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Executives

Dave Wallace - Chairman and CEO

Tom Stoelk - Chief Financial Officer

Analysts

Joe Hill - Tudor, Pickering, Holt & Company

Victor Marchon - RBC Capital Markets

Jack Aydin - Keybanc Capital Markets

Waqar Syed - Tristone Capital

Eric Pachman - Morgan Stanley

Superior Well Services, Inc. (SWSI) Q2 2009 Earnings Call August 7, 2009 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Superior Well Services Incorporated Earnings Call. My name is [Shumica] and I'll be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Dave Wallace, Chairman and Chief Executive Officer. Please proceed.

Dave Wallace

Thanks, [Shumica]. Good morning, everyone, and welcome to the Superior Well Services second quarter 2009 conference call. Joining me today is Tom Stoelk, our CFO. I'd like to remind all those participating on the call today that a replay of our conference call will be available to listen to through August 22nd, by dialing 888-286-8010. The conference ID for the replay is 44327690. The webcast will be archived for replay on the company's website for 15 days.

Before I begin with comments on our operating performance, I'd like to make the following disclaimer regarding our call today. Except for historical information, statements made in this presentation, including those relating acquisitions or expansion opportunities, future earnings, cash flow, and capital expenditures are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. All statements other than statements of historical facts included in this presentation that address activities, events or development that Superior expects, believes or anticipates will, or may occur in the future are forward-looking statements.

These statements are based on certain assumptions made by Superior based on management's experience and perception of historical trends, current conditions, expected future developments and other factors that are believed appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond Superior's control, which may cause Superior's actual results to differ materially from those implied or expressed by the forward-looking statements. These risks are detailed in Superior's Securities and Exchange Commission filings. The company undertakes no obligation to publicly update or review any of the forward-looking statements.

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

Energy market fundamentals continue to deteriorate during the second quarter with US land rigs bottoming in the middle of June. The decline in gas rigs which bottomed in July was offset by a consistent and steady rebound in oil rigs in the middle of June year-to-date. Our activity levels follow these rig trends with job counts bottoming in May followed by an up-tick in June.

Our revenues were consistent with our activity levels as monthly sales bottomed in May and improved in June. Part of the challenge to pick the bottom in any cycle based on our preliminary July revenue numbers which were better than June, it appears when they'd be moving up from the bottom of the trough with respect to activity levels and sales. Some competitors appeared to have changed their strategies from market share growth regardless of the impact on financial performance in cash flows to reducing expenses closing, locations, retrenching the core areas and stacking on a moving equipment.

We anticipate that this market retrenchment will provide some benefit to us in certain location and areas given our footprint. We see the pressure pumping market rebalancing over times. Some of our larger competitors have commented on moving 10% to 15% of their horsepower internationally. Older, less efficient and less reliable horsepower is being retired. Equipment is being moved out of basins and fast. The combined effect of these trends is that pressure pumping capacity in North America to decline significantly which would go a long way towards improving their supply and demand fundamentals in this market.

I would like to note that the majority of Superior's fleet is newer and has been built between 2005 to 2008. During the quarter we accelerated the speed and depth of our headcount reductions and focused on reducing other costs to align our cost structure with current and anticipated activities level. Our primary focus is return to profitability and generate positive cash flow. That said, because we know many customers choose us because of our service quality reliability and safety record, we continue to maintain our equipment to our traditional high standard and develop unique technologies and processes or enhancing returns and reducing risk for a broad and diverse customer base.

We have still have the industry leading expertise on our teams which are customers and investors have come to rely upon in both up and down cycles. Revenue in the second quarter of 2009 was $90.5 million, a sequential decrease of 26% from the $122.3 million reported in the previous quarter ended March 2009 and a 24.4% decrease from the $119.7 million reported in the second quarter of 2008.

Operating loss for the second quarter, excluding a $33.2 million non cash, non recurring pre-tax goodwill impairment charge was $26.1 million as compared to $19.1 million of operating loss reported in the previous quarter and $16.6 million of operating income reported in the second quarter of 2008.

The year-over-year revenue decline was the result in the decline of activity levels resulting from lower industry demand for well completion services coupled with increase price competition which in turn led the higher sales discount across our operating regions.

