Executives
Greg Rosenstein - VP, IR
David Dunlap - CEO
Analysts
Joe Hill - Tudor Pickering & Company
Robin Shoemaker - Citigroup
Marshall Adkins - Raymond James
Geoff Kieburtz - Weeden & Co
James West - Barclays Capital
Bill Sanchez - Howard Weil
Stephen Gengaro - Jefferies & Company
Daniel Burke - Johnson Rice
Joe Gibney - Capital One Southcoast
William Conroy - Pritchard Capital Partners
Jeff Spittel - Madison Williams
Superior Energy Services, Inc (SPN) Q3 2010 Earnings Call October 28, 2010 8:30 AM ET
Operator
Good day ladies and gentlemen. Thank you for standing by. Welcome to the Superior Energy Services Third quarter earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, October 28, 2010.
I’d now like to turn the conference over to Mr. Greg Rosenstein with Superior Energy Services. Please go ahead, sir.
Greg Rosenstein
Thank you. Good morning everyone and thank you for joining today’s conference call. Joining me today are Superior’s CEO, David Dunlap; and also Ross Burkenstock, our Vice President of Corporate Accounting who is sitting in for our CFO Robert Taylor who is out ill today.
Let me remind everyone that during this call, management may make forward-looking statements regarding future expectations about the company’s business, management’s plans for future operations or similar matters. The company’s actual results could differ materially due to several important factors including those described in the company’s filings with the Securities and Exchange Commission.
During this call, management will refer to EBITDA, which is a non-GAAP financial measure. And in accordance with Regulation G, the company provides a reconciliation between net income and EBITDA on its website.
With that, I'll now turn the call over to David Dunlap.
David Dunlap
Thank you, Greg and good morning to everyone. Last night we reported revenue 435.4 million, EBITDA of 121.2 million and net income of 33.2 million or $0.42 per diluted share. The company continues to progress and our strategy to build out our core intervention and drilling products and services in the North American land and International Markets. During this quarter we relocated assets from our Gulf of Mexico drilling products business to land markets in the US and we took delivery of new assets to feed the growing demand for premium pipe rentals.
Our revenue and earnings from the North American land market continues to grow faster than the rig count, third quarter revenue from the North American landmark, it was a record 158 million, that’s an increase of 31% sequentially, and an increase of our 121% year-over-year. We experienced utilization gains for coiled tubing in almost every district and continue to see moderate price gains in some of the US markets.
As expected Gulf of Mexico revenue declined with revenue of 162 million which is a 16% decrease sequentially and a 27% decrease year-over-year. The deepwater drilling moratorium and the residual slowdown in shallow water coupled with less engineering and project management work lead to the decline. Our results include very little contribution from the wreck removal project which is just about complete and no P&As were performed on Bullwinkle due to the timing of Droshky coming online.
I'll discuss in more detail later some of these comments, the third quarter demonstrated why we like both product line and geographic diversification. We benefited from a strong rebound in the Marine segment as a result of support work on the Macondo oil spill and high utilization for the 250-foot class liftboats which were out of service from most of the second quarter. Our efforts in the quarter related to the Macondo spill response helped significantly to overcome the loss of revenue related to the deepwater drilling moratorium. International revenue was 116 million which is a 3% increase sequentially and 26% increase year-over-year. The biggest sequential gains were on well control, specialty tubulars and subsea services.
I'd now like to discuss our segment performance in detail starting with the subsea and Well Enhancement Segment. In the Subsea and Well Enhancement Segment revenue was 289 million and income from operations was 40 million which represents sequential increases of 2% and 22% respectively. The high incremental margin was primarily due to the increased activity in coiled tubing and cased-hole wire line. Revenue increased sequentially 31% to 111 million on land and 4% to 74 million internationally, while Gulf of Mexico revenue declined 19% to 105 million.
The product line showing the largest sequential increases in revenue were coiled tubing and cased-hole wire line services. In the US, coiled tubing revenue continues to demonstrate one of the strongest growth areas for the company. Revenue from the company's 33 coiled tubing units on land in the US has increased 155% over the third quarter of 2009 and 37% sequentially. Coiled tubing continues to benefit from the proliferation of multistage fracturing projects at horizontal wells where it is being used to drill out plugs and wash out profit from these frack jobs, which is the big step change from the traditional uses of coiled tubing and it is driving higher utilization.
We anticipate that this will continue into next year and demand for coil tubing should continue to expand as horizontal drilling and completion techniques are up five to more oil reservoirs in the US. Internationally, the revenue increase was driven primarily by subsea work and well control services. We have not seen any changes in Hallin Marine’s primary market and so our outlook for Hallin remains unchanged from last quarter.
However we have been successful in moving Hallin vessels into areas outside of their traditional South East Asia market. The Ullswater was in West Africa from most of the third quarter and we expect this vessel to remain in the West Africa market for some time. We also expect to have at least one of our vessels in Australia before the end of this year and probably in the market on a permanent basis.
In the Gulf of Mexico, about half of revenue decline was due to the fact that we essentially wrapped up the BP Wreck removal project in the second quarter. We also had a couple of other end-of-life project conclude there in the second quarter. The pace of permitting for end-of-life work was slow at the beginning of the third quarter or as a result of the oil spill, but did pick up as the period progressed.
