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Oil States International Inc. (NYSE:OIS)

Q4 2007 Earnings Call

February 20, 2008 11:00 am ET

Executives

Bradley Dodson - VP and CFO

Cindy Taylor - President and CEO

Analysts

Bill Herbert - Simmons

Ken Sill - Credit Suisse

Jeff Tillery - Tudor Pickering

Kevin Pollard - JPMorgan

Joe Gibney - Capital One Southcoast

Chuck Minervino - Goldman Sachs

Operator

Good day and welcome to the Fourth Quarter 2007 Oil States International Earnings Call. My name is Candice and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session after the prepared remarks. (Operator Instructions).

I would now like to turn the presentation over to your host for today's conference, Mr. Bradley Dodson, Vice President and Chief Financial Officer. Please proceed sir.

Bradley Dodson

Thank you, Candice. Welcome to the Oil States fourth quarter 2007 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer.

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

I will turn it over to Cindy now.

Cindy Taylor

Thank you Bradley and thanks to all of you for dialing into our call this morning. I would like to just kick off with some summary comments about the quarter and then we'll follow-up with each business segment's review and our outlook comments.

Despite some softness in the quarter in Canada and certain US markets, Oil States posted fourth quarter results within our previous guidance range. However, our results were benefited by a lower than expected tax rate. Our operations were led by continued strengthening in our offshore products segment and oilsands-driven accommodations businesses. The strength of these businesses, coupled with the contributions from the two rental tool acquisitions, completed in the third quarter of 2007, and mitigated significantly weaker drilling rig utilization, due to holiday shutdowns in the quarter.

For the fourth quarter of 2007, Oil States reported record revenues of $581 million, EBITDA of $94.7 million, and net income of $48.2 million or $0.95 per diluted share. Our revenues and EBITDA were up 11% and 1% sequentially. Our reported earnings of $0.95 per share were negatively impacted, due to greater than expected holiday shutdowns and some weather delays in certain portions of the United States. We also incurred cost overruns on a drilling equipment project and our offshore products group, which reduced our EBITDA margins in that segment. However, record sales of our offshore products during the quarter mitigated this margin decline.

Bradley will take you through more details of our consolidated results and then I'll come back on the call and conclude our prepared remarks with the discussion of each of our segments and our market outlooks.

Bradley Dodson

Thank you, Cindy. For the fourth quarter 2007, we reported operating income of $71.6 million, revenues of $581 million and EBITDA of $94.7 million. Our net income for the fourth quarter of 2007 totaled $48.2 million or $0.95 per diluted share. The comparable fourth quarter 2006 results were $73.2 million of operating income on revenues of $484.3 million, and with EBITDA totaling $90.4 million. The fourth quarter 2007 results represented a 20% year-over-year increase in revenues and a 5% year-over-year increase in EBITDA.

Depreciation and amortization in the fourth quarter of 2007 totaled $21.4 million compared to $14.6 million in the fourth quarter of 2006. This increase was due to the acquisitions completed in the third quarter of 2007 and the capital expenditures made over the past 12 months. D&A is expected to total $23.6 million in the first quarter of 2008. Net interest expense in the quarter totaled $4.3 million, compared to $4 million in the fourth quarter of 2006. Our first quarter net interest expense is expected to be $5.1 million.

The effective tax rate in the fourth quarter was 30.1%, this lower rate was due to a statutory rate changes in Canada, which benefited the fourth quarter effective rate. We expect the first quarter 2008 effective rates to be 34.2%. Our total debt at the end of the fourth quarter was $492 million, up from the $433 million at the end of the third quarter of 2007. This was due to $68 million spin on CapEx in the quarter, and $23 million spin on share repurchases, with the spending partially offset by our hurting cash flow. Our debt to capitalization ratio at the end of the year was 31%.

At this time, I would like to turn the discussion back over to Cindy, who will review the [actualities] of each business segments.

Cindy Taylor

Okay. I am going to start with our Well Site Services segment and as usual, my comments will focus on our sequential performance, comparing our fourth quarter 2007 to our third quarter 2007. Our Well Site Services segment was up sequentially, 16% in revenues, and 3% in EBITDA, due to increased contributions from our expanded accommodations in the oilsands region, and a full quarter contribution from the Schooner acquisition, completed in the third quarter, partially offset by softness in our West Texas drilling operations and weather delays in Oklahoma and North Texas due to ice storms in December.

