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Oil States International, Inc. (NYSE:OIS)

Q2 2012 Earnings Call

August 1, 2012 11:00 am ET

Executives

Cindy Taylor - President and CEO

Bradley Dodson - SVP and CFO

Patricia Gill – Director, IR

Analysts

Marshall Adkins - Raymond James

Stephen Gengaro - Sterne, Agee

Kurt Hallead - RBC

John Daniel – Simmons

John Lawrence - Tudor, Pickering

Jeff Spittel - Global Hunter Securities

Blake Hutchinson - Howard Weil

Daniel Burke - Johnson Rice

Operator

Welcome to the Oil States International Incorporated Second Quarter 2012 Earnings Conference Call. My name is John and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please not that this conference is being recorded.

I will now turn the call over to Ms. Patricia Gill. Ms. Gill, you may begin.

Patricia Gill

Thank you, John. Welcome to Oil States' Second Quarter 2012 Earnings Conference Call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; and Bradley Dodson, Senior Vice President and Chief Financial Officer.

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

I will now turn the call over to Cindy.

Cindy Taylor

Thank you, Patricia, and thanks to all of you for joining our call this morning. During the second quarter of 2012 Oil States generated strong earnings of $2.01 per diluted share on $1.1 billion in revenues and $111 million of net income.

I'm happy to report that our second quarter results increased year-over-year for all of our business segments and either met or exceeded our prior guidance for the second quarter 2012.

Occupancy levels at our major oilsands lodges in Australian villages remained very high during the quarter and provided strong RevPAR for our Accommodation segment. Growth in our Accommodations business continues to be supported by organic room count expansion in all of our major accommodations markets. In this segment, customer contracts provide us with longer term revenue visibility.

In our Offshore product segment, backlog and margins improved to new record levels with backlogs totaling $562 million at June 30, 2012. We continue to see strong bidding and quoting activity particularly for our subsea pipeline and floating production facility products on a worldwide basis.

Our Well Site Services and Tubular Services businesses performed well during the second quarter despite regional volatility created by softening commodity prices. Activity and demand remained strong for our high and completion services particularly in the Bakken, Eagle Ford, and Permian Basin markets. Partially offsetting activity declines in the Marcellus, Barnett and Haynesville region. Our Tubular Services segment reported a new quarterly record for tonnage shipped which was up 12% sequentially.

Customer demand for OCTG remains robust and we continue to see strong activity particularly in the Permian Basin and offshore Gulf of Mexico.

At this time, Bradley will take you through more details of our consolidated results and financial position, and then I will conclude our prepared remarks with a discussion of each of our segments and will give you our thoughts as to the current markets outlook.

Bradley Dodson

Thank you, Cindy. During the second quarter of 2012 we reported operating income of $169 million on revenues of $1.1 billion.

Our net income for the second quarter of 2012 totaled $111 million or $2.01 per diluted share, which included a pre-tax gain of $2.5 million or $0.03 per diluted share after tax which related to insurance proceeds received during the second quarter in excess of net book value for a land drilling rate that was blocked in a fire in the first quarter of 2012. The comparable second quarter 2011 results were $115 million of operating income on revenues of $820 million. Second quarter 2011 net income totaled $74 million or $1.34 per diluted share.

The year-over-year increases in profitability resulted from organic growth initiatives. In the Accommodation segment and the Well Site Services segment increased sales of deepwater capital equipment, higher US land drilling and completion activity, and a resurgence in exploration and production activity in the U.S. Gulf of Mexico.

During the second quarter we reported cash flow from operations of $184 million which included $11 million of cash flow generated from working capital reductions. During the quarter, we spent $99 million in capital expenditures primarily related to ongoing expansion of our accommodations business, the addition of rental equipment deployed to service the active US shale plays, and for facility and equipment expansion in our offshore product segment.

Our net debt at the end of the second quarter totaled $1 billion and our debt cap ratio approximated 34%.

As of June 30, 2012, the company had $767 million of combined availability under our credit facilities along with a $114 million in cash.

