BJ Services Company F3Q08 (Qtr End 6/30/08) Earnings Call Transcript

BJ Services Company (BJS)

F3Q08 (Qtr End 6/30/08) Earnings Call

July 22 2008 11:00 am ET

Executives

Bill Stewart - Chairman, President and CEO

Jeff Smith - CFO

Dave Dunlap - COO

Analysts

Geoff Kieburtz - Weeden

Collin Gerry - Raymond James

Dough Becker - Banc of America

Jim Crandell - Lehman Brothers

Byron Pope - Tudor Pickering Holt & Company

David Anderson - UBS

Chuck Minervino - Goldman Sachs

Alan Laws - Merrill Lynch

Robin Shoemaker - Citigroup

Pierre Conner - Capital One Southcoast

Thomas Curran - Wachovia

Presentation

Operator

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

Bill Stewart

Thank you and thanks everyone for joining us today. Before we start the conference call, I will mention that some of the statements we make during the call may include projections, estimates and other forward-looking information. This would include any discussion of the company's business outlook.

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

Now I'll start by saying that we are greatly encouraged by the quarter results, not just by the numbers, but what those results represent. Now it appears that we have achieved price and margin stabilization in our US Pressure Pumping operations. This is a significant event to us as I think all of you know, and we also achieved improved margins from our International Pressure Pumping operations, which we've been working on quite diligently.

Now assuming that the market environment continues to be as robust as it is today, we believe the company is in a position to produce sequential positive earnings comparisons on a more reliable basis as we move forward from here.

Now this morning, we reported net income for our third fiscal quarter of 2008 of $143 million or $0.48 per diluted share. This was a 12% increase from the second quarter of fiscal '08. Consolidated revenue for the quarter $1.3 billion and that was up 4% from the previous quarter. This is the highest quarterly revenue figure that we've achieved in the history of the company.

Operating income was $207 million, an 11% improvement from previous quarter. Canadian activity was hindered by seasonal spring breakup period as is typical for our third fiscal quarter. But the US Pressure Pumping operations and the International Pressure Pumping operations and our Oilfield Services Group all posted good sequential revenues and income margin improvements. Drilling activity in the US increased more than we expected in the quarter, and we finally started to see some price stabilization in most parts of the US.

Internationally, weather conditions were generally more favorable than the prior quarter and activity improved particularly in Europe and Asia-Pacific. Our Oilfield Services business continued to grow both in the US and internationally, led by Completion Fluids and Process & Pipeline businesses.

Year-over-year consolidated revenue increased 15% with our operating income decreasing 20% and earnings per share down 16% for the company overall. All of our reportable segment showed revenue improvement from the previous year.

North America Pressure Pumping price declines since last year, resulted in lower consolidated operating income margins. Capital spending for the quarter was $107 million, lower than our last recent quarters though we expect capital spending in the fourth quarter to increase in line with anticipated annual plan spending levels. Looks like fiscal 2008 capital spending to be in the range of $640 million.

Looking at our various operating segments and starting with US/Mexico Pressure Pumping, we believe we are beginning to experience price stabilization as I mentioned earlier in the US and activity levels continue to increase. US/Mexico revenue was up 10% compared to the previous quarter, while average drilling activity was up about 5%. The Rocky Mountains, the Northeast, East Texas and Gulf of Mexico regions all showed double-digit percentage revenue growth from the previous quarter.

The rate of sequential pricing erosion diminished in the third quarter and was in line with our guaranteed expectations. In addition we made progress in controlling or recovering some cost increases and improving labor efficiencies. These factors contributed to the operating income more than increasing 21% compared to 20% in the previous quarter.

We continue to operate at very high levels in our US operations. Job turn downs for the quarter were $29 million compared to $14 million in the second quarter. Drill rig count currently stands at over 1,900 rigs and shale plays continue to dominate the headlines. Materials, fuel and other cost increases are becoming increasingly a concern to our US business, but we are taking appropriate measures to ensure that we can effectively service our customers as cost effectively as possible. Price book increase is being considered for later in the year and we will be addressing that as we move forward from here.

Year-over-year, our US/Mexico Pressure Pumping service revenue increased 9% with our Rocky Mountains, Mid-Continent, East Texas regions contributing to the increase.

