BJ Services Company Q2 2008 Earnings Call Transcript

BJ Services Company (BJS)

Q2 2008 Earnings Call

April 22, 2008 9:30 am ET

Executives

Bill Stewart - Chairman of the Board, President and Chief Executive Officer

Jeff Smith - Chief Financial Officer

Dave Dunlap - Chief Operating Officer

Analysts

Marshall Adkins - Raymond James

Chuck Minervino - Goldman Sachs

Alan Laws - Merrill Lynch

Geoff Kieburtz - Citigroup

Dan Pickering - Tudor Pickering & Holt

Jim Crandell - Lehman Brothers

Brad Handler - Wachovia

Scott Gill - Simmons & Company

Pierre Conner - Capital One Southcoast

David Anderson - UBS

Presentation

Operator

Good day everyone and welcome to the BJ Services’ second quarter earnings release. Today’s call is being recorded. At this time, for opening remarks, I would like to turn the call over to the Chairman of the Board, President and Chief Executive Officer, Mr. Bill Stewart. Please go ahead, sir.

Bill Stewart - Chairman of the Board, President and Chief Executive Officer

Thank you very much. Thank you for joining us. I am joined here today with Jeff Smith and Dave Dunlap. Jeff is our CFO and Dave is our Chief Operating Officer.

Before we start the conference call, I would like to mention some of the statements we make during the call may include projections, estimates and other forward-looking information. This would include any discussion of the company’s business outlook.

These types of forward-looking statements are subject to a number of risks and uncertainties that could affect their outcome. I refer you to the latest Form 10-K on file with the SEC where you will find a discussion of the risk factors relating to the company’s business. These factors and other factors mentioned on the call could cause actual results to differ materially.

This morning we reported net income of our second fiscal quarter of $127 million or $0.43 per diluted share. This was 26% decrease from the first quarter fiscal ’08. Consolidated revenue for the quarter was $1.3 billion, consistent with the previous quarter and operating income was 187 million, a 26% decline from the previous quarter.

Year-over-year revenue increased 8% with operating income down 36% and earnings per share down 33%.

As we move through the regions, I will be discussing some of the issues that impacted margins for the quarter. First, US Pressure Pumping. US Pressure Pumping margins were impacted during the quarter by lower price for services and by certain costs that were greater than what we planned.

Some of the cost issues are being addressed through cost reduction initiatives and we expect good progress on that during the quarter and some of our cost issues are being addressed through cost recovery initiatives and we hope to get good progress there too.

Regarding service pricing for the quarter, service prices were down more than expected or more than experienced during the prior few quarters. However, most of the price loss occurred in January and as we completed a number of pricing agreements with our customers, pricing was relatively stable in February and March.

US operating income margins for the quarter was 20%, down from 28% in the prior quarter. And in light of the industry developing positive fundamentals, I actually look at our margins more positive and negative. That the center operating margins to the range of 20% should reinforce the expectation of significantly reduced new capital flowing into the market at a time when we should see modest increase in activity and I would expect possibly that consolidations may be more likely at these margins levels.

At this point, our objective is to grow the business and increase profits at about this margin level. For the quarter, in the US, the number of jobs performed were down slightly from the prior quarter, reflecting the effect of holidays and weather. Job turndowns for the quarter were 14 million compared with the 18 million experienced in the prior quarter.

The fundamental outlook I think is good in the US with forward natural gas prices in the range of 10, $11. Gas storage was below the five year average coming out of the winter withdrawal season and also 23% below the prior year level at the same time.

LNG does not seem to be a threat near-term to natural gas prices as natural gas prices are at a significant or US natural gas prices are at a significant discount to European and Asian market natural gas prices. Basically those markets attracting most of the LNG these days. Our customers were active throughout the US, but the shale formation area is being of most interest for future growth. That includes the Bakken, the Marcellus, the Fayetteville, the Huntsville, and others.

A number of our customers have announced budget increases for the second half of ’08. That includes Petrohawk, Anadarko, and Chesapeake, more support for an expected uptick in US activity as we move into the latter part of the year. We have stated and we continue to believe that the turning point for positive sequential comparisons in the US should be in the latter part of calendar year ’08.

Now, regarding capital. As we have completed much of our capital build for the hotspots in the US market, during 2008, we will most likely announce a capital build budget for 2009, down from 2008 most of the capital spend reduction will be from the US and Canadian markets.

Canada Pressure Pumping operations experienced the typical revenue growth expected in the winter quarter. Revenue increased 14%. Rig releases, which is an indicator of well completions, for the quarter were actually down 2.6% in the face of higher rig activity. I think a more accurate reflection of the market is actually rig releases or wells completed and I think we did quite well in a market where the activity was down. Pricing for services declined about 11% for the quarter, reflecting price agreements with three of our major customers became effective in January and there continues to be a very competitive marketplace in the Canadian market.

The two bright spots in the Canadian market, they include the Bakken Shale Formation in Southern Saskatchewan and the Montney Formation in Northeast British Columbia. As to the latter, we were involved in fracturing some reservoir defining wells during the quarter. However, the well results are not disclosed by the operator. Feedback on the wells is quite positive. British Columbia will be another -- will be a long-term development as minimal infrastructure is in place to pursue that formation at this time.