The lower demand for our services was partially offset by revenues from the Diamondback asset acquisition and increased our activity levels in new service centers that were established within the last 12 months.

As a percentage of gross revenues, sales discounts increased 14.3% in the second quarter of 2009, compared to 2008 and increased 7.3% sequentially compared to the March 2009 quarter.

All of our operating regions experienced higher sales discounts for the second quarter of 2009 compared to 2008. While we can't control commodity prices or appliance CapEx budgets, we can control our cost structure and how we approach in the market. We continue to respond proactively to the current market environment by reducing cost focusing on maintaining high service quality, bringing new services and technologies to market and seeking operational efficiencies.

We have reduced headcount by approximately 1,130 employees, a reduction of 44% to approximately 1,460 as compared to 2,589 employees at the beginning of 2009. We were reduced across all of our operating regions and administrative functions to better align our headcount utilization with activity level. While reducing headcount is never our preferred course of action, these steps have lowered our monthly personal cost by approximately $6 million. Full benefit of these reductions will not be realized until the third quarter, as 75% these reductions occurred in March through July.

We have also reduced our number of service centers located by consolidating operations in certain areas and closing centers located in weak market that are not expected to make that strong recovery as environment improve. Reducing our exposure to markets rendered unprofitable in this market environment will also result in increased cost savings at Superior. We have been implemented additional cost saving initiatives that Tom will review.

We recently announced that Superior was selected by Marathon Oil Corporation for the EXCAPE Completion Process License. The EXCAPE Completion Process can increase reserve potential by strategically targeting discrete pay intervals with perforating guns mounted outside the casing and integral valves inside the casing for zonal isolations.

We are well positioned to provide high quality cementing and fracturing stimulation services in support of the EXCAPE process for Marathon and other customers across our operating region.

Now let's turn the focus to our five operational regions. Our Appalachian service centers support the Marcellus and other Shale plays. Revenues of 28 million in the Appalachian region were down 39% for the quarter year-over-year and down 8% sequentially. Gross loss impacted activity level in April and May for most of our locations in Northern Appalachia and Michigan.

Shallow drilling activity continue to drop as the MP operators shifted their CapEx dollars to drilling wells in the prolific Marcellus shale play. Our Marcellus shale team sales team continues to make progress with new customers as confirmed by the increased diversity of our customer base and the increase of our Marcellus job count. Our solution focused Marcellus shale technical team has specific industry experience in the play and has helped our customers maximize recovery and ensure that they're getting the highest rates of return on their investment.

From an innovative perspective, our technical team has developed our exclusively gamma frac slick-water system that reuses 25% to 50% of our customers' flow-back water, thereby reducing the amount of fluids that need to be disposed and lowering our customers' fluid disposal costs, further enhancing their returns. We are aggressively marking this system to all of our shale customers including those in the Marcellus, whereas fluid disposal is a significant regulatory and cost issue.

Competition continues to increase in this area as other companies move equipment and crews into Appalachia in an attempt to pick up market share in the Marcellus. Our expertise and helping leading [E&P] operators increase recovery rate and generated stronger returns on dollars invested, combined with our consistently demonstrated high job performance and our reputation for excellent service quality helped us maintain a strong competitive position in our backyard. We also remained to be the conventional well leaders in Appalachian.

Revenues in the Southeast region of 12.1 million were down 46% for the quarter year-over-year and down 44% sequentially. Reduced activity levels in our Alabama and Mississippi markets along with aggressive discounting in the Haynesville shale play, led to the revenue decline.

During the second quarter, we saw a number of competitors who were pricing below cost to gain market share. We decided to not participate in a number of these jobs and focused our efforts on improving our economics in these regions.

Our Haynesville technical team continues to demonstrate our proficiency in performing high quality completions and high pressure, high temperature down hole environments like those found in the Haynesville. Similar to the Marcellus team, our Haynesville team has specific industry experience in this shale. They continue to provide innovative solutions that translate to better well performance and the preservation of economic returns to our customers.

For example, they are also introducing our gamma frac slick-water system developed in the Marcellus to our Haynesville customers and are developing alternative profits for the Haynesville market that offered improved, high temperature stability and better cost strength at lower cost and traditional more profits.

