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Layne Christensen Company (NASDAQ:LAYN)

F3Q2011 Earnings Call Transcript

December 7, 2010 11:00 am ET

Executives

Andrew Schmitt – President and CEO

Jerry Fanska – SVP, Finance

Analysts

Richard Paget – Morgan Joseph

John Rogers – D.A. Davidson

Steve Ferazani – Sidoti

Christopher Patel [ph] – Janney Montgomery Scott

John Brett [ph] – KS Capital

Jay Chap [ph] – Bank of America/Merrill Lynch

Herb Buchbinder – Wells Fargo Advisors

Dick Kindig [ph] – Keeley Asset Management

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Layne Christensen fiscal 2011 third quarter earnings conference call. At this time, all participant lines are in a listen-only mode, and later we will be an opportunity for your questions. Instructions will be given at that time. As a reminder, today’s conference call is being recorded. I’d now like to turn the conference over to the President and Chief Executive Officer of Layne Christensen, Mr. Andrew Schmitt. Please go ahead.

Andrew Schmitt

Thanks, Leah. Good morning, everyone. I’m here with Jerry Fanska, our Chief Financial Officer. And we would like to welcome you to the third quarter conference call. Earlier today, we issued a press release outlining the results for the third quarter ended October 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 then I will give you an overview of 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 third quarter increased $52 million or 23.9% to $269.8 million from $217.8 million in the prior year. Water Infrastructure revenues increased $35.5 million or 20.4% for the quarter to $209.9 million. The increase resulted mainly from acquisitions and from specialty drilling operations.

Mineral exploration revenues increased 68.2% to $51.7 million from $30.7 million last year, with demand increasing across most regions, the largest of which being Africa, the US, and Mexico. Layne Energy revenues decreased 57.9% to $4.9 million, impacted by lower natural gas prices and the exploration of favorably priced forward sales contracts that were in effect last year.

Cost of revenues increased $47.9 million or $209.7 million or 77.7% of revenues for the three months compared to $161.8 million or 74.3% of revenues for the same period last year. The increase as a percentage of revenues was primarily focused in the Water Infrastructure division due to higher cost structured projects this year and 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 $37.9 million in the quarter from $31.5 million in the prior year, primarily the result of increased incentive compensation expenses of $2.3 million as a result of higher earnings and $1.4 million in added expenses from acquired operations, and the remainder spread across various categories.

Depreciation, depletion and amortization decreased in the quarter to $12.8 million from $14.2 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 increased in the quarter to $4.3 million compared to $1.2 million in the previous year as a result of an improved mineral exploration market in Latin America. Interest expense decreased to $337,000 for the quarter as a result of scheduled debt reductions.

Income tax expense was $5.2 million for the quarter, an effective rate of 38.7% compared to $4.9 million, an effective rate of 42.7% for the same period last year. The decrease in the effective rate is mainly the result of a catch-up adjustment to reflect through the third quarter higher than expected estimated earnings for this year. The net result for the quarter was $0.42 per share compared to $0.34 per share last year, a 23.5% increase.

The company’s balance sheet at October 31, 2010 reflects total assets of $808.3 million and stockholders’ equity of $491.5 million; debt reflected as current maturities on the balance sheet of $6.7 million; and cash and cash equivalents of $32.9 million.

The company generated $26.2 million in cash from operating activities in the quarter. Investing activities totaled $22.3 million and included $670,000 in oil and gas expenditures, with the remainder divided between acquisition-related activities of $11.4 million and net additions for PP&E of $10.2 million. Early in this quarter, we also paid off $20 million in long-term debt.

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

Andrew Schmitt

Thank you, Jerry. Before I get into operations review, a couple of comments about the FCPA notice. As mentioned in our press release in connection with updating our Foreign Corrupt Practices Act policy, some of the employees raised questions in late September 2010 about among other things the legality of certain payments by the company to customs clearing agents in connection with importing equipment in the DRC and other countries in Africa.

Our Audit Committee is engaged outside counsel to conduct the internal investigation to review these and other payments with the assistance of an outside accounting firm. We’ve contacted the SEC and DOJ to inform them of this matter, and naturally the company will cooperate fully with the government authorities. But the review is still ongoing, and we don’t have conclusions yet. But based on results to date, we currently believe the amount in question with regard to the payments is not material with respect to Layne’s results of operations or financial statements.

So now turning to the operations, our Water Infrastructure group had a stronger quarter than we anticipated, as activity and profit particularly on the water well drilling job in Afghanistan was really at a peak in the third quarter. Unfortunately, we were informed very recently that this project will finish shortly.

Based on that information, we will be moving to standby rates until the equipment is back in the US. Even so, we should still have revenue and earnings for about six more months from that project. These specialty-type drilling projects, we feel, are going to be a key to bridging the gap in our rig utilization until the US municipal market for our services improves.

As a result, we are actively looking to do more international water-related work and are in discussions currently about jobs in Saudi Arabia and Ethiopia. We’re also having another large wastewater injection drilling rig built to expand our service offering to the power industry. In hindsight, this is probably something we should have done years ago when we were very busy in the municipal sector. But I think we all know how it goes when you are – one has more work than you can handle. During a strong economic cycle, the diversification is just generally not as high on the agenda as it probably should be.

The Reynolds business, which is more infrastructure intensive, those businesses combined for a pretty decent quarter as well. That revenue of $125 million was an all-time quarterly high of 19% from a year ago. The division EBIT was up only about 5% from a year ago. So what that tells you is it’s taken about $20 million more revenue to produce more profit than last year.

Our cured-in-place business Reynolds’ Inliner, certainly they did their part helping the quarterly improvement, with revenue up 23% and division EBIT up 38%. However, our heavy civil business has had a tougher time primarily due to such a very competitive bidding environment for those projects.

