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Executives

Andrew Schmitt – President and CEO

Jerry Fanska – SVP, Finance

Analysts

Richard Paget – Morgan Joseph

Ryan Connors – Janney Montgomery

Anish [ph] – Bank of America

Steve Ferazani – Sidoti

Steven Fisher – UBS

John Rogers – D. A. Davidson

Christopher Patel – Janney

Layne Christensen Company (LAYN) F2Q2011 Earnings Call Transcript September 2, 2010 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the fiscal 2011 second quarter earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator instructions) As a reminder, this conference is being recorded. I’d now like to turn the conference over to our host, President and Chief Executive Officer, Mr. Andrew Schmitt. Please go ahead.

Andrew Schmitt

Thanks, Ellen. Good morning, everyone. I am here with Jerry Fanska, our Chief Financial Officer. We would like to welcome you to Layne Christensen’s second quarter conference call. Earlier today, we issued a press release outlining the results for the second quarter ended July 31, 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 some of the division operating performance and how we see things going forward.

Okay. Jerry, you want to take us through the numbers?

Jerry Fanska

Thank you, Andy. Good morning, everyone. Revenues for the second quarter increased $36.1 million or 16.6% to $253.3 million from $217.2 million in the prior year. Water infrastructure revenues increased $19.8 million or 11.4% in the quarter to $194 million. The increase resulted mainly from acquisitions and from specialty drilling operations.

Mineral exploration revenues increased 67.8% to $50.8 million from $30.3 million last year, with demand increasing across most regions, the largest demand increase being in Africa and Mexico. Layne Energy revenues decreased 51.3% to $5.8 million, as a result of the exploration of favorably priced forward sales contracts and to the current lower natural gas price environment.

Cost of revenues increased $32.2 million to $197.7 million or 78.1% of revenues for the three months compared to $165.5 million or 76.2% of revenues for the same period last year. The increase as a percentage of revenues is primarily focused in the energy division as a result of nearly flat production costs combined with lower revenues due to the lower gas prices.

Selling, general and administrative expenses increased to $31.7 million in the quarter from $30.3 million in the prior year, primarily the result of increased incentive compensation expenses of $1.9 million as a result of higher earnings and $1.1 million in expenses from acquired operations, offset by reductions in various other expense categories.

Depreciation, depletion and amortization decreased in the quarter to $12.1 million from $14.3 million primarily due to lower depletion rates in the energy division resulting from updated estimates of economically recoverable gas reserves.

Equity in earnings of affiliates decreased in the quarter to $1.6 million compared to $0.4 million in the previous year as a result of a customer-driven project delay at a large South American mine. Interest expense decreased $295,000 to $517,000 for the quarter as a result of scheduled debt reductions.

Income tax expense was $6.6 million for the quarter, an effective rate of 50.4% compared to a benefit of $4.4 million for the same period last year as a result of an impairment charge for oil and gas properties. Excluding this charge, the company would have recorded income tax expense of $4.2 million or an effective rate of 49%.

The increase in the effective rate was primarily attributable to the impact of non-deductible expenses and the treatment for certain foreign operations. The net result for the quarter was $0.33 per share compared to a loss of $0.45 per share last year, that loss also including an after-tax non-cash impairment charge of $0.68 per share.

The company’s balance sheet at July 31 reflects total assets of $764.1 million; stockholders’ equity of $480.8 million; total long-term debt of $6.7 million, excluding current maturities of $20 million; and cash and cash equivalents of $49.2 million. The company generated $16.1 million in cash from operating activities in the quarter. Investing activities totaled $34 million and included $752,000 in unconventional gas expenditures with the remainder divided almost equally between acquisitions and additions to property, plant and equipment.

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

Andrew Schmitt

Thanks, Jerry. When you look at the individual business operating segments, our mineral exploration division is once again a clear winner. And it continues at a very strong level. Both the year-over-year and sequential improvement is coming from our wholly-owned business. If we were to pull that piece out of the segment reporting that you’ve seen that division’s quarterly EBIT is $7.3 million versus $1.2 million last year on a revenue increase, as Jerry said, about 68%.

Our total of the Latin American affiliate net income is below last year, $1.6 million versus $2.4 million. In this case, the issue really was a shutdown at one of the larger mines that we operate on in Chile. The problem was safety-related, but it was not a problem that we had. There were other problems on the mine. The mine just resumed normal operations. Our affiliate results should be improved next quarter. We will also point out that our Latin American affiliates are playing in a key role in the efforts to safely free the trapped miners in Chile.

Turning to the water infrastructure businesses, the biggest year-over-year improvement this quarter was in our legacy water well drilling pump division, ground water treatment. Their division EBIT was up about 56%. This improvement was split really pretty evenly between the Afghanistan water well project, improvements that we saw in the Midwest Great Lakes regions, and in the overall ground water treatments part of the company. The rentals in our geoconstruction businesses, which are the most infrastructure intensive, they were up a combined 17% revenue. But if you back out the W.L. Hailey acquisition we made last November, the overall revenue is essentially flat as was the division EBIT.

