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Oil States International, Inc. (NYSE:OIS)

Q3 2011 Earnings Conference Call

November 4, 2011 11:00 AM ET

Executives

Patricia Gill – Director, IR

Cindy Taylor – President and CEO

Bradley Dodson – SVP, CFO and Treasurer

Analysts

Collin Gerry – Raymond James

John Lawrence – Tudor, Pickering, Holt

Jeff Spittle – Global Hunter Securities

Stephen Gengaro – Sterne Agee

Blake Hutchinson – Howard Weil

Victor Marchon – RBC Capital Markets

Daniel Burke – Johnson Rice

John Daniel – Simmons & Company

Brad Handler – Credit Suisse

Tim Everett [ph] – Hunter Global

Operator

Welcome to the Oil States International Third Quarter Earnings Conference Call. My name is John, and I’ll be your operator for today’s call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Ms. Patricia Gill. Ms. Gill, you may begin.

Patricia Gill

Thank you, John. Welcome to Oil States’ third quarter 2011 earnings conference call. Our call today will be led by Cindy Taylor, Oil States’ President and Chief Executive Officer; and Bradley Dodson, Senior Vice President, Chief Financial Officer and Treasurer.

Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent the remarks today contain information other than historical information, we are relying on the Safe Harbor protections afforded by federal law. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K and our other SEC filings.

I will now turn it over to Cindy.

Cindy Taylor

Thank you, Patricia. And thanks to all of you for joining our conference call this morning.

I am pleased to report that Oil States generated record quarterly revenues and EBITDA in the third quarter of 2011 and each of our business lines witnessed strong demand for our products and services despite the global economic uncertainty impacting the equity markets and our stock price.

Our accommodation segment reported sequential revenue growth of 12% due to organic expansions in the Canadian oil sands region coupled with growing contributions from the MAC and Mountain West acquisitions. Strong US drilling and completion activity grow sequential improvement in our well side services and our tubular services segment. Our offshore products business also performed very well during the quarter, with EBITDA of 27% sequentially on strong margins.

We were able to maintain our high backlog levels in the third quarter consistent with our guided book-to-bill ratio of approximately of approximately one time for the second half of 2011. We expect global deepwater spending to continue at strong levels, with additional project opportunities coming from Brazil, West Africa, Southeast Asia, and Australia over the next 12 months.

During the third quarter of 2011, oil sites generated earnings of $1.67 per diluted share or $92 million of net income, $192 million of EBITDA and over $900 million in revenues. Consolidated operating income more than doubled to a $144.5 million in the current quarter, up from $70.4 million in the third quarter of 2010, and our gross margins improved to 26% from 24% a year ago.

At this time, Bradley will take you through details of our consolidated results and financial position, and then I will conclude our prepared remarks with a discussion of each of our segments and will give you our thoughts on the current market outlook.

Bradley Dodson

Thank you, Cindy.

In the third quarter of 2011, we reported operating income of $144 million on revenues of $903 million. Our net income for the third quarter of 2011 totaled $92 million or $1.67 per diluted share. The comparable third quarter 2010 results were $70 million of operating income on revenues of $588 million. The third quarter 2010 net income totaled $46 million or $0.88 per diluted share.

The year-over-year increases in profitability were primarily due to improved earnings from each of our business segments, as well as contributions from the three acquisitions closed in the fourth quarter of 2010.

During the third quarter, we reported cash flow from operations of $126 million offset by capital expenditures of $141 million. Our net debt for the third quarter totaled $979 million and our debt cap ratio was approximately 38%. As of September 30th, 2011, the company had approximately $846 million with combined availability under our credit facilities and cash balance totaling $119 million.

During the third quarter of 2011, we repurchased 209,000 shares of common stock at an average price of $60.35 for a total cost of $12.6 million. As of September 30th, 2011, we had approximately $87 million available under our authorized share repurchase program which expired in September of 2012.

In terms of fourth quarter 2011 guidance, we forecast G&A to be approximately $51 million, net interest expense to be approximately $19 million. Diluted shares are expected to total $55 million in the fourth quarter of 2011 and we currently estimate our effective tax rate for the fourth quarter to be sequentially flat, at approximately 28%. We currently expect to spend a total $635 million in capital expenditures in 2011. Some of this forecast may carry over into early 2012 depending on the timing of those expenditures.

At this time, I’d like to turn the discussion back over to Cindy, who will review the activities in each of our business segments.

