Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Greg Rosenstein - Vice President of Investor Relations, Secretary and Member of Administrative Committee

Robert Taylor - Chief Financial Officer, Executive Vice President and Treasurer

David Dunlap - Chief Executive Officer, President and Director

Analysts

Daniel Burke - Johnson Rice & Company, L.L.C.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

William Sanchez - Howard Weil Incorporated

J. Marshall Adkins - Raymond James & Associates, Inc.

Matthew Beeby - Global Hunter Securities, LLC

John Daniel - Simmons & Company International

William Conroy - Pritchard Capital Partners, LLC

Geoff Kieburtz - Weeden & Co., LP

James West - Barclays Capital

Robin Shoemaker - Citigroup Inc

Superior Energy Services (SPN) Q2 2011 Earnings Call July 28, 2011 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Superior Energy Services Second Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, July 28, 2011. I would now like to turn the conference over to our host, Greg Rosenstein. Please go ahead.

Greg Rosenstein

All right. Good morning, and thank you for joining today's conference call. Joining me today are Superior's CEO, David Dunlap; and CFO, Robert Taylor.

Let me remind everyone that during this conference 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 record quarterly revenue of $510.8 million, EBITDA of $149.1 million and net income of $48.1 million or $0.59 per diluted share. Without question, our second quarter results were exceptional and exceeded our expectations. There were several positive factors during the period, as we had strong performance across multiple product lines and geographic areas.

While the performance was broad-based, there were several major drivers that I would like to highlight. First, U.S. land revenue advanced to nearly $200 million in the second quarter and represented 39% of total revenue. That is an 11% increase in sequential growth compared to a 6% increase in rig count.

Our tactical decisions to prioritize the U.S. land market from an asset allocation and capital spending standpoint is paying off well in a market that we believe continues to offer great opportunities for further growth.

More than 40% of our overall 2011 CapEx is being directed to the U.S. land market. We have now placed all 8 of our 2011 coiled tubing unit additions in service. We have delivered 50% of our new drill pipe and are now waiting delivery of pressure control equipment, perforating-related assets and other rental assets to service the very high demand that we are experiencing in the U.S.

Our success in the U.S. land market was complemented by our success in the International business during Q2. During the quarter, we recorded a record $138 million in revenue or 27% of our total revenue. This represents a 33% increase from Q1, driven by our Subsea and Well Enhancement segment.

We experienced the expected seasonal rebound in Southeast Asia, and our Hallin Marine business continues to make tremendous progress in what has been a difficult market for the past 5 quarters.

During the quarter, we successfully completed a 2-well subsea P&A project in Indonesia. This very comprehensive project incorporated the use of one of our subsea support vessels, our lubricator system and our downhole expertise and project management and it was executed flawlessly. In addition, overall demand for intervention services is increasing and was evidenced during the quarter by higher snubbing revenue in Australia and the start of a new snubbing project in Peru.

As expected, the Gulf of Mexico business realized the normal seasonal improvement from Q1. Revenue increased 32% sequentially, as we benefited from an uptick in the shallow water for intervention and end-of-life services and a modest resumption of deepwater drilling, which had a positive impact on our completion services and downhole drilling products.

Our market share for downhole drilling tools in the deepwater is consistent with where it was prior to the Macondo oil spill when we had assets on 31 of the 33 rigs working.

Finally, we experienced margin improvement at Hallin Marine and completion services, which drove some of the high incremental margins we experienced in the Subsea and Well Enhancement segment. At Hallin Marine, we had a significant improvement in subsea vessel activity and utilization. Hallin got past the breakeven point, and we believe they are on their way to achieving higher levels of profitability during the second half of the year.

For completion services, it was really a matter of time, as this product line is highly levered to the Gulf of Mexico market. Even the modest activity gains that we realized in the Gulf during Q2 provided higher utilization for our tools and stimulation services, as we executed on several new projects during the quarter. There are more good things happening within our completion tools business that I will discuss a little later in the call.

In summary, our outstanding performance was due to the priority that we placed in growing our presence in the robust U.S. land market, the early stage recovery in the Gulf of Mexico market and the turnaround in the subsea market that helped drive international growth. Finally, the high incremental margins were due in part to the turnaround at Hallin Marine and completion services.

Robert will now walk you through some of the financial detail, and then I will discuss our guidance and outlook for the remainder of the year. With that, I'll turn the call over to Robert.

Robert Taylor

Thank you, Dave. As we go through each segment, I'll make comparisons for the first quarter of 2011. In the Subsea and Well Enhancement segment, revenue was $336 million and income from operations was $51 million, which represents sequential increases of 28% and 363% respectively. Gulf of Mexico revenue increased 32% to $111 million, with some of the main increases coming from completion services and intervention services such as coiled tubing, wireline and snubbing.

International revenue was $94 million, which represents an increase of 52%. We've spent much higher utilization for vessels performing subsea inspection, repair and maintenance work.

In addition, we had large increases in pressure control-related projects and snubbing services.

U.S. land revenue increased 13% to $131 million. Our coiled tubing business grew another 10% in the quarter. We also experienced increases in pressure control services, wire line and remedial pumping. Overall, the segment had an incremental operating margin of 54% due to the strong revenue increases for these product lines, many of which are primarily fixed cost in nature.

In the Drilling Products and Services segment, revenue was $149 million and income from operations was $30 million, which represents a 16% sequential increase in revenue and a 37% sequential increase in income from operations.

