has spent a considerable amount of time and resources working with its lenders, considering its other strategic alternatives. During this time, Beryl has lost a number of its key personnel and very little has been done in terms of enhancing production our reserves.

Given the circumstances, we felt the proper accounting treatment was to write-off our investment. We may be able to preserve economic value if Baryl can find the appropriate strategic alternative, and we certainly hope that it will and believe that it will. We think the business needs a focused effort and some time to get back on its feet. As a result, we're working with the other Beryl stakeholders to review alternatives.

Turning to our core operations, there were two major factors that impacted our results relative to the first quarter, in addition to the fact that the rig count fell another 30%. First, our well intervention and rental tools businesses were adversely impacted by the steep declines in drilling and production activity in those markets. Overall, we experienced a 27% decline in domestic land revenue, as compared to the first quarter. Our well intervention land revenue was $49 million down 25% from the first quarter, and our rental tool revenue on land was $26 million, a 31% decrease.

We're taking steps throughout the year to cut costs in our land business units. We've reduced our domestic workforce, eliminated and consolidated locations, and moved assets to more attractive regions. But what we haven't done is reduced our ability or our capacity to generate revenue when this market returns. We're not gutting this company we're not tearing it apart. We are maintaining our capability to generate revenue in the future when this market returns.

Most of our costs, however, are still fixed, especially in well intervention. As a result, margin depression is steep when the revenue line falls. That is the primary reason why well intervention gross profit margin decreased from 43% in the first quarter to 36% in the second quarter.

The second factor was that we performed less work on the platform recovery project in the prior quarter. The project is well ahead of schedule and on budget. During the period, we came up with an innovative way to complete a certain aspect of the project. It required us to build special equipment. As a result, we did less work on that project, while we built some equipment that we will be able to use on this project, as well as future projects we anticipate undertaking of this nature.

We expect work on this project for the remainder of the year to continue at about the same pace as in the second quarter. We do have a lot of other work to do and we're dedicating a lot of assets that worked on BP in time to the new work we have demand for now. We utilized some of our idle marine assets, for example, in other projects that started toward the end of the second quarter and will continue into the third quarter.

I will now review the operating highlights by segment and make comparisons to the first quarter. The well intervention segment revenue was $231 million and income from operations, excluding the impairment, was $27.6 million. That represents decreases at 20% and 55% sequentially. As I mentioned earlier, domestic land revenue in this segment was $49 million. We saw a decreased utilization in pricing for many of our production-related services in areas such as the Rockies and Mid-Continent region.

In the Gulf of Mexico well intervention revenue was $148 million, a decrease of 23% from the first quarter, primarily related to the platform recovery project. Plug and abandonment, another decommissioning activity increased as the [ENP] companies faced a costly insurance renewal period where deductibles and premiums doubled, and in some cases tripled. As a result, several companies are self-insuring. This created a sharp increase in P&A activity that we believe will continue throughout the year.

International revenue in the well intervention segment increased 9% due to our two Angola projects and increases in hydraulic work over and snagging services in Australia and the Caspian region. In our rental segment, revenue was $102 million and income from operations is $20 million. This represent a 19% decrease in revenue and a 43% decrease in income from operations compared to the first quarter.

Revenue for rental tools in the domestic land markets is $26 million down 31%, with the biggest declines occurring in the accommodation and stabilization product lines. Both of those businesses are tied to the rig count. A directional drilling rig count, which is an important driver of stabilization rentals, was down 34%.

Rental revenue in the Gulf was $43 million down 9% from the first quarter, and most of the decrease is from reduced shallow water demand for drill pipes, especially tubular and stabilization growth. Finally, international rental revenue was $33 million down 19% for the first quarter.

These are three areas that impacted that rental business. First, we had some accommodation sales in Trinidad and manufacture sales have stabilized in South America and Europe that did not repeat in this quarter. Secondly, drilling projects in eastern Canada and Columbia were cancelled or postponed during the second quarter. We're going to provide drill pipes and specialty tubular for those projects and they will occur in the near-term.

Third, we reduce rentals to drill pipe and specialty tubular in Venezuela, as we removed some assets out of the country and wait to receive payments from [PDVSA]. In July we received [ACME] and payments [PDVSAs] indicating that it's stepping up its payments. Our remaining receivable balance in Venezuela is $23 million.