I think we are now in the early stages of both the shale plays in Canada, whichever time could develop into Barnett Shale type activity areas. We are now in the breakup season for the Canadian operations with road bands in place. We have taken a number of cost saving initiatives to minimize the loss of revenue and profit during the quarter. Main initiative involves personnel and we are now loaning to other operations that need experienced personnel, the personnel from our Canadian operation.

Moving to International Pressure Pumping. And before we really get into the details, I would like to point out that during the quarter we revised the internal management reporting structure of our pressure pumping operations in Africa. Our North Africa results, which includes Algeria and Libya are now included in the Middle East operating segment, while the West Africa results, south of Nigeria including Angola and Gabon are now included in our Latin American operations. Nigeria and the Coastal areas north of Nigeria are included in the Europe segment. These changes were made to bring a better business development focus, better management effort, better support, and align the operations with our customers and the language spoken in these two areas. Revenue in the prior quarter and the reported quarter reflect this change.

Revenue for our International Pressure Pumping operations increased 1% from the prior quarter. Latin America and Russia experienced good revenue growth, 10% for Latin America and 31% for Russia. While Europe, Middle East and Asia Pacific experienced lower revenue from the prior quarter, revenue decline in Europe 6% was primarily attributable to coal tubing activity declines in the North Sea.

The revenue decline in the Middle East 2% was primarily attributable to lower revenue in India and Saudi Arabia, both having great quarters in the prior quarter. And revenue decline in Asia Pacific was primarily attributable to weather conditions affecting our Australia and Malaysia operations coupled with rig delays in Thailand. In Russia, revenue increased 31% sequentially as activity recover from extremely cold weather conditions.

I’m very pleased with what’s happening in Russia on the margin side. As many of you may know, we offloaded the low margin non-core workover rig business last year. We also implemented a management change mid last year and began the process of indigenizing our work staff in Russia. All this has resulted in improved results on lower revenue on a year-over-year basis.

Margin improvement process has just begun. I think there is more to come here. Latin America revenue increased 10% sequentially. Attributable to the increased activity in Brazil and Venezuela, the Blue Angel stimulation vessel in Brazil resumed normal operations during the quarter after being docked for a significant part of the prior quarter as a transition to a new contract. The Blue Modern stimulation vessel is being built in a shipyard in Brazil. It will go to work for Petrobas under a long-term contract in our fourth fiscal quarter.

Offshore cementing business in Brazil will be experiencing a nice pick up as we recently were awarded four new offshore cement unit placements on new rigs moving into the Brazil market. These placements will be made in 2009 and 2010. We recently won other new contracts for operations in Brazil and Venezuela and we expect Latin America region to provide significant growth opportunities for the company as we move forward.

Revenue from our Oilfield Service operations were down 8% sequentially due to lower revenue from each of our businesses except the Completion Tools operations. Tubular Services revenue was down 8% as their business was affected by weather conditions in North Sea and project delays in other parts of the world.

Process Pipeline services revenue declined 3% sequentially due to normal seasonal decline for them. Chemical Services revenue declined 1% sequentially and Completion Tools revenue was down 2% sequentially due to lower activity in the Gulf of Mexico.

Completion Tools revenue was up 10% sequentially with expansions in the international markets contributing to the growth. We are expecting improved revenue from each of these business units in the current quarter. Tubular Service offering initiatives as well as the pending Intercore acquisition should add further growth to this group.

Chemical Services has taken possession of new low cost highly efficient low rates stimulation equipment destined for Permian region. The strategy is for Chemical Services to provide small production enhancement treatments for wells more efficiently than the use of conventional pressure pumping equipment can provide. This will begin to generate revenue for us in the current quarter. Completion Fluids is implemented in expansion initiative to provide tech plug, a fluid loss control material to a number of international markets making use of the company’s international infrastructure. We expect this new service offering to generate its first revenues in the first fiscal quarter of 2009.

Finally, we should close the acquisition of Intercore shortly. This business will be a nice add to the Completion Tools business and allow us to broaden the scope of our downhole tool offering throughout the world.

Turning to the Q3 outlook, the US market, we expect drilling activity to increase in the range of 2% compared to fiscal second quarter. On the pricing front, we expect competitive landscape to continue in the US market. However, we are forecasting the rate of price supply experienced in the previous quarter to be moderated in Q3.

In Canada, spring break-up is in full swing with current drilling activity at levels somewhere to this time last year. Accordingly, activity levels in Canada are not expected to be significantly different than last year’s levels. In the International Pressure Pumping segment, we are anticipating modest revenue improvement and slightly improved margins in Q3. The largest sequential improvement is expected to be in Asia Pacific as the business is expected to improve after experiencing the weather disruptions and project delays of Q2.

We anticipate sequential revenue margin improvement in our Oilfield Service Group. We are projecting our casing and tubing business to recover from delays experienced in the second quarter. Also, we are entering the season of higher activity for PPS, which is projected to contribute positively to the third fiscal quarter results. Based on these assumptions, we are currently projecting diluted earning for the third quarter to be in the range of $0.39 to $0.43 per share.

I will turn it over to Jeff.

Jeff Smith - Chief Operating Officer

Okay. Thank you, Bill and good morning. I will just take a few minutes here to address some of the margin highlights for the quarter. Consolidated operating income margins for the quarter is 14.5%, that’s on revenue $1.3 billion. The operating income margin was down from 19.7% in the previous quarter and down from 24.5% reported for the same quarter last year.

