Tesco's (TESO) CEO Fernando Assing on Q2 2016 Results - Earnings Call Transcript

| About: Tesco Corporation (TESO)

Tesco Corp. (NASDAQ:TESO)

Q2 2016 Earnings Conference Call

August 9, 2016 10:00 ET

Executives

Anne Pearson - IR

Fernando Assing - President & CEO

Christopher Boone - CFO

Analysts

Daniel Burke - Johnson Rice

John Watson - Simmons & Company

Tom Curran - FBR

Rob MacKenzie - IBERIA

Operator

Greetings and welcome to the Tesco Second Quarter Earnings Conference Call. At this time, all participants will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Anne Pearson. Thank you, Ms. Pearson. You may now begin.

Anne Pearson

Thank you, Rob, and good morning everyone. Welcome to Tesco's second quarter 2016 earnings conference call. Your hosts this morning are Fernando Assing, Tesco President and Chief Executive Officer; and Chris Boone, our Senior Vice President and Chief Financial Officer.

Before I turn the call over to Fernando, please note that we will be making forward-looking statements within the meaning of Private Securities Litigation Act of 1995 and Canadian Securities Regulation. These statements are based on current expectations that involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are more fully described in our 10-K and 10-Q filed with the SEC and with securities regulatory authorities in Canada. We'll also be using certain non-GAAP measures during the call. And the earnings release we issued this morning contains a reconciliation of these measures to the closest GAAP measures.

So now I'll turn the call over to Fernando Assing.

Fernando Assing

Thank you, Anne, and welcome, everyone. Thank you for joining us this morning.

We're still of the opinion that the timing of the market bottom remains unclear and that the path to recovery will be volatile. Recent declines in commodity prices confirmed this position. This highlights the importance of liquidity in this market as a key measure of survivability. Our strong liquidity provides us the optionality to perform on a wider range of market conditions, this includes whether in a longer downturn or funding growth in a recovery market.

I will now ask to Chris to go through the financials and then I'll provide you with some additional perspectives on the market and our strategic initiatives to return to profitability. We'll then answer your questions. Chris?

Christopher Boone

Thank you, Fernando. Good morning, everyone. I'll begin with the discussion of our second quarter operating results and wrap up by summarizing our third quarter outlook. Please refer to the day's news release for additional financial details on the quarter including reconciliations of non-GAAP to GAAP measures, as well as our 10-Q which will be filed later today.

This morning we reported revenue of $33.6 million, adjusted net loss of $15.8 million or $0.39 per diluted share and adjusted EBITDA loss of $7.5 million. Adjustment to net loss and EBITDA this quarter were primarily due to additional restructuring cost from headcount reductions and facility closures totaling $2.9 million. While revenue declined 5% sequentially, both adjusted EBITDA and operating loss improved as we realized the benefits of prior restructuring efforts. Looking at each business line starting with products; revenue increased by 24% from the prior quarter to $20.6 million from higher new top drive sales and the delivery of an offshore pipe handling system.

The delivery of our first offshore catwalk originally expected in Q2 was delayed until Q3. The second quarter ended with a backlog of nine top drives with a potential value of $8.5 million, that's slightly down from a backlog of 10 units with a potential value of $9.5 million at the end of Q1. As expected rental revenue declined sequentially by about 10%. Rental utilization was 15% on a fleet of 118 units compared to 14% in Q1 on a fleet of 121 units. We saw a slight pickup in rentals in North America and Russia late in the second quarter but that was offset by lower rentals in Latin America. We continue to experience pricing pressures globally and don't expect any relief soon. However, we have started to see more inquiries on rentals and aftermarket services in North America since the beginning of the third quarter. We are cautious to forecast when these opportunities may convert into contracts and subsequent revenue.

