Complete Production Services, Inc. Q1 2008 Earnings Call Transcript

Complete Production Services, Inc. (CPX)

Q1 2008 Earnings Call Transcript

April 24, 2008 9:00 am ET

Executives

Mike Mayer – SVP and CFO

Joe Winkler – President and CEO

Analysts

Scott Gill – Simmons & Co.

Marshall Adkins – Raymond James

Ken Sill – Credit Suisse

Kevin Pollard – JP Morgan

Dan Pickering – Tudor, Pickering, Holt & Co.

Stephen Gengaro – Jefferies and Co.

David Anderson – UBS

Joe Agular – Johnson Rice

Mike Drickamer – Morgan Keegan

Pierre Conner – Capital One Southcoast

Roger Schmitz – Monarch

Presentation

Operator

Good day ladies and gentlemen and welcome to the first quarter 2008 Complete Production Services earnings conference call. My name is Cynthia and I will be your operator for today's call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator instructions) As a remainder, this call is being recorded for replay purposes.

I would now like to turn the call over to your host, Mr. Mike Mayer, Chief Financial Officer of Complete Production Services. Please proceed.

Mike Mayer

Thank you, Cynthia. Good morning everyone. Thank you for joining us this morning as we host our first quarter 2008 earnings conference call.

Before we begin the discussion of our financial results, please note that some of the statements we make during this call may contain projections and estimates including comments about our outlook for the Company's business, which are forward-looking statements within the meaning of the Securities Acts of 1933 and 1934. These forward – looking statements are based on limited information as of today, which is subject to change. These forward-looking statements are further subject to risks and uncertainties and actual results may differ materially. You should not assume that these forward looking statements remain valid beyond the current quarter. I refer you to our various documents filed with the Securities and Exchange Commission for a more detailed discussion of some of the risk factors that might impact our business.

With that, I will turn it over to Joe Winkler.

Joe Winkler

Thanks, Mike, and good morning to all on the call. I'm pleased to report a very good performance by Complete Production Services in Q1 2008, this against a backdrop of caution and uncertainty at the end of last year and the beginning of Q1. You will recall there was quite a bit of concern over activity levels due to expectations of lower natural gas prices and the impact that additional service capacity could have on our business. This followed a fourth quarter, in which we had weather impacts, holidays, year-end slowdowns, you name it.

As winter arrived the natural gas prices began to increase. Our customers started off the year more confident than they closed it and we begin seeing the impact in our business. Not only was activity beginning to pick up but our customers began to concentrate more on the execution of the drilling plans within the resource plays in order to increase their production and lower their finding and development cost. They have really kicked into the manufacturing phase of these resource plays. As the quarter played out, the confidence level improved and activity increased, and we begin seeing our customers announce positions in new and emerging resource plays.

That is the backdrop, and now to our performance review. We will start with a sequential look. For the quarter, we generated revenue of $455.3 million, net income of $43.9 million, and fully diluted earnings per share of $0.60. Revenue increased $30.7 million or 7% and EBITDA was up $10.3 million. There was very little impact from acquisitions during this period. During this period, the U.S. rig count declined about 1%. Our EBITDA margin improved to 27.3% from 26.9%, with incremental EBITDA margins of about 33.5%.

Completion and production services led the way with revenue up $26.7 million and EBITDA up $10.6 million. EBITDA margins improved to 31.7% resulting in EBITDA incrementals of 38.6%. EBITDA of $124.5 million is about $3 million greater than our previous in Q1 of '07. A portion of this improvement is the seasonal Q1 recovery in Canada. Our fluid handling business performed well, especially our operations in the Rockies and the Mid-Continent areas due to a pickup in activity in these areas. Better management by our team of the trade opportunity price and utilization and the impact of additional investments.

Our coil tubing operation in Mexico turned in a solid performance. However, this was offset by the impact of much lower activity in the Gulf of Mexico and the effects of additional capacity in some of our Mid-Continent and North Texas operations.

Our pressure pumping business was up in revenue and EBITDA although our percent margins were slightly lower than the previous quarter. We benefited from the full quarter impact of our frac fleet, offset somewhat by the carry over of the lower pricing experienced in Q4.

Our well service business was steady during the quarter. Both revenue and margins were up slightly. In most areas, pricing was firm during the quarter, but we did see a little lower utilization in some of our markets.

Drilling services segment revenue was flat. However, margins declined due primarily to lower pricing and inflationary forces, mainly fuel and labor in our rig logistics business. And within our product sales segment, revenues and margins improved due principally to better product mix.

Now to the year-over-year review, year-over-year revenue increased by 11.8% to $48.2 million, with most of the growth from our completion and production services segment. During this period, the growth in the U.S. rig count was approximately 2%.

Our completion and production services segment revenues increased approximately $48 million or about 16%. Segment EBITDA margins were 31.7% and we delivered EBITDA incremental of 18%. Most of this growth was attributable to organic investments.

Our well service business delivered a good performance, although our utilizations were down a little, our per hour rates were up slightly. Our pressure pumping business contributed to the growth as a result of the impact of CapEx deployed over the course of 2007. However, EBITDA was down due to the change in pricing experienced in the latter part of 2007.

Our coil tubing business generated additional revenue on the strength of our coil tubing drilling project, an excellent performance by our Mexico operation, the additional volume from our investments and our fleet over the course of the year, offset by lower activity levels in the Gulf of Mexico and the effects of additional capacity on our Mid-Continent and North Texas area.

Our fluid handling business performed very well during the quarter. Our volume was up with good incremental due to the benefit of our investments and equipment and to a lesser extent the impact of a couple of acquisitions done early last year. This business performed well across all areas.

Offsetting these positive performances were the continued challenges in Canada, which was down in both revenue and EBITDA, and our rental operation, which is beginning to experience the impact of additional capacity through lower utilization and lower pricing.