Our Gulf of Mexico revenue increased 53% to $39 million due to an increase in rentals of drill pipe and stabilization equipment, as the market experienced higher drilling and completion activity in both the shallow and deepwater areas. U.S. land revenue increased 7% to $68 million, as a result of our increased demand for accommodations in bottom-hole assembly.

Revenue from the international markets increased 7% sequentially to $42 million, primarily to increased rentals of stabilization equipment in Brazil and premium drill pipe and accessories in Colombia.

Our operating margin increased almost 20% from 17% in the first quarter. Our gross profit margin was slightly lower due to revenue mix, primarily related to the sale of drill pipe that was damaged during the quarter. We expect the gross profit margin to improve in the third quarter.

In the Marine segment, revenue increased 8% to $26 million while we essentially broke even when excluding the $5.9 million gain on sale of 4 liftboats. Liftboat utilization increased to 70% from 57% in the first quarter of 2011. However, this was offset by larger-than-expected U.S. Coast Guard inspection and repair and maintenance expenses that should not peak in the third quarter. We sold 2 liftboats from our 145 fleet, a 160-foot vessel and a 200-foot liftboat.

Turning to the balance sheet. At the end of the second quarter, the face value of our debt, exclusive of discount was approximately $1.2 billion, which will reduce to about $800 million at year end when we pay off the convertible debt.

As you may recall, in April, we raised $500 million of 6 3/8% senior notes, which removed the refinancing risk associated with convertible notes, which can be put and called in December this year. Net debt to EBITDA at the end of the second quarter was 1.7x as compared to 1.9x at the end of the first quarter. Net debt to total capital was 37% as compared to 38% at the end of the first quarter.

Our days and sales outstanding, which is a primary focus of our working capital management program, was 77 days at the end of the second quarter as compared to 79 days at the end of the first quarter and 90 days at the end of 2010.

Capital expenditures during the second quarter were $108 million. We spent $55 million in the Drilling Products and Services segment and $52 million in the Subsea and Well Enhancement segment. Year-to-date, our capital expenditures have been $217 million. While this amount is a bit lower than expected for June 30, we still anticipate that our CapEx for 2011 will be in the range of $500 million.

From a modeling perspective, in the third quarter, we think you should model G&A in a range of $90 million to $93 million. And for DD&A, we think you should model a range of $66 million to $68 million. Also we anticipate our interest expense to be in the range of about $21 million. We also anticipate a 36% effective income tax rate in the third quarter. I'll now turn the call back over to Dave who will discuss our earnings guidance and outlook for the remainder of the year.

David Dunlap

Thank you, Robert. It is clear to me that we have picked the right moment in time to have a record capital spend at Superior Energy Services. Our management team and employees have done a tremendous job of putting that capital to work for you. And our execution during the second quarter gives us the confidence to increase our earnings guidance for the year to a range of $1.96 to $2.16, which implies a second half range of $1.25 to $1.45 per share. The guidance reflects operational earnings which is exclusive of gains and losses.

The composition and magnitude of our second quarter outperformance is one of the reasons why we felt we could increase our guidance. We believe the second quarter exit rate, which reflects strong utilization of existing assets across most product lines, will be enhanced by our first half capital addition and new assets that are entering the market in the coming weeks.

We underspent our CapEx during the first half of the year due to delivery delays for pressure control equipment, perforating-related assets and accessory equipment. In addition, we are slightly behind schedule in capital spend, related to several of our facility expansions budgeted for 2011. Where possible, we have worked around delays by utilizing existing assets or renting equipment. We did experience on-time deliveries for many of our larger asset purchases allocated for the U.S. market, especially in the areas of coiled tubing and premium drill pipe.

We are expecting our CapEx plan to catch up rapidly with many of the items I mentioned being delivered early this quarter. Our geographic market outlook overall is quite bullish. We think the U.S. land market is still underserved, and we believe horizontal drilling will remain robust, which should continue to drive demand for our downhole drilling tools, service rentals and intervention services. We continue to experience high utilization levels for coiled tubing and drilling products that are leveraged to the demands of horizontal well bore geometry.

Activity in the shallow water Gulf of Mexico for intervention and end-of-life services should remain seasonally strong. In the deepwater Gulf, we've maintained our belief that there will be 15 drilling rigs drilling for oil and gas added to the market by the end of the year. The number of rigs working during the second quarter would suggest that we are slightly ahead of that pace. However, the number of new permits issued has slowed recently. So we'll stick with our original guidance in that market.

Internationally, we will continue to grow, although it will be difficult to duplicate the 33% quarterly revenue growth rate that we achieved in the second quarter. Nonetheless, I expect subsidy vessel activity and demand for intervention services and drilling tools to continue at a healthy clip. Our subsea vessels are working or will soon be working in Australia, Malaysia and Indonesia. Demand for premium drill pipe is increasing in Africa and Latin America, and we've also begun a 4-well subsea P&A project in the Red Sea that should be completed early in the fourth quarter.

In terms of strategy execution, we have made great strides in expanding our sand control completion tools business into international markets. In fact, the pace of expansion has been much quicker than we originally forecasted, which I think will benefit us later this year and beyond.

We've been awarded almost $20 million in international contracts for work to be completed during the remainder of 2011 and 2012. That's well ahead of pace. In Brazil, we were recently awarded a sand control screen order which will be delivered during 2011.

In addition, Superior has been selected to provide the first Multi-Zone Single Trip sand control system in Brazil. This award is evidence of the progress that Superior has made in establishing an industry-leading position in the area of Multi-Zone Single Trip sand control applications.