Now, in marine segment revenue was $27.5 million and income from operations was $4.9 million. This represents a 19% increase in revenue and a 77% increase in income from operations. Three factors drove our improved performance in the marine segment, the first was seasonal. A utilization increase as we entered the traditional work season for marine assets in the shallow water Gulf. The second was that our 230 foot class liftboats back in service after being out for the entire first quarter due to inspections and maintenance.

And third, we had contributions from the two new 265 foot class liftboats which entered the fleet during the quarter. Two forty-five class liftboats is working in Mexico continues to perform well, in fact the contract has been extended another 30 days until early September. There's a strong possibility that the liftboat will remain in the project beyond that time.

In terms of G&A, some of our cost cutting efforts materialized this quarter as G&A was $60 million down from $65 million in the first quarter and $66.5 million in the second quarter of '08. In the third quarter we expect G&A to be in the same range as the second quarter.

We believe DD&A of $52 million to $54 million is a good run rate for the third quarter. Cash spent for capital expenditures during the second quarter was $67 million. Expansion CapEx represented about 82% of our expenditures. Year-to-date our CapEx is $149 million, we expect our CapEx the remainder of year to be in the range of $125 million to $135 million if not less.

At the end of the second quarter, the face value of our debt exclusive of discounts was approximately $770 million down from $834 million at the end of the first quarter. Our net debt is $733 million. The breakdown is as follows, $400 million in convertible notes, $300 million in senior notes, $15 million in myriad and $55 drawn on our revolver.

Debt to EBITDA at the end of the quarter was 1.23 and our net debt to EBITDA was 1.17, debt to total cap was 37.8 down from 39.2 at the end of the first quarter. In terms of our outlook for the remainder of the year we see the domestic markets stabilizing based on recent trends and pricing and utilization of our well intervention services and our rental tools account. I'm really hesitant to call the bottom here but it's beginning to look like it's bottomed in this domestic market.

In the Gulf of Mexico, we expect rental activity to remain where it was in the second quarter and then experience the normal seasonality later in the year assuming we have no hurricanes that could generate again a spike in demand for our services.

In our international markets, we expect activity to be flat to slightly up from where we are now especially for rental tools. We expect slight improvements in the rental markets in South America, especially Brazil, as well as in the Middle East, Far East and West Africa. We expect the North Sea will be flat to down.

Overall, we expect activity levels to be similar to where they were in the second quarter, which is a positive sign of this market environment as it is an indication of finding the bottom and stabilizing and we hope that that's where we are. Our balance sheet will continue to stronger as we build cash throughout the remainder of the year, especially as we continue to reach milestones in our platform recovery project and pay down debt. We have no debt covenant issues none of our debt matures in the near term. Our balance sheet is in really good shape.

That's all I have, we'll now take your questions.

Operator

(Operator Instructions) Our first question is from James West - Barclays Capital.

James West - Barclays Capital

Terry, based on your outlook that you just mentioned for stabilization in the U.S. and the Gulf and perhaps flat to up internationally, can we read through to that that third quarter earnings should be fairly consistent with what you report over the second quarter?

Terry Hall

That's probably going to be the case, James. I don't see any reason for them to be a lot different.

James West - Barclays Capital

Then just one other question for me on pricing, I know generally you're pricing holds up much better during the downturn then other drilling related businesses. Could you give us a sense of the pricing declines you've seen so far for the rental business and then perhaps the well intervention business?

Terry Hall

Well, pricing pressure clearly has been the worst on the land markets and in the Gulf of Mexico. Internationally it didn't happen but it's begun to happen now so you've seen pressure there. It's just something that's kind of moved around the globe, pricing is off another 10% to 20% on the service side, 5% to 10% on the rental side. It's generally more stable because our services are more production related then drilling related and that's just again by design.

So we don't have the volatility that maybe a drilling related service provider would have, but there's really not many of those guys around anymore other then the really big guys who are the ones that are more focused on drilling related services. They've already reported and you've heard their comments. I think this decline and the pressures that we've seen here are certainly unprecedented in my 30, 40 years in this business.

And again we've dealt with it and, while it's been steeper and harder, the results have been pretty much the same. Production related services hold up better then drilling related services. Our rental revenue gives some balance to our business, our geographic diversification has helped us to where overall we're making money, we're generating cash and we'll accumulate a lot of cash throughout the year.

