Cameron International Corporation Q3 2009 Earnings Call Transcript

Nov. 3.09 | About: Cameron International (CAM)

Cameron International Corporation (NYSE:CAM)

Q3 2009 Earnings Call

November 3, 2009 8:30 am ET

Executives

Scott Amann – Vice President Investor Relations

Jack Moore – President and Chief Executive Officer

Chuck Sledge – Senior Vice President and Chief Financial Officer

Analysts

James Carndell – Barclays Capital

Bill Herbert – Simmons & Company

Robin Shoemaker – Citigroup

Jeff Tillery – Tudor, Pickering & Holt

Dan Boyd – Goldman Sachs

Geoff Kieburtz – Weeden & Co.

[Roger Reid] – Natixis Bleichroeder

Mike Urban – Deutsche Bank

Stephen Gengaro – Jeffries & Co.

Joe Gibney – Capital One Southcoast

Brian Uhlmer – Pritchard Capital Partners

[David Griffiths – Scopia Capital]

Brad Handler – Credit Suisse

Operator

Welcome to the Cameron Third Quarter Earnings Release. (Operator instructions) It is now my pleasure to introduce your host, Mr. Scott Amann Vice President of Investor Relations for Cameron.

Scott Amann

This morning you'll hear from Jack Moore President and Chief Executive Officer of Cameron, and Chuck Sledge Senior Vice President and Chief Financial Officer. Jack and Chuck will offer some commentary on the results for the quarter and we'll then take time to field your questions.

In accordance with the Safe Harbor provisions of the securities laws, we caution you some of the statements made on this call may be forward-looking in nature and as such are subject to various factors not under the control of the company. For a more complete description of these factors and the related risks and uncertainties, please refer to Cameron's annual report on Form 10-K, the company's most recent Form 10-Q and the associated news release.

With that I'll turn things over to Jack.

Jack Moore

Q3 earnings for Cameron were $0.56 a share which included $0.02 for restructuring costs. Revenues for the quarter were just over $1.2 billion, slightly below last quarter and 18% below the prior year quarter primarily due to short cycle businesses. The most significant story for Cameron in Q3 is bookings. Each of our three operating groups reported sequential bookings growth in Q3. In fact, 8 of our 11 business units realized increased sequential order flows in the quarter.

I'm pleased with all of our business units and their ability to focus on markets and customers in this environment. Maintaining that focus while addressing costs including downsizing operations is a real testament to the quality of the people on our team.

Total bookings for the quarter finished at over 1.3 billion an increase of 440 million from Q2 which resulted in an ending backlog of over 5.1 billion which is an increase of 100 million sequentially. Our drilling and production systems group signed a multiyear frame agreement with Petrobras. As a part of this agreement, we booked the first 111 trees or about 80% of the total package in the third quarter. We expect the remainder of the order over the next 12 to 24 months.

We also increased orders in our surface systems and Petroco, Cameron's process systems business as well. Petroco booked its largest order ever with the award of a project for multi-faced pumping systems offshore Mexico. This project is directed at boosting flow rates of crude production in existing fields. It could be just the first of several more to come in the future.

I have no doubt that when NATCO is combined with this business that many more opportunities like this one will be developed for both onshore, offshore, and subsidy applications. While on the top of NATCO, NATCO's shareholders are scheduled to approve the transaction at a special meeting on November 18. Once this is confirmed we hope to complete the transaction as soon as possible, perhaps the same day.

As I've said before we're very excited about adding the people, technologies, and overall capabilities of NATCO, and together with Cameron we'll have the combined capability to offer more advanced technology and global reach to meet the present and future needs of our customers.

Another pleasant surprise was that our surface system orders grew by 30% sequentially in Q3. Results from a lot of focus that we have placed with our U.S. shale gas initiatives in both the Haynesville and the Marcelles are paying off plus we've seen some decent recovery in both the Rockies as well as project orders in Europe and Africa.

Our drilling orders were essentially flat with Q2 of '09. We did however book one stack in the quarter for Sevan, had no cancellations, and our aftermarket bookings continue to improve over sequential quarters.

Our value and measurement group also saw sequential bookings in Q3 versus Q2 driven by a 60% increase in our engineered value business. This is due to the receipt of several large project awards in both China and Russia that we have been tracking for most of the year.

Process values also saw its best bookings quarter for the year in Q3 with a big shift to international orders. This is where we secured a large order for [Gastrom]. These guys have been very successful with expanding their market penetration and we will see more success in the future. We've also realized some additional benefit in our process aftermarket orders from the integration of a recent acquisition in Australia.

The biggest change but with the smallest number was in our distributed value business. Bookings improved by 10%. The main fact here is that they improved versus Q1 and Q2. This positive turn is the result of a lot of hard work on the part of this team to go out and expand their markets.

Compression orders grew sequentially by 18 million in Q3. This was lead by our centrifugal business where we booked a substantial project in India for 11 centrifugal gas compressors for various ONGC facilities. I've said this on a number of occasions, but our compression team continues to reinvent themselves in this very limited market environment. In years past, having total bookings of 370 million through three quarters would have been a good year. Today in this market this number is exception, though I know that the folks are running this business are still not satisfied.