Looking at the segment performance on revenue of $643 million for the quarter, US/Mexico Pressure Pumping operations reported operating income margin just under 20%. Margins were down from 27.5% reported in the previous quarter and down from just below 35% in the same quarter last year.

I think that Bill described in his remarks the issues surrounding the margin performance for that segment, so I won’t be repetitive there.

Moving on to Canada, revenue was 139 million for the quarter, resulted in operating income of 14 million or 10.4% of revenue. Operating income margin was 360 basis points below the previous quarter and well below our expectations that this highly competitive market led to the significant pricing erosion sequentially. Margins were also impacted in the quarter for some adverse business mix in that market.

Looking at the results compared to the same quarter last year, operating income margin was down 500 basis points due to year-over-year pricing pressure, net pricing margin impact on -- pricing was partially offset year-over-year by cost reductions that were implemented in the second half of 2008, which included the asset, the pre-deployment to others markets, as well as headcount reductions there.

For Pressure Pumping outside of North America, our operating income margin of 12% for the quarter was slightly below the previous quarter and also below the expectations that we set out for the quarter. Margin for the quarter were most notably impacted sequentially by adverse business conditions in certain Asia Pacific markets.

Now favorable weather conditions in Australia and Malaysia and delayed activity in Thailand led to lower margin performance in that region. Partially offsetting Asia Pacific’s lower margin was improved performance in Latin America, which was led by higher margins in Venezuela to get better utilization of our equipment in that market as well as improved utilization with the Blue Angel stimulation vessel that we had in Brazil.

Moving to the Oilfield Services Group, revenue for the quarter was 209 million with operating income of 38 million or 18% of revenue. This represents an 80 basis point decline sequentially and a 230 basis point decline from the same quarter that we experienced last year. Lower margins from our Tubular Services and Chemical Services businesses led the margin decline for the group sequentially. The Tubular Services decline was due to a worst weather in the North Sea market in addition to costs associated with project delays in certain markets outside of the US.

The decline in Chemical Services was attributable to lower international business coupled with higher maintenance and fuel costs. On a year-over-year basis, the lower margins in Oilfield Services Group were due to our Tubular Services business as described earlier as well as some business mix in Canada and the Gulf of Mexico in connection with our Completion Tools and our Completion Fluids businesses.

Switching to the balance sheet, we ended the quarter with 616 million of debt, that’s down 8 million from the previous quarter. We had cash on hand at the end of the quarter of 43.6 million.

Notable uses of cash during the quarter included capital spending of $150 million and dividends of just under 15 million. Debt to cap at the end of the quarter was 16.4% with net debt to cap at 15.4.

At this time, I will turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). We will take our first question from Marshall Adkins with Raymond James.

Marshall Adkins

Hi guys. Just a few questions on guidance. Obviously, back in January, we were -- you were thinking that we would be mid 50s and we were low 40s here. Walk me through what changed in the last couple of months? I mean obviously, your pricing contracts came in a little bit lower but walk me through just the big issues because that’s a pretty big difference from just a couple of months ago?

Jeffrey Smith

Yeah let me break it down for you a little bit. In terms of the pricing and I’m going to get a little bit granular here Marshall, but I think it will help people understand the miss. I am assuming you’re talking about the guidance for this quarter.

Marshall Adkins

Right.

Jeffrey Smith

Okay. So, in North America, we experienced pretty significant increases in fuel costs that resulted in about couple of penny with respect to that miss. Pricing was much worse particularly in Canada than we expected. So, North America coupled with a little bit deeper discounting in the US, those two in aggregate based on the guidance is a miss of about $0.06. And then as Bill mentioned, we had some other cost issues, one notably was the startup cost associated with Arkansas Base. We had some lessons learnt there and that contributed about $0.04 to the miss there. Breaking it down any further, I’m not going to get too much in the detail, but international was off a bit as we described in our Oilfield Services, most notably our Tubular Services business was off.

Marshall Adkins

Alright. Well, then going forward on the guidance you have for next quarter, it’s modestly lower than what you did this quarter. I mean obviously, I know Canada usually falls off, you mentioned here that pricing still declining albeit not as fast as it was. I’m just having a hard time, how you can be even close to this quarter or would that be the startup cost that you saw sort of something going away?

Bill Stewart

Well, are you saying from your perspective, are we high or low?

Marshall Adkins

Well, you seem to be a little high, because normally the third fiscal quarter falls up pretty big just because of Canada alone?

Bill Stewart

Well, I think that from the Canadian perspective and I think we provided a little bit of direction historically here. We’re looking at Canada coming down between $0.06 and $0.07 for the quarter and that’s going be offset by what we expect to see recovery in some of these international issues that we experienced in the quarter as well as Oilfield Services, I think some of the delays we experienced in Tubular Services should come back for us, our Process & Pipeline businesses is approaching the higher season, revenue generating season there, so we should see some benefit from that.

Marshall Adkins

And is the revenue growth in US going to offset pricing, ongoing pricing decline. You kind of hit a few mixed signals in the press release in terms of pricing saying that, it’s going to be stable in February and March, but you’re still kind of thinking it’s going continue to decline, but not at the same rate?