I think when we come out of it we'll be better off then when we went into it, only because everything I see is we'll end up taking a little market share, the markets wild but the market will return. When it does we'll have more market share then we went into it with.

Operator

Our next question is from Robin Shoemaker - Citigroup.

Robin Shoemaker - Citigroup

If you could give us a view as to perhaps a broad view of platform decommissioning opportunities in the Gulf of Mexico beyond your current large project and what kind of structure you expect to see there whether it be large kind of comprehensive projects like the one you're on now or more piecemeal and whether that business is declining or stable or increasing in the current environment?

Terry Hall

Well, I think the plug and abandonment market in general has seen a nice move upward in the last several months. That's driven primarily by insurance rates and operators trying to find ways to reduce that insurance exposure. It's typically a well bore focus and they're trying to eliminate to the extent possible active well bores to relieve that insurance exposure. So that is sort of a universal cost of the board approach from the big companies to small companies. They spend a great deal of emphasis placed on plug and abandonment and we clearly have been sold out in that arena for some time.

While that's the general trend you have several companies and again we're not going to name them we don't do that, but there's several companies that have awarded larger scale projects of late and we benefited from some of that and we'll continue to benefit in the future. I think there will be some larger scale projects that will be in the neighborhood of $50 million to $100 million, we're involved in those we will continue to be involved in those.

I don't know that we'll see another turnkey contract like the BP, in part because of all the disclosures we've had to make over time. I think a lot of the operators are going to try and go back and run the projects themselves and work with us on a day rate and maybe not do the turnkey. When I think at the end of the day the turnkey was by far of great benefit to BP and its partners in the deal and saved a lot of money by doing it that way and we came out better.

But that's just the function of how this thing operates, but it wouldn't surprise me if there is another large turnkey at some point. But I don't see another one of the size of BP right now. But we have been awarded some other large projects, we do expect to get the award of some more of those large projects and in the meantime we're involved in an awful lot of very small projects.

We've actually been turning down work in the P&A department so that business looks good. And it's not really a surprise to us for several years the normal P&A business has been off it was really kind of hard to understand, but I think the realities of the hurricane seasons and what's happened to the insurers is finally really come to the forefront. And now people are getting back into a serious wave of activity not unlike the wave of activity we saw after hurricane Andrew in the early 90s.

So I think a lot of the larger operators have decided to really get back after it and commence one and two year programs where they will be very active for extended periods of time, tie up equipment and crews. We're seeing that happen. We're beginning to be involved in those. That will be I think a very good business for us going forward.

Robin Shoemaker – Citigroup

And so based on that description, I guess that would not be an area where you're experiencing the pricing pressures as you are in the drilling related services.

Terry Hall

No, there's not a lot of pricing pressure on it. Any time you've got a market where the service groups are fairly well sold out, there's not going to be a lot of pricing pressure. So that sale's up. These are businesses that you go out on these jobs and these are $10,000, $12,000 a day jobs. They're not huge jobs because in many cases they involve anywhere from 6 to 10 people in a relatively small equipment spread.

Sometimes they involve heavy marine assets, sometimes they don't. So the fact that there's a lot of activity and not a lot of pricing pressure in the overall scheme of things will not have that big an impact on our company because still plug and abandonment is a relatively small part of our overall business.

Robin Shoemaker – Citigroup

The follow-up then is I didn't hear a comment from you on this call regarding your deepwater well intervention strategy. Could you bring us up-to-date on that and whether that opportunity still looks very attractive to you.

Terry Hall

That strategy hasn't changed at all. I'm glad you asked the question. We continue to be committed to the deepwater well intervention business. We are actively engaged in some deepwater intervention activity right now. We anticipate being more and more engaged as we go forward, particularly in '10.

We have lubricators now that we're employing and we're in the process of building some state of the art lubricators that we anticipate we'll be able to bring to the market in '10. In the meantime, we're developing credibility with the market and gaining experience.

What we haven't done is go out and commit to a vessel and the capital that would be required to do that in this market. We kind of pulled back on that. We may live to regret that. There could be some spike in demand right now and we might wish that we had a boat, but we've made a decision to err on the side of conservatism right now.