Chuck will walk you through the margin story in a few minutes but I would note that we continue to benefit from a combination of solid execution and cost focus. In overall EBITDA margins for Cameron for the quarter came in at 18.5% and like last quarter our drilling Subsea, engineered values and process values led the way.

But let me walk you through our outlook for the business before I turn it over to Chuck. Our short cycle business is predominantly focused on North America. We've definitely seen a bottom with several of our business units, specific surface and distributed. Recent activities suggest the shale gas place will provide new growth opportunities for those focused in this market. And as I stated earlier, Cameron's initiatives in this area over the past year are now bearing results.

But with lots of concern still surrounding this sustainable U.S. economy recovery and its impact on demand for gas, and thereby its price, you have to somewhat be concerned about how fragile the recovery will be. As for as other parts of the world, we expect to see near-term short cycle market opportunities in Europe and in the Middle East but expect Asia to continue to be slow.

Several large pipeline value orders for the quarter were finally realized but we have more on the radar that have yet to be awarded. As we have said in previous quarters, none of these projects have been cancelled just deferred. We expect [Gordon and Curl] to come through in the new future and we expect to see awards for projects in Indonesia and populated New Guinea as well.

We also see the benefit of global stimulus activities supporting demand for our process value markets. Airports and gas processing and receiving terminals have been the target of these recent awards. And as I mentioned earlier, our compression business is seeing the benefit of expanding gas processing infrastructure in India as well as China.

As for deep water, we continue to see timing of major projects extended. However, so much is in the Q that we seem to keep adding more projects to the list with relatively few falling off and none as a result of cancellations. We believe it will take time for customers to develop conviction about oil prices. One of the foundations for that conviction will be demand and recovery and we feel that is getting closer.

Will it be 6, 18 months before change in attitude occurs? It will not be the same for everyone but the fact is all of our major customers, both international oil companies and national oil companies have a lot of prospects that will require Subsea hardware.

Our current thinking is that in Q4 Petrobras should award Lot 2 of their frame agreement trees and we would expect that Chevron will award their Jacks St. Malo project for the Gulf of Mexico. Brazil will continue to play a major role across most all of Cameron's business units. Is not only a subsidy story for Cameron, drilling, surface processing, values and compression will have opportunities to service both Petrobras, the international oil companies, and local contractors as this market expands.

Our total year guidance reflects some of the uncertainty with respect to today's price environment. Meanwhile reductions in supply chain costs are running their course and some customers understand this. However, we continue to experience pricing pressure from competitors. Given all of these dynamics, I know that our 16,000 plus employees at Cameron prepared for these challenges by focusing on their costs, their cycles, and their customers.

Now we'll turn it over to Chuck Sledge to discuss the financials.

Chuck Sledge

Cameron continues to execute well on delivering our backlog and on our cost control efforts in this down cycle. Operationally we delivered $0.58 per share versus our original expectation of $0.50 to $0.55. The good news is it's a repeat of the story of the second quarter margins.

As Jack mentioned, we've been able to reduce our costs faster than the pricing pressures in the market has affected us. We thought we would see some negative pressure on margins this quarter and that just didn't materialize to the extent we thought it would. We do expect to see margin slippage but the magnitude and timing of its deterioration is somewhat uncertain.

As Jack mentioned, we experienced an 18% decline in revenue sequentially driven primarily by our shorter cycle businesses, particularly our surface and distributive value businesses. As you saw in our release we did incur $0.02 of restructuring costs and NATCO deal costs during the quarter. You should expect to continue to see us restructuring our business during the fourth quarter to ensure our cost structure is in line with current market conditions. Our tax rate for the quarter continued to trend down as we make additional progress in maximizing our international tax saving opportunities.

Cash flow from operations was $184 million year-to-date which is behind last year's level for two reasons. First, we built inventory in our project-related businesses to support future deliveries. Secondly, we've experienced a reduction in cash advances as a result of the delay in large project awards the industry has experienced this year.

The good news is that the project-related inventory build should result in higher Subsea project-related revenues in 2010. Additionally, as the build in inventory is moderated, we should continue to see improved cash flow generation in the fourth quarter.

We continue to invest in our business to ensure we maintain our position as a low-cost producer in the market we participate in. As a result, our CapEx forecast for the year is now $240 million. As a reminder, we did not buy back any stock during the quarter as we're restricted from doing so until NATCO closes. Once we get this behind us, our share buy back will return to the menu as potential use of our cash.

Turning to backlog for a moment, we did not have many cancellations during the quarter; in fact, only $16 million. We currently have $178 million of backlog associated with drilling projects that do not have ultimate operator contracts. Now this is actually down from $337 million last quarter, so the risk associated with this part of the backlog continues to decrease.

Our guidance for the fourth quarter is $0.49 to $0.53 per share which translates into full year guidance of 226 to 230 up from the previous guidance of 215 to 225 and, obviously, these are excluding any unusual charges. Our D&A is currently tracking at $145 million and the share count embedded in our guidance is 222 million shares.

Scott, let's open it up for questions.

Scott Amann - Vice President Investor Relations

Operator, let's go ahead with Q&A please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Carndell – Barclays Capital.

