Layne Christensen Company F1Q11 (Qtr End 04/30/2010) Earnings Call Transcript

Jun. 2.10 | About: Layne Christensen (LAYN)

Layne Christensen Company (NASDAQ:LAYN)

F1Q11 Earnings Call

June 2, 2010 11:00 am ET

Executives

Andrew Schmitt – President & CEO

Jerry Fanska – SVP Finance

Analysts

Richard Paget - Morgan Joseph & Co.

Jonathan Ellis – B of A/Merrill Lynch

Dick Kendig – Keeley Asset Management

John Rogers - D. A. Davidson & Co.

Steve Ferazani – Sidoti & Company

Operator

Welcome to the Layne Christensen fiscal 2011 first quarter earnings call. (Operator Instructions) With that I will turn the conference now to Mr. Andrew Schmitt. Please go ahead, Sir.

Andrew Schmitt

Thank you. Good morning and welcome. I am here with Jerry Fanska, our Chief Financial Officer and we would like to welcome you to Layne Christensen’s first quarter conference call. Earlier today, we issued a press release outlining the results for the first quarter ended April 30, 2010.

Before we discuss the financial results, I would like to remind the participants that the call may contain forward-looking statements that are subject to the Safe Harbor statement found in today’s press release. Jerry will take you through the financial results and I will give you an overview of division operating performance and how we see things going forward.

Okay Jerry.

Jerry Fanska

Thank you Andrew, good morning everyone. Revenues for the first quarter increased $26.5 million or 13% to $230.7 million from $204.2 million in the prior year. Water infrastructure revenues increased $4.8 million or 2.9% for the quarter to $172.9 million. In the water infrastructure division during the quarter revenues from previously acquired operations increased $14.4 million. Specialty drilling, a large piece of which was work in Afghanistan increased by $12.2 million and GeoConstruction revenues increased $4.2 million. These increases were offset by reduced revenues of $16.8 million from a large utility contract in Colorado that was substantially completed last year.

We have also experienced continued weakness in our municipal water supply markets and in the housing sector. Mineral exploration revenues increased 85% to $45.9 million with increased activity across most regions, the largest of which were West Africa and Mexico. Layne Energy revenues decreased 7.5% to $9.5 million attributable to the exploration of favorably priced forward sales contracts and to the current lower natural gas prices.

Cost of revenues increased $12 million to $171.9 million or 74.5% of revenues for the three months ended April 30, 2010 compared to $159.9 million or 78.3% of revenues for the same period last year. The decrease as a percentage of revenues was primarily focused in the water infrastructure division as a result of higher profit margins on the GeoConstruction and specialty drilling work and to a lesser extent decreased activity in mineral exploration.

Selling, general and administrative expenses increased to $33.5 million in the quarter from $31.7 million in the prior year primarily the result of increased incentive compensation related expenses of $2.9 million as a result of higher earnings and $1.4 million in expenses from acquired operations offset by $1.9 million due to a reassessment last year of the recoverability of value added tax balances in certain foreign jurisdictions and accrual for certain other taxes.

Depreciation, depletion and amortization decreased in the quarter to $14.1 million from $14.3 million primarily due to the lower depletion rates in the energy division resulting from updated estimates of economically recoverable gas reserves. During last year’s first quarter the company received litigation settlements valued at $3.2 million. The settlements included receipt of land and buildings valued at $2.8 million and cash receipts of $333,000. There were no litigation gains in the three months ending April 30th this year.

Our equity earnings affiliates in Latin America was relatively flat this quarter over last year. Interest expense decreased $284,000 to $526,000 for the quarter as a result of our scheduled debt reductions. The income tax rate for the quarter was 47% compared to 48% last year. The decrease is primarily attributable to the impact of the nondeductible expenses as pre-tax income increased this year. The net result for the quarter was $0.34 per share in earnings compared to $0.05 last year.

The company’s balance sheet at April 30, 2010 reflects total assets of $740.5 million, stockholder’s equity of $475.1 million, total long-term debt of $6.7 million excluding current maturities of $20 million and cash and cash equivalents of $67.9 million. The company used $3.5 million in cash from operating activities in the quarter. Investing activities totaled $12.3 million net of proceeds from equipment sales. The investing activities included $387,000 in unconventional gas expenditures with the remainder primarily for property, plant and equipment additions to the other divisions.

With that I will turn it back over to Andy to talk about the operations.