We think there will be a lot of opportunities to acquire vessels and in the meantime what we're doing is aggressively building and designing all the related equipment that we would deliver with the vessel to well intervention works. We haven't slowed down at all. The one thing we have done is we've backed off of getting out and making big capital commitment to the large intervention vessel.

Operator

Our next question comes from Mark Thomas – Simmons & Company.

Mark Thomas – Simmons & Company

On the oil field rentals, margins actually ticked higher quarter-over-quarter, yet revenues were down. I thought this was more of a volume-driven segment than price-driven. Could you just give some color on why margins came in higher sequentially?

Terry Hall

It's just a product mix issue. It all depends on where it comes from. Deepwater pipe rentals will generate better margins than combination rentals and things, so it just depends on the product mix. It remains the bright side of the deal is that from 15 years ago we said we'd get in the rental business to balance our exposure in a down market to the service business.

And to protect us so we wouldn't generate overall operating losses in a bad market, and that's what rental is doing for us today. That's why we spend the capital we have over time. And if you look at it over various quarters, the margins move up and down and it is generally driven just by product mix.

Mark Thomas – Simmons & Company

And then for my follow-up, can you just give us an update on those two Angola projects, how they're tracking, I guess how long those projects last? And then, if you're bidding on any more work in that region?

Terry Hall

We're bidding on more work. Those projects will go on, they're multi-year projects. We expect to be there for a year to two years or more, maybe four or five, so certainly a year or two. We're getting more exposure over there in that market which is what we wanted. We've been through quite a learning process to get to know the market and the people we'll be working with over there. We've had challenges, we've met them well, we've done very well there and we think our prospects for expanding our offering in that region are very good.

Operator

Our next question comes from Joe Hill – Tudor, Pickering, Holt & Co. Securities.

Joe Hill – Tudor, Pickering, Holt & Co. Securities

Terry, can you tell us how much the sequential revenue declined from the platform removal project hurt the second quarter relative to the first quarter?

Terry Hall

No. Joe, no we're not. We've never really released that for various reasons, but I continue to think that all of you guys who I know do good work analyzing this stuff are making too much of BP. We said when we got on the project it's the type of work we do day in and day out. We do it all the time. We just don't talk about it because it's typically the type of work your customers don't want you talking about.

We continue to do work of that type all the time. There's nothing that unusual about BP, other than the fact that we had to disclose it and it was a turnkey. It generates good margins but most of the work we do on the well control unit generates very good margins. So we're all over the world right now, well control work. We're doing various in sundry things.

The fact that we work less on BP, that's a fact. But we worked more on some other things. We took the men and people that might be working on BP and put them on other projects when we had demand for their services while we built some special ops equipment to I think finish this project maybe more efficiently, but more importantly to put us in the position to deal with future projects in sort of a new and innovative way that will give us I think a leg up.

So don't make too much of it. We're not going to give you the numbers but we did less work in the quarter than we did in prior quarters and we'll probably do less work, we'll probably do about the same amount of work as we go forward into '10 on that project because we have a lot of other things to do.

Joe Hill – Tudor, Pickering, Holt & Co. Securities

Do you still kind of think that project could wrap up in the middle of 2010?

Terry Hall

Yes. With regards to, it could be a little early than that but probably it will be first quarter, second quarter of '10, something like that. It depends on how fast we push it. We're not in a hurry here to necessarily wind it up. We've got it under control. We really don't have any exposure, storm exposure or anything like that. It's in really good order. To the extent we had demand for people to go do emergency projects and things for them that they need today, we're inclined to go do that as opposed to saying oh, we're busy on a turnkey or so-and-so.

In some cases, we had the very customers, we had the BPs and others that that project involved, asking us to go do other work. So we've got it in a really good position right now. We're really proud of how it worked out. But we can ease off of that project and can go work on other things and come back to that without worrying about some sort of exposure right now. So we like where it is. We're going to bring it in under budget, ahead of schedule, and that means until sometime in early to mid '10.

Joe Hill – Tudor, Pickering, Holt & Co. Securities

Just kind of changing topics for a second, with regards to your deepwater well intervention strategy, you've talked a little bit about getting a specialized vessel to kind of prosecute that strategy. Is the value really in the boat or is it in the tool set and the people? And does it make sense to just do a long-term [verideck] charter for a DP vessel and run it like that as opposed to actually ponying up the money for a boat?