During the quarter we sold three used top drives ending with a fleet of 118 units. Our target remains to reduce the rental fleet to about 60 to 70 units. This is part of our overall strategy to improve cost efficiency and right-size the business to current market demand. Adjusted operating loss for the product segment was $2.4 million versus adjusted operating loss of $4 million in Q1 with sequential incremental margins of 40%. The margin improvement primarily reflects the benefits from higher new product sales and cost reduction initiatives. Looking next to tubular services, revenue was $13 million, down 31% from Q1. The sequential revenue decrease was expected and mainly reflects lower activity in U.S. land, Latin America, and global offshore markets.

Despite overall market declines, last quarter we maintained and in some cases increased market share in the markets in which we operate. The adjusted operating loss from tubular services was $6.6 million with sequential decremental margins of 17%. The benefits of restructuring efforts helped offset the impact of lower revenues. Living next to corporate and R&D, corporate expenses were $5.7 million which is down about $200,000 from Q1 on an adjusted basis. Research and engineering cost were $1.3 million on an adjusted basis versus $1.7 million in Q1 as we continue to prior prioritize our investments in the current market.

Net foreign exchange losses were negligible in Q2 compared to $1.2 million last quarter and $1.4 million a year ago. We have significantly reduced our currency risk in Argentina by transferring local currency into dollar denominated account. Our effective tax rate was a 1% benefit compared to a 1% expense last quarter and a 79% expense a year ago and we had a $15.3 million valuation allowance.

Turning now to our balance sheet. As of June 30, we had cash and cash equivalents of $97.5, up almost $44 million from March 31. This includes $47 million of proceeds from the secondary equity issue we completed in June. In July, the underwriter exercised a portion of its option raising almost to an additional $1 million. Fernando will discuss the rationale of the equity raised in a few moments. Free cash flow was near breakeven before restructuring expenses of $3 million. During the quarter we reduced accounts receivable by $9 million. We also reduced inventory by approximately $5 million from product sales and improved supply chain management.

As we've been stressing, cash generation and preservation continue to be a high priority. We spend $1.1 million on CapEx, primarily for tubular services equipment and certain infrastructure projects. This was offset by $1.5 million of proceeds from the sale of used top drives. We expect CapEx in the second half to run slightly above the first half rate but this could increase to support certain initiatives we'll be discussing in a moment. In addition to the new equity capital, we are finalizing a new asset-backed credit facility that replaces our prior facility which was canceled today. Any interim we have cash collateralized approximately $2 million of letters of credit. Details of the new facility will be disclosed upon closing.

Turning to our outlook for the third quarter. Q3 will be very challenging, products revenue is expected to be down sequentially due to several factors. First, we expect to deliver fewer new top drives going from five in Q2 to one to two in Q3. The lower commodity prices in Q1 and early Q2 impacted the timing of bookings in Q2 pushing delivery dates to Q4. We also experienced effect of a less profitable mix in Q3. While we see some opportunities for a few inter-quarter deliveries, we have not included them in our current forecast. We still expect to sell a few used top drives in the third quarter.

Second, as a reminder, Q2 included the benefit of an offshore pipe handling system. Third, while rental activity is expected to be flat sequentially, aftermarket is expected to decline due to lower part sales associated with the delivery of new products. As a result of these factors, products adjusted operating loss is expected to increase in Q3. Tubular services segment revenue and adjusted operating loss are expected to be flat compared to Q2 as increased activity in U.S. land is offset by lower international activity.

Corporate and R&D expenses are expected to be slightly down sequentially with depreciation remaining flat. Based on these ranges we expect adjusted EBITDA losses to increase in the third quarter. Cash is expected to be down as working capital reductions and asset sale proceeds will not be able to completely offset these EBITDA losses.

With that I will now turn the call back to Fernando.

Fernando Assing

Thank you, Chris. I think that at the beginning of the call we maintain our position as the market recovery will be a slow and volatile process. While much progress was achieved, Q2 was still a difficult quarter and we expect Q3 to be another challenging one.