In May 2012, we announced a redemption of our 2-3/8% contingent convertible senior notes. Subsequent to the end of the second quarter 2012, the outstanding principal amount of $135 million was paid in cash funded by amounts available under our existing US credit facility with remaining conversion value paid in shares of oil based common stock. Additional information regarding the settlement of the convertible notes is detailed in our Form 10-Q that we plan to file later today.

In terms of third quarter 2012 guidance, we expect depreciation and amortization expenses to total $58 million and net interest expense to approximate $17 million. Diluted shares are expected to total 55 million shares in the third quarter of 2012, and we currently expect our third quarter 2012 effective tax rates to approximate 28.5%.

We currently plan to spend between $600 million and $700 million in capital expenditures during the calendar year of 2012 with approximately 70% directed towards organic expansions in our accommodation segment.

At this time, I would like to turn the discussion back over to Cindy who will review the activities in each of our business segments.

Cindy Taylor

Thanks Bradley. I would like to lead off with our largest segment in the accommodations area. Here occupancy levels at our major oilsands lodges in our Australian villages continued at very strong levels during the second quarter of 2012. Accommodations revenues increased 29% year-over-year and EBITDA increased 37% year-over-year primarily due to the 29% increase in average available rooms due to contributions from our new lodge and village investments made in 2011 and early 2012.

On a sequential basis our accommodations revenues decreased 14% primarily due to the seasonal reduction of Canadian mobile camp activity resulting from the effects of spring break up along with the $18 million favorable US mobile camp contract settlement reported in the first quarter which did not repeat in the second quarter. RevPAR remained at strong levels of $123 due to continued high occupancy levels at our major lodges and villages.

In our Offshore Product segment, we generated $192 million of revenue and $41 million of EBITDA on the second quarter. EBITDA grew 14% sequentially due to increased sales of deepwater capital equipment and better cost absorption in our manufacturing facility.

Segmental EBITDA margin set a new quarterly record of 21.4%, reflecting continued strong industry demand for our higher margin proprietary products and services, along with good project execution.

We booked over $220 million of new orders during the second quarter of 2012 and achieved a new record backlog level of $562 million at June 30th, 2012. During the quarter, we booked significant backlog additions that included our key connectors, deck equipment, and drilling product orders.

Our Well Site Services segment generated revenues of $177 million and EBITDA of $59 million in the second quarter of 2012, compared to $183 million and $59 million respectively in the first quarter of 2012.

Second quarter 2012 results included a pre-tax gain of $2.5 million related to insurance proceeds from a drilling rig lost in the first quarter of 2012.

Revenues from our rental tool business decreased 8% and EBITDA decreased 10% when compared to the first quarter of 2012.

Though second quarter activity remained particularly strong in the Bakken, Eagle Ford, and Permian Basin regions, we experienced sequential declines in dry gas basins such as the Marcellus, Haynesville, and Barnett Shale due to continued low natural gas prices resulting in lower activity and pricing in those regions. Revenues from our land drilling rigs increased 9% on a sequential basis due to higher day rates and better utilization.

During the second quarter of 2012, Tubular Services generated revenues of $462 million, compared to revenues of $428 million in the first quarter of 2012. EBITDA increased 6% sequentially to $25 million. OCTG shipments increased 12% sequentially to a new quarterly record of 230,000 tons. Gross margin, as a percent of revenue, was 6.3% during the second quarter of 2012.

The company's OTCG inventory increased $4 million sequentially to $477 million as of June 30th, 2012, supported by strong customer demand, particularly in the Permian Basin and offshore Gulf of Mexico.

Now, I'll transition and just give you a feel for our outlook as we move into the third quarter of 2012.

In our accommodation segment, we continue to see ongoing customer demand for additional room count expansions in Australia, Canada, and the United States. Operations at Karratha Village our first facility located on the Northwest Shelf of Australia commenced at the beginning of July. All of Karratha's 208 rooms are expected to be operational by mid third quarter.

We are pleased to announce that we are now fully permitted in Texas for our U.S. accommodations business and have begun to deploying rooms at our new Three Rivers, Texas location in July. We should be fully operational at Three Rivers in the fourth quarter.