We announced two expansions in this water infrastructure group of businesses recently. Intevras is a treatment company, which will be primarily focused on treating the frac flow back water and produce water generated from the large shale natural gas plays in the US. We also purchased companies in Brazil and Uruguay, which will operate as part of our geoconstruction division. And that focus will be on sole stabilization and foundation markets. We like Brazil quite a bit, and as you know, Brazil has been an area of expansion for our mineral exploration division as well.

Layne Energy’s revenues, which you could see in the segment earnings breakout, reflect the weak spot market pricing for the quarter versus an 8.85 price for the quarter a year ago. Production is being held really steady. It’s flat year-over-year. EBITDA is 36% for the quarter, still the highest in the company, but pretty small solace to us, as we’ve grown accustomed to the energy business being an oversized bottom line profit contributed to the company. We are drilling a few wells, mainly shallow well or the whole leases, and we won’t probably maintain that posture as long as natural gas pricing stays below about $5 million per Mcf.

Looking forward, for the balance of the year, the mineral exploration business continued to be planing out at a very high level of activity. It will slow a bit due to the rainy season parts of Africa, but that is fairly typical in the third quarter. The Latin American affiliates look very solid as well.

I would tell you that we keep a watchful eye for any meaningful slowdown in China that curves any demand for minerals, but at this point we really haven’t seen that. We certainly haven’t seen it in gold and copper pricing. Third quarter looks pretty set to us with the work we have. And at this point, we’d anticipate the normal seasonal slowdown, which begins about mid-December and last anywhere from six to eight weeks.

Layne Energy recently has experienced even lower spot natural gas prices because we had the extremely hot weather throughout most of the country, and that’s cooled a bit. Typically, these prices would move up as we head into the winter, and we’d expect that to be the same case this year.

I think when we step back and look at the natural gas business, the new regulations particularly in the Marcellus Shale, the higher cost I think was originally estimated to drill and complete those properties, and especially the acquisition costs that have been laid into some of the new plays by the large E&P companies. It would seem to argue to us the natural gas prices are going to recover sharply with any meaningful move up in the US economy.

When you look at the water infrastructure group, looking forward it’s more complicated to forecast that business in the commodity side of our company. The Reynolds business is at a backlog of roughly $400 million. We also have an additional $100 million or so award we’ve been awarded, but the contracts are still in the process of being finalized. So it didn’t make the official backlog numbers.

We naturally would queue into that backlog as long as the weather is good. It’s typical for the construction side of our business. We will need to keep out muscling this economy with volume and all the Reynolds businesses, as the margins have weakened over the last several months. It could be we’ll need about 15% more revenue at current prices for Reynolds to remain flat with last year. The W.L. Hailey acquisition sort of be a key if Reynolds has to match last year’s EBIT. It would still be a challenge, I think.

The Layne legacy water well drilling repair business improvement last year had been due to the results of the Afghanistan project until this quarter. We’re finally, and I do say finally, seeing some pickup in the great – in the Midwest Great Lakes region of the country and in some of our groundwater treatment activities. We definitely need a boost from this domestic water supply market as a contractor for the government that is in charge of moving our rigs from location to location.

In Afghanistan, lost control of a rig last month and the rig was seriously damaged and couldn’t be easily repaired in that country. So currently, our Afghanistan projects are down to just one rig. Our understanding at this point is we will continue working on the contract, but the profitability will be cut in half going forward. Even with this unfortunate incident, which fortunately no one was hurt, I think we have finally moved off a bottom at least enough for our legacy groundwater business to have a much better second half than last year.

Finally, our geoconstruction division will have a decent second half. But as we’ve said for some time, the Katrina work in New Orleans was as good a jet routing job as we have ever had in the company. And additionally, all the profits from that job came in the second half. So really it’s that project along with lower natural gas prices that are the main reason the second half comps look difficult for us. We do not see any significant dip in economic activity, just a little more competitive pricing on the big infrastructure side.

And as you can see from looking at our cash balances, and they dropped since this press release, we are still investing in areas that show promise and they were fairly conservative we wouldn’t be spending our cash if we had concerns about a continued recovery. That might take a little longer than it was like to be modest, but we still see things moving forward in a positive way.

Now if we have any questions, we’ll try to answer them. Lola, if you want to see if there are questions out there?

Question-and-Answer Session

Operator

Certainly. (Operator instructions) First we’ll go to the line of Richard Paget with Morgan Joseph. Please go ahead.

Richard Paget – Morgan Joseph

Good morning, guys. Andy, I wonder if maybe we could talk a little bit more about MinEx. I mean, if we look at the revenue run rates, it’s almost to the levels that we hitting the peak of the last cycle in calendar ’08. I know margins are a little bit lower, but I wonder if you could talk a little bit about how this cycle is unfolding relative to the last cycle, what’s your visibility right now given there are some jitters in the global recovery as we speak, and just what are your customers telling you in terms of what they are going to need going forward.

Operator

Mr. Schmitt?

Andrew Schmitt

I’m sorry. Richard? I’m sorry, I hit the wrong button here. Richard, I think the difference – Lola, everybody still there?

Operator

We lost Mr. Paget, but he could still be on the call.