Moving onto Canada, Canadian Pressure Pumping revenue $49 million for the third fiscal quarter, was 90 million lower than the previous quarter. That's a 65% in our decrease as the region entered its annual spring breakup period. As a result of lower revenue, the region reported an operating loss of $17 million in the quarter compared to operating income of $14 million in the prior quarter. Year-over-year revenue in Canada increased 38% with average rig activity up 22.

The Canadian third quarter operating loss of $17 million improved from the $22 million loss in the third quarter of last year, primarily as a result of increased revenue and cost reduction initiatives that we put in place this past quarter. Spring break-up here is now over. Drilling rig count is currently running at about 410 rigs, that's a 9% increase from this time last year and Canada operations are well on their way to recovering from the seasonal loss.

Moving to our International Pressure Pumping operations, revenue increased over 8% from the prior quarter to $317 million and it was up 14% in the same quarter last year. Revenue from the Europe segment was up 25% sequentially, benefiting from increased activity in the North Sea and Continental Europe. Revenue was 8% lower than same quarter year primarily as a result of redeployment of our stimulation vessel, Vestfonn, from the North Sea to India late in 2007.

Revenue from Asia-Pacific increased 26% sequentially. They benefited from increased activity levels and large margin number of service charge performed in New Zealand, Malaysia and China. Average active drilling activity in the region increased 11% from the prior quarter. Year-over-year, revenue in Asia-Pacific increased 5% with increases in New Zealand, and China being slightly offset by declines in Malaysia and Thailand.

In Latin America, revenues increased 2% sequentially on basically flat average drilling activity. Activity driven declines in revenue in Columbia and Brazil were offset by increased activity in Argentina, Venezuela and Central America. Year-over-year revenue in the region improved 30% with most major markets in the region showing improvement.

Moving to the Middle East. Our revenue increased 3% sequentially. Our revenue increase from most countries within the region was partially offset by lower revenues in India and Bangladesh. Revenue decrease in India was largely attributable to dry-docking of the Vestfonn offshore stimulation vessel for most of the quarter. Those repairs that were done during (inaudible) are now completed and the Vestfonn went back to work in late June.

Year-over-year the Middle East revenue increased 21%, benefiting from new service contracts in North Africa and Kazakhstan. Moving to Russia, revenue decreased 3% sequentially. This reflected a reduction in activity, as our service contract with TNK-BP has become a little defocused on our operations these days. Revenue in Russia increased 9% on a year-over-year basis. Revenue from the oilfield service group increased 22% from the prior quarters and improved 32% from the prior year.

Tubular services revenue was up 16% sequentially, and 18% year-over-year, primarily as a result of increased international activity for them. Process and Pipeline services revenue was up 24% sequentially, recovering from its normal seasonal decline in the quarter, and increased 45% year-over-year, a result of large projects in the Middle East, Asia Pacific and Canada.

Chemical services revenue was up 19% sequentially and 46% year-over-year, primarily as a result of increased activity in the US. Completion Tools revenue increased 1% sequentially and 5% year-over-year, reflecting the inclusion of the Innicor product for the last 6 weeks of the quarter, and increased revenue in Brazil compared to the third quarter of last year.

Completion Fluids revenues increased 60%, tremendous growth in that segment, 60% sequentially and 31% year-over-year-year primarily as a result of increased activity on a strong mix of premium bromide based fluids in the Gulf of Mexico. Sometimes product or service mix goes to your favor (inaudible).

Moving on to our outlook and looking at the fourth quarter, in the US we expect drilling activity to increase between 3% and 4% compared to the third fiscal quarter. We expect pricing to remain generally comparable to what we experienced in the third quarter. Activity in the US remains very high and is expected to continue that way. Drilling permit trends, gas prices, gas storage level, I believe all support that view. As we move on in this market we will continue to focus our efforts on labor efficiency, cost controls and also moving our stimulation assets into the over stretched markets that are under served which are a few in this tired market place in the US mainly in the shell formations throughout the country.