Our accommodations revenue increased 39% sequentially and our EBITDA increased $6.3 million or 28%, due to contributions from expansions of our Beaver River, Athabasca and Wapasu Creek oilsands lodges, coupled with a stronger Canadian dollar. EBITDA margins were lower sequentially due to transportation and installation costs incurred on our mobile camps, as we ramped up for winter activity.

We remain at full effective utilization levels in all three lodges and seasonal demands for our large camps is robust. Subsequent to December 31st, 2007, we completed the acquisition of a smaller oilsands lodge named the Christina Lake Lodge. This lodge is strategically located in the southern oilsands region, near Conklin, and provides some expansion capability.

On a sequential basis, our rental tools revenues increased 12% and our EBITDA increased $1.7 million or 7%, due primarily to a full quarter's contribution from Schooner, and coupled with sequential improvement in our wire line and thru-tubing rental tool operations. This strength was partially offset by continued weakness in conventional Canadian activity and weather delays in the midcontinent region during December, which we mentioned previously.

Sequentially, our drilling revenues and EBITDA were down 12% and 38% respectively, due to lower utilization in our West Texas drilling operation, and due to extensive holiday shutdown. Our average daily revenues were flat on a sequential basis, but our cash margins were $1,900 a day lower, primarily due to reduced fixed cost absorption on lower utilization, coupled with higher repair and maintenance costs.

Now, if we can just shift and talk about offshore products. In this segment, our revenues and EBITDA remained strong during the quarter despite disappointments on a drilling rig equipment project. We reported record quarterly revenues of $141.2 million and EBITDA of $21.3 million, compared to revenues of $132.1 million and EBITDA of $24.7 million reported in the third quarter of 2007.

Included in our fourth quarter results are approximately $5 million in project cost overruns on three BOP transporter systems. Two of these systems have been accepted by our customer, and were shipped by the end of the year. The third system is expected to ship during the first quarter of 2008. These cost overruns were partially offset by stronger than expected revenues and profits from our bearings and connector products during the quarter.

Overall, our EBITDA margin in the fourth quarter was 15.1%. Our backlog declined 9% sequentially, due to strong revenues recorded in the fourth quarter, and coupled with contract award delays.

Subsequent to December 31st, 2007, we acquired a 22 acre Waterfront facility on the Houston Ship Channel to expand our internal capacity and support a growing demand for increasingly larger subsea production and floating drilling rig equipment.

A few comments on our third segment, Tubular Services: Here our revenues and EBITDA were up 8% sequentially, due to an increase in our tonnage ship. Sequentially, our gross margins were down slightly to 5.7% from 6%, realized in the third quarter of 2007. We continue to successfully reduce our inventory, which was down by 8% during the quarter, in an effort to improve our turn rate and therefore an improved return on invested capital.

OCTG industry inventories also improved during the quarter, with month supply on the ground moving to 4.6 months, based upon February OCTG situation report estimate.

I am going to transition a bit just to give you some outlook comments again for each of the three segments, starting with well site services. Within our well site services segment, we continue to see significant growth opportunities for our accommodations business in the oilsands region. Our board recently approved the further expansion of Wapasu Creek by an additional 800 rooms, bringing its future capacity to 2300 rooms by the end of the third quarter of 2008.

At the time of our third quarter earnings conference call, we indicated to you that we expected activity to continue to increase in the oilsands region, despite the then recent announcement of proposed royalty increases by the Alberta Premier. Since that call in November 2007, several major oilsands operators, in particular Petro-Canada and Suncor, have announced approval for major oilsands project expansion.

Our rental tool contributions should remain strong in the United States and will be augmented by our two recent acquisitions. We expect to see growth in resource plays, such as the Fayetteville, the Barnett Shale, the Rockies and various midcontinent regions, where we are very active.