Contrary to the falling drilling activity in the rest of the nation, the rig count in the Haynesville shale play continues to increase, we remained focused on providing high-tech cementing and stimulation solutions to existing and new customers that are required in this high-pressure, high-temperature plays.

On the material side, we are working with the sand coating firm that is resin coating our sand resulting in significant all-end lower resin coated sand cost. Revenues from the Southwest region of 27 million were up 83% for the quarter year-over-year and down 25% sequentially. The Southwest region hasn't been impacted by the decline in gas rig count in Texas and the Permian Basin and utilization and pricing has softened. We've seen an up-tick in activity in the oily Permian markets in June and July and feel we are well positioned to capture additional jobs as the market improves.

We reduced our cost structure in the Southwest and we'll continue to monitor the situation and further reduce cost as needed. Revenues in the mid continent region of 21 million were down 6% for the quarter year-over-year and now 19% sequentially. Similar to the Southwest region, the Mid-Continent region is also seeing drilling activity levels fall dramatically and has been challenged by utilization and pricing weakness.

We maintain our position as one of the premier provider of technical pumping services for the deep high pressure wells in Western Oklahoma and in the Woodford shale. This position allowed us to develop our relationship with Marathon that led to the EXCAPE Completion Process License.

To increase our efficiency in the Mid-Con, we have closed unprofitable locations, move crews to basins and continue to reduce cost. Revenues from the Rocky Mountain regions of 2.3 million were down 84% for the quarter year-over-year and 72% sequentially. Our activity levels bottomed in the Rocky's in May and we've seen improvements in June and July.

Activity in the Bakken oil shale play in North Dakota has improved and we are continuing to expand our presence in the active oil areas, while many competitors have exited this region. Our new Williston cement bulk plant is operational and we've began servicing new and existing customers with cement services in this region from our Williston and Rock Springs bulk plant. We reduced our headcounts significantly in the Rocky to help improve profitability.

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

Tom Stoelk

Thanks Dave. As Dave mentioned revenues were $90.5 million for the second quarter 2009 which was a decrease of 24.4% as compared to the same period last year and a 26% sequential decline. Revenues from our technical pumping services which include stimulation, nitrogen and cementing accounted for 85% or $77.1 million of our total revenues. Down hole surveying, completion services and fluid logistics were responsible for 6%, 4% and 5% of revenues respectively.

Revenues by operating region in the second quarter were $28 million in Appalachia, $12.1 million in the Southeast region, $27.1 million in Southwest region, $21 million in the Mid-Continent region and $2.3 million in the Rocky Mountain region. Revenues during the second quarter of 2009 were impacted by continued rapid decline in drilling activity in each of our operating regions. The decline in overall industry demand cause an increase in competition among service companies competing for a smaller universal work. As a result sales discounts increased significantly year-over-year.

As Dave previously mentioned, company wide discounts increased 14.3% during the second quarter of 2009 compared to the second quarter of 2008. All operating regions experienced sequential quarterly increases and discounts and on a company wide base such discounts increased 7.3% sequentially compared to the March 2009 quarter.

Cost of revenues increased 11% or $10.2 million for the three months ended June 30th, 2009, compared to the three months ended June 30th, 2008. As a percentage of net revenue, cost of revenues increased to 113.4% for the second quarter of 2009 from 77.2% for the second quarter of 2008 due primarily increase sales discounts on materials, lower labor utilization due to the drop in drilling activity and higher depreciation expenses.

Discounts in pricing fell faster than the materials and the personnel reduction which compressed our margins. As a percentage of net revenues, material costs, labor expenses and depreciation increased in the second quarter of 2009, compared to the second quarter of 2008 by 11.8%, 8% and 11.7%, respectively.

The year-over-year increase in material costs as a percentage of net revenues was due to higher sales discounts on materials. Labor expenses as a percentage of revenues increased 8% to 27.6% in the second quarter of 2009, compared to the second quarter of 2008, because of lower utilization due to rapidly declining service demand.

Depreciation increased 11.7% in the second quarter of 2009 as compared to the second quarter of 2008 due to additional assets acquired through the Diamondback asset acquisition as well as an overall drop in equipment utilization due to the drop in demand for our services. Additionally, the higher level of sales discounts during the second quarter of 2009 compared to the second quarter of 2008 impacts the comparability of year-over-year increases for materials, labor and depreciation.