We expect Canada to rebound strongly this quarter as the Spring break up period is over. Canadian drilling rig activity currently stands at over 400 rigs. It is about 9% above where it was at this time a year ago. We think this is a foundation toward a nice couple of quarters ahead of us. In the International Pressure Pumping segment, we are anticipating the modest revenue improvement and slightly improved margins in the fourth quarter.

The largest sequential improvement will likely be in the Middle East, now that our Vestfonn vessel and India are back in service; after being dropped off for repairs most of the prior quarter. In Latin America oil extract increased. In Malaysian activity to occur in the fourth quarter, we expect continued margin improvement for our Oilfield service group despite the outstanding quarter result for the Process Pipeline services and Completion Tools business. We anticipate fourth quarter improvement coming from our Completion Tools business and also our Tubular services business. And we expect a better results will contribute to an improved quarter overall for the group.

As we are currently projecting our diluted earnings for the fourth fiscal quarter are expected to be in the range of $0.54to $0.57 per share. At this point I'll turn it over to Jeff.

Jeff Smith

Okay, thank you Bill and good morning. I'll just quickly address some of the highlights on our margin performance for the quarter. Consolidated operating income margin for the quarter was 15.6% on revenue just over $1.3 billion. The operating income margin improved from 14.5% in the previous quarter, it was down from 22.4% reported in the same quarter last year. With the exception of Canada which was in Spring break-up during the quarter, our operating income margin improved sequentially in each of our reporting segments.

Now looking at the segment individually, on revenue of $707 million for the quarter, our US-Mexico Pressure Pumping operations reported operating income margin of roughly 20.8%. Those margins were up from 19.7% reported in the previous quarter making the first sequential improvement in US-Mexico operating income margins in several quarters. As Bill mentioned earlier, it appears that we have reached a point of pricing stabilization in most US regions, as the rate of price decline experienced this quarter was much lower than what we'd experienced in quarters past.

In addition, we've been successful in negotiating arrangements with many of our customers to recover portion of our fuel cost increases, which also helped with margin stability in the quarter. Operating margins in the US were quite a bit below the margins of 33.3% reported in the same quarter last year and that, as most people realize, is primarily due to the lower pricing we experienced between those two periods noted.

Moving on to Canada. Canada was in spring break during the quarter. So, sequential operating income margin comparisons are not particularly meaningful. In the third quarter, our Canadian operations did lose $17 million on $49 million of revenue after earning roughly $14 million operating income on $139 million of revenue in the previous quarter.

The $17 million operating loss this year is about $5 million improvement from the same quarter last year, as we implemented cost reduction measures in latter part of 2007, which included asset redeployment to other markets as well as headcount reductions. During the quarter, we were also able to use some of the Canadian field personnel in our US operations as they were experiencing that breakup time.

For pressure pumping outside of North America, operating income margin improved sequentially to 14.3% on $317 million of revenue for the quarter. That compares to 11.9% that we reported in the previous quarter. Margins improved most notably in the Asia Pacific regions as a result of increased activity in New Zealand, Thailand and China, and more favorable weather conditions in Australia as well as Malaysia.

Margins also improved nicely in our European region as a result of increased service activity experienced in the North Sea. Year-over-year international operating income margins were slightly lower from 15.4% to 14.3%, primarily as a result of lower high margin product sales we had in India as well as China, in addition to lower activity we experienced in Thailand.

Moving to our Oilfield Services Group, revenue for the quarter was $256 million with operating income margin of 19.4%. That's up from an 18% operating income margin in the previous quarter, but down from 21.6% in the third quarter of fiscal 2007. Sequentially, higher sales in service activity led to higher operating margins in tubular services, process and pipeline services, chemical services as well as completion fluids, so good success there.

Operating income margins, however, in the completion tools business were negatively impacted in the quarter due to inventory impairment charges totaling $6 million. Year-over-year, the lower margin was primarily the result of favorable margin performance with our pipeline business, which was more than offset by lower completion tools margin due to the inventory charge that I just described.

Moving to the corporate segment, corporate operating loss was abnormally low in Q3 for a couple of reasons. First of all, we revised our accrual and our accrual rate for annual incentives to more closely reflect expected company performance for the year. Secondly, the company benefited from an insurance settlement related to a case that we had inherited with our acquisition of OSCA back in 2002. So the combination of these two items resulted in a one-time quarter benefit in the aggregate of roughly $7 million to that segment.