Land drilling utilization in West Texas is recovering nicely from the holiday shutdowns experienced in the fourth quarter. We also put a new rig out this quarter in the Barnett Shale, which will contribute to our results in the first quarter. Our overall utilization is expected to improve sequentially, but not to Q3 2007 levels, given normal seasonal weakness in the Rockies during this first quarter.

Our outlook for offshore products remains robust, despite the fourth quarter decline in backlog. Our backlog position remains at strong historic levels overall, and product mix and margins within backlog remained consistent with recent levels. We are forecasting first quarter EBITDA margins in the 16% to 18% range on continued strong sales activity.

As it relates to tubular services, industry inventory levels have continued to decrease on a month-supply basis. While some OCTG manufacturers have recently announced first quarter spot-price increases on their OCTG products, I would point out that a large percentage of program work was secured prior to the announced price increases. As a result, we expect gross margins to be flat, to slightly improved in the first quarter.

We continue to believe that industry consolidation at the mill level will lead to a stronger environment longer term, in this particular business.

Considering all of the above factors, our earnings guidance range for the first quarter of 2008 is estimated at $1.10 to $1.20 per-diluted-share. We remain very positive about our company and our prospects, particularly in the oilsands region. We have recently announced several strategic actions, which should facilitate our growth in 2008, including the acquisition of the Houston Ship Channel facility and our Offshore Products division, and the acquisition of the Christina Lake Lodge in Canada.

In addition, our board has approved a further expansion of our Wapasu Creek Lodge, in supporting oilsands developments in Canada.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Bill Herbert of Simmons. Please proceed.

Bill Herbert - Simmons

Thanks. Good morning.

Bradley Dodson

Good morning.

Cindy Taylor

Good morning Bill.

Bill Herbert - Simmons

With regards to the guidance here, and just kind of drilling down a little bit with regard to the assumptions; taking PTI first, historically, for the past two years, revenues have been going up anywhere from 30% to 40% quarter-on-quarter Q4 to Q1. Order of magnitude, is that the same type of expansion that you are looking for in Q1?

Cindy Taylor

Bradley has given me a thumbs-up. I don't have it front of me. But that sounds --

Bill Herbert - Simmons

Sounds conservative; if Brad gave you a thumbs-up, right?

Cindy Taylor

Well, the key for us there, of course, we are doing it off a larger base

Bill Herbert - Simmons

I understand

Cindy Taylor

And you know, the key for us is -- and I want to remind everybody who might not recall this-- that the winter is certainly impacted, not only by our lodge facilities, which we do focus a lot on in our presentations, but also these large mobile camps.

Bill Herbert - Simmons

Right.

Cindy Taylor

And, the drilling camps. As I acknowledged in my comments, the large mobile camps are doing exceedingly well in support of SAGD drilling operations, as well as pipeline construction, and we're at pretty full utilization currently. The drilling rig count has slowly responded as well; I would say that's the greatest variable there. But we feel very good about those operations, generally speaking.

Bill Herbert - Simmons

Okay. And from the margin standpoint, is there any reason why PTI margins Q1 in '08 won't be at least as good as they were in Q1 of '07?

Cindy Taylor

I don't have Q1 and '07 with me.

Bill Herbert - Simmons

41.8% I think, EBITDA margin.

Cindy Taylor

I am sorry how much were they?

Bill Herbert - Simmons

41.8%, I think.

Bradley Dodson

That's right.

Bill Herbert - Simmons

Yeah. And the only reason I ask, is I guess we had a lot of expense here in the fourth quarter, but we're starting at a much lower level, and below 30s, and do you claw all that back and then some in Q1, or what would keep that from happening?

Bradley Dodson

I think it will be in the high 30s; that is my projection right now. And part of that is a little bit of mix. We've got a couple of large fabrication projects that are going out in the first quarter that --

Cindy Taylor

In the Gulf of Mexico.

Bradley Dodson

In the Gulf of Mexico, which are nice projects, and we're excited about them that they're at slightly lower margins than the high 30s.

Bill Herbert - Simmons

Okay. And then secondly, with regard to Offshore Products, is the way to think about the quarter with $5 billion worth of cost overrun, if you will, expense. You add that back and thus you are at about 18.5% margin for the quarter and we have had a nice sustained uptick in margins for that business this year, if you make that adjustment for the fourth quarter. And again, is there any reason why incremental margins shouldn’t be at least as flush as they were last year going into 2008?

