Oil States International's CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: Oil States (OIS)

Oil States International, Inc. (NYSE:OIS)

Q4 2011 Earnings Call

February 17, 2012 11:00 a.m. ET

Executives

Cindy Taylor – President and CEO

Bradley Dodson – SVP, CFO and Treasurer

Patricia Gill – Director, IR

Analysts

Jeff Tillery - Tudor, Pickering, Holt & Co.

Collin Gerry – Raymond James

Jeff Spittle – Global Hunter Securities

Victor Marchon – RBC Capital Markets

Stephen Gengaro – Sterne Agee

Joseph Gibney - Capital One Southcoast

Jonathan Sisto – Credit Suisse

Scott Burk – Canaccord

Bill Sanchez - Howard Weil

Cole Sullivan - Jefferies & Company

Jim Casagrande - Bridgehampton Capital

Operator

Welcome to the Oil States International Fourth Quarter 2011 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’ fourth 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.

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 laws. 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 other SEC filings.

I will now turn the call over to Cindy.

Cindy Taylor

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

I am pleased to report that Oil States generated record revenues and EBITDA in the fourth quarter both on a quarterly and full year basis. Current commodity prices were conducive to continued customer investment driving strong activity across all of our business lines. The strong demand coupled with the results of our strategic growth initiatives over the last two years led to our record earnings.

In 2011, we successfully grew the room count in accommodations segment by over 4500 rooms representing a 36% growth from year end 2010 level. Opportunity for investment remains strong and we look forward to continued organic room count expansions in Australia, Canada and in the U.S. shale plays.

Our offshore products segment also generated record quarterly revenues, EBITDA, EBITDA margin percentage and backlog. We entered the year with 535 -- we ended the year with $535 million of backlog in our offshore products segment, and we expect a strong pipeline of bidding opportunities to continue in 2012. Our well site services and tubular services business saw a minimal impact related to holiday downtime during the fourth quarter at complex completions and the active shale plays generated increased demand and pricing for our equipment and services.

During the fourth quarter of 2011, Oil States generated earnings of $1.72 per diluted share on $94 million of net income, $206 million of EBITDA, and $996 million in revenues. Consolidated operating income more than doubled to $153 million in the current quarter, up from $68 million in the fourth quarter of 2010. In addition, our gross margins improved to 25% from 21% 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 segment and will give you our thoughts as to the current market outlook.

Bradley Dodson

Thank you, Cindy. During the fourth quarter of 2011, we reported operating income of $153 million on revenues of $996 million. Our net income for the fourth quarter of 2011 totaled $94 million or $1.72 per diluted share. The comparable fourth quarter 2010 results were $68 million of operating income on revenues of $697 million. Our fourth quarter 2010 net income totaled $51 million or $0.94 per diluted share, the four acquisition costs totaling $6.3 million.

The year-over-year increases in profitability were primarily due to organic growth and improved earnings from each of our company’s business segments, coupled with contributions from the three acquisitions we closed in the fourth quarter of 2010.

During the fourth quarter, we reported cash used from operations of $7 million due to a $170 million investment in working capital. Working capital increased during the fourth quarter primarily due to increased receivables and inventory in our tubular services segment.

Capital expenditures in the fourth quarter of 2011 were $116 million. Our net debt at the end of the fourth quarter totalled approximately $1 billion and our debt to cap ratio was approximately 37.5%. As of December 31, 2011, the company had approximately $759 million of combined availability under our credit facilities and a cash balance totaling $72 million.

For the full year 2011, we invested $487 million in capital expenditures. We currently expect to spend between $600 million and $700 million in capital expenditures during 2012, of which $150 million relates to projects carrying over from 2011. Approximately 66% of the 2012 CapEx budget will be directed towards accommodations, 20% towards well site services and 14% towards offshore products.

In terms of first quarter 2012 guidance, we forecast depreciation and amortization expense to be approximately $51 million and net interest expense to be approximately $19 million. Diluted shares are expected to total 55.5 million shares in the first quarter of 2012 due to our current stock price. We currently expect our first quarter 2012 effective tax rate to approximate 28.6%.

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

Thanks Bradley. I will lead off with accommodations which is our largest segment. Our major oil sands lodges and Australian villages continued to realize strong occupancy levels during the fourth quarter of 2011. Accommodations revenues increased 66% year-over-year and EBITDA increase of 115% year-over-year primarily due to contributions from the MAC and Mountain West acquisitions, coupled with capacity additions and higher occupancy levels in our Canadian lodges.

On a sequential basis, revenues increased 4% while average available rooms for our major lodges and villages increased 7%. Revenue per available room was slightly lower sequentially due to the mix of rented rooms and some holiday impact.

In our offshore products segment, we generated $186 million of revenues and $38 million of EBITDA in the fourth quarter of 2011 compared to $140 million of revenues and $28 million of EBITDA in the third quarter of 2011. This 33% sequential improvement in revenues was due to increased revenues from production platform related equipment and connector products out of Asia, improved profitability in our Houston facilities and additional service work.

Reported EBITDA margins reached record quarterly levels of 20.2%, reflecting a product mix which favors our proprietary higher margin products along with good project execution and cost absorption. We booked approximately $208 million of new orders during the fourth quarter of 2011 and reached a new record backlog level of $535 million as of December 31, 2011. Significant backlog additions during the quarter included a major pipeline connector order in Brazil, tendon bearings for the Guara Lula project also in Brazil, several crane orders and additional production equipment for a TLP in the Gulf of Mexico.