In the quarter, our effective tax rate was 28.3% and that included the favorable resolution of a number of tax exposures, primarily resulting from audit settlements as well as expiring statutes. We anticipate that our tax rate for our fourth fiscal quarter will return to a more normalized rate of around 31.5%.

Switching to the balance sheet, we ended the quarter with $601 million of debt. That's down $15 million from the previous quarter. During the quarter, we issued $250 million of 6% senior notes that mature in June of 2018. The proceeds of this debt issuance were used to repay $250 million in floating right notes that we had mature on June 1.

Cash on hand at the end of the quarter was $82.5 million. Notable uses of cash during the quarter included capital spending of $107 million, dividends of just under $15 million, as well as the acquisition of Innicor Subsurface Technologies that occurred in May for roughly $53 million. Our debt to total cap at quarter end was 15.4% with net debt to cap at roughly 13.7%.

And with that, I will turn the call over to Jennifer for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). And we'll take our first question from Geoff Kieburtz with Weeden.

Geoff Kieburtz - Weeden

Good morning.

Bill Stewart

Hello, Geoff.

Geoff Kieburtz - Weeden

I just wanted to ask a little bit about the CapEx trends there, it did come down. You've got a positive backdrop to the business. Is there anything in that, I mean is there timing issues or some difficulty in expending that capital?

Bill Stewart

Some difficulty in what?

Jeff Smith

Spending it.

Bill Stewart

Spending it?

Geoff Kieburtz - Weeden

Yeah. You're kind of looking at doubling your CapEx in the fourth quarter versus the third quarter. It just seemed an unusual pattern?

Bill Stewart

Our plan was to spend $640 million on an even keel all the way across the various four quarters. And I think we were up to that pace for the first couple of quarters or close to it. And there have just been some projects that hadn't develop quite as quickly as we had anticipated. Some of that is facilitating type stuff. You want to add to that, Jeff?

Jeff Smith

Yeah. A lot of that is timing, Geoff. And the way we have it planned out right now that we will have an exceedingly high amount of capital in our fiscal Q4 to catch up. Bill is right. There was some facility items out there, non-revenue generating capital spend that didn't occur. But for the most part, the revenue generating assets that we anticipated to build and send out to the field will occur in the quarter.

Geoff Kieburtz - Weeden

Got you. Out of the $640 million, how much if facility-related expenditure?

Jeff Smith

Well, it can be quite a bit. We've got some facility activity that's going on, particularly addressing some of the shale plays. We have a footprint in these locations to address the market as these shale plays start to develop even further. But as you could imagine, these facilities were designed to house the size of frac lease that were required to execute the frac jobs.

Geoff Kieburtz - Weeden

All right.

Jeff Smith

We're also building two stimulation vessels. One of the states, I think, is a little behind, expected spending a little more. So, it's just kind of a mix of things and there is no intent for it to be one way or the other.

Geoff Kieburtz - Weeden

All right. And you did mention in your comments that there were some efforts underway to, I think, relocate equipment or at least add equipment into markets that are particularly strained. Did I hear that correctly?

Bill Stewart

That's right. Yeah. In the states, particularly the shale formations are just booming with demand and they are underserved. So we're taking some assets that are interested in moving into those markets and where all of our current build schedule calls for new assets to go into those markets too. Is that it, Geoff?

Operator

And we'll go next to Collin Gerry with Raymond James.

Collin Gerry - Raymond James

Hi. Good morning, guys.

Bill Stewart

Good morning, Collin.

Collin Gerry - Raymond James

Okay. So clearly there is a renewed optimism here in North America, and I guess we're cutting here an anecdotal evidence of spot pricing improvements and you guys certainly have a bullish tone on your call. I guess, given all that we're seeing there, where do you see margin potential for the next two to three quarters when you bake in the fact that some of your capacity is on contract, it was maybe signed at a less bullish point in time and you're seeing the cost inflation, could we get to mid 20s in the next two to three quarters?