Andrew Schmitt

Okay. I’ll answer Richard’s question. Sorry about that, folks. I said the difference between this peak and the last – this particular time and the peak in 2008 is that this doesn’t really feel like a book. Last time, it definitely did. And it felt like we were getting pretty frothy. This feels a lot more steady. We have laid out from peak to trough 800 people. We hired about 450 people back. Yet we’re running about the same amount of shifts as we were at the peak. So we are a lot more efficient. The pricing is not back where it was, but our margins are moving close to that. So we’re doing about the same work with a lot less people. We’re certainly more organized. It feels steady. Our customers are continuing the work. As I said, we probably planed out at a high level.

I don’t think that – I don’t think that we have any exaggerated frothy peak going here. I think it’s just steady at a high level and as long as the minerals pricing stay range bound where they have been. So we don’t get a significant slowdown in China, which drives so much of the appetite for base metals, or India having an awfully good recovery in their economy as well at 8.85% last quarter. So that’s a big factor in the go-to-market. So it doesn’t feel like a boom. It feels like working at a high level of activity, but in a very efficient manner and don’t need the pricing that we needed before to make roughly the same profits. So it feels a lot better this time in getting nervous at the peak. Okay?

Operator

And next we’ll go to the line of Ryan Connors with Janney Montgomery. Please go ahead.

Ryan Connors – Janney Montgomery

Thank you. Good morning. Staying on the MinEx business there, Andy, I mean, looking at your performance versus your competitors in the first half overall, it looks like your growth rate off of the trough has been significantly higher than your peers. I mean, it looks like your revenue first half up about 75% in the first half versus a growth rate 45% to 50% for the peers. So can you – do you have any comment on that and – or what the potential explanations are for that? And what your perspective is on what that means from a competitive standpoint?

Andrew Schmitt

Well, we typically get out of the block in our wholly-owned business pretty quick. I think it’s a mix of rigs that we have and probably the mix of business. So if you were to look at the last recovery, even going back to the Asian financial crisis when we first bottomed in calendar year 2002, we moved up about 7%. Most of the industry had not recovered. Then in the next year, we moved up 56% and pretty much straight along for a couple of years. Typically what happens is the mix of business with Boart Longyear, particularly with the products side of the business. They have inventory to work off, as they work off that surplus inventory for all the cancelled orders. Then you start seeing the products side improving for them. And they began to make up that gap.

Same thing with Major Drillings. They typically will have a higher concentration of juniors to small mining companies. So we move sharply when the Majors move. And eventually you see more junior fund-raising going on, more expansion in the gold sector or in the small – and they typically catch up and typically from an earnings standpoint, will pass up given the high mix of diamond drilling that they have in the company. Our Latin American affiliates follow a similar pattern. They are a little slow out of the blocks. They have the bigger contracts, but typically the pricing is not as good as our wholly-owned business because we don’t have a lot of long-term contracts. So we can move up quickly, and as soon as our activity moves up, we tend to move up on price once we become pretty convinced the activity is fairly stable. So what you’re seeing is very typical for the pattern.

When I say real plain out, then you would expect our Latin American affiliates to see improving prices. We’d expect Boart’s manufacturing to – prices to go higher for consumables, rigs, et cetera. And you would expect Major’s business with that nice, heavy diamond mix to begin become a factor as they shift to more diamond drilling. So if it happens like last time, that’s probably what will happen. And it’s not unusual, it’s more a reflection of the quick trigger on pricing, the mix of rigs, where those rigs apart, and the fact that we have very little encumbering us in terms of longer term contracts. So we can get out in a heavy, heavy exposure to the Major’s. So remember the Major’s were missing. And as I said, they acted more like small E&P or junior companies, and we were somewhat doubtful in the rigs that we’re asking for. But when they move, they move collectively in a big way and we typically take out of the blocks in a hurry. So given the concentration in the industry and the public company with Major, ourselves and Boart Longyear, pretty easy to watch the pattern and pretty easy to anticipate.

Ryan Connors – Janney Montgomery

Okay. That’s helpful. Now just to be clear, so you have begun to see in the wholly-owned businesses the benefits of pricing here in the first half?

Andrew Schmitt

We really have. We’ve started to move up in that EBITDA range. If you were to – it's sort of hard to do, but if you were to break out the wholly-owned business, EBITDA in the quarter was about 21%. So, versus a year ago at this time, the EBITDA probably about 14%. So we got probably about three-quarters of volume and about – and a quarter for pricing. So mix can have a factor on that, but at this point, as we saw into playing out an activity, when we start renegotiating these contracts for next year as long as we are comfortable with the volume of work and number of rigs that the customers are asking for. We will push them a little bit on price. But we don’t have to push them as much as we did in the boom. As I said, we’re a lot more efficient. And I’d say everybody just didn’t realize when you’re getting those frothy, frothy peaks like that. You’re really not – it looks good, but really at that point it’s all price-driven. It’s not your efficiency. You’d find that out after you come crashing down and start that process over.

Ryan Connors – Janney Montgomery

Sure. And then just another question on MinEx, to the extent you are able to do so, can you walk us through the financial impact of the recent acquisition in South America, specifically what the rough timing and magnitude of that will be in terms of the contribution to the equity affiliates line?

Andrew Schmitt

In the geoconstruction side of the business?