James Carndell - Barclays Capital

First question I have is on the Subsea area. Jack, if you look at the outlook for Subsea orders now, do you see the projects that you originally thought that might happen in late '09 or the first half '10 pushed out until much later as well so everything sort of moves to the right or is it just that the project that you thought would happen in '09 had been pushed out?

Jack Moore

Jim, if it would have been at the first of the year I would have said, based on what we saw at the beginning of '09, I would have said yes. We've seen projects move to the right. Nothing really surprises me where we're at today. We continue to see most every major project shift to the right given just the amount of uncertainty around the stability of price, and some of it's not just price, some of it's partners in politics.

So, really it's hard to say in this environment whether moving them to the right is a function of the current environment or just the state of big projects. We see all of them move to the right, more so now I guess in this environment than we have in the past. So, yes, we have far less projects in '09. I think if you look at the current Quest numbers they're predicting 400 trees for '09 plus or minus what happens with Petrobras here on the next lot. That's probably a lower number than we all thought it would be going into this year, but not surprising where we sit today.

James Carndell - Barclays Capital

Do you think that the awards that are taking place, Jack, are becoming more price competitive?

Jack Moore

I would say just based on some the feedback we've gotten a recent project in the North Sea would suggest that.

James Carndell - Barclays Capital

A couple of questions about just specific fields, where do you stand now on the next phase of block 31, do you think that will be an order during 2010? And how about – you mentioned the large tenders in Brazil. How about the pre-salt fields in Brazil?

Jack Moore

As far as block 31 the next phase, as I stated in the last call, we're working closing with BP, looking at the next developments in terms of how do we work with them to take cost out of these projects. I think given, again, their outlook on price being maybe a little less bullish than maybe they were a year ago, a year and half ago, my guess is that we may see something at the end of '10 but probably most likely it's a 2011 event. I think it just kind of depends on how their outlook over the next six months goes.

As far as the 40 pre-salt trees that are being tendered currently, that tender goes in next week, and its 12 trees for one field, 18 for another there's three bidders. My guess is it will be sometime in the first quarter, first half of '10 before we find out who wins those.

James Carndell - Barclays Capital

Do you think it'll be two winners?

Jack Moore

I'm sorry, 22 and 18. I'm sorry?

James Carndell - Barclays Capital

Do you think there'll be two winners?

Jack Moore

There could be. Probably, most likely I think there will be. However, there is an option for one of the three bidders to bid on all 40 trees if they so elect to do so.

James Carndell - Barclays Capital

Last thing, Jack, you I think characterized the Subsea tree outlook that there's a lot of projects that are entering the backlog and not many falling out. If you look at Quest's forecasts from 2010 to 2013, they have us up in the 800, 900 plus area for trees of 2012, 2013. I mean do you see things that rosy that there's enough projects that could make the number of Subsea tree orders get that high by that time period?

Jack Moore

Jim, I think it really is going to get back to the conviction that these operators have towards price. The potential is there. If you look at the list we track on our global tracking system, it's just page after page. And it's not just big projects it's a lot of little twos and threes all over the world that could be very rewarding at certain price economics.

So my guess is it won't be 800 trees in the next five years, but it's going to be a lot bigger number than it is today. And the rigs coming on stream over the next two to five years, the deep water rigs that will be entering our marketplace are definitely going to support the capability to do a lot more than what we're seeing today.

Operator

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

Bill Herbert - Simmons & Company

I think you've already answered my question but I'll ask it anyway by your response with regard to projects slipping to the right. But the question is with regard to DPS revenues for 2010 at this stage hazarding a guess, do you think that revenues are flattish or down year-over-year?

Jack Moore

Bill, we haven't gone through our budgeting process so I'm really a little hesitant to answer that question. But I will tell you in the project-related Subsea businesses those revenues will be up quite a bit and that will become a more prominent part of the DPS mix in 2010.

Bill Herbert - Simmons & Company

Drilling I would suspect would be likely lower surface I wouldn't imagine it would be lower, any thoughts on surface?

Chuck Sledge

It depends on the recovery of some of the short cycle businesses. We can turn backlog into revenue a lot quicker in surface than we can some of the major projects.

Bill Herbert - Simmons & Company

Okay. Well, it doesn't sound that bad then. Second line of inquiry, with regard to V&M margins, Chuck, pretty strong showing in the third quarter. What was the driver of that, was it mix or what?

Chuck Sledge

It was that and the what as well. It was mix and then also it's that spot in the cycle where we got a lot out of our supply chain on stuff that was priced a year ago in the engineered world.

Bill Herbert - Simmons & Company

So counting on the latter going forward, probably a bit more tenuous? And how should we think about margins going forward?

Chuck Sledge

I think probably in the V&M it's a safe bet that they're ultimately going to trend downward. You've seen what's happened in the backlogs and so the order of magnitude we're not done with our budgeting process, Bill, but my gut tells me they're going to come down.

Operator

Your next question comes from Robin Shoemaker – Citigroup.

Robin Shoemaker - Citigroup

I wanted to ask about you mentioned in your press release the completion of the Romanian facility expansion in terms of your surface equipment plant there. So I know there was some strategic kind of reorganization going on there in terms of how you address the supply chain issue with this plant. So if we think about the next couple of years if there is a strong recovery in the surface equipment market, how are you positioned differently for that versus where you've been?