Jeff Smith

Well, in the current time, Collin, and we've have talked about this a number of times, the focus is to achieve a turning point where we get stabilization of margins here in the states. We think we are there. We are confronted with some material cost improvement or labor cost increases. And those fit in the equation historically and more acutely as we move forward in the next couple of quarters. So, we'll be having to deal with that. One way or another, we talked about a potential price increase that we'll be considering later in the year. But from a fuel pricing perspective we have a number of our customers under agreement. And I think, about two thirds of our business is fixed in terms of annual agreements for pricing, about a third is in the spot market, as we move forward, and activity intensifies, that's where the greatest potential for price improvement is for. We are not in the position to tell you where we think it can go. My main objective is to keep it where it is. Keep it about where it is, maybe try to get a little more pricing in the system, and leverage off the incremental revenue that we are able to achieve.

Collin Gerry - Raymond James

Okay. And then if you go back to the '05, '06 timeframe you saw a huge ramp-up in capacities, now you are starting to see a very bullish and optimistic up market again. How do you see the industry adding capacity here in the near-term, and I guess along those lines one of your competitors mentioned that in the Haynesville in particular you are seeing about 1.5 to 1.7 times the service intensity on drilling applications, so you bake that and does the market absorb capacity better this time around?

Bill Stewart

Well I think there'll be less capacity coming into the market, I mean all indicators are that's the, case you've heard it, stated from some of these little small companies', CEOs, that's the case. Sense from our suppliers is the volume of capacity moving into the market is significantly less. And you couple that with the market. They can fairly, easily absorb it, they need that capacity. So short to medium-term we don't see any issues in terms of oversupply of capacity.

Collin Gerry - Raymond James

\

Okay. Thanks guys.

Operator

And next we will go to Dough Becker with Banc of America.

Dough Becker - Banc of America

Thanks. You are talking about a US rig count increase of 3% to 4% in the current quarter. It was up 5% last quarter. Is that because you are seeing some constraints, whether it be OCTG or wages or is that just out of conservatism?

Bill Stewart

Just three months difference and could be a little degree of conservatism, but that's what our view is in terms of rig count increase.

Dough Becker - Banc of America

Okay. One of your competitors mentioned that they were at least contemplating moving some capacity into Canada, back into Canada given the improving market there. Is that something that you guys would be considering?

Bill Stewart

Yes, not much, but we do feel like we are undersupplied with our fracturing capacity. And we indeed need some capacity in Canada because of some of the trends that are developing there that are higher rate, larger horsepower type frac capability. We'll be adding a little of that type capacity in the Canadian market first to serve the Bakken area down Southern Saskatchewan and that Bakken Shale play. And then in the winter time to move up to the northwest in British Columbia to serve the shale play up in that area, which should activity during the winter.

Dough Becker - Banc of America

Okay. And then the best we can tell, I understand that these are soft numbers, but FracTech is going rapidly. By estimates it could actually be surpassing the size of your fracs lease in terms of hydraulic horsepower. How does this get incorporated in your strategy going forward?

Bill Stewart

Well, if they had as much capacity as we have. I'll be extremely surprised

Dough Becker - Banc of America

Okay.

Bill Stewart

But our strategy is to keep our focus on the market, develop technology that we believe will make a difference, develop effective and efficient cohort that will service very effectively for our customers and let the cards fall it may.

Dough Becker - Banc of America

Okay. And then just one last issue; may be just an update on Arkansas. Obviously, it was an issue last quarter. Certainly, it seems like those issues have been marginally resolved?

Bill Stewart

Yes, may be Jeff can help you with that one.

Jeff Smith

Yes, I can address that. I think that, we talked a little bit about a couple of things. One was we had little bit higher maintenance in that quarter. As well as, we were experiencing some challenges on the merge side, with respect to some of the operating practices or some of the operators there. We have gone to them and discussed some of those challenges that we have, and I think we have got those resolved with the customer, and that's reflective in this quarter.

Dough Becker - Banc of America

Thank you very much.

Bill Stewart

Sure.

Operator

And we will take our next question from Jim Crandell with Lehman Brothers.

Jim Crandell - Lehman Brothers

Hi. Good morning. Bill, could you give us your estimates on how much you think US stimulation capacity for the industry is up this year, will be up this year and how much your capacity will grow this year?