So we started temporary reduction in P&L activity. We are very pleased that on acquisition of the sand control assets from Baker Hughes. Superior completion services is the newest addition to our theme that brings a tremendous reputation for technical innovation and service quality which will benefit us greatly. This business is today largely dependant on the Gulf of Mexico market and as a result is significantly impacted by the lack of new well permits in the deep water and shelf.
However despite these tragic market conditions, this business is about breakeven point and will become a solid profit contributor as new wells begin to drilled in the gulf. In addition, we’ve already begun introduction of this technology into the international markets and expect to see contributions from these markets in the near future.
There is a lot of interest in what the new BOEM regulations regarding idle iron might need for Superior. At this point it is difficult to quantify, but we believe it will accomplish what we thought might occur as a result of Macondo, which is an acceleration of P&A and decommisioning work in the Gulf of Mexico. After issuing the notice to leaseholders, the BOEM sent letters to operators lifting structures and wells that need to be removed with instructions on how operators are to submit their abandonment plan.
Operators have 120 days to submit abandonment plans from the time they received their letters from BOEM. The idle iron coordinator of the BOEM will then review the adequacy of their plans with the operator and the abandonment plan progress will be tracked by the idle iron coordinator once it’s been approved. We are working with many of our customers that help develop and implement their plans.
How much of this work is incremental to what is already being planned, it’s hard to determine. I think what this does is create new visibility and awareness for end of life activity in the eyes of industry participants that is the market leader in P&A we will certainly generate our share of the work.
To move on to the drilling and products segment where revenue was a 118.7 million for the quarter and income from operations was 15.4 million which represents a 2% sequential decrease in revenue and a 24% sequential decrease in income from operations.
Given the decline in the deep water Gulf of Mexico and the slow pace of permitting in the shallow water, I think our results in this segment are better than expected. This is attributed to an increase in demand in the US land markets where revenue increased 31% sequentially to $47 million. The 10% increase in the domestic land rig count and 14% increase in the horizontal rig count drove higher demand for accommodation, stabilization equipment, premium drill pipe and other drilling related equipment.
More importantly than just horizontal wells, the migration that we are witnessing in the US to longer lateral sections and high pressure formations dictates the need for premium drill strength. We have picked I believe the perfect time to initiate this expansion of our pipe-rental business in the US.
For us, this is a business which incorporates a degree of technical support and drill strength design that allows us to distinguish ourselves in the market. Our continued capital investment in drilling related rentals in the US will drive revenue and margin growth in this business as we progress.
Gulf of Mexico revenue, decreased 29% to $33 million due to the moratorium and slow pace of permitting in the shallow water. Internationally revenue was essentially flat, we saw increases in the North Sea, which were offset by declines in Latin America and West Africa.
We move on to the Marine Segment where revenue is $27.6 million and income from operations was $5.9 million. Revenue increased 44% sequentially as a result of higher utilization. Fleet utilization increased to 88% up from 62% in the second quarter about half of revenue increase was related to Macondo oil spill.
The remainder of the revenue increase was primarily, primarily related to the performance of our two 250 foot class liftboats which were almost fully utilized. As you recall in the second quarter the two vessels were out of service for about half of the quarter, due to inspection and maintenance work.
Our incremental margins also benefited from a reduction and repair and maintenance expenses as compared to the second quarter. The area of special projects mentioned before the BC wreck removal project. We largely completed our work on this project and expect to collect the remaining $154 million in cash during the fourth quarter. We recently built about $44 million and still have about $110 million left to build.
On Bullwinkle production from Marathon Droshky came online at the end of July. It was a little bit later than anticipated, as a result we could not access the platform during that time. So this delayed our ability to go out completing the P&A during the quarter.
We anticipate plugging 2 or 3 wells during the fourth quarter, the P&A procedures have been submitted to the BOEM and we do not anticipate any permitting delays as the pace of permits for this type of work has been [stake].
The balance sheet at the end of the third quarter the face value of our debt exclusive of discount was approximately 907 million, up from 853 million at the end of the second quarter.
Our debt increased due to an acquisition the sand control completion tools business from Baker Hughes. Debt to EBITDA at the end of the third quarter was 2.8 times and debt total capital was 42%. These ratio should improve by year end as we collect cash from the wreck removal project and stay down our revolving credit facility which was 194 million at the end of the third quarter.
Our capital expenditures during the third quarter were 91 million, we spent 32 million in the drilling products and services segment, primarily for drill pipe specialty tubular on land and internationally, we spent 45 million on the subsidy and well enhancement segment with the largest amount going towards construction of the compact semi submersible vessel.
Year-to-date our CapEx is 239 million with about 36% of that amount going to the international markets. We expect our CapEx in the fourth quarter to be in the range of 150 million, the largest CapEx item will be for the 265 per class liftboats. Drilling products and services and the construction of the compact semi submersible.
For 2010, we anticipate our CapEx to be about 400 million with that CapEx being funded out of operating cash flow. We have already made a few comments regarding outlook, our press release provided a fourth quarter guidance range of $0.40 to $0.44 as all of our Macondo related activities are now complete, we are replacing these earnings with increases related to our intervention services and drilling products and services.
We continue to see signs of growth in the US land market. I expect the pricing for coil tubing could increase modestly during the [third year] and demand for specialty tubular should also increase.