Cindy Taylor

I will lead off with our accommodation segment. Our major oil sands lodges and Australian villages continue to realize strong occupancy levels during the third quarter of 2011. Accommodations revenues increased 78% year-over-year and EBITDA increase of 103% year-over-year primarily due to contributions from the MAC and Mountain West acquisitions, which flows during the fourth quarter of 2010, in addition to a 32% increase in average available rooms and higher RevPAR year-over-year at the company’s oil sands lodges.

On a sequential basis, revenues increased 12% while average available rooms for our major lodges and villages increased 14%. Revenue per available room was slightly lower sequentially due to the mix of available rooms and internal utilization of rooms used by our installation crews executing ongoing expansions.

In offshore product segment, we generated $140 million of revenue and $28 million of EBITDA in the third quarter of 2011 compared to $132 million of revenue and $22 million of EBITDA in the second quarter of 2011. The 6% sequential improvement in revenues was due to higher connector products and production platform related equipment partially offset by lower subsea equipment sales. Revenue for this segment came in below our prior guidance as some connector products sales from our Asian operations flipped into the fourth quarter.

Reported EBITDA margins were strong, at 20%, reflecting some positive margin adjustments on production equipment orders. We booked approximately $150 million of new orders during the quarter, third quarter of 2011, and maintained a strong backlog level, with $514 million reported as of September 30th, 2011. Our backlog was negatively affected during the quarter by the strengthening of US dollar, which led to a reduction in the amount of our backlog denominated in foreign currency.

Our well site services segment generated revenues of $173 million and EBITDA of $56 million in the third quarter of 2011 compared to $154 million and $47 million, respectively, in the second quarter of 2011. The 21% sequential increase in EBITDA was driven by growth in the US completion activity that continued to favor our higher-end and proprietary completion equipment coupled with improved utilization from our drilling business.

Revenues from our rental tools business increased 13% and EBITDA increase 22% when compared to the second quarter of 2011. These sequential improvements were attributable to better pricing and service mix related to the continued increases in US completion activity in support of horizontal drilling and complex completions in the shale play with particularly strong activity in the Bakken, Marcellus, Eagle Ford and Permian Basin region.

Revenues and EBITDA from our drilling segment increased 11% and 16%, respectively, on a sequential basis due to high regularization as two previously inactive rigs resumed operations during the third quarter, coupled with better cost absorption.

During the third quarter of 2011, tubular services generated revenues of $363 million and EBITDA of $19 million compared to revenues and EBITDA $332 million and $18 million, respectively, in the second quarter of 2011. Tubular services’ OCTG shipments increased 5% sequentially to 182,300 tons from 173,300 tons shipped in the second quarter of 2011.

Gross margin as a percent of revenues remained strong at 6.3% during the third quarter of 2011. Our OCTG inventory decreased modestly to $375 million at September 30th, 2011 due to strong demand experienced in the third quarter with increased tonnage sold particularly in the Permian Basin regions.

Now I’d like to kind of transition and give you some of our thoughts to the market outlook. As it relates to accommodation, demand for our remote side accommodations continues to grow in all of our major markets and we continue to focus on future expansionary opportunities.

We recently announced the construction of a new Australian village named the Calliope Village near Gladstone and Queensland, Australia. The village will have an initial capacity of 300 rooms and is expected to be ready for occupancy during the fourth quarter. Calliope’s proximity to the various LNG projects sanctioned in the Gladstone and Curtis Island area broadens our commodity exposure to include closing gas and LNG.

At the time of the announcement, we have secured a nine-month contract with options for extension for 100 rooms and are pleased to report that a second customer has signed a one-year contract for the remaining rentable rooms.

In the fourth quarter, we expect our average available room to grow from 15,931 rooms to approximately 17,000 average rooms available, which represent a 7% sequential growth. Accommodations revenues are expected to total $235 million to $245 million in the fourth quarter of 2011.

Our internal forecast suggests that EBITDA margins will likely be slightly down by roughly 100 basis points sequentially in the fourth quarter as we mobilize equipment in Canada for winter activity and incur expected holiday downtime.

In our offshore product segment, we booked approximately $150 million in orders in the third quarter and maintained a strong backlog level that provides us with good revenue visibility for a strong 2012. Fourth quarter revenues are projected to total $155 million to $165 million as we expect to receive incremental revenues from product sales that carried over into the fourth quarter. EBITDA margin should approximate 18% during the quarter.

As it relates to well site services, our rental tools business is closely tied to US completion and production services activity with particular leverage to high-end multi-stage completions and what generally track movement in shale drilling and a horizontal rig count. Revenues and margins for rental tools in the fourth quarter of 2011 will be dependent on the extent of the holiday downtime experienced in the key [ph] shale region.