Bill Stewart

I think, Dunlap is here, I will take a first shot at that and then may be he can fill in the gaps. And I think we stated this early on. It could be up around 10% and our capacity will be up somewhere in that range. The market quite clearly will absorb that capacity easily. And I think even it will be underserved with that degree of capacity adds. I will pass it on to Dave with this remark.

Dave Dunlap

10% is about where we think that is Jim and I'll have to say it's being largely absorbed into these gas shale areas, as well as the Bakken Shale area, where higher horse power requirements per fleet are kind of the order of the day. And just to give you a reference point, as we talk about the Haynesville Shale, this is an area that's requiring some of the largest horsepower fleets we've ever seen in the industry up to 30,000 horse power, and that's the horsepower that has to handle a high pressure. We are seeing service treating pressures in the 11,000 feet as our range. So, it's got to be high horsepower fleets, and it's got to be unit that can withstand that pressure. And those increased activity particularly in North Louisiana is observing a lot of this additional capacity.

Jim Crandell - Lehman Brothers

Okay. And my other question was as well on pricing Bill, I was little surprise there you say your goal is to keep pricing where it is now in the US market. And that's really in the face of what is increased cost, can you talk about the pricing environment out there, do you think by the end of the year you'll be able to get either nominal or real price increases on these one year contract rollovers and tenders that will come up before year end? And do you think the market will really tightened enough to allow you to get real price increases before year end?

Bill Stewart

Okay. Well, when I said, what I said, I didn't mean that we were trying real hard to keep prices where they are. What I meant to say, if I said that, was that for five quarters we've seen price erosion and margin erosion. And the goal that we had over those five quarters was to get to the end of the tunnel, if you will, and achieve a point where pricing and margins stabilized. That was our goal. And we believe we are at that point and so to quickly convert to the idea that you are going to see substantial price improvement after going through what we've done. I think it is little impractical. So I think the more practical view is that if we can just go through another quarter and get comfortable that in fact prices have stabilized.

And during the process we see a lot of more intensity of activity. The pendulum will start swinging over toward us, being able to negotiate better pricing. And I've mentioned that, that was a possibility that we were considering when I said we were considering a price book increase later in the year. And so, I think what we need to do is to let this next quarter play up. See what happens. Move on into the fall period and just kind of determine what we believe the market holds at that point. And then, I think, I can give you a little better view on the leverage that we would have in terms of addressing this better pricing issue.

Jim Crandell - Lehman Brothers

Okay. Thanks, Bill. One final question for Dave, if I could? Dave, would you comment on how you see the percentage of the market being changing, if at all, for that part of the business that's pretty much a commodity business, where the lowest cost supplier gets the business? And that percentage of the business where your technology that you've developed can win the day?

Dave Dunlap

Well, I will tell you, Jim. Some of the newly discovered and developing shale plays in North America are requiring a different level of technology than, say, the benchmark of the Barnett Shale. The Haynesville is a perfect example of that. It's a deeper formation. It's one with the higher pressure. The completion requirements are significantly more complicated than what we see in the Barnett. Of course, the resource quality, it seems to be extremely good as well.

These are fracs that, as I mentioned, will treat it as significantly higher pressure. The fluid requirements on these fracs are different than what we see in the Barnett. The jobs that we've done so far are typically utilizing what we refer to as a hybrid fluid, which is a combination of crosslink fluids as well as slick water. And so, as we continue to move into more difficult shale formations in the US, those technical requirements are going to once again step up and be very important to our customers as they were in the early days of the Barnett.

Jim Crandell - Lehman Brothers

Okay. Thank you very much.

Operator

And next we'll go to Byron Pope with Tudor, Pickering, Holt & Company.

Byron Pope - Tudor Pickering Holt & Company

Good morning, guys. As we think about the next couple of quarters, what can we look to get some sense as to whether or not the supply/demand fundamentals in the US Pressure Pumping business are such that you could get net pricing improvements? Should we be looking or asking about Saturday frac schedules building as the job to turn down rate or we should monitor. What should we be listening for in the next couple of quarters to gauge that?