Jack Moore

Robin, this is Jack. Good question. We've had the luxury of being in Romania now for close to five years operating a facility we made through an acquisition. And what we have seen is its access to supply chain, its access to our markets relative to ship, rail or road or truck transportation is exceptional.

So we feel extremely good about their capability to meet global market to requirements from that location.

From the standpoint of the facility itself, it is absolutely our most state-of-the-art modern manufacturing facility we've ever built. It's absolutely amazing. And from our focus on investing in our business based on where we can drive our lowest cost without compromise to quality or delivery, this really is a poster child for that.

Robin Shoemaker – Citigroup

I just wanted to ask one question as to post the acquisition of NATCO. You'll still have a very strong balance sheet, liquidity very, I guess no net debt. So could you comment on beyond this acquisition, opportunities for further acquisitions in terms of willing sellers the ability to make any acquisition for cash as opposed to stock and how you assess that environment today?

Chuck Sledge

Robin a couple things. First of all, my gut tells me if you're a larger public company acquisition or even maybe a private equity you're going to want some stock just to ride the upside. Secondly, and you're still seeing valuation differences between buyers and sellers. And so you're going to have to be, in my view, be creative about how you solve that difference.

And you're able sometimes to find a way to skin the cat to make both parties feel comfortable that number one, they're not paying too much. Number two, they're not leaving too much on the table. So seeing more of a willingness to try to come up with creative structures that create win-wins, so I think over here the next 12 to 18 months on the smaller acquisitions you'll probably see a pickup in the pace.

Robin Shoemaker – Citigroup

On the smaller side.

Chuck Sledge

Yes.

Robin Shoemaker – Citigroup

Okay. Then if you resume your share buyback post this completion of the acquisition, what is your remaining kind of authorization there? What kind of magnitude of share repurchase authorization do you have or would you seek?

Chuck Sledge

Yes, I think we've got 6 million to 8 million shares, I can't remember the exact number, on the share repurchase program. But when we go through that we'll go to the board and get another authorization.

Operator

Your next question comes from Jeff Tillery – Tudor, Pickering & Holt.

Jeff Tillery – Tudor, Pickering & Holt

Jack, you discussed pricing on Subsea, could you just discuss pricing more broadly? Do you think it's bottomed in some of your shorter cycle businesses? And then for the question for Chuck is when do you think kind of the most acute pressure from the pricing discounts is felt, is that kind of Q1 of next year?

Jack Moore

On the pricing for I did mention the Subsea side of it and it's really project-to-project and I think related. And I will also say in some areas of our business in Subsea, we are not seeing as much price come into play as it is really more the confidence that the customers have in your ability to execute and perform. And I think that will continue to be the case on a lot of the major projects with a lot of the international oil companies especially.

On the shorter cycle businesses, it's really a mixed bag. It's geographically driven. Where we may have a lot of competitors in one geographic market, we'll see a lot more price pressure. And on the lower pressure related equipment, we'll see a lot of price pressure. But in the high pressure applications, our margins for our surface equipment, for instance, in the high pressure shale place is holding up fairly well.

I think again, customers want to make sure whoever they work with have the capabilities to execute on their work and it narrows the playing field down quite a bit. We've seen a lot of price pressure in our valve markets around the world. And here we have a little different set of dynamics relative to the competition. Not a whole lot of big household names. A lot of family-run type businesses. A lot of niche players.

So we tend to see a little more, I guess, challenges us sometimes to understand what the pricing philosophy is with some of these folks. But that's kind of been the case with these markets for a while. So we continue to I think wrestle with that.

Chuck Sledge

Jeff, as far as the margins and the bottoming of the margins, again, preference all by we haven't seen the rollup of our budget yet. But remind you that the first quarter's always traditionally within Cameron pretty weak compared to the fourth quarter. And then I'm not sure exactly how that'll play out this year. But absent any unexpected moves in pricing or cost, you'll probably see a bottom in margin sometime middle of next year.

Jeff Tillery – Tudor, Pickering & Holt

Jack, just with regard to timing of some of these Subsea projects, one of your competitors on a call last week seemed to indicate they felt the timing was firming on more of these projects. The way you've talked about it so far doesn't seem like you're quite there in seeing a timing firm. Would you agree with that statement? And then just how would you characterize overall orders for next year in Subsea? More back-end weighted than front-end at this point?

Jack Moore

I would say that we've never been very good at guessing the timing of the major projects. We've always been more optimistic in terms of when they would be awarded. So I don't see anything different in this environment that would tend to change it. Other than a lot of the projects, I would probably agree with maybe the consensus out there that a lot of these projects have been on hold and have been sitting for a while are going to start to roll out.

As I said, our list of projects in the Q is growing, it's not shrinking. And these projects are going to rollout I think sooner than later relative to the number of rigs that are coming on stream to support both the drilling campaigns and the completion campaigns associated with them. So probably a little mixed bag. But I would tend to still say that it's probably back half weighted in '10 and a much stronger '11, just given I think the environment we're in today.

Jeff Tillery – Tudor, Pickering & Holt

My last question so Q3 book to bill was greater than one for the first time in a while. If Jack & St. Malo hits, do you need any other large projects to hit in Q4 for you to think book to bill greater than one in Q4?