Our well site services segment generated revenues of $187 million and EBITDA of $59 million in the fourth quarter of 2011 compared to $173 million and $56 million respectively, in the third quarter of 2011. The 8% sequential increase in revenues was driven by higher U.S. completion activity coupled with improved pricing and service mix which favored our more proprietary completion equipment and services.

Revenues from our rental tools business increased 10% and EBITDA increased 15% when compared to the third quarter of 2011. These sequential improvements were attributable to the addition of new equipment deployed in the active U.S. shale basins and an improving service mix. Fourth quarter activity was particularly strong in the Bakken, Marcellus, Eagle Ford and Permian Basin region.

Revenues from our drilling segment increased 2% on a sequential basis due to higher day rates and better than anticipated rig utilization despite some holiday inefficiency. However EBITDA decreased sequentially as cash margins were negatively impacted by adverse workers’ compensation and other insurance adjustments.

Going on to our tubular services segment, during the fourth quarter of 2011, tubular services generated revenues of $386 million and EBITDA of $17 million compared to revenues and EBITDA of $363 million and $19 million, respectively, in the third quarter of 2011. Tubular services’ OCTG shipments increased 4% sequentially to 189,000 tons from 182,300 tons shipped in the third quarter of 2011.

Gross margin as a percent of revenues was 5.6% during the fourth quarter of 2011. The company’s OCTG inventory increased 12% to $421 million as of December 31, 2011 supported by customer orders and strong demand particularly in the Permian basin.

I’d like to transition and give you some of our comments and thoughts as to our market outlook, as we move into 2012. In our accommodations segment, we continue to see customer demand for additional rooms in Canada, Australia and in the U.S. However we are experiencing some permitting delays in the areas that we do operate in.

We recently announced the acquisition of a manufacturing facility in Johnstown, Colorado and the purchase of an open camp facility in the Eagle Ford region. The Colorado facility will provide additional manufacturing capacity of up to 2500 modular units per year, facilitating our planned capacity expansions in the U.S. shale plays and Canadian oil sands region. Production is expected to commence in the second quarter of 2012.

The Carrizo Springs, Texas open camp features 60 available beds and provides us an entry point into the Eagle Ford region to further expand our accommodations business. During the fourth quarter of 2011, we opened our first village serving the Gladstone and Curtis Island LNG project in Australia. In addition, we continued existing village expansions.

In the first quarter of 2012, we expect our average available room to grow from 17,069 rooms in the fourth quarter of 2011 to approximately 17,800 average rooms available, representing a 4% sequential growth rate.

Accommodations revenues are expected to total $260 million to $265 million in the first quarter of 2012 with EBITDA margins within our long-term margin guidance range of 41% to 43%. As it relates to offshore products, during the fourth quarter, we booked $208 million in orders in this segment, attaining a new record of backlog level of $535 million at December 31, 2011. As a result, we entered 2012 with a strong backlog position that provides us with good revenue visibility for this year. The pipeline of potential new bids and quotes remain strong with expected opportunities in Brazil, Southeast Asia, Australia and West Africa.

First quarter revenues are projected to total $170 million to $180 million. EBITDA margin should remain in the 18% to 20% range as has been experienced over the past several quarters depending upon our sales mix in a given quarter.

Our rental tools business has over 50 locations in North America and is closely tied to U.S. completion and production services activity with particular leverage to high-end multi-stage completions, generally tracking movements in shale drilling and the horizontal rig count. Lower natural gas prices continue to impact dry gas drilling activity in the United States. Thus far, declines in the gas rig count have been largely offset by increases in oil and liquids rich drilling. With our broad network of locations covering the majority of active regions, we believe that our rental tool revenues will mirror overall U.S. drilling and completion activity.

First quarter revenues for our well site services segment are expected to range between $100 million and $185 million with EBITDA margins ranging around 32% to 33%.

In early February, we lost one of our land drilling rigs working in the Rockies in a rig fire. Fortunately no one was injured in connection with the incident. The rig, however, is expected to be a constructed total loss that was fully insured. As a result, our marketed fleet will be 33 rigs going forward as we currently do not have plans to replace the rig, although we will evaluate it.

We anticipate first quarter utilization for our drilling business to remain at high levels, depending upon weather disruptions in the Rockies. Activity in the OCTG market remains strong with a healthy supply demand balance of approximately 4.5 months supply of inventory on the ground. Distributor and mill pricing remains competitive as the mills attempt to retain market share in preparation of increasing OCTG mill capacity in 2012.

Imported product continues to constitute approximately 50% of the market. Our OCTG sales generally follow trends in the U.S. rig count. Indication from our customer base calls for a continued strong activity particularly in the Permian basin, and we are also seeing an increase in inquiries and orders for deepwater pipes.

We expect our tubular services segment to generate revenues of between $360 million and $370 million in the first quarter of 2012 with gross margins ranging from 5.5% to 6%.

In conclusion, 2011 was by all measures a record year for Oil States. The acquisitions that closed during the fourth quarter of 2010 contributed earnings that well exceeded our acquisition expectations and provided us with new platforms and markets for growth. Demand for our remote site accommodation is strong and supportive of our planned room count growth in Australia and Canada.

We also see opportunities to further penetrate the North American remote site accommodations market to support the shale regions as well as SEGD activity in Canada. Our current record backlog levels in the offshore products segment position us well to achieve strong results in 2012. We believe offshore activity and major project announcements will continue at a robust pace throughout the year.