SG&A expenses increased 30.6% or $3.3 million for the second quarter of 2009 compared to the second quarter of 2008. As a percentage of revenue SG&A increased 6.5% to 15.4% for the second quarter of 2009 from 8.9% in the second quarter of 2008.

During the fourth quarter of 2008, we completed the Diamondback acquisition, which increased SG&A expenses in the second quarter by approximately $3.6 million compared to the second quarter of 2008. Its worth noting that our cost reduction steps decreased SG&A that is reflected in our second quarter results as we realize the sequential decrease of 2.1 million of SG&A or a 13.1% drop from the 16.1 million reported in the previous quarter ended March 2009.

In the second quarter of 2009, we recorded a non-cash, non-recurring charge totaling $33.2 million for the impairment goodwill associated with our technical services of fluid logistic business segments. We determined that a triggering event had occurred which under GAAP requires us to perform interim test or assessment of our goodwill based on the assessment results we recorded a non-cash impairment charge net of tax increased our current net loss by $20.2 million or $0.87 per diluted share during the quarter.

Operating loss was $26.1 million before the goodwill impairment and $59.2 million after the goodwill impairment charge for the second quarter of 2009 compared to operating income of $16.6 million for the second quarter of 2008. Approximately 78% of the total operating losses before the goodwill impairment charge for the second quarter of 2009 were generated by the Mid-Continent, Southwest or Rocky Mountain regions which were the most impacted by declining activity levels in pricing erosion.

As discussed earlier, lower activity levels, higher sales discounts, and lower labor utilization were the primary contributors to the operating loss. Adjusted EBITDA decreased $33.9 million in the second quarter of 2009 compare to the second quarter of 2008, the negative 7.3 million net income before the goodwill impairment charge decreased 27.3 million to a net loss of 17.7 million in the second quarter of 2009 as compared to the second quarter of 2008 due to decreased activity levels as previously described.

As, Dave mentioned, we have reduced our headcount aggressively to align our cost structure with current and expected activity levels and to help improve profitability in response of this down cycle and current competitive environment. To further reduced cost, we have closed four unprofitable service centers initiated the 10% to 15% reduction in executive salaries which was effective April 15th. This continued our employer match in 401(k) plan which was effective May 1st, amended our healthcare and other employee insurance programs which became effective June 1st and are cutting additional lower head costs.

We've also initiated a Furlough program effectively July 1st, which consists of unpaid leave for our workforce depending on which program you are in, its either off one out of every eight weeks or one out of every ten weeks. In addition, we are focusing our efforts on reducing material, repair and maintenance and fuel cost and have cut nearly all discretionary spending. We are asking for and receiving price concessions from our vendors and we'll continue to focus on maintaining the performance of our relatively new fleet while seeking ways to improve profitability and productivity.

We believe that the actions we have taken will result in significant cost savings in the near term and had all our cost saving initiatives has been full effect for the second quarter, we believe Superior with a pushed adjusted EBITDA to the positive territories. In addition, we expect to implement other cost saving measures during the remainder of 2009 including further reductions in our cost structure.

Turning to the balance sheet, our working capital increased $7.6 million to $95.4 million at June 30th, 2009 comparing to the yearend amounts of December 31st, 2008. The changes of working capital were primarily due to $21.3 million decrease in accounts payable that resulted from decreased activity levels. In addition the income tax receivable increased $18.5 million for tax refunds, expected to be realized through the carryback of operating losses generated in 2009.

The increase was partially offset by a decrease in trade account receivables of $37.2 million due to collections of our receivables. On a sequential basis, working capital decreased $7.9 million from $103 million, March 31st, 2009 to $95.4 million at June 30th, 2009. Trade accounts receivable, sequentially declined approximately $30.6 million from $96.5 million at the end of the first quarter.

Our inventory levels were relatively flat sequentially from the first quarter to second quarter. We've focused on reducing inventory levels and have positive results with chemicals and cement, each down about 20% sequentially, these declines were offset by increased sand inventories necessary for the increased shale work which requires larger amounts of sand for job and for the resin coating process for the sand used in our deeper basin work.