Cindy Taylor

Yeah. As we commented, Bill, overall our mix in backlog is very comparable with what we have seen.

Bill Herbert - Simmons

Okay.

Cindy Taylor

At times, differently by quarter end; again I mentioned it before, there is fairly bright variability in our margins depending upon that mix with things like our drilling riser FlexJoint, our SCR FlexJoint, connectors on TLPs as an example, installation work, [as in] very high margin work. So mix always plays a factor into that. And you can see variability; that's why we generally give kind of a 200 basis points range of margins, depending upon the mix going out within a given quarter, and, of course, we are privy to the turns of that backlog, that can alter a bit.

Fundamentally, though, I think the comment is that mix is in good shape. We've got some significant bids out there that make us feel fairly confident overall about this business. And these cost overruns obviously are a bit unusual for us. I should comment about it, I think, but, in particular, it has got some very high end equipment that is new to the marketplace, never been engineered before. We bid it with a key customer of ours in 2005. So long time ago, when utilization of our facility was much different. We learned a lot, we have expanded our capabilities dramatically in coming up with these. But clearly we are in this business to make money, so it was a disappointment.

Also I want to point out, there is $5 million of cost overruns that is not cumulative losses on the project, and the losses were much less than that. But, of course, you have got to erode your margins first.

Bill Herbert - Simmons

Got you.

Cindy Taylor

And then you go into a [lost] acquisition. So I don't want to be misinterpreted that these were aggregate losses overall in the project. But related to the impact on the quarter, it was significant.

Bill Herbert - Simmons

Last one for me, with the mills, raising prices here for OCTG products; any reason not to believe that margins have basically bottomed for this business?

Cindy Taylor

Right now, visibility turned quickly in this market. But, the macro environment is much better today than we've seen over the last year. Just in terms of industry inventories on the ground, and, yes, there are mill price increases. The caveat, I do want to remind everybody, so much of this business today is let through program work. We had a fairly decent, if not significant, build and what we call apparent backlog by December. Even a more significant build in January, because we were awarded a large amount of this program work. That program work is generally led for six months at fixed prices.

So, although, there are price increases, it really affects the portion of the business that is spot business throughout the first six months. But, all those being said, yes, you are right, the fundamental drivers for the business do look better.

Bill Herbert - Simmons

So first half '08, how should we think about margins? Flat with Q4 or a bit better?

Cindy Taylor

Flat, but a bit better.

Bill Herbert - Simmons

Okay. Thanks very much.

Cindy Taylor

Thank you, Bill

Bradley Dodson

Thank you, Bill.

Operator

Our next question comes from the line of Ken Sill of Credit Suisse. Please proceed.

Ken Sill - Credit Suisse

Yeah, good morning.

Cindy Taylor

Good morning Ken.

Bradley Dodson

Good morning Ken.

Bill Herbert - Simmons

I wanted to dig into the acquisition of the facility in Houston and try to figure out how we should be modeling that in terms of what does it do to your capacity in Offshore Products and how long before we start seeing a revenue impact and what’s the impact on margins as you try to get that facility started?

Cindy Taylor

Okay. I would like to comment initially just from a business perspective, then I’ll let Bradley walk you though in a little more detail. But, first of all, this was a facility that we had looked at years prior, so we are very familiar with it. This is one of the areas where we were outsourcing some of our larger product work anyway. So, we have over the course of the last nine months or so built a quality workforce, trained them in our procedures, our welding technologies etcetera. So it is not as if it’s just an empty facility at this time, and, in fact, the three BOP transporters that we talked about have been executed in that facility on an outsourced basis prior to this time. It has been an ideal facility for large equipment, both on the drilling equipment side and the production equipment side, where you can load it directly in the slip on a barge, given the significant overhead carrying capacity and the slip, where large barges can come in. That benefits us quite a lot, as we go into increasingly deeper water environment, larger equipment, higher pressure rated type equipment. We have a fantastic facility in our South Houston operations that we’ve expanded significantly, but it is land lot.