Moving to our drilling services segment, profits were down significantly on an increase in revenue, with EBITDA margins declining from 30.9% to 22.6%. Our contract drilling business revenue was up slightly. However, margins were negatively affected by lower utilization, higher operating cost and lower rates on some of the rigs. And our rig logistics business struggled during the quarter, resulting in lower revenue and lower EBITDA. We experienced lower utilization and lower pricing in some markets due to the impact of additional capacity, and we continue to feel the effects of inflation on our cost structure particularly fuel and labor.

Within our product sales segment, revenue was down but EBITDA up due primarily to product mix within our supply store business.

Moving away from the income statement, our CapEx for Q1 was approximately $51 million, about one half of our spend in Q4. It was a little over 60% growth and about 40% maintenance.

On the strategic front, we slowed down our acquisition phase in 2007 to strengthen our balance sheet to be opportunistic anticipating that consolidation opportunities might become available.

On April 15, we acquired Frac Source, a Barnett Shale based pressure pumping competitor. By early June, we will be working three fleets for a major Barnett Shale operator. Two of the fleets will be working 24 hours a day, not less than six days a week, while the other will be working a minimum of 18 hours per day, not less than six days a week. Each of the fleets are under contract with remaining terms are from 28 months to 3 years.

Total consideration is approximately $90 million, which includes the purchase price and an estimated $20 million to finish out the third fleet and to modify the fleets to operate in a manner we think meets ours and our customer's objectives.

A couple of points to take away from this transaction, our team's operational ability and expertise to meet our customer's very high expectations and to generate acceptable returns to CPX, our customer's confidence in our ability, our commitment to and belief in this business as an integral part of our completion and production service strategy focused on the resource plays.

The increasing demand for horizontal wells within the resource plays that require significantly greater service intensity, particularly multi-stage fracs, and consolidation opportunities are available. The process has begun and we intent to participate. We also have our sixth and seventh fleet that we expect to deploy late Q2 in a market outside of the Barnett Shale.

By the end of Q2, we will have deployed approximately 200,000 hydraulic horsepower. A lot has been going on in our pressure pumping business in the last few months. We also closed on a small rental and fishing operation in late Q1 for approximately $9.5 million. The operation will fit well with our already existing presence in the Piceance and will provide an opportunity to further expand our position in the Raton Basin.

Strategically, in order to improve our focus and allocate our resources to our desired growth areas, we are in the process of negotiating the sale of certain of our noncore assets within our product sales segment. The transaction is subject to a number of conditions including completion of due diligence and proper approvals, and if consummated would likely occur in May and involve cash consideration in the $50 million range.

I will now turn it over to Mike for some additional financial details and come back for our outlook.

Mike Mayer

Thanks, Joe. As Joe mentioned, we still back our capital expenditures in the quarter investing a total of about $51 million. As a result of significant investments we've made over the last several quarters, however, our depreciation and amortization expense increased $11.6 million for the first quarter of 2008 compared to the first quarter of 2007. We expect to see depreciation continue to increase through the second quarter, as we place into service additional frac fleets and other equipment, as well as take into account the impact of the Frac Source acquisition.

Depreciation and amortization should increase between $2.5 million to $3 million in the second quarter of 2008 compared to the first quarter of 2008. Net interest expense in the first quarter was down slightly from a year ago due primarily to lower interest rates. We ended the quarter with a leverage ratio of 1.73 and our debt-to-capital ratio was about 45%.

Borrowings under our revolver carried interest rates ranging from 4.2% to 5.5%. We would expect interest expense to increase modestly in the second quarter due to the additional borrowings required to finance the Frac Source acquisition, offset by positive cash flow from operations.

Our effective tax rate for the quarter was 36%, which is lower than the rate we recorded in the first quarter of last year. The difference is due primarily to lower tax rates in foreign jurisdictions, as well as lower state taxes. We currently expect the full year rate to be 36% as well.

We are pleased with the overall strengthening of our balance sheet thus far in 2008 and we will continue to execute our growth plans through the remainder of the year. We think our available liquidity under our credit facility coupled with solid cash flow from operations should be more than adequate for the foreseeable future.

I'll now turn it back to Joe.

Joe Winkler

Now to our outlook, our customers indicate they will continue to execute their drilling plans especially within the already identified resource plays. We expect activity levels in the new resource plays to begin to pickup, but the phase will be dependent upon acreage position, services, capability, and availability, customers' internal resource availability, et cetera. The activity variable seems to no longer be in question especially in the near-term.

Capacity and its impact on price and utilization is the other variable. Although, we have not seen as dramatic an impact as some were anticipating, we still need to keep an eye on it. You heard us say we have seen the impact in some of our businesses in quarter one. Inflationary forces especially fuel will continue to be a concern. Although we will attempt to recover some of this through price increases or fuel surcharges, there is no assurance that we will be able to do so.

Our expectation in this environment is that pricing is stable and that we do not incur additional major pressure during Q2. The forces in play in our business in Q2 are the seasonal decline in Canada, our coil tubing drilling project will take a break until early Q3, we will redeploy the units but will not have the same utilization or pricing on the revenue in the redeployment.

We will benefit from the pressure pumping acquisition. However, we will be burdened by startup cost associated with the deployment of the additional two frac fleets. We expect there may be some additional pricing utilization pressure carry-forward from Q1 in some of our coil tubing markets. We will benefit from the full quarter impact of Q1 CapEx, will incur the additional DD&A that Mike referred to. And given all of this, we expect EPS in quarter two to be in the $0.53 to $0.55 range.

In summary, an excellent quarter one, activity levels in our markets look good, customers continue to expand their position in the resource plays. This drives increased number of horizontal wells and increased demand for our services. We continue to build out our position as the resource play service provider with a focus on the completion and production phase of the wellbore within our well service, coil tubing, pressure pumping, wireline and fluid handling businesses.

Before opening it up for questions, I would like to personally thank all of our dedicated employees for their efforts to successfully execute our strategy. We think they make a difference.

Cynthia, we will now open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Scott Gill of Simmons & Company

Scott Gill – Simmons & Company

Hi, thank you. Good morning, gentlemen.