This will affect the entire industry and should not be viewed as a company-specific issue. However, we could save some reduced revenues and margins and rental tool sequentially in the fourth quarter of 2011 depending upon the extent of holiday downtime. We anticipate utilization for our drilling business in the fourth quarter to see some impact from holiday and weather-related downtime, but nonetheless expect utilization to remain at 80% or higher.

Accordingly, well site services revenues are expected to approximate $100 million to $175 million in the fourth quarter of 2011. The OCTG market remains active and the supply-demand balance had tightened further, with approximately 4.3 month supply of inventory on the ground. Distributor and mill pricing is improving in a gradual and disciplined manner with recent mill price increases announced in the range of $50 to $100 per ton.

Imported product has decreased recently, but still represents approximately 46% of the market. Our OCTG sells generally follow trends in the US rig count and current indications from our customer base are positive and reflect strong activity continuing into the immediate future. We expect our tubular services segment to generate revenues as between $380 million and $390 million in the fourth quarter of 2011, with gross margins ranging from 5.5% to 6.5%.

In conclusion, the first nine months of 2011 have produced record results for our company due to excellent operational execution amongst our business lines. We have also benefitted from acquisitions that closed during the fourth quarter of 2010 whose earnings contributions have well exceeded our acquisition economics. Oil prices have rebounded to levels that continue to be supportive of our customer’s spending plan and we remain optimistic about additional accretive growth opportunity for each our business segment.

That concludes our prepared comments. John, would you open up the call or question and answers at this time please?

Bradley Dodson

John?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Collin Gerry from Raymond James, please go ahead.

Collin Gerry – Raymond James

Hey, good morning.

Bradley Dodson

Good morning, Collin.

Cindy Taylor

Hi, Collin.

Collin Gerry – Raymond James

This quarter for you guys is quite refreshing relative to some of the industry tidbits that have been coming out from oil service land, in general. We’ve been hearing a lot of companies report about cost inflation and kind of supply change disruptions affecting operations. It didn’t seem to come through in your numbers and not in your guidance either.

Maybe talk a little bit about, just generally speaking, what you’re seeing in terms of cost inflation or supply chain problems and how that may affect your business or it does not?

Cindy Taylor

I think we’ve performed pretty well during the quarter and we’re not seeing dramatic delays. One thing that we did do particularly in our rental tool equipment line is really expand our own internal facilities particularly in Oklahoma City where particularly our proprietary equipment, manufacturing built in-house. So to some degree, we’re controlling our own destiny, so to speak, from a supply chain perspective.

In the rental tool, you can see in our results that we got particular benefit. A lot of that with tied to isolation equipment and frack equipment. And again, all of that equipment is manufactured and controlled out of our own operations, and I think that does make a difference both from the standpoint of planning, installation and timely delivery, which really helped our operations.

So, I’m not going say that it’s not a tight market because clearly, it is. We’re challenged every day to retain our hands and our workers and manage the cost in the field, but again, I think we’ve had an outstanding quarter in the segment and I think it’s reflective of good planning.

Collin Gerry – Raymond James

Okay. Well, yes, I know certainly relative to some the other guys, it is impressive. Switching gears, I think today pretty much all your divisions have been doing phenomenally well, except maybe tubular has been the lager. Based on your guidance and sort of revenue to Q4 and kind of margin, am I sensing an inflection in the market and maybe talk about your confidence as we’re moving to 2012 about some of those numbers being sustainable. I mean, I guess we’re all worried the macro trends but based on what we know now.

Cindy Taylor

Maybe I’m a little sensitive to it but our revenues were actually up sequentially 9.2% on the hill but a 6.5% expansion in the US rig count. So, I didn’t necessarily think that that operation disappointed. Our shipments were up 5.2% and the balance of the increase was price related. So, I think part of it just may be what analysts were projecting relative to rig count assumptions. I don’t know the answer to that.

As it relates to Q4, again, we’re continuing to see increased activity expansions in the rig count exceedingly strong activity for this segment particularly in West Texas and the Eagle Ford, the Bakken and other regions. We’ve met with our customers. And again, we kind of track log. We don’t publish backlog in this segment, but we certainly track customer orders and our forecast are always predicated on the visibility and timing of those expected orders.

Now, my only other caveat to you, this is a day-by-day sell business. It can vary obviously. It’s not like having a firm contract out there that you have assurance in terms of volumes and price. But we have pretty good outlook and typically, our fourth quarter is a stronger quarter in terms of volumes delivered for many reasons, but a lot of it is, I think, customers trying to get the wells down before year end, sending their capital programs and the like. But if I just go back the last couple of years, Q4 views, yes, it’s a pretty good quarter.