Total long-term debt at the end of June was approximately $229.6 million with $149 million outstanding on our $250 million syndicated credit facility. Total long-term debt less cash at June 30th, was $221.5 million. Currently we have approximately $141 million outstanding leaving us with approximately $102 million of availability under our credit facility after accounting for our letters of credit.

Our facility matures in March 2013 and we are currently in compliance with our debt covenants. While we fully expect to see improvement in our adjusted EBITDA and for adjusted EBITDA maintained as current levels, we project we would violate the covenants in our credit agreement evidencing our credit facility as of the end of the third quarter of 2009.

In order to address this situation, we have begun discussions with our lenders and our credit facility to amend the facility so that covenants are more in line with our current operating results. For the second quarter of 2009, we made capital expenditures of approximately $8.5 million. We plan to continue to focus on minimizing our discretionary spending, limiting our capital expenditures and managing working capital of maximized liquidity.

At this point, I'd like to turn the call back over to Dave, for some additional closing comments.

Dave Wallace

Thanks, Tom. We built Superior Well Services into the fifth largest pressure pumper in the US and even in this downturn we are actively working to improve our competitive position. Creating our three-basin specific technical sales teams has positioned us as one of the leading high tech players in the most active basin where our expertise is needed to maximize recoveries and returns.

We believe that our strengths of reliable equipment, high service quality and technical expertise and the key unconventional shale play combine to help reduce risk and maximize returns. For our customers, as we consistently deliver result based on demonstrated performance and found technical expertise.

Our management team is experienced and has successfully weathered several down cycles in the course of our careers. Although we have made the difficult decisions required to improve profitability, we are not sacrificing service quality or innovation. Our plan to endure this down cycle and emerge as a strong competitor remains the same.

We will aggressively cut cost at all levels of the organization to align our cost structure with the realities of the current market environment. Provide the highest levels of service quality and result to our diverse base of strong customers and acquire new customers on the basis of competitively priced high quality service, maintain our disciplined approach to managing liquidity and cash flow, strengthen our presence in the markets where we have a clear competitive advantage in high tech completion in the plays with the most durable economics.

Prioritized capital investment to maintain the performance of our relatively new fleet, ensuring high levels of service quality, safety and reliability, continue to innovate and build on our technical logical advantages and maintain and strengthen our technical sales teams.

Last year we established three basin specific shale play, technical sales teams to position us as the market leader for high tech and super high tech work in the most profitable year as resource play. These teams have been very successful in pushing our high tech fluids into the horizontal shale plays, building relationships with new customers, maintaining relationships with existing customers, and securing work in plays offerings long-term potential for activity and growth. By working together these teams are also instrumental and deploying our technologies, techniques in best practices across all of our regions and customers.

As a result, we believe Superior Well Services is well positioned for when the market eventually turns back up. Our crews have build a quality reputation, one job at a time and I would like to thank all of our employees for their hard work, continued dedication and professionalism during this difficult quarter.

I would again like to mention that our primary focus is to return to profitability and generate positive cash flow. Ours is a cyclical business and we'll continue to make adjustments to position our people and assets not only for the downturn but also with an eye towards making the most of the eventual recovery. Found it challenging to predict the movement on extent of this cycle, demand for our services increased modestly in the month of June as compared to May and revenues for the month of July were higher than June.

As Tom mentioned, had all of our cost saving initiatives been in full effect for the second quarter, we believe Superior would have generated positive adjusted EBITDA in the second quarter.

This concludes our prepared remarks. I will now turn the call over to [Shumica] to help coordinate our question and answer session.

Question-and-Answer Session

Operator

(Operator Instructions). You have a question from line of Joe Hill of Tudor, Pickering, Holt. Please proceed.

Joe Hill - Tudor, Pickering, Holt & Company

It sounded like you made some good progress in the quarter on the cost savings plan. You could have been EBITDA positive if everything has been kind of set in place at the beginning of the quarter. I would imagine that the third quarter probably looks EBITDA positive in and out itself, but given the improvements you are seeing in the market, maybe in terms utilization plus the cost saved. Do you guys think you might have a shot of being EBIT positive in the third quarter?

Dave Wallace

It still lot of pricing pressure out there Joe, and as we continue to see pricing improve and utilization improve, it's going to take a little time to work through that, so I think we are encouraged by the progress that it's making. But we are not optimistic that third quarter is going to make that kind of recovery.