At a same time, our strongly liquidity following the equity offering give us the flexibility to manage a wider range of uncertainty about the timing and pace of the recovery. There were some positive market signs in the quarter like rig count increase, increases and production declines in U.S. However, there were also headwinds like we rig count reductions in several key international markets and continued global pricing pressures. The recent steep decline in oil price is softening the consensus about the pace and trend of the recovery. In other words, were not as good yet and we're now counting on a quick recovery to return us to profitability.

This brings me to my next point, the cost reductions and restructuring alone will not be sufficient to meaningfully improve our profitability. We know that we need to scale up our revenue run rates and improve our product services and services mix over the next several quarters to achieve a breakeven EBITDA. We must take advantage of our strong position and the changes in the marketplace to increase our market share. And that means, first, increasing the market adoption of our existing automated offerings. Second, accelerate the deployment of new technologies. Third, adapting our business model more aggressively to the needs of our clients. And finally, continuing to search for potential targets to acquire synergistic technologies to complement our offerings and leverage our platform.

What is important to keep in mind is that we have positioned Tesco to be able to successfully operate in different market scenarios. If the market does not improve and continue at current levels, we have the same power and technologies required to gain market share from weaker competitors. In a recovery market, we have the capacity to be an early participant by aggressively funding CapEx and working capital. In addition, we have the ability to accelerate technology deployments. It is also important that we respond quickly to key emerging markets trends that favor Tesco.

These strengths are; first, greater integration of drilling services into the rig operations. Second, achieve of capital to the upgrading of rigs, particularly around automating pipe handling and mechanizing rig floors. Third, increased focus on highly mobile broken play tools that can easily move between rigs and create much greater capital efficiency. And finally, the acceleration of real-time control and communication technologies to enhance the capabilities of top drives and the drilling performance. The aim of our initiative is to address these trends and create growth opportunities in a stagnant and competitive market. These initiatives are consistent with a strategic shift we started two years ago.

Now let me walk you through some of this in a little more detail. Within the product segment, we include funding the deployment and commercialization of our suite of rig flow mechanization technologies. This will increase pipe handling automation and will remove people from the rig floor reducing cost and risk from our customers. Critically, this process can allow all the rigs to be upgraded, to be more competitive with newer more automated rigs at the fraction of a cost. As an example, during the quarter we chipped our first offshore pipe handling system and are ready to chip our first offshore catwalk.

Second, expanding the scope of our aftermarket services to maintain and repair third-party pipe handling equipment also will provide upgrade options that significantly extend both, the life and the capabilities of this equipment, again, at a fraction of its replacement cost. We have upgrade packages already in place that are at the added horse power and torgue [ph] to one of our most popular top drive models. We're working on similar applications for additional Tesco models, as well as third-party equipment. And finally, we'll push for the market adoption of our first generation ARC that were -- which add significant drilling performance to our top drives. We'll be deploying additional performance and drilling features that will be part of one seamless, full integrated performance enhancing platform. As a result, we signed our first commercial ARC agreement during the quarter with four rigs under contract right now.

Within the tubular services segment, some of these initiatives include converting more land market share from conventional casing running to our automated evolution model which requires significantly fewer people and less equipment. We were pleased with the progress achieved in certain customers in targeted U.S. market to this offering in the second quarter. With spec conversion rates to increase as we introduced additional cement and accessories and functionalities later this year. In addition, CRT tools are now being included in large Middle East tenders and we suspect increased use of automation in these markets in the future.

Next, we're developing additional cost emerging offshore market and we'll push to add scope and market share within our existing operations. Our target offshore market remained the Gulf of Mexico, the North Sea, Indonesia, Malaysia and Mexico. Despite reduced activity in this market, we have invented opportunities to grow through superior HSE, service quality, through more profitable technology and we win-win innovative business models. In addition to this revenue generating initiative, we're also making investments to reduce internal inefficiencies and to automate manual processes. We continue to transition certain smaller international markets to third-party channels, in fact, we're working on several new opportunities right now. You have heard from us that this third-party market channels will help us increase our international reach with minimal investments and limited risks.