Oil prices are at levels supportive of our customers’ spending plans and however, the recent reduction in natural gas prices will impact activity levels in legacy dry gas shale basins. In 2011, we saw the impact of lower gas prices on activity in the Barnett, Haynesville and Fayetteville regions. We will continue to monitor current natural gas prices and the impact on activity particularly in the Marcellus during 2012.

We maintain close communication with our customers and at this point, believe that any reductions in gas directed activity will be largely offset by oil and liquids rich activity. Our broad North American coverage with over 50 locations affords us the ability to quickly react and relocate our equipment and service personnel to areas as directed by our customers’ plans and activity.

That completes our prepared comments. John, would you open up the call for questions and answers at this time please?

Question-and-Answer Session

(Operator Instructions) Our first question comes from Jeff Tillery from Tudor, Pickering, Holt. Please go ahead.

Jeff Tillery - Tudor, Pickering, Holt & Co.

Offshore products, you talked about kind of a robust opportunity going forward. If I take the full year 2011, the order rate – it got to close to $200 million per quarter. Any reason to think that there is no reason to do with similar amount of orders for the full year 2012?

Cindy Taylor

As I mentioned in our prepared comments that bidding and quoting activity is very strong. A lot of that backlog builds over the last year to year and a half came from floating production facilities, concentrated generally in the Gulf of Mexico and Brazil but particularly right into the Gulf of Mexico. We’re going to kind of see a shift of a lot of the bids and quotes that we see that are in-house now, in Brazil, particularly West Africa, Southeast Asia and Australia just in terms of the geography. But again, my prediction is that it’s going to be very strong. It’s hard to predict quarter by quarter when those orders hit as you know.

But the overall level of our activity is very strong and I see no indication today that suggests that reduces our declines. There is quite a lot of optimism as you know in the various deepwater basins over the next five years or so. Again, we see a significant amount of bidding and quoting activity around floating production facility both TLPs and FPSOs, and we are seeing really kind of a resurgence of activity on the subsea side.

Jeff Tillery - Tudor, Pickering, Holt & Co.

Okay. And for rental tools, margins were higher than we thought they’d be in the fourth quarter. But if I take kind of the second half of 2011, are you seeing anything on the price front that would make you nervous about those margins being able to sustain for at least – it’s not like you can see terribly far out but at least for the next several months.

Cindy Taylor

We really don’t see anything at this stage, and again, as you know, we’ve had a fairly flattish rig count in totality a lot of shift from dry gas stations into oil and liquids rich plays. We have been working through that. In fact, all of 2011, particularly the Haynesville rig count dropped almost 50% since the beginning of 2011. So it’s already at a much lower level. I feel like that this is kind of not a new thing even though gas has certainly taken a lag down in overall pricing. Significant declines also were experienced last year in the Barnett and Fayetteville and I would just cite generally the one market that we had thought would be fairly robust this year, when we were doing our planning late 2011 is the Marcellus.

Right now we’re not really seeing any significant decline. But I think we’re at about 135 rigs or 140 rigs last week. So it’s holding up. There have been some operators that suggest they may reduce rigs in the Marcellus but it seems to be they’re going to shift those to the Utica right now. So on balance, we see a fairly strong and robust market in totality.

Jeff Tillery - Tudor, Pickering, Holt & Co.

If you give just some color, you mentioned permit delays for various areas on the accommodations. Any color you can provide on that.

Cindy Taylor

Part of it’s going to tie into some of the comments Bradley will give you in terms of CapEx spending. Interesting enough, despite being headquartered in Houston, Texas, we’re having quite a lot of permitting delays in the state of Texas, trying to further penetrate the Bakken. So we’ve had a little bit of CapEx deferrals from 2011 to 2012 where we had intended to have some facilities up and running in the fourth quarter that going to move obviously into 2012 at this stage.

We face this often times. I’d say part of our delays actually in Australia are related to lank banking and seeking development approvals well in advance of the work starting. So there is nothing to take really there in connection with our Australian operations. And quite conversely, a lot of our planned expansions in Australia this year are on – expansions of existing facilities with existing customer base such that we are not dependent upon new project awards and our permitting approvals in place. So we feel very good about that growth rate overall. We’re also doing some prospective land banking activity in Canada as well.

Jeff Tillery - Tudor, Pickering, Holt & Co.

And my last question just on OCTG, you mentioned in the press release strong customer demand happened to drive inventories up there. Is that characterized – is that by a few customers or is it more broad based customer interest that’s driving the inventories higher?

Cindy Taylor

We go through a lot of – as you know following the business as close as you do, there is a lot of program work that reup at the end of a year going into the beginning of the next year. Sometimes it’s kind of hard to say in terms of totality other than our parent backlog as we call it that we track internally and therefore we do a lot of inventory purchasing based on that is definitely up. And clearly a portion of that as we mentioned on the call is coming from offshore deepwater programs that are getting some resurgence in activity with improved overall Gulf of Mexico outlook there.

Operator

Our next question comes from Collin Gerry from Raymond James. Please go ahead.

Collin Gerry – Raymond James

Good morning, team. Great quarter again and really fantastic 2011. Hopefully 2012 will be as prosperous. I want to hone in on the accommodation side. Cindy, did I get your guidance right that on the revenue for next quarter was $260 million to $265 million?

Bradley Dodson

Correct.

Collin Gerry – Raymond James

Okay. So if I just kind of do some quick math there, I think the room guidance was 4% but the revenue guidance would have been closer to 10% growth. So I guess the delta there is – am I right to think that kind of rev per room is going up on a quarter over quarter basis?