Andrew Schmitt

Thanks Jerry. From an operating standpoint in our water infrastructure segment the Layne legacy water well drilling business in the U.S. domestic market, as Jerry said, remains very weak. If we pull the Afghanistan job out of their quarterly numbers revenue would be down 12% from a year ago and the remaining U.S. business only marginally profitable. Essentially a two-rig operation running around the clock in a war zone is the reason Layne Legacy was profitable in this first quarter.

Without question this is the patriotic thing to do on this job and we are extremely proud of our employees, all who volunteered for the project. They are also doing one heck of a job in executing this work which looks like it will continue for at least the balance of the year. The military is pleased with our work and the forward-operating bases we are supplying will have the best potable ground water, I can assure you, ever produced in that country.

Other than this project this municipal sector for drilling of new supply wells is almost nonexistent. Cities and towns throughout the country are postponing spending for just about everything they can; in our case maintenance or otherwise. What work is out there is also very competitive as one would expect.

Moving to the revenue and rentals operations, removing the impact of W.L. Hailey, the acquisition we made last November, the revenue would be down about 12% this year. The reason for the apples-to-apples decline from last year, first quarter we had that large pipeline job in Colorado and about half of that revenue fell in the first quarter last year. If you take that out then the rest of the work we have in rentals is jobs that are fairly flat with a year ago. I think worth noting is our cured in place CIPP business. EBIT there just about doubled over last year.

Efficiencies gained from our [in-liner] manufacturing plant expansion we finished last year and better margins were the primary contributors as the revenue was up only about 5% year-over-year. Although the backlog in rentals in total at the end of the quarter has weakened somewhat from January that is about to be reversed in a major way. Over the course of the past several weeks we have projects totaling about $126 million where we are the apparent winner. Of that about $40 million went to W.L. Hailey, the company we just purchased in November. So not a bad way for Hailey to join the Layne Christensen family.

If all of these awards are booked just the rentals business backlog alone would be approximately $500 million. In analyzing the infrastructure segment numbers one of the bigger swings compared to the prior year’s quarter was due to our GeoConstruction division. Their division EBIT swing for period to period was almost $3 million. The reason for that was a good deal of the spending for the Katrina job we had in New Orleans was in last year’s first quarter. Just about all of the revenue and profit was generated in the second half of last year.

As a result the infrastructure segment earnings how a big, favorable boost in this first quarter comparisons to prior year but some of that will reverse in the second half when we start comparing second half year-over-year comparisons. We do have a decent backlog in GeoConstruction so the revenue comparison I think will hold up but the margins and EBIT and the work we have now is going to be considerably lower than the New Orleans Katrina project.

Far and away the superstar of the quarter though has been our mineral exploration division, wholly owned business. While our Latin American affiliates were flat year-over-year the wholly owned exploration business has experienced a moon-shot of sorts. Revenue almost doubled and the wholly owned EBIT swung from a loss of $171,000 in the first quarter of last year to about a $6.7 million profit. We actually had two nonrecurring events in last year’s numbers that netted to about $1 million favorable gain in MinEx so if you took those out the wholly owned MinEx loss really was over $1 million from operations last year and therefore the swing this quarter was about $7.8 million on a $21 million increase in revenue. So approximately 37% incremental EBIT fall through.

The mining industry has clearly gone back to work, particularly the majors, and our management did an amazing job gearing up for such a dramatic turn of events. To do a complete flip in activity and do it this efficiently is really quite remarkable. We are not back at the prior boom pricing but if the activity holds we will continue to recruit and recruit some at price down the road as well. The U.S., Mexico and Africa really experienced a big pickup from year ago. However, Australia and Canada were actually a little bit weaker than a year ago. So the move up in activity in our case is not universal.

The flat year-over-year comparison for our Latin American affiliates was the result of a slowdown in drilling at our largest customer’s mine. Those issues, unrelated to our work, have been addressed at the customer’s mine and the activity should move up resulting in improvements in comparisons going forward. Likely more modest than the wholly owned business experienced this quarter.

Layne Energy was essentially flat year-over-year which was a bit of a surprise given we only had two months of forward sold natural gas in the quarter as April natural gas was sold at essentially spot price. In spite of that we had lower depletion due to a catch-up adjustment made this quarter plus lower lease operating expenses. That combined to produce a flat quarter with last year. Gross production averaged about 18.8 thousand cubic feet per day versus 20.4 per day a year ago.

Our net delivered price was $7.17 per MCF, still quite good versus the $7.37 price in the prior year. I will tell you the year-over-year comparisons from here on out at current spot pricing will be real, real difficult unless these gas prices begin to move up substantially. The net/net is we need a long, hot summer in the U.S.