Jeffrey Smith

Yeah, the mixed signals weren’t intentional here. I'll try to be as clear as we could. I think that we’re in the market where we could see continued decline in pricing. I don’t believe that we will see the pricing erosion that we have experienced most particularly the one that we just closed out. As we’ve spoken before, we have experienced 3 to 5% prior to that. Now as we look forward, I think the market is still quite competitive and so, what I would expect to see is at the lower-end of kind of that 3 to 5% and maybe below that as we look forward. And in a nutshell, I really don’t anticipate the US contributing to any sequential growth from Q2 to Q3 on the profitability side.

Marshall Adkins

Alright. And then part of certainly kind of coming back Q3 that’s probably that bottom in terms of what we are seeing because Canada will start to come back in the second half of the year, I would presume.

Bill Stewart

That’s how I am looking at it, Marshall.

Marshall Adkins

Great, very helpful guys. I’ll turn it over to someone else. Thanks.

Bill Stewart

Thanks.

Operator

We will go next to Chuck Minervino with Goldman Sachs.

Chuck Minervino

Hi, good morning.

Bill Stewart

Good morning.

Chuck Minervino

I just wanted to ask you a little bit about the capacity. I guess roughly 25% of the capacity has left Canada in the past year or so. Do you have any plans to bring capacity back or add capacity there?

Bill Stewart

In the Canadian business?

Chuck Minervino

Yeah, yeah.

Bill Stewart

Well, at this point, we have no plans to do that. If we view the market more favorably, latter part of -- first part of ’09 and then on into ’09, then possibly we’ll consider taking more capacity up there, but at this point we have no plans to do that.

Chuck Minervino

Okay. And when your competitors said that they expect 12 to 15% new capacity that comes do market in 2008. Do you have a similar assessment of the horse power additions or what are your views on how much capacity is going to get increased?

Bill Stewart

This is a process of lot of guess work, some facts and a lot of guess work, but our feel was about 10% somewhat in that range, and I would suspect by ’09 it’s going to be even less than that.

Chuck Minervino

And is your capacity additions going to be above or below the industry average?

Bill Stewart

It’s probably with -- there are a number of -- you are actually talking fracturing capacity I suppose?

Chuck Minervino

Yeah.

Bill Stewart

But it’s probably right in there with the industry average.

Chuck Minervino

Okay.

Bill Stewart

Most of our capacity we’re adding is in markets that are unreserved. So by service companies, there is a real need for more capacity in the Fayetteville, the Marcellus, Bakken, parts of the Rockies, and that’s the markets that we have targeted for more capacity.

Chuck Minervino

Okay, thank you.

Bill Stewart

Yeah.

Operator

We will go next to Alan Laws with Merrill Lynch.

Alan Laws

Good morning.

Bill Stewart

Good morning.

Jeffrey Smith

Good morning.

Alan Laws

A couple of things. First what total or what proportion of the total contracts that you have rolling in ’08 fiscal year have already rolled onto the newer lower price tag?

Bill Stewart

We don’t really track that from a percentage of contracts basis because many of these are contracts until the customer or we decide it’s time to take another look at what the pricing is.

Alan Laws

You are not annual, you’re not dealing with the bulk of them being annual contracts?

Bill Stewart

Some are annual; some are just in place for indefinite period of time. But, we had quite a few, let me say that were finalized both for US and Canadian market in terms of the volume that we generate through those customers.

Alan Laws

Were most of those your contracts or were they the typical one where they give you a calls ahead time to lower you price?

Bill Stewart

What was that again?

Alan Laws

Were the bulk of them one-year contract rollers, where you had to come to the table or are they calling you to the table?

Bill Stewart

Most of them were one-year contracts.

Alan Laws

Okay. Was there a particular region in the US that hurt you more than any others?

Bill Stewart

Yeah.

Jeffrey Smith

We had some weather issues in the Rocky Mountains that was below expectations. Also, we had our East Texas business was a little off.

Alan Laws

Okay. So Rocky is more of a seasonal primarily?

Jeffrey Smith

That’s right.

Alan Laws

Alright. And then did any of the of mobbing of equipment, you talked about that last couple of quarters to other regions in the US impact the margin more than just straight pricing or had a higher contribution in the straight pricing?

Bill Stewart

I don’t think mobilization of equipment was an issue. We did have some costs, unusually higher cost out of the Fayetteville/Arkansas area, where we are building a new base and moving equipment, basically getting a new business started in that area. We had some logistical issues and manpower issues that we currently think will be more effective cost controls in place in the current quarter.

Alan Laws

That was the $0.04 that you had mentioned in your commentary?

Bill Stewart

Yes, correct.

Alan Laws

Alright. You also noted growing earnings at these margin levels kind of going forward. Could you flush that a little more, are you going to pursue maybe a share versus price strategy in the coming up-cycle?

Bill Stewart

We felt like that we could gain some market share. I don’t know those are words that don’t bring too well out there, but basically we felt like that we have not - we have lost market share to some of the these little small players, but we never competed with because the market was growing so fast. And then as we began to compete, we would bring technology and execution capability to the table if they could provide again some market share. Well, I think we've basically stabilized the market share over the last couple of quarters. We didn't gain a lot, but we basically stabilized our market share over the last couple of quarters. And so from this point at least through, halfway through ’09, our objective is to try to fix this bottom, which we have mentioned on the call earlier in terms of pricing stability. We think the fundamentals are there to provide that and possibly grow the business somewhat over the course of the next year and the general reasonable expectation I think is at about the same margins.