Our GeoConstruction division sort of rounds out this infrastructure group. Their revenue is $18 million this quarter, up about 12%, but the division EBIT was down 52%. This is because a year ago, we had the Katrina job in New Orleans, which we’ve said. And for GeoConstruction, that was probably the best jet routing job we’ve ever had. But I would add the addition of Bencor recently to this division. That has the potential to be one of the best acquisitions we have done. And it will not be a one year event like Katrina.

So when we add it all up in what we think is a still fragile US economy with a lot of the normal drivers of our Water Infrastructure business, what I’ll say is missing an action. Here the revenue is up 20% and earnings are up 12%, and the backlog is $626 million, up $100 million from last year. And when I think about it, maybe considering these numbers, perhaps we’ve been complaining a little too much about the so-called tough economy. I’m sure a lot of people would like to have those kind of problems.

Certainly, there can be no complaints about the current mineral exploration economy. I mean, it’s really hot. We were within a couple million dollars of our highest quarterly revenue ever and about 4% to 5% in margin from the pricing point at that time. Every region we operate in throughout the world was improved over the last year. Our Latin American joint ventures were also up significantly with our share of their after-tax net income up 240% year-over-year.

Wholly-owned mineral exploration company’s division EBIT was even stronger, up 488% from this time a year ago. We’re in the late discussion stage with our mining customers about their requirements going forward. Overall, it appears their budgets will be higher next year. But I have to say it really does and feel frothy to me like it did in 2008.

In our dealings today, there seem to be a much more controlled, delivered pace on the customer’s part, which is better for the service industry as well as the mining companies. We will add incremental capacity next year, but still cautiously and with the primary focus on adding it through efficiencies by replacing the older rigs. I would expect mineral exploration prices should improve overall next year and positively impact earnings as a result. I mean, we look at it worldwide, I mean, MinEx activity, gold-based metal projects, they are just in a very strong place right now.

Okay. So now we’ll shift a little bit round and out our divisions from sort of feast to famine. When we look at Layne Energy’s prior year earnings contribution, it is really proven to be very difficult to replace as we expected. Other than the periodic ceiling test adjustments we’ve had through the years to reserves, we’ve not had an operating loss from the segment since the early startup days of the business.

I can assure everybody it’s not a cost problem as our expenses have remained well under control, but this shoulder month of September and October when natural gas prices usage declines, it produced some really even weaker spot prices. In fact, in the US, we are basically where we were last year for natural gas in storage. We may not benefit from an extremely cold winter like we had last year.

Another issue to me is US natural gas exploration rig count is up about 28% this year while the natural gas prices are 7% lower. A lot of that activity is in the larger shale plays where the major oil and gas operators now paid some very high prices beginning to these concessions. So rather than a rational exuberance and exploration spending, it seems to be as more likely a lease exploration that’s driving a lot of the drilling, and of course, the need to quickly prove up reserves that so much money has been spent already.

The drilling activity on the oil side makes a lot more sense from a value standpoint. And that is where we’re going to be focusing our attention as well. So you may begin to see a modest mix shift in our interview production if our internal efforts gain some traction there. The division EBITDA for Layne Energy this quarter was 32%. Worst is about 23% for mineral exploration and 10% for infrastructure. Still sounds pretty good by comparison to our service businesses until you realize that last year at this time it was 75%. So we are definitely a little homesick for the good old days in the natural gas business.

I think, in summary, we’re continuing to make steady progress with a goal of moving back to the peak earnings we achieved in the calendar years of 2007, 2008. I think that effort is going to be what I would call a third, a third and a third process. By that I mean, if you look at last year’s results, excluding reserve write-downs, we tried to get a third back or more this year, a third next year, and the same for the following year.

In order to attaining that goal, I think we’ll still need to continue to execute extremely well and recently acquired companies like we have to enhance each of these business segments. If we follow that path, we should have a tremendous amount of additional momentum if we eventually benefit from some economic expansions in the US, Europe and Japan that adds to the current momentum that we see in China, India, the rest of Asia, and in the emerging and developing markets.

So with that, we will be going to take your questions that you might have. Bear in mind, though, I can’t address any questions about the company’s FCPA investigation until that’s finalized. So we will be able to discuss that in due course once it’s concluded. So question’s we’ll take on then financial and operating questions if you have any. Leah, you want to see if there are any questions out there?

Question-and-Answer Session

Operator

Certainly. (Operator instructions) And our first question is from the line of Richard Paget from Morgan Joseph. Please go ahead.

Richard Paget – Morgan Joseph

Good morning, guys.

Andrew Schmitt

Hey, Richard. How are you?

Richard Paget – Morgan Joseph

Good. Andy, just on those last comments about returning to peak earnings levels, and I guess minerals. Call it 2.20-ish. Were you talking about next year or is that a little bit longer term goal?

Andrew Schmitt

No, I was thinking that – I was counting this year for the first third. If you look at the last year’s results without the reserve write-down, Richard, where we were, we’re on a pace to at least pick up that third, maybe a little bit more. I think the estimates may be a little bit higher out there. And if we can roll into that and pick up a third next year and a third the following year. I mean, it’s just sort of a rule of thumb. We’re assuming that we’re going to have to do it in an economy that’s not robust. So in terms of our planning process, that’s all we can assume. We certainly think the President’s announcement the other day was positive, certainly on the extending tax cuts, things like that. But for planning purposes, we’re just assuming this thing. We’re just going to have to shoulder our way through and look at the drivers that are out there that have been, as I said, missing an action. So against that backdrop, we just want to – it is just a ballpark. I mean, that’s the way I sort of look at things, and it probably will be reflected on a planning process next year. We should pick up something incremental from Bencor. I think we’ve put that in the press release in here.