Collin Gerry – Raymond James

Okay. So, there is a little bit of seasonality but it does sound like your kind of opinions was that market in general it’s a little more bullish now than maybe earlier in the year.

Cindy Taylor

I would say so, but a lot of that, we’ve had a very good rig count expansions and we’ve had continua; reductions of inventory on the ground. The only guidance I gave you early in the year is even though we’ve had a strong rig count various capacity coming into the market that it’s given you a pretty solid in-balance type market. In other words, we’re not seeing momentum price increases, but we’re seeing as I said on the call kind of gradual disciplined price increase that lead to a very firm market.

Collin Gerry – Raymond James

All right. I’ll stick to my two-question rule. Thanks again. Great quarter.

Cindy Taylor

Thanks, Collin.

Operator

Our next question comes from John Lawrence from Tudor, Pickering, Holt, please go ahead.

John Lawrence – Tudor, Pickering, Holt

Hey, good morning, guys.

Bradley Dodson

Good morning, John.

John Lawrence – Tudor, Pickering, Holt

Just a quick question on the combination on margins. Really, Australia helped there on the mix side. But what’s really driving the better margins? Is it scale? Is it better execution? What’s really the driver there?

Bradley Dodson

I think it continues to be that the lodge and village business is we continue to grow it. It does garner a higher margin and as that contributes to greater percentage to the revenues and, therefore, the EBITDA, we guided all along that it should – the margin should continue to accrete upwards.

I think in addition, our team in the US has the –with the Mountain West acquisition has a good critical mass in that region and that helps Calliope as well. And I think the execution in Australia and in Canada year-to-date has been quite good. So, I think within this plus or minus this range of where we were in Q2 and Q3 on margins, I think these margins are sustainable in the near-term.

John Lawrence – Tudor, Pickering, Holt

Okay, great. And then just on the ’12 CapEx, I think on the last call, you talked about $600 million. Is that still the case? And then on the accommodation adds there, will most of those be on contract or you build those on stack?

Bradley Dodson

We have not updated our guidance from $600 million. So, we’re going to keep that for right now. We’re in the budgeting process as we speak and so, I will have a firmer number for you as we move in to the fourth quarter, and then obviously, announce fourth quarter earnings in February.

Of the room count, well, originally in Calliope we started building that somewhat on the stack basis, but then got those two contracts that we’re very pleased about. That’s a big win. The 200 rooms at (inaudible) Australia don’t have contracts yet. Those are the only speculated rooms in Australia that are on the drawing board right now.

In Canada, the expansion at Wapasu of (inaudible) this year that was all contracted. The expansion at Hyundai was all contracted. We’ve got about 800 rooms that we were adding to Athasbasca and Beaver River. And originally we’re going to add some to complement those (inaudible). Some of those rooms now we believe are going to be – instead of going to Conklin, we’re going to Hyundai. So that will be a positive there as well. So we just keep greater demand in that Firebag Kearl region.

John Lawrence – Tudor, Pickering, Holt

Okay, great. Thanks a lot guys. Congrats on a great quarter.

Bradley Dodson

Thank you.

Cindy Taylor

Thank you so much.

Operator

Our next question comes from Jeff Spittle from Global Hunter. Please go ahead.

Jeff Spittle – Global Hunter Securities

Thanks and good morning guys.

Bradley Dodson

Good morning, Jeff.

Jeff Spittle – Global Hunter Securities

Maybe on offshore products, if you could start off there and just maybe some incremental color on the margin roadmap for the next 12 months. Correct me if I’m wrong but I’m guess we would have favorable mix in pricing trends ongoing over the last 12 months. And then of course, throughput improving a little bit. And so, could you just walk us through, I guess, those dynamics? And certainly, it looks like we’re ahead of schedule in terms of the margins that you guys have achieved already, but how does it play out from here?

Cindy Taylor

Well, I think you’ve hit on a lot of the points there. The mix in our backlog is a favorable mix. It’s weighted towards our connector products and our production facility connectors and equipment, which historically have been very good for us, both in terms of hit margins and execution.

We did have a very strong margin quarter this quarter. Revenues were a little lighter than we thought. Again, it’s just some – high demand in our Southeast Asian region that slipped in the Q4. It’s not a loss of revenue. And we did have some favorable kind of POC adjustments but that just means the projects are going well. That’s good news.