Ryan Connors – Janney Montgomery

No, in the MinEx side. No.

Andrew Schmitt

When you’re looking at the company in Brazil and Uruguay?

Ryan Connors – Janney Montgomery

Yes.

Andrew Schmitt

Yes. Those are on the geoconstruction side.

Ryan Connors – Janney Montgomery

Okay, got it.

Andrew Schmitt

Yes. That business is going to be tied to construction, more foundation side of the business. It’s going to be more foundation where slurry walls – they also do a lot in marine area, free supporting. Remember the marine work we did in Katrina, this company goes back 25, 30 years. The owners do with our key guys in our geoconstruction division as well. We like Brazil a lot. We have participated on projects with them, but just as a partner. And we decided to formalize the partnership and take a bigger piece of the business. So they are the operating general partner just like our Latin American affiliates will be, same type of relationship. We’re 50-50 partners. They run the show. Their business is a nice fit with our sole stabilization business. And we like the slurry wall, that part of the foundation business better and better.

And I would suggest we’d invest again in that area possibly before the year is out. We like it a lot. We see growth there. The margins are good. It can be a specialty of a specialty. There is a lot of work to be done on dams, as they re-certified dams and how they’ve hit their 50-year. It’s a little bit like you see (inaudible) would show the average age of pipes. And you know that clock continues to tick away. And we’ve seen improvement secured in place, stronger improvement than we’ve seen in other parts of the heavy civil or construction business. So it looks a little bit like that in the foundation area, and we like the specialized nature of that business. So you’re probably seeing another investment in that area for us as well. In this particular case, it probably won’t be a joint venture would probably be just an outright purchase.

Ryan Connors – Janney Montgomery

Okay. That’s helpful. Thanks for your perspective this morning. Take care.

Andrew Schmitt

Thanks, Ryan.

Operator

Next we’ll go to the line of Jonathan Ellis with Bank of America. Please go ahead.

Anish – Bank of America

Good morning. This is Anish [ph] calling in for Jonathan Ellis. I guess my first question is, how many wells are you operating as well in the second quarter and do you plan on looking up any – for the full year?

Andrew Schmitt

I think we’ve got about 540 wells that we are operating. What we’ve been doing is just drilling a little bit of shallow oil well – five, six wells. We haven’t done much on the natural gas side, except we are going to lose the lease, and we like the area. So we’ll go ahead and drill the well to hold the lease. But it’s not going to be significant. I think if you looked at the gross production year-over-year, we’re almost in that production, almost flat with a year-ago quarter. We had taken these wells down to really what we had forward sold. We are staying right about that level right now.

I don’t see much reason to wrap up the production unless we see a move up in gas prices, and the economics would look attractive to us. I forget at this point how many PUDs we have to drill, but we don’t have any shortage of drilling locations there. We are still looking at properties, and we are seeing recently an upturn in the number of properties coming to the market, more oil than gas, which actually suit us right now. In fact, we are down in Houston this week in two data rooms, looking at properties. So the gas market, we just can’t get really good read on. Sort of decided we’ll just wait it out since we don’t have any bringing ideas about where it’s going to go or how quickly it goes. And if we can find oil properties that make sense, our comfort level is little bit higher there.

Anish – Bank of America

Okay. That’s helpful. And I don’t know if you’ve addressed this, but what is the pricing on the backlog business versus your current contract?

Andrew Schmitt

On the Reynolds backlog, the business – for the Reynolds businesses?

Anish – Bank of America

Yes.

Andrew Schmitt

It might be – if I look at the operating margin, I give some insight in that. For the quarter, bottom bottom-line fully loaded on Reynolds division EBIT. It’s about 4.7%. Last year it was about 5.4%. So I’d say the backlog we have now where we were bating jobs in the – two years ago, in the 12% range, we sort of stepped down to 10%. And it’s probably now in the 8% range, if I have to guess, fully loaded. That would not be true of the CIPP business. It’s a little bit higher margin. But when you look at the mix work altogether, you’re talking about a decline in maybe 2%, maybe 1.5% range. And it’s easy for that group just to take the revenue and take the 1% or take the 1.5%, and that will be the gap we are trying to make of.

Anish – Bank of America

Okay. That makes sense. And have you also looked at adding additional drill rigs in the mining business, either be through acquisitions or ordering piecemeal given the increased utilization rates? And what are your current utilization rates for the rigs?

Andrew Schmitt

We’re probably moving in that 80% range. So 90% of that is much as you can do because you’ve got downtime and you’re moving rigs between locations or something happened on the mine or you’ve been told to wait. It’s 90% probably low (inaudible) at the peak. We may be moving a little bit north of 80%, 81%. But I would tell you we are probably in the countries we operate, in the countries that we’re operating in. We’re probably approaching about where we’d like to be utilization-wise. So in order to expand, we would have to add rigs. We’re milking the efficiencies out of the equation pretty good. And we’re either going to bring the equipment out of the mothballs. We’re going to add new rigs. So we typically upgrade.