Joe Winkler

Hi, good morning.

Mike Mayer

Hi, Scott.

Scott Gill – Simmons & Company

Actually I got several questions here, I guess first, Joe, just talk to us a little bit about cost inflation and you had a really good quarter here. We heard a lot from the pressure pumpers this quarter about fuel inflation, another cost inflation hurting their numbers, yet – and I know pressure pumping is small within the big mix of complete. But, on fluid handling, there is some pretty substantial fuel cost there. How does – how were you able to avoid it in the first quarter?

Joe Winkler

Scott, I don't think we avoided it. No question it's an issue for us as well. Part of what we mentioned is that get a little better job, and as we did in Q4 on the price utilization trade-off, additional volume due to increase in activity as well as the investments that we made. We are not immune to the impacts of the inflationary forces. I think our team did a very, very good job managing it. And one of the reasons I mentioned and as we go forward is that's an issue we are going have to continue to answer with.

Scott Gill – Simmons & Company

And my second question, if you could give us a little more color on Frac Source, $90 million for three frac fleet, I thought in the past you guys were giving guidance for the frac fleet, call it 20,000 horsepower cost about $20 million – maybe a little more than $20 million. This looks to be more like $30 million per fleet, is there is something special about the horsepower or is that just the price you pay for those contracts?

Joe Winkler

It's the business, it's an acquisition albeit at a bit of a startup. When you look at the total economics and our estimation, this is no different than the others that we have been doing in times past in terms of the expected multiple. It's also one in which we have negotiated terms and conditions in about a three year contract on each of the fleet. So, the economics were solid and as well the risk is mitigated by virtue of a fairly long-term contract in that business.

Scott Gill – Simmons & Company

Can you give us some …

Joe Winkler

And yes, the price is greater than the cost of the fleet.

Scott Gill – Simmons & Company

Can you give us some valuation metrics, generally in terms of enterprise value to EBITDA or something like that?

Joe Winkler

Do we estimate on this 3.5 to 4?

Mike Mayer

Yes.

Joe Winkler

3.5 to 4, something in that range depending upon how well we do, it could be better.

Scott Gill – Simmons & Company

And do you have cost escalation provisions in the contracts?

Joe Winkler

Just a minute, I'm doing some quick math, Scott, make sure it's about right, okay. Certain portions of the costs will be in this contract provided by the customer.

Scott Gill – Simmons & Company

Okay. So you are fairly protected from rising fuel costs and …

Joe Winkler

The answer to that is yes.

Scott Gill – Simmons & Company

Okay

Joe Winkler

To your question, yes, we are protected these – the fuel and I think sand as well are items that will be provided by the customer.

Scott Gill – Simmons & Company

Okay. I will let others ask and I will get back in the queue.

Joe Winkler

Thanks Scott.

Operator

Your next question comes from the line of Marshall Adkins of Raymond James. Please proceed.

Marshall Adkins – Raymond James

Joe, I am going to stay on the same subject view from it, but it looks like you are going to have by the end of the second quarter about 10 frac fleets, is that right, am I doing the math right?

Joe Winkler

You are doing your math correct

Marshall Adkins – Raymond James

It's pretty simple math.

Joe Winkler

That's why you are able to do it right, excuse me. I'm sorry, I couldn't resist.

Marshall Adkins – Raymond James

We state school educated guys think alike. Let's – give me some insight here as to how much of your business is going to be for, let's say, a year from date and how much you think would be frac driven, number one. And then Scott mentioned BJ having some issues last quarter. Obviously, you all did very well. Their outlook was a little iffy. What is your outlook there on the frac side and kind of where you see that business going?

Joe Winkler

I think evident by our willingness to do a transaction at this time and the like, Marshall, I think that we are pretty optimistic on the business. That doesn't mean we won't see some short-term bumps in the road. But, the demand for horizontal drilling continues to increase. That drives a big portion in demand for multi-stage frac-ing. I think the other issue here is the ability to get the job done. That's not unimportant. Yes, there is going to be issues with fuel, there's going to be issues with sand and competition and the like. But, we think that's what allows us to be able to differentiate. So, in terms of your question where do we think it ends up, I mean we have got kind of a fleet. I suspect we are looking at a run rate of revenue about $300 million guys something in that range? Something in that range and it depends then on what you forecast for the rest of the company, but certainly it will be a bigger portion of what we do as we go forward. And we intend to continue look for opportunities to grow the business in the locations.

Marshall Adkins – Raymond James

So, pushing 20% of the business ex further acquisitions?

Joe Winkler

I don't know.

Mike Mayer

It will be more like to 10% to 15%.

Joe Winkler

It will be more like to 10% to 15%. Prior to the most recent transaction and deployment of the two additional fleets, we were probably 9% to 10%.

Marshall Adkins – Raymond James

So, just under 9%.

Joe Winkler

And so, yes, we will pick it up. That will increase to pushing 15%.

Marshall Adkins – Raymond James

All right, you hit a little bit on pricing in a couple of divisions and you are going pretty fast. But, could you kind of go back through, what are you seeing right now kind of on price on the drilling side and the work-over side, coil tubing, et cetera?

Joe Winkler

Yes, (inaudible) we don't have many drilling rigs. What we do have are principally in the Barnett Shale. And that's – and we are not a huge player, but we would describe it as stable to perhaps picking up a little bit depending upon the rig capability. We get a little bit of a mix shift there, but bottom line there our view is that it is stable to perhaps picking up.

Well service business, I would describe that, and this is going to be in general, not all markets are the same, but relatively stable in the well service business. The issue in the well service business is more utilization and inflation given the capacity effects. We are seeing lower utilization and that as well due to customers efficiency and them executing in the manufacturing environment, getting better and better at what they do. But we do see some inflationary forces there, but bottom line I would describe that one as well and our expectation for it to be stable.