It will take several quarters for the initiative to meaningfully impact our profitability. However, we're confident that we have the liquidity, the flexibility, the technology and the strategic directions to put off fact [ph] on our path to profitability.

With that, we would like to thank our shareholders for having the confidence to continue to invest in the vision and people of Tesco. And with that, operator, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from the line of Daniel Burke with Johnson Rice. Please proceed with your question.

Daniel Burke

Good morning, guys. I was wondering, historically -- it's just kind of a broad question but historically Latin America has been obviously a large market for you all, trends there haven't been easy year-to-date, could you maybe just address how that -- I mean, how Argentina, how Mexico, how some of those markets have trended for you guys so far this year and what the outlook is in that region for the second half of the year?

Fernando Assing

Yes, let's try to structure some thoughts around it. Latin America was the largest international operation for Tesco over the last several years or unless until 2014. The significant part of that revenue mix was coming from the few rental contracts we had, both in Argentina and Mexico. So highly concentrated revenue at the time. We have decided -- given the market conditions, that we will concentrate in the two biggest markets, Mexico and Argentina, we're transitioning in the smaller markets Colombia, Ecuador and couple of more smaller operations to a third-party market channel, distributorships, technical alliance or similar. We already transitioned Venezuela which was by the way a few years ago a large operation for Tesco, also fundamentally a rental operation.

So what's happening right now is both markets are undergoing significant transitions for some of the same reasons and actually also because a very peculiar moment these markets are leaving. In the case of Mexico, what's happening is that the -- there is -- we're in the vacuum in the middle of the process of transitioning activity from PEMEX to the international operators. Now a secured important exploration and production sharing agreements with PEMEX earlier this year and last year, and additional bidding round are expected later this year and the following year. So over the next year or two there is going to be a massive influx of international companies who want to bring significant CapEx, drilling CapEx, for high-end drilling, especially offshore.

So we're in that vacuum right now, we're -- there is very little PEMEX activity, they are having the wrong issues right now and we are waiting for that international activity. At this stage, we are still committed to the market and we continue to evaluate that as the quarters come and depending on how much we can really invest in retaining our market position in that place. In the case of Argentina, it is more complicated because not only they are living an experience -- it's a complexity of the cycle but also there has been some significant political transition and significant regulation advances that dramatically change or will change shortly how the oil companies get compensated and paid for in Argentina.

And that's really also causing massive swings in activity. In the case of Argentina, the local activities are little more diversified, YPF has -- this is the biggest player by far but there are some other companies that do have some market share, some locals and some international. So we are also watching Argentina carefully, we have restructured significantly, there is more restructuring that we would like to make, particularly in Argentina, but we are still believing in the long-term potential of that market, therefore paying for our market position at this stage.

Daniel Burke

That's helpful right now. So keeping the commitment in the infrastructure of Mexico, Argentina, otherwise retrenching. Okay, that makes sense. And then maybe just one, you alluded to it earlier on the aftermarket side and the third-party initiative. How do you feel about the progress being made in terms of third-party aftermarket efforts and what's the outlook there over the next year, year and a half?

Fernando Assing

Yes, before we go to the market let me suggest a small correction to be coming of a retrenching in the aggressive level. Rather than retrenching we're changing how we exploit and monetize and do we sustain the smaller markets through third-party distribution, through technical alliances, we don't want to have on those markets, there are significant opportunities in those smaller markets, we just need to change how we just operate on those. And with respect to aftermarket, we're actually very happy with the progress of the third-party initiative. While revenues are very low these days, a very meaningful percent of the revenues are already coming from the third-party. And remember that this is a completely additive market channel for us, when the market returns, we'll now have a market share in a market that is several times larger than the installed base. We're also -- the step one of that initiative was to select -- to look after a selected number of competitors top drives but the ultimate goal is to provide a completely integrated aftermarket and fleet management services for all the pip handling equipment and rig floor equipment and we are slowly but surely progress along those lines. When we're really hopeful that when the market returns that's going to be an exponential revenue channel for us.