In the Gulf of Mexico our 265 per class liftboat will be back in service. One should return to service this week and the other is expected by early November.
Finally, I think the international markets would continue to see smaller, but positive increases in activity. For the fourth quarter modeling purposes, we think G&A should be in the range of 85 million to 87 million and [D&A] should be in the range of 58 million to 60 million.
Looking beyond the fourth quarter and end of 2011, I think our CapEx would be at least 400 million again with most of the capital being allocated towards the US land and international markets. We have several coil tubing units on order to keep up with the explosive demand that we have seen for these services I expect our fleet could expand by as much as 25% in 2011.
With our country manager in brazil and I believe our GM approached international expansion is well under way in that market. Our balance sheet is in excellent shape and we should continue to generate strong cash flow that will support our geographic expansion strategy and our outlook both in the short term and for 2011 is extremely bright.
That’s all our prepared comments, and I’ll now open up the line for questions.
Question-and-Answer Session
Operator
Thank you sir we will now began the question and answer session. (Operator Instructions). Our first question is from the line of Joe Hill with Tudor Pickering & Co. please go ahead.
Joe Hill - Tudor Pickering & Company
Dave we have heard quite a bit about capacity increases from the pressure pumping providers and you have a intimate similarity with that business, my impression of coil is that it hasn’t been quite as aggressively pursued recently and that the capacity adds are probably lagging there its in pressure pumping, is that your impression as well?
David Dunlap
That is absolutely my impression, what we have seen in the market is really a change in the use of coil tubing, coil tubing historically have been used as primarily an intervention tool and over the course of the last year we have seen coil tubing take on a prominent role relative to well completion and drilling out frac plugs as well as watching out profit and stages where we see a screen out. The coil tubing market is tight, operators are calling those units out when they began the factory and operations, these are often 24 hour operation and all of that has put a tremendous strain on capacity in that market place and I think that as an industry we have not added coil tubing at nearly the pace that we have pressure pumping equipment. And so we have seen in the market right now its really quite a bit tight there.
Joe Hill - Tudor Pickering & Company
How much of the market do you think today demands 2 inch coil for work as opposed to smaller diameters?
David Dunlap
About half
Joe Hill - Tudor Pickering & Company
Okay. And how much of your incremental capacity is going to be two-inch?
David Dunlap
About two-thirds.
Joe Hill - Tudor Pickering & Company
Okay. That's very helpful. Thank you. And then just thinking about Hallin and what you are going to do there strategically, I guess it was probably a little bit worse than breakeven this quarter?
David Dunlap
It was right around breakeven, which is kind of what we expected from Hallin Marine. And I think, our expectation is going to be about that now for at least the next three or four quarters the market side. We've got our capacity I think distributors into a little bit better way, we're not completely relied on South East Asia now having moved about West Africa and went down to Australia. But there is still a lot of capacity out there in the market and I think really my expectation for the next four or five quarters is that we're going to maintain about a breakeven business there. Now we are continuing to pursue the strategy of subsea (right) well intervention and that's the real strategic purpose behind our acquisition of Hallin Marine and all that is progressing as we expected. If there is any real change in what our expectations there are for Hallin Marine and what we have seen from the (Technical Difficulty).
Joe Hill - Tudor Pickering & Company
And can you remind me what type of revenue is associated on a per-well basis for the P&A jobs at Droshky?
David Dunlap
In the range of 3 million.
Joe Hill - Tudor Pickering & Company
3 million?
David Dunlap
Yes.
Operator
Thank you. And your next question is from the line of Robin Shoemaker with Citigroup. Please go ahead.
Robin Shoemaker - Citigroup
Thank you. Dave, just addressing broadly what you touched on is the plug and abandonment opportunity relative to this recent ruling, you said the customers have approached you to talk about their P&A liability. Does this raise the opportunity to enter into multi-platform contracts as you have in the past? In other words, a little more of the total work as opposed to call-out work, where you could bid the work as you did for the BP or Bullwinkle on a total-project basis?
David Dunlap
I certainly think that we will see some customers that lean for that type of contracting methodology. There'll be some other customers that handle this all internally and try and place companies like ours on a contract basis and there'll be some other business on a call-out basis. We're going to see a mix of that just as we do in the market today. I think the difference is that this is department center with our customers today because of this BOEM letters they’ve received they're having to address these plans for these properties at a bit more timely fashion and that might otherwise have been. But Rob and every customer is going to take a little bit of different approach to how we want to contract this. I do think that it's likely that we’ll see some of those same type of contracting options that we've seen in the past with things like Bullwinkle or things like the BP wreck removal project, which is a turnkey. We'll see it all.
Robin Shoemaker - Citigroup
Okay. And just in terms of a possible scenario for the recovery of the deepwater drilling over the next year, your business has done relatively well because of the shale plays and the drill pipe rental opportunities that you've had. But how are you thinking about the restoration of drilling in the Gulf of Mexico in deepwater over the next year and how that impacts your rental tool opportunity set?