Bradley Dodson

It’s fairly flat sequentially. What’s happening Q4 and Q1 is that the mobile camp business in Canada picks up, it’s become obviously a smaller piece of the overall business. But it does see a sequential improvement Q4 to Q1 and that’s what we’re seeing.

Cindy Taylor

And we also, as you – suffer more significant, I would call it, holiday downtime. It’s really just people taking vacations in the latter half of December around the Christmas holiday. So you have a combination of what Bradley has pointed out on kind of mobile fleet activity and a little bit of lower activity due to vacation timeframe in the fourth quarter.

Collin Gerry – Raymond James

Okay. So that makes sense. Just it sounds like kind of Canadian seasonality in there –

Cindy Taylor

Yeah, but again, Bradley is pointing out, we are heavily contracted in both of our major markets in Canada and Australia. RevPAR is going to be in that flattish range, other than mix type changes.

Collin Gerry – Raymond James

Okay. And then kind of sticking with this division, a pretty robust CapEx as you kind of bake into the percentage that you gave us for the accommodations business. My question is, is that a ratable level of spend kind of linear through the year, or is there any kind of lumpiness or is it back-end or front-end loaded?

Bradley Dodson

Well, the spend will be – in Australia will be fairly ratable. As you can imagine, we produce the rooms and takes some time for them to be installed. So the rooms going into operation are going to favour Q2 and afterwards from new expansions some of which we don’t have contract in hand quite yet. So they are still subject to getting final customer contracts on them.

In Canada, some of the spend will be earlier in the year but as we are finishing up the expansion of Henday, Athabasca and Beaver River. The big question will be to the extent that there is an opportunity for expansion beyond the existing lodges in Canada, when do we get the contract there that then allows us to the comfort and ability to move forward with that expansion in Canada. The U.S. I think Cindy politely alluded to it. We love to spend more money in the Bakken and the Eagle Ford sooner. But we are having permitting issues.

I think our tone maybe is one where we are more surprised by that. We certainly in the State of Texas as, we usually think of it as being more pro-business and it really has been more difficult from that standpoint, which has been a little disappointing. But on a relative basis, this is not (ph) problems that our team isn’t well equipped and well experience in handling in Canada and Australia. The municipalities have the right to manage the accommodations in the area and we have experienced with convincing them that our solution is one of the better options. So what we will do in the U.S. and we’ve spent a little bit earlier on the Mountain West units. And then hopefully once we get past the permitting issues in North Dakota and Texas, we will be able to move forward on some open campus expansions.

Collin Gerry – Raymond James

So it sounds like your CapEx guidance is kind of what you intend to spend and there’s going to be some factors that play into that timing, the permitting that you mentioned and maybe you getting contracts from some of your Canadian stuff is going to kind of really determine the timing of that spend. Is that a fair assessment?

Bradley Dodson

Yes, it’s a very fair assessment.

Collin Gerry – Raymond James

Okay. And then last one from me, just sticking with this division. I think in prior conference calls, we had thought about kind of 1500 both in Australia and Canada room count expansion in ’12. Is that still what we are thinking or is the outlook more supportive for more expansion or just kind of we need to see how these factors kind of hit the bottom line, then we will find out as we go through the year?

Bradley Dodson

I think there’s still the opportunity and we still think that the opportunity to add 1500 rooms in both markets. In Australia, I think Cindy in the past has characterized this very properly that Australia seems a little bit easier to get there mentally because it’s essentially expansions of existing villages where we already have the DAs in place. We’ve got the ability – so we got the permit in place, we’ve got existing customers in the existing village. So adding 200 or 300 rooms at four, five of the villages seems very achievable. Still we have to get the contracts in hand, we’re not going to be building rooms speculatively in those markets. But given the activity levels that seems like a reasonable forecast.

Canada, we’ve got the room expansions with the existing lodges. Those are in process. But it doesn’t get us all the way to 1500 rooms in ’12. Really that the next leg of the Canadian growth has got to come from quite frankly the Total, Suncor activity levels and those RFPs are out there. But we’ll have to see. Hopefully by mid-year we will have seen some of those rooms get contracted. And hopefully we are successful on the portion of it.

Operator

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

Jeff Spittle – Global Hunter Securities

Just wanted to maybe follow-up on what Collin was talking about in terms of the RFPs that are out there in totality. I understand that you still don’t necessarily have anything in hand but just to give people a sense I guess of what the order of magnitude of rooms are that are potentially out there for Canada over for the next 12 to 14 months.

Cindy Taylor

Well, it’s a great question. Of course the Suncore, Total joint venture, or consortium, however you want to characterize it, control a lot of the incremental kind of greenfield new project activity in the marketplace that are up there. As we have mentioned before that’s generally the Fort Hills development, the Joslyn development and also Voyager and other activity increases with existing operations. But again, those are really the focus that are out there. There are some significant RFQs. At this stage, we are looking anywhere from probably 12000 to 18000 rooms or kind of what are being talked about. The customer base is still trying to figure out how they plan to do that and what their timing is.

And then in addition to that, obviously what the mix of developer on rooms versus third-party supplied rooms will be. We do anticipate that we will have some further information on these during this quarter, in fact, I had hoped to have a little better information as of this call. But any event it’s a substantial opportunity and a strong number of rooms but we just can’t give you better information than that today.