Terry Hall

We made the decision that long-term it makes sense to own the boat in our view, and part of that has to do with kind of who we are, Joe. I agree that the real deal is the equipment and the tool set, and we're building that and we're going to have a state-of-the-art tool set. If we were Schlumberger, because of our name we know we would get work and we might not need to own the boat and somebody might be a little more patient with us in trying to line a boat up, but we're not. We're going to be the smaller guys coming in saying we can do this work and compete with them.

One of the advantages there is that we own the boat, we own the tools, this is our spread, and we're responsible for the whole thing. That's worked well for us with liftboats in our services. We've found an advantage there and we think the same thing will play out in deepwater. Again, if we were Schlumberger and Halliburton, I might do it differently.

But because of the size of the company we are and the mark we want to make in the business and the fact that the types of services we provide, I think at the end of the day it will make sense for us to own the vessel. But in this particular marketplace and we're conserving capital, we're trying to be smart here, we've kind of pulled back. We've came very close to closing on something that would have gotten us some boats.

There's a lot of issues, a lot of shipyards right now. So we've just decided maybe the best thing to do is back of that. Build the tool set, develop our expertise, we're on some deepwater intervention jobs now. We've had more awarded to us with lubricators we now own. And I think that in the future we'll probably buy a boat but it's because really of who we are and the size of our company what we're trying to do. I'm not saying that makes sense for everybody but I think it makes sense for us.

Operator

Our next question comes from Joe Gibney – Capital One Southcoast.

Joe Gibney – Capital One Southcoast

Just wanted to follow up on Venezuela comment there, the $23 million in receivables outstanding? Are you incrementally a little more positive now on recouping those than maybe you were a quarter ago? I'm just curious on redeploying assets if you're shifting things around in that region, where you'd go?

Terry Hall

Well we'd go to Trinidad. We can move around to other areas in South America and Brazil. I'm feeling better about getting paid. We've gotten some money. Again all of the money we're owed is not owed to us by [PDVSA]. Some of it is owed by other contractors. Of course they're waiting to get paid by [PDVSA] to pay us. But they don't have the legal right to now to not pay us because we don't get paid by [PDVSA]. So we're working with them but we're certainly not ready to write this off right now. We expect to get paid.

There's some things going on in Peru, things going on in Brazil. We've got things going on in Colombia, in Trinidad. We have ways to move these things around and that's the good thing again about primarily a rental business. You don't have a lot of people involved. You can move those assets to other markets and deploy them if you've got a presence there. And we do, fortunately we do, we've got a footprint in a lot of other areas in South America that we can deploy these things to.

Joe Gibney – Capital One Southcoast

And just touching base on the liftboat side, curious your outlook here in the near-term day rates and utilization moving to 3Q and 4Q relative to some of your comments on the P&A side, expect more seasonality is the way to generally think about it here with the activity picking up a little bit in this quarter? Higher boats obviously enjoying a little bit more utilization day rates? More color there, would be appreciative?

Terry Hall

No, I think you want to err on the conservative side here. I'm sure there will always be some seasonality in our business. The assets that seem to be working the best and maintaining the best rates are the larger, longer-legged liftboats, which has been our focus for some time. They're doing very well because there's not very many of them. I think the demand there will hold up.

I think the smaller boats are the ones that are probably more exposed to seasonality than the larger boats. So we're cautiously hopeful that our marine business may hold up pretty well, particularly bigger boats. And we may not see the normal seasonality that we would see, at least in the larger fleet.

Operator

Your next question comes from William Sanchez – Howard Weil.

William Sanchez – Howard Weil

Terry, just a follow up on an earlier question, you've made a decision to defer here either owning, I think you dismissed chartering, a deepwater vessel for well intervention. What now should be think about kind of as the max water depth that you can serve with the lubricator system as you have it designed now?

Terry Hall

The ones we have in-house are good up to 700 feet or so, 500 to 700 feet we've worked with them. The ones we're going to build obviously are going to water depths double that or more. But the demand for work right now is in the water columns of 300 feet to 500 feet. That's where most of the action is.

And we can actually work those, but again it's a small lubricator, small diameter size. It's got some issues but it works in many applications and it's working now. We're building something obviously a larger bore size to go to deeper water.