In the third quarter of 2012, we expect our average available rooms to grow to approximately 18,600 total rooms available. Accommodations revenues are expected to total $260 million to $265 million in the third quarter of 2012, and EBITDA margins are expected to be within our long-term margin guidance range of 42% to 43%.

In Offshore Products, biding and quoting activity remains robust, particularly for subsea pipeline and floating production facility products on a global basis. We booked over $220 million in new orders during the second quarter, representing a book-to-bill ratio of 1.2 times. This activity couples with our high backlog levels provides good revenue visibility for the remainder of this year and into 2013.

Our recently announced acquisition of Piper Valve Systems will further leverage our technology and capability within our offshore product segment and is expected to generate $19 million of revenues in the second half of 2012.

Third quarter revenues for this segment are projected to total $205 million to $215 million with EBITDA margins ranging between 18% and 20%, which will be dependent upon our mix of revenues.

As it relates to Well Site Services, activity levels in liquid-rich drilling area such as the Bakken, Eagle Ford, and Permian Basin remained fairly robust, while the persistently low price of natural gas continues to negatively impact dry gas drilling activity in the United States.

Our broad coverage of the active oil and gas regions causes us to believe that our rental tool revenues will reflect overall US drilling and completion activity trend with particular leverage to high end multistage completion. However, pricing pressures in certain regions is likely to persist.

Third quarter revenues for our well site services segment are expected to range between a $170 million and $175 million with EBITDA margins of 32% to 33%. We expect third quarter utilization for our land rigs to remain at high level.

The OCTG market remains healthy with a supply demand balance of less than 4.5 months supply of inventory on the ground. Distributor and mill pricing remains competitive with about 50% of market demand currently supplied by imports. Prices have declined modestly as the mills focused on retaining market share in anticipation of OCPG mill capacity expansion. Recent indications and orders from our customers suggest continued strong activity particularly in the Permian Basin and also Gulf of Mexico.

We expect our tubular services segment to generate revenues of between $440 million and $460 million in the third quarter of 2012 with gross margins ranging from 6% to 6.5%. As of June 30th 2012, approximately 87% of our tubular inventory was committed to customer orders.

In summary, our second quarter results were very strong year-over-year and met or exceeded our prior guidance in all segment. Our outlook remains positive and is supported by ongoing customer conversation, planned organic growth and record deep water capital equipment backlog.

That completes our prepared remarks. John, would you open up the call for questions and answers at this time please.

Question-and-Answer Session

Operator

Thank you. We will now begin the Q&A session. (Operator Instructions). And our first question comes from Marshall Adkins from Raymond James. Please go ahead

Marshall Adkins - Raymond James

So you seem to be bucking the trend here in the drilling side and the sooner pipe side. I guess I am little surprised that your optimism looking out to the next quarter's results, I mean everyone else seems to be, both in this quarter and the next quarter things are looking as good as it seems to be for you. Help me understand what’s going on, why is your business holding up so well?

Cindy Taylor

Well, I will start with tubular obviously that’s a little more significant to us than the drilling rigs that we have but, both the first quarter and the second quarter our tonnage shipped and, therefore, our performance has fairly significantly exceeded the rig count movement during that period of time. And I kind of sit back and attribute it to several things but we have particular strength, relative strength I would say, in the Permian Basin which has been very strong in the first half and our outlook remains strong there.

We also are getting contributions, we are not at peak levels in the Gulf of Mexico by any means but is certainly improving. And so, we are coming off a low if not almost nonexistent base of activity therein. Again Gulf of Mexico in addition to the highly complex land completion played very well into more of a premium product range which we do supply.

We also have realized without the customers market share gains with the first half of this year. And so, again, we look at the inventory we are holding and we are about 87% committed. Most of what we do is pursuant to customer conversations and specific orders and so, our visibility would go pretty good about the numbers that we have given you as to outlook for the third quarter.

If I look at our drilling rigs, I realize there is a little bit of bucking the trend in the sense that we have improved utilization and improved day rates. I will also mention now we are really kind of in two markets with two thirds of the rigs in the Permian Basin and about a third broadly in that Rocky Mountain region. We have got some very active strong customers and part even our Permian rigs which historically are always spot based rigs we could fix on a one year contract kind of return for doing some upgrade work for those rigs and make them suitable for a very significant customer that we have out there.