Richard Paget – Morgan Joseph

Yes.

Andrew Schmitt

When you add it all up, we’d still be able to do that, or at least that’s our internal goal if the economy stays about where it is now, just a gradual recovery.

Richard Paget – Morgan Joseph

Okay. And now that you did bring up Bencor, I wondered if you could get into a bit more detail. Right now, I guess they are working on some dam projects. Is that a kind of longer term way we should look at it? I know they have done some other work with subways and other geocon-type projects. Just want to get a sense of what we should be paying attention to in terms of macro drivers, whether it’s Army Corp’s budgets or anything in particular that’s going to be the growth driver for these guys going forward.

Andrew Schmitt

They are a specialty of a specialty. When you get into the type of work that they do in the small stabilization area, and they will touch the dams, they will touch construction for buildings. They will touch cut out walls. They will cut tie-backs, foundation-type work. They really bring expertise to us that we didn’t have. We’ve picked up some of it with Costa Fortuna. They have been immediately helping us actually consult with us on the job done in Brazil that has been giving us problems. So they really bring a level of expertise in that area that we haven’t had a lot of these jobs.

Now, Richard, as you know, you end up with these jobs being bundled together and bid together. And if you can only do one service, sometimes that puts you out of disadvantage. So we’ve looked at this area for a long time to give with the specialty jet routing that we do. This is an excellent strategic bid. The dam work looks awfully going forward as so many of these dams have to be recertified. But the big construction projects, both here and internationally, look good. We bring a lot to Bencor in the way of bonding capacity that they really never had before. So they were restricted by their own balance sheet, as what they could activity bid home. That’s not going to be the case for Layne.

We probably have $500 million, about $600 million in bonds. So that change is that whole market that they can address. So when you pack, package that together with Reynolds, heavy civil group, and Bencor, and ours is all stabilization business in geo. That’s a pretty important package. This is a business that we’re expecting really, really big things out of the year they’re headed. And this absolutely filled the big gap for us, might as well as I think strategically anything that we’ve dropped in. So it will be – it will help across a number of business lines and we will have them with the bonding capacity and be able to be at multiple parts of this business. It will also, I think, help us partner with other big GC related companies when they look at projects because we could bring the expertise before where we could not. So it’s going to be a good one, I think.

Richard Paget – Morgan Joseph

And then, is it safe to assume since it is a specialty niche that the margin profile is better than average?

Andrew Schmitt

Definitely –

Jerry Fanska

Definitely.

Andrew Schmitt

Definitely better than the margin we would typically see. I mean, if you look at GeoConstruction last year when we had the Katrina work, which was very specialized, and happen to hit us right in the screws. I mean, you’re looking at a prior year third quarter division EBIT of 21% versus 9.8% this quarter, even though when you look at the revenue, it’s actually up a little bit this quarter, 18 versus 16 a year ago. So that gives you a little bit inclination as to when you hit – when you got a more specialized construction business, you can add some pretty decent margins.

Richard Paget – Morgan Joseph

And then looking at the water backlog, it suggests a little over $300 million in new awards. Now I know some of that has been core, but even if you back that out, still a decent increase from the prior couple quarters. I wondered if you could talk about what types of projects are stronger, whether this is more Afghan work going into backlog or it’s –

Andrew Schmitt

When you look at the Layne legacy water business, I think it’s probably flat where it was last year. Jerry, you have the particulars. I don’t.

Jerry Fanska

Legacy business is up some from last year, probably $30 million. GeoConstruction is up $15 million, not counting Bencor. And the rest of that would be Reynolds start work from last year.

Richard Paget – Morgan Joseph

Okay. So it’s across the board then.

Jerry Fanska

It really is across the board.

Richard Paget – Morgan Joseph

All right. And then, getting over to the mining side, I know there were some catch-up work. Any other – I know you were helping out down in Chile. Anything that you consider not necessarily one-time, but anything that influenced profitability one way or the other that was unique to the quarter?

Andrew Schmitt

No. We’re seeing a ramp-up and an improvement across the board compared to where we were a year ago. But remember last year was pretty awful in the business, particularly in our wholly-owned business. So we’re seeing a general – as I said, every region was improved. We’ve got some that we still think are laggards and there is room to improve. One is still in Canada. We’re not a big factor there, but we’re not doing as well as we like. And Australia, in the peak, was one of the more profitable businesses that we had in the entire mineral exploration group.

In fact, on a relative basis, I think in 2008, I think, Jerry, probably was. And we’re not – we've not seen the pickup that we felt we could in there. I think it will improve. So those are two pretty good sized mineral exploration markets. So they are better than they were a year ago, but not that to the extent the improvement we’ve seen in North America, West Africa. But it’s going to bounce around a little bit anyway. In this particular quarter, we had pretty good move upward. And particularly compare the comparisons for our partners, they moved up as well, but the comparisons for us were pretty easy, quite honestly, compared to last year.

Richard Paget – Morgan Joseph

All right. And then finally, Jerry, a little housekeeping on the tax rate. It’s been fluctuating. What should we –?

Jerry Fanska

I think you are probably in the mid-40, 45, 46 probably.

Richard Paget – Morgan Joseph

And as I’ve – balance for the fourth quarter or is that the way to look at it next year as well?

Jerry Fanska

I think that’s pretty much as for this year. So, yes.

Richard Paget – Morgan Joseph

And the next year high-40s?

Jerry Fanska

Yes. I would say that’s right.

Richard Paget – Morgan Joseph

All right. Thanks. I’ll get back in queue.