Jack Moore

Well, I would say that our Q4 is, and anyone's Q4 looking at the timing of any projects is going to be somewhat dependent on these big projects hitting. But if Jack St. Malo was to be awarded and Cameron was to win it, I think that would be good for our quarter bookings.

Chuck Sledge

Yes, that certainly would give us some breathing room on the book to bill.

Operator

Your next question comes from Dan Boyd – Goldman Sachs.

Dan Boyd – Goldman Sachs

I'd like to follow-up on valves, where not only were margins strong, but revenue was also strong sequentially. Given that orders are starting to pickup but you're also potentially fighting some decline maybe from prior orders and backlog slipping a little bit or pricing, but how should we think about the progression of revenue from here? As distributed valves start to come back, should we expect revenue to only go up from here?

Chuck sledge

No, we're currently forecasting, Dan, to be quite honest, relatively flat here for a few quarters.

Dan Boyd – Goldman Sachs

Then a potential uptick in the back half of the next year which could actually still keep revenue flat as to slightly up next year, is that correct?

Chuck Sledge

It all depends on what happens in the shorter cycle business and it's too early to call. We've not seen enough of an increase to probably get you there yet. But it all depends on what your forecast is for the back half of the year activity U.S. rig count.

Jack Moore

Dan, I think we clearly have seen a bottom with respect to our short cycle businesses. Just how strong we'll see in terms of it coming off that bottom is unknown. Keep in mind that a lot of our customers still have a lot of inventory they're working through. So as they work through those inventories and for some it'll be a longer period of time than others, we'll continue to see the bookings in those businesses slowly climb back. But it could be at least another couple of quarters we see any appreciable growth from where we are today.

Dan Boyd – Goldman Sachs

With flat revenues we look at margins, it's really then just the pricing impact rolling through that should impact from there. Is that just a couple hundred basis points from here, a potential downside?

Chuck Sledge

Could be, but depends on what happens to cost. I'll also point out Dan, you've not seen an engineered valve, the impact of the lower pricing on orders we've taken over the last 12 months. That has not yet hit the results.

Dan Boyd – Goldman Sachs

Optimistically speaking we could keep margins relatively flattish in V&M.

Chuck Sledge

No, they're going to trend down.

Jack Moore

I think mix with engineered valves is going to impact that to some degree.

Dan Boyd – Goldman Sachs

Okay, and then just lastly on the Petrobras order. I assume some of the related tools and equipment may have fallen into the fourth quarter. Can you give us an update of what you have booked in the third and what may have fallen into the fourth?

Jack Moore

That's a good point, and what we've booked in the third quarter was strictly the trees.

Chuck Sledge

Three hundred million.

Dan Boyd – Goldman Sachs

Okay, so we could see a hundred million or a little above that fall into the fourth then to help support orders?

Chuck Sledge

Yes

Operator

Your next question comes from Geoff Kieburtz – Weeden Group.

Geoff Kieburtz – Weeden & Company

With your comment that you think margins overall will sort of find a bottom in the middle of 2010, it seems to imply that you don't see a lot of long-term margin pressure on the longer cycle businesses. You talked about pricing pressures in the longer cycle businesses but am I right in thinking that's not so severe, otherwise you might expect a longer pressure on the margins?

Chuck Sledge

The one where we have seen pressure in longer cycles is engineered valves. So that's the one that really has seen the most pressure.

Geoff Kieburtz – Weeden & Company

And that's yet to be reflected in the numbers?

Chuck Sledge

That is correct.

Jack Moore

Keep in mind too, Geoff, yes we've seen some competitive pressure on margins relative to price. Don't underestimate the impact that we will get from the investments we made back into our manufacturing environment. And that's helped us a lot, that's help up rationalize some of our costs on these projects going forward. And our job is to keep as much of that as we can, but as we see margins come under pressure from the price standpoint, that is a wonderful position to be in if you've got a low cost position.

Geoff Kieburtz – Weeden & Company

So your comment about so far being able to cut costs ahead of pricing, you think you'll be able to largely, but not completely, continue to achieve that outcome?

Jack Moore

Well, we'll continue to push on it. But I still would agree with Chuck's comment that a lot of the projects we booked in the last 12 months have been at lower prices, and that's going to flow through our revenue here in the coming 12 months.

Geoff Kieburtz – Weeden & Company

You mentioned that you booked a stack in the quarter.

Jack Moore

We did. For those of you out there who do not believe that drilling equipment is still being ordered for deep water, it is. It's alive and well.

Geoff Kieburtz – Weeden & Company

My question was as you look at the rigs on order, do you have an approximate number of how many are – well, how many of the ones that you have a pretty high confidence being built haven't ordered stacks yet?

Jack Moore

Well I would say there's probably a small handful outside of the Petrobras stacks and really the near-term future for the deep water new builds is going to be Petrobras, and those that are going to be awarded those by Petrobras to be built in country. So those are the ones I think everyone is really focused on today.

Geoff Kieburtz – Weeden & Company

A bit of a technical question, to what degree do you expect NATCO's technology to be an asset in dealing with the CO2 issue in the pre-salt in Brazil?