David Dunlap
Well, I think it's going to be a relatively slow process that we've experienced here, I mean I know that we have some of our customers that are already attempting to get permits for deepwater wells. My expectation is that that's going to be a bit of a slow process. I think that we get up into 2011 maybe by the end of the first quarter in 2011 we'll begin to see a few permits that have been issued and a few rigs that are drilling. And as the year progresses there will be a few more, I don't believe that, as I look at in 2011 my expectation would be maybe have complete returns by the end of the year. Maybe a bit more than that, it's kind of a hard call for us to make. We have transferred some assets out of the deepwater but a lot of our assets are specific to deepwater wells, so we're in a position to respond when the market begins to pick back up. We don't have a lot of fixed cost associated with that business so we're in kind of a good position here Robin to be able to take advantage of this market as it develops. We don't have to be out in front of it very much from a prediction standpoint, so my crystal ball is not always perfect on these things, but I'm not terribly optimistic about a huge number of these rigs that are back to work in 2011. I hope I'm wrong.
Robin Shoemaker - Citigroup
Yes. And in terms of the vessels you bought from BJ Services, are they being utilized currently? What's the prospects for them going back to work?
David Dunlap
They have been utilized we have done some work on these vessels since the acquisition closed. Utilization is low I expect that it will continue to be low and so the deepwater market really kicks in well. The vessels are not going to be at any point of time I think the primary profit contributor from that business, the primary asset that we were interested in as we carried out this acquisition is the tools business. And the tools business is also today very much relying on the Gulf of Mexico but the business model, the profitability model and the two business is a bit better than it is on both. Those tools exportable into the international markets, it’s a big part of our strategy today. The vessels you know I am not terribly optimistic, wasn’t terribly optimistic when we entered this acquisition about stimulation vessel utilization being very robust and the Gulf any time since, you know, I didn’t have very high expectations, and those are expectations that are being there.
Operator
Thank you and our next question is from the line of Marshall Adkins with Raymond James. Please go ahead
Marshall Adkins - Raymond James
Morning, Dave. Obviously, you all got a pretty big bump in the Marine Services side, the liftboat side from Macondo work. How bad is that going to fall off or can the 265 coming back into the fold help stem that decline?
David Dunlap
Thanks Marshall, we did get a nice up on the marine side from the utilization stand point as a result of a Macondo, the 265s coming in will I expect to largely make up for that the overall utilization we had on liftboats this past quarter was exceptionally high. But I think what we are expecting overall from the fleet of dot 70% utilization that’s pretty close to what we are experiencing today. The 265s are in high demand and they are going to work as soon they come out of shipyard. So I don’t know that we completely replaced, that but we do largely we're in a close quarter 265 coming out with pretty high day rates as well
Marshall Adkins - Raymond James
So some margin hold up as well?
David Dunlap
Yes listen, what we benefited from the Macondo we are not going completely recover just in old market, but we do make up for a large part of that because 265s do come at that rate.
Marshall Adkins - Raymond James
Okay. Last question for me. You said you had hired a Brazilian manager. Just give us an overall update on the international arena and how you see things unfolding there. Most of the bigger guys have seen somewhat disappointing results in the international division, so give us your take on that.
David Dunlap
Sure we are, I am really encouraging our guys to take kind of rifle shot approach to what we are doing in the international market expansion. We got a lot of things that we can do. Our math is fairly clear and so what I am really encouraging our guys to do is to look at the some of the bigger more stable mature markets. Brazil I just think its an in obvious bit for us, obviously, at the top of our priorities as far as hiring management and a management team to build out our business there. The other types of market that may not have exactly the same characteristics of Brazil but are similar at places like Australia and Malaysia and once again, we are looking at those markets with kind of a rifle shot, so what can we can do and go build a local management team and build our businesses kind of from the inside out in those place. Its hard on manger in Brazil, he is putting together a good team, he’s putting together his priorities. I expect as we progress in 2011 we will be able to talk to you all about some of the victories we have there. In the mean time, we are going through that same process down in Australia. And we’ll get a management team for Australia in place kind of go through the same process and what I am saying its just kind of a progressive approach to this selecting those large mature and growing market is our target.
Marshall Adkins - Raymond James
Terms like its going be more ‘12 for those new areas that you are going into before we should model any meaningful revenues or earnings?
David Dunlap
I think as 2011 progress I hope I am able to say that we are having some success with the model down in Brazil its, I think that we are going to be able to see about some improvements in Brazil before the end of 2011 and you know depending how Australia kicks off we maybe able to tell you about some victories in Australia by the end of 2011. But I think you’re thinking of it right this is a progression, my football analogy here would be as four yard and a cloud of dust.
Operator
Thank you and our next question is from the line of Geoff Kieburtz with Weeden & Company. Please go ahead
Geoff Kieburtz - Weeden & Co
Thanks. Dave, could we come back to sand control business from the perspective of international expansion, what are the prospects? How quickly do you expect get some traction there?
David Dunlap
Okay well Geoff this is a process that I think will be I been through this before with the exact same product line with the exact same product line it took us two years to get the technology in to the international rock markets and really begin to feel some momentum. The advantage we have this time is the technology is known in some of the international markets. So clearly the places that we are targeting initially are those places where the BJ tool technology has been used internationally before this divestiture. So those customers are familiar with the technology, in most cases they are familiar with the people that have developed and will be applying that technology in the field.