Those actions and commitments that we made had really firmed up utilization and firmed our day rates. Now, the balance of the rig there is a couple in the Rockies that are long term contract but a lot of the other ones are clearly on spot. But I think it is a fact that we are in a couple lot of strong yet narrow market and we are highly efficient kind of low cost provider of the equipment that we have in the market. So, there is not a whole lot of logic to start succeeding a bigger overpowered rig at a higher day rate in replacement for our work. So, we feel pretty good thus far in the way about our activity on those drilling rigs as well.

Marshall Adkins - Raymond James

The share gains which you gave on the pipe side is it just because you get a better reputation in the premium side or is there something else going on?

Cindy Taylor

I think it is a combination of a lot of things, Marshall, none the least of which is the longstanding reputation we have in this business, over 75 years of working in the business, having key relationships cannot be understated as well to afford ourselves the premium product that we have.

We have also committed capital in many areas on the ground where we actually have some fantastic storage facilities and handling equipment, threading etc on the ground in these basins where a lot of our competitions have really not done that. And then we have done some other things obviously in terms of system activity that really do help our customers manage their product over the long term. So I think it is kind of a combination of all those things.

Operator

Our next question comes from Stephen Gengaro from Sterne, Agee. Please go ahead.

Stephen Gengaro - Sterne, Agee

Two questions. First, Cindy, you have stuck to your guns on the 18% to 20% margins in offshore products and you have had really four very good quarters in a row here. Is the mix changing at all the third quarter, is the absorption changing or is it just you want to see more before you get a little more aggressive?

Cindy Taylor

Well, I will be honest, it's a little of those, but we look at mix primarily and we have a broad range of products, some -- a lot of what we do is on percentage of completion and, therefore, you get that moving, if you will, of margins. Other things are delivered when booked when shipped and we have some booked when shipped products that we are targeting for delivery in the third quarter that move that our average margin down just a little bit. Obviously, nothing negative whatsoever it is just a mix oriented issue.

But to your latter comment, we've moved up significantly, and I am a realist, you are not going to always hit improving peak margins sequentially every quarter. We wish we could do that, its not reality. So I would like that kind of keep you in that long term margin guidance band not only for offshore products, but for accommodations. And then if we see a real sustain change of course will adjust that long term band.

Stephen Gengaro - Sterne, Agee

But it sounds like the calorie content in the backlog though this secular deepwater trend (inaudible) is in general improvement?

Cindy Taylor

Yes, we remain very comfortable and confident in our backlog mix.

Stephen Gengaro - Sterne, Agee

Great. And then my second question is on the accommodation side, any updates on either your observed room count expectations and/or any of these projects which are sort of we have been hanging out there for a while?

Bradley Dodson

Sure it was, the most material contract we are working on it is imperial extension of (inaudible) that the notice for that not moving or remains September 30, 2012. As you recall that the initial contract ran from the end of the first quarter 2010 through the end of the first quarter of 2013. Those current conversations continues, nothing negative. We are just working through you know those discussions with the customer and ultimately we can be to be optimistic that we'll get that extension.

We did put 200 rooms out to work at Karratha on July 1, and we are excited about that. The opportunities to add rooms in Australia still looks strong, the focus still remains on ground field expansion in Bowen Basin which is Queensland met coal region.

In Canada, we continue to add a few rooms in the second quarter to existing locations. We are working on a few smaller greenfield opportunities, but ultimately the next big phase expansion in Canada is going to be depended on Suncor and Total and what they do with their three projects and those -- it is unclear, I think ultimately they are going to need room over the next three to five years in a significant fashion. but as we said kind of all along this year, it hasn’t -- the timing of that hasn’t been what we initially thought because we thought we would have heard something in February and we hadn’t so far so. I think ultimately it will be successful, we are a very strong player in the market, but that's has been a little slow to come to fruition.