Jack Moore

Well I think it's significant. When you look at the work their doing with Petrobras and have been doing on the [scenar-membrane] technology, which clearly is one of the most sufficient methods of removing CO2, it's clearly going to be a huge advantage once we're able to bring that into Cameron's capabilities whether it be local content, support, [marinization] ultimately. All those things are clearly going to be advantageous to the customers relative to having the combination of NATCO and Cameron. So it's a huge opportunity.

Geoff Kieburtz – Weeden & Co.

Has NATCO done anything in terms of being able to put that technology on the sea bed?

Jack Moore

The [scenar-membrane] technology, no.

Operator

Your next question comes from [Roger Reid] – Natixis Bleichroeder.

[Roger Reid] - Natixis Bleichroeder

Real quick, I guess maybe to understand some of what's going on in just the underlying business this year whether it's DPS, valves and measurement, etc. Aftermarket sales, I mean is that part of the mix that we're seeing help the margins out?

Jack Moore

No, I think it's primarily what we talked about earlier which is the ability to get cost out. That's really what's driving the margin.

[Roger Reid] - Natixis Bleichroeder

So are your customers still hesitant to – I mean you made a comment earlier about customers have a lot of inventory to work off. I mean, could that be part of what could impact 2010, they work the inventory off this year you start selling more parts next year which helps margins?

Jack Moore

That could potentially happen.

[Roger Reid] - Natixis Bleichroeder

What does pricing look like along that side? Is that also under pressure the way the new equipment is or does it tend to be more stable over time?

Jack More

I would just characterize the pricing environment to going forward as a little bit of an unknown. In the aftermarket side, it's held up pretty well and it will continue to hold up pretty well. On new product side it would tend to, I think, get handicapped to some degree by the geography and where it's applied.

Operator

Your next question comes from Mike Urban – Deutsche Bank.

Mike Urban – Deutsche Bank

So, a lot of questions on the margin profile here going forward. I was just wondering if we could kind of wrap this all up. Is it a fair statement to say that the margin decline that you expect overall is somewhat of a foregoing conclusion in the near-term given what's in the backlog and then just the mitigating factor in terms of how steep that is and when it recovers and how sharply it's going to be a function of the recovery in the short cycle businesses?

Chuck Sledge

I think that's a good way to put it.

Mike Urban – Deutsche Bank

And then on a broader question, Jack, you talked about the investments that you've made in the service business to impact the shale mark. You talked about the transformation or I guess you said reinventing themselves in the compression business. Are there other opportunities like that, things that you might not of done in the past, things that have not been traditional Cameron businesses that you're targeting on any of your business lines across the portfolio?

Jack Moore

Well, I could go through a list of them, maybe showing a little bit of our strategic content going forward. When you look at Cameron's enterprise, it is really amazing with all the capabilities we have when you connect some of the dots. And I think we've learned this through our shale gas initiatives and some of the other initiatives we've taken on whether it be focused around LNG or gas storage in other areas of the business, and even countries specific.

But there is always going to be room to improve our market penetration relative to leveraging the Cameron brand. And that's really what a lot of our focus is really been. The guys have really switched on in the last year as these markets started to turn. How do we really differentiate ourselves relative to - not only our competitive landscape, but also just the historical way we've worked?

And some customers are very open to it and some are still more traditional in how they want to acquire services and products. So we'll continue to push it, I think there is still a lot of opportunity and we will continue to leverage where we can the Cameron portfolio to exploit it.

Mike Urban – Deutsche Bank

So a lot of the opportunity is in working across product lines and leveraging that opportunities then?

Jack Moore

Absolutely, I think we've always talked about the fit that we enjoy between wellheads and valves and measurement and compressions and while we really love the NATCO story is the separation it sits in between all of this. And just how wonderful it's going to be to have a company that is really big into it that's going to touch so many other parts of Cameron.

As we evolved as a Subsea company over the years, all of this evolves to the Subsea spaces. And [marinizing] a lot of this technology are things that we continue to work on collectively. But you still have to remember that 99% of the wells being completed around the world are completed onshore or on offshore platform. That is a still a huge market that we want to be very focused on going forward as well.

Operator

Your next question comes from Stephen Gengaro – Jeffries & Company

Stephen Gengaro – Jeffries & Company

Two quick follow-ups, the first, Chuck, you mentioned the drop in the tax rates sequentially. It sounded like from your comments that it should remain at around that level or a little lower. Is that a fair conclusion? Or are there things which could make it go higher?

Chuck Sledge

That's a pretty fair conclusion. They can always go higher depending on where the revenues recognize but our current thinking is that its not going to go any higher than it is today.

Stephen Gengaro – Jeffries & Company

Then can you give us a sense for where it might be next year? I mean is the 26% range a good guess right now.

Chuck Sledge

That's a good guess. We've got to finish rolling up our budgets but that's a good starting point.

Stephen Gengaro – Jeffries & Company

My second question and I know it's back to the margins which you're probably sick of talking about, but when you look the order from Petrobras, do you feel like you have the infrastructure in place down there, A, to execute that around the margin levels we've seen over the last year, or is that going to be part of what pressures margins going forward?