Operator

And 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. Congratulations on the quarter.

Andrew Schmitt

Thank you, John.

John Rogers – D.A. Davidson

Just on the Afghanistan water well drilling, can you give us a little more color on how much that contributed or how important that is right now?

Andrew Schmitt

I think last quarter we had said if we didn’t have Afghanistan, we wouldn’t be making any money in Layne legacy.

John Rogers – D.A. Davidson

Yes.

Andrew Schmitt

That’s certainly true. Let me look for ourselves. But when I look at the results, I’ve got – how can you distinguish between – very well between the specialty drilling on the injection well business and Afghanistan. So those two are in there together. But if I make that is something that is all Afghanistan, the comment has not changed for the third quarter. We’re not making any money without Afghanistan and we’ll be shifting to standby rates. Now the standby rates are no huge, gone down from the day rates because we knew there would be lots of downtime when some of them would be – certainly most of it was out of our control given where we were working. So we’ll probably lay it out four to six more months, still making a contribution, and specialty work and the other areas we hope will kick in. But that’s still true on Layne legacy there.

John Rogers – D.A. Davidson

Okay. Andy, when you talk about the growth over the next couple of years, then if the Layne legacy business is coming down next year as the Afghanistan work dissipates. I assume Reynolds maybe is a little better and you’ve got the acquisitions. But does that mean all of the – most of the growth is going to come out of the minerals business. Is that the big driver? Is that the right way – or am I thinking about it the wrong way?

Andrew Schmitt

Well, we have some upside notwithstanding not being able to replace Layne legacy on some of the water treatment processes we have in place. So we would hope that their contribution, both Intevras, the MCL acquisition, SolmeteX on the arsenic side. We would hope we’d see a little bit more contribution from those. We also are pushing hard on the specialty drilling side of the business. We’ve really not, as I said, pushed out in that area very often. I mean, I know in the Ethiopia project, we typically wouldn’t have bid the project. We don’t have any water well drilling equipment to speak of in Africa. All that’s got to be moved there. We’re normally not competitive on those projects.

And what we’re seeing when we move out internationally is we’re still not going to be the low bid on these type projects, but I think people have been burned enough on the water side. And I think water is reaching a situation in many parts of the world that they just can’t afford to have contractors come in there and not deliver higher capacity, very productive wells that continue to be produce water without producing sand and that are completed properly any longer. So we’re actually getting a better reception than we thought. We’re being the low bid on these water projects. There is no longer the criteria was when we tried – geez, Jerry, I’m going back ten years and didn’t have much luck. We were – our pricing was just through the roof. Well, a lot of these countries or municipalities felt that they would pay for water well drilling. So, that may be different this time around. And it’s – clearly the reception is better than we thought. I can assure you we were not low bidder.

On the bid, we turned in to Ethiopia. And we’re still talking to them. It would not be the case before. So, don’t want to get too gloomy and doomy. I mean, it’s – we're good about coming up with projects, and we don’t expect looking at winning the award in New Orleans last year for Katrina and the Afghanistan project this year with the military. So we’ve tried to show them in past years the ability to pull rabbits out of the fact, so to speak. And part of that’s a diversification in the company and a fact that it’s a continual effort. We just didn’t slow down. So – but we’re going to have a tough time making up for Afghanistan. We knew we couldn’t make up for Katrina this year.

The mineral exploration business will show some growth, probably more on the pricing side, because activity-wise what we’re going to squeeze out is efficiencies. As you replace equipment, we’ll be facing problems trying to prove the rigs again. We know in 2008 when we got stretched on people and equipment and had equipment running that really needed to be part, that were not as efficient, and we get into that mode. So I think minerals will continue to – with the pace growth. The Reynolds backlog, we know where we bid it. We’re going to shoulder our way through that. Bencor will be a help. But you’re right. We need to come up with – what's next year’s big project going to be? We don’t have it right now. Okay.

John Rogers – D.A. Davidson

Okay. And I think it was the last call, the last couple – you talked a little bit about maybe looking at some oil producing properties?

Andrew Schmitt

We have none, and I think it’s more of a grassroot effort because the pricing on oil has gotten so attractive that when you look at buying oil properties, they’re very expensive.

John Rogers – D.A. Davidson

Yes.

Andrew Schmitt

So I think we’re going to have to do more with crews in the field leasing and do it more grassroots. That’s why I said you may have a modest improvement. Anyhow, the contrarian in me says really what we ought to be looking at is gas. Gas in some of the areas that everybody raise to the shale plays and left behind, but that’s probably the right move right now for us to look at. It’s just – it's tough to do, and there are not so many gas properties for sale anyway because nobody wants to sell them. So – but ours have to be more grassroots. I don’t think we could – we’re not going to be inclined to pay up for oil properties and our view is that 90 going to 120 old next couple of years, heck, we don’t know that. All we can do is look at where it is today and say, boy, fine, but that’s gone down some for me to buy anything. But we’ll go out at least land, see if we can do a good job in an organic way like we did with the natural gas to begin with.

John Rogers – D.A. Davidson

Yes. Okay. And lastly – and I know you said you couldn’t comment on it. But on the FCPA investigation, do you have any sense on how long it’s going to take before we can get some more clarity?

Andrew Schmitt

I don’t know the – Audit Committee is conducting the investigation. And so it’s not like it’s a process that Jerry and I can be involved in.

Jerry Fanska

I really don’t know. I mean, I know what they have done to this point, but you wanted to be thorough. So if we stand further then maybe it will turn out to be that it’s necessary, they still want that process because you certainly don’t want to come back and have to revisit anything. So you wanted to talk whatever time they need to take and do it as thorough as possible. So I really don’t know. I can’t give you, say, a certain percent or whatever through, I just don’t know.