Jeff Spittle – Global Hunter Securities

Understood. That’s very promising. And maybe if we could switch over to offshore products. I know Houston and Houma it sounds like you had a nice mix of inbound order flow there. Maybe could you characterize how that fit into the overall $207 million number and how much more room do you need or how many more quarters of a similar run rate of inbound orders do you need to see before you are happy with the throughput levels with those facilities?

Cindy Taylor

A lot of times, we have got a global manufacturing footprint and as I have alluded to before, we don’t manufacture one product. We have multiple products and so at times even though our record backlog levels, we are not really where we want to be in a couple of facilities that for us has been Houston and Houma. Houma exposed more to crane and benchwork. However we started seeing a recovery in their backlog in the third quarter. And we continue to see good bidding activity. As I mentioned, we got some very good crane orders in the fourth quarter and those are manufactured generally either in our Houma-based operations or (indiscernible).

Again, we got some improvements there in terms of backlog build. We’ve also lagged, again if you follow the major subsea players installation contractors, we’ve kind of avoided the activity in 2011 in that space. We are starting to improve increased orders there. As I mentioned in our prepared comments, we had a very good pipeline order come out of Brazil and that will impact our Houston based operations. We booked that in backlog in Q4. And so I guess my point there is we don’t need a lot more or any necessarily incremental backlog, it just needs to be allocated in our facilities such that we get better margins and better cost absorption. But we’ve made very good progress in Q3 and Q4.

Operator

Our next question comes from Victor Marchon from RBC Capital Markets. Please go ahead.

Victor Marchon – RBC Capital Markets

First one is something that I missed. The guidance that you provided for well site services on the revenue side and did you also provide margin guidance for that segment?

Bradley Dodson

We did. Well site revenue guidance was $180 million to $185 million for the first quarter of 2012 with EBITDA margins ranging from 32% to 33%.

Victor Marchon – RBC Capital Markets

Thank you. I had a couple of questions. Just one on OCTG market, just want to see if you could talk to what you are seeing from an industry inventory level as we made our way into the year and how you see that moving forward?

Bradley Dodson

Well, it’s in a reasonable range. It’s been plus or minus 4.5 months and there are some indications that it possibly is starting to expand a little bit. But we are watching it closely. There are some data about what the import probably is going to be here in the first couple of months of 2012. So we will have to watch it. Overall I think the market has been – we have been quite straightforward and we were watching the productive capacity expansion in the U.S. by the domestic mills. We continue to do so. That has generally, as you have seen in our results, for having 2000 rigs running, by dealing on pricing.

We think that continues, I think generally the pricing for OCTG is fairly stable. I don’t see a significant weakness in it but there could be some softness in it by the end of the year. But in the short term, things are business as usual.

Victor Marchon – RBC Capital Markets

And a similar question just in the Permian basin for you guys, land rigs, have you seen anything change from a competitive standpoint over the last month or so with additional rigs coming into the market, putting any pressure on day rates there?

Cindy Taylor

Not at all. It’s an extraordinarily robust market. If you recall, we moved two rigs out of the Rocky Mountain region kind of in the latter half of 2011 with the commitment to a strong customer of ours to make upgrades to those rigs. And in connection we are going to put a total of six rigs on a year contract with that customer. Those are just types of things we were seeing but overall again, it’s continuing a strong market. I acknowledge our margins were lower in Q4 than we would like them to be. That had to do with quite a lot of – just really workers type catch-up adjustment, a good portion of which related to prior period issues.

So we are not looking for those lower margins to go forward. There is really no negative operational type of indication in the Permian.

Victor Marchon – RBC Capital Markets

And the last one just on the offshore products, just want to see if you guys could talk me a little bit about Brazil. I believe you guys have been increasing your presence there and seemingly have a very good opportunity set. And just want to see if you can give an update on your operations in the country and the opportunity you see there.

Cindy Taylor

Well, we have been operating in Brazil for about 12 years now, more in a service repair type capacity. We have not done much in the way of new manufacturing in country. We are clearly going to evaluate opportunities to do that as the market grows and develop. We have opened a sales presence – strong sales presence in Rio and we’ve got an expanded workforce in place. It is clearly an area of focus for us. We do supply a lot of product into Brazil that are manufactured through our global base of operations. Just like everyone else, you’re going to see us continuing to expand in countries and further build local country content.

But in terms of specific guidance in terms of activities in the country, we will just kind of update you throughout the year 2012 but know that – that is part of our plans and focus. And if you will notice our offshore products CapEx is a little bit higher this year and part of that will be attributable to planned expansions in the country.

Operator

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

Stephen Gengaro – Sterne Agee

Two things if you don’t mind. The first on the land drilling, on the implied cash margins you mentioned, I think, some noise in the quarter. Should they revert back or are they going to remain at lower levels than we saw in the middle part of ’11?

Bradley Dodson

So kind of taking out what I would say would be – they are not non-recurring, so I would say unusual relative to the year-to-date run rate prior to that. Cash margin in the fourth quarter would have been about $4500 a day. So you can still see that we had some seasonal or holiday inefficiencies in the fourth quarter relative to the $5000 a day that we averaged in the third quarter of 2011.

As we look into first quarter of 2012, I think that we will have the ability – we will have a little bit of downtime – we will have – once that’s dropped, effectively we won’t have the rig in the Rockies. I think our cash margin should return to that normalized $4500 to $5000 a day.

Stephen Gengaro – Sterne Agee

And then the second question was on the offshore products, you had another quarter of plus 20% margins and you kind of provided sort of 18% to 20% range. What’s going on there and is there kind of confidence that’s creeping higher that you can keep margins maybe above that range? I know it’s somewhat mix related but how should we think about that, not just in the first quarter but as we kind of go through the next two years, should that trend higher?