Jack Moore

We're quite comfortable with where we are. Again, we've made a lot of investment in Brazil over the last three years to focus on costs internally and optimize our infrastructure. We have lots of footprint. We've added a substantial amount of property, both in our Tabtate facility and our [inaudible] aftermarket facilities over the last couple of years.

We have the ability to expand and given the campaigns we've had over the last several years of building out facilities, improving facilities, we have a lot of internal horsepower to get that done. So we're quite comfortable where we're at in Brazil with both our infrastructure footprint today, our ability to control costs and deliver on the margins we expect to generate down there, and we're happy with it.

Stephen Gengaro – Jeffries & Company

One final follow-up on Brazil, as we look at the orders coming up there, the sub-salt trees and then also the manifold, you mentioned the sub-salt trees, how you feel on the manifold side as far as Cameron's participation in that and if you were sort of how that impacts your capacity down there.

Jack Moore

I've said this probably before, Cameron has a long track record of being manifolds all over the world. We've just never done it in Brazil. We haven't had we felt a competitive cost position to be able to do it to, A, to compete and B, to make money at it. We've worked on that the last few years. Our guys down there have taken this initiative on. We've put our manifold team in place. We have put one in place in Brazil to focus on this opportunity.

We are actively bidding this current agreement that Petrobras is going out there, Lots 1 and 2 of the manifold bids and hopefully we will successful. If we're not, we'll continue to work it and we will be building manifolds in Brazil one way or the other. And I would tell you that Brazil and Petrobras are going to be very anxious for us to get there.

Operator

Your next question comes from Joe Gibney – Capital One.

Joe Gibney – Capital One Southcoast

I just want to follow-up on a few minor points. On the surface side, it's certainly encouraging from a plus 30% on the bookings sequentially. Jack, you mentioned some recovery in the Rockies and some directional trends being positive in the shales but how much of that mix was domestic North America shorter cycle surface versus your international which is typically more than 50% of the business. Just curious on that sequential delta, what's happening in North America there.

Jack Moore

Actually quite a bit was in North America, which was a nice surprise, and we did pick some incremental bookings in North Africa and in Europe on a couple of projects. But a good chunk of the growth was in North America and a lot of it was focused in our regions where the shale initiatives have been launched.

Joe Gibney – Capital One Southcoast

Chuck, on the CapEx side, just a minor tweak up versus where we were last quarter, is this just some incremental spend on machine tool sets and efficiency emphasis as it has been in the past?

Chuck Sledge

Yes, it is.

Joe Gibney – Capital One Southcoast

Then just referencing that back to the V&M side and certainly as pricing implanted here we're going to have some pressure over the next couple of quarters. Do you anticipate getting any kind of a tailwind on the margin side as you roll into a little higher run rate out of Romania? You mentioned in your release here its up and running in October and not quite up to full capacity yet, but any potential benefit there given the efficiencies on off-road in this facility?

Chuck Sledge

The Romania plant will add some benefit to the margin whether it gets overcome by other factors is still yet to be seen, but the margins out of the Romanian product versus where we use to make it will be quite a bit better.

Joe Gibney – Capital One Southcoast

Jack, every quarter I ask you about compression and every quarter they just kill it versus my model here so these guys executing quite well. What specifically has happened on the order front that's certainly held things here in a pretty tough environment? So it's been pretty surprisingly resilient here.

Jack Moore

It is and you're right. They surprise me sometimes but I know that they're not satisfied with it, which is always good to have that attitude. They really focused a lot on international and I would say that's the key to it. They've gotten out of their historical focus, which is just a handful of customers in North America to being much more focused on the international markets.

Chuck Sledge

What's driven the really good financial performance this year has been the backlog that they came into the year with. So they're doing good things on trying to replace that backlog but as that backlog comes down, they're going to have to work hard. And they know that.

Joe Gibney – Capital One Southcoast

Chuck, one last one there on the cancellations in the quarter, the 16 million, could you repeat for me the backlog at risk and any color on what specifically did come out.

Chuck Sledge

The 16 million of cancellations was primarily in the compression group. The backlog at risk that I spoke about is one that we've been speaking about for some quarters, and that's the rigs without contracts. That's 178. So I think overall cancellations have had a virtually nil impact on Cameron this year.

Operator

(Operator's Instructions) Your next question comes from Brian Uhlmer – Pritchard.

Brian Uhlmer – Pritchard Capital Partners

I'm looking out to 2011. I'm trying to figure out what kind of capacity you're going to have in Southeast Asia and when the Johor expansion is expected to be completed?

Jack Moore

We will finish our expansion in the Johor facility this year, in fact just pretty darn close to being finished now. And so my expectation is between now and January it will be complete. So we'll have ample capacity there to support that market from a deep water standpoint. And as you may or may not know, we've had infrastructure in Singapore for quite some time and we have quite a bit of capability there from the surface to support the surface markets there as well as [inaudible].

And then our facilities in Australia really are supporting our aftermarket facilities there, which will be beneficial to us. And the other thing is we picked up, I talked briefly about it but we did pick up an acquisition in Australia for our process value markets, a company called GeoGraph that's very well positioned in Australia and really supports of all that Asian market from an aftermarket standpoint for values, which we intend to leverage in a few other arenas.

Brian Uhlmer – Pritchard Capital Partners

From the Subsea side, can you send overflow capacity from Johor down to Singapore, and have you been doing that?