John Rogers – D.A. Davidson

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

Operator

And next we have a question from the line of Steve Ferazani from Sidoti. Please go ahead.

Steve Ferazani – Sidoti

Good morning, Andy. Good morning, Jerry.

Jerry Fanska

Hi, Steve.

Andrew Schmitt

Hi, Steve.

Steve Ferazani – Sidoti

Can you give us an idea of just how much excess capacity you think there is on the MinEx rig side and how that’s affecting your pricing negotiations for this month?

Andrew Schmitt

We began that process – I don’t think we’re – any rigs we have parked, they are going to stay parked and they are being parted out, okay, and be chopped up for scrap iron. So with that caveat, till we add new capacity, which we’re doing, we put in order than now for next year because lead times are long. I’d say we’re pretty much where we’re going to be. We could run a few more drills in Canada and we could run a few more maybe in Australia, but with just a very few. So crews-wise, we’re pretty much matched out I think at this point. If we’re not, we will be shortly. So we’re going next year. It’s really what the customers want and the incremental pass that we can add or can we get more efficient with what we have. So that’s a challenge.

Steve Ferazani – Sidoti

How much power is that giving you in terms of pricing for next year?

Andrew Schmitt

Well, I’d say there’s more pace with the customers. It’s not like 2008 when we had everybody and their brother begging for drills and anything that free up and went immediately to another job. And I said last call, this is going to be more balanced so we can move up the prices at 4% or 5%, 6%, 7% range, something like that. Overall, the mix is going very – that's probably what you’ll see. It’s based on their part. It’s more based on our part. We’re going to get a cost push. We’re getting it on capital equipment on consumables and we’re going to get it on labor. So are the mining companies. So more of that cost push that will roll itself through, then you try to get a little bit increment on your own pure price.

Steve Ferazani – Sidoti

Okay. The miner strike in Chile, is that going to have any impact this quarter on your affiliates in North America?

Andrew Schmitt

At this point, I’ll be with them on Thursday and Thursday night and Friday of this week. So I’ll have a much better answer then and we’ll get an update. At this point, they have not raised that as an issue and we’ve not seen it in their forecast.

Steve Ferazani – Sidoti

Okay. Just the last one for me, just a little of housekeeping on the energy side, Jerry, do you know what the cash operating costs are now per I guess 1,000 cubic feet?

Jerry Fanska

I think we’re still in probably the 3.50 range.

Steve Ferazani – Sidoti

And as I look at the numbers you released, you gave us a selling price and a production, but the revenue from that segment is always like $1 million higher. Can you just sort of explain the simple variation in the numbers?

Jerry Fanska

Say it again?

Steve Ferazani – Sidoti

In the press release, you’ve put out the selling price and you’ve put out the production. But it never – if you multiply the two numbers, it doesn’t match the revenue number.

Jerry Fanska

Yes, usually it’s third-party gas or some fluctuations in that. We pushed out the people’s gas to our pipeline and that has a bearing on it.

Steve Ferazani – Sidoti

Got it. What kind of discount are you seeing now to Henry Hub? Is it staying around the 10-ish percent or –?

Jerry Fanska

I would say it’s –

Andrew Schmitt

It’s not been much lately.

Jerry Fanska

No, it’s been slow.

Andrew Schmitt

Maybe $0.20, $0.30.

Jerry Fanska

Yes.

Andrew Schmitt

Not been much. We’ve seen since pipeline capacity went in, the discount that we used to see, we don’t see and haven’t seen since the Rocky Mountain express plan was extended into the East. That really narrowed that gap. So we’re at $0.30 to $0.40. We’ll have $0.20, $0.30 rather than we used to be $1.00 at one time a couple of years ago. We’re not seeing that.

Steve Ferazani – Sidoti

Okay. That’s helpful. Thanks a lot.

Operator

And next we’ll go to the line of Christopher Patel [ph] from Janney Montgomery Scott. Please go ahead

Christopher Patel – Janney Montgomery Scott

Yes, thank you. Good morning, Andy. Good morning, Jerry.

Jerry Fanska

Good morning.

Andrew Schmitt

Good morning, Chris.

Christopher Patel – Janney Montgomery Scott

Just on the mineral exploration business, can you talk a little bit about sequential changes and the dynamic you’re seeing between the wholly-owned business and the affiliate businesses and how we should think about the contribution between those two in the coming quarters?

Andrew Schmitt

The affiliate business, if you look at their year-to-date results, they should have some pricing improvements on the bigger contracts that we have in Chile and Peru. So I would think that when you look at their results, they should benefit from that pricing improvements in the – when you look at our US run rate that we’re at right now in our wholly-owned business, we come out of the box really quick because we’re generally in a bigger box when things go wrong than our affiliates. But you see that rate of expansion for us jump up, as it did this quarter, comparatively speaking. That will begin to slow down and where we narrow our affiliates pick up some pricing on the big contracts. That helps because they are big contracts.

We’re already at a pricing point where we’re going to be pushing up a little bit, but not too much more. So their lag, I would think their results should improve going forward at a rate that equals maybe as better than we see. And that’s part of the normal push and pull that the big contracts versus no contracts, not surprising upside versus hard [ph] to improve the pricing on the big contracts, but then you get them and it rolls through on a big number. Because when you look at the overall revenue in the affiliates, remember they’re pushing close to $300 million in revenue where our mineral exploration business is more in that $200 million. It will only wide out. So they are bigger than we are, and so they have a bigger base to pull those prices through. So I don’t know if I confused or not, Chris.