We do not make a lot of acquisitions of companies in the mineral cycles. Boart Longyear and Major have been a lot more active than we have historically in this area. But we typically do well in the market share department once you back out all the acquisitions. So it allows us continually upgrade. We wouldn’t turn any acquisition down in that area that look good to us right now. But right now, we are starting to planing out a little bit. So we’re ready to go move it with prices going into next year. We start our negotiations in November/December with the customers, or even we’ll have to add some capacity.

Anish – Bank of America

Okay. And then I guess while we’re on pricing, have you started negotiating pricing for 2011? I just want to be clear on that in terms of the mining contracts and what year-over-year change are you projecting there.

Andrew Schmitt

We will more than likely get busy around November when they start calling for budget numbers. So it will be more October/November. And particularly the Majors do a more formalized – formal approach for their budgeting and whatnot. They will begin to call for rigs. They will begin to reveal some of their drilling plans. They will begin to ask about pricing and what numbers should they use for next year. I think since everybody will be tighter coming a little discussions clearly than a year ago, there will be some movement on prices, but as I said, it doesn’t seem like a boom where you’re really hitting that price lever nor do I think everybody needs to at this point. I got a good price level on the commodity side, on the gold side. You’re probably looking at hopefully 5% to 10% moves up in that area.

Anish – Bank of America

Okay. That’s really helpful. And that’s all my questions. Thank you very much.

Andrew Schmitt

Okay. Thank you.

Operator

And next we’ll go to the line of Steve Ferazani with Sidoti. Please go ahead

Steve Ferazani – Sidoti

Hi, good morning, Andy. Good morning, Jerry.

Jerry Fanska

Hi, Steve.

Andrew Schmitt

Hi, Steve.

Steve Ferazani – Sidoti

I want to ask about – I guess pleasantly surprised that you indicated some improvement on the legacy water business. Is there a lot of maintenance stuff that’s been pushed off? Are you actually doing some new drilling activity? Can you give a little more color on what you are seeing there?

Andrew Schmitt

Yes. What we’re seeing is mainly improvement in the repair and maintenance side. There is no question that you can always stretch rubber band so far. And that may be a little bit of a replacement well. With all the gloom and doom in the state budgets and the local budgets, tax revenues for some states have improved. You just don’t hear a lot about it. And I’d say we see a little bit of loosening of the purse strings, whether it’s forced because they have to do the maintenance. There is no question that hot weather probably drove a little bit of the delayed activity inside equipment comes under such stress when they have to ramp up their pumping activities and people are watering the yards and using more water. So it’s hard early stage to sort out. It just feels like we’ve bounced off the bottom in that legacy business.

When I look at western US, it’s an area that we’d like to see pick up at Arizona, Colorado, California, Nevada area, because that’s been one of the more depressed. We’d like to see Florida move up. For us it’s up because we’ve got the specialty work down there with the injection well business in South Florida. But we’d like to see that Florida and Georgia area move up a little bit for the same reasons. We’ve not seen that. Most of our improvements have been in the agricultural areas, in Arkansas, parts of Mississippi, parts of Alabama. We haven’t seen those housing areas pick up. Great Lakes had been weak for us. But that includes the greater Chicago area, the greater Milwaukee area, both of the city zone surface water, but the surrounding suburbs are groundwater. Some work improvement in the Michigan area. So it’s good to see that Midwest area, certainly the Kansas, Nebraska, Iowa picking up in that area as well. So it’s a start.

You’d like to see the more heavily hit areas in the housing sector see some growth or not coincidentally many of those states had the biggest problems budget-wise, notwithstanding Illinois has its own profit. But – so we hope it’s a start. And it feels a little bit like the bottom, and like I said, even with the rig that rolled over and taken out of the mix there, I feel good enough. I think that legacy will have a better second half than last year and hopefully that will begin a slow recovery. It will be slow, but bouncing off that bottom and generating a decent EBIT would be helpful. That’s been a big part of our business forever.

Steve Ferazani – Sidoti

How much longer can we expect Afghanistan to contribute? Do you have any timing on that?

Andrew Schmitt

I think now with the one rig we’ll probably go into next year, as we have still the wells lined up, we just have less equipment. To do it with unfortunately Boart Longyear a week later moving the rig – the contractor or subcontractor moving the rigs roll that rig too. So after reading the Congressional record, very nice testimony about both Layne Christensen and Boart Longyear and the only companies that have been able to extract water at that depth and clean it up to that purity, no sooner I had read it, within two weeks, half of the deep well capacity for the military disappeared. A very regrettable situation.

Steve Ferazani – Sidoti

Can you add a little bit on the margin pressure on the Reynolds side? It sounded like you said the CIPP was holding up better. Is there competitive pricing there that’s an issue or –?

Andrew Schmitt

I think we’d probably reach the bottom where people can work. What is that where the prices follow to the cost of the least efficient competitors, I think we may have finally reached that point. I’m not seeing jobs bid any lower. These are guys don’t have a stomach part or it’s about as low as they are willing to bid them. And I think everybody has discovered at least Reynolds and those businesses can make money at these prices. I’m not sure a lot of, what I call, the refugees from the residential contracting area and the refugees from commercial contracting, I think they are probably finding apart at which you only bonded – these bonded municipal jobs, some of them quite sizable and loaded with a fair amount of risk. I think we’re probably seeing the once that dove in a little bit too aggressively not realizing they can’t do the work. Jerry was with the bonding people, and clearly they are seeing more defaults. He was with them, what, last month?