Cindy Taylor

Well, as I have always said, you’ve got mix related factors that come into play and timing of the shipments. We do major projects, large projects on a percentage of completion basis. But then we will have a lot of things that are tied to actual shipment date. So it’s hard to predict with the level of precision around, an 18% to 20% range is a fairly tight range given the diversity of our operations. But the major message here is that we’ve got a very high historic backlog level, in fact, a record level.

Our mix is a good mix weighted towards either proprietary or semi-proprietary products, a greater weighting there. And we are seeing the improvement in backlog builds in some of our facilities that lag on an EBITDA margin based on last year. So yes, to answer your question I feel better, good about sustainability of the margins in offshore products.

Stephen Gengaro – Sterne Agee

Just one final. When we look at the CapEx spending and sort of what’s targeted on the accommodations side. Are you – how is your capacity to handle that growth right now? It seems like you are getting pretty stressed but is that – what would you do if couple of these large projects hit right away, is there constraints there or –

Cindy Taylor

I will speak to the market separately. As it relates to Australia, recall that we added roughly 2000 rooms in 2011. So the plan of 1500 rooms is not a stretch. We believe we can do that for the most part internally. We have some outside suppliers that we had used to support our Queensland operation to a limited degree last year. And we also identified an Asia supplier to help us with our needs on the northwest shale. So I feel as it relates to Australia, our capacity is in good shape and we could leverage that if growth dictates that via these other third party providers that have supported us in the past.

As it relates to Canada, we got two manufacturing facilities in the Edmonton area that are operating at good utilization level or will be throughout 2012 in our opinion. Part of the strategy of adding that new manufacturing facility in Johnstown in Colorado, of course, is to hit penetrate further of the U.S. shale play market but it also gives us added alternative manufacturing source to support our Canadian based operations on a very cost effective basis, even delivered into locations. So I think that again, we’ve expanded our capacity in both markets in 2011 particularly with the addition of this new plan in Colorado. So we definitely think we can respond to activity increases should they materialize.

Operator

Our next question comes from Joe Gibney from Capital One. Please go ahead.

Joseph Gibney - Capital One Southcoast

Just one quick question. I was just curious what the room breakout was, Canada and Australia out of the 1769 you provided on lodge and villages?

Bradley Dodson

Sure. We were a little less than 10,000 in Canada. The exact number was 9967 in Canada. That’s average for the fourth quarter of 2011. 7102 rooms in Australia.

Joseph Gibney - Capital One Southcoast

Cindy, I was just wondering if you could talk a little bit on your revenue per ticket within rental is a pretty sizable uptick this quarter. Just wondering, I think you referenced mix, you referenced incremental equipment. If you just give us a little incremental color on sort of factors that play to happen in fourth quarter. I mean it’s moved up nicely throughout the year. Just more of a sizable uptick this particular quarter, was it more equipment mix, or was it more basin mix, just kind of curious what occurred here in the fourth quarter?

Cindy Taylor

Well, I think it’s just a little bit of both. But certainly we have noted in our prepared comments, the greater intensity of the activity in the shale plays favors our proprietary equipment, particularly our Appalachian tools and services that are very integral to a pressure pumping and is a multi-staged frac job. And so that’s a driver – if you could have the information and model on number of zones completed, that would be a major driver for our revenue and our profitability. But that’s kind of the best answer that we have is a movement towards our higher end more proprietary equipment and an increase in the number of stages completed in the marketplace. And we have deployed some incremental new technology as well that’s beginning to contribute to our results.

Operator

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

Jonathan Sisto – Credit Suisse

Hey Cindy and Bradley, it’s actually Jonathan. Just wanted to piggyback actually on that last question. A lot of the large diversified players are talking about labor issues in North America. Is that something you guys are experiencing in getting engineers?

Cindy Taylor

Well, I think as it’s always been the case, we’re in a cyclical business and our labor pool definitely gets stretched a bit when we have busy times. But we’ve been in kind of the 2000 rig count level for a while now, and we’ve had to adapt in past cycles and this one is no different. But we are clearly focused on attracting new workers, training those workers and retaining the ones that we have. Our people of course – as an industry, it’s a very mobile workforce. So when we see declines in areas like Tyler and Shreveport, North Louisiana, lot of times they are picking up and they are doing jobs in the Eagle Ford, the Bakken, the Marcellus and that’s just going to continue I think at this stage.

But I don’t see anything outside the norm if you will and just recognize most of these trends were ongoing during 2011. And again the rig count is actually down modestly from a higher level that it was. So but our people work hard, they -- travel times, times away from their family and overtime, and we are doing the best we can to manage that. So I would say we are not different than the major service company in that regard.

Jonathan Sisto – Credit Suisse

And one last one if I may. The one thing I didn’t hear you mention was international expansions on the accommodations front outside of Canada, Australia and the mobile units in North America. Any update there that you care to share?

Cindy Taylor

No, we really don’t have an update. Just know that it is part of our strategic plan there are areas that we are looking to try to expand our global footprint. And clearly we will update you when we have something more tangible in place.

Operator

Our next question comes from Scott Burk from Canaccord. Please go ahead.

Scott Burk – Canaccord

So just wanted to ask a couple of questions about accommodations. First of all, what percentage of total revenue is coming from U.S. shale plays now within accommodations division?