It’s always hard to – I think an analyst wants to know, is it going to be exactly 18% or 18.5% every quarter. And we can’t answer that. But we can tell you is that our margins are trended on a higher-end. Most people that know me had known that – first of all the goal is to get those EBITDA margins to 20%.

So, we’re very pleased with this quarter’s performance. We will be ramping revenue as evidenced in our projections. And not only hesitation right now in the margins, it’s just the fact that there’s always some under absorption due to holiday downtime, typically, in this quarter. We don’t think it will be significant and, therefore, we got it to the roughly 18% EBITDA margins in Q4.

But importantly as we move forward into 2012, we’ve got a very strong backlog level. The mix is very good. And so, the outlook for margins continues to be fun at favorable trend.

Jeff Spittle – Global Hunter Securities

Very encouraging. And then switching over to the accommodations business, I just want to make sure I understand the seasonal dynamics now between Australia and Canada. You’ve got some holiday downtime and mobilization in this quarter. And then correct me if I’m wrong, typically, you have a little bit of rainy season and then holiday on the first quarter down in Australia, offset by a strength in Canada and then sort of a reversal of that as you work in a spring break up in Q2?

Bradley Dodson

That’s exactly right.

Jeff Spittle – Global Hunter Securities

Okay. Great. Thanks, guys. Congrats on another great quarter.

Bradley Dodson

Thanks, Jeff.

Cindy Taylor

Thanks, Jeff.

Operator

Our next question comes from Stephen Gengaro from Sterne Agee. Please go ahead.

Stephen Gengaro – Sterne Agee

Thanks, good morning.

Bradley Dodson

Good morning.

Stephen Gengaro – Sterne Agee

Really, just two follow-ups – one, can you give us, probably any sense for what your initial plan is for room growth in ’12. I know you alluded to it on the last conference call. Should we stick with that for now or do you have any additional color?

Cindy Taylor

I’m going to kind of kick-off. Why don’t we stick with that for now? I’ll just tell you, there’s one iron in the fire, particularly as it relates to our Canadian operations in terms of bidding prospects and opportunities. But there’s nothing solidified to a point that we can announce it. And so, Bradley in giving the guidance is doing to the best that he can in terms of what he put out there to date.

But we will be going be going through formal budgeting process over the course of the next – the balance of November and then all of December. And again, we do expect to firm up some of these conversations that hopefully, we can give you more specifics. But I’ll let Bradley give you any more color to that.

Bradley Dodson

No, I think right now we’re still looking at 1,500 room additions, so 1,500 rooms added next year in Australia and 1,500 rooms added next year in Canada. And we’ll firm that up as we go in to February, but I’d still stick by the guidance. I think those are good numbers.

Stephen Gengaro – Sterne Agee

Okay. Thanks. And then, you bought back stock in the quarter. I think your net-debt to cap ratio is kind of right in the mid-30s. Is – should I assume that that dept to cap level is where you feel comfortable longer term? And you would not be against buying back stocks with your current ratio going forward, right? Is that a good way to think about it as far as what you might do from a repurchase perspective?

Bradley Dodson

Yes. I think we’ll continue to be – our share repurchase program is the component of our capital allocation and our capital discipline. And certainly our returns have always been the best off of organic growth opportunities. We’re not going to forego organic growth opportunities to buy back stocks. But certainly in the third quarter, there are periods where the stock, we felt had acted irrationally and it’s always good to be opportunistic to buy in some stocks. And that practice will continue.

Stephen Gengaro – Sterne Agee

Okay, great. Thank you.

Operator

Our next question comes from Blake Hutchinson from Howard Weil. Please go ahead.

Blake Hutchinson – Howard Weil

Good morning.

Cindy Taylor

Good morning, Blake.

Blake Hutchinson – Howard Weil

I just want to get your thoughts, Cindy. You did mention the awards cycle and offshore products kind of shifting from Gulf of Mexico to rest of the world over the next 12 months. Is there a timeframe that you have kind of circled on the calendar whether it’s late first quarter of next year or second quarter of next year or any particular time that you feel like the bulk of the award tend to center around in terms of timing?

Cindy Taylor

That’s always a mystery, as everybody knows. The more you promise a lot of these tenders get (inaudible). But if you will recall we had guided to a book-to-bill of about one at the end of our second quarter going into the second half of 2011. It’s not to say that we’re not evaluating and bidding quite a lot of projects. Most of those projects are currently more in Brazil, West Africa, and Southeast Asia, and Australia, simply because as I mentioned, a lot of the awards that were available to us in the Gulf of Mexico during 2011 are already reflected in our backlog.