We've also been awarded contracts for sand control tools and installation in Nigeria and contracts for Packers and gravel pack installation in Equatorial Guinea.

In addition to our completions business, we are finding success in marketing our oil spill containment technology to international customers in several markets. We have made the most progress with North Sea customers, as we signed up, up to 12 subscribers we required to make the venture economically feasible. Our emergency response approach involves multiple functions and disciplines, including the debris removal, dispersion injection and well containment and capping equipment to handle larger spills. Our position as a leader in pressure control markets makes us uniquely qualified to market this solution on a global basis.

The value in establishing the Superior brand in the international markets through our high-technology product line and innovative solution exceeds the financial contribution of these awards. It serves as a testament to our growing reputation worldwide and our ability to penetrate multiple geographic markets with our diversified portfolio of products and services.

To summarize our outlook, we are exiting the second quarter with strong utilization and favorable market environments that should lead to additional work for assets in place and a rapid absorption of new equipment as it gets delivered. The market environment, coupled with our team's ability to execute, give us comfort that the short-term guidance is achievable. And longer term, we continue to successfully execute our geographic expansion plan and establish our brand in new markets.

And with that, we'll open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Daniel Burke with Johnson Rice.

Daniel Burke - Johnson Rice & Company, L.L.C.

Dave, a question on Subsea and Well Enhancement. The gross margin performance in Q2 was quite strong. Looking forward, you referenced that Hallin margins could continue to improve over the second half of the year, I believe. I think you're doing some Bullwinkle P&As, which should be pretty high margin. I guess the question is, do you think there is room to push that gross margin above that 42%? Or is that a little bit of a high watermark because of 1 or 2 high-margin jobs you might have had going on in Q2?

David Dunlap

I don't know that the margins were driven necessarily by 1 or 2 high-margin jobs. I think as much as anything, what we saw really drive margins in the segment was a return to marginal profitability for both the completion services and Hallin Marine businesses. And so these are businesses that, as you know, and as we've talked about, have been a bit of a drag on us that we expected to return to profitable levels, and that's really what we've done. Overall in that segment, I would not suggest that you try and drag that margin up by some more -- much higher than where we were in Q2.

Daniel Burke - Johnson Rice & Company, L.L.C.

Okay, and then you referenced Hallin. On the international side, within Subsea, you are about plus $35 million, I believe, in revenue. Can you give me -- is it -- sequentially, is it fair to split that half Hallin, half non-Hallin, some of the international onshore stuff. Is that about the right split?

David Dunlap

I'm not sure if that's the right split or not. I mean, Hallin's revenues were certainly up from the first quarter, which as we described in the last quarter's conference call, Hallin Marine's utilization in Q1 was quite low and the Southeast Asian market was poor. And really, what Hallin Marine did from a revenue standpoint was about recover to levels that we experienced during the fourth quarter of last year. And utilization was fairly similar with what we experienced in the fourth quarter last year. It's contribution from Hallin Marine. It's contribution from completion services. It's a contribution from a land standpoint. It's contribution from our well control, and it's really across the board, Dan.

Daniel Burke - Johnson Rice & Company, L.L.C.

Good to hear. And then maybe just a last question. Looking at the next couple of quarters and the higher guidance range, Dave, I was wondering if you could address maybe how you're contemplating 2 factors in the guidance. Number one is sort of how should we think about traditional seasonality that your business sees in Q4 versus the fact that you have a lot more capital deployed? In other words, do you think Q4 EPS should be higher than Q3? And then more near-term in Q3 and I guess the beginning of Q4, what about Gulf of Mexico weather risk?

David Dunlap

Yes, so that was a number of questions. Let me start with kind of earnings flow. I mean, we do expect as we get out to the end of Q4 that we'll begin to experience some of the normal seasonal slowdown in the Gulf of Mexico. Last year, the way that it impacted us was beginning late November, and it was -- there was a real impact in the month of December. A lot just depends on weather patterns. It's kind of hard to call. But I think from a forecasting standpoint, we would see that slowdown, which really for us slows down on the offshore intervention business, as well as the P&A decommissioning business, end-of-life services kind of towards the end of the fourth quarter. And so we think earnings in the fourth quarter -- think of that being kind of flat with where they'll be in Q3, generally. And I see you'll have some new equipment that's going out that pulls things up, and you got the seasonal slowdown in the Gulf that kind of pulls things down. So overall, fairly similar from Q3 to Q4. Let's see. The other part of that question was weather in general. So really, Q3 from a risk standpoint is probably a bigger risk just in the way of tropical storms and hurricanes in the Gulf of Mexico. We think what we've done within the guidance range is kind of give a range that would allow for the types of disruptions that may occur. It's impossible to predict these things as you well know. So we don't build into our earnings guidance really a significant long-term shutdown in the Gulf of Mexico. Instead, I think what we build in are those minor interruptions such as the one we're having right now. In the Western Gulf of Mexico, we've got a few liftboats that are sitting at the dock waiting for this tropical storm to pass through over the weekend, and that's kind of normal this time of the year. I think our guidance range covers that.

Operator

Our next question comes from the line of James West with Barclays Capital.

James West - Barclays Capital

Dave, I think when you joined Superior, you were, I guess, somewhat less interested in the U.S. land market. And that's certainly changed, and you've shift a lot of capital to this land business, and, of course, the consensus views on land has obviously changed as well. Two questions, I guess, around that One, where do you think we are in the U.S. land cycle at this point? And then number two, would you be interested in further acquisitions or acquisitions that were North American focused?