Joe Hill - Tudor, Pickering, Holt & Company

What was your average utilization for [Stem] in the second quarter versus your exit rate and then kind of what the rate is today?

Dave Wallace

Part of that is based on, we continue to downsize crews, so when we look at our utilization for the quarter it was roughly 40% to 45% which would have been down first quarter but again based on the downsizing a lot of crews would have been not too far off from what we saw in first quarter.

We felt like we are very well positioned, we know our utilization a little soft in second quarter but again we've maintained some really high quality crews and we can see the utilization picking up so we felt like we are in a strong position to ramp-up with that.

Joe Hill - Tudor, Pickering, Holt & Company

Can you give me a sense of the order of magnitude of improvement that you are seeing today relative to your second quarter average?

Dave Wallace

I think, it's still little early to tell that. July was up kind of nice little sequential bump as far as activity over June and right our outlook for August appears to be potentially little stronger.

Joe Hill - Tudor, Pickering, Holt & Company

Finally, could we get some help on the tax rate guidance, the CapEx guidance and maybe SG&A for the third quarter?

Tom Stoelk

Effective tax rate, probably looking at about 38%, the CapEx we are trying to manage as much discretionary spending as we can probably another four or five million in the third quarter. With the impact of the Furlough program and the reductions that we made, most of the reduction you saw on SG&A quarter-over-quarter was about 2.1 million bucks or dollars rather than it was mostly labor looking probably at with Furlough and the full quarter impact probably about $1.5 million on the labor side.

Operator

Your next question comes from the line of Victor Marchon of RBC Capital Markets. Please proceed.

Victor Marchon - RBC Capital Markets

Dave, just on your comment about seen some competitors price jobs below cost. Was that specific to the Haynesville or is that more broad based amongst other markets as well?

Dave Wallace

I would say it was lot of the Western markets when you look at Mid-Con, Texas Permian, again there was pretty dramatic rig count drops in those area and there is lot of capacity in those areas. The initial move was trying to keep the crews busy, no matter what just keep walking the cost down with it. In those areas basically, they got to the point that they were pricing below cost in those areas, so not only Haynesville but also some of the Western regions as well.

Victor Marchon - RBC Capital Markets

Are you still seeing that today or is it similar order of magnitude, has that going little bit better?

Dave Wallace

I would say the pricing in those basins have started stabilizing and part of it is due to a little bit of increase in activities, specially the oily areas. There is still some one off that are still below cost but its starting to balance out a little better.

Victor Marchon - RBC Capital Markets

From the improvement activity that you are seeing in June and July and seemingly what you are saying at the beginning of August, I suggest that from the pricing standpoint things should be stabling at around here, given where activity direction is going?

Dave Wallace

That's what we hope. Initial indications are is that it's certainly at the bottom and maybe flattening out.

Victor Marchon - RBC Capital Markets

And if I could just on the guidance on the DD&A side going forward, Tom, anything you can give us there?

Tom Stoelk

I take the run rate that you saw in the second quarter and I wouldn't push it much more than maybe 100,000, 200,000 each of the remaining quarters. You are not too far off, I don't think doing that.

Victor Marchon - RBC Capital Markets

I missed the CapEx number that you gave for the third quarter.

Dave Wallace

Approximately $5 million, I think is what I've said Victor.

Operator

You have a question from the line of Jack Aydin of Keybanc Capital Markets. Please proceed.

Jack Aydin - Keybanc Capital Markets

If you look at the second quarter what was the lowest month in terms of revenue and utilization?

Dave Wallace

It may would have been the bottom of our activity as far the lowest revenue utilization month and part of that would be again, seasonality is still in affect in Appalachia and that's kind of sand pricing is getting too soft and some of these basins that we're just going to pass on some of the bid, but May is what we see is kind of the bottom of the trough.

Jack Aydin - Keybanc Capital Markets

What kind of utilization you need to basically to get to a breakeven on average?

Dave Wallace

We are thinking that when we started getting up close to 60% that basically pricing has improved, utilizations improved and we should be getting close to where we need to be to start making some money.