I didn't mean to imply that I would not charter a vessel. I was trying to say that my preference would be, we do in fact have vessels chartered right now, and if we get that lubricator and we don't own a boat we'll probably charter a boat. Hopefully we won't have to charter for too long a period of time. I'm just saying when we have our own toolset in a normalized market, I would rather own the asset than charter the asset.

That's all, I think we can, because again of all the businesses we're in, I think we can generate a great deal of utilization for the vessel and justifying owning it. Whereas it might not make sense for other people, I think in our case it will make sense to own versus charter. I didn't mean to imply that I would not charter because we have in the past chartered. We're chartering now and we may well charter in the future.

But I would prefer to own, but while we debate that issue and go back and forth and when's the right time to get into that market, we're building those toolsets. And we're actively engaged in that subsea market again, really honing our skills and establishing creditability with our customers now as we begin to talk to them about the new lubricator systems that we'll be bringing out in the near-term.

William Sanchez – Howard Weil

Terry, do you still believe that, I know you've talked in prior calls about once we see the expiration of the big WA&D contract that perhaps through acquisition and just normal growth and other opportunities on WA&D that you can essentially kind of refill that or replace that work out there in terms of your revenue stream. Do you still feel that way even maybe deferring the decision on the deep water vessel here?

Terry Hall

Well I think from a revenue standpoint whether we work with a chartered vessel or an owned vessel, the top line will be pretty much the same. I think the bottom line implication might be different. Yes, we intend to replace that revenue and get back the type of revenue stream we were seeing before we had this dramatic and drastic downturn in the market. Look around, Bill, we're doing a lot of things.

We've gotten into a lot of markets after we commenced the BP project. We were not in Angola when we started the BP project. We did not have liftboats in Mexico when we started the BP project. We were not in Brazil when we started the BP project. We're spending money. We're making investments now in those markets and I expect those things could grow and pay off in the future. So those things alone may not replace it all, but those things as well as other niches we're working on right now will replace it.

Operator

Your next question comes from David Nierenberg – Nierenberg Reinvestment Management.

David Nierenberg – Nierenberg Reinvestment Management

How are you feeling about your ability to monetize your other current assets?

Terry Hill

Good.

Operator

Your next question comes from Joe Agular – Johnson Rice.

Joe Agular – Johnson Rice

Terry, just a quick question on your land business overall, I know you have been in a big, like everyone else a cost reduction mode in the first part of this year, do you feel that you have your cost structure in line now with kind of the market that's out here?

Terry Hall

Well we look at our cost structure, not just at the market that's out there, but we're looking at the market we hope to be there in the future. We've made a pretty good investment in infrastructure, building out a footprint. We've got the newest fleet of equipment in many cases out there. We've ended up high grading our workforce, while we have reduced the work force very dramatically, we've actually added a lot of people.

And I think we've got the premier work force right now, and I know we've got the best equipment on North America land. Now we are defending those markets in many cases. We're not sitting here just whacking and cutting and saying we're going to run this thing down to where we're making money in this down market. If we did that I think we would drastically reduce our capacity to make money in the future. So we're sitting in there.

We're cash flow positive currently right now today in the North America land market and that's really our focus is to try to stay there. We're not focused on trying to turn a profit right now on that market. The only way you would do that would be to drastically cut this thing off and then when the market returns, we would have greatly reduced our capacity.

And I don't think that's in the best interest of our shareholders. Do we're not losing cash in the land market. That's really our focus and we want to maintain our base, stay in the markets that we believe will return and retain our best assets which are good people.

Joe Agular – Johnson Rice

And the second question I had on the follow up was you mentioned Mexico a minute ago. Could you maybe update us on, it sounds like a market that has a lot of potential in getting the liftboat in there, first foot in the door so to speak? Could you maybe, is there any update to give there yet or is it still a little too early?

Terry Hall

I think it's a little early. We've got a history of talking about Mexico and things not developing as fast as they should. So we probably ought to be quiet about it, but we've got one boat down there. It's already been down there longer than we thought it would be and it looks like it's going to continue to stay down there.

It's done more for us than all the sales calls and trips to Mexico could ever have done because it's there and I think Chemex and related parties are seeing what it can do. All of the horror stories they had heard about things happening in the early '90s, those issues seem to be going away. It works well. It's done a lot more than they expected it could do.

And there's certainly a lot of interest in having some other vessels down there. All you have to do is look at their production decline and you see that there is an opportunity for us there. And they seem to be quite interested in it at the moment.