David Dunlap

Yes, I mean -- I think you're right about my attitude changing regarding the U.S. land market from where it was a year ago -- or actually 5 quarters ago. I don't know that I'm unique from that standpoint. I mean, I do feel different about the U.S. land market today. I've seen the migration that our customers have made to more exposure to oil and liquids-rich, away from natural gas. It's a basin that historically, at least through my career, has been highly levered to natural gas and it's not today. And it's taken us a couple of years to migrate to a rig count that is as levered as it is to oil. But I mean, I think that fundamental drive from our customers has changed my opinion, I think, probably a lot of people's opinion about the U.S. land market. If you follow the assumption that oil prices are going to remain in a range at least above $80 a barrel, then there's really not a reason why we should begin to see oil-related or liquids-rich related drilling activity decline. At the same time, you've got a natural gas rig count which is 1,000 rigs off of its peak from September of 2008. I don't know when natural gas prices will begin to rebound. But somewhere out there, over the next few years, I think we'll see that. That's going to put pressure on the marketplace to accommodate more natural gas drilling. All that tells me, that we're in a different type of cycle than we've seen in North America in the past. And I think it would be a -- it's hard for me to envision that we're anywhere near the peak of that cycle. In fact, maybe more towards the midpoint, if you want to think of it that way. And so how does that relate to my investment appetite in the U.S. land or North American market? It's pretty good. We're fulfilling that with our capital spend budget this year. I would expect in 2012, we have continued healthy additions of new assets into the U.S. market. And if the right opportunities come across for us to do acquisitions in the U.S. land market, I would certainly be in favor doing this.

James West - Barclays Capital

Okay, that's helpful. On the international side, you've made good progress, obviously, in Brazil, in Australia and Southeast Asia. When should we expect to hear about really a third region or a third market that you'll invest in?

David Dunlap

I think we'll be -- I think we'll probably be talking to you about that later this year. And we've got several markets that we are spending quite a bit of time in right now, understanding and analyzing to ensure that we kind of put our focus on the right place. A lot of it has to do with our ability and our confidence in putting together a local management team to lead our company's efforts in those new markets, and that's a characteristic that certainly applied in Brazil and Australia. It's one I feel very strongly about. So we'll be adding some of those from a strategic standpoint and talking to you about them as the year goes on. In the meantime, we've had a number of projects begin to develop in the international markets that really aren't part of our strategy to build out multiservice line operations. And I think we'll continue to see those. An example of that is the snubbing project that started up in Peru during the course of the quarter. It's not that we're going into Peru to intentionally build out a big multiservice line operation. But those types of opportunities, particularly in the area of intervention services, I think, will continue for us. And the type of commodity price environment that we're in, we certainly have international customers that are interested in going into their oil fields and enhancing production. And that's right where these intervention services fit. So I really, in addition to the multiproduct line build outs that we're doing in Brazil, Australia and we'll be doing in some other countries, there are going to be other opportunities to take advantage of intervention.

Operator

Our next question comes from the line of Marshall Adkins with Raymond James.

J. Marshall Adkins - Raymond James & Associates, Inc.

Dave, I think we all have kind of looked at the North American land stuff. They're doing pretty well there, but the surprise here, certainly for us, was how strong the Gulf was and you mentioned numerous different areas of the Gulf. I want to get a little more color on those areas, where the Gulf is improving and kind of get your thoughts on the sustainability that specifically the rental tools in deepwater, you mentioned end-of-life. The BJ stuff seems to be picking up as well. Could you just give us a little more color on each of those things in the Gulf and how long you expect it to continue?

David Dunlap

Yes, certainly. I mean, really, I'll separate this response in a couple of different ways. First off, the intervention and end-of-life type work, the P&A and decommissioning of business, which really, what this business has been in the second quarter, Marshall, is they returned to the levels that we saw in kind of the fourth quarter of last year. Q1 was very soft in those services. We've talked about that last quarter. We expected them to return to a stronger seasonality, as a result of seasonality, and they certainly did. I don't think that we've actually, and I know we have not really experienced significant increases year-over-year on the intervention side or on the plug and abandonment and decommissioning side of business. This is normally when we're busy and we're busy now.

J. Marshall Adkins - Raymond James & Associates, Inc.

So the big move they've talked about last year or year before, whatever it was, where the BOE is going to get stricter with that, doesn't seem to be pushing, at least on a sustained basis, meaningfully higher abandonments yet?

David Dunlap

That's absolutely correct. And what I've said about this I think still holds true and that is, I don't believe that we would -- I didn't believe that we would see increases during the second and third quarter that we're always busy during that period of time and we're busy now. If we're busy with this type of work in late November and end of December when the weather window is not so good, then I'll change my answer. But for now, we're not seeing it. And I'll be kind of surprised if we do. Then there's the drilling side of business and so we did begin to see a return of some of the deepwater rigs during the second quarter. We didn't get the full benefit of that during the quarter. I think we'll continue to see that deepwater rig count migrate upward. The pace of permits is still slow. I think it will continue to be slow, but our forecast all along counted on 15 of those deepwater rigs being at work by the end of December. And you heard me say I still kind of hold true to that. I think that's where we'll be. The completion tool business and completion services business in total did much better in the second quarter than the performance that we've seen from that group since the acquisition from Baker Hughes last year. It was a bit surprising to us even how well that business recovered. But our guys have done a good job, I think of ensuring that the Gulf of Mexico customers knew who Superior was and knew the business that we were in now, from a completion standpoint. And as soon as that deepwater market begin to open up, we were there to take advantage of it, and the guys did a great job from that standpoint.