Jack Aydin - Keybanc Capital Markets

This is a comment, we would have visiting a lot of E&P companies, and basically all they were telling us that the major three or four companies we're trying to discount so severely that they want the smaller service companies out of business and that's why they were keeping the pressure. Is that the impression you getting and how you really dealing with it?

Dave Wallace

We're definitely seeing some pretty aggressive pricing in some of these markets and the big three have been trying to pickup market share. One, they have a more diversified product mix that may help them, but it really gets down to pricing and service quality. When we see our cost structure, we still think that we have a lower cost structure than the big guys and our service quality in basins is better, so combination of continuing to modify, oversea our cost structure and maintaining that high service quality will start winning in the long run.

We are starting to win projects now just because we are seeing some people that they may have bid low but they couldn't perform and now they are kicking those guys off the projects and bringing people like us and because we have proven that we have such really high service quality in areas.

Jack Aydin - Keybanc Capital Markets

On a G&A run rate, or we should look at this G&A going forward like the 13 million or 14 million down little bit more about another million too or this is a run rate that we should look at going forward?

Tom Stoelk

No, I think Jack, what I was trying to answer on the first quarter was, we are expecting a sequential decline in labor expense in G&A and I think I said a 1.5 million and that's about where I would target. Most of the decline that we've made, we've cut a lot of discretionary spending in the SG&A area during the second quarter, so the bulk of that is going to be labor driven and so that's going to be certainly the majority of what we expect the sequential decline to be. I think its going to reduce.

Jack Aydin - Keybanc Capital Markets

If you look at the year end, what kind of exit rate G&A would be?

Dave Wallace

We really don't provide a guidance on that but I think you will basically see a trend down into the $4 million on a monthly basis and then it's just at some point you may have to cut again. We start to see an up-tick a little bit in activity certainly in July and June for us. Hopefully it stabilize, but I would guess about $4 million a month after we get out of the fourth quarter or third quarter rather.

Operator

Your next question comes from the line of [Eric Pachman] of Morgan Stanley. Please proceed.

Eric Pachman - Morgan Stanley

A couple of a clarifying questions on the cost side or cost cutting efforts that you guys are going through right now. On the labor cost, you gave the number of 6 million per month. I seem to remember that being 4 million last quarter is that gone up a little bit or is this kind of including the healthcare and some of other things?

Dave Wallace

No, its definitely going up because the total labor for us in Q1 was about 44.9 million and in Q2 it was about 35.6 million, was about 11.3 million in change and about 2 million of that was on the Edmond side and about 9.3 million of that was on the cost of goods sold side. It's definitely increased.

Eric Pachman - Morgan Stanley

On those numbers it sounds like you probably have another 7 million or 8 million to go in 3Q to get the total 18 million, right?

Tom Stoelk

I think that seven is maybe on the high side, but I think it's probably over five, somewhere between five, six, six and a half, something like that but seven might be a little high. You're you right, there is more to go.

Eric Pachman - Morgan Stanley

On the non-labor cash cost of sales, going from 1Q to 2Q, it looks like as a percent of revenues it crept up a little bit, looking forward do you see any kind of cost saves on the materials side that can bring you back down to 1Q levels as a percentage of revenues?

Tom Stoelk

What we try to communicate, I think during the dialogue of the script if you will was the fact that that most of the impact when you look at materials as a percentage of net revenues was really driven by the discounting. The discounting went up sequentially about 7.3%, so the amount that we were able to recover out of those gross revenues was obviously less.

Material costs were on a gross revenue type basis, fairly flat. I do think you'll see some improvement there, if we get discounts in pricing that behave a little bit, it's probably a slow climb, probably maybe 1%, 2% kind of a net neighborhood as far as a reduction as a percentage of net revenues.

Eric Pachman - Morgan Stanley

One last question, on the industry, Dave you are seeing equipments is three to five years old, you kind to talking of the Haynesville, and some of the other higher intensity shale plays. Is their a certain ages of the equipment where customers just won't take the capacity anymore or they are getting up to around eight to 10 years, just not even find to work anymore?

Dave Wallace

We're seeing anything that's probably six years and older horsepower-wise would have had the older model engines and pumps on the backend and it's not as durable for working in some of those basins. A lot of that stuff is what we expect the competition to stack out in their excess yards or potentially move abroad. It's going to take a lot of the older fleet of projects like that.