Jerry Fanska

Yes.

Andrew Schmitt

And they have clearly indicated they see more defaults. So our guess is some of the busy people that – look, we used to bid on the work and have five to seven competitors bid on it. Then we went for bidding where we had 12 to 15. Now we’ve gone to the 18 to 20. I think that last straw sort of fit the bottom there. That’s it, Steve.

Steve Ferazani – Sidoti

Okay. Fair enough. Thanks, everyone.

Operator

And we’ll go back to the line of Richard Paget with Morgan Joseph. Please go ahead.

Richard Paget – Morgan Joseph

Hey, guys. Just quickly on the energy, it seems like you guys manage your costs pretty well. Should that be kind of an expectation going forward that if we keep these levels and gas stays around this area, you’ll still be able to make a marginal – the small profit?

Andrew Schmitt

I think we have and I think we probably need to be in that. I feel a bit more comfortable. We hadn’t dipped down recently into the 3.50, 3.60, 3.75 range, which happened as I said after the weather started to cool a bit. You’d think with prices going up beginning probably in October or get through the September shoulder period, that October, November, December at the current off level we can make some money that moves a little bit closer to 4.50 to 5.00 range, get off this 3.50 range. I’ll be curious to see what the results for the month of August look like and early parts of September. But yes, we will probably get a little boost as we come into the year. And if we do, I think similar results will be expected.

Richard Paget – Morgan Joseph

Okay. And then just to be clear, on the Afghan projects, you said profitability got hit because one of the wells was taken out of commission. Is that fair?

Andrew Schmitt

One of the rigs – yes, we’re – I don’t know – according to our contract, we will be paid for the rig, whether that rig will be returned back to the US, that’s really the government call. If I was in the US and we had the facilities that you have in the US, you could see if you can repair it. It’s just not practical in Afghanistan. But we’ll see if it gets returned, put it back in commissions at this point we’ll just shoulder forward with the one rig as will Boart at this point, I guess. So we actually have another contract. It’s in the northern part of the country that we are talking to the one of the primary contractors for the government that would like us to move another rig in that part of the country. So it’s just difficult to get the real clear direction at this point, things moving at a little different pace. So we will see and – for reasons, we’re not giving all the information in terms of movement.

Richard Paget – Morgan Joseph

Right. Do you get the sense that once these contracts in hand are done, there is more work to do, or that pretty much gets what the plans are?

Andrew Schmitt

Richard, our view was that we were there for the surge in personnel and because of the anticipation of the increased level of activities prior to the winter season. So I just don’t know. That’s a tough one to say at this point in time. But as I say, they have talked to us about another contract in the northern or in the southern part of the country now. And we’ll see. I mean, we’ll certainly turn in a bid if asked to.

Richard Paget – Morgan Joseph

All right. Thanks. That’s all I got.

Andrew Schmitt

Okay. Thanks, Richard.

Operator

Next we’ll go to the line of Steven Fisher with UBS. Please go ahead.

Steven Fisher – UBS

Hi, good morning.

Andrew Schmitt

Hi, Steve.

Steven Fisher – UBS

Just one other follow-up on the Afghanistan. Is there any recovery you can get for the lost time on that rig? Is there any sort of insurance that you have there?

Andrew Schmitt

We’ll be paid for the rig itself. So there won’t be any loss in terms of the value that we have on the books for the rig. Our contract had to stand by on two pieces. It had stand by on the crews. Those crews back in the US. So we’re off at standby. And we have a standby tied to the equipment, which as soon as the government pays us, our assumption is that that standby will stop. There are still supplies in inventory that are inaccessible. We need – I don’t know exactly what our operating people will make a determination there. They may keep the supply there as backup, which is always probably a pretty good idea as long as we’re running the rig and particularly with the prospect we’ll have to move another rig over there.

Steven Fisher – UBS

Okay. And on the water business in general, I mean, I wonder if you can give us any sense of direction on backlog over the next couple or few quarters. And you mentioned about $100 million of pending awards. And I guess there is some acquisition. And I guess just wondering where the pace of business can go. So what all those pieces mean together when you look at the backlog outlook in the next two to three quarters?

Andrew Schmitt

Well, I think that we will be pretty – I'm looking at last year’s backlog in this August/September. And we ramped up to about $394 million in October. My guess is, with the acquisition of Hailey, we push a little bit past that. Don’t you think, Jerry?

Jerry Fanska

Yes.

Andrew Schmitt

We’re right at $397 million – $394 million, and yet a $100 million would be $494 million. We don’t cut into that backlog at a pretty good rate. So that probably would be slightly ahead of where we were in last year October, which is a pretty good peak. There could be – including the acquisition when we hit November, it was at $434 million with the company we bought. Okay? So the question is, are we any higher than we would on an apples-to-apples comparison? I don’t think so, Steve. And I think it’s all flat – I said we needed about 15% more revenues. That would tell you that we need about another $50 million, $60 million in backlog beyond where we were in November on an apples-to-apples, including the Hailey acquisition. We will just see if we get it. I know the guys at heavy civil are still seeing a lot of building activity. And I think cured-in [ph] place business may have sort of flattened up. So we’ll just see – if it comes, it would probably on the heavy civil side, maybe not the CIPP. We’d just have to see.