Daniel Burke

Okay, great. And then maybe just to carry the last one, I suppose its mixed dependent but what kind of top line do you all believe you need to see to return to EBITDA breakeven, I think you were pretty explicit Fernando about needing to push more revenue through to get back to that type of level. Do you give a sense for that?

Fernando Assing

Well, we have a couple of comments. One, if you look at our results -- recent results you will see that last time we were about breakeven EBITDA was when our revenue run rate was approximately $50 million. So I think it's fair to use that as a reference. But also we are a different company, we're optimizing, we're restructuring, we are changing the revenue mix from less profitable products and services to more pro profitable products and services. So there is a chart that we'll get there even faster. But working against that we also have significant pricing pressures, so we'll let you model the -- all those arrows pulled in different directions but I think the range of mid 40s to low 50 is our target revenue for repairing our fundamental EBITDA issue.

Daniel Burke

Great, well that's helpful guys. Thank you for the time.

Operator

Thank you. Our next question comes from the line of John Watson with Simmons and Company. Please proceed with your question.

John Watson

Good morning. Apologies if I missed this earlier but would you mind quantifying the revenue from the offshore pipe handling sale in Q2?

Fernando Assing

We made some -- we provided some sense of magnitude in the prior call but we prefer not to provide that particular pricing point John, it's a sensitive information, it would be too easy for the competition -- some of which is in the call right now to start mapping our pricing structure.

John Watson

Okay, that's fair enough. And then on the rental rates, it looks like they might have declined slightly, sequentially. Could you provide any color around why they may have fallen quarter-over-quarter?

Fernando Assing

Pricing pressure continues to be endemic in the industry and globally, and we saw a slight pickup in activity and with revenue flat, your assumption that there were some price softening is correct. And we don't expect pricing to recover any time soon. Now there are some indications that these are inquiries about some potential rental activity in the near future.

John Watson

Okay, that's helpful. I'll turn it back. Thank you.

Operator

Thank you. [Operator Instructions] Our next question today is coming from the line of Tom Curran with FBR. Please proceed with your question.

Tom Curran

Good morning, guys. Fernando or Chris, the first contracts for ARC when it comes to those four rigs were they with the same land driller and if not, how many different land drillers and then geographically, where are those contracts for?

Fernando Assing

Let's try to give you a smallest information without giving away the game here Tom. We can tell you three different drilling contractors; high-end drilling contractors involving three different operators because at the end we sell these to both the -- primarily to the operator and then we partner with drilling contractor. So you could say six parties have been part of these four contracts and the initial results have been very encouraging. We are outperforming the competitor's solutions that have been in some of those rigs. And the feedback from the client is very positive. From the geographical point of view, we can tell you that we have -- by choice, was our choice to push for the initial installed closed home. So some of those are -- most of those, if not all are in Canada. And we also wanted to use a market that was -- where drilling performance was at its peak. So generating significant drilling performance improvement in the market as developed as -- the Canada market will make the point that our platform is very impactful.

Tom Curran

Okay, thank you for that added color. But when it comes to the move in the land drilling market towards upgrading here in the U.S., could you speak in more detail to what you're seeing there. How much traction you've gotten. And where specifically you're getting it by product line or technology?

Fernando Assing

Yes, let's try to walk you through some of the -- what we're watching right now. First, we're of the opinion that ever rig will have to be upgraded. The not so good rigs to compete with the very good rigs. And the very good rigs to remain the best rigs. So the price is going to be in every rig to improve. At this stage in North America specifically, some of those upgrades are in the pumping systems, the walking systems are very fashionable these days but we are convinced in Tesco that in North America the next wave of upgrades will have to do with rig floor mechanization. The industry do not have the people to bring back to the rig floor when the rigs mobilize. So we are proposing that our technologies will allow those rigs to operate with a fraction of the people needed in a typical rig floor. Also the standards for safety, the standards for service quality are ever increasing, there is less tolerance for errors and mistakes, the cost of retraining on attracting talent for the industry range is going to be huge, and we think there is going to be a wave of rig floor pipe handling mechanization that is going to manifest sometime early in the cycle, early in the market recovery.

And there is also a reality we're experiencing right now and so we had -- we're working in a couple of bookings that illustrate what's happening right now. We have a very happy client with some order Tesco top drives, electrics, and they have had for years but they just got a contract, they are signing a contract that requires thorough power and some features and functionality that is ordered top drives don't have, they are perfectly good machines, they just don't have the capabilities to drill the significantly more complex work. So that's inclined was on the call with us this morning trying to secure some two emergency deliveries for them to try to keep that contract. So that shows you that recovery may come in different shapes and different sizes, including some rigs that have perfectly functional top drives that will need newer equipment to be able to face the challenges of drilling of today.

Tom Curran

Very interesting, Fernando, thank you for that overview. Last one for me and then I'll hop back in the queue. You've previously shared in 2015 50% of your product revenues came from recently developed products. Do you have what that percentage was for the first half of 2016? And whether you do or not, could you also share specifically which products have been driving that?

Fernando Assing

Well, the percent remains very high, in fact if you take the -- if we pay the offshore pipe handling package, all that would be considered new technology. And if you look at the some of the top drive deliveries we have made year-to-date, some of those are related to the generation of modest electric. So few of those will fall into the -- what we call NT5 technologies that are having commercialized within the last five years. I think if you -- if we borrow the kind catwalk, we are -- the offshore catwalk was delivering eminently, that will be another contributor to that mix within the NT5. If you count the -- all the ARC revenue that is going to show up and the future is going to be NT5. So we are seeing relatively high percent of NT5 contributions. We just need volume.

Tom Curran

Okay, thanks for the answers.

Christopher Boone

Tom, if you have any additional questions. There is no one else in the queue.

Fernando Assing

Rob, can we check if there is anyone?

Operator

Yes, we have a question coming from the line of Rob MacKenzie with IBERIA. Please go ahead with your question.

Rob MacKenzie

Thank you. A question for you Fernando, I think you just mentioned in your comments that you were delivering an offshore catwalk imminently. Did I hear that correctly? And is that the one you build in Q2 or is that a separate one or Q3 here?

Fernando Assing

Correct Rob, that was -- that one we were discussing in the last call as being our first high-end offshore catwalk, fully automated, fully articulated, highly customized, we're very happy with that. And it's another demonstration that we are -- we are by now an accepted high-end rig mechanizations to prior for offshore. What happens that the client couldn't ask for couple of additional modifications in last minute which we're very happy to make. And we also undertook additional testing, and then we missed the quarter, their unit is ready, fully tested with several hundred cycles of testing. And we're just doing the last admin proceedings to deliver it, it should be picked up imminently by the client.

Rob MacKenzie

Okay. But -- correct me if I'm wrong, when I was listening to your comments earlier, I thought you were saying that really one of the reasons Q3 would be challenging would be; top sales down [ph], but not have the benefit of pipe handling system. I guess so the pipe handling system is due to the catwalk in Q3. Is the pipe handling system more complex bigger dollar item than the catwalk?

Fernando Assing

Correct, not only -- yes, there was a fairly recent profitability, very large -- about 2.5 times if you want to get a sense of its scale, 2.5 times at revenue, really high-end, a set of high-end equipment that went to in that package. That went on Q2 and did help Q2. The catwalk was supposed to be Q2 meet the quarter and it's now going in Q3.

Rob MacKenzie

Okay. Can you give us any kind of a ballpark range on what the catwalk might represent in revenue or is that similar comments; the pipe handling system?

Fernando Assing

Yes, Rob, it's a single equipment, so if I give you a ranch I'll give away the price. And there is a lot of people curious about this newer frame from Tesco. So we'll -- let's keep it internal as this stage. We can tell you that -- what we can tell you is that it's two to three times the price of more typical land catwalk.