And so I really think that we're going to see some expansion of revenue into the international markets sooner compared to the prior experience that I had with this product line several years ago. So, I think that it will begin to make some mark on international revenue before the end 2011. And some of the markets that we are targeting, as I said, they are the markets where the technology had been used before where the product line is known, now it’s a matter of introducing Superior as the new owner of that technology. But I feel fairly confident that its going to be accepted very well by those international customers. It will be kind of a two to five year process to build out international revenue and maybe we compress that by two years.
Geoff Kieburtz - Weeden & Co.
So the answer to my question, your answer to the prior question pretty much the same, how prominently does sand control figure in your overall international expansion strategy?
David Dunlap
Well, I think in those sand control markets that are part of our international targets that figures prominently, Brazil would be an example of that. We're at those place where the technology is known. The technology has been successful with both sets of (inaudible) as well as the foreign operators. Other international markets aren’t going to have the same sand control components because they don’t necessarily have the same degree of unconsolidated formation. Australia is an example of that. Australia is a target for us but the sand control market in Australia is not so big. So its not going to fit perfectly with everything we target from an international standpoint.
And the unconsolidated formation market such as Brazil, West Africa or Indonesia or India, Egypt, these places that are traditionally a part of the unconsolidated formation front, that’s where we'll be targeting. Someone we're going to fit we're looking at company-wise, some of the targets as well.
Geoff Kieburtz - Weeden & Co.
And if I could ask, on the coil tubing, it's really a question comparing with pressure pumping, can you give us a sense of how undersupplied would you think the coil tubing market is today? How much 24/7 operations do you have with your equipment? What's the lead-time to get new capacity on the ground?
David Dunlap
Geoff, the market is really tight. The type of utilization which were around and slightly in excess of 70% utilization is really getting close to the theoretical maximum that we could run with coil tubing. And operators in many cases are having to use other alternatives for drilling out frac plugs and washing out sand and on stages where they have experience screen out. Other than coil tubing, for instance we've got some rig-assist snubbing units in the US that had very low utilization until just a couple of months ago and the primary reason we are seeing utilization out of those is they are putting them on completion to draw our frac plug because it can't get a coil tubing in it.
So when you see the market moving forward with these alternatives which are not nearly as efficient as what we do in coil tubing, I think its pretty clear indicator that the market is extremely tight. We are running 24 hour operations in North Dakota, in Pennsylvania, in North Louisiana and in South Texas. It's tight. So as it pertains to capacity additions, we have placed some orders for coil tubing units during 2011. I can't say that the lead time for those units is accepted. Based on what we've seen, we could take up to 35% capacity addition in 2011. I don’t know if it will, that’s not our plan at this moment, but we could access that from the supplier today. And I've seen coil tubing lead times in the past as much as 18 to 20 months.
It doesn't seem to me like we've quite reached that point with coil tubing yet. And one of the other things just a kind to continue with this thought, I think its pretty clear that we're going to see additional horizontal drilling taking place in South Texas as 2011 progresses. And I know that’s what I hear from our customers and clearly there is going to be a higher degree of spending in South Texas in the Eagle Ford in 2011. It's a market that is very tight from the coil tubing standpoint today. So probably what I want to do is I want to add enough to pass these this so that we're able to stay in this really nice position that we have as a market leader in coil tubing in US.
Operator
Thank you, and our next question is from the line of James West with Barclays Capital. Please go ahead.
James West - Barclays Capital
Dave, I thought it was interesting, your comments about a geomarket strategy in Brazil and then taking that to Australia. I guess I would-- I think Superior has been in a lot of these international markets before. They are not new to a lot of these places, but it seems like you're putting in a new management structure and I'm curious, one, if that's true. But also number two, if there's markets where Superiority has a big presence where you already have more of a geomarket-type structure setup?
David Dunlap
Yeah. I think, really the first place that we are applying this geomarket type structure and I want to come back and define that on my terms in a second, is Brazil. When I talk about this geomarket structure, I think its one that the industry and particularly larger players that certainly migrated to this type of strategy in recent years.
For a company like ours, the way this market of course works is that we have local management teams, the local people that understand the local customers understand the local business practices that are pulling through our product lines as opposed to having product line hit that are based in Houston or Lafayette or New Orleans that are pushing their product lines into these markets. I think the advantage of that local team is they are on the ground more frequently, they are closer to the customer, and can recognize the opportunities better than someone that’s remote from the market.
Of course the other advantage you get is that you are able to establish a single infrastructure, a single administration and not have duplicate SG&A cost or strategy for facilities.
Overall, it gives us an opportunity going to market with a single name, a singe face, provide clarity to the customer on who we are, we're able to accomplish, and most importantly to have that strong local management influence that pulls through our product lines at the right moment of time.
James West - Barclays Capital
And do you have to hire from some of the other service companies that have local management or do you have guys internally that you could promote to a country manager type situation?
David Dunlap
I think in most cases its going to require us to go out to market and hire some. We have some people internationally that perhaps could step up to this. There is challenge, but I think in a lot of case and its going to be a function of looking out to market, brining someone in that has worked in the market for a long time, and in most cost cases its National Staff.
Operator
Thank you. And our next question is from the line of Bill Sanchez with Howard Weil. Please go ahead.
Bill Sanchez - Howard Weil
Dave, my first question for you is, seasonally we typically see a drop in fourth quarter revenues in the Gulf of Mexico in your Subsea and Well Enhancement business. I'm just curious, if we exclude Bullwinkle from the conversation and you talked about some of the delays, perhaps in the third quarter, does that not occur this year, some of that work gets done in 4Q, we don't see that seasonal drop in the Gulf of Mexico-based business, if you will?