J. Marshall Adkins - Raymond James & Associates, Inc.

So it sounds like you're optimistic that continues as well?

David Dunlap

I don't think there's any reason to believe it won't. It's a business -- it was still a low business level from a deepwater standpoint overall in Q2. And I've heard some argue that while maybe the pace of permits slows things down -- well, I don't know if it's going to slow down from the rig count we saw in Q2. It's still a fairly minimal level, and so if you take that as kind of the baseline going forward, I think you'll argue that you'll get nothing but upside to it.

J. Marshall Adkins - Raymond James & Associates, Inc.

All right, and also it sounds like, I guess, you're levering that internationally pretty well as well?

David Dunlap

Much faster than I thought we would. When we did the acquisition last year, I thought that we would be spending most of 2011 in kind of marketing activities related to international and really not seeing any substantial income from the completion services business internationally. It turns out that we've been successful sooner than we thought we would be. And that certainly is going to help us in the second half of the year. We hadn't seen that. That's not part of our Q2 results, but you do begin to see it as a result of some of the contracts I mentioned in Q3 and Q4 and then that carries forward into 2012 for us.

Operator

Our next question comes from the line of Geoff Kieburtz with Weeden & Co.

Geoff Kieburtz - Weeden & Co., LP

Dave, you partially answered this question, I think, already in regards to the range of your guidance. Being really -- taking into consideration Gulf of Mexico weather risk. Is that -- did I understand that correctly? That's the primary reason for the $0.20 range in the second half earnings?

David Dunlap

Yes, I think that's exactly right, Geoff. I mean, we've built in a $0.20 range there. If we had perfect weather in the Gulf of Mexico, then we probably will lean more towards the high end of that, but it's never a perfect weather in the Gulf of Mexico. I think the lower end covers us for what we would consider to be the normal kinds of shutdowns that we have for weather disturbances that develop. If we get something dramatically different from kind of a normal type of storm, then who knows what could happen. I mean, sometimes these things blow through and you're shut down for 3 or 4 days. Sometimes it blows through and you're shut down for 2 weeks. It's impossible to predict and so we don't. Instead, I think what we've done is given a range here that covers us for the normal types of disturbances that we see in Q3.

Geoff Kieburtz - Weeden & Co., LP

I'm just trying to reconcile that with the other comment in regards to roughly speaking expecting the third quarter and fourth quarter earnings to be pretty close to each other, but the third quarter is where the greater weather risk normally exists, right?

David Dunlap

That's correct.

Geoff Kieburtz - Weeden & Co., LP

So I mean, I'm not trying to split hairs too much, but is it really most of that $0.20 range or uncertainty really lies in the third quarter? Do you see where I'm going with this?

David Dunlap

Yes, I don't know that I would characterize it as most, but I don't know, maybe it is most. Listen, we didn't really look at it that way necessarily. But certainly, from a weather-risk standpoint, Q3 represents bigger weather risk than what we see in Q4. In Q4, we know we're going to have weather issues from the middle of November through the end of December. I don't know if it helps you or not, but I mean, that's the way we looked at weather risk as we were thinking about this. There are Q4 weather risks. It's going to happen.

Geoff Kieburtz - Weeden & Co., LP

Are there any other major variables in regards to the range on that guidance?

David Dunlap

No.

Geoff Kieburtz - Weeden & Co., LP

Okay. All right. And your response to an earlier question in regards to Subsea and Well Enhancement margins. Was that -- you kind of said, don't expect it to go much higher. Was that a long-term comment or just a short-term comment?

David Dunlap

I think that's more of a short-term comment. I mean, obviously we think what will happen that the 2 segments that have been underperforming there from a margin standpoint are Hallin Marine and Completion. So let me segregate my thoughts a little bit on those. With Hallin Marine, we saw improved utilization in Q2. We believe as we progressed over the next 4 or 5 quarters that we're going to have some opportunities to get a little bit of pricing permit a time, and so that's going to help from a margin standpoint. And I don't want to get overexuberant in my thoughts here about pricing for Hallin Marine. When you're coming out of a slow market like that, it's a gradual increase. We all think of it that way. With Completion Services, we saw them move up into a level of profitability that we haven't seen since acquiring those assets. And I fully expect, over the course of the next 5, 6, 7 quarters that, that business will build to a level of what I would consider to be kind of normal profitability that you'd see from a business that's got a Gulf of Mexico and International business mix. And so I guess the main issue there is don't look for the kind of gross margin improvement that we saw from Q1 to Q2 to repeat itself. What we've done is kind of enter a level of gross margin performance that's reasonably right at this point in time for that business, and then it gradually will improve from there.

Operator

Our next question comes from the line of Robin Shoemaker with Citigroup.

Robin Shoemaker - Citigroup Inc

Dave, I wanted to ask you about the Gulf of Mexico. You've addressed this partly. But you've talked previously about losing quite a bit of your rental tool business for the deep Gulf of Mexico with the moratorium, and I guess, it's partially come back, but you redeployed a lot of rental tools into the U.S. land market. How much -- with the recovery we have seen so far in Gulf of Mexico drilling, how much of that lost rental tool revenue have you recovered? Or is it now just a matter of do you really want to redeploy tools back to that market?