Joe Agular – Johnson Rice

And wasn't it also the case where they were doing of sort of production related services with drilling rigs and you all have –

Terry Hall

They still are. They're using [semi]. Part of that is because of the bottom conditions are such that they're really a little bit unsure about where someone could set legs down and where they could drop some mats down, but many of their fields don't have those issues.

And those are areas where they're showing a lot of interest in us because it would clearly be a more cost effective operation. We could go in and dramatically reduce their day costs and I think do a great deal for them, in terms of enhancing their production and maintaining their production in those fields that have been in such steep decline.

Operator

Our next question comes from Tom Escott – Pritchard Capital.

Thomas Escott – Pritchard Capital

You had three major charge-offs in the period and can we assume, taking these three big charges, that you've looked through everything else and you've scrubbed it pretty well and that we really don't have anything else hanging over us that could get charged off here in the balance of the year?

Terry Hall

Tom, we didn't take this lightly. We thought long and hard about doing this and what we did was just driven by accounting rules. Right now there's nothing that I know that would cause me to think we're going to do it again. I think a lot of this we've done with a great deal of caution and being very conservative.

While there were three, really one of them relates to Baryl Oil and Gas and that's kind of a unique situation that really was out of our control to start with, we had 40% interest in a company. And the write-down of intangible assets, we didn't write down any of our equipment, we didn't lose anything, we didn't junk anything, we haven't thrown anything away, because we don't have any junk. So we wrote down some intangible assets and I don't anticipate and we're not setting here today in fear of having to do this again.

Having said that, there are accounting rules out there today that people are pushing that can drive you to do things triggered by all manner of issues, whether it be stock price or something else, that can cause you to go through another test. We've studied this thing pretty hard and we don't see anything now that would cause us to think that we'll be doing this. You might have noticed that we weren't one of the first people to jump out here and do this.

We don't take these matters lightly, we study them hard, we work very hard at this and we've worked this thing pretty hard and we've tried to do all the right things here. We don't see any reason to expect any more in the future, but I'm not saying it couldn't happen. Who knows what's going to happen. We didn't expect the market was going to do what it's done over the last months. Again, based on what we know, what we see right now today, no, I don't expect there to be any more.

Thomas Escott – Pritchard Capital

I guess I was particularly targeting this question related to idle equipment, some of the old lift boats and even some of the land-based well service things that probably has been idle for quite some time, but sounds like you've addressed that issue. And then earlier on, I think you, at least I understood that you expressed some confidence you would not be charging off the Venezuelan receivables so –

Terry Hall

That's right, but we considered all of our equipment and, again, there's a lot of people that may have some older equipment spreads on land but that's not us; we've got new equipment. And we've looked at every single thing within our assets and we wrote down the things that were appropriate to write down, we wrote down the intangibles. But we don't have any old equipment that would warrant being written off.

Operator

Our next question comes from Terese Fabian – Sidoti & Company.

Terese Fabian – Sidoti & Company

I have a third quarter question since we're nearly a year out from our last hurricane event, can you talk a little bit about what to expect, when the hurricane season strikes in full, what the variations might be if they come in the eastern or western Gulf.

Terry Hall

Well, there's not going to be a lot difference to us whether it comes in the eastern or western Gulf because, from a business interruption standpoint, once a hurricane gets in the Gulf, it tends to shutdown operations across the board.

The operators in recent years have become more and more and more cautious and, actually by the time one gets down to south Florida, they're shutting down the northern Gulf. So that was not the case 10 years ago, but is the case today; so whether it's in the eastern Gulf or the western Gulf that will shutdown operations. And that is generally a shutdown of five to seven days minimum, even when the storm doesn't get anywhere near you, it just takes them that long to shutdown and start back up again.

Obviously, if you get some damage, then that's a whole other arena and that is generally followed by a demand for lift boats and surveying and damage assessment type work, as people try to repair things and get their production back on line. Then several months after that, your normal service activity comes back.

The net impact, after the storms have passed, is typically you don't see a drastic increase in your revenue, but you don't see it falloff all that bad because to the extent you lose some revenue related to production related service activity, you gain revenue related to repair and damaged stuff.