As an example, as I’ve mentioned, we do a lot of the BOP stack-up and integration work in that Houston facility. We do all the

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assembly, testing. [Author:r]

Then you have to break it down again to truck it out. So this is an ideal compliment that we can work with these two facilities, depending upon the actual manufacturing and assembly work and the size of the equipment that is done.

So again, we are in a good position, because we are not starting from scratch. We will finish this third transporter; it's already obviously in the facility. We will finish it there and load it out. And then the next step, obviously, is not only taking our existing backlog and allocating that between the facilities, but also bidding on things and building backlog that we might not have been capable of bidding on, after having this facility and I think Bradley has maybe a few more comments to give you some information there.

Bradley Dodson

Ken, we feel it's an accretive acquisition. We've added the capacity with the transaction, effectively bringing an outsourced facility internal. The capacity will initially be used to deliver some of the items that we currently have in backlog that we had anticipated to outsource the incremental work that we are looking at. We should start to see benefits and the second half of this year. And really as Cindy mentioned, it will help us tap into the hub-and-spoke development models that a lot of the large deepwater operators are starting to use. In particular, addressing some of the subsea pipeline equipment; pipeline and manifold, pipeline and terminal jumpers, etcetera. And so we expect to see a good return this year as we had, and just kind of a run-rate state in the second half.

Ken Sill - Credit Suisse

And, before you guys had said that you were essentially kind of maxed out on capacity other than de-bottlenecking. So, could you give us a rough idea in order of magnitude, what this could do to your quarterly or annual revenue capacity, your business capacity?

Cindy Taylor

Well, we are kind of looking at each other at this stage. We haven't even assessed the maximum capacity of this facility at this stage. But, what we've really looked at is, what we can almost call, low hanging through and get a pretty ready payback on this facility, within terms that are very attractive. I have to get back with you on maximum available capacity, because it is a very large facility.

Ken Sill - Credit Suisse

Well, I guess for modeling perspective, then what we should look at is say okay, you are going to be able to keep growing the offshore products business. You are not going to be capped out because of capacity constraints and then worry about when you max out later. But, all I was always trying to get at is can we just assume that if you go back to your fairly steady strong growth in Offshore Products?

Bradley Dodson

I think it will help. But, I think a lot of it will depend on what we know we can do in this facility with our current backlog, and then it's a matter of being able to market this expanded ability to deliver larger projects that we just, quite frankly, were unable to effectively bid on previously.

Ken Sill - Credit Suisse

Yes. And then one last question on the accommodations business; could you give us an idea of how much of your capacity in the oilsands are going to be up year-over-year when you get this Wapasu expansion done in Q3?

Bradley Dodson

Ken.

Ken Sill - Credit Suisse

And will that all come on at once or will it be kind of phased?

Bradley Dodson

It will be phased in primarily late second quarter, early third quarter.

Ken Sill - Credit Suisse

Okay.

Bradley Dodson

And we are building off of a larger number than we should; significant growth fourth quarter to fourth quarter '06 to '07 this year. This will add kind of an incremental from where we stood, maybe an incremental 15% capacity.

Ken Sill - Credit Suisse

On a year-over-year basis?

Bradley Dodson

Yes. If we looked at kind of fourth quarter '07 to what we expect in fourth quarter of ‘08.

Ken Sill - Credit Suisse

Okay. Thank you very much.

Cindy Taylor

Thank you, Ken.

Operator

Our next question comes from the line of Jeff Tillery of Tudor Pickering. Please proceed.

Jeff Tillery - Tudor Pickering

Hi, good morning.

Cindy Taylor

Good morning Jeff.

Jeff Tillery - Tudor Pickering

You mentioned in your prepared comments about the lodge you guys acquired in the Southern part of the oilsands region that is scalable. Can you talk a little bit more about that, kind of order of magnitude and what you could do with that lodge?

Cindy Taylor

It was a small lodge; it's close to 100 beds of capabilities. But, the beauty of it is the location which is in that Southern region that we have been targeting. There is owned land and leased land that we can expand incrementally as long as we get the clearance to do so. That kind of expansion is more in the range of kind of may be 200, 250 type beds. But, by virtue of being in the area, they also get some added work on some catering facilities, logistics management services in that Southern region. So, it's not so much the size of that operation as just it is the further penetration in an area that we are targeting.