Cindy Taylor

I might add in to what Bradley has talked about we are obviously all watching the new growth projects in Canada and of course Suncor came out recently with not only their earnings, but their outlook. And they have got some new leadership, they are heavily focused on generating returns on invested capital, they're not wanting to push these projects simultaneously to quickly prepare that they create their own inflation. However, it sounds like these projects are still moving forward and they have publicly stated that they plan to present all of the three major project to the board of directors for sanctioning in 2013.

So nothing has really changed, but they're not -- they're doing anything to try to accelerated those projects at this stage. Again, it is a cost control focus that they have and obviously the client generates improved returns on invested capital by doing so. So I think that's probably the fullest updates that we have on that point for you.

Operator

Our next question comes from Kurt Hallead from RBC. Please go ahead.

Kurt Hallead - RBC

Hey just a quick follow-up just on Steven's question. Can you just remind us what the potential room growth opportunities would be for those projects you mentioned there for Suncor?

Cindy Taylor

Well, they're very substantial and it varies depending upon the way that they bid but there's really three major projects Suncor will operate two, Total will operate the Star. But I think in all cases each of those projects is estimated to meet anywhere from 3,000 to 5,000 rooms so they're substantial.

Kurt Hallead - RBC

Okay. Could you provide us an update on the -- I think you referenced before about 3,000 room growth for this year and that you're I think a little under halfway through that in the first six months of the year, could you give us an update on your expectations on that room growth rate in the back half of the year?

Cindy Taylor

Well, we kind of commented all along Australia growth is going to be with as Bradley said Brownfield growth meaning room adds to existing facility generally with existing customers does not the press release type of room count growth but it's kind of steady as she goes. It has always been planned to be back-end loaded largely because of the wet season that we encounter generally in the first quarter although it has extended some into the second quarter as well. So I just say generally speaking we feel like we remain on track as long as it will drop and we can actually get some incremental rooms as felt.

In Canada we had I think it was roughly 650 rooms "in the bag" if you will, because those were the first half expansions of Beaver River Athabasca and Henday the latter half has been largely dependent upon the timing of the Suncor and Total works which I'd say if anything yes that has the light of that and will have some impact on our thinking potentially. However we're not necessarily getting the timing on those specific lodges and village room. We've seen barely robust demand for the SAGD type areas, which command our mobile camp assets. So we're already looking at a lot of activity associated with that going into the winter season in support of our customer's activities there.

Kurt Hallead - RBC

Okay, great. And then just a follow-up I had on offshore products here, you reference I think the significant backlog that you have there and interesting query and bidding activity and so on. Just wondering if you might be able to provide a little bit additional color on the subsea pipeline front? Is that all predominantly, is that Gulf of Mexico or is that geographically dispersed?

Cindy Taylor

Right now it is dispersed but right now, but a material concentration I'd say in Brazil.

Kurt Hallead - RBC

Okay. And then on floating production as well is that similar primarily being driven by Brazil at this point?

Cindy Taylor

Brazil, but then there is other areas in Southeast Asia and Australia that are interesting to us. West Africa is there but it's lagged just a little, the other regions just a little bit.

Kurt Hallead - RBC

Okay.

Bradley Dodson

And there is also a project in the North Sea that we're working on.

Operator

Our next question comes from John Daniel from Simmons. Please go ahead.

John Daniel – Simmons

Cindy do you have or a better say, how do you measure theoretical revenue capacity for offshore products and what would that capacity be today?

Cindy Taylor

You know I'm not -- I don't have any answer for you at this side. I'd really have to think that through and the complexity there is if we look at capacity we still got some available capacity in Houston and [Halma] we're very full, and Arlington, the UK, Singapore. We got some extraordinarily full in Brazil but we're going to be expanding there as you know. But what that doesn't necessarily contemplate it adding a whole new shift to what we're currently doing. So there is some theoretical capacity, is very much labor dependent. And we have high skilled labor so that's just not an easy number to pull off the chart.

I can only tell you that we're being in my due regards probably not to mention the other thing you do is outsource some of your work into the supply chain when it's not your key technology to alleviate size or your key technology.