Cindy Taylor

It’s fairly consistent. And I haven’t looked on it on a revenue basis but the EBITDA coming out of the lodge and villages has generally constituted about 85% of the total. So 15% from U.S. and Canadian mobile camps.

Scott Burk – Canaccord

Okay. Terrific. And where do you see the most potential -- if you look out say past 2012, where do you see the most potential for continued growth? Is there more opportunity in Australia? I am just wondering you look at forecast of Canadian oil sand production and it looks like it starts to plateau in 2015. I am just wondering if longer term the growth is going to come from Australia and the U.S. shales?

Cindy Taylor

Well, I think they are both very good market. They have been historically and I think they will be prospectively. At times we do look back and if you look at, there is a huge wealth of project in Australia. It feels like very tangible visible growth. So I’d have to probably agree with you and say yes. I mean, you’ve got four major LNG facilities that are being built on Curtis Island and the Gladstone region. There is going to be a lot of coking (ph) gas, exploration development, pipeline construction. You‘re going to need expanded rail, port facilities, all of the same is really true on the northwest shales, either new market as you know that we are targeting. We opened our first facility in the Gladstone region in the fourth quarter.

Last year and we’re -- hope to open our first facility on the northwest shale in the second quarter. Those are new markets. These are on the heels of a very strong outlook for growth in our base metallurgical coal basins and with again, as Bradley elaborated, expansion of existing facilities, existing customers, there is also a lot of potential new investment coming into the coal mining region as well. So it’s kind of – you kind of draw a five year trajectory of growth and it does look exceedingly promising in Australia.

Now my history has always been in Canada to your point, we used to follow a lot of manpower curves that are provided by the government, 5, 10 years ago when there’d always be a falloff two or three years out. The reality is it’s never occurred because there is more and more activity that is moving into the Canadian oil sands. So I am not sure that even though you are seeing some forecasts that show a plateauing, if that will actually be realized. Time will tell.

Scott Burk – Canaccord

Okay. Terrific point. And then as you are talking to these LNG customers in Australia, is there any kind of fear developing that we see kind of global shale revolution impacting gas prices worldwide and not just in the U.S. and maybe some concerns about the viability of those projects longer term?

Cindy Taylor

I think all I have heard is full speed ahead.

Bradley Dodson

I think there is at least – and we are not experts in this by any means. But the prospect that U.S. shale plays impacting global LNG, I think is several years off.

Scott Burk – Canaccord

And then one final question about – a little more color on the CapEx spend. When you build the room, how long before between the CapEx spend when you actually start to realize in revenue from that room?

Bradley Dodson

Well, the CapEx for a given room kind of comes in three components. You’ve got the actual manufacturing of the room, you’ve got the transportation, you’ve got the install, or site whereabout (ph). So it becomes about a third, a third, a third and they’re probably ratably over somewhere between three and six months, depending on how big the expansion is, and quite frankly how big the central facility costs are associated with this. If we are building a brand new village, you can’t have any room turnover to a third-party until we’ve got the kitchen, diner, rack room in place. If we’ve got a larger village to have, suitably large enough central facility to add another 100 to 200 rooms, they could come on quickly.

Operator

Our next question comes from Bill Sanchez from Howard Weil. Please go ahead.

Bill Sanchez - Howard Weil

Bradley, as we think about the offshore products business from a revenue perspective full year, I know historically you’ve kind of guided that 75% to 80% of backlog kind of turns in a given year. Is that still fair given the composition you see in the backlog here as we end 2011?

Bradley Dodson

Yeah, I’d actually even a little bit better than that. We will file our 10-K hopefully today if not shortly and as of the end of the year it was actually 85%.

Bill Sanchez - Howard Weil

85% that you would expect, okay. Thank you. And Bradley, are you able to just outline on the specialty connector deliveries that’s slipped from third to fourth quarter, Asia Pac. How much in revenue was that contributed to the fourth quarter?

Bradley Dodson

There are about – I’d say, $10 million or $12 million. Let me pull that up. I am sorry, it’s about $10 million to $12 million.

Bill Sanchez - Howard Weil

Okay, $10 million to $12 million. I was just curious on that number just given the guidance that you gave $170 million to $180 million and just see how kind of on an apples to apples comparison that would be. So I appreciate that.

I guess, just one other question for you Bradley. As far as the tax guidance, I know you gave the first quarter – I was just curious, is the 20.6% probably a good rate to assume for the full year 2012?

Bradley Dodson

It is. For right now, we will certainly update every quarter. But that is our current guidance for the full year effective rate. Basically we had a higher than expected U.S. state income taxes that we realized that had an impact on the overall effective rate in 2011. You only have to build these into make that adjustment to fourth quarter earnings, as a result caused the higher rate of little over 31% in the fourth quarter. Longer term I think that 28.6% just given the mix of the -- where the income is coming from domestically, internationally, that should be pretty good.

Bill Sanchez - Howard Weil

Okay. I guess I’ve got just one more and just as it relates to the new facility in Colorado here. I think Cindy, you mentioned 2500 modular units a year with the second quarter 2012 start-up. How do we think about a split there between which manufacturer if you will on a permanent lodging site versus maybe a mobile production if you will as we think about looking at the total number of room counts or lodge counts that you guys report as well?