Alan Laws

Okay. So would you be in a position to add this kind of margins in activity levels going up, would you go after the incremental demand by adding capacity at these margin levels?

Bill Stewart

No; likely no.

Alan Laws

Okay. And the last thing, how about putting the number around the pricing decline expected for next quarter in the sort of 3 to 4% range. Do you guys have a number that you are thinking?

Bill Stewart

I don’t think it’s going to be quite that.

Alan Laws

Okay. Thanks a lot. I will turn it back.

Bill Stewart

Yeah.

Operator

We will take our next question from Geoff Kieburtz with Citigroup.

Geoff Kieburtz

Good morning.

Bill Stewart

Good morning.

Geoff Kieburtz

When you - I think you made a comment, Bill, about expecting the pace of capacity additions to slow down given the margin erosion. Do you believe that the margins that you had in this quarter are comparable to what other players in the market had?

Bill Stewart

I don’t know why it should not be.

Geoff Kieburtz

Okay, alright. And when you went through the kind of the surprises, it sounded as if you were more surprised that the pricing erosion in Canada than in the pricing erosion in the US, did I misunderstand that?

Bill Stewart

I didn’t try to convey that thought, no.

Geoff Kieburtz

Okay. So, what is your thought then about why the pricing eroded more dramatically than you had anticipated coming into the quarter?

Bill Stewart

Well, we were just thinking that the rate of price erosion should at some point begin to moderate but there were a lot of great opportunities with customers that developed in December timeframe that were strong competitive forces having to make agreements at prices a lot more aggressively than we had in the prior quarters and you got to defend your territory and much of what we did during the negotiating process was to defend our territory and all that resulted in these pricing results that we are talking about.

Geoff Kieburtz

Okay.

Bill Stewart

It was just a reasonable expectation, it was all off the markets.

Geoff Kieburtz

Okay. And my last question, you had mentioned I think that you were very pleased with the performance in Russia and some other folks described the Russian pressure pumping market is being oversupplied with declining margins and actually capacity beginning to be pulled out of that market. Are you seeing it differently?

Bill Stewart

No, we have had some problems of our own from a managerial perspective and we were in some non-core businesses there and our business was spread a little too thin, too many bases with not enough revenue. So, we are kind of in a pull back and let’s focus, let's indigenize, let's get the cost where they ought to be and as a consequence, we have been fighting our own internal battle whereas these external market forces are clearly in place and we have been having to deal with that too. We are not adding any more capacity, we’ve moved a little, some capacity out of Russia, but we now have some fairly good contracts. We’ve got most of our work staff are Russian, and so with the lower revenue improvement I think you will see some good incrementals there.

Geoff Kieburtz

Okay. Do you expect to keep the current capacity in Russia then?

Bill Stewart

Yes, we do.

Geoff Kieburtz

And where did you move the stuff you took out of Russia too?

Bill Stewart

Somewhat to Kazakhstan and somewhat I think we sent some down to Latin America.

Geoff Kieburtz

Okay. Thanks very much.

Bill Stewart

Yeah.

Operator

We will go next to Dan Pickering with Tudor Pickering & Holt.

Dan Pickering

Good morning.

Bill Stewart

Good morning.

Dan Pickering

I would like to talk a little bit about the international business. For a couple of quarters now the margin levels have been kind of below the average over the last year. I am just curios if that is a function of ongoing infrastructure cost and expansion, pricing issues? It sounds like there is a little bit of turmoil in the organization in some areas. Can you give us a better read there?

Bill Stewart

Well, you just have to go region by region, Latin America were doing wonderful, sending equipment there, getting new contracts. So, the great vessel position in Brazil, new cement unit placements for new rigs moving into Brazil, that's great.

West Africa, basically that’s kind of a startup area for us and we have struggled and margins are low. We’re getting some new contracts, but the margins are still pretty low and that’s the reason that we put that area under Latin America. There is a common Portuguese language between Angola and Brazil. Many of the other companies manage Angola out of Latin America and so we’ll have better technical support, better marketing effort I think as we make this sort of change.

In North Africa, we got a mix, we got a startup in Libya, which is not producing good margins, but we also have the more matured Algerian business, which is doing fine. We are adding capital to Algeria and expect nice contribution there. Libya has been a little slow going, low margins and - but under the new management out of the Middle East, you got the common language and good support capability and it should do better in that market. So I think the trend there will be positive and upward.

Europe’s slow growth kind of a maintenance market for us, we get significantly impacted by the absent flows of activity in Norway. And when there is low revenue, you really get hit on the bottom line because of the cost being higher than any place in the world. So, that’s the difficult place for us. In Russia we just talked about what’s happening there. Middle East doing great, I think the problem we've got this quarter in the Middle East was the last quarter was a great quarter. So comparisons are difficult and same with the Asia Pacific, had a great quarter last year and weather conditions come along and margins are quite as good.

Dan Pickering

I guess we saw the second half of last year run in something like the 14, 15% margin range. I mean is that realistic for the second half of this year?

Bill Stewart

I think so. Let me tell you, I mean, we’ve got everything in place to produce better margins all throughout the world and has an intensive margin improvement process going on here. So I think we will see better margins.

Dan Pickering

Okay. And then Bill you mentioned in the US on the cost side, you were seeing diesel hitches by roughly $0.02 a share. So are you going back to customers to try and get them to pay that or how are you avoiding or recouping those costs?