We've also been very active in terms of entering into international joint ventures, which also help us quite a lot there. So it's a longwinded way of saying I'm probably not going to answer your question other than I think we have been very responsive to our customers and responsive to demand growth to-date and we intend to continue to do that, so that what we never want to do is tell our customers that we can't deliver to their needs on time so.

John Daniel - Simmons

Okay. Well worth a shot. I don't know if you can answer this one or not but when you look at the Texas market for accommodation tell me how big you think that opportunity is?

Cindy Taylor

Well, we do not necessarily want to be all things to all people. We are looking at potentially three locations to support the market in Texas. As we mentioned, the Three Rivers site has roughly I think 300 rooms. That would be a likely size for the other two targets that we are evaluating.

John Daniel - Simmons

Okay. And will these rooms be sell to just one customer or would it be open to others?

Cindy Taylor

And we -- the whole idea all alone has been to open them up to multiple party. In certain towns or geographic areas there maybe concentrations but a lot of times it maybe a major E&P player and their contractors.

John Daniel - Simmons

Okay. And last for me, I'll turn back. There were just any preliminary thoughts on '13 CapEx?

Cindy Taylor

As we think it is a little too early for that, John. We would like to get at least started through the budgeting process and get a little better visibility on some of these major accommodations expansions. As you know that generally has been about two third to 75% of our CapEx. And so, timing needs to be worked out a little more fully.

If we get some better indications, we might be in a position to get you something preliminary at the next conference call, if not then we will firm that up as we move towards December.

Operator

Our next question comes from John Lawrence from Tudor, Pickering. Please go ahead.

John Lawrence - Tudor, Pickering

So, nice uplift in RevPAR this quarter up 10% year-over-year. How so we think about RevPARs going-forward? Is it mostly, can be occupancy gains or is there pricing in there as well?

Bradley Dodson

Well, I think that the 123 for the second quarter is really strong and what we basically saw the swing factor in Q2 RevPAR has historically been Canadian occupancy. The Canadian lodges duly due have strong full-year occupancy but it is really strong in Q1 particularly at Cochran. Usually, it slipped little bit and we just have not seen that. So, we are running at basically full tilt really across all the major lodges and villages. So, I think the risk is more than occupancy does from essentially full to really strong rather than it actually go on the other direction.

John Lawrence - Tudor, Pickering

Should we assume some rate increase as well?

Bradley Dodson

It is really more a mix right now. There are certain, for instance, Karratha, those rates are more expensive, it is more expensive place to operate. (inaudible) the initial contracts were shorter term and so the rates were up kind of reflective of that as opposed to longer-term rate. So, right now, it is more mixed and it really is pricing.

John Lawrence - Tudor, Pickering

Okay. Got it. Thanks. And then, just one more, there has been a bit a noise Inuit issues in Australia. Are there issues affecting your accommodations business at all there?

Bradley Dodson

No not.

Cindy Taylor

The short answer is no. And this is not the first time that we kind of have the grumblings out there that, we had almost continually since we bought the business. We had a couple of customers that have cut some marginal type activities. We do not know if that is because of the mine or because of the negotiation but it really had zero impact to us because we are more focused on the higher-end metallurgical coal mining and development that is unlikely to slow. And so, we really have not seen that. And just about all the reports that come out from any of the material agencies that track the mining sector they would continue to have a very robust outlook.

Operator

Our next question comes from Jeff Spittel from Global Hunter Securities. Please go ahead.

Jeff Spittel - Global Hunter Securities

I guess, if we can touch a little bit on the outlook for rental tools and the sustainability of margins. Would it be fair to say, because of your broad geographic orientation and basin footprint that there is not a lot of cost and efficiency here or mobilization of equipment that needs to be done there? And I guess, that second element of that is just to your exposure of the high-end of the completions market in the uptake in raw horsepower and activity there?

Bradley Dodson

Well, I will lead off and let Cindy tag in. We do touch most of the basins. I think a lot of the equipment has been moved around over the last really three quarters looking back, but we are still moving personnel around. So, there is some efficiencies. We have got grips that have been lived in and around lets say the Haynesville area as an example but obviously, the activity right now is not in that region. And they are on a rotational basis working out at one of our other districts. So that causes a little bit of cost inefficiency, but that has been going on for sometime now. So, I do not see that really being a huge incremental or different factor impacting the outlook.