To summarize, the water infrastructure business looks pretty solid on the rentals more infrastructure intensive business given their large backlog of work. However, the margins are skinny on this business so there is not a lot of room for error on the job execution side. The Layne Legacy water well drilling business looks like Afghanistan will continue to drive earnings this year. I think we will see a gradual improvement in the municipal market beginning to have a positive impact in the second half.

Mineral exploration activity is likely going to plane off a bit at this level. I think that would be fine with us if a pickup is far and away stronger than anticipated. It probably tells us the major mining companies overreacted on the down side so we are benefiting from their adjusting to physical demand that in total remained higher than they expected. Still it would be hard to see a big move up from this quarter’s results and we know the activity is all about Asia; mainly China. They are taking some steps to cool off their economy.

Layne Energy unfortunately is stuck in the natural gas pricing funk and really can’t do a great deal about it. That will begin to be a drag on earnings going forward. At $4 per MCF, the current spot price; I think it is actually $4.18 today; we are about $1.50 per MCF below our fully loaded division EBIT cost. We will still generate a little bit of EBITDA but earnings are not Layne Energy’s future at today’s prices. This is probably our biggest headwind we will face in the balance of the year. Second would be when we start to make those second half comparisons with that New Orleans Katrina work that was in there a year ago. So even with the minerals extraordinary come back the rest of the year is going to be a challenge from our vantage point.

With that if you have any questions, we will be glad to take them now.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Richard Paget - Morgan Joseph & Co.

Richard Paget - Morgan Joseph & Co.

I wanted to talk a little bit more about water infrastructure especially on the new awards in the quarter as well as some of the low bid pending you have for rentals and Hailey. Could you talk more specifically about the types of projects they are? Are there any big ones you won? Is it more dispersed? Is it on the wastewater side? Just a bit more specifics on that.

Andrew Schmitt

The Hailey award was tied to the Nashville work related to the recent flooding in Nashville. So it is a variety of work; repair work, diversion of water work, heavy civil type work that there were actually four projects. It looks like Hailey was awarded all four of the projects. They are Nashville based and they are a preferred contractor of the city. A good start and unfortunate with the flooding. Certainly that was quite tragic. That is where part of that is. About 1/3 is tied to that.

The rest would be on the heavy civil wastewater pipeline side. Probably split 50/50 for another, 50% of the work. Then CIPP has had a couple of good awards. So it is pretty well spread. I can’t tell you how much is stimulus driven. Those numbers have sort of been hard to wrap around. The interesting thing and very encouraging thing, we have chewed into the backlog we had in January. So from last quarter’s backlog we gave you we have [steady] into that. So these types of apparent low bids we will be awarded if they all get booked is a big boost because we were a little bit concerned.

We are used to seeing that backlog chewed into as we move into the better weather in the summer but it started coming down a bit early and with the longer lead times in the rentals business is my thought was “Oh boy” this is the delay you expect to see with an 18-24 month window these larger projects have. So really this was fairly recent. During the last three weeks. That is pretty encouraging because I wasn’t feeling too good as I watched this backlog start to get chewed up a bit so early in the year.

So it is a pretty positive development and the fact that it is fairly broad based. We are not seeing that on the Legacy Water business. It, as I said, would be down without the Afghanistan job from a year ago which wasn’t anything great to write home about by any means. The good news is if you pulled Afghanistan out they kept their gross margin at about 24%. About where it was a year ago so the guys are digging at their heels a little bit. But we had a lot of exposure in Layne Legacy, as you know, to the areas that really were driving a lot of growth back in 2007 and 2008; California, Arizona, Nevada, Florida, Texas, the greater Chicago area.

So those areas that really had not recovered most notably the areas that have the largest housing growth; probably some of the biggest migration of people to some of the warmer climates. So it is to be expected. That business is going to be a gradual recovery. Typically we follow the municipal spending at the city, county, state local levels it follows tax collection quite a bit. So as the economy improves and as tax collections improve and sales taxes go up, etc., etc. then you will gradually see those municipal markets improve. Those are more of the day to day projects.

Richard Paget - Morgan Joseph & Co.

I guess that is probably a good lead in to my next question. You already talked about Afghanistan and that project will continue to go throughout the year in your estimation. Last call you talked about chasing more federal type work. Any other opportunities out there you are tracking that might be a boost until the local business kind of rebounds back?

Andrew Schmitt

I think probably the area we are looking at more on the Legacy side is on the specialty drilling side. Afghanistan clearly falls in that category. But the injection wells based on the tighter regulations for waste water disposal down in Florida we are actually drilling on that project right now. That is about a $5 million well to inject the wastewater from a power plant in the ground because they just can’t put the waste water far off shore anymore.