Bill Stewart

Yeah, addressing those costs will be part of this cost recovery process that I mentioned earlier.

Dan Pickering

How quickly do you think that might be able to take effect?

Bill Stewart

April 1 was when we were – it was May 1 that we were focusing on getting some relief on these issues.

Dan Pickering

Okay, so it’s really going to be more third or the September quarter before you see it?

Bill Stewart

Well, we will seed. I mean we are going to do all that we can to try to get it as quickly as we can.

Dan Pickering

Okay. Alright, thank you.

Bill Stewart

Thank you.

Operator

We will go next to Jim Crandell with Lehman Brothers.

Jim Crandell

Good morning. Bill, where do you think you are now in terms of capacity utilization of your stimulation suite in the US?

Bill Stewart

I think we are probably in the 88% range, somewhere in that range, 88 below 90s…

Jim Crandell

Yeah. And where do you think the industry is?

Bill Stewart

We think in the same neighborhood.

Jim Crandell

I mean, there were some observers Bill, myself included, taking my question but I think that we could add as many as 200 land rigs over the course of this year if we did and that was the overall outlook could the pressure pumping business, stimulation business accommodate that kind of increase in rig activity, and I guess, you must disagree with that because your sort of outlook is that you are not looking for any improvement in margins but it seems to me that that would tighten the supply/demand materially out there over the course of the year?

Bill Stewart

Yeah, I mean, it all depends on what the customer is willing to do. Currently if the customers are doing fracs Monday through Friday, a very little frac work done on the weekend, and so they start fracing on Saturday and sometimes on Sunday then you can squeeze more utilization out of your equipment, people would be at that point a limiting factor.

Jim Crandell

Don’t you think that in that sort of recovery, the pricing would come back significantly?

Bill Stewart

Well, absolutely.

Jim Crandell

Yeah, I mean reasonably, I was going to say pricing will come back reasonably significantly by year-end under that. And so your comment about that you I think you made the comment in the US that you sort of work at the -- I guess that's a fiscal year forecast that you would keep margins about the same in the US?

Bill Stewart

Well, that's my gut feel for what the market will bear at this point. Nothing more than that, we don’t -- we’ve got a psychology in the market that’s shifted over toward the customer. Back couple of years ago, the psychology was basically in the hands of the service companies as we were able to dictate pricing based on missed jobs and scheduling jobs way out in the future and such as that we are missing fewer jobs and the schedules are not quite as long as what they used to be and under those circumstances we’ve had this price impact. Now if activity comes back and we go through that same process of scheduling jobs out long-term and missing jobs that come along then the psychology will shift back to us and that’s what you need for better pricing. I don’t see that happening between now and the end of the year and that’s the reason that the most reasonable expectation is a degree of price to build this settling into the business in such a way that we start producing positive comparisons in the US business.

Jim Crandell

Okay. Bill, if it -- let's say if I am right, if something you see this sort of strong recovery in the US over the balance of the year, it looks like it’ll continue to ’09, you made the comment that you think capacity additions will be even less. I was thinking that comment that we sort off the rate than the capacity additions again in the industry and that and what kind of sort of lead times do you think they are today to add capacity into the market if we see that sort of strong recovery scenario over the course of the year in the US?

Bill Stewart

Well, I think there are about nine months for equipment to build at this point.

Jim Crandell

So, if you saw utilization full for your fleet, pricing was moving up, wouldn’t you go back to adding capacity at a greater rate for ’09?

Bill Stewart

Not in the States. I think we have satisfied what our needs are in the States for a reasonable time. There is some equipment that’s old and de-crap that may need to be replaced and we will have to be adding some maintenance capacity if you will or replacement capacity. But as far as incremental capacity adds, our objective would be to try to squeeze as much add up what we’ve got as we can.

Jim Crandell

Okay. And in terms for the quarter that's out Bill in the North America versus your expectations, would you say that in North America would you say cost and lower prices played a roughly equal role?

Bill Stewart

Yeah, I think that would be correct.

Jim Crandell

Okay. And could you -- I know you have been sort of tracking it quarter by quarter and every quarter your sales were down X%, but where do you think we are now versus the peak in US stimulation pricing?

Bill Stewart

Versus the peak, 20% down.

Jim Crandell

20% down, that’s not a surprise. And could you characterize why you had these -- I mean $0.04 a share for one base is quite a lot. I mean, could you characterize why the cost overruns in Arkansas?

Bill Stewart

Well, we don’t have a permanent facility there, we have a temporary facility, we are hiring people, moving equipment in, and we are operating out of a temporary location. And we are doing these huge frac jobs that unless the sand storage capacity is minimal, all throughout that whole region. And so, there was tremendous amount of demurrage and other costs relative to that that impacted the results.

Jeff Smith

Just we are in the beginning stages of trying to put together our new base and at the same time get fully operational with equipment out of a temporary facility.

Jim Crandell

Okay. And Bill, I thought you said that the costs were apparent early in the quarter, most of the price reductions took place in January and then things stabilized. Did you consider after you were aware of the January results putting out some kind of release lowering your guidance or did you think you could get it back or you didn’t think it was big enough to do that?

Bill Stewart

They are early announcement really. We don’t think it was necessary and it was only until about the March month that it became obvious that it would be as much of a miss is what we actually realized.