There are various bids – significant bids in all of these major markets that are ongoing in various stages. I cannot pinpoint which quarter they will be let and awarded. However, my outlook for 2012 is very strong generally.

Blake Hutchinson – Howard Weil

I don’t know if you can answer this but is there a significant portion of the current backlog that’s scheduled for delivery in ’13 rather than ’12?

Cindy Taylor

Bradley is flipping his books, but typically, 75% to 80% of our backlog will turn to revenues in the forward of 12 months. That’s been our history. I haven’t actually looking to him to see if that had – that trend line has changed in any way.

Bradley Dodson

No. It was right at 75% last quarter and I’ll tuck it here in a second. We do have some work order of magnitude of $30 million to $40 million worth of backlogs that is set for ’13 delivery.

Blake Hutchinson – Howard Weil

Okay, great. And then just from a modeling perspective, Bradley, do we need to be thinking about as many subsidy peers have some sort of extreme seasonality from Q4 to Q1 and other drop-off in top line there and not getting too far ahead of ourselves with top line in Q1?

Bradley Dodson

In our offshore products?

Blake Hutchinson – Howard Weil

Yes, sir.

Bradley Dodson

I don’t. At this point I don’t think there will be any. As we progress to the final quarter, I think we’ll certainly update everyone. But at this point that’s not typically been an issue for us.

Blake Hutchinson – Howard Weil

Okay, great. And then finally, just looking at the rental pools business, at least sequentially, a little more driven here by job count than pricing, in your mind is that – how is that divided up between Asia is being a healthy market you know, pick up in completion and see kind of new equipment that you had an order coming into the market?

Bradley Dodson

Let me see if I can answer them.

Blake Hutchinson – Howard Weil

I guess in other words, was it – is there any disproportion amount of the activity increases simply driven by taking delivery of new equipment, I think that'd me more into the heart of the question.

Bradley Dodson

It is new equipment, I think it's also a market that's favoring our proprietary isolation equipment as well as our higher end equipment where we got broad coverage across the market in all the shale plays, but we've been very strong in the backend, we've been very strong with (inaudible) Marcellus.

And so between strength of our isolation equipment, our truck rentals, as well as being in the right places with the right type of equipment and then adding some of that equipment just – I was pleased with how – that the account was up, I was pleased with all of it, and we continue to have some pricing power in the market.

Blake Hutchinson – Howard Weil

Great. So all of the above. Thanks a lot for the time.

Cindy Taylor

Thank you.

Operator

Our next question come from Victor Marchon from RBC, please go ahead.

Victor Marchon – RBC Capital Markets

Thank you, good morning.

Cindy Taylor

Good morning, Victor.

Bradley Dodson

Good morning.

Victor Marchon – RBC Capital Markets

First question is on accommodations. You guys have talked about all sends and all stray [ph] I just wanted to get your thoughts and your outlook and potential growth opportunities in the U.S. particularly with Mountain West.

Cindy Taylor

Well, you know the mountain west acquisition as I alluded on the call has performed exceedingly well, there are certainly shortages on those major basins that we operate in. Our customers need equipment and we're going to be adding capacity to support their efforts as we go forward.

We're also looking to potentially expand that type of product and service outside of the Rocky Mountain Balkan region into other markets as well.

Victor Marchon – RBC Capital Markets

Okay, great. And the only other – on the drilling side, I just wanted to ask on the opportunities on stacking additional equipment or are you guys still on any upgrades or new builds for that business?

Cindy Taylor

You're talking about drilling?

Victor Marchon – RBC Capital Markets

Yes.

Cindy Taylor

We don't have many rigs available. There's one that kind of gone down temporarily here or there, but most of our rigs were working now, we talk about on that second quarter kind of reactivating and upgrading some rigs pursuant to contract with our more significant customers in that segment.

We have discussions on some new build rigs, but for us to do that, we want pretty sound economics and reasonable contract visibility.

So I don't know that that materializes or not. I think it's kind of right now, operate effectively, get high utilization, good cost absorption, and where we can – price increases going forward.

Victor Marchon – RBC Capital Markets

And the last one Cindy [ph] I'm sorry, I just missed the guidance for well-side Services revenue in the fourth quarter.

Bradley Dodson

We were at – make sure I got it right. 170 million, 175 million.

Victor Marchon – RBC Capital Markets

Okay, great. All right thank you guys, I appreciate it. And then congrats on the quarter.

Cindy Taylor

Thanks, Victor.

Bradley Dodson

Thank, Victor.