David Dunlap
I think its certainly possible maybe even likely. This is the time of year where we get sea conditions that make it a little billion more difficult to mobilize from time to time. Bill, those things are always hard to predict and understand. Perhaps a bit of difference in the structure of the company’s revenues today though is that with much more of our revenue coming from US land that overall our revenue in that segment is not nearly a subject to the seasonal variations is to what we've seen in the past.
Bill Sanchez - Howard Weil
And I guess, it's my next point, when Macondo had hit and you guys had given your initial guidance, in terms of the earnings loss there, and I believe it was $0.20 on a net basis. Given the tools that you've now redeployed from offshore back onto land, my guess is that the second half impact won't probably be that dramatic and I'm just wondering as we think about the recovery of the earnings stream in 2011, can you just kind of share with us your thoughts on EBIT there?
David Dunlap
You are right, our guidance to the street, back in June that, we thought Macondo and the deep water drilling moratorium would cost us $0.20 in the second half of the year and I don’t think our thoughts have really changed. That is what it is costing, we have been able to re-deploy some of those assets and we have also added assets. I mentioned from capital expenditure standpoint we had and we will continue to have CapEx devoted for the US land market.
It’s overcoming that loss, not completely but it’s overcoming that loss. At the end of the day it’s still a loss, I mean if we didn’t have a deep water drilling moratorium, we will be generating that $0.20 in the second half of the year, but we have been able to re-deploy some of the assets, not all of those assets are re-deployable. And there is lot of our rental assets that are really specific to the types of wells that are drilled in the deep water Gulf of Mexico that just don’t have application, either in international market or in the US land market. So it’s not likely, we’ve been able to transfer even a majority of our assets out.
We have been able to transfer some and as much as anything we have had additions to the US market that have allowed us to capture the revenue we had there.
Bill Sanchez - Howard Weil
Yes, I think it's worth nothing, too, you did a great job, I thought, of just the resiliency of the drilling products and services, gross margins in the quarter. I think one would have expected a much sharper drop there given the loss of that high-margin Gulf of Mexico rental tool business, so.
David Dunlap
I think our guys did a fantastic job of stepping out into the market, recognizing the losses that we were going to have and really stepping up to move into some new areas and these US land areas for us, in a lot of cases are by a pipe rental standpoint, but our team did very well in exploiting that market at a moment of time where we really need it. That’s been quite obvious.
Bill Sanchez - Howard Weil
Absolutely. Last question for me, maybe perhaps for Greg. Could we just get for the third quarter what the tolling production was, barrels per day? I know Droshky came on and I'm assuming, fourth quarter, we should be probably giving the existing production, are we talking 55 to 60,000 barrels a day now that we should be plugging into the models?
Greg Rosenstein
What we did for the quarter in terms of our own production was close to 3,000 a day. As Dave mentioned we had service work we want to get to during the quarter to work on enhanced production, but we couldn't access the platform. And Droshky, right now I think it's around 41,000 a day and that's obviously fluctuates, so that's kind of where it is.
David Dunlap
Yeah. I know you recall the Droshky team online with only three to four wells and I think Marathon announced this that their fourth well, there was a problem that was going to require some work, which they expect to do in the first or second quarter of 2010. So what we're getting out of Droshky is only production from three wells.
Bill Sanchez - Howard Weil
Okay, but there is some other third-party tolling production going through there as well though in addition to Droshky, correct?
Greg Rosenstein
Yes, on top of that is at least probably around 10,000 a day.
Operator
Thank you. And our next question is form the line of Stephen Gengaro with Jefferies & Company. Please go ahead.
Stephen Gengaro - Jefferies & Company
I think two things I just wanted to follow-up on, but the primary one was when we think about 2011 and we think about your, I think you've said 400 million at least in CapEx, how should we think about sort of the efficiency of that CapEx deployment from a growth perspective on the revenue line or what kind of EBIT returns you look for, how should with think about that?
David Dunlap
First-off on 2011 CapEx, it will be largely oriented towards the international market and US land. It will have a significant mix although we hadn’t detailed it yet, but a significant mix of rentals associated with it which our rental margins and returns have been fairly consistent in the international market with what we experienced in US.
So I think you can think of it that way. I think you can also consider that as mentioned we will have expansion on the coil tubing side of the business in the US. We may have some expansion into the international market in coil tubing, but right now it’s not the part of the firm plan. I think most of our coil tubing capacity will come into the US and so I think you can think about that coming in at a contribution, but similar to what we are seeing from that business today.
Stephen Gengaro - Jefferies & Company
Okay. But so those two seem to indicate that it will pretty readily hit the revenue line when equipment gets delivered?
David Dunlap
I think generally so. I think the part of the benefit that we have here in both cases with premium pipe rentals as well as the coil tubing units. I think the market is prepared to accept that capacity addition as soon as we are ready to supply it. So I don’t expect a big lag time. We are not necessarily putting that capacity into new markets for us. It will be going into districts where we already have a presence today.