David Dunlap

Yes, so a couple of things there. Just for clarification purposes, on deployment of assets from the deepwater rental tool base, we took out of that market last summer what we could that would apply in other places. The bulk of the assets in those businesses related to deepwater drilling in the Gulf of Mexico are really specific to the deepwater drilling market in the Gulf of Mexico. And so don't think of this as a large amount or large percentage of our total assets that have transferred out. Most of them have been there and are still there. And as far as the contribution that we're seeing from the deepwater market today. I mean, we've got about 20% of the rigs that we're drilling in the deepwater, 25% of the rigs, I guess, that have gone back to work at this point that weren't in for a full quarter in Q2. Now you kind of start in Q3 with that. We think we will exit Q3 with maybe 2 or 3 more rigs being added to that fleet. And when you get up to 15 rigs by the end of the year, as we think will happen, that's roughly half of the number of rigs that were out there in the deepwater area drilling for oil and gas well in deepwater prior to Macondo. We gave up about $100 million annually with the rental tool business. So just think about when you get out to that point in December, we'll have about 50% of our revenue volume -- profit volumes back from that.

Robin Shoemaker - Citigroup Inc

Got it. Okay, understood. And that is some of your best margin revenue within the rental tool business I think you've indicated.

David Dunlap

Yes, that is amongst the best margin revenue that we have anywhere.

Robin Shoemaker - Citigroup Inc

Okay, when we talked shortly after you became CEO, you had quite a bit a good impression of the opportunity in Brazil on the rental tool business also. And you've mentioned a couple of completions and sand control projects now in Brazil. How do you see that rental tool opportunity in the Brazilian market?

David Dunlap

Still feel very good about it. I mean, we've had -- we are participating, I've been participating in a number of tenders in Brazil for Petrobras-related rental tools. We saw our bottom-hole assembly business step up from a revenue standpoint from Q1 to Q2. We're seeing some opportunities with IOC, as well as with some of the Brazilian independents for rental pipe opportunities in the second half of the year. So I still feel very good about rental tools there. Our completion tool business made progress in Brazil really faster than I thought they would, but the Brazilian completion market is one that is quite large and very interesting too. We're pursuing a wide range of opportunities in Brazil now, rental tool-related, intervention-related, obviously, completion tool-related. It follows the full gamut.

Robin Shoemaker - Citigroup Inc

Yes, it's encouraging. Okay. Lastly, I just wanted to ask about the prospects for large multi-platform decommissioning projects such as Superior has had in the past. And I guess you have one ongoing project with the Bullwinkle platform. But is this the kind of work you see more of in the future, or it sounds like you're as busy as you can be currently with your existing capacity? So what are the prospects of any more sort of large projects like you've had in the past?

David Dunlap

Well, there's certainly not one that I'm ready to talk to you about right now. We will always be on the outlook for those. And I think our experience with those large projects makes us a company that is very attractive to the customer base for carrying these things out. But they are -- these projects don't grow on trees by any means. And we think we're in a position to capitalize on those types of projects when they come up, but they are very difficult to plan and predict. And I can tell you none of our guidance that we've given to you is predicated on one of those large projects coming through. That being said, a comment that you made about utilization in this decommissioning business, I'm not sure I agree with. We're not at maximum utilization in that business today even though this is the seasonally busy time of the year. We could do more work with the assets, with the resources that we have in place. The market for these types of activities has been okay. I wouldn't describe it as great. I expect as time goes on that we do see that market firm up. So I'm not sure that once again our guidance or our forecast is based on that. But I think there's good reasons to believe that we'll see it firm up some as we go forward. But I just want to make that point. We're not fully utilized in that business today.

Operator

Our next question comes from the line of Joe Hill with Tudor, Pickering and Holt.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

Dave, when I think about the completion tools business. Can you give me a sense as to how much of that is Gulf of Mexico versus international today?

David Dunlap

Well, it's all been Gulf of Mexico to this point. I would -- I think a good way to think about the tools side of that business is that, as we go forward and look at, say 2012, maybe a third of that overall total revenue is coming from the international markets progressing to 2013. It may become as much as half of the overall revenue is coming from the international market. I would expect as the business reaches a maturity standpoint or something close to a maturity standpoint that international becomes the biggest part of that revenue mix.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. And in terms of how to think about tracking the health of the business is number of wells put down in whatever unconsolidated sense. Is that going to be a good proxy for growth in that business in the Gulf of Mexico? And what kind of market share do you think you have there?

David Dunlap

Yes, okay. So I mean, really, your rig count in the offshore areas that requires sand control is probably your best proxy. So that's Gulf of Mexico, Brazil, West Africa, parts of Asia, parts of the Middle East. That's kind of the best proxy for you to use. Our market share is fairly low overall in that business. I mean, more than half of the overall market is in the international arena. And to this point, we've not generated any revenue internationally. So that means that, that entire market is there available to us for us for growth.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

How about the Gulf of Mexico share?

David Dunlap

The gulf of Mexico share traditionally for this product line and the people that promote and engineer this product line has been good. I mean, I think you can think about overall, historically the market share for this product line being in the kind of 25% range.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. That is pretty good. And Dave, when you -- you talked about healthy additions for capital expenditures in 2012, should we be thinking of maybe a flat capital budget year-on-year?

David Dunlap

I think a flat capital budget would be a bit conservative. I mean, that may be a good plug for you to use at the moment. But what I've said is that we -- and I think I've been consistent in saying this is that we see a lot of opportunities available to us for growth. We intend to reinvest the cash flow that we generate. I fully expect that we're going to generate more cash in 2012 and we are in 2011. And so unless those opportunities start to shrink, which I don't see, or unless those opportunities are coming at a margin threshold or return threshold that's not acceptable to us, then we're going to keep investing.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. What do you think the lead time on the coiled unit is today?