Operator

Our next question comes from Daniel Burke from Johnson Rice, please go ahead.

Daniel Burke – Johnson Rice

Good morning everyone.

Bradley Dodson

Dan.

Daniel Burke – Johnson Rice

Most questions have been asked. But I was curious looking at the prospective opportunities for the MAC, you guys have talked pretty consistently about the opportunities around LNG and coal seam gas. I was wondering if a couple of big mining projects in Southern Australia, do those factor into you know the potential opportunities set of the MAC?

Cindy Taylor

That's on our radar screen in terms of our growth projects yet. We've been in continual dialogue with those major projects probably for the last five or seven years particularly the Olympic Dam Project if that's the one you're referring to, I think we're in a good stand to participate in some of that activities to move forward, it's just been on and off so long that I don't have good visibility and therefore, that's not considered in our growth plans in the immediate future.

Daniel Burke – Johnson Rice

Okay, that's helpful. And then maybe the last one, really revisiting an earlier question but has – on the Mountain west side, has Mountain west enable to match the margin improvement tractor of the overall accommodations business over the last couple quarters?

Bradley Dodson

These margins are consistent with the overall segments if that answers the question.

Daniel Burke – Johnson Rice

It does. That’s really all I have left. Thank you all.

Bradley Dodson

Thank you.

Cindy Taylor

Thank you.

Operator

Our next question comes from John Daniel from Simmons & Company. Please go ahead.

John Daniel – Simmons & Company

Hi, guys. Just a couple of housekeeping for me. Bradley, I think you said the average rooms in accommodations for Q4 would be 17,000, what’s the exit rate in Q4? Thank you.

Bradley Dodson

I don’t have the exact exit rate; will be a little bit higher than that. I can get that though.

John Daniel – Simmons & Company

Okay. And then can you just tell us how many of the drilling rigs are drilling today?

Bradley Dodson

All of them.

John Daniel – Simmons & Company

All of them? Okay. And generally, sort of (inaudible), you know, short term contract still?

Bradley Dodson

For the most part, we do have six rigs with one customer that we're upgrading to them and with that, we’re getting this one year contracts that began which will officially begin in ’12.

John Daniel – Simmons & Company

Okay.

Bradley Dodson

And we got one (inaudible) under a longer term contract.

John Daniel – Simmons & Company

Excellent. And then last one. As we look at the – we just assume you continue to spend at current levels on CapEx. Where do you – what do you think is a reasonable branch for depreciation next year?

Bradley Dodson

For depreciation, I’ll get a better number by the time of the fourth quarter earnings call but I’ve been using depreciation specifically for ’12 of 220 and then you’ve got amortization shouldn’t change that stuff $13 million.

John Daniel – Simmons & Company

Okay, 230 to 240 is good. All right. Thanks, guys. Great quarter.

Cindy Taylor

Thanks, John.

Bradley Dodson

Thanks.

Operator

Our next question comes from Brad Handler from Credit Suisse. Please go ahead.

Brad Handler – Credit Suisse

Sorry. Sorry about that. I had it on mute. My apologies. Good morning. Thank you.

Bradley Dodson

Good morning. That was a challenge. A couple of unrelated questions. But it’s just as we – you helped us with a little bit of sort of margin thinking in the accommodations area for next quarter and just sort of conceptually have it, think about it, but is there – is there anything as ‘12 evolves in your mind that changes the margin range from the ’11 experience? Is there something about growth in any of the areas which is you know, margin dilutive or accretive?

Bradley Dodson

I’ll cap it, and I'll let Cindy add some color at the end. As we go through the segments, offshore products, the backlog, margins and backlog are good so I would say it should have a – because they’re favoring our work production related equipments of – it should have a upward bias there. They’re just depends on through all the facilities.

We have very good volumes going through Aberdeen and Arlington and Southeast Asia. The question is can we build enough back – as we said before, can we build enough backlog in Homer [ph] and Houston. So, is there – not a drag on margins both areas are profitable, they’re just not up to the rest of the margins and the rest of the business.

Accommodations, we continue to grow Mountain West, The MAC and oil sands rooms. We should be able to maintain these margins that could have an upper bias [ph] but they should be in this range.

For the North American businesses, well-side services and tubular services, you just going to have to bug in your rig kind of assumption.

Brad Handler – Credit Suisse

Sure. Fairly very – right. Obviously very dependent on activity there. Okay. That’s very helpful. Thank you. Maybe you’ve addressed this in prior calls and if you have I apologize. But I’ll ask you to revisit, I guess, briefly. How are you – what’s the opportunity set as it relates to floating production systems in Brazil? In other words like a replica FPSOs. What’s your – is there an opportunity for you there?