So its truly incremental to what we already have going on from that standpoint. So the start-up time should be fairly minimal. A part of our CapEx next year as well will be going towards continued construction of the compact semi-submersible which is not expected to be deliver until 2011 about mid 2012. So there is a component to that CapEx that’s got a bit longer term horizon before it begins to deliver for us, but I think by and large, a lot of where we will be investing our capital next year are in things that we think are going to go to work in the market fairly quickly.
Stephen Gengaro - Jefferies & Company
And then just as a follow the maintenance CapEx portion is what?
David Dunlap
About a 100.
Stephen Gengaro - Jefferies & Company
Okay.
David Dunlap
Round of…
Stephen Gengaro - Jefferies & Company
And then just one other main question, that is when we look at what the government regulations are calling for on the well abandonment side, and we look at your history here, you are having a couple of sort of major sort of projects that you've been involved with, do you think that is a likely way you'll see this business flow through to you, or do you think it's going to be more on a one-off basis, and so how do you view the portfolio approach versus the kind of one-off jobs?
David Dunlap
Yeah, I mean I think that what we can expect in the mix is going to be similar to what we have experienced in that mix. There will be some opportunities for some of the bigger turn key projects there’ll be some opportunities for just long term work contracts and then there’ll be some call out work its I think its that we probably expect some more mix to what we have seen in the past.
Operator
Thank you. And our next question is from the line of Daniel Burke with Johnson Rice. Please go ahead.
Daniel Burke - Johnson Rice
Dave, question on Bullwinkle P&A activity. I think at one point you had expected to do as many as eight this year, doing two to three now staring up in Q4. Is it reasonable then to assume that you know that spill over into next year, plus the P&A activity that you expected to do there in 2011, suggests you could do four to five Bullwinkle-related P&As per quarter during 2011?
David Dunlap
Its sense a little to me Daniel, we did originally anticipate having eight P&As completed by the end of this year, its really more likely to be about three, its probably a better number for us. Its five that we have anticipated during this year, its filling the next year I think we kind of had an expectation that maybe its five or six with the old estimates call it, maybe something like 10.
So, 10 next year, really probably at the lowest. My thoughts on this is eight to ten is probably an expectation we are going to have in 2011, there is other work that we will be doing out of Bullwinkle there are interventions and intended activities in some of the well bores that are not ready for P&A that our partner is Bullwinkle Dynamic is very interested in and enthusiastic about and we’ll be carrying our other work but I think overall our expectation is about the pace of P&A is a bit separate.
Daniel Burke - Johnson Rice & Company
Okay. And then just to stay with your allusion to other work to be performed out there, I think you mentioned earlier that equity production was running about 3,000 barrel equivalents per day. Any updated thoughts on where you could drive that number over the next two years? Obviously, it’ll take some time, but if you can actually grow that figure?
David Dunlap
I don’t have a lot of comments on that, I think we are kind of following the lead from dynamic on this but they are pretty excited about some of the opportunities and some of the well bores that are existing out there. We just have to see what their plans are and clearly the production has been higher on these wells then it is today, so I think if we are able to get out and do some intervention work, then maybe we can boost that production backup. The work was really curtailed as a result of Droshky not coming online during Q3. And as soon as Droshky came online, and then we got out and started probably working forward to get some P&As done. But its speaking design [Eric] I think that got some real enthusiasm for what they can do to enhance production on the platform of that.
Daniel Burke - Johnson Rice & Company
Okay, great. I understand. And then switching gears, you mentioned that the 265-foot liftboats were going to be a recipient of some CapEx. I'm assuming you are referring to the third and the fourth of those liftboats. Can you update us with maybe your ambitions for those assets and when we could see those reintroduced into the market?
David Dunlap
Let me clarify so that liftboats that we have CapEx the boats for in Q4 are the two lift boats that are being delivered in Q4. And those are the 265 that have been in the shipyard for about nine months now almost a year that are coming now. And so that is the CapEx that I referred to for the liftboats I think Q4 is related to those two.
At this point we have, we’ve not finalized any expectation for CapEx related to liftboats during 2011.
Daniel Burke - Johnson Rice & Company
Okay. And then maybe a last one for me. I'll take it towards the international market once more, but specifically to the international rental tool business, it seems like that topline has been very stable now for a number of quarters, and I guess my impression has been that scenario where you have consistently been devoting capital, it's a business with -- I think, amongst the higher-visibility businesses you have internationally. Can you be a little more specific maybe on 2011 with regard to the international rental tool business and the ability to step that up?
David Dunlap
I don’t know already that to reveal exactly how much CapEx we are going to spend on the rental side of the business in 2011 but I think earnings it will be a considerable portion of our rental international CapEx next year which I think is going to be roughly half of what was spent in total to that diverted to the international markets. We do see some very good opportunities for the target markets that I have mentioned, Brazil predominantly and Australia for that. The opportunities in Brazil I think are going to be fairly immediate as it seems to be a market that has a lack of certain of the rental tools that we will provide, that’s kind of have superior you’ve got businesses in brazil to begin with the immediate demand for rental products that are available there. So I certainly expect to see a significant portion of our international CapEx of 2011 going to that side of market, I don’t know that maybe by the time we get out of the conference call next quarter we will be able to give you a little bit better visibility on when our CapEx will be lowering after 2011 and specifically what areas of the business it will be devoted to
Operator
And our next question is from the line of Joe Gibney with Capital One Southcoast. Pleas go ahead.