Christopher Patel – Janney Montgomery Scott

No, no, that’s good. That’s helpful for me. And then – okay. If – I guess going back to the Bencor acquisition, you talked about the profitability profile there and how that will help offset some of the roll-off in the Afghanistan project. Can you talk about the seasonality that you see in that geo business for Bencor any different than the geo business that you have now?

Andrew Schmitt

It’s a – at this point, most of their work is US, and it’s scattered around the country. So if it wasn’t weather-related, I mean, it’s all a question of can we get on – can we move on the job? Can we actually billed and earn, generate the revenue? I mean, it’s going to look a little bit like Reynolds businesses. It’s going to look a little bit like Layne legacy where areas of the country affected by bad weather, whether it be snow or heavy rains or whatever. It’s going to – we could easily come up and say, geez, Mother Nature was unkind to us and it certainly happened before. And we had really difficult problems and it’s reflected in the quarterly results. So they are just as exposed as any of the other construction-type businesses we have to the weather. If they are in Las Vegas, it’s probably not an issue. If they are up in Wisconsin, it very well could be.

Christopher Patel – Janney Montgomery Scott

Okay. But outside of weather, any difference in, I guess, the customers if they are working for in the budgets that they work through versus –?

Andrew Schmitt

No, I think it’s just back. We typically don’t see that too much. There is enough business and there is enough backlog, and there is enough ongoing activity that the thing it really, really trips us up is generally weather-related. The awards or bids come out. We’ve been on a regular basis for fairly active. I guess you could hear a dry spell, but given how well established Layne legacy, the Reynolds businesses, Bencor has been around a long time. Our GeoConstruction business has been around a long time. It typically – when things get real slow and there is nothing out there in the broader economy that dictates that, it’s just the bad luck of the drop. That just means we’ll pick up quicker in some other time.

Christopher Patel – Janney Montgomery Scott

Got it. Great. Thanks, guys.

Operator

And next we go to the line of John Brett [ph] from KS Capital. Please go ahead.

John Brett – KS Capital

Good morning, Andy, Jerry.

Jerry Fanska

Hey, John.

John Brett – KS Capital

Andy, you spoke a little bit about adding capacity at the wholly owned mineral operations. And I assume you’re talking about wholly owned. But what about in terms of the affiliate business? They are obviously, as you mentioned, doing the $300 million in revenue. Are they going to look at capacity additions in the same vein that you are looking at?

Andrew Schmitt

They will. And it’s – I’m sure when we meet with them later this week, we’ll be talking about capital spending. And we’ve seen more capital spending. Think about last year, they didn’t slow down that much like we did. I mean, we’ve seen more rig additions from our Latin American partners in the last three or four years than we’ve ever seen before. I mean, they don’t hold back. They need equipment. They are very frugal, prudent people. But if they need equipment to take care of the customers, then they’ll look to us and recommend that we add. So certainly we spend more capital in the last four years than I ever remember spending before. So now, that will be one of the top items in the next year’s plan and the capital they need to execute it.

John Brett – KS Capital

How do you – you talked about restraining your capacity additions. How do you see – what do you see out there in terms of the competitive environment in terms of capacity additions? What’s the other people doing?

Andrew Schmitt

I think when you look at more longer and major drilling, they are following sort of the same path as we are. That’s adding equipment and replacing older equipment, and then you pick up that increment of capacity. I think when you get into the smaller drilling companies, I think to the extent that they can borrow the money, they will be pretty aggressive and moving up their capacity. And that will be driven more by the junior mining companies and their need for equipment than it would for ourselves board a major because we’re going to have a higher concentration though in our Latin America affiliates. We’re going to have a higher concentration of a large mining companies in the business. So their requirements, I think, will be more paced. The juniors will be stronger. And when you look at the copper price and even in base metals, normally we think the junior is more associated with gold – with gold and silver, but there is almost no place you look where they can’t raise the funding in the markets they are in. Canadian market has been strong.

The Australian market has been strong. I mean, they are going to push the envelope and they are going to push in a way. And maybe while we don’t see – I don’t figure it as profit. In 2008, a lot of the peak that we added was juniors. It wasn’t necessarily the majors. We’ve not done that this year or this go-around. Most of our ramp-up in activity had been because the majors went back to work. And that affected us pretty dramatically, not so much our partners because they never pulled back quite like we did. So I think you’ll see smaller competitors aggressively moving into those junior markets. It won’t be – they will turn down the business, but our first priority, we’ve got to be take care of the major customers and really take care of their needs around the world. It’s not like you can select and then say, well, we’ll work here, but we’re not willing to go here or there. So we’ve got to be full service. So –

John Brett – KS Capital

Andy, do you think – when you look at the near-term price levels, is there a price comparable or whatever that you think things get frothy and maybe a little bit stupid again in terms of activity?

Andrew Schmitt

I think what tampers out a little bit is, you know, the pricing is very good right now? When you look at Western – mature Western economies, nobody feels that good like they did in 2007 and ‘08. I mean, everything looked good on a broad, broad basis. And so the comfort level, I think, was very high. Till you see Europe get past their problems with the EU until you see in fact the UK and the US can handle their issues with the debt going forward and then we start to see Japan demonstrate that they can shoulder their way through this period of time. I think that tampers things a little bit, John.

John Brett – KS Capital

Okay, okay.

Andrew Schmitt

That’s a big difference to me when I look at it from a macro standpoint.

John Brett – KS Capital

Yes, okay. Andy, thank you very much.

Operator

And next we have a question from the line of Jonathan Ellis with Bank of America/Merrill Lynch. Please go ahead.

Jay Chap – Bank of America/Merrill Lynch

This is Jay Chap [ph] on for Jonathan Ellis.

Andrew Schmitt

Hi, Jay.