Cindy Taylor

Oh, absolutely. We’ve gotten very good content on previous FPSOs in our offshore product segment which Aberdeen is what you’re speaking to and there’s quite a lot of future pre-thought development bids and opportunity development bids and opportunities going forward which, again, as I mentioned some of our brightest areas for potential backlog build are in Brazil.

And so, the content on an FPSO is typically our high end and our proprietary equipment we’re generally we enjoy strong market share number one and, again, good project execution. That’s been a consistent thing for us. So, these types of developments are very attractive fitting opportunities for us.

Brad Handler – Credit Suisse

Sure. As it relates to that specific bid but I was referring to the eight replica version. I don’t think there’s been any awards there. I guess I’m curious, is there other suppliers or components have been awarded kind of all eight if you will? Can we think about the connector products maybe similarly? Is that how the bid is structured?

Cindy Taylor

I don’t know. When you refer to – I heard more about project nine. I don’t know what eight replica version. I’m not sure; I know which one you’re speaking to.

Brad Handler – Credit Suisse

Much if I have a name for it. I just know that (inaudible). Efficiencies where they order FP- eight replica…

Cindy Taylor

Okay. Fair enough. You’re just talking about FPSOs generally not necessarily the ones that are field specific. And our timing is such that we’re going to lag just a little bit in terms of timing of award. I either going to go to the installation, whoever is going to build the unit so to speak and a lot of times we will either bid direct or (inaudible) or bid to the recipient of award or who’s building the actual FPSOs. But we’re not going to be first in line in terms of receiving that award content.

Brad Handler – Credit Suisse

Right. That makes sense. Okay. I think you’ve gotten to it. Thank you very much.

Cindy Taylor

Thanks.

Bradley Dodson

And if I could – I’ll answer John’s question from a minute ago. I think the exit rate on rooms for accommodations just fall in 1700 – 17,500, 17,600 branch exiting 2011, so a little bit higher than the average rooms available for the quarter.

Operator

Our next question comes from Tim Everett [ph] from Hunter Global. Please go ahead.

Tim Everett – Hunter Global

Hi, guys. Great quarter. Just on the Canadian accommodations. Can you us an update on Suncor potential new projects there and then longer term, what the EBITDA margin potential is on new projects. Is it similar – I understand Australia has a higher EBITDA margins but how we should think going forward of new projects EBITDA margin in Canada?

Cindy Taylor

We expect our large EBITDA margins to be consistent with new opportunities versus existing opportunity. They’re not major updates. I mean, Suncor hotel are out there with a lot of feelers right now and bidding opportunities but there’s nothing solidified to a point that we can give you specific feedback in terms of opportunity set at this stage.

Again, as I mention, I just characterize it. We got a lot of arms in the fire with various project opportunities and customers that are fairly significant opportunities that have yet for various reasons not materialized either project delays, environment pyramiding, all the host of things that impact Canadian oil sands development is not a company specific issues.

But, again, there’s some very good growth opportunities that could leverage us better than our obviously telegraph growth. We’ll just to see how that play out and whether we win the work.

Tim Everett – Hunter Global

Okay. And just one follow-up question. I think in the past you’re talking about potential expansion in the Latin America maybe you can give us an update there.

Bradley Dodson

It still on the to do this. We’d like to move the accommodations business into South America specifically, so we’re working on it. It’s going to be one of the things that it’s going to take us some time to do.

It’s not going to be contributing to earnings certainly by year end and I think if we could get something done by the end of next year, I think that would be a huge success. But that market is going to evolve. It’s not the same level of maturity that we see in Canada and Australia.

So, it will be our first on-tray into it will be a starting point. And I don’t see it being a major contributor for several years but it’s the market where we need to enter into now so that we’re there when it does mature and does get to a point where can really be a significant contributor to the overall accommodations business.

Tim Everett – Hunter Global

Great. Great quarter, guys. Thanks.

Bradley Dodson

Thank you.

Operator

Once again, if you have a question, please press star then one on your touch tone phone. Standing by for questions.

We have no further questions at this time.

Bradley Dodson

Okay.

Cindy Taylor

Okay. Thanks so much. We’re very excited to have the call today. We’re very proud of our operations and our executions during the quarter and look forward to a good fourth quarter and even stronger 2012.

And I appreciate your attendance, your loyalty and your support of the company and we’ll be talking to you soon. Thanks so much.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for your participation. You may now disconnect.

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