Joe Gibney - Capital One Southcoast
Just a couple of quick ones for me, just falling on there on the pipe side of rental. I appreciate the comments relative to CapEx spend next year. I'm just curious, as it stands today, what percentage of your rental mix, revenue mix is drill pipe?
Joe Gibney - Capital One Southcoast
Its roughly in a third and I expect this time goes on and that will increase to the percentage of our overall rental business because it seems to be the product area within rentals that we have the highest demand for and secondly I think its an area where we do have a nice competitive advantage this is a group that it's fairly unique on the road side of the business and that they market with the use of technology in engineered drill strength which is not always the case in that business. And I personally think it gives us nice competitive advantage or offer to a customer, really an engineered package for a drill string, as opposed to just pipe that shows up on a rig.
And I think we have witness that we stepped into new market that, that approach is part of the reason why we've been successful at breaking into these new markets as quickly as we have. So I think overtime the mix of our business is going to lean a bit more towards the overall piping. But it's about 35.
Joe Gibney - Capital One Southcoast
Just one last one, just on Hallin breaking even now as it stands and tracking that way for the next several quarters, what is the revenue contribution though, is it still tracking comparably where we were, roughly around 30 million per quarter?
David Dunlap
Yes. That's in the ballpark 30 million a quarter.
Operator
Thank you. And your next question is from the line of William Conroy with Pritchard Capital Partners. Please go ahead.
William Conroy - Pritchard Capital Partners
Quick question back on the US side, and really more on the rental side. When you came on as you looked at the portfolio, it really at the exposure, there were some areas maybe where Superior just traditionally hadn't really trafficked. So as you're contemplating the CapEx that you are between the end of the year and really into next year, does that get you into those areas in the US land or are those still kind of hanging out there as fertile territory for you?
David Dunlap
I don't know that they necessarily get us into those markets. I mean, from a footprint standpoint our most significant footprint in the US markets has really been on the services side of the business, intervention services. It's our most complete geographic footprint, along with the product line. I think there are certain cases and markets where we are able to utilize that foot print for expansion of rental tools that in most cases what we are going to do is you know kind of start from scratch in that area and that’s really what we have done. I don’t know we've leveraged off of the relationship to the footprint that we have, coil tubing or electric line being able to expand relatively. In a lot of cases it’s a different client that you are speaking to and different facility requirement. Did I answer you question?
William Conroy - Pritchard Capital Partners
What I was really after was, to the extent that you need to get into other markets with Rental Tools in the US land, does the $400 million of total CapEx next year get you there?
David Dunlap
Yes I think its not just next year this is a longer term exercise then that but I was thinking I think we will certainly see some of that CapEx in 2011 that goes into these US markets that are relatively new for us from a rental standpoint. But we won’t get at all of them in 2011 we don’t get into all of them with the capacity we want to have in 2011, this is two, three year exercise and maybe even beyond that to satisfy what we think we can capture, and the way over our share in the market.
William Conroy - Pritchard Capital Partners
Okay. That's helpful. Great. And completely different subject, can you update us on the status of the large-diameter lubricator?
David Dunlap
Large-diameter lubricator is still scheduled to engineering and development and delivery prototypes schedule by the end of the year.
Operator
And our last question is from the line of Jeff Spittel with Madison Williams. Please go ahead.
Jeff Spittel - Madison Williams
Wanted to touch on the Gulf of Mexico. If you could, give us a comparison between the disposition of the IOCs versus the independence, or the independence expressing a little bit more reservation not just on the permitting side, but more about liability caps, contingency plans, et cetera?
David Dunlap
Most of the comments that I've heard about the deepwater had been recently from the IOCs. I think our large independent customers are also exited to get back out into the deepwater arena as well. At this point I think that all of our customers that have had a significant history in the deepwater arena are all in the same camp from that standpoint. They are all ready to go back to work and certainly acting like they are going to be given permits and talking to us like they are going to be given permits here soon.
Jeff Spittel - Madison Williams
Good, that's encouraging.
David Dunlap
There is a difference in attitude or approach to expected continuation of their deepwater activity.
Jeff Spittel - Madison Williams and Company
And then shifting over to the international expansion plan, give us a sense of, you're starting to hear a little bit more about pilot projects in some of the international shale plays, understanding there is unconventional gas production and development going on in Australia, give us a feel for where these shale plays internationally fit on your radar screen using that football analogy. Is this something you worry about, at the end of this drive when you get in the red zone; is there something next season and a little bit further off?
David Dunlap
I think its probably next season.
Jeff Spittel - Madison Williams and Company
Okay. That's what I thought
David Dunlap
This is just a function. There are certain of those markets such as Eastern Europe and Australia where there has already been some degree of exploitation of the unconventional resource but development of these resources is going follow the resource pyramid exactly the same way as they did in the US. You are going to see initial exploitation of the cheaper to get assets and as time goes on more difficult and extensive assets they exploit will be exploited themselves. It's probably a next season or may be the season after next issue.
Operator
Thank you. That does conclude the question-and-answer session. I would now like to turn the call back over to management for closing remarks.
David Dunlap
Thanks everyone for joining us and we'll talk to you again next quarter.
Operator
Ladies and gentlemen, this concludes the Superior Energy Services third quarter earnings conference call. You may now disconnect. Thank you for using ECT conferencing.
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