Bill Stewart

All those things you just pointed to, job turn down rate is clearly an indication of demand for Pressure Pumping Services. The rig activity, that's another one. I think if you look at the rig distribution into the shale areas, that's probably another indicator. So, it's just those general things that are pretty obvious when you think about it that are the key to getting better pricing.

Byron Pope - Tudor Pickering Holt & Company

Well, haven't yet stabilized at this point?

Bill Stewart

Pardon me?

Byron Pope - Tudor Pickering Holt & Company

You mentioned that most of your US region saw pricing stabilizing during the course of the June quarter. Could you speak to where you still haven't seen pricing stabilized at this point?

Bill Stewart

No, we really can't do that.

Byron Pope - Tudor Pickering Holt & Company

Okay. And thinking about pricing for the Canada market, given that that market seem to have turned on a dime and you had a lot of capacity to leave that market, how do you think about pricing opportunities as you move closer to the winter drilling season in Canada?

Bill Stewart

Well, we're starting out at a pricing level that's a little below what it was last year. And again, similar to the US, I think they are going from a very low level of activity. They have had some capacity exit the market. All the major companies up there have recognized that in order to effectively address what activity seems to be in brew for this coming winter season, there will be a need for additional capacity. And we'll just have to monitor the situation, see what develops over the course of the fall. During the fall, we start negotiating prices with our customers, and if it's a little better than what people expect in terms of activity, we might be able to get a better price up there.

Byron Pope - Tudor Pickering Holt & Company

Okay. And then last question from me. We're getting closer to the point where industry is taking delivery of a lot of new built jack-ups and floaters, could you speak to BJ's historical market share in terms of cementing skids on those rigs and how you think about your market share opportunities as you go forward over the next couple of years about the rigs coming online?

Bill Stewart

Sure. Yeah, we're doing great in that category. I think Dave can really make you a good picture here.

Dave Dunlap

We've had an initiative underway for the last several years to try and get BJ cementing equipments placed on these rigs while they're in the shipyard. And without speaking about specific market shares, I think we anticipate as we get through this -- seems to be about a five or six year overall schedule for rig construction and modification, we do expect to see an improvement in our overall share of offshore cementing units as measured by numbers of units on rigs around the world.

We've had an initiative in place where we moved our cement unit construction to Singapore about three years ago. That's closer to the shipyards. It's allowed our expertise to be fully leveraged by those drilling contractors that are building rigs in places like Singapore, Korea and China. That's been a great strategic move for us. And I think we'll really be reaping the benefits of that over the course of the next few years as those rigs go out in the marketplace.

Byron Pope - Tudor Pickering Holt & Company

Okay. Thanks guys.

Bill Stewart

Thank you.

Operator

And we'll take our next question from David Anderson with UBS.

David Anderson - UBS

I just had a follow-up question on the offshore question there. So, with all the new build rigs we have on order out there, what percentage of them already have contracts with the cementing side?

Bill Stewart

I think it's about a third.

David Anderson - UBS

Only about a third of them, okay. So presumably, obviously, all the ones that are coming on this year and next year already have that. So could you speak a little bit towards what you expect your incremental growth from the offshore segment to be in '09?

Bill Stewart

Yeah. I don't think we want to give specifics here, but I think we've done pretty well. All the offshore skids are being built in Singapore. Most of the new built install rigs are being built in that area either Korea or in Singapore itself. And we have a number of installations ongoing at the present time. So, we feel pretty good about where we are at this point.

David Anderson - UBS

And I'm just curious as to how far in front of the rig being delivered or being activated or is the cementing package ordered typically?

Bill Stewart

Between one and three years.

David Anderson - UBS

One and three years. Great. That's all for me. Thanks.

Operator

Next we'll go to Chuck Minervino with Goldman Sachs.

Chuck Minervino - Goldman Sachs

Thanks. You touched on addressing some of the cost increases going forward. Can you just give us a sense of the strategy there, what some other plans are to do that just so we get a little bit of sense of the back half for the year?

Bill Stewart

I guess we were talking about US. We have an intensive effort to try to keep our discretionary spending down to a minimum. We are still on the process of replacing contract employees and we have some situations in our operation where we have people that don't live in an area work in an area kind of on a rotational basis, so we're attempting to try to get as many local people within our districts as possible to reduce labor that way.