Implicit in our guidance, (inaudible) about 50 basis points decline sequentially in meaningful margin Q2 to Q3. I think that we are still seeing some competition and pricing pressure in certain market, gas markets are rough. And the Marcellus had a rough quarter sequentially Q1 to Q2 not unexpected but fairly shocking.

So, as a result, the outlook I think is pretty good. Our focus on higher end equipment helps mitigate some of margin pressure that we seen in some of the more competitive markets where quitting on equipment, overcapacity has cost some of the material pricing decline.

Jeff Spittel - Global Hunter Securities

All right, and then shifting over to offshore products we've seen some encouraging signs I guess in terms of subsea capital equipment order flow from some of the other guys in the free market. Is it fair to say with the visibility that you see out there that their potentially lease is an acceleration as people move, look forward on some of these development projects across multiple regions encoding activity probably over the next 12 to 18 months?

Cindy Taylor

If I understood your question correctly I guess I'd say a couple of things the three can be obviously a leading indicator for subsea activity, because those three have to be connected into a host facility or into a pipeline and that large area that we participate in so. Clearly that and I don't know whether I'd say that sitting and coding is accelerating our value with the product for so long that the others are very healthy level of activity and I think everybody knows a lot of it own resort with capital brought. But this a step change in terms of bidding and coding activity on the subsea that coming out of Brazil.

Operator

Our next question comes from Blake Hutchinson from Howard Weil. Please go ahead.

Blake Hutchinson - Howard Weil

Just starting off in taking a look back at RevPAR I guess kind of implicit in your guidance for Q3 given that we should have a rebound and kind of that the Canadian business and there is room count growth in the major lodges you said, may be I guess you're saying that your RevPAR is going to probably drop by 7 or so percent, is that in your assumption and just to clarify at this point in the quarter has that high capacity utilization eased to the point that you actually think you'll experience that type of decline in RevPAR?

Bradley Dodson

So we do have a RevPAR decline sequentially, yes. Some of that is -- has been, so let me answer your last question first. The occupancy level since a lot have not dropped off.

Blake Hutchinson - Howard Weil

Okay.

Bradley Dodson

But there is really only one way they can go, is down unfortunately we've been running as I tried to imply at fairly full occupancy levels.

There's also been a fair amount of volatility in the Australian dollar, its rebounded here in the last couple of weeks, but that didn’t help in the second quarter by any means. So, really RevPAR was strong in the second quarter in spite of some weakness in the Aussie dollar which didn’t help. And so, I think we've been a little bit conservative on our Aus dollar outlook in the guidance.

So, occupancy I think its hard to imagine is the four (inaudible) Aussie dollar staying where it is could be, but that's kind of how I'd look at the outlook in terms what could go right and what could go wrong.

Blake Hutchinson - Howard Weil

Okay. And then the kind of underlying RevPAR when we do eventually you say come back to earth in terms of occupancy level, is the kind of natural underlying rate improved as well where kind of the 100 to 115 that we ran out for a couple of years is solidly towards the higher end?

Bradley Dodson

I think that’s certainly possible. Yeah, I do know.

Blake Hutchinson - Howard Weil

Okay.

Bradley Dodson

I mean, some of its going to be mix. I mean, we -- the rates on (inaudible) and Karratha they're going to be strong and that -- and ultimately that will be 7% of Australia's rooms right now getting close to 10. So, I don’t think that -- we're trying to be diligent about our rate structure and our pricing model is consistent. If customers will give us longer term contract they get longer term rate. If they're shorter term contracts they get closer to spot rate. And so, a little bit of it will be mix.

And obviously, at the end of the day, rate is completely dependent achieving our targeted return. And so, we're deploying more capital. An example, in Karratha where its expensive the rates are higher implicitly because we're focused on making that return.