Within the call, it's going to matter by markets, we have seen – we talked about it in Q3 and Q4 a little bit of pricing pressure, little lower utilization in certain markets and that we think is directly attributable to the capacity that's come into the market. We expect that to continue a bit. What we are finding there is it does matter the ability to do the job and do it properly, et cetera, et cetera. So, that will take a little bit of time to sort itself out. But, we do expect a little bit of pressure in certain markets (inaudible).

Let's see, pressure pumping, the way we see it today from where we are and what we are doing, I would describe that as stable. Keep in mind, our comments are specifically limited to the Barnett.

Let's see, what I'm missing guys, anything else? Fuel handling in aggregate, East Texas might be a little bit under pressure pricing, but the rest of the area I would describe that as well as being relatively stable.

Marshall Adkins – Raymond James

Last one just a quick one, ballpark what percent of your business right now is in these unconventional shale or resource plays?

Joe Winkler

What – it's 7% to 8% thereby, smaller?

Mike Mayer

Big number.

Joe Winkler

Yes, I mean it –yes, it's probably 70% plus there, Marshall, perhaps 80%.

Marshall Adkins – Raymond James

Good, thank you guys. Great job.

Joe Winkler

Okay, thanks Marshall.

Operator

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

Ken Sill – Credit Suisse

Hi, good morning guys. Wanted to follow up on one of Scott's questions and talk about the cost of capacity. So, what if you are to start today and order new frac fleet, which I am assuming you are probably not, what would it cost and what do lead times look like now?

Joe Winkler

Well, just depends on the your definition (inaudible) cost is not terribly different than what it was and we are talking probably something in the $20 million, $25 million range depending upon configuration. And I suspect it would take you probably about nine months perhaps, it all depends maybe a year, depending upon where you sourced your product and if you (inaudible) yourself, et cetera. So, $20 million, $25 million, nine months are so, maybe a year, Ken.

Ken Sill – Credit Suisse

Okay. And what are the lead times on the coil tubing and the work-over rigs right now that, has that changed?

Joe Winkler

Work-over lead times has come down versus where they were. You can probably get a work-over rig in a quarter or two something along those lines. Coil probably looking at a year thereabouts. Qualify on coil, a lot of the capacity coming out on coil I think is going international. And so, while the queues were long, the destination is principally ex-North America.

Ken Sill – Credit Suisse

And then you had mentioned you are going to be selling part of your products business for $50 million probably late this quarter I guess.

Joe Winkler

Hopefully.

Ken Sill – Credit Suisse

Yes, hopefully. How much of that as a percentage of the revenues and what kind of margin – if you are willing to disclose it, what kind of margins are you getting out what you are selling?

Joe Winkler

We'll cover those details when we get it done in January.

Ken Sill – Credit Suisse

When it closes, so just leave it in for now?

Joe Winkler

Yes, if you don't mind. We have got a lot of work to do yet on that, but as we have said before and we said in the call, what we'd like to do is redeploy that capital into things that we want to concentrate on and grow within the completion and production phase of the well bore, not to (inaudible) businesses but just not a strategic definition.

Ken Sill – Credit Suisse

Okay. And then, just wanted to get your view, obviously with the investment in pressure pumping, you are fairly confident in the outlook there. Kind of looking through the landscape, the big guys Schlumberger and Halliburton seem to think that things are in your camp, that they are stable and they had pretty good quarters. BJ just doesn't seem to be thinking as positively or actually performing as well. I guess is there a bifurcation of the market going on right now, where there is just much fiercer competition at the bottom or commodity business and there is a term market that's got better pricing, or is it really just kind of where you happen to be at the time when you are signing up for deals that affects your margin right now.

Joe Winkler

I think it's a combination of things, Ken, and we could only speak through our eyes and what we see and where we participate. I think it matters where you are, I think it matters how big you are, and the more areas that you are in, perhaps the more exposure you might be to some areas that aren't as good as other areas might be, that may be more competitive. Customer views might be different. I think it matters on your performance, your ability to get the job done. And clearly, it matters as well in this business that unlike 18 months, 2 years ago, (inaudible) work, you need to able to perform. And if you don't, utilizations will be done and given the cost structure, you will likely suffer as a result of that. So, we can speak to where we are. It's not perfect by any stretch. It is competitive, it is tough, we are not immune to the forces in play. Our people have stepped up and done a bang-up job execute and anticipating certain things. And from the long-term perspective, we think it's a great business and a good place to be. That does not mean we won't get some bumps in the road, but the path to that success will have some ups and downs.

Ken Sill – Credit Suisse

One final question, and I know you guys have spent a lot of time looking at where you want to put your new capacity. Maybe you could talk about what are some of the areas where you wouldn't want to be putting these capacity right now?

Joe Winkler

Okay. It's your question.

Ken Sill – Credit Suisse

Well, it gives you a lot of latitude/

Joe Winkler

I know. Well, from our standpoint, our strategy is focused on the resource plays. And so, it would be unlikely that you would see us get into an area that was not a resource play with our stimulation business. But I rather not speculate exactly what those areas might not be, Ken, but suffice it to say, highly likely that it would be in a resource play.

Ken Sill – Credit Suisse

Then I will try to direct it another way then, obviously what's going up in Arkansas and Eastern Oklahoma is attracting a lot of interest, looks like a lot of people are trying to get into that market. Are some of these, is there a danger that people are trying to position equipment in anticipation of work that could kind of the delay the recovery in pressure pumping, or do you think that demand is going to pretty much match supply this year kind of regardless of what people are – where people are moving the assets? I have some worry about the Fayetteville and all these people.

Joe Winkler

I understand, your question is, is there a bunch of capacity heading to or already in the Fayetteville and the Woodford that could be ahead of demand by the customer. I don't know the answer to that question, Ken. I said, our businesses were pretty much focused on the Barnett and I don't know the answer to that question. I mean, there is no question that our belief is in those areas that demand for the service will continue to grow. I don't know for sure in the near-term whether that demand will be more or less than the capacity available to provide the service. The other issue that gets into the equation as well as the ability of the service provided to do the proper job.

Ken Sill – Credit Suisse

Okay.