Jeff Tillery - Tudor Pickering

So is it fair to say that it is one avenue that you are using to grow in the south. ItBut it is not the only avenue you guys are exploring?

Cindy Taylor

That's exactly right, and I think we have been very clear that we are working with Alberta’s sustainable resources to get a lead. We have moved that process forward. We just don't believe that we are going to be able to announce that; hopefully, without much undue delay. The process with SRD has moved well. We are now working with basically the consultation rights and making sure that we are addressing the needs and concerns of the various aboriginal groups in the area effectively, which is a process that is very important to doing business in that region. And so that's really where we are right now, but, clearly, we have said before that is part of our focus, but until we secure the lease with no additional obligation, we are not in a position to announce that.

Jeff Tillery - Tudor Pickering

And you guys in the past have talked to us about the revenue and EBITDA numbers from the oil sands versus the non-oil sands piece of accommodation, do you have that Bradley?

Bradley Dodson

I do. In the fourth quarter, we had oil sands revenues of just under $50 million US and the EBITDA kind of fully burdened was order of magnitude about $22 million US.

Jeff Tillery - Tudor Pickering

Okay. So, there is a pretty big ramp sequentially in non-oil sands piece: is that fabrication work and that's what you're talking about continuing in the first quarter as well?

Bradley Dodson

No. The fabrication work I mentioned was a couple of projects we got working on our Louisiana operations that should ship in the first quarter of '08.

Cindy Taylor

But, there is in the first quarter; that's why I'm trying to make sure we stay focused on it with large facilities. Or one element of our contribution that we have all of the mobile camp, small and large mobile camp, that support both conventional drilling and Sag B type drilling as well as pipeline construction. They get a significant seasonal lift in the first quarter.

Jeff Tillery - Tudor Pickering

And your land drilling business with utilization in the first quarter somewhere between, where you are in the fourth and third quarter, do you think you get kind of half way back on a cash margin basis or EBITDA margin basis in that business?

Cindy Taylor

I don't have all of the percentages in front of me, Jeff, but we are clearly looking at improved EBITDA margins depending on how we finish the quarter at 400 or 500 basis points with improvement. I believe I'm kind of looking to Bradley for verification and he are saying that is correct. The point is that the significant softness in the fourth quarter was really holiday related shutdowns; we felt like for the most part in West Texas.

That West Texas operation now it was not immediate in the recovery -- the holidays were just severe and they have extended into January 7th, 10th, 15th depending upon the operator. But there is every indication that that was holiday related downtime. The rigs are working. They're working at comparable rate to what they were in the fourth quarter.

That improvement in West Texas will be mitigated because we always had seasonal downtime in the Rockies, and then it's particularly severe this year with all the extreme weather that they have had. So, it's moderated and that's why just want to be sure that it we've recognized that we are recovering in total. But, we are still impacted by some weather circumstances, but the major message that I see today is that the business is actually picking up very well, and, therefore, my optimism is pretty good as we go into the second quarter.

Jeff Tillery - Tudor Pickering

Okay. And my last question is just on the Rental Tools business; margins kind of flashed down a little bit versus the third quarter, I mean, Q4 representative of what you expect going forward in 2008 or are you seeing any pricing weakness on the margin?

Cindy Taylor

I think we may have lost the 150 or 200 basis points sequentially if my recollection, you probably have the numbers in front of you. A lot of that I really think was related again to the holiday and to the weather that we experienced. The key is we got to figure out what kind of run rate EBITDA margins are, given the acquisition of these two businesses that have a little different service mix versus just pure rental mix. And so, we are kind of tweaking that between Q3 and Q4, but I really think the margin deterioration was more related to the holidays and weather than anything else.

Jeff Tillery - Tudor Pickering

Okay. Thank you very much.

Cindy Taylor

Thanks Jeff.

Operator

Our next question comes from the line of Kevin Pollard of JPMorgan. Please proceed.

Kevin Pollard - JPMorgan

Thanks. Good morning.

Bradley Dodson

Good morning.

Kevin Pollard - JPMorgan

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Just I wanted to follow-up on your comments on potential expansion in Southern Alberta, if you're success in getting that lease negotiated, would this project be similar in scale and like initial size and ultimate scalability to like your Wapasu Creek facility?[Author:r]

Cindy Taylor

It would be, and you're exactly right. We would start that out depending upon the demand environment around 400 or 500 beds, but have it scalable. I haven't talked to them whether it’s 1500 beds or 2000 beds, but scalable based upon the growth and demand and the customer activities so that we time that against the demand, but it would follow a very similar profile to Wapasu.

Kevin Pollard - JPMorgan

Okay. And so you'd really, if we kind of look at on a kind of per room basis if that project successful on going forward ultimately could be maybe a 25% plus capacity expansion to oil sands -- assuming fully scaled up.

Cindy Taylor

Well, if we get fully scaled up.

Bradley Dodson

Fully scaled up

Kevin Pollard - JPMorgan

Yeah, yeah.

Cindy Taylor

Right, I think Beaver creek is 750, just help me with the numbers for clarification, Athabasca.

Bradley Dodson

Is that 1500 right now.

Cindy Taylor

Is that 1500?

Bradley Dodson

Right now.

Cindy Taylor

Yeah, okay and than Wapasu.

Bradley Dodson

It’s headed 2300 almost.

Cindy Taylor

2300, so that will help you do that

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map[Author:r]

.

Kevin Pollard - JPMorgan

Okay.

Cindy Taylor

In terms of what capacity expansion that might yield up over the course of the year to two years.

Kevin Pollard - JPMorgan

Okay. Thanks. And, then, if I could switch over to the offshore product, I want to kind of close the loop on Ken's line of questioning there, it sounds like because of both the outsourcing -- no longer having the outsource so much work as well as perhaps not having to run some of the other facilities quite as fill out that even in the absence of top line expansion from that acquisitions it should help the margins fairly considerably?

Cindy Taylor

We certainly hope that's the case. We are addressing -- I think the point here we are addressing bottleneck, where we see them particularly on the fabrication and assembly side of the business. Obviously, another concern we have, and what we are working on, is the engineering side of the business; there are all poly engineered products. So, a lot of it is exactly doing what obviously we are trying to do; supply chain management, and you're going to hear the exact same thing from NOV, Cameron or FMC on this that.

Even though we are in sourcing or bringing in all these work or still heavily dependent on delivery -- timely delivery, quality delivery of

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steal[Author:r]

beams, and forging and machined products. So, there are just a lot of things that we have to due to coordinate in. There is the capability to improve our margins from where they are now. I will tell you, though, it's just a lot of work and we are doing everything we can to address the issues that are out there.

Kevin Pollard - JPMorgan

So, we would probably be mid-year or so before we really start to see revenue impact on the margin from that? Can you get some of that work reallocated quicker than that?

Cindy Taylor

I think we will start reallocating some of that work by the second or third quarter.

Kevin Pollard - JPMorgan

Okay. And just a last question: I was wondering if you could give us some comments on the acquisition landscape. A may a couple fairly sizable deals in rental tool late last year. So, maybe just a quick comment on what you're seeing out there right now?

Bradley Dodson

We continue what we feel is a good discipline of continuing to be out in the marketplace looking for transactions both on a marketed basis and also trying -- well we've had more success sourcing them ourselves really from our field operations and management. That discipline continues; the activity out there has been pretty consistent with the last 6 or 9 months. So, we still are looking and I think execution always dependant it's never quite as easy as we expected it to be, but we continue to discipline of looking and it will continue to be a portion of our growth strategy.

Kevin Pollard - JPMorgan

Okay. Thanks guys.

Operator

Our next question comes from the line of Joe Gibney of Capital One Southcoast. Please proceed.

Joe Gibney - Capital One Southcoast

Good morning, everybody.

Bradley Dodson

Good morning, Joe.

Cindy Taylor

Good morning.

Joe Gibney - Capital One Southcoast

Most of my questions have been answered; just a couple of follow-ups. Bradley could you just -- I apologize if I missed earlier it in the call, update us on CapEx expectations for '08?

Bradley Dodson

Yes, we are going to file our Form 10-K later this week, it will have disclosure in there. We are currently expecting to spend about $282 million there, as you probably if you piece together based on our $68 million in the fourth quarter of 2007, versus what we are expecting at the end of the third quarter for 2007, we didn't get every things spent in 2007, that we are expecting.

So, there is a fair amount of carryover from '07 to '08 predominately finishing off the lodges and the oil sands region and then we have a couple of projects, one of which we've announced this morning the Wapasu Creek expansion, but then also implicit in that $280 million number is the fourth lodge in the Southern region, fourth major lodge in the Southern region. So…

Cindy Taylor

Which will be of course be dependent upon securing that lease.

Bradley Dodson

Right.

Joe Gibney - Capital One Southcoast

Okay. Thank you. Update us on the share buyback, if you could please add $23.4 million in the quarter, I believe your authorization is 69, is that correct?

Bradley Dodson

That's right.

Joe Gibney - Capital One Southcoast

Okay. You guys are approaching this, or how should we think about share buyback as we move through '08 here, is it really an optimistic basis or are you mostly dramatic about it?

Cindy Taylor

We do it opportunistically, Joe, and we had a fourth half quarter decline in our share price and you saw us step up the existing share repurchase authorization. We increased that and announced that. I believe it was in January, just to make sure that we have that capability to respond to things in the market place.

As we view that overall as just a portion of our strategy in total obviously we're very, very focused on growth, organic in particular, and through acquisitions as well so we tend to look at just like you said opportunistically and really focused on the balance of capital allocation alternatives that we have at given points in time.

Joe Gibney - Capital One Southcoast

Okay. And just to follow up a little bit on the OCTG side; flattish margin expectations so another quarter of inventory draw down. Any other anecdotal signs that turn here -- in pricing and you mentioned consolidation at the mill level and I'll see a lot of the program work, but just trying to get a sense of what's it going to take I think at your perception or additional color on moving the needle incrementally higher here given this basically record low inventory levels, where we are right now?

Cindy Taylor

I guess what I'd comment we had a very strong demand environment on a tonnage basis in the fourth quarter. Number one, I think that is a favorable sign. We are beginning to see somewhat more activity in the Gulf of Mexico that's unrelated to just deep water type activities. It's hard for me to say or make a call whether that's going to be a significant turn.

I'm kind of mitigating that right now until I see more evidence of it. But, I think broadly speaking today the outlook for natural gas is just a whole lot better than it was a month ago. And so it's hard to tangibly say where the OCTG market is going, which is kind of a leading indicator of a lot of activity in North America, but if I look at the sign it's very hard to see a whole lot of down size from where we're now.

Joe Gibney - Capital One Southcoast

Sure. I appreciate it. Thanks. I'll turn it back.

Cindy Taylor

Thanks, Joe.

Operator

Our next question comes from the line of Chuck Minervino of Goldman Sachs. Please proceed.

Chuck Minervino - Goldman Sachs

My question was more macro related. I was wondering if you could just touch on any anecdote effects of the higher natural gas prices here on certain areas of your business, has there been a change in the dialogue with customers or have you guys seen any change in potential change in pricing as a result of it?

Cindy Taylor

-->

I think it's too early. We were when we did build our budget and our plans we expected on average kind of that same 3% to 5% growth in the United States, but I'm trying to touch on it. It was very much geographic base with some of the brighter growth opportunities in our views for our business lines anyway concentrated in the Fayetteville, the Rockies, the Mid-Continent, the Barnett with, then thought that some of the other markets might be flattish to even potentially down depending on how that worked out. But, I think there is certainly a bias to think that would natural gas strengthening that outlook could improve. I personally think it's premature to make that call.[Author:r]

Chuck Minervino - Goldman Sachs

Okay. That's helpful. Thank you.

Operator

(Operator Instructions). This concludes the question-and-answer portion of today's conference. I will turn the call back to management for any closing remarks.

Cindy Taylor

Right, Candice. Thank you for your assistance this morning. I want to extend my thanks to all of you for getting on the call today. We do appreciate all of your continued support and look forward to hopefully a good first quarter. Thank you all.

Operator

Thank you for your participation. You may now disconnect. Have a great day.

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Source: Oil States International Inc. Q4 2007 Earnings Call Transcript
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