Steven Fisher – UBS

Okay. And sorry, can I ask you to run through the numbers on what your cash and debt position is again at the end of the quarter? I know you said you’re a little lower after that as well.

Andrew Schmitt

Yes. I think I’d probably say what it was last night.

Jerry Fanska

We have $26 million in debt, 26.667. $20 million of that actually was paid off – or $13 million of that was paid off in August and the rest of it that we’ll pay in September and the rest of it next year. And then we’d be completely free of debt. Cash at the end of the quarter was –

Steven Fisher – UBS

I guess at $49 million.

Jerry Fanska

$49 million, $50 million.

Steven Fisher – UBS

Yes, okay.

Jerry Fanska

So that will come down with the payment of the debt. But still $20 million, $25 million available.

Andrew Schmitt

Yes. We had $30 million in the banks last night, was about $31 million. Debt included in the banks scattered around the world, but in the various operations. But just in the US banks sitting there was $31 million last night.

Steven Fisher – UBS

Okay. Great. Thanks a lot.

Operator

Next we’ll go to the line of John Rogers with D. A. Davidson. Please go ahead.

John Rogers – D. A. Davidson

Hi, good morning.

Andrew Schmitt

Hi, John.

Jerry Fanska

Hi, John, how are you?

John Rogers – D. A. Davidson

Good. One thing I – I just want to be clear, Andy, when you were talking about the water business, should we see a seasonal uptick in the third quarter? We’ve seen that in the past that you were sort of telling about planing and –

Andrew Schmitt

We had good Octobers in the past. You’re right. We have had good Octobers, and that typically our business on the municipal side turns to the local line legacy drilling pump repair. Around Thanksgiving, things start to slow. Then you hit the winter month, and it really becomes an issue of how much work can you get done. I would think certainly compared to last year you would see an improvement. And October – October, this quarter is typically a pretty telling quarter and then we’ll slow down a little bit that’s typical. So we’ll see. It’s a good question, John.

Historically, October – August, September, October have been pretty decent for us in the legacy side. The Reynolds backlog is so big. You can look at it and sort of gauge how much of work that they are actually getting done, and they get a lot of work done when the weather is good. And if we have real problems in the winter, then it typically affects their ability just to generate, get out on the site and do the work. But that’s a good question. I would say historically that’s been the case. And if I say I think we’re bouncing off the bottom here and maybe bouncing up a bit, that should happen. I think that we could look for that actually.

John Rogers – D. A. Davidson

Okay. And then the second thing, in terms of your depreciation rate, it’s come down and I guess – is that a good rate to be thinking about now?

Jerry Fanska

In the second quarter?

John Rogers – D. A. Davidson

Yes. You dropped down to $12 million and –

Jerry Fanska

It will probably a tad bit higher than that, but not too much.

John Rogers – D. A. Davidson

Okay.

Jerry Fanska

I mean, most of that was just missing the energy.

John Rogers – D. A. Davidson

That’s what I thought. Okay.

Jerry Fanska

And the depletion reserve calculations. So that depletion rate will down for the rest of the year. So it may go up a little, but not too much.

John Rogers – D. A. Davidson

Okay. And then just – I know we talked about this a little bit, but in terms of – I forgot the name of the company, the South American geoconstruction business, will that be – where will that be consolidated? Or I mean, in what segment will that be included in?

Andrew Schmitt

That will be in the water infrastructure sector.

John Rogers – D. A. Davidson

Okay. And is that –

Andrew Schmitt

That geoconstruction.

John Rogers – D. A. Davidson

Okay. And with the large uptick and it looks like in the backlog that they have, is this transaction immediately accretive or do you still have to amortize that backlog?

Andrew Schmitt

No, I think in that joint venture, I mean, they have got the work we announced one of the jobs they have in the mining side of the industry. And really it’s a lot like the Latin American affiliates. I mean, these guys are up and running. We’ve made some pretty big capital contributions to specialize the equipment they need of the job on the mine for valet [ph]. So I’d expect these guys –

Jerry Fanska

Should be incremental.

Andrew Schmitt

Yes. I would think that they would make some contribution. We’ll have to segment that on the equity in earnings. Otherwise it will be crowded out with the Latin American affiliates' exploration business.

Jerry Fanska

We probably got 50%, John, but they will be picked up as equity earnings of affiliates. If you see the revenue, you will just see our share of their earnings.

John Rogers – D. A. Davidson

Okay. And then in terms of the MinEx joint venture, is that operation – the delays that you saw in the Chile project, is that behind you now? Is that back up and running?

Andrew Schmitt

Yes, that’s back up and running. There were problems on the mine and we were down – I don’t know, several weeks. So pretty serious issues, but we are back up and running. And as I said, we are playing a pretty important role. Our affiliates are in the recovery – our team to recover the miners that are trapped, only mining in Chile as well. So in fact, we’re moving people from the United States over to assist with that. There is a plan A and there is a plan B. Plan A is the one discussed pretty much with the raise bore attempt to follow one of the pilot holes down and raise it up, and after three or four-month operations. Plan B is we had one there with seven rigs on the site. Three of them were ours. We had drilled into the workshop one of the holes. I think the three holes, two are case, one has been left open, one into the workshop, about a five-inch hole.