Joe Winkler

That affects the equation and that takes a little time to sort out, but it affects the equation.

Ken Sill – Credit Suisse

All right. Thanks, Joe.

Joe Winkler

Okay.

Operator

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

Kevin Pollard – JPMorgan

Good morning, guys.

Joe Winkler

Hi, Kevin, good morning.

Kevin Pollard – JPMorgan

I wanted to touch on the CapEx. Last quarter, you scaled it back a little bit – or actually quite a bit from your original plan, I think, some concerns of overcapacity and maybe some concerns on the demand side. And since that time, obviously, the outlook has gotten considerably better, particularly in your resource play markets. And so, I was wondering if you could maybe give us an update on where you are thinking with the CapEx budget, if a decision has been made on what would have to happen for you to maybe revisit the original higher budget and things like that.

Joe Winkler

Well, as we said in the call last time and part of our success is our ability to be opportunistic and we will continue to watch and monitor. Our CapEx, well, it will be up. A portion of the consideration on the pressure pumping acquisition will flow into the CapEx, and I mean, what we say last time, about 150 and there would be 20 plus or minus on that. So, when you think it in your model's allocation purchase price plus or minus 68 to 70, the balance is in CapEx. So, suffice it to say, Kevin, we have some ideas and thoughts and to be determined whether we significantly increase our CapEx for the remainder of the year. Our strategy was to strengthen our balance sheet to be opportunistic and that's what we are doing. We are not going to forego growth opportunities in positions and markets where we have a solid position. So, to be determined.

Kevin Pollard – JPMorgan

Well, it sounds like the bias is definitely towards the upside given the current outlook?

Joe Winkler

More bias toward upside than downside.

Kevin Pollard – JPMorgan

Are there any other areas, I mean, obviously you've just made a big investment in pressure pumping, so it seems likely that further increases in expenditure would be more geared towards things like coil tubing or well service. Are there any of those areas that you'd be more likely to focus on?

Joe Winkler

As far as we said, what we'd like to do going forward is to concentrate our efforts in the world of coil, well service, pressure pumping, wireline. And so, I don't think you'll see – in terms of significant investments, I don't think you'll see a big shift out of us at this stage.

Kevin Pollard – JPMorgan

You probably put fluids at the bottom of your priority list?

Joe Winkler

I wouldn't say the bottom, but in terms of our business performed very well. We did a very good job of that. We have spent a lot of time building that one out. It's time to concentrate on the others, to build them out.

Kevin Pollard – JPMorgan

Okay. If I could just touch on the pressure pumping acquisition one more time real quickly, since that's growing much more quickly than the rest of the – the completion and production segment, I was wondering if you could give us a feel for how you're pressure pumping EBITDA margins are relative to the overall segment. Are they higher or lower? And the faster growth in pumping will be something that dilutes those margins or actually brings them up?

Joe Winkler

I don't think it will dilute the margins.

Kevin Pollard – JPMorgan

Okay.

Joe Winkler

It will – we pretty confident based on everything we know today, that it will be accretive to the margins.

Kevin Pollard – JPMorgan

Okay. All right.

Joe Winkler

Unless of course the margins in all the others begin to rapidly rise.

Kevin Pollard – JPMorgan

Fair enough.

Joe Winkler

Okay.

Kevin Pollard – JPMorgan

Okay. Thanks, Joe.

Joe Winkler

Okay. Thank you.

Operator

Your next question comes from the line of Dan Pickering from Tudor, Pickering, Holt & Co. Please proceed.

Dan Pickering – Tudor, Pickering, Holt & Co.

Good morning, Joe, Mike.

Mike Mayer

Hi, Dan.

Joe Winkler

Good morning.

Dan Pickering – Tudor, Pickering, Holt & Co.

Qualitatively, I guess we had a lot of one-time issues last quarter, some issues in Mexico, et cetera. Was Q1 in terms of just overall activity, was it noticeably better than fourth quarter or did we just take a lot of those negatives away?

Joe Winkler

Well, I think, Dan, it was noticeably better than the fourth quarter. The fourth quarter had a lot of noise in it, so it was – at least when you were looking at it during or shortly at the end of Q4, it was difficult to tell what was going on. And as we got down to the timeline in Q1, Q1 I mean it just started off a little bit better, not great I might add but a little bit better. And as the quarter played out, the confidence and the tempo at least from our perspective just seemed to pick up. And so, I think it's a fair statement to say that it was better activity wise in Q1 than it was in Q4.

Dan Pickering – Tudor, Pickering, Holt & Co.

Okay. And then, from a – you did a good job of explaining kind of what's going on with pricing in various areas. How – at complete, how does the pricing decisions get made? Do you guys sit in Houston and say, this market feels better guys, let's not give up any price, or does it happen field level up?

Joe Winkler

It happens in collaboration and it starts at the field level in terms of what's going on in their market, what are the forces in play, what are the opportunities. We think, frankly, we'll have some discussion here, but those who know it best are at field level and they understand our desire to generate margins that can fund additional equipment and other things. So, it starts at the field level.

Dan Pickering – Tudor, Pickering, Holt & Co.

Okay, thank you. And then, you mentioned start-up costs associated with your, I guess, fleets five and six or six and seven.

Joe Winkler

Six and seven, yes.

Dan Pickering – Tudor, Pickering, Holt & Co.

Yes, six and seven. Can you give us a rough magnitude of what that might be just in dollar terms?

Joe Winkler

Well, that's a tough one, Dan, but let us do a little work on that. I don't know if we …

Dan Pickering – Tudor, Pickering, Holt & Co.

I'll follow up with you on that one.

Joe Winkler

I mean, it's probably, I would think, couple of million bucks.

Dan Pickering – Tudor, Pickering, Holt & Co.

Couple of million dollars?

Joe Winkler

I would think so, yes.

Dan Pickering – Tudor, Pickering, Holt & Co.

Okay, and …

Joe Winkler

And that will be determined depending how quickly we can get deployed and start generating revenue and so on.