Bradley Dodson

Well, 2500 units has to do more with the box, and what goes into that box varies than what we need to run through the facility. In the near term, one of the things is that facilities can capture immediately insourcing the Mountain West expansion. Those Mountain West units don’t have the same permitting that the open camps do in the U.S. shale plays and so we’ve had, I would say, no difficulty but fewer difficulties deploying those units. And so in the near term and in 2011 we outsourced all the manufacturing of those units to third parties. The near term opportunity for us is to insource that obviously cuts out the third party margin, given its better deliverability and certainty of deliverability to our customers. And so that’s what we will be looking to do.

Assuming we can get through the permitting issues which I'm cautiously optimistic, we will be able to do in Texas and North Dakota. That will be the next focus. I think to Cindy’s point, that’s the offensive move as it relates to the Colorado facility. The defensive move is if we start to be impacted by labor shortages and labor inflation in Canada, we believe that should we face that type of inflation in Canada, we can deliver rooms out of Colorado to the oil sands cost effectively.

Bill Sanchez - Howard Weil

Make sense. It sounds like it’s going to be a nice deal for you. I appreciate the time.

Operator

Our next question comes from Cole Sullivan from Jefferies & Company. Please go ahead.

Cole Sullivan - Jefferies & Company

Just a question on the mobile camp business in the U.S. As you guys are expanding more into that, how do you see the margins comparing with the Canadian and Australian businesses? And then also are you seeing any contract term – lengthening of contract terms, that sort of thing?

Cindy Taylor

The margins are generally comparable from activity to activity. So that mix is fine. We do have – I would say generally (indiscernible) to a year of contract, predominantly in the Bakken and predominantly associated with the major E&P/independents that are working in the area. If we have more of an open camp concept, we typically are not going to have much in the way of contracts other than maybe a month or two at a time. And therefore we typically plan utilization in kind of the 60% to 65% level for those types of facilities.

But again, returns are commensurate and they are interesting opportunities but we will just do the best that we can. And I view it as additive but as Bradley is pointing out, the major driver for our business continues to be the major lodges in Canada and villages in Australia.

Cole Sullivan - Jefferies & Company

Okay. I just have one follow up on the rental tools business. Looks like a lot of guys have been impacted by timing issues in 4Q as assets were moving around on the pressure pumping side. And I guess, they would continue to happen in the first quarter. It looks like you guys weren’t impacted by that and you talked about – your office locations and everything helping out. Do you see any more impacts from that because it should continue to accelerate out of the gas plays? And do you see any timing issues, not so much on the pricing side but more on the timing side?

Bradley Dodson

Well, Cindy alluded to it either in our comments or answer to another question, we faced that pretty much through 2011. We saw the Barnett rig count go down fairly significantly. We saw Haynesville rig count. So we were moving people and equipment around all year long and I would say it was fairly seamless to the outside investors. We’ve been – we’ve heard the comments from our peers and our competitors about fourth quarter and assuming it goes in the first quarter.

So I think we’ve added in a margin of little bit of conservatism in our guidance for Q1 in case we see that impact but thus far, our team has done a really good job of – and our personnel doing a good job of rotating in and out of these markets and moving the equipment efficiently. So I am cautiously optimistic that we could continue to do that but there is a little bit conservatism in our guidance to manage through that.

Operator

Our next question comes from Jim Casagrande from Bridgehampton Capital. Please go ahead.

Jim Casagrande - Bridgehampton Capital

Two quick questions. The first, that $600 million to $700 million in CapEx for next year, could you give an estimate of what percentage or what kind of maintenance CapEx might be? I assume the majority of that number is lot of expansion.

Bradley Dodson

We typically point to depreciation and full year depreciation guidance is around $210 million to $220 million. So that would be a good maintenance number.

Jim Casagrande - Bridgehampton Capital

Got it, okay. And then my second question was someone addressed I guess two questions ago. But just on a fundamental basis, talking about the U.S. shale opportunity in accommodations, maybe it’s my misperception but I mean outside of the Bakken shale play, some of these areas where the drilling is occurring a little bit less remote than what you just do in Canada and Australia. So do you think is there potentially, let’s say, more competition from mobile accommodations and how does that kind of impact what you would look as your returns on investment?

Cindy Taylor

Sure, Jim. We look at – I would have said probably agreed with you three years ago on that comment. We’ve had one-off type operations, we had a camp working in the Fayetteville for probably five years. That made a lot of sense for the operator but they are kind of isolated opportunity which really changed the landscape of, of course, the Bakken. And now the Eagle Ford, these are very large geographic regions that are very spread out and generally dominated for very small towns that are in the region.

So the towns actually cannot generally accommodate the influx of workers that are coming into the region. And if they do, a lot of times it’s such a strain on the local economy from inflation but wage inflation, housing inflation, that is a net negative overall. And so we’ve always provided a very good buffer that allows for the local communities to benefit but not putting too many strains on their local businesses and services. We are hearing about potential opportunities in the Permian particularly as you move a little further west. And we’ve evaluated and we will continue to do in kind of Marcellus and Utica as well.

Jim Casagrande - Bridgehampton Capital

And just one quick follow up, the Carrizo Texas acquisition that you’ve had, do you that over the next year there is more either buildouts or let’s say acquisitions of that size or are there some larger hundred plus, several hundreds opportunity?

Cindy Taylor

It could be a little of both realizing that the Carrizo operation we bought it because it’s an operating facility on the ground but it’s also got room to grow and permit in place. And so that’s really the strategy around acquiring that operation.

Operator

We have no further questions at this time. Do you have any closing remarks?

Cindy Taylor

No, fantastic. I appreciate it. I know you all have very busy week, this week and ahead of you. So we always appreciate your following and given us your time. Have a wonderful weekend. Thanks.

Operator

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

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