The other thing about like Haynesville projects is it's a lot higher pressure than even like the Barnett and Woodford and some of those areas. Some of those areas were maybe used 20,000 horsepower to stimulate the well, you are going to look at a trading pressure that's probably double in the Haynesville, so going to be looking that to achieve the same rate. You're going to be looking at probably 40,000 to 50,000 horsepower for job just to stimulate those wells.

The Haynesville is a good example of, you may have several crews running but the horsepower per crew is probably going to be double of what we have seen in some of the other basins. Lot of that excess horsepower just be used and needed on these higher pressure jobs.

Operator

Your next question comes from the line of Waqar Syed of Tristone. Please proceed.

Waqar Syed - Tristone Capital

I have a couple of questions. First on the CapEx, you mentioned that it's about $5 million for Q3. Is that kind of a maintenance level CapEx and if you forecast in the future, should be consider $5 million to be the minimum level that you can spend in a quarter?

Dave Wallace

Actually of that $5 million, its probably going to be two to three new equipment that was ordered in 2008 that hasn't been delivered yet but we have some items coming in, in third quarter and then the run rate on maintenance CapEx probably going to be 2 million or 3 million bucks a quarter, something like that. Again depending on some of these jobs, they are a little more intensive so our goal at this point is not to rob parts of existing units but to keep all the units functional. We got our newer fleet and therefore we want to keep that fleet operational because we see that activity in our opinion has turned the corner a little bit, we want to have that equipment ready to handle the extra activity coming up.

Waqar Syed - Tristone Capital

You mentioned that June was ahead of May in terms of revenues and July was ahead of June. When we compared that to April, could you say how June, July is taking up with the month of April?

Dave Wallace

June and July are below April but kind of approaching April's levels. When you look at the quarter, April would be probably the high month coming in and as Dave had answered to one of his questions, the large activity of client for us actually in May was coming out of the frost in Northern Appalachian and in some areas and then picked up in June and then picked up again in July, but they would be slightly lower than the April levels.

Waqar Syed - Tristone Capital

What was the kind of magnitude decline in revenues between April and May?

Dave Wallace

About 9 million.

Operator

You have a question from the line of (inaudible). Please proceed.

Unidentified Analyst

Question regarding the Clean Water Act, does it pose a threat and if so what impact does it have for Superior?

Dave Wallace

It is definitely something that is being reviewed by the Federal Government and something that we continue to monitor. We've actually been dealing with this in certain states, Alabama has adopted for quite a few years. We've been in Alabama since 2002. To get approved in Alabama we had to have Green Fluid that were pretty approved to meet the US Federal Drinking Standard. We see it as just part of doing business.

Tom Stoelk

I think also just another comment with that is, we are joining with others in the industry just to make sure that our legislators are informed about what the actual, about the things like that, lot of the cementing and things like that is actually protect ground water, stuff like that. Just trying to the extent we can join with others in the industry to make sure at least that individuals making those decision or as well educated on the matters as they can be.

Dave Wallace

We think we're also ahead of learning curve for some of other smaller competitors. We have worked in states already where that's been a requirement, so, we got our fluids pre-approved and now that they are certified to work in these other basins as well.

Unidentified Analyst

Is there a threat of having additional cost that cannot to passed on, because I have read something, where they want to make for each well has to have an additional $100,000 for the project just where they contested and know that the fluids not hurting anything or give away the secrets that you all have of the fluid. Can they pass on that cost?

Dave Wallace

Looking at the example of the Alabama, that we gave earlier, that's what we did upfront, we've got all our fluids pre-tested, pre-certified then we could use them on treating those wells. When we designed to do a job in Alabama, we just gave a list and the quantity that the materials that we're going to use on those wells again and they were already pre-certified. We are expecting probably a similar process at this point in some of the other states. We think there could be some upfront cost but probably potentially many more after that.

Operator

There are no further questions at this time. I would like to turn the call back over to management for closing remarks.

Dave Wallace

I appreciate everybody being on the call today and we look forward to talking to you at the end of third quarter. Thank you.

Operator

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

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Source: Superior Well Services, Inc. Q2 2009 Earnings Call Transcript
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