That is a key part of the more specialty contracting we are having to move to. In that case the rig and all of the components cost about $7 million of capital. So it is a pretty big commitment and we have not been in that market for 20 years. The wells are very, very complicated and difficult to drill. So that is probably the area we are moving into is to try and get more and more specialty type drilling. We have not been very competitively bid large international water projects. That may change if we can find large enough projects.

We were pretty noncompetitive in one recently in the Middle East. So we may have to reexamine that as well. I just think the municipal sector, the piece that is tied to housing and new water supply could be slow for a number of years. We need to fill that hole and fill it in a profitable way. We are going to focus more on the industrial treatment side. Actually we have separated that business from our base treatment business and have a real push in that area. We are in discussions. We are still in discussions in the opportunity to treat water in the Marcellus shale. I think we are a lot closer to coming up with a transaction there that would give us a good toehold in that market with a process we really like.

It won’t be quite the R&D investment we thought we had to make before because it is a proven process. So that whole shift into the treatment and the specialty side is where we need to take the business in the absence of a real strong municipal spending market.

Richard Paget - Morgan Joseph & Co.

Moving on to MinEx. Just given the recent moves in the market and some of the commodity pricing coming down a little bit have you noticed any different posture from your customers whether they are getting a little bit edgy again and they might scale back some of their plans? Or at these levels are they still confident in having a longer term outlook and things continue to be on the high levels of activity?

Andrew Schmitt

We haven’t seen them back up at all. I think if you talk to anyone that is in the mineral exploration business we are pretty guarded this level of activity we have seen now and how quickly it has turned around I think that made us all very guarded. We see China trying to slow down their economy and that certainly catches our attention. I would also tell you one thing that goes a little bit unnoticed is in the last boom back in the 1996/1997 period of time it was really all about the five tigers. If you start looking at those economies today China is not the only economy making a big move up.

Look at Singapore at 15%. If you look at the Philippines, South Korea and Taiwan. Thailand has its share of problems. In the absence of them their economy would be performing extremely well. So it is more Malaysia. It is more than just China at this point. It is pretty broad brush. Brazil’s economy grew at 8%. So there is a little bit more firepower here. We actually don’t expect it to move up from here but we are not hearing anything from our customers at this point that would say they are going to pull back on programs.

Actually Canada is pretty weak. Canada is surprisingly weak. We are not that big a factor there but it is surprisingly weak and the market in Australia has been weak for us. The tax on mining companies is going to reduce the prospects. So it is not all a perfect world out there by any means. Right now we are not hearing anything that would indicate a slow down but we are very careful. Our capital spending is staying on a pretty tight leash. We are going to spend about a little less than $50 million. We spent almost $90 million in the last robust boom period, calendar year 2008.

Our cash is up $5 million versus where we were a year ago. Clearly even with the working capital spending and what not we have a pretty tight rein on things. I would say we will stay guarded but no we are not hearing any backing off. $3 copper, gold over $1,000 you are probably going to see activity. I think the thing to watch is inventories. You already see some increased inventories in nickel and lead and things like that and they are starting to soften.

Copper opened up this morning under $3. I think $3 is important although a lot of the customers we work for are very low cost. We will see. It is a good question. I don’t know.

Operator

The next question comes from the line of Jonathan Ellis – B of A/Merrill Lynch.

Jonathan Ellis – B of A/Merrill Lynch

In the water business, I don’t know if you have this handy right now but the EBIT margins for Legacy rentals and also GeoConstruction. I know you sort of referenced profitability on a year-over-year basis but I am wondering if you have the actual EBIT margins.

Andrew Schmitt

The EBIT for our Legacy is 4.9%. EBIT for rentals without GeoConstruction is 4.8%. If you throw all the infrastructure together it is 5%. If you were to compare that to a year ago it was 2.7%. As I said, you have the problem with GeoConstruction, such a big year-over-year swing. That is where it is.

Jonathan Ellis – B of A/Merrill Lynch

Should we assume the GeoConstruction margin this quarter given the New Orleans project rolled off, were they comparable to the 30% achieved last quarter or would they have been lower?

Andrew Schmitt

No. You had about $12 million of revenue in there and about $1 million in EBIT. That’s all.

Jonathan Ellis – B of A/Merrill Lynch

The backlog, I know you referenced what the rentals backlog would be with the addition of these new contracts. I am curious, what is the timing of that potential backlog conversion into revenue? Are these longer-term projects? Would they be converted into revenue in fiscal 2011? Can you give us a sense there?