So the part you lose is the five, six, seven days at a time that you're shutdown for storm event. That's like the empty seat on the airplane it's pretty hard to recover that. The work that doesn't occur during those periods is just deferred and you do it later. So the work isn't lost, but you've got costs associated with the days you're shutdown and really you have nothing to really offset that with.

So if you get a series of storms that occur, you're shutdown for a week and then there's another storm that's sitting out there on the horizon, sometimes people elect to not go back to work to wait and see. So, again, depending on the storm patterns, if you get five or six of them lined up in close order, you can have an extended period where you're shutdown. If there's a fairly good gap between them, the periods aren't as bad.

From just a bottom line standpoint, this is one of those situations where an ill wind that doesn't blow good for someone, if you get a series of these storms and there's actually never any damage or anything else, that's not a good thing; the better thing for us is if there is some damage. That's just the reality. But some years we've had major interruptions in work for extended periods of time and no actual damage, so it was just bad.

We've had other years where there was only one real storm that got in, did significant damage, and it was a great boom to activity for 18 months thereafter and sometimes longer. I'm just trying to explain it's all over the board, but don't think that there's any difference between a storm in the eastern and western Gulf, because the immediate impact of that is pretty much the same.

Terese Fabian – Sidoti & Company

On the special equipment that you built for the platform recovery project, where is that applicable and how did that go about being developed?

Terry Hall

We developed it internally, with our own design and engineering staff. It's just a way to treat sediment on the bottom. If you're trying to excavate an area and it continues to fill in through the current or otherwise, you can stand out there and continue to try to pump it away and then deal with all the water clarity issues you might have, or do you do something else to try to protect the area you're trying to excavate.

And so I don't want to get into a whole lot of it because it is proprietary, but we just think it was time to back up, design a system to deal with it, because it has application here on one part of the BP project, and it will certainly have application in projects we're undertaking in the future.

Operator

Our next question comes from John Fitzgerald – Raymond James.

John Fitzgerald – Raymond James

Looking on the rental side, would it be safe to assume I guess given how deepwater is really held up better, the mix issue and the favorable mix you guys had in the second quarter, is something that would be sustainable? And then from a top line perspective, do you guys think some of the increases you'll see in Latin America would be enough to offset some of the declines that you'd expect to see further domestically?

Terry Hall

We expect our business to grow in South American markets, so to the extent it does grow, that will offset some of the clients in the Gulf. We've always said that deepwater rentals were deepwater activity in general is not nearly as volatile as shallow water or domestic land business. And we've got a nice product line to address the deep water.

So I think our deepwater business will hold up as we got forward, we expect that, and we expect the South American activity to pick up for us. We've invested a lot of time and money and we're getting into projects now that are just starting to kick off. So, yes, to some extent, the up tick in deepwater activity and other activity in South America is going to offset the decline in shallow water activity and domestic land markets.

John Fitzgerald – Raymond James

And you guys also noted that holding off right now in the near-term on the well intervention from a vessel perspective, is there any other places where you guys might see some acquisition opportunity or where pricing has gotten a bit more attractive or maybe internationally of anything like that?

Terry Hall

Well, the areas where you're seeing opportunities are in the areas that are the most depressed and we sort of feel like we've got enough exposure to those areas. We went into the domestic land market saying that we knew that it was a volatile market, but that the guys who had the newest equipment at the end of the day would end up with the best employees and typically outperform the market.

Now, it wouldn't make it good, but you could outperform the market and I think our results proved that. So we're going try to maintain that footprint and the infrastructure we've established on land, but I don't know that we want to increase it now because we're sort of taking market share bit-by-bit right now, and we think we'll take more in the future, and I don't now that it would make a great deal of sense for us to take further exposure there in the market.

In the other areas, I don't there's been a big change in the opportunity internationally, for example. And we've just been quietly sort of building our footprint in infrastructure out in those areas, and I think we'll continue to do that. So the answer is you're not likely to see us make acquisitions, I don't think, on the North American side. On the international side, I don't think that the opportunities are a great deal better today than they were 60, 90, 120 days ago.

Operator

Ladies and gentlemen, this concludes the question and answer session. I would now like to turn the conference back to management for any closing remarks.

Terry Hall

That's really all we have. We thank you for your interest and your support.

Operator

Ladies and gentlemen, this concludes the Superior Energy second quarter earnings conference call. Thank you for your participation, you may disconnect.

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