Blake Hutchinson - Howard Weil

So, underlying that should be a positive trend sequentially on RevPAR even if we do again come back to earth. At what point, in your negotiations on (inaudible) can we clarify, is there rate for the extension already built and do we have to think eventually that rate moving down a bit and impacting RevPAR at some point in '13?

Bradley Dodson

The rates are already set in the extension. They do allow for a modest rate decline in the extension period. I can't remember off the top of my head, I think its 3% to 5% over the two year extension. And I've modeled it out, I don’t think it impacts overall RevPAR though I think that it will be gained elsewhere, that is usually offset.

Blake Hutchinson - Howard Weil

Great. That is it. That is very good color. And then, just quickly on offshore products, just kind of a bigger picture question. In the past, as we kind of hit more of an FPSO versus and TLP cycle, you pointed towards somewhere in the range of $10 million to $25 million content opportunity per FPSO. I mean over time here has that grown or has your experience been towards the higher-end or beyond the high-end of that number and not just kind of the success we are seeing in some of these back (inaudible) in bookings per quarter?

Cindy Taylor

A lot of this, yes it has been trending up a bit more kind of in the $20 million to $30 million a range, but a lot of that has to deal with the configuration of the specific FPSO, the number or import lines and export lines. Again, we have a lot of the key connection technology that allows us a floating production facility to secure itself to the seabed and integrate all the lines. And so, design configuration has a lot to do with it. But clearly, it is on the increase based upon the type of work in fields that we are supporting.

Blake Hutchinson - Howard Weil

And just one final one, we talked a lot about absorption and mix in the business. I mean, is not this -- looking-forward at these levels of capacity. I mean does pricing start to play a part here more in which you can do in terms of margins or is it fairly in a static pricing model?

Bradley Dodson

I will take that down. And I would say that it is a more of a static pricing model. And in up cycle, we do not usually like to move prices in less. What is impacting us is the input price forging in particular. But on the flip side, we also do not cut pricing significantly, it is we are at low activity levels. Our components well our content of $20 million to $30 million on a (inaudible) FPSO on average or $50 million to $70 million on a TLP and that just relates for the riser components in the Merlin and [Flashstone]. That is a lot to us, it is not a big piece of the overall project cost. And so, we do not really look to dodge people on the upside and we do not really expect to cut prices on the downside.

Operator

(Operator Instructions). And your next question comes from Daniel Burke from Johnson Rice. Please go ahead.

Daniel Burke - Johnson Rice

Just had a two small questions left, but Bradley, I think you mentioned working a few smaller greenfield ops I believe in the Canadian market. I was wondering if you could maybe loosely qualify what scale those might represent and if the way to think about is in the mobile camp bucket or small scale lodge? Is it more adequate representation of what those might be?

Bradley Dodson

It's a lodge -- (inaudible) was related to the lodges that's just the comment, its related to lodges. And we are looking at one that's about 300 rooms. And there are couple others that are more in the preliminary stages that I am going to pass on quantifying at this point.

And then, as Cindy mentioned, we have been making a good progress inside the region. We saw it and we do use mobile camp assets in the region generally. And we've been making good progress. We have a good first quarter. The mobile camp business was down sequentially in the second quarter but I thought performed very well in Canada. The margins in second quarter were much improved. I think the team up there has done a very good job of kind of reorganizing the business and the results have improved back to where we use to see them.

Daniel Burke - Johnson Rice

Okay. That is helpful color. And then, maybe last one for me. CapEx clearly is back half waited, should we think of remaining CapEx as evenly distributed over the last couple orders or is it going to continue to crest into the Q4 timeframe?

Bradley Dodson

My best guess right now Daniel is that it is equally weighted. There it is going to be lumpy, but I think the lump will even out and my best guess is that -- you'd modeled kind of we were at 200 year-to-date I think kind of what that's make it 225, 225 -- 200 to 225 per quarter for this in fact two quarters.

Operator

Okay. And that was our last question. I want to turn it back to Oil States for closing remarks.

Cindy Taylor

Alright. Thanks to all of you. I know this is just an incredibly busy time for all of you. And we appreciate your following and you time today and look forward to catching up with you as we move into the third quarter. Thanks so much.

Operator

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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