Jack Moore

Really the reason we built Johor is to get it out of Singapore and focus their attention 100% on Subsea so we've actually moved product from leads primarily to Johor.

Brian Uhlmer – Pritchard Capital Partners

You've already started that?

Jack Moore

Yes.

Brian Uhlmer – Pritchard Capital Partners

Is there kind of a capacity number you can throw out in terms of trees per year plus or minus some range?

Jack Moore

It depends on what the tree looks like, but as we said it's probably somewhere between 175 and 200 companywide not just in Johor. That number in Johor is probably 40 to 50 today, but it can flex given the type of tree it is.

Operator

Your next question comes from [David Griffiths – Scopia Capital].

[David Griffiths – Scopia Capital]

I had a quick question about your exposure to Mexico. I guess one, how much is it? And then two, do you have an outlook for that market in the upcoming year?

Jack Moore

Well, Mexico for us is we're not a turnkey player there so some of the questions around Chicontepec and how that may evolve over the coming years. While we would be an interested party, some of that work is being supported on a turnkey basis by a competitor. So that we don't have as much exposure to but in overall Mexico we have a fairly active operation down there in Veracruz where we manufacture a lot of the surface wellhead that's being consumed in country.

We've had a very active position there for many, many years. We've got a very good relationship with [PNEX] and as well as a few of the operators there that have been working turnkey [Slumber-J] for instance. And so we feel very fortunate to be in that position and also in a good position in terms of how their business will move forward.

Mexico is going to struggle to keep production moving. You saw our announcement with Petroco on our processing systems business down there. That's got a lot of potential future that I think you're going to see a lot of that technology being applied in these oil fields and we're going to be actively pursuing that.

Operator

Your next question comes from Brad Handler – Credit Suisse.

Brad Handler – Credit Suisse

You mentioned early on the call some success in India and China and I guess I was just hoping to draw out some more from you on that and the prospects over the next couple of quarters for more orders. So maybe you can speak to that broadly.

Jack Moore

Well, primarily it's been in the valve and it's been in our compression side of the business. The infrastructure there that pipeline infrastructure, as well as gas processing and receiving terminals it's probably been the most active market for Cameron in the last 12 months relative to the infrastructure type pieces of business, and a lot of that is just the money that they're pouring back into their local economies.

So we've been in a good position there. We've moved some of our manufacturing capacity over the years into China directly to position ourselves to support the local markets for those kinds of activities and that's paid off.

As far as on the oil and gas side, I think it will continue to be driven by the pricing environment that we see. So I would say that we're in a good position to participate on that end of the market, but I think it's going to be probably not as robust as we've seen on the infrastructure side.

Brad Handler – Credit Suisse

I'm sorry, is that lower end applications and so you're seeing more price competition from local suppliers?

Jack Moore

Well, I think that's true. On the real shallow well environment, especially in China, a lot of the local suppliers support that market. It's just not one that Cameron has been focused on and could be competitive on. So that's kind of been the situation with it.

Brad Handler – Credit Suisse

Just to stick with it for one more follow-up, in terms of the pipeline and the gas processing presumably these are multiyear opportunities or was there sort of a big slug that has gone through and you've won your allotted share and perhaps now you're attention moves to the oil and gas side.

Jack Moore

No, I think it's a good story that's going to continue to evolve. They continue to build out their infrastructure. It's not a one-shot deal for them.

Chuck Sledge

I'll add if you look at some of the industry forecasts they look a lot like the Quest data that the hockey sticks quite large but it does tend to slip to the right.

Brad Handler – Credit Suisse

Unrelated follow-up on the Petrobras rig awards as you mentioned a lot of that as it relates to your stacks, what are you doing, what do you need to do to best position yourself for those opportunities as they roll through and how do you see your potential there?

Jack Moore

Well, the award of the stack in this quarter was for Sevan it wasn't in Brazil. But it may ultimately be going to Brazil but time will tell. As far as Brazil itself, what's really going to drive, and I look at this from a long-term view, is really company's ability to support them locally. Cameron has been in Brazil quite a long time.

We're one of the very few companies that support our own drilling equipment in country and the only ones directly that do that. And I think that's set very well, not only with Petrobras, but with the local rig contractors. Cameron is there in their own backyard with our capabilities to completely support all of their needs from a drilling support aspect.

As far as the new build contracts, there's only two companies that are on the ASL and that's [NOV] and that's [Okar] with Maritime Hydraulics and we have been working closely with Maritime Hydraulics over the years. Have worked with them to support many of the new build stacks that are going to various parts of the world and will continue to work with them in this environment as well as we move forward.

Brad Handler – Credit Suisse

How do you position your rig essentially the [Okar] that you're partnered rig design. How do you kind of insert yourself in that process or does Petrobras do that insertion for you?

Jack Moore

We have jointly worked very closely together for the last several years to leverage the best that we both bring and that's just through a lot of the cooperation and collaboration with our mutual teams. That's not really driven by Petrobras.

Operator

We have no further questions at this time. I'd like to turn the floor back to management.

Jack Moore

Thanks to all of you for joining us this morning.

Operator

This concludes today's teleconference and you may disconnect your lines at this time. Thank you for your participation.

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