David Dunlap

It depends. We -- I think you're looking at general at somewhere in the neighborhood of 9 to 12 months.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. And then finally, I've heard some stories about maybe some of the construction guys trying to enter the P&A decommissioning market in order to drive utilization of their assets and put a little bit of pressure on the market. Are you seeing any of that in the Gulf of Mexico right now?

David Dunlap

This is always a market that is prone to companies that have the right types of assets to participate. And it's also prone to guys who don't have any assets at all to participate. You can be in the decommissioning business with a project management company and rent all your assets in. It's a business that has historically seen a pretty broad group of overall competitors. I don't know if that situation is any different today than it was a year ago or will be a year from now when there are a lot of construction projects going on or pipeline projects going on in the Gulf of Mexico and assets become tighter, when those projects are not in such abundance and assets are available and people look for a way to put them to work. So I don't know that we've specifically seen an onslaught of new competitors in that business. But Joe, the structural decommissioning side of business for us is one that we've kind of been relatively low historically from a market share standpoint, not really looking to grow that market share. We're not the biggest player in that business either. Our expertise and where we have benefited the most in this business in the past has been on those very specialized projects, like the BP wreck removal project that involved a lot more than structural removal. It involved the plug and abandonment of wellbores that were laying on the seafloor that our pressure control expertise makes us uniquely qualified to deal with.

Operator

Our next question comes from the line of Bill Sanchez with Howard Weil.

William Sanchez - Howard Weil Incorporated

My question, Robert, was for you, just with regard to the second quarter margin performance in the drilling proxy and services business. Did I hear you correctly that the reason that you guys mentioned the lower margin sequentially was a function of the damaged drill pipe that had hurt margins, am I correct there?

Robert Taylor

Yes. That's part of it, yes.

William Sanchez - Howard Weil Incorporated

I thought on -- I thought when it related to damaged drill pipe that the customer obligation or that obligation came back to the customer in terms of making you guys hold for the damaged drill pipe. Was that not the case in this instance?

Robert Taylor

The margin impact is dependent on how much with an input value of the asset is. So if you have an asset that you've lost that has very little net book value then, you're going to get a great margin. In this case, what we have was some of these assets that were relatively new that were damaged. And we recovered all of our costs and made a margin. It just wasn't at the normal margin that we typically enjoy in that segment.

David Dunlap

What you have to think about is a lot of the drill pipe assets have been added to the U.S. land fleet very recently, and they're not depreciated. So when we lose that pipe, we're losing pretty high margin or pretty high net book value pipe.

William Sanchez - Howard Weil Incorporated

Okay, that's a great clarification. And then I guess, just as we think about the margins within the drilling products business going forward, you certainly are expecting to be up again in 3Q. I'm just curious, from a mix perspective, Dave, right, because I think you mentioned earlier you're going to get the higher-margin Gulf of Mexico deepwater work continuing to come back into the equation here. I got to believe that as we think about the U.S. land business, the top line there you're going to be probably seeing growth in excess of rig count I would imagine, even though you were relatively flat in Q2. The magnitude of margin growth that we could expect in that business, second or third quarter, any ideas how we should think about that for that segment as a whole?

David Dunlap

I mean, I think, in general a good way to think about it is, at least in the third quarter, returning to margins that are closer to or maybe a little bit better than what we saw in the first quarter from a margin standpoint. And that's really, I'd say closer to or better than. It's really a function of some of the deepwater assets going forward.

William Sanchez - Howard Weil Incorporated

Okay. And I guess, just as it relates to U.S. land in the Subsea and Well Enhancement, so given the capacity additions there, it's probably still a reasonable expectation to assume that top line revenue U.S. land is growing faster than the rig count just like we saw in 2Q going forward. Is that fair?

David Dunlap

I think that is fair as well.

Operator

Our next question comes from the line of William Conroy with Pritchard Capital Partners.

William Conroy - Pritchard Capital Partners, LLC

Dave, maybe a couple for you. One is, when you think about the Gulf of Mexico, how should we think about the sequential growth that you guys just put up in terms of the seasonal upturn which was certainly present and the increase in activity maybe I'll say related to permitting? So you've got 2 factors going there. Can you maybe try to handicap between the 2 for us?

David Dunlap

Yes, I'll try to do that. I mean, kind of going back to the factors that drove this Gulf of Mexico business. If you go back and think about the fourth quarter as your benchmark for the intervention business and the plug and abandonment decommissioning business and for shelf drilling, okay? That's a good benchmark. What we added to that is we added additional completion tool -- completion services revenue as a result of some of the deepwater rigs going back to work, and we added the rental tool revenue on the deepwater rigs. And so I know that because of the quarter we had in Q1, this can be confusing. That's why I draw you back to Q4 as the base point. Now if you go back and look at both of those segments from a Q4 standpoint, I think it flows a little bit better.

William Conroy - Pritchard Capital Partners, LLC

Got it. That helps. And just as a follow-up and changing gears, and following on to a previous question about your interest in the U.S. land market. This obviously has been a pretty significant initiative for the company, say, during your tenure. How well penetrated do you think you are in some of those land markets, where Superior, historically, did not have much of a presence. And I'm thinking that even the Eagle Ford, which is relatively new for everyone, but West Texas and the Bakken, and maybe how well penetrated compared to some of the other land markets where you guys have historically had a better presence?