Andrew Schmitt

I don’t know exactly. I would think the work in Nashville is probably going to move out fairly quickly and I would expect they would give Notice to Proceed pretty quickly given the nature of what generated or requires those projects. I think the rest is probably the usual 15-18 months. What do you think Jerry?

Jerry Fanska

I agree.

Andrew Schmitt

Two years. I was going to say if you look at the backlog when I say we started to chew into it a bit, in January this is rentals only it was like $439 million. February it was $416 million. March it was $413 million. April picked up a little bit at $423 million. Of course you add the projects we have got but recognize we will also do some work in the month as well.

So you can see if all these projects ended up on our books it would be about $500-600 million. So rentals last year was about $400 million in revenue last year. If you drop Hailey in at about $470 million. So you have about a year’s, a little over a year’s backlog, which we didn’t book anymore business. I feel pretty good about that. It happened so recently every week we were the apparent low bidder on a number of good projects.

Jonathan Ellis – B of A/Merrill Lynch

A related question, the backlog both of which you already have and the potential new backlog you referenced, do you have a sense of what the margins are on that work relative to what you reported this quarter?

Andrew Schmitt

They are not a lot different. Bidding wise we are bidding about where we have been bidding for the last 6-9 months. The key really will be job execution. We have done an awfully, awfully good job the rentals people have almost since the day we bought the company on both the heavy civil and the CIPP. I think we have sort of become accustomed and almost expect that. With this much work to execute sooner or later that will probably be, if we report disappointments it will probably be over something that went haywire or something that got delayed. The usual weather problems nobody anticipated.

I would say that is more critical. We are bidding the jobs the same place we have been bidding it. So it is not like we have turned up the heat a bit and become more competitive. It is going to be similar to what we have seen.

Jonathan Ellis – B of A/Merrill Lynch

If we could turn our attention to the mining business for a moment, one question I have is do you have a sense for where utilization rates are on your drilling rigs right now and given where you mentioned the pickup in the last quarter, do you anticipate adding any additional rigs or well capitalized at this point in that business?

Andrew Schmitt

I think we are about where we need to be in terms of the money we have put in the business and the capital we have pushed back in. Utilization wise it is hard to say. I always say you can’t get much over about 85%. 90% is sort of the extreme. We are probably in the 75-80% range. We would be stronger but things are weak in Australia and fairly weak in Canada. I would say in Mexico, West Africa and the U.S. we have got to be pushing 80%.

Jerry Fanska

I agree.

Jonathan Ellis – B of A/Merrill Lynch

On pricing in the mining business you talked a little bit about how price could improve. Just so we understand, would you have the ability or flexibility to adjust pricing intra-year or given the annual nature of the contracts that you have would most of the price improvement have to wait until the beginning of calendar 2011 based on whatever negotiations you have in the second half of this year?

Andrew Schmitt

I think what triggers it is the request for additional equipment or a new project that you are relocating to where it gives you an opportunity to sit down with a customer and say look on average we are about 15% below where we were a couple of years ago. The reason the guys are doing as well as they are in mineral exploration obviously they have a logistic pickup extremely well but our costs are a lot lower.

The longer we stay at this activity level those costs for consumables, labor costs, the cost for people will start to move up. We know you can’t stay at this activity level long before everything starts to move up on the cost side. So we have flattened out. We will push the customers a little bit on pricing and try and improve the margins particularly in some of the more difficult markets to operate in. But there is not going to be too much movement from here unless there are changes in events. A big step up would stretch everybody right now and that would be a cause to sit down and say we are going to have a better price than this because I can’t get the people, equipment, consumables or the parts like I could.

We are already seeing some lead times stretch out so that tells you how it snapped back on certain supplies. We are certainly seeing increases in drill pipe already. Customers have certainly moved because of the iron ore increase up in a hurry. That is typically, we are on average 15% from peak to trough. Maybe we have picked up 4-5% of that. It is probably 10% you could get from here.

Jonathan Ellis – B of A/Merrill Lynch

On the unconventional gas business, I guess you had mentioned in the past the potential for doing some small hedging in fiscal 2011 until forward prices reach the $6-7 level. Is that still your strategy? Do you have any gas hedge to this point? Or do you plan to engage in any hedges for the balance of this year?

Andrew Schmitt

We really don’t. I guess we could lock down sort of a fairly wide range collar if we wanted where you just sort of lock in at a price that ties into maybe your EBITDA costs and give you a lot of upside to maybe $9.50. Maybe some type of range like that so you didn’t miss any run up in price and you are protected [turns] maybe the EBITDA or the cash flow at this point. We haven’t done it. We have talked about it. That opportunity is out there and that type of hedge would be relatively cheap.

We have just seen this market find quite a bit of resistance at this $4 pricing and with the tragic events in the Gulf of Mexico and the shutdown of the rigs in the deepwater piece that is oil and also gas, I think you would almost have to look at the reserves on land in the United States had to all of a sudden become more valuable because I don’t think they will shut down deepwater drilling by any stretch but I just think it will be more costly. It will be slower to get permits. The process will really, really begin to move very slowly and in the shallow water there is just not the opportunity off-shore and the decline [inaudible] are still some of the steepest in the country in the shallow Gulf of Mexico.

So whether you are an oil producer or gas producer on land you look like your value of your reserves just went up. I would say too under the Energy moniker I already had an interest on the drilling side in the land drillers in the United States for oil and gas. Certainly my interest didn’t go down with the tragic events with BP and Transocean. There could be a little bit of reshaping of the market. I don’t think the stock markets and equity market recognizes that but if you are a land oil and gas service company and don’t have exposure to off-shore or if you are a land driller your prospects in terms of development of reserves going forward have to all of a sudden get a boost. I certainly haven’t seen that reflected in the market valuation of some of those companies. Under the heading of Energy and we being a service company I can assure you it has caught my attention.

Jonathan Ellis – B of A/Merrill Lynch

Have you noticed potentially yet or in the future increased bidding activity for acreage on shore on conventional gas projects? As a function of this oil spill are you seeing more companies turning their attention to potentially leasing acreage and drilling on-shore?

Andrew Schmitt

Definitely seen it on the oil side. You have seen it on the rig count as well. So you definitely see more activity on the oil leasing side. The gas leasing side still seems to be dominated by the big movers like Reliance, Shell recently, into the shale plays. We haven’t seen much conventional natural gas properties come on the market at all. We have not seen much unconventional come on the market unless it is shale again tied to the [inaudible] or something it is very expensive.

So there is a bit of a disconnect and it is probably reflected in where the drilling activity is and those basins it is. The rest is just sort of frozen. If you are a conventional gas company you really don’t want to go to market right now. From what we were looking at it sort of dried up there on the type of gas properties we look at and the oil properties as I said they got pretty expensive in a hurry as oil moved towards $80.

We sort of just pulled back. We thought it probably makes more sense to us to find partners that have properties and do a drill-to-earn. That is the way we got in the business and that is a little bit easier for us to do it. Lower capital. They have taken some of the risk out, all the better. So I think that probably makes more sense for us because we are not seeing the deal flow on the gas side and the oil side got expensive. That is our posture today I think.

Operator

The next question comes from the line of Dick Kendig – Keeley Asset Management.

Dick Kendig – Keeley Asset Management

Could you provide a little more color on your costs [in the gas business], your LOEs, development costs, etc.?

Andrew Schmitt

We are about $1 per MCF in LOE. I would say finding and developing costs, where does it stand now Jerry?

Jerry Fanska

We are basically on average for the first quarter LOE is 121, gathering and transportation 56 so all in with G&A, etc. at 242 cash cost. Then you add depreciation obviously and you get 555.

Dick Kendig – Keeley Asset Management

Have you thought at all, there has been an awful lot of gas supply in this country that [audio fades]. Have you thought about selling that business?

Andrew Schmitt

Boy if I did it wouldn’t be in today’s market I don’t think. We don’t need the cash. The cash flows [part]. We are not spending much capital. Last year it generated 1/3 of our operating EBITDA for the entire company. It only spent $4 million in CapEx. So pretty good return. We pushed the gas down to just what we had forward sold because we didn’t want to burn off the reserves too cheaply and that strategy worked pretty good.

I have got 3,954 people working in Layne excluding the joint ventures. I have 30 in Layne Energy so it is clearly not a management drain. At the cash cost Jerry just gave you shows the 30 people know what they are doing in that business. So my view is if I had to I guess I could but I don’t generally sell assets at the bottom of the market.

Dick Kendig – Keeley Asset Management

You talked a bit about the Marcellus. Are you drilling disposal wells in the Marcellus?

Andrew Schmitt

No. The disposal wells we have started on are in Florida.

Dick Kendig – Keeley Asset Management

Are they related to the oil and gas business?

Andrew Schmitt

No. It is the power plant and the energy side but on the power side primarily to deal with the wastewater streams and the need to inject that wastewater stream in the earth as opposed to try to treat it or move it somewhat treated offshore. Regulations have tightened in a market that has always been a niche market, it looks like the number of wells that will be needed for the Florida power industry may spread as that technique becomes more accepted is going to probably double in the next several years.