Jay Chap – Bank of America/Merrill Lynch

Hi. My first question is, what are you seeing in terms of pricing trends in both the Reynolds and the legacy business?

Andrew Schmitt

In the Reynolds business, we’ve given up about what, Jerry, 1.0, 1.5 percentage point in a fully loaded margin type. So we’re about 1.5. And I don’t – yes, maybe 1.0 to 2.0 range. On the Layne legacy business, I think we’re flat at this point.

Jerry Fanska

Yes, we’re just flat.

Andrew Schmitt

It should not go anywhere. And there is not enough drilling related municipal need for new well capacity to really draw a good beat on that, Jay. We’ve got a lot to bid on. I can give you a little bit better thought, but at this point, I’d just say, look, we’re flat and we don’t – we've got a backlog that’s 1% to 2% weaker that we don’t have to either make it up executing or it’s going to drop to the bottom line.

Jay Chap – Bank of America/Merrill Lynch

Okay. And my last question is, can you provide us with any color on the pricing and project activity in the CIPP business?

Andrew Schmitt

The – I don’t know, Jerry. Do you have any backlog?

Jerry Fanska

Yes.

Andrew Schmitt

Maybe that one helps compared to a year ago, but I don’t have the backlog in front of me. I don’t have that detail.

Jerry Fanska

The backlog is actually down a bit from October last year.

Andrew Schmitt

Some of that maybe in the same list –

Jerry Fanska

Some of that was stimulus last year. Some of that stimulus, plus we have a project that fall intense been awarded, but it’s not made into that bond run. So I think that big your difference. It is flattening out, I think, Jay. I mean, it’s – if you look at their – let me give you their operating margin relative to the Reynolds business.

Jerry Fanska

Their division EBIT is 11.5% of – EBIT. Last year, it was 10.3%. Okay? So little improvement in that area, and the revenue was up. I think I gave that on the call, and double check. I think it’s 23% or something. So that’s – it's not facing any pricing deterioration or pressure at this point. It’s up a little bit, and that’s about where the works be and be at.

Jay Chap – Bank of America/Merrill Lynch

Okay. Thank you.

Operator

And next we got to the line of Dick Kindig [ph] from Keeley Asset Management. Please go ahead.

Andrew Schmitt

Dick, you there? I don’t think we – Leah?

Operator

Okay. Very good. We’ll move on to the line of Herb Buchbinder from Wells Fargo Advisors. Please go ahead.

Herb Buchbinder – Wells Fargo Advisors

Hi, Andy. A couple of questions. Did you walk away from Afghanistan deal or did they tell you that they didn’t want to renew the contract because I thought you’re going to renew it.

Andrew Schmitt

We were very surprised. We had gone from having the one rig that was out of commission. That was not going to be repaired that our understanding would just going to be backed by the military. To then thinking that we were going to repair the rig, actually talking about how do we ship to Derrick back into Kandahar and could get that Derrick mounted, it got twisted when the rig rolled over with the other rig continuing to run to getting an email that project, we weren’t going to fix the rig that had been rolled. And in fact, the other rig, once we finish it up, and I don’t know how many wells, that evolved but I didn’t get the impression there were a lot, as the project was going to be halted.

I don’t know if (inaudible) got the same message or not. I have spoken to those guys. They had a rig turned over as well, you remember, and last one? And so they were only running one rig. I just hadn’t circled back to find out that there got the same message we did. But it was a surprise to us, we were not under that impression we thought the contract would be in fact extended and without they actually wanted us to try to repair the rig in country. So we went from – with that – being at that point, to finding out none of the above. But in this situation, we obviously don’t know all the answers nor do we need to know. We’re in the Army, so to speak. So, all we do is say, yes, sir. So we said, yes, sir, and we’ll make those arrangements. So –

Herb Buchbinder – Wells Fargo Advisors

So you had a home for that rig when it’s going to no longer be needed in Afghanistan or not?

Andrew Schmitt

Well, they will move and let specialty operation where they were before. So –

Herb Buchbinder – Wells Fargo Advisors

The other question I have is if you look at the natural gas price that you realized during the quarter and where it is today, how much improvement is there and is it enough yet to turn things around a little bit or how much more do you need to feel more comfortable with it?

Andrew Schmitt

The price on the quarter –

Jerry Fanska

Yes, it’s a little better today than it was then. I mean, it’s little over 4. I mean, we were 3.80 average in the quarter. So I mean –

Andrew Schmitt

Clearly, the 3.80 average –

Jerry Fanska

4.20 spot yesterday?

Andrew Schmitt

I read as 4.50 this morning, right around there on the NYMEX. So you take our $0.20 off. That would be about right. Yes, it’s – at that particular point right now, or it would be $0.50 an Mcf than what we had averaged for the quarter.

Jerry Fanska

Average for the quarter, yes.

Herb Buchbinder – Wells Fargo Advisors

And that will help, but it’s still not good enough.

Andrew Schmitt

No, it’s not good enough. If it’s maintained at that area, we could probably produce a profit, but it won’t put us back to an 8.70 average if you look at it a year ago.

Herb Buchbinder – Wells Fargo Advisors

Yes. All right. Thanks a lot.

Andrew Schmitt

Okay.

Operator

And we’ll go back to the line of Dick Kindig. Please go ahead.

Dick Kindig – Keeley Asset Management

Can you hear me now?

Andrew Schmitt

Yes, we can.

Dick Kindig – Keeley Asset Management

Okay. Hi. Andy, could you explain the rationale for being an energy? It’s such a small percentage of the overall business and probably consumes a fair amount of management time and effort, particularly if you talk about grassroots, I mean, if you send land man out there to try and lease acreage, you’re going to be out there competing with a jillion other guys from E&P companies.

Andrew Schmitt

Dick, when we got involved in Layne Energy, it was coal bed methane, and we were actually drilling shallow wells, shallow gas, and coal bed methane. And we knew a lot about the water-related problems. In fact, we consulted with our water guys quite a bit even with our customer – even with our oil and gas companies we are working for. So it was an outgrowth of that and our belief in late 2002, 2003, that in fact their natural gas prices were not going to stay low. And we were already in the business on the drilling side anyway, and we talked about being backward integrated. And we move up through several experiences there that we actually pull back and just state in the E&P business once we figured out the geology in the Turkey Basin, we had a pretty good business there and conservatively forward total gas. So it produced a nice earnings stream for us.

And we managed the capital pretty tight. So that was solidly good thing for us that we shallow. It was operations, very operations intent, project intent. We are very good at that. When you look at the business today with the natural gas prices being as low as we are, we certainly wouldn’t want to divest of the business. In fact, as you know, we’ve pushed that production down, just not willing to burn up 20 million cubic feet a day of gas when the prices aren’t that attractive. So just on a baseline at this point. So it’s – we have 4,500 people in laying wholly owned businesses. $2,500 in the joint ventures. We have about 25 people in Layne energy and about – I don’t know – three, four staff people here?

Jerry Fanska

Yes.

Andrew Schmitt

So when you talk about at being a management intent to certainly not as intense as our service businesses on a day-to-day, week-to-week basis by any means. So what we do is we have this investment and we have some opportunity, we think, even on the lands we already have. And the old side of the business looks attractive. It’s not going to make us rich and famous, but it’s not going to take much of an investment and we already have people steel people, folks in place. So I think at this point in time, we are just trying to improve the situation that has certainly changed from where it was, you know, ‘05, ‘06, ’07. 2008, we extended it through. 2009, the early part of this year because of that forward-selling program, but we don’t have any massive effort there.

And as I said, what looked attractive without the one-time on the oil side looked attractive at $55 a barrel, more of the old West Texas Permian crude, but that’s morphed into a very hot market as well. So, our conservatism sort of put this back. But at this point, I don’t think we would get – well, I’m not saying any gas properties, because I don’t think we can get fair value for ours and we can move this into a situation where it is profitable, like say, this first quarter that has never happened to us before, and change the mix a little bit. We think it will be – the numbers will continue to improve. So it’s not a big issue either way in terms of its prominence in the company, and it is not a big issue in terms of time and effort that we spend a lot of time on it, because we have our pros, they know what they are doing. And so we really don’t spend a lot of time in there, in that effort. So I know you have mentioned this several times on the call and I probably haven’t given you an answer you want to hear, but –

Dick Kindig – Keeley Asset Management

Well, I just – maybe you have a different long-term perspective on the outlook for natural gas prices. Mine is pretty bearish. We’re finding a lot of gas in this country and there is a lot out here and I think it is going to be some time. In addition, if your costs are at 3.50 an Mcf, you can go out and hedge. The strip is higher than that it would seem like. So have you thought about putting hedges back on?

Andrew Schmitt

We have. We have, and every time we hit the shoulder periods of time, we always regret not doing it. So we are back looking again and praying for a cold winter day. So – because we do know the costs real well, and the properties are – they are predictable properties. We don’t have all kind of variations. So we are definitely looking at it because we want to get a return on that investment, as you could see from the operating EBITDA. They still can generate pretty good EBITDA. So we definitely want to improve the cash position of that business. So absolutely we have our pricing committee. We will be looking at that. We have a call actually tomorrow with our Layne Energy people.

Dick Kindig – Keeley Asset Management

Just not to beat a dead horse to that, but is there oil on these properties too in the Cherokee Basin?

Andrew Schmitt

Yes.

Dick Kindig – Keeley Asset Management

There is? Okay, well –

Andrew Schmitt

They produce a lot of oil for many, many, many years, as you know.

Dick Kindig – Keeley Asset Management

Maybe that’s the answer.

Andrew Schmitt

It very well may be, Dick.

Dick Kindig – Keeley Asset Management

Drill a little deeper and a little horizontal.

Andrew Schmitt

Well, we are – for our type of wells to tap that oil, it’s a $65,000 expenditure for the well, and it is $10,000 dry hole cost. So the risk is pretty low, believe me. And if you ever hit anything, that produce is worth the time. It’s a great return. So right now, we are going to be Kansas oil men.

Dick Kindig – Keeley Asset Management

Okay, thank you very much.

Andrew Schmitt

All right. Thank you.

Operator

(Operator instructions) And there are no further questions. You may continue.

Andrew Schmitt

Thanks, Leah. Appreciate everybody’s time on the call, and we move into this fourth quarter and let us hope Mother Nature treats us pretty decently so we don’t have the seasonal weather-related issues. Right now, things look pretty steady in all the businesses, and we have got some work, as we discussed earlier, certainly next year to replace the Afghanistan job. We have a challenge on execution on the Reynolds back on. We know it is a little bit weaker, but we have got Bencor and Costa Fortuna. So I think on this oil stabilization, we look pretty good, and on the MinEx side, we will try to improve our efficiency and try to get a little bit of pure price on the contract side as well.

So, thanks again, and we’ll talk to you after the fourth quarter call, full year next year. Take care.

Operator

Ladies and gentlemen, this conference is available for digitized replay after 1 PM Central Time today through December 14 at midnight. You may access the digitized replay service at any time by calling 1-800-475-6701 and enter the access code of 179289. International participants may call 320-365-3844 and use the same access code 179289. That does conclude your conference for today. Thank you for using AT&T Executive Teleconference Service. You may now disconnect.

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