We’re going to attempt to go in there, partner as well, with a rig and see if we can’t open that up 12 inches on the first path out and they come back on the second path and open it up another 12 inches. It will be challenging. It’s about 680 meters in angles. So you’re doing this with a rig that can drill minerals. Reverse circulation can drill water wells. So we will see if that can be done. But we are right now – we had a conference call yesterday looking for certain specialized skills we have in Layne in the States and moving the rig from our Latin American affiliates on site to – the initial rigs are seven rigs. I think we had three, Major had one, Boart had one, and a couple of the local companies – I think Foraco had one. So – but those are gone, and that comes down to the recovery of our – I say plan A is a raised bore as far as I know. And they will begin that process. Plan B, little bit like the situation with own BP Macondo well, plan A and a plan B. If we could get the hole down, we might be able to get there sooner than the estimates for plan A. But I’d say it won’t be easy, but we’re moving on that. I think the rig moves on Friday, tomorrow.

John Rogers – D. A. Davidson

Okay. Well, good luck with that. And I hate to ask, but I mean, is it financially significant?

Andrew Schmitt

The work is being paid for, but it’s just – we'll just call it time and material. The main focus is to see if we can get those people out.

John Rogers – D. A. Davidson

Okay. Okay. All right. Well, thank you.

Operator

(Operator instructions) And we’ll go to the line of Christopher Patel with Janney. Please go ahead.

Christopher Patel – Janney

Yes. Hello, guys. Thanks for taking my question.

Andrew Schmitt

Hi, Christopher.

Christopher Patel – Janney

Just in terms of acquisitions, you've talked about being opportunistic in the energy space in this environment, and the two recent deals that we've seen, they were in water and MinEx. So, can you talk about why the energy deals haven't been there? Or I guess more broadly, how you look at energy from a strategic standpoint now given where natural gas prices are?

Andrew Schmitt

Okay. There is – if we go back, say, a year ago at this time, I think there was still an expectation in the natural gas market. And you saw – and I’m not talking about the big shale plays that the Shell Oil and Exxon and people like that have come in and gobbled up. But when you look at the conventional and unconventional gas plays, about a year ago we were still seeing deal flow in that area with an expectation that the gas prices were just down. And they were going to rebound. My view is a lot of that has been growing out of the market, and the gas, sellers of those properties just pulled back and really didn’t pull a lot of property on the market, even though several of the larger E&P companies like ConocoPhillips said they were rearranging the portfolio and others like have focused on the big shale plays.

So a lot of talk about rearranging, but not a lot of people willing to put those properties on the market on the gas side. The liquid side, natural gas, liquids and oil recovered and we saw a rash of oil properties come on the market. We really like what we saw early when the oil price was $55 and people thought that was going to break $50. As it moved up to $75 to $80, those values really took a big leap. And then of course, everybody pushed their focus towards new oil plays that could be drilled in unconventional ways. So we’re now seeing all properties sort of settle out a little bit and they are attractive. The natural gas properties, I don’t think anybody can really get a view on them. So we are not seeing those properties still come to market. I think when they do, it has to be with the expectation that they are not going to be purchased. Purchasers aren’t willing to hope that we’re going to look at something north of $6 an Mcf.

I think you will have to see pricing and something that more likely represents the current range. And it’s going to take a while for, I think, sellers to get there. On the oil side of the business, what gets us better is low decline curve, West Texas, Permian oil, where you’ve got producing properties that can be down spaced. Okay? When we get into projects where there is a lot of exploration to be developed, then it begins to stress us a little bit in terms of capital allocation if we are not buying cash flow and we were to buy an oil liquid’s heavy property. It would likely be with a partner. That partner might be an industry partner. It might be private equity.

There are opportunities on a transaction we really liked, but it required a lot of capital to develop, lots of PUDs to be drilled. That probably will push up depending on the size. You get much north of $100 million, it’s probably going to push us into the partnership. We’ve got cash flow coming from producing properties. It could be bought at a decent price. It can be extended a little better down spaced. That’s probably we finance into ourselves. So that gives you sort of a – and that would be on the oil side. It’s not that we are terribly afraid of gas. We just don’t see much that comes to market. And if it did, it would have to reflect the current outlook, not the hoped-for outlook. I think all more likely reflects a current range or value in the $75 oil price range. I’m not seeing gas properties reflect $4.50 range.

Christopher Patel – Janney

All right, great. Thanks so much.

Andrew Schmitt

Okay.

Jerry Fanska

Thank you.

Andrew Schmitt

Thanks, Christopher.

Operator

And there are no more questions in queue.

Andrew Schmitt

Okay. Thanks, everybody. We appreciate your time, attention and interest. And we will continue to push forward and hopefully against the backdrop of a modestly recovering economy in the US. It begins to have a more positive impact on some of our order supply business. Thanks again. Thank you, Lola. That’s it.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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