That was the reason for our interest. The barrier to entry is they are very difficult to drill and the capital requirements are pretty significant. It can be fairly profitable work. Higher profit than we would typically see in a water well if you will drilling environment. In the Marcellus our interest would be on the treatment side of the business. That is treating the frac flow back water when they frac the wells.

Dick Kendig – Keeley Asset Management

You have to build a treatment plant?

Andrew Schmitt

You do. The company we have been in discussions with has a process where you would treat production water, from the normal production water that is produced in the wells primarily in the more mature markets like the Barnett Shale but also has a process to handle frac flow back water. So in this particular case they have a couple of units out right now at one of the major oil and gas companies.

Their process interests us because it also looks like it is very applicable for zero discharge standards for a power plant as well as landfills where they are having to take liquid material and it takes up so much space in the landfill. So there is a broader application and that is very attractive to us. We have very active discussions going. Fairly small company but really may have some good technology that fits us across a number of product lines on the treatment side.

The only drilling we would be interested in doing in any of the shales, Marcellus or Barnett, would be if we owned the oil and gas drilling company. Those depths are too deep for us and the extended reach horizontal leg you would have to have an oil and gas driller. There are clearly some out there that are fairly interesting right now, particularly if you can use some of those techniques to drill oil which we think you can. They do in the [inaudible] shale. So there could be some interest opportunities out there. As I said to John it has definitely caught my attention and certainly it helps being quite comfortable coming out of the oil and gas industry.

Operator

The next question comes from the line of John Rogers - D. A. Davidson & Co.

John Rogers - D. A. Davidson & Co.

I just want to make sure I have these backlog numbers right. At the end of April or the end of the quarter Rentals backlog was $423 million?

Jerry Fanska

That’s right.

John Rogers - D. A. Davidson & Co.

Subsequent to the quarter end you have pending awards of $126 million including $120 million at Hailey?

Andrew Schmitt

No, $126 million in total. You are right to say pending. You can always get somebody protesting an award and the usual stuff as you well know.

John Rogers - D. A. Davidson & Co.

The GeoConstruction business you talked about the other markets but are there opportunities, new opportunities in GeoConstruction you are pursuing?

Andrew Schmitt

We have discussions ongoing right now in Brazil with people we have partnered with before on projects and we are very, very interested in expanding that relationship. We see Brazil as really a good market to be in on both the foundation side of the business; both for GeoConstruction type stabilization projects or slurry walls, other processes we have not been as big in.

We are very, very bullish on Brazil right now when it comes to foundation type work. Really it is difficult for us except for one-off projects not to have a more established base of operations particularly in Brazil. You really need to be there. You have got to have a reputation and you have to know how to work in the construction industry there. So yes there are good opportunities and it has come out of partnership that has been fairly good for us and is a very proprietary piece of equipment we bought and put into the venture.

So it is a timely question. That is sort of where we are on the water treatment on the frac flow back water. Very active in those areas. This company is bigger than the frac flow back company because there is just not anybody big in that area at this point. It is well established and has been around for a long time. Well known to our GeoConstruction people. So that is very interesting where you see some of those types of emerging economies and that type of growth it is very attractive to us. We need to find a way to grow GeoConstruction. Our short-term goal is to find a way to double that business because it has some really sweet spots when you hit them as we have seen through the years both in the U.S. but internationally as well.

John Rogers - D. A. Davidson & Co.

But is there anything else in New Orleans?

Andrew Schmitt

I don’t know if the process and techniques we used are going to be required going forward. I know we continue to make pitches to the Corps about alternative jet [grouting] methods to say soil mixing and other processes. So we have increased our exposure to the Corps of Engineers. They know us a lot better and are very pleased with the job we have done. So there may be. The work is clearly not finished there. It is just that we have to be more specialized than your normal [grouting] or soil mixing. You have to sell them on that alternative method and it just takes awhile. The process there can be slow. Yes, there is still work there. It would be specialized.

Jerry Fanska

And our guys are actively pursuing it without question.

Andrew Schmitt

You just have to make the pitch and sell them. That is what we had to do the first round. They thought long and hard before they gave us the go-ahead and then they literally couldn’t keep up with us. So they definitely know the value.

John Rogers - D. A. Davidson & Co.

On the energy business with the expiration of your hedges in April was that business profitable? Also from a cash flow point of view?

Andrew Schmitt

In the month of April?

John Rogers - D. A. Davidson & Co.

Yes. Because that is the point where you didn’t have any hedges then. Isn’t that right?

Andrew Schmitt

Yes that is correct. We had in the month of April about $1.8 million in revenue and EBIT if you will of $19,000. But we had a much lower depletion. Depletion was lower by about 500,000. I think that ought to give you a window if you look at an un-hedged spot price without that depletion adjustment. I actually don’t know where the depletion is going to shake out. That is sort of a catch-up adjustment. So we will have to see what the financial people come up with for the month of May, June and July. That is where it was in April.

Operator

The next question comes from the line of Steve Ferazani – Sidoti & Company.

Steve Ferazani – Sidoti & Company

On the energy segment should we assume production relatively stable to modestly lower the rest of the year? I am assuming you are not drilling anything additional?

Andrew Schmitt

I think that is fair. At this point we have sort of locked in on that production level. We don’t want to tamper too much with the wells. If there is a natural decline we might take it and that would really be dependent on the engineers and what they say in terms of maintaining that production. We have been drilling. Mainly what we have been drilling is on the oil side. More of the shallow oil. There is some spotty opportunities in the area that can be fairly attractive if you can nail it down like a lot of the Kansas drillers. So if you see any drilling it is likely to be there and I guess the issue for us would be for the engineers how do they want to manage the field.

At this point we think we can probably spend a limited amount of capital and cash flow until we see a little bit better window on pricing which you begin to see more and more people projecting that gas prices are likely to move up and maybe the cost to develop and produce the shales on a fully loaded basis is not as low as people think. So it is kind of interesting. At the $4 gas price contributed a lot of activity in the shales being shut down for some of the drill rigs being stacked by some of the more notable people in the shale like XTO and Chesapeake. So that $4 resistance level may be something to that.

Steve Ferazani – Sidoti & Company

We still haven’t seen much pull back in gas rig count yet though so you wonder.

Andrew Schmitt

Well, I think you have. It has not been on the horizontal side yet but you are going to see that if we stay in the $4 range. The big problem is you have to be able to hold the leases. So my question would be how many drill rigs are actually drilling a well that is just going to be cased, not completed, to hold the lease because a lot of money has been paid even in the form of acquisitions and companies that just had acreage really or the acreage itself with the lease is beginning to…that clock ticking on leases you may see a lot of this activity not to produce any gas. But if their contract or leases allow them to just stick a well down and case it and hold a certain amount of acreage, that may be what you see. So we might not see as much gas coming on the market as you think. That would be classically the gas industry wouldn’t it?

The economy is recovering and all of a sudden which was reliable, dependable and [inaudible] items in terms of supply activity picks up and there is no gas. So anyway, I don’t know. It is an interesting thought. One of the reasons I like the oil and gas drillers on land more than I used to and would have in the last year or so is the fact the big operators have spent so much money on the investment particularly in the shale that they don’t have any choice but to drill it. Whether they have to complete it I don’t know. That depends on their lease agreement. But I know they have to drill it. So it kind of makes you wonder. They are going to drill it. That is for sure. I don’t know if I want to buy the completion but I sure as heck know they have to put a hole in the ground sooner or later.

Steve Ferazani – Sidoti & Company

You mentioned a couple of times the attractive valuation of drillers certainly if we look at some of the ones that are out there they do look fairly low priced. I guess the question would be if you start kicking the tires what is a reasonable fleet size you would be willing to take in and then how important is it the quality of the rigs, horsepower of the rigs. How serious as you start looking it would you get?

Andrew Schmitt

It would have to be set up to drill under balance and be able to kick out the extended reach and probably be in a range from 6,000 to 12,000 foot range. We have seen that before where that ends up being in short supply. You would want new rigs. You wouldn’t want any of the more old stuff. You would have to have a preponderance of equipment that is fairly new and set up to drill what we think it appears the future is going to be.

Whether you are looking at the [inaudible] shale or the Marcellus shale or even conventional oil and gas that are drilled similarly and then put into multi-stage frac. Because you couldn’t do it without the idea that you make a pretty good strategic case that is where it is going to be. You also have to make the case that gas at $5 is still a good strategy meaning you either lose the leases or you drill it.

I think the low end of the rigs would not be attractive. You would want to be in that sweet spot. You wouldn’t want to be ridiculously deep and big. You wouldn’t want to be so shallow you couldn’t kick out 7,000 feet at 8-9,000 foot depth fairly comfortable.

Operator

We have no additional questions.

Andrew Schmitt

Thanks everybody for your time and attention. We will chat with you, some of you before, but if not we will see you next quarter. Thanks again. We appreciate it.

Operator

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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