Dan Pickering – Tudor, Pickering, Holt & Co.

Right. And as you look at those deployments, it sounds like you've identified the market where you are going. With the Frac Source acquisition, you were able to secure some pretty long-term work. Do you have long-term work for fleet six and seven?

Joe Winkler

Your question is, do we have a contract for six and seven, the answer to that is no.

Dan Pickering – Tudor, Pickering, Holt & Co.

Okay.

Joe Winkler

We have opportunity and that doesn't mean it won't evolve into something, but we've identified and we are moving.

Dan Pickering – Tudor, Pickering, Holt & Co.

Okay. And should we look for those fleets to be in a new market for you? I mean, I know it's not going to be the Barnett, you said that, but …

Joe Winkler

Right.

Dan Pickering – Tudor, Pickering, Holt & Co.

So, a new market for Complete as a company?

Joe Winkler

No. It's a market in which we have a presence and one which we'll be delighted to talk about in the next call.

Dan Pickering – Tudor, Pickering, Holt & Co.

Right, okay. And finally, for me anyway, we've seen with the basic transaction kind of a combination of drilling and workover companies here a little bit. You are involved in the drilling business, you are involved in the workover business. Do you have any increased interest in being bigger in either of those segments other than organic growth?

Joe Winkler

You said in the drilling and/or workover?

Dan Pickering – Tudor, Pickering, Holt & Co.

Yes.

Joe Winkler

Well, yes, we have a strong desire to have an increased presence in size in the well service business. It's certainly core to what we do and think it is right down the strike zone of our strategy. In terms of the drilling rigs, we'll have to give that one some more thought.

Dan Pickering – Tudor, Pickering, Holt & Co.

Okay. Doesn't sound like that's necessarily that high on your list right now.

Joe Winkler

Yes, that – not given the other opportunities that we have.

Dan Pickering – Tudor, Pickering, Holt & Co.

Right.

Joe Winkler

We never say never, but …

Dan Pickering – Tudor, Pickering, Holt & Co.

Okay, fantastic. Thanks, guys.

Joe Winkler

Okay. Thank you, Dan.

Operator

Your next question comes from the line of Stephen Gengaro from Jefferies. Please proceed.

Stephen Gengaro – Jefferies

Thanks. Good morning, gentlemen.

Joe Winkler

Hey, Steve, good morning.

Mike Mayer

Hey, Steve.

Stephen Gengaro – Jefferies

Just really I guess two quick ones. One, looking at some of the – some of the growing areas and the one that I'm thinking of is the Marcellus. Are there thoughts of getting involved there and if so, would it be the acquisition or organically? My guess is via acquisition because of the logistics there, but can you shed any light on that?

Joe Winkler

Sure. It's an area that we have given a great deal of thought and consideration to, and our stated strategy is that into a new area, our preferred approach would be to acquire the appropriate platform, which we think allows us to fast forward the timeline and mitigate the risk and become successful or not. That would be our preferred approach. That doesn't mean in all cases that's what we would do, but in answer to your question, yes, we would like to be there. We've given consideration. We, all things being equal, would prefer to acquire our way in, but that's not 100% guaranteed.

Stephen Gengaro – Jefferies

And is that – is that an area which would be higher on the list of areas that you're not in?

Joe Winkler

Based on what we know today, I would say the answer to that question is yes.

Stephen Gengaro – Jefferies

Okay. And then just as a follow-up to some of the other questions on the pricing/margin side, the incrementals in the quarter both sequentially and year-over-year were very strong, particularly the CPS division. Would – are they sustainable or do you think the inflationary pressure has kind of lowered them a bit going forward?

Joe Winkler

That's a good question and we talked about a bit on that on the last call and recall that in the flow from quarter one to quarter two, some of the forces that are in play, particularly the drop in Canada, is going to be difficult to sustain the sequential margins or to sustain the margins sequentially. Whether we can get it back up as time plays out will very much be a function of the pricing environment and the inflationary forces and recall that because we aren't investing as heavily in new equipment, we don't get the benefit of the strong incrementals to come in and support that.

So, unless we can get some pricing power, it's going to be difficult to sustain those margins going forward, but we're going to be fighting the headwinds of little lower utilization, inflationary forces. So, it's going to be a challenge for us. But we're going to try.

Stephen Gengaro – Jefferies

Okay.

Joe Winkler

And we're going to give it a go and we're probably going to be told no in a couple of cases, but we're going to give it a go.

Stephen Gengaro – Jefferies

Very good, thank you.

Joe Winkler

Thanks.

Operator

Your next question comes from the line of David Anderson of UBS. Please proceed.

David Anderson – UBS

Hey, Joe. You were talking about your CapEx before of outcome into your CapEx plans. What about other companies' CapEx plans in terms of the small caps that have been out there? Obviously, they've been a little bit of an issue last couple of years and everybody's been kind of building up capacity kind of. And really over capacity situation in the market. Are you still seeing that discipline out there in the market or is $10 plus gas price a little bit of a concern to you?

Joe Winkler

Well, you heard my comments. I mean, we're still watching and concerned about the effect of capacity on our business. And generally speaking it's not as bad as it was a year and a half ago. There is still some capacity coming in to the start-ups that they orders a year or two years ago and deployed and so on. So my general sense, David, is that it's not as bad as it was, but it's not something we can afford to take our eye off at the moment.

David Anderson – UBS

Can you put like a number on there? I've heard anywhere from, like, 10% to kind of 12 to 15% range. What your take? I'm being kind of general here in coiled-tubing, pressure-pumping.

Joe Winkler

Coiled – well, pressure-pumping, that's a really difficult one here to get – I've heard others talk about capacity increases in the 10%, 15% range. I have no reason to think that's not incorrect. There's no question but that the volume coming in is much lower than we saw in either '06 or '07, and the coiled-tubing world, I think we estimated for '07 we brought in somewhere between 20 to 25% of the fleet and based upon what we think we know – what our team knows – that's probably more like a 10% number this year in 2008. And in the workover, I mean, between ourselves and some of the other guys, we are bringing down the volume. I suspect some of the smaller guys as well are bringing it down, but it's difficult to tell. There are a lot of manufacturers in that business and it's hard to really get your arms around it. But my sense of it is that that's down as well. By how much I'm not sure, David.

David Anderson – UBS

And that 10% quote to be used by North America because your comments suggested that most of the capacity is going international, correct?

Joe Winkler

Inert is almost specifically U.S.

David Anderson – UBS

Okay. And then there's a couple of questions surrounding equipment getting in advance of a play. Just curious we look at Canada in ERG than every other EMP seem to have all of a sudden mention their acreage in the (inaudible) up there. How soon – each one of these companies is only talking about a handful of wells of course right now. At what point do you kind of look at that market and say this is an area we need to get in front of? Is this like I guess specifically with Canada because it's kind of an unusual market for you. You don't have a ton of presence up there.

Joe Winkler

Well sometimes you need to take risk, and I'm not suggesting that's necessarily the case here, but you have to anticipate where the ball's going to be. And given one's size and given one's balance sheet and liquidity, you may or may not be able to take that risk when you want to, but I think in some of these situations I think what you're going to see is, is that in order for those plays to be economically viable, there will have to be some services capability and availability put in there in anticipation of what's going to occur. And not everybody can do that. Not everybody will do that. And so, that will depend upon a lot of things, including other options and alternatives that may be available to an organization. So, it's a very difficult one to answer. It's going to be specific to the company at hand.

David Anderson – UBS

Would you care to put where Complete Production fits on that risk profile?

Joe Winkler

Not at the moment, no.

David Anderson – UBS

Okay. And I guess last question, you have done a couple of deals here and turns out with all cash. Your stock's obviously doing quite a bit better than it has in recent months. Should we continue to expect all cash deals here on any acquisitions you make? Because you mentioned that you're going to participate in this consolidation you see in the market.

Joe Winkler

It depends on the deal, it depends upon the opportunity, the relative valuations, etc. We certainly, given the run in our stock of late, it's getting to the point where that's a currency that we can consider.

David Anderson – UBS

Right.

Joe Winkler

As we stated before, all things being equal, we would prefer it to be cash, but not always are all things equal.

David Anderson – UBS

Understood. Thank you, gentlemen.

Joe Winkler

Okay.

Operator

Your next question comes from the line of Joe Agular from Johnson Rice. Please proceed.

Joe Agular – Johnson Rice

Hey, this is Joe Agular of Johnson Rice.

Joe Winkler

Joe, good morning.

Joe Agular – Johnson Rice

Good morning. Actually, Joe, I think all the questions I had have been asked already, so I'll just leave it at that. Thank you very much.

Joe Winkler

All right. Well, thank you very much.

Operator

Your next question comes from the line of Mike Drickamer from Morgan Keegan. Please proceed.

Mike Drickamer – Morgan Keegan

Good morning, guys.

Joe Winkler

Hey, Mike, good morning.

Mike Mayer

Hey, Mike.

Mike Drickamer – Morgan Keegan

Joe, I just want to follow up on a question that's already asked. Talked about do you want to get bigger in the drilling segment. Let me ask it a different way though. What are your thoughts on service companies merging with as far as benefits or drawbacks?

Joe Winkler

Why that question came up, I think, on the last call as well, and I forget exactly who the two players were, but there was a driller combining with a service – well service operation. And I think our comment then was something along the lines that – and I believe that's the case here in the most recent one, that a fair price was paid and that given the valuation that they would continue to run the businesses, not that they weren't running them this way, in a disciplined and fiduciary manner. And I would expect there to be no change as a result of what's happening to this point. Now the real question is, is there a huge strategic benefit to putting those type of services together and I think there's an open question there. I'm not suggesting that there is or isn't; I think it's an open question as to what it is and how big it might be.

Mike Drickamer – Morgan Keegan

Okay, that sounds good. And then let me follow up; one of the issues that came up on previous conference calls was availability of frac sand. I think BJ Services commented that the major pressure pumping guys were able to get it perhaps at the expense of some of the smaller guys. Did you guys have any frac sand issues in the first quarter and how are you looking for future supply here?

Joe Winkler

There's no question that that is one of the challenges facing a number of providers and ourselves included. And suffice it to say that while it was an issue, we did not have any real problems with sand impeding our ability to deliver our performance. Now, it wasn't easy, but our team anticipated and did some things and I'll not go into what all those are, but we anticipated and we worked hard and we were able to not allow that to be a big problem for us. Not that it was easy; to the contrary.

Mike Drickamer – Morgan Keegan

Okay. And you think that's something that will continue in the future, especially as you add more –

Joe Winkler

Also I might add that that's going to be in some respects a specific area of geography. Sand availability is not the same everywhere; type of sand used is not the same everywhere. So, it's going to – you can't say it's an issue across the board. It's going to be very geographic specific and I suspect it will continue to be a challenge and we'll continue to slug our way through it. But from our perspective, we worked our way through it, anticipated and it did not impede our ability to deliver the service during Q1.

Mike Drickamer – Morgan Keegan

All right, guys. That's it for me. Great quarter, guys.

Joe Winkler

Thank you.

Operator

Next question comes from the line of Pierre Conner from Capital One Southcoast. Please proceed.

Pierre Conner – Capital One Southcoast

Good morning, gentlemen.

Joe Winkler

Hey, Pierre, good morning.

Mike Mayer

Good morning.

Pierre Conner – Capital One Southcoast

My first question is some math that I won't even purport to start and we'll let Marshall handle that, but –

Joe Winkler

That's great.

Pierre Conner – Capital One Southcoast

Just a little bit on the sequential on your guidance, so back to where you started coming off the $0.60 into the guidance of the $0.53 to $0.55. So, we've got a couple of drivers I think. I wanted to know from magnitude between Canada and coiled tubing unit drilling operation. Are those the biggest pieces and if so, roughly how much of that?

Joe Winkler

Canada is clearly the biggest, I mean, what did it drop last year, Mike? What we'll give you is for point of reference is the magnitude of the drop last year.

Pierre Conner – Capital One Southcoast

The total drop, I guess, was $0.05 last year.

Joe Winkler

I mean, it's not insignificant. Last year – and of course the market has changed a bit up there, but last year I think it dropped order of magnitude about $18 million in revenue and $8 million, $9 million of EBITDA. Now, I don't know if the drop this year is quite as large because we start at a different starting point, and we've done some things to address our structure there, but no question that's a big driver. The coil project, that's a net-net. That's probably – I don't know what we're doing in that operation, but that's probably before offsetting it by redeployment, there's probably $1 million or $1 million plus, something like that, in that range.

Pierre Conner – Capital One Southcoast

Delta?

Joe Winkler

No, that's the – yes, it could be the delta. It might be a little high.

Pierre Conner – Capital One Southcoast

No, that's – okay, that's all I was looking for, just some of the magnitude of those. You mentioned those specifically.

Joe Winkler

Mike was looking at the numbers, so last year it was ballpark $10 million EBITDA, and it won't be, I don't think, be as great this year. So, coming out of the box, we have to overcome about $9 million, $10 million in Canada.

Pierre Conner – Capital One Southcoast

Got it. Okay, that's helpful. Further on coiled tubing and you mentioned – although I think you just described some of it, so maybe if you can more, we're talking about the capacity add in the North America being more in the 10% range. You mentioned you thought pricing was stable, so just reconcile that a little bit for me, Joe. Are you even or is the demand growth exceeding that? Is that your take, that you've got more than 10%?

Joe Winkler

There is and you've heard us say in the prior calls, utilization's off a bit and so while you might have a bit of a stable pricing environment and we did say we did see some pressure in certain markets on pricing, the utilization rates will be down.

Pierre Conner – Capital One Southcoast

Okay.

Joe Winkler

And so demand is still continuing to grow, but the capacities come in and then you get new players, new entrants and you've got to get through that and sort that out and you might give up a little work and then earn it back through your performance and it just takes awhile to work through and sort that out. But our estimate is, we ended '06 about 300 units – this is U.S. – at the end of '06 and brought in about 65 to 75 in '07 and, I don't know, maybe it will be another 10% add in '08, give or take.

Pierre Conner – Capital One Southcoast

Okay.

Joe Winkler

I think that's right. But it's order of magnitude.

Pierre Conner – Capital One Southcoast

Got it, okay. All right. The last one is on the cost side again and you made the point and you all did execute quite differently than several others that are very important on managing some of the cost; although, you seem the pressure. So, my question is on is fuel side particularly. Some of your lines you can pass it on rather easily, some no. And that's what I was – drilling obviously the fuel costs are direct customer cost, I'm assuming, what about well servicing? It sounds like in pressure pumping, you have some contracts where it is, the rest is not.

Joe Winkler

Right.

Pierre Conner – Capital One Southcoast

A little color on that.

Joe Winkler

Well, you're absolutely right in terms of the drilling rigs. Typically, that will be the burden of the operator, in our rig logistic business, which our trucks that were moving rigs. There's a lot of fuel and we mentioned that that was part of our issue.

Pierre Conner – Capital One Southcoast

Okay.

Joe Winkler

And our margin performance. In terms – we have in our fluid handling operation, a lot of fuel. Fuel is a big part of our cost structure and it's not, from what we've seen, not doing anything but going up. And we'll work diligently to mitigate that and we've got some thoughts and ideas and plans and we will ask. That doesn't mean necessarily we will get, but we will ask. And I think depending upon where you are and what you're doing, our customers are fuel and labor a little more sympathetic to that than some other things, but to be determined.

Pierre Conner – Capital One Southcoast

That. And then well –

Joe Winkler

We're not immune to it and we don't have a magic wand. We just need to work real hard and where we can be opportunistic and where we can't, manage it as best we can to mitigate the impact.

Pierre Conner – Capital One Southcoast

As a component of well servicing, the biggest cost component is labor, fuel next. Is that one of those that you'll have to ask for?

Joe Winkler

Yes, labor is – I think – I guess fuel would be the next thing. Repair is [ph] new rigs, but repair is probably not. So, I think that would be the order of magnitude would be labor and related and then fuel.

Pierre Conner – Capital One Southcoast

Okay.

Joe Winkler

I think that's right.

Pierre Conner – Capital One Southcoast

Okay, thanks. All right. Mike, Joe, thank you very much.

Joe Winkler

Thank you.

Mike Mayer

Thanks.

Operator

(Operator instructions) Your next question comes from the line of Roger Schmitz from Monarch. Please proceed.

Roger Schmitz – Monarch

Hey, guys. How much –

Joe Winkler

Good morning.

Roger Schmitz – Monarch

Is it a problem at all to find qualified personnel, currently, just given the increase in capacity that you've been seeing?

Joe Winkler

Yes, the answer to that question is, yes, it is difficult; it's not easy. Our team has been pretty successful at being able to find the qualified personnel to meet our needs, but it's not an easy task.

Roger Schmitz – Monarch

Thanks. All the rest of my questions have been answered.

Joe Winkler

Okay, thank you very much.

Operator

You have a follow-up question from Scott Gill from Simmons & Company. Please proceed.

Scott Gill – Simmons & Co.

Yes, thank you. My questions have been answered as well. I don't know how to get out of this thing.

Joe Winkler

All right. Thanks, Scott.

Scott Gill – Simmons & Co.

Okay.

Operator

There are no more questions in queue. I would now like to pass the call over to Mr. Joe Winkler for closing remarks.

Joe Winkler

Cynthia, thank you very much and we take this opportunity to thank you guys for spending time with us this morning, reviewing Q1, and we look forward to your presence on our next call to talk about Q2. Thank you very much.

Mike Mayer

Thank you.

Operator

And thank you, ladies and gentlemen, for your participation in today's conference.

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