Jim Crandell

Okay. And the last question, but do you think that as you look at your fracturing business that lots of it is being impacted by technology. I mentioned on Halliburton call we had the CLO of one of those two or three largest independent of the country basically just saying that the business as a commodity, he doesn’t use Halliburton and Schlumberger or BJ and that they know as much of the fracturing companies and this is the company that has 70, 80 range of work, so I was a little bit surprised to hear that and represented almost that all the companies held the same way. Do you see that more of the businesses becoming commodity focused?

Bill Stewart

I think about 50% of it is simpler type works that many of these smaller companies can do about the benefit of research and development and technical service laboratories in the various regions where we operate and the other 50% is more technology oriented at this time. Over time, I think you will see that the large fracturing companies, the Halliburton and Schlumberger and BJ spending more on technical development will come up with new products, new techniques that will make those more simpler jobs, more technical by showing that the technical attributes of the job provides better results. That’s what makes a difference between us and the smaller companies, and over time, I think the technology approach will be the winner.

Jim Crandell

Do you think the message is getting out appropriately to the -- I guess the larger customers that again in late of May comments and questions?

Bill Stewart

I think they understand what the difference is between the various service companies and what they can provide, yes.

Jim Crandell

Okay. Thank you for your answers, Bill.

Bill Stewart

Sure.

Operator

We will take our next question from Brad Handler with Wachovia.

Brad Handler

Thanks. Good morning.

Bill Stewart

Good morning

Brad Handler

Maybe I’ll shift gears a little bit back to international. On that conference call earlier, one of your peers indicated that there was $10 billion worth of large projects outstanding, there were some discussion about integrated projects as part of that question and presumably some of those are being bid as integrated projects. Just curious about your approach to partnering for some of that that would work, maybe you could put a dollar amount on kind of you are not the potentially outstanding for you all over the next couple of years?

Bill Stewart

Actually, it's a small part of our business. We have done some project type work in Mexico and the Burgos Basin and we have in that case teamed with other companies to provide all the various services, drilling, well site, prep, we provide fracturing, coal tubing and cementing type services. There is a couple of other projects being bid on down in Mexico and we are involved in bidding process. But aside from that for us, we don’t really see that business as being all that significant. There has been a project in Saudi Arabia that we bid on with Baker. And in Russia, we were not involved any of that type of work at all. I think Schlumberger does most, a lot of the integrated package work in Russia. Outside of those three areas, very minimal in terms of project work in the marketplace.

Brad Handler

Okay. Interesting, all right, thanks. I appreciate that. I guess just an unrelated question, can you just share a little bit more about some of those cost initiative that you mentioned. I understand the fuel surcharge stuff, but on the cost side, I guess mostly North American related, just may be couple of examples of things that you can do?

Bill Stewart

There is a couple of areas in the personnel area that we can think improve on. We have a number of contract employees. We have a number of people that rotate in the areas and those are very costly, keep your equipment going, but the costs are much greater than if you have local people that do the work. So, and we are also loaning people out in the Canadian business right now that’s in breakup so we have got the people that otherwise wouldn’t be very busy, loaned out to the US, other parts of our operations throughout the world. Keep those folks active and minimize hiring and other parts or at least feel the need that the other parts of operation have on this one or two month basis.

Brad Handler

Okay. I understand the loaning stuff. And with respect to hiring permanent workers, I guess you sort of answered both, I guess but with respect to hiring permanent workers, you are finding, how tight are the labor hiring conditions, sort of get the sense that things are very, very tight?

Bill Stewart

It’s pretty tight particularly people with experience.

Brad Handler

All right. So that sounds like a struggle to try to put any more permanent employee base in various regions?

Bill Stewart

Well, you start to do a lot of training. We have some expedited training programs for supervisors, for our frac jobs and cement jobs and engineers, and we have some programs that offer training and development for our equipment operators, and we are finding that those training programs are very busy right now.

Brad Handler

Got you. Okay, thanks for the answers guys. I will turn it back.

Bill Stewart

Sure.

Operator

We will take our next question from Scott Gill with Simmons & Company.

Scott Gill

Yes. Good morning.

Bill Stewart

Good morning.

Scott Gill

I guess, my first question, I want to go back to the topic of Canada. Last year for the spring breakup, we saw the impact of earning cost to BJ about $0.09 and I think Jeff you made the comment of pricing down to 11% in Canada, yet your guidance costs were only $0.06 to $0.07 this year. Can you kind of bridge last year to this year, what the difference is?

Jeff Smith

Yeah, without putting on paper, let me just speak to the kind of the key areas as I look at it. Last year, spring breakup lasted a bit longer than what we anticipated plus we had a quite a bit of cost inefficiencies there. And so I have taken that away, the removal of the capacity out of the market, it is going to benefit that as well. Grossly, Scott, it is a pricing game here, and so that’s the best estimate that we have at this time. Directionally, pricing has been going down. The hope is that we will kind of reach in the bottom there, and so those factors involve I think that comes to $0.06 to $0.07 decline as where we look at the business right now. And last quarter was much deeper than I think anybody expected and the impact was much greater.

Scott Gill

Okay. And I guess Bill, when we look at frac spreads, new frac spreads being built today, can you contrast the delivery time of a frac spread today say versus at the peak of the last cycle, maybe, 18 months ago?

Bill Stewart

No, I think it’s probably nine months versus 12 or 14, something like that.

Scott Gill

Okay. And Bill I didn’t write this down, I may have missed it. You’ve mentioned ’09 capitals spending, what was that number?

Bill Stewart

We’ve not announced that number, but as I indicated in the commentary, it will be down for ’08. ’08 was down about 10% from’07. You might see something similar and maybe a little more.

Scott Gill

And what would cause you to reverse that thinking, why because you had to need to spend more, not less?

Bill Stewart

Well, you look at your forward plan and what cash you produce or expect to produce and then you assess the capital needs against that and many a times that’s greater than what you’d like to spend. So you try to prioritize the various projects and get to a level that you feel comfortable with. I think in light of the overall company’s results, that I am a little inclined to pullback on capital spending at this point and that’s where I am coming from.

Scott Gill

Okay. And I guess last question, Bill, you also mentioned in your opening comments that you would expect to see consolidation in the North American Pressure Pumping market, does BJ plan to be a participant in that consolidation?

Bill Stewart

As the pricing today, probably not, but I think that certainly all companies are probably not doing as well as we are, and now we expect that we got some managements out there that it might be a lot of impatient about things and all of that kind of is a foundation for companies coming together, and I think you’re likely to see that. We are making the little acquisition soon, and I think this kind of environment will give us more opportunities to do the same thing again and again.

Scott Gill

Okay. Thank you very much.

Bill Stewart

Thank you.

Operator

We will go next to Pierre Conner with Capital One Southcoast.

Pierre Conner

Good morning gentlemen. Following up on some of this margin compression that was due to facility expansion, I wanted to ask, what are we looking for go-forward, you mentioned new shale areas that the customers are interested in. Do you anticipate that you are having some buildout issues in some other regions once you get Fayetteville behind you?

Bill Stewart

No, I think Fayetteville is a very different situation in that we have basin in McAlester, Oklahoma, which is really too far away from the center of the Fayetteville Shale area. The Bakken, we have base up there in South Dakota right accessible to the Bakken region. We are spread all the way through the Rockies with adequate base coverage and up in West Virginia and Pennsylvania we have bases in those areas for the most solace play and they are up in Canada and in Saskatchewan we have a base up there that’s close of hands. So, infrastructure is pretty well in place in all the regions except in the Fayetteville the other exception is up in Northeast British Columbia and that’s new for everybody both the oil companies and service companies and that’s going to be a long-term development process as soon as they prove out that formation.

Pierre Conner

Okay. But that point you bodes it well, well positioned to that areas, not to expect any further expenses associated with that. Further on the cost issues in North America, you mentioned fuel surcharges in particular beginning to hear some commentary about province and deliverability, fringe points. What is your perspective on sand in particular availability on what might that save for higher-end province use?

Bill Stewart

Yeah, sand is some case was being allocated by the suppliers, as suppliers are adding a little capacity on their part, but we have seen some stand delivery disruptions from time to time but it is not major, I think the large service companies were probably getting the preference on sand, as compare to the smaller one so we are in the good start in, in that regard.

Pierre Conner

You don’t have any incremental cost associated with further delivery that you can pass on, relative to province?

Bill Stewart

No. I mean it work if you don’t prices for sand go up and that just a basis forgetting a little better price from the customer to that one element, we have a able to adjust for that if in fact those stand use for the year is up significantly compared to prior year. So basically activity is up dramatically. Even though revenue is modestly up, is all prices resulted in our very flattish revenues.

Pierre Conner

Right. Okay. A lot of these already being answered gentleman thank you very much.

Bill Stewart

Thank you.

Operator

We will take our final question from David Anderson with UBS.

David Anderson

Just came back to your capacity addition comment you are missing 10% this year come in line of the market, I assume if a net number and I think you touched upon some of your comments, you changed out and in the past you have talked roughly 25% that needs to be changed out. What your plans for that this year, can you quantify that in which environment do you think is the best for you to change those equipment out.

Bill Stewart

We are replacing equipment during ’08, more aggressively then we have in all the year past. So this is perfect kind of our environment for building a great lot replacing old and lots of efficient equipment and upgrading the efficiency of your operations. So this were at the growth is pull back some utilization is not quite as it was in the prior year. You’ve got the circumstances for replacement as opposed to adding capacity and that’s what we’re doing to some extent.

David Anderson

Okay, it will help now, and I guess one last question kind of bigger strategy question, I guess the big difference between now as you look at the North-American market trying to pickup, the bigger swing now in past as this happened as you have whole flue of new independence out there, is there any change in terms of your thinking of how you’re going to force the market now a kind of different set of competitive out there than you had in the past?

Bill Stewart

No, I don’t think so. I think we will be competing more with the smaller companies than what we had in the past. You know, in the past since ’02 when these companies came into the market, we didn’t really compete with those guys. The mark was growing so fast that everybody had more work to take than what they could cover, and so actually the use of technology, the use of our marketing group, the use of our service laboratories, and what it can do in terms of providing a better service being part of the process that gives us a little advantage compared to the smaller companies and we’ll compete on that basis.

David Anderson

Great, thank you.

Bill Stewart

Thank you.

Operator

Thank you. That does conclude the question-and-answer sessions today. At this time, Mr. Stewart I would like to turn the conference back over to you for any additional or closing remarks.

Bill Stewart

All right, thank you, thanks for all for joining us and we’ll see you in the next call.

Operator

Thank you ladies and gentleman once again that does conclude today’s conference. We thank you for your participation.

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