David Dunlap

Yes, I think that's a great question. We have -- we probably -- I would gauge our penetration as being the best in North Louisiana, in the Northeast and in North Dakota. We certainly have assets and operations in South Texas and the mid continent Permian Basin and in Colorado and the Rockies. But I would say that our geographic penetration in those markets is certainly less than it is in North Louisiana, the Northeast and North Dakota. And so as time goes on, I would expect that those are markets that we're able to see some growth in, above and beyond just general market growth in this place because we're successful in moving into them. And we're present in those. They're just -- we don't have the same kind of maturity from a penetration standpoint that we do in the Northeast, North Louisiana or North Dakota.

Operator

Our next question comes from the line of John Daniel with Simmons and Company.

John Daniel - Simmons & Company International

Just a couple of follow-ups. Dave, on Brazil, can you give us a sense as to what 2011 revs range bound what that might be and what the opportunity set is for '12?

David Dunlap

Yes, so I think what we've told you guys in the past is we did about $30 million in 2010, and we expect that to grow somewhere in the 30% or 40% range during 2011. In 2012, I'm really not sure I'm ready to pin myself down to a number for 2012. We've got a lot of tenders that are outstanding right now that could really cause a big swing. I mean, some of the tenders that we're participating in could add as much as $10 million, $15 million a year of revenue, and we're starting with $30 million basis pretty significant. I mean, those are the types of opportunities that are out there and available for us right now. And I think that we will capitalize on a range of those opportunities. I'm just not sure how much for 2012 at this point.

John Daniel - Simmons & Company International

Can you say when you would expect to hear on those tenders? Is that something?

David Dunlap

Well, I mean we talked about a couple of them. We had the sand control screen tender which I talked about, and that's actually going to impact us in the second half of 2011. We've got this Multi-Zone Single Trip, once again, completion tool win that I talked about earlier that is going to impact us both in 2011 and probably not be installed until 2012. So listen, as we get those rewards, we will talk to you about it.

John Daniel - Simmons & Company International

Okay. Given the sharp increases we've seen in coiled tubing rates, things like that, have you seen any customer shift from coiled tubing back to traditional workover?

David Dunlap

For -- are you talking about for proppant cleanout application?

John Daniel - Simmons & Company International

Yes. Anything along those lines? Is that something that you're hearing about?

David Dunlap

That's something I'm hearing about. I mean, clearly, I think that -- I've talked in the past about the fact that with all of the completions-related work we're doing with coiled tubing, we're not doing very much intervention work. And they were in excess of 400 or close to 500 coiled tubing units that were working in the market before we started doing these numerous multi-zone frac jobs 3 years ago. And those coiled tubing were all doing intervention work. Now I don't think that intervention work is all sitting on a shelf, somehow it's getting done. Service rig is one way to do that. Snubbing is another way to do it, if it's an application that requires a live well access. But I don't know that I've heard specifically of service rigs taken over for coiled tubing and washing out proppant and doing the type of completion-related work that we're doing today.

John Daniel - Simmons & Company International

Okay, and just one last one for me. I know you haven't set a '12 CapEx budget. But in theory at this point, if you would think about an allocation of the dollars. Would this be consistent with what you're doing in '11, or would you shift more internationally? Any thoughts?

David Dunlap

Yes, I mean, I think, in general as time goes on, there will be more of a shift to international. As our footprint goes -- grows where it's going to grow as a result of new equipment. We don't have equipment to transfer in any of these new markets. And so the general trend will be for a higher percentage of our CapEx dollars to go to the international markets. I thought we'd be spending more in international this year as a percent of our total capital budget, but of course, I didn't think we'd be spending $500 million a year ago either. And part of what we've done, I think, is to really try and capitalize on this very robust U.S. market. I think that market is going to continue to be robust in 2012. So I'm going to try to find ways to take advantage of opportunities, both in the U.S. land business as well as the International business.

Operator

Our final question comes from the line of Matt Beeby with Global Hunter Securities.

Matthew Beeby - Global Hunter Securities, LLC

Just a clarification on the coiled tubing. It sounds like I heard a 10% revenue growth. Is that accurate, and is that driven more by the new units that were added during the quarter, or is there still some pricing strength there?

David Dunlap

It's not necessarily driven by new units that came in during the quarter, probably more driven by units that came in late last quarter. So it's still capacity-related as much as anything. From a pricing standpoint, the moderate pricing gains that we've been able to make into coiled tubing, I think, are getting eaten up by labor inflation to a great extent. And I think there'll continue to be some slight upward movement of pricing in coiled tubing as the year goes on. But I'm not really counting on a lot of that driving earnings improvement for us. Our earnings improvement is more driven by additional equipment in the market than it is pricing or higher volume.

Matthew Beeby - Global Hunter Securities, LLC

Shifting over to the Marine segment real quick, do you expect their margins to be more like we saw in 1Q and continue to sell vessels in that segment if you maybe hit the highlights of what the strategy is there going forward?

David Dunlap

Yes. Well, I mean, I certainly think their margins are going to be better than what we saw in the second quarter. First quarter is one where, seasonally, it's generally not one of the better quarters for liftboats. So actually, what we're expecting is better margins in the third quarter than we've seen in any of the first or second quarter for the liftboats.

Operator

At this time, I'd like to turn the conference back to management for closing remarks.

David Dunlap

Yes, well, thank you everyone for joining us, and we'll talk to you again next quarter.

Operator

Ladies and gentlemen, this does conclude the Superior Energy Services Second Quarter Earnings Conference Call. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Superior Energy Services' CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts