Superior Energy Services Q2 2007 Earnings Call Transcript

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Superior Energy Services Inc. (SPN)
Q2 2007 Earnings Call
July 31, 2007, 11:00 AM ET

Executives

Greg Rosenstein - VP, IR
Terence E. Hall - Chairman and CEO

Analysts

Robin Shoemaker - Bear Stearns
Joe Agular - Johnson Rice & Company
William Sanchez - Howard Weil
James Rollyson - Raymond James
Daniel Pickering - Pickering Energy Partners
Thomas Escott - Pritchard Capital
Scott Gill - Simmons & Company
Stewart Glickman - Standard & Poor's
Martin Malloy - Capital One South Coast

Presentation

Operator

Welcome to Superior Energy's Second Quarter Conference Call. During today's presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. [Operator instruction]. This conference is being recorded Tuesday, July 31, 2007. I would now like to turn the conference over to Greg Rosenstein, Vice President of Investor Relations. Please go ahead, sir.

Greg Rosenstein - Vice President, Investor Relations

Okay, Thank you and Good Morning everyone. Thanks for joining today's call. Joining me today are Chairman and Chief Executive Officer Terry Hall, our Chief Financial Officer, Robert Taylor, our Senior Vice President, Pat Barnard. Before I turn it over to Terry let me remind everyone that during this conference call management may make forward looking statements regarding future expectations about the company's business, management's plans for future operations of similar matters. The company's actual results could differ materially due to several important factors including those described in the company's filings with the Securities and Exchange Commission. During the call we may refer to EBITDA which is a Non-GAAP financial measure and in accordance with Regulation G the company provides a reconciliation between net income and EBITDA on its web site. Now with that I will turn it over to Terry Hall.

Terence E. Hall - Chairman and Chief Executive Officer

Good Morning, everyone. Thanks for downing [ph] in. I assume that you have all read the press release and I'll recap those results in dollars. Revenue was $396.8 million, EBITDA was $162.3 million, again above 40%. About our income, net income was $70.1 million or $0.85 diluted earnings per share. Main fact is the lull to this record quarter was first, we were able to go to non Gulf of Mexico revenue by 14% to total $199 million. This is the first quarter in our history where atleast 50% of our revenue came from outside the Gulf of Mexico and we are actually ahead of schedule in delivering that result. We told the market some time ago that we would be a 50% embedded by year end so we are ahead of that projection that we made on several occasions.

We put additional equipment to work on land despite a fairly softy market highlight and difficult weather in Texas and Oklahoma. You heard a lot about that from our competitors and other people in the service businesses. In addition our Rental tools segment continues to grow rapidly especially in the international markets and again that contributed to our significant boost in revenue on that side.

Second driver in the quarter was a 23% increase in oil and gas production over the first quarter of '07 which led to direct result in the oil and gas segment and many of you recall [inaudible] time to time and held us down so we have always been able to offset the difficulties representives from time to time and on occasion did also and this is one of those occasions. That, the design, that's the strategy.

In the well intervention segment our revenues a $190 million. Income from loss [ph] was $42.1 million as compared to first quarter revenue increased 8% due to activity increases in domestic land and international markets. The increase in international revenue was due to additional activity for our hydraulics workover and snubbing services particularly in New Zealand and Venezuela.

In the domestic land markets we saw increases in coiled tubing and Electrified services as we were able to put new drills [ph] to work. This was partially offset by flat or decreased activity in engineering and project management [inaudible] coiled tubing and electrifying services in the shallow water Gulf of Mexico. Effective couple of factors occurring in the Gulf of Mexico that were worthy of note. First I think the shallow water Gulf is in a transition period that we have seen often times in the future and several times in recent years. Several majors and large independents built properties for smaller companies and I think a lot more of that is going to happen in the future. Whenever that occurs work tends to slow down as the settler stops working on his properties and the buyer then needs time to go through and make plans to decide what he is going to do. So what happens is you get a slow down in activity and there is a lot of that going on but I think that's really about all there is to it. The Gulf of Mexico is not dead. We think property buyers are accumulating cash for acquisition and not redeploying it much cash grow back into their existing wells for the time being. I don't think there's [inaudible] long term change in their fundamental to their growth, I think there's plenty of work to be got, to enhance in the production in these fields and then obviously, there is a lot of work in the play in abandonment area as we go forward.

Secondly, I think operators are little more efficient with their CapEx expenditures. Part of this is related to… our earlier point [inaudible] property fix. As a result, we are seeing more a measured pace when it comes to schedule and the performing work. Operators have been rescheduling some projects, postponing others. Some of are evaluating our operations in an effect to drive more efficiency, get better results and set properties up to sell. There is a lot of points going on, but I won’t think any of them have been historic, long-term negative impact. It’s just something is happens to us as time to time in the Gulf reduction mix [ph] and things like this in the posting [ph] our call. And there they are think continue to come back towards where they were at the most before [ph]. The decrease in our operating margins is primarily due to re-completion of our emerging projects. One is international well control project, the other is an engineering project in Gulf of Mexico.

As we have told in the past whenever we did all in this high profile well control problem, they generate a lot of revenues, their margins are very, very high, and you can't predict when we say they are going to occur. I mean, they occur from time-to-time. This [inaudible] some quarter, some quarters we don’t. And that can have a dramatic impact on the bottom line margins, just because the margins are so high, [inaudible] do experience that type of work. If this… it happens from time-to-time, and again, that sort of by the time [ph] that’s only the best part in this business.

Looking at this project management jobs that’s going in the Gulf as a result of Hurricane Katrina and Rita and even Ivan. These are large projects. They generate significant amount of money for us. They probably terminate and at some times they fixed dates [ph] which to get the next project going on and we are in some transition period there on those projects, but we are going back to work on those projects. So, we see this revenue contribution coming back to us.

In the Rental Tool segment, our revenues were $123 million. Income from Ops was $46.6 million. The biggest increases over the first quarter came from rentals of stabilizers and drill collars in both domestic land and international markets. This is a very good sign for many reasons. First, demand for stabilizers historically has been a good leading indicator for the rest of our business. You probably [ph] call this business our groundhog. When they start ramping up and their demand starts improving, invariably maybe a few weeks, it might two months, but saw [ph] this activity follows because people wanted [ph] to stabilizers in the drill collars stores [ph] before they start drilling and getting the [inaudible]. So, this is a pretty good indicator of significant demand in the future.

Secondly, horizontal direction of drilling are drivers of stabilizer demand and we see this type of drilling remains robust in the domestic land markets for the foreseeable future. This is really the key driver of these businesses. These non-conventional plays all depends heavily on directional drilling and all goes to up to stabilizer as well as a lot of our other rental products. This should continue to set the stage for the additional opportunities in our Well Intervention Group as we penetrate those landmarks so I think we will able to bring more services to those well sites in these non-conventional plays.

Other one item to show demand growth over the first quarter included the rental connecting iron with Gulf of Mexico, especially deepwater and drill pipe and onsite accommodations in both of Gulf of Mexico and in international markets.

In the marine segment, our revenues were $35.2 million and income from Ops was $15.2 million. As we have told in our last conference call we expect the lower revenues in profits from our liftboats due to increase in shipyard base for our large boats. The 245-foot and 250-foot class liftboats incur 89 shipyard days during the quarter, that’s compared to 0 days in the first quarter, and these by the way our highest margin liftboats.

Meanwhile our utilization increased to 77% from 74% in the first quarter. Looking at July, our liftboat utilization is as follows. From 145 to 155 class, 73%; 160 to 170, 80%; 200, 80%; 230 to 245, 74%; 250, 94%.

Going to the Oil and Gas segment. At SPN Resources, revenues were $48.2 million, income from Ops $11.9 million. Second quarter production was approximately 875,000 barrels of oil equivalent, over about 9,600 boe per day, up from approximately 711,000 boe or 7,900 boe per day in the first quarter of ’07. We have some successful sidetrack drilling programs during the quarter, which contributed to these production increases and our average realized price was $56.79 as compared $54.06 in the first quarter.

In Coldren Resources, our earnings from equity investment were $1.2 million. This was largely due to the fact that we did not have unrealized losses on a market-to-market accounting for hedges in place. The impact to prior commodity prices was partially offset by lower oil and gas production. Production at Coldren was approximately 11,000 boe per day. We think it will improve in the third quarter to between 11,000 and 12,000 boe per day. Many of the third party issues have happened to production in Coldren have resolved themselves, and again, this is an issue whether of substantial measurement turnover driven by first [inaudible] Coldren that set all the drilling plants and other things back substantially and they are about to give them back online. And when that happens, you will see this production start to get backup [inaudible] Coldren has been declining production because no work has been done on the property due to the lot of turnover in management. They finally got a new management team established and I think things are beginning to move in a very positive direction within Coldren.

And the CapEx part. Expenditures during the second quarter were $116.5 million. 52% of CapEx was in rental, 32% in Well Intervention and the remainder was spread throughout the rest of our business. Expansion CapEx represented about 71% of our expenditures. We expect CapEx in the third quarter to be about $90 million to $100 million.

On G&A front, expense increased by $3 million over the first quarter primarily related to the international marketing, bonus and other compensation related expense. We expect third quarter G&A to be in the range of $55 million to $57 million. DD&A increased primarily as a result additional oil and gas production of SPN Resources as well as our CapEx expenditures through June 30, 2007. We believe DD&A of $49 million to $52 million is a good run rate for third quarter.

Looking at our balance sheet. At the end of the quarter, we had approximately $751 million in debt, which breaks down as follows. $400 million in convertible notes, $300 million in senior notes, $35 million drown in our revolver and myriad debt of $16 million for a total of $751 million. Debt to EBITDA at the end of the second quarter was 1.34. Debt to total cap was 46%. From an outlook standpoint, we think we will continue to grow in domestic land international market, which will really bode well for our rental tools and Well Intervention service. As a reminder, we are not in primary the pressure pumping business, so the market issue is impacting that segment of the industry have not made their way to the production related services that we specialize in such coiled tubing and electric line service.

We think the deepwater Gulf will remain robust, which again, will then certainly been benefit our rental tool segment and secondarily benefit our service segment [ph]. We have less visibility in shallow water Gulf of Mexico market because all these been the case. In the short-term, its power drilling [ph] vision activity ramping up significantly especially as we enter the most active part of the hurricane season. As a result, we expect the marine segment to ship small but not meaningful increase in activity. It is just feeling sloppy in going part over the next couple of months in that business, but again, that’s not unusual in our business. Lastly, we think production at SPN Resources will average between 9,500 boe and 10,000 boe of debt.

That’s really all I have. We happy to answer any questions that you may have at this point.

Question and Answer

Operator

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions].

Our first question comes from Robin Shoemaker from Bear Stearns. Please go ahead.

Robin Shoemaker - Bear Stearns

Yes. Hi, Terry. Just wanted to ask you if we look at the Warrior acquisition and the kind of plan you had for Warrior in 2007… kind of return on investment objectives and goals you had. Are things going better ahead or with plan or behind or can you comment on that?

Terence E. Hall - Chairman and Chief Executive Officer

Robin, it’s little bit all over the board. A lot of things are doing better. I think if you are looking at forecast… doing are forecast just looking before the conference call and actually many things are better than forecast. Some are kind of sideways and some are little worse. I think, in general we are still very, very happy about the deal and look at things that are quite going to where we thought. It’s pretty easy to see what’s going on. The equipment deliveries have been a little slower than anticipated, but yet revenue per unit as we get them is been high. The utilization has been higher than we used in our projections. The revenue numbers are coming in many respects higher than we projected per unit. We just don’t have as many units as we thought we would have. And in some cases we are still missing critical pieces of the overall project and so we are having direct things going to the project, we in fact have minimal cost in to lot of our things. But for the most part these are things outside of our control. If you look at things that are within our control, I would say things that are going at if not better and the vast majority of cases than we anticipated.

So, overall it’s quite good. We have obviously been through the worst time of the year that you would normally experience and landmark is following [ph] the bad weather, in spite of all that these guys have delivered. I think they had done a great job, again going back and looking at our forecast they have really outperformed the forecast on the revenue line. Equipment deliveries are little bit late. Their utilization is better than anticipated. We are still waiting and we got lot of hands because in many aspects, we short few costs here there and that caused the red [ph] things and that pulls [inaudible] with margins [inaudible]. We certainly see while at the end of the calendar we have some problems and we are all gloating over the fact that that was so much better than anticipated in these other areas.

Robin Shoemaker - Bear Stearns

Yes. Okay.

Terence E. Hall - Chairman and Chief Executive Officer

Bob, it’s a mix bag, but it’s all really good in fact it’s a little weak. It’s very easy to streamline and see this is going to be corrected in the near-term.

Robin Shoemaker - Bear Stearns

Yes. Okay. And so have you taken delivery of your Derrick Barge that you are building this year?

Terence E. Hall - Chairman and Chief Executive Officer

No, we have not. That doesn’t come in until early… late first quarter ’08.

Robin Shoemaker - Bear Stearns

Okay. And that will be going to the Gulf of Mexico?

Terence E. Hall - Chairman and Chief Executive Officer

Yes. Right now we currently planned to bring that to the Gulf of Mexico.

Robin Shoemaker - Bear Stearns

Okay. And you satisfy with this other Derrick Barge--?

Terence E. Hall - Chairman and Chief Executive Officer

Yes. We anticipated that Derrick Barge will stay there long-term.

Robin Shoemaker - Bear Stearns

Right. Thank you.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you, Bob.

Operator

Our next question comes from Joe Agular from Johnson Rice. Please go ahead.

Joe Agular - Johnson Rice & Company

Thank you. Terry, you mentioned the growth in your non-Gulf revenue, I think the 14% in the quarter. Could you maybe give us some detail on what the international growth was or what your international revenues were?

Terence E. Hall - Chairman and Chief Executive Officer

Yes. Joe I think so. I haven’t… dig all this out for you, okay. No, the land stock… the international stock was up about 8% overall and the land stock was up 17 of course is more than international land, so it was probably about 50-50 Joe.

Joe Agular - Johnson Rice & Company

Okay.

Terence E. Hall - Chairman and Chief Executive Officer

Also that’s coming from land business and half come from international.

Joe Agular - Johnson Rice & Company

But I jus want… you are showing… still showing pretty strong growth internationally in the non-U.S. markets?

Terence E. Hall - Chairman and Chief Executive Officer

Absolutely.

Joe Agular - Johnson Rice & Company

Yes, and is a mainly rental tools there or what other drivers of international growth or other?

Terence E. Hall - Chairman and Chief Executive Officer

It’s primarily rental, but you started to see things into New Zealand on the call. I don’t think you heard about. It’s also that that the contract we had in place about a year ago, we finally starting to work there. So, we are penetrating in the market on the service side that did not really as roughly as we were increasing revenue on the rental side internationally. And land, of course were getting more equipment, getting more active. We got all these. You are seeing, we got some stuff in place what is driving the growth in the landmark, it’s a little bit more than it is in the international market currently. That’s… they both are still growing and if you just drive the fact that we got Warrior and had a Warrior to [inaudible] where do you have your most growth then I would say it’s still more on international side than the land side. And once you get Warrior into the mix will clearly… you really have the numbers all apart, you probably say quarter-over-quarter more growth on the land side and is on the international side. So, that’s attributable to the big contribution at Warrior.

Joe Agular - Johnson Rice & Company

On the international side, are there more acquisitions out there that you pursuing or do you think you just what you have in place that allow you to continue to grow?

Terence E. Hall - Chairman and Chief Executive Officer

No, Joe we are aggressively looking for a significant acquisition, really two that we could make in international market. One in the Middle-East and one in Asia-Pacific market that would get us some of the service business that we want to get into, that would bring a labor component because that’s a challenge going to international market. So, we can very successful on rental because we don’t have to deliver personal. Once you get into the service business, you need personal and clearly, we are not one of the exporting labor to those market to do what [inaudible] a very higher level of supervisory of national level. So, we are going to have the… we have to make some service acquisitions in those market to be able to really penetrate significantly. And it’s been very difficult market and the way that it’s beginning to look a little bit better. So, we kind of take you about the type of businesses we will buy. We are looking at several now. We looked at several in the past. We miss some because we didn’t want to pay up as much as the some of the private equity groups wanted to pay. Don’t be surprise if we make one.

Joe Agular - Johnson Rice & Company

Okay.

Terence E. Hall - Chairman and Chief Executive Officer

Or two. I think we need more service exposure in Middle-East; we need more service exposure in Asia-Pacific market. We are not better out today, I mean year ago, we are trying to figure out how to expand in North American landmark and international mark. We got way behind this. We got testing that acquisition now and we are aggressively looking forward two significant service acquisitions in international market.

Joe Agular - Johnson Rice & Company

Excellent. Thank you Terry. Nice quarter.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you, Joe.

Operator

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

William Sanchez - Howard Weil

Good morning, Terry.

Terence E. Hall - Chairman and Chief Executive Officer

Good morning, Bill. Wait before you ask my question, I don’t who all persons on the call, but just because I said that I will need the 5,000 calls and the Western Bank [inaudible] biggest.

Unidentified Company Representative

We don’t want to be platter [ph] with all that all those. Anything goes and things might be pressurized through this call. Okay go ahead, Bill.

William Sanchez - Howard Weil

Thanks. Terry, I was hoping you could maybe just talk a little bit more about the kind of the margin expectations in the Well Intervention here for the back half of the year. You saw a pretty sharp decline in your margins in the second quarter as we are seeing a pretty sharp increase in the first quarter versus the fourth quarter. I know you talked about the higher margin Well control work, but could you may be just speak to what a good assumption may be in the back half of the year, so we think you may be an average of the first and second quarter?

And then I guess this is related follow-up, can you talk about just the margin characteristics of the Warrior, now that’s included in Well Intervention. How is that fracing versus your overall Well Intervention averages I guess? Is it above? Is it in line? Is it below? Talk a little bit about that.

Terence E. Hall - Chairman and Chief Executive Officer

Well, I think the margin expectations should be somewhere in between first quarter to second quarter. I don’t know if we are going to get on another big… bore out, it’s going to generate revenue. No, we really can’t tell that. I don’t know how fast some of these project management jobs to ramp up and get started, exactly how many days they will contribute. And every day out of naïve that they don’t contribute will probably hurt margins. And I hate to tell you that I think it is best to look at it over time and probably averaging the two quarters that get you pretty close. And even after you do that [inaudible] part of our business will outperform or under-perform and at the end of the day, we will probably come in pretty close to… somewhere in the range of the street [ph] expectations. But it is very difficult for us to predict exactly where it’s going to come from. Just like the oil and gas service, in some quarter hurt this and other time you have this. I am not trying to avoid, I am just trying to tell reality is. The margin in those service businesses can change based on getting a significant amount of high pressure while on work and cause the revenue to go up. You don’t get high pressure work and margins in wireline goes down and when that margin goes down it will have an impact on the overall margin. So, it’s hard to predict. I will suggest that you start picking average, if you need for modeling purposes.

With regard to Warriors I don’t think their margin expectation today, what really expect and what we hope for in those line and when you cost [inaudible] I think as we get more equipment in that is needed, we will see rental goes down, we will some of the costs go down, we will see the margins get back. It’s very easy for us to see how to get that margin next to ours or better than ours and what is going to take to fix those. In many cases, we anticipated have equipment where we don’t have today. So, again we thought it will take some time, but the good news is that the revenue is really sort of what we projected by the equipment, their utilizations what we projected are better and those are all the good signs. The thing that you need to fix it, getting the [inaudible] putting that in place and doing certain other things to improve the margin that this step, it takes a little bit of time. And not quite where we wanted it to be they were comfortable that they will, get to where we needed to be and where they either are equal to or better than the margins that we have in our similar businesses and similar markets.

William Sanchez - Howard Weil

Thanks for that Terry. Just one other question here quickly. Can you talk a… just focusing back on international, the opportunity on the marine side? I know Mexico; the Middle-East even North Sea has been areas you have mentioned as potential areas of interest too eventually have some liftboat presence there. Can you update us in terms of the kind of thoughts on the marine side for international?

Terence E. Hall - Chairman and Chief Executive Officer

Well, I think the opportunities are there. Those of you who followed Mexico kind of know that everything there takes… you never know when it’s going to happen. There continues to be a lot of interest in puts and boats [ph] down there. We continue to believe boats will go down there. Along ago we gave up predicting when that might happen. I think that significant liftboat opportunities in the Far East, there is opportunities in the Middle East. The pricing in the Middle East is historically not been so attractive that we would want them to jump out and frontable [ph] the lower cost over there and get into a market that historically as not had the rate which you would like to have and the rates that you can get even in the Gulf of Mexico or in other markets. So, we feel that the greatest various opportunities in that Mexico, Trinidad and Venezuelan market and then you go over to the Asia-Pacific market where we think there is significant opportunity. We have got quite a bit of activity going on over there.

As always, always has been a lot of opportunity in the Nigerian market, south of Nigeria. Its something we have been a little nervous about and nevertheless, we are dealing with a lot of enquiries and looking at a lot of options that would service, the west coast of Africa has always we have been cutting [ph]. Keep in mind that is known as [inaudible] which is West African once again. You need to worry about that whenever you think about going into those markets. There is actually [ph] some opportunities in the Caspian Sea that we have been working on, opportunities in India. We have been approached over there about those [ph] into both in partnership in case we are doing different things. We are looking into that and still pretty good opportunities in Venezuela with all the reservations that we had about working in those markets. You have got to be certain your customers are not going to take.

A lot of opportunity going on. Our base has been real busy. We have been looking at building more boats. We have been a little bit active with the spot 2 [ph] slot those people will build and take some bulk out and the impression we have got about that later. Not a big deal, but we are anticipating that…. and without saying when… don’t know when, I am not holding back on you. We are anticipating that we will get some of our boats out in Gulf of Mexico. And by the time we get them out, we may have some boats to replace them as well.

William Sanchez - Howard Weil

Thanks for the call Terry.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you, Bill.

Operator

Thank you. Our next question comes from Jim Rollyson from Raymond James. Please go ahead.

James Rollyson - Raymond James

Good morning, Terry, guys.

Terence E. Hall - Chairman and Chief Executive Officer

Good morning, Jim.

James Rollyson - Raymond James

Terry just actually switching back domestically here your elimination oil and gas were way down versus what they have been which I guess imply that you did less work for yourself and more for other people. Thoughts on how that trends, I realize it probably bounces all over like everything else but just any color you have got there?

Terence E. Hall - Chairman and Chief Executive Officer

Well, we have always said that the strategy in SPN versus the standalone business and you are supposed to make money in the oil and gas business and they have done a very good job of that. And secondarily, we had excess capacity in our service lines, we would go do work with them. And as the parent of that company, the one thing we control the shot on is when they spend the money or when they do their work. So, we have been very busy with our assets in the Gulf and on land and elsewhere and haven’t had a lot of idle assets to push that way. So, you haven’t seen us do a lot of work with them in the quarter now. If things did slow down in the Gulf and other areas, you would see us probably start doing more work with them because they would have lot of work identified and set up a sort of work library that we can’t go do when we need to. But a reason just a rightful thing they will need for us to do that. And I guess this… that’s the design. It is always just a way to utilize excess capacity in our service implemented businesses.

James Rollyson - Raymond James

Right. This obviously sounds like you are pretty busy third party at the moment.

Terence E. Hall - Chairman and Chief Executive Officer

Yes.

James Rollyson - Raymond James

So, that’s good. And then for my follow-up, just looking at the cost in SPN resources came down nicely and again I recognize that bounces around but you think this is part of a trend where your average cost per boes is going to stay on the lower end of things absent hurricanes and problems?

Terence E. Hall - Chairman and Chief Executive Officer

It should get better over time but that doesn’t. It’s great when you have got something if it isn’t 10,000 barrels a day but you have got significant number. Several wells that are producing 500 to 1,000 barrels a day and one of those things can go down to two or three weeks to high point following a self announcement on a quarterly basis dramatically impact your margins in the business. So, that’s just the nature of oil fields and basically worked over wells that things have very hard. Jim, I am not trying to avoid it, but I really hate the predicted cost going to be in that business with what we have learnt is they are all over the board. I mean one quarter they are way up, our production is down and then the next quarter you see the benefit of all the work you did and the expense you had in the other quarter and things look much better and really have to look at that thing over a very long period of time to get an idea. And that’s without factoring in the hurricane issue. But right now for the most part a lot of our costs are fixed and when the production goes up and then your cost of boe goes down. And ask for something that significantly take our production down maybe some mechanical failure or third party pipeline issue or otherwise. Yes, the cost will probably stay down for a while as long as we can keep to keep these production numbers where they are and we don’t encounter some significant hits that are generated by hurricanes or some other events outside of our control.

James Rollyson - Raymond James

Perfect. Excellent job, guys. Thanks.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you, Jim.

Operator

Thank you. Our next question comes from Dan Pickering from Pickering Energy Partners. Please go ahead.

Daniel Pickering - Pickering Energy Partners

Good morning, Terry.

Terence E. Hall - Chairman and Chief Executive Officer

Good morning, Dan.

Daniel Pickering - Pickering Energy Partners

I may have misheard you can you repeat again kind of your thoughts on the total utilization as you move into the December launch, was it slightly higher or was it just kind of wallowing here in terms of..?

Terence E. Hall - Chairman and Chief Executive Officer

Well, I think that there is a chance it’s going to get a little bit better than it has been of late. I don’t think at this point its going to get significantly better.

Daniel Pickering - Pickering Energy Partners

Okay.

Terence E. Hall - Chairman and Chief Executive Officer

Its probably best described as a sideways market and where it is today going forward just because of all the things I talked about. We have got a lot of properties in transition; we have got a lot of people rescheduling who are looking at different options. The panic… the absolute panic to jump from one job to the other is not there right now. But its not unusual, they are looking at the hurricanes, they are all a little nervous about getting into long-term projects where they might get caught up and they have all got a variety of excuses but there is still a lot of work to do, there is still significant demands for the boats. We are still keeping the boats pretty busy. So, and I… we have been through a period here… a little transition period for things to working itself out and getting up those to be more active than they were here for to two weeks ago. So, I think it will be a little bit better as we go forward but not significant.

Daniel Pickering - Pickering Energy Partners

Are you seeing any customers taking any action relative to hurricane season to try and make sure that they have potential work over capacity available? Or is that just going to be let's see how hurricane season plays out type of situation.

Terence E. Hall - Chairman and Chief Executive Officer

They may be thinking about that internally, Dan. But they haven’t expressed that to us, they never do.

Daniel Pickering - Pickering Energy Partners

Okay.

Terence E. Hall - Chairman and Chief Executive Officer

That’s the type of thing they would tell us about but they maybe wondering about it because they are always concerned about giving us any kind of advantage or any kind of a debt. So, they would prefer to if anything have us things they are not planning on doing anything and try to work on this memory [ph]. I don’t mean that… not criticizing anybody, particularly not customers, but typically they are not likely to share those thoughts with you until the very last minutes.

Daniel Pickering - Pickering Energy Partners

I see and in a sideways market, Terry what does that mean for rates? They came down a little bit Q2 versus Q1 do you anticipate further downtick in rates or we are pretty stable here?

Terence E. Hall - Chairman and Chief Executive Officer

I think the rates are pretty stable. I mean it’s been trading at a pretty sized bandage where you might get some weakness in rates; it’s going to be in the small boats. We never really experienced any pressure on the big boats for a significant amount of time now. And that’s kind of numbers that are out of the small boat business. And I think the pressure always is in the smaller boats which might go down 12% or something but it can’t. That’s not where we make our money in anyway. We make our money in the larger boats and that’s related to the rates that itself generate but the service we deliver from the boat.

Daniel Pickering - Pickering Energy Partners

Right.

Terence E. Hall - Chairman and Chief Executive Officer

Bigger boats are really more our model. Small boats tend to be back to debt. If you are going to have some great deterioration and that’s where we will see it first and that will go on for a while before we get some big boats and we really see no sign of that.

Daniel Pickering - Pickering Energy Partners

Okay. Second question would be around the international markets. Clearly, your interested in growing there, I mean talk through it just a little bit about just sort of the company three years from now, I mean would you like this to be a business that’s half international or more or do you have a specific goal there. Just kind of qualitatively walk me through your international strategy.

Terence E. Hall - Chairman and Chief Executive Officer

I think at the end of the day internally we have set some goals that we don’t necessarily share with everyone. But in general, I told people I said that we would be half… western half Gulf of Mexico by the end of ’07 and we have reached that benchmark. We are clearly striving to get to the position where the international business is somewhere between the third and maybe as much as 40% of our overall business.

Daniel Pickering - Pickering Energy Partners

Okay.

Terence E. Hall - Chairman and Chief Executive Officer

And pushing there and of course that would be a very easy thing to do if other businesses weren’t growing. But as they grow it becomes harder to make that contribution. Our international business has grown dramatically but as a percentage of the overall it may not look like it’s growing that much but that's because of the evidence of growing as much as they have. But that's where we are pushing, that's our objective is to end up international being certainly not lessen third of our business and I wouldn't be disappointed see being 40% of the overall business.

Daniel Pickering - Pickering Energy Partners

And then just I don't want to pin you down too tightly here but when you think about that you think… when you say of your business, you are including SPN resources and--?

Terence E. Hall - Chairman and Chief Executive Officer

Everything.

Daniel Pickering - Pickering Energy Partners

The total company?

Terence E. Hall - Chairman and Chief Executive Officer

Sure. Absolutely.

Daniel Pickering - Pickering Energy Partners

Okay, great. Thank you.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you, Dan.

Operator

Our next question comes from Thomas Escott from Pritchard Capital. Please go ahead.

Thomas Escott - Pritchard Capital

Good morning, fellows.

Terence E. Hall - Chairman and Chief Executive Officer

Hey Tom.

Thomas Escott - Pritchard Capital

When you were on the call, you had made a comment that you came through what's been several of the sloppiest months of the year in terms of weather, equipment delays and moving equipment around et cetera and clearly, most people in the business have seen that problem. So, my question is here at the end of July, seasonally and sequentially as those weather related issues starting to clear up, I mean you get deliveries of this equipment that you need and weather cooperating such that you are getting better equipment utilization and better activity levels here in June and July than perhaps we saw in April and May?

Terence E. Hall - Chairman and Chief Executive Officer

Utilization a little bit better. We really expected to get better later in the year as we get more equipment. My comments on weather were primarily related to wind and there have been a lot of problems just with rain and mudslides and other things going on in the Rocky Mountain area in the West in general. I know you have all heard about all the rain that has been going on out there and it does push up those businesses. We really haven't had significant weather impacts in the Gulf of Mexico but the weather is getting better and things will improve in those Western land markets that you could have significant weather problems in the Gulf of Mexico in the summer time. So, we are always dealing with weather interruptions of some kind. It won't surprise us if we continue to have them one way or the other; we don't like to make excuses about it we just like. That's a factor to strictly a land company well it can be devastating but we are not and if it's strictly domestic company it can be devastating. But again, that's the full point of being diversified and we would expect the land business to get better as we go forward and we don't know if, the Gulf have experienced significant weather interruptions as I would have been have it last summer. We really haven't had a lot of problems so far this year. We are all hoping we will go on to not having any problems and if that's the case then overall I think everything will improve for us because some day I think the land markets are getting better. We are working our equipment deliveries in, we will get over integrating things and opening up new shops and training hiring these people. We are going through all the things that we could go through when you merge companies there is a lot of expense which takes proper work as a way out of this system. And I think we are beginning to see some of that happen. So it's, there's so many factors going on here. It's very difficult to answer that question other than the way I am trying to answer it. Yes things are going to get better on the land side and the land side, don't know what to expect in the Gulf of Mexico, hurricane season or it's going to rain, it could get a lot worse than next day might. I expect the land market to get better. We do have equipment due that's coming in. I expect the markets to improve in Warrior as well as other land businesses as we grow throughout the year and they get away from their bad weather time.

Thomas Escott - Pritchard Capital

Well, thank you. My question really was the land business. I didn't clarify that, I meant Warrior; I meant Well Intervention on land.

Terence E. Hall - Chairman and Chief Executive Officer

Just land yes, I just have to be careful someone could misinterpret.

Thomas Escott - Pritchard Capital

That's fine. Thank you. I appreciate it.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you, Tom.

Operator

Thank you. Our next question comes from Scott Gill from Simmons & Company. Please go ahead.

Scott Gill - Simmons & Company

Yes. Good morning, Terry.

Terence E. Hall - Chairman and Chief Executive Officer

Good morning Scott.

Scott Gill - Simmons & Company

Terry, on SPN resources, very nice production here in the second quarter and your guidance is actually up a little bit into the mid point here in the third quarter. As you look at into 2008, any sense as you are going to look at declines in the work you have on the drawing board, what production could look like for SPN resources up 2008?

Terence Hall - Chairman and Chief Executive Officer

If we keep working on those fields successfully hopefully we can maintain it in that area. We don’t have any plans to significantly increase it, unless we make some acquisitions and do some other things. It’s a business that we have not been trying to grow, we got it sized about what we wanted it to difficult strategy from a stand alone standpoint they have done a phenomenal job. I think of identifying opportunities… exporting opportunities getting a lot more out of the ground than we bargained for. But it won't go on for ever because depletion is a real factor. But I think we got enough stuff that we can do to clearly keep a way going pretty good. But long-term, it will have to come down unless we can make some other acquisition.

Scott Gill - Simmons & Company

That's good. And on the rental side of your business. You posted some really nice sequential numbers last year at still at very good levels, closer to 7% sequentially this year. Can you talk to us a little bit about that business I think, in the past you said that somewhat constraint by your ability to get equipment, rental tools out into the market, is that still the case? Can you just kind of talk a little bit about how you expect that market to unfold through the back half of the year?

Terence E. Hall - Chairman and Chief Executive Officer

Well I think our opportunity is to go into the land markets in North America. We will open up as we get into the year. Again, do Warrior and other things that we are doing to expand the businesses there. I think that, we will see that improve. On the international front, you got to get a lot of new equipment; a lot of the stuff that you sent to those markets is primarily new. Looking at drill pipes. You got to get the pipes, you got to get it delivered, there's always a scheduling issues there. We are getting better and better at doing this, Scott. Our operations in the North Sea and Aberdeen has helped us a lot there. And just any thing we have done is improve that market and that's really is our... it’s not just the story, the fact that we spent some money on CapEx and rental tools. Obviously, we are able to distribute it better than we were a year ago and two years ago and that's because we have expanded our exposure and our ability to deliver and stage equipment in different spots around the world. And we are always working on that and there's never any one big deal, we do this… you don’t hear us talk about it. Collectively, step back and look back 24 months and say I will have we have done a lot of things from a distribution standpoint to assist us in getting the stuff out into the African Markets, the Middle Eastern markets, the North Sea market, South America, Asia-Pacific. I mean we are constantly working to develop that network while at the same time we are acquiring our own [inaudible]. I think it just gets better as we go forward. But there's no big significant event that's triggering any of this, just a lot of work, a lot of different fronts to expand our distribution capabilities our staging capabilities, our sales capabilities, coupled with an aggressive program that we have had in place for some time to acquire this arm.

Scott Gill - Simmons & Company

Its not, not to put words in your mouth but, it sounds like U.S. plan and international the demand for Rental Tools is as good or better than what we have seen over the last couple of quarters in terms of the growth rate there and your ability to meet that demand. Do you feel comfortable with that? Is that fair?

Terence E. Hall - Chairman and Chief Executive Officer

We feel comfortable with our ability to meet the demand. And I think on the land side, we can't just make an acquisition like the one we did on those facilities, you get all that infrastructure exposure. You get some more market. That helps, maybe the overall demand is not increasing that much we are stuck with either the demand itself or we are taking more market share. Now I really think, lately, the last several months is that we have been taking market share maybe more than the market has been growing. Now, on the international side, I think it’s a different story. I think demand is up but I think actually we are getting pieces in the markets we were never in before but if you looked at it, I will say on the land side we are gaining market share more than the market… more than the demand is growing. On the international side, the growth has been more than just growth in demand but we are also getting market share. It’s just not as significant an impact as it is in the last quarter.

Scott Gill - Simmons & Company

Okay. Thank you, Terence.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you, Scott.

Operator

[Operator Instructions]

Our next question comes from Stewart Glickman from Standard & Poor's. Please go ahead.

Stewart Glickman - Standard & Poor's

Terry, when you first announced the Coldren deal, I think you mentioned that there is potential longer-term for some follow-on oil field services work coming from Coldren. I was just wondering how far away we are from seeing kind of a material contribution of Coldren to Oil field services?

Terence E. Hall - Chairman and Chief Executive Officer

A minimum of six months, maybe a year.

Stewart Glickman - Standard & Poor's

Okay. And for my follow-up question. When you talked about the trend in the shallow Gulf of…some of the larger independents and the majors divesting themselves of their properties to smaller operators. How do you see that playing out in terms of demand for project management work? Do you think you are going to see maybe more smaller jobs, and perhaps I would… reduce for lumpiness that you get from project management work?

Terence E. Hall - Chairman and Chief Executive Officer

The project management work is primarily hurricane related, and that still a lot of that work going to take place over the next couple of years. And that’s really not related to this property turnover issues. Project management will continue, since these projects are of a very large scale, they require a lot of planning, a lot of marine equipment and a lot of assets being brought together and so you demos on and you gear up to go on another one, there is always a period of time if by you could intellectually say it will should take more than a week or two… may take a month or six weeks to get up and get going on the next project that you have in the queue. You have got to work to just try to get it started and getting ramped up, totally unrelated to property turnover. And the property turnover area would happen, somebody sells slower property, they put it on the market and the market at the fixed rate, they don’t do any work for the market, okay. They want the mini money and they probably slowed down spending money before they took it to the marketing process to try to drop down their LOE and make the property look more attractive. So, you are seeing slowdown. You don’t know what's going on and this could get late itself. And they announced they are going to sell it, they put it on the market then you got a month or six weeks to two months probably try to market it, again, nothing happens except this absolutely essential emergency work. Then someone acquires it and it takes in, six weeks, eight weeks six months to decide what they are going to do with the property until they get their people on that is just the way they work on and then they tend to give their reaction because certainly gone and they are invested instead of spending this amount of money to buy this property, this what we expect to do and generally it’s a fairly aggressive forecast can plan because they think this opportunity is a benefit and then they get very busy. So, it’s work done go away this gets pushed, and get a significant number of properties in trade here. You are going to have a slowdown in activity and then you will get a ramp up of activity later when the new guy gets started. So, that’s what I am referring to there with the same properties trade out. We have seen this happen before. It will have an impact… a negative impact and then you see the thing kind of come back and again over time, you will work yourself out. But in any given quarter, we can create an anomaly that looks like their activities also little bit while it takes it four or five significant pieces to be in plate to create what appears to be slowdown in activity. And we are seeing some of that now, it’s not unusual we have seen it in the past. But that’s totally unrelated to project management work.

Stewart Glickman - Standard & Poor's

Okay, that’s helpful. Thank you.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you

Operator

Our next question comes from Martin Malloy from Capital One South Coast. Please go ahead.

Martin Malloy - Capital One South Coast

Congratulations on the quarter.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you, Marty.

Martin Malloy - Capital One South Coast

Most of my questions have been answered just a quick question on hedging, do you have any hedges in place SPN Resources?

Terence E. Hall - Chairman and Chief Executive Officer

No, none at all.

Martin Malloy - Capital One South Coast

Thank you.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you, Marty.

Operator

Thank you. At this time, we have no further questions in queue. I would like to turn the conference back to management for any concluding comments. Please go ahead.

Terence E. Hall - Chairman and Chief Executive Officer

Thank you very much for attending. We hope you are as pleased as of course we are. Thank you.

Operator

Thank you ladies and gentlemen. It concludes the Superior Energy second quarter conference call. If you would like to listen to a replay of today's conference call please dial 1-800-405-2236 or 303-590-3000 and use passcode 11093868 # to access the conference. Thank you again for your participation today and you may now disconnect.

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