Rob MacKenzie

Great, thank you so much. And then a housekeeping question, can you share with us what your -- with the revenue you generated from selling rental top drives was in Q2?

Christopher Boone

The proceeds -- if that's on the cash flow, that was about $1.5 million of cash we generated from the sale of that used top drives.

Rob MacKenzie

Great, thanks guys. I'll turn it back.

Operator

Our next question is a follow-up from the line of Tom Curran with FBR. Please go ahead with your question.

Tom Curran

Chris, decided to take you up on your offer with a bit of a lag till that Rob jumped in. For tubular services in the Gulf of Mexico, could you give us an update on where you're at with your deepwater contracts, the legacy breakthrough contract and number of rigs you're currently on? And then the follow-on work you've won?

Fernando Assing

Tom, Fernando here. Let me jump in, I just got an update on that. We had -- we are performing, the client is very happy. In fact, let me tell you, we just broke a record, there is not only a record for that client globally but that record in the Gulf of Mexico and we got a very nice letter. So this is also three years into this contract and I'm still impressing the client, we're really changing how tubular services are performed offshore. The -- remember that's a platform-centric contract, so we're in -- all the platform we've got to sign from day one, we are getting into the rig side now. If you recall, our strategy was double sided, one was to incorporate the additional scope into all the operations we have because we started basically running completions, now we are running casing in some of operations.

So that was the objective, one on objective, two of course to get more -- we can get out of the platform, get into the rigs, and we are progressing nicely along those lines. In the particularly case of Q2 and very especially in Q3, we're going to have an unfavorable mix in some of the platforms are undergoing earlier operations and one or two of the rigs are moving. So the fluctuation in revenue have nothing to do with our performance, it has to do with the logistical movements and operational logic of the platform and rig, which were onboard. That contract is also -- that contract has placed us as one of the largest tubular services companies in deepwater, in the market and we're grabbing the attention of all the clients who want to replicate what we have achieved with this particular client in their operations. So very interesting -- regretfully, the market conditions are terrible in the Gulf of Mexico with -- if you recall, at the peak, the market had almost 40 rigs, it has now 17 with three rig departures in Q2; and not expected to improve anytime soon.

So we're holding the fourth at the bottom of the market and we are recognized competitor, and when the market improve, we'll improve with the market.

Tom Curran

Okay, thanks for that update. And then turning to the M&A pipeline, with the tiny technology tuck-ins we've seen and over the past year and the related update they've given on their M&A focus going forward, as well as with indications that form is going to be returning to the market with an increased focus. Are you just seeing growing competition for the prospects you would have an interest in and could you just give us an update on how the pipeline has evolved overall since the last call?

Fernando Assing

Yes, well certainly, the -- as the bottom forms, many companies are going to turn their attention into realizing M&A opportunities before valuations go back up. So we do expect that field to get a little crowded. However, our hunting territories are little different, I'm sure you would appreciate that what looks miniscule to NOE is still giant for us. So we -- our strategy is technology incorporation. We have the platform, we have a vision, that vision provides a playground which is rig mechanization, rig flow mechanization, pipe handling automation and performance drilling, rig control. And within that hunting ground there are some companies we would love to incorporate into our platform, we're talking to a couple -- we are constantly evaluating the market. And until not very recently, there was still a surprising gap between bid [ph] prices. Some of these companies, if not all the companies who are looking are private and the valuations can get very funny at times. So we're very actively looking at companies and certainly we have some of the firing power we need to act when we find the right opportunity.

Tom Curran

Okay, thanks for letting me back [ph].

Operator

Thank you. At this time, I'll turn the floor back to Fernando Assing for closing remarks.

Fernando Assing

Thanks, Rob. Thank you for your interest in Tesco and we look forward to speaking to all of you again during the third quarter conference call. Thanks.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference and you may now disconnect your lines at this time and have a wonderful day.

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