And then, we're trying to pass on one way or another as much of the kind of specialty costs, if you will, that we incur in connection with our job. So, Jeff may have mentioned the moorage that we had incurred up Arkansas. And that was a special type situation that we've effectively addressed. And so, if anything else develops in that area, we'll focus on that too.

There are many of our technologies that we have that are better less costly to us, but do a better job for the customer that are more effective that if we can convince a customer that that's part of what he wants in terms of his frac or cement design, then our margins were helped by those proprietary products. And so, part of our effort is to try to move the customers to our proprietary products.

Chuck Minervino - Goldman Sachs

That's really helpful. Second question, in the Oilfield Services segment really strong growth there. Just was wondering what the strategy might be from a CapEx standpoint in that business or even an acquisition standpoint Do you have a plan to maybe expand that business in a greater way given the strength in that business?

Bill Stewart

Absolutely. Innicor was part of that. We're looking at a couple of more opportunities that would fall into that segment for us and we've got a great international platform -- offers these guys' very efficient effective means of expanding into the international markets. Most of them were kind of US headquartered until then. So it's a great strategy, worked well for us. You can see that reflected in the results. We'd just like to have more of it.

Chuck Minervino - Goldman Sachs

Okay. Thank you.

Operator

And we'll next to Alan Laws with Merrill Lynch.

Alan Laws - Merrill Lynch

Hi, good morning. I have few kind of small follow-up ones. First one was on I wonder if there is anything special about the completion fluid surge? Is that like technology base or is it just a new contract?

Bill Stewart

Dave, you want to address that?

Dave Dunlap

Yeah. The completion fluids business has a tendency to be a bit lumpy from time to time. It was lumpy in the wrong direction last quarter and lumpy in the right direction this quarter. Our fluids sales are based on two primary types of technologies like calcium chloride-based fluid and a bromide-based fluid. And the bromide fluid is significantly more expensive. The use of either one of those fluids is dependent on bottom-hole pressure that an operator experiences. And so, it happened this quarter that we had a high percentage of bromide fluid sales, but we also had a high percentage at some of our key index sales in filtration and specialty chemicals. So they hit on all cylinders.

Alan Laws - Merrill Lynch

Okay. There was a question earlier, Bill, last quarter you talked about setting up the yard there cost you about $0.04 a share, I think, is the number that you used. Wonder if you could give us what would the sequential earnings pick up there was or what the difference was quarter-to-quarter?

Bill Stewart

Yeah. It wasn't so much the facility as it was operational challenges that we had experienced. So I'm not going to give the specifics in terms of our earnings per share from that front. But a couple of things as I mentioned earlier, one was, of course, we had some fuel issues. We had some maintenance issues as well. Most importantly, the moorage charge that we were talking about where you have tremendous amount of sand and sitting on locations that's incurring the moorage cost. And that's unique to some customers in that particular market. And so, as I mentioned earlier, we have gone back and discussed the operating practices and been able to rectify that issue. It was something that was related to kind of the start-up associated with that location.

Alan Laws - Merrill Lynch

Is it safe to say that you absorbed the full $0.04?

Bill Stewart

Well, I think so. And when you're going into a new market and open up a new facility, you are not as efficient with one practically than you would be if you had a broader base of equipment.

Alan Laws - Merrill Lynch

Sure. Okay. Another question on International Pressure Pumping. Outside North America, Russia, is it still one of your most important markets? I'm wondering if you could make some comments around that, what's going on there today and versus what you think about kind of going forward longer term in that market.

Dave Dunlap

Well, Russia is a very difficult market for us. It's oversupplied in fracturing capacity. Our main service line is fracturing and prices are not wonderful. We've been working hard to try to indigenize, and I think we've accomplished that. So, we've been able to reduce our cost.

But during the process of focusing on cost reductions and improving quality and such, the major contract that we have is with TMK and BP. And I mentioned earlier in the call that they are really deep focused from field operations and the activity has reduced quite significantly, which has impacted us. So, at this point, I don't really have a great story to tell in connection with Russia as it is today and we're looking at it real close to see what our various options are on improving results there.

Alan Laws - Merrill Lynch

Okay. My last question has to do with, we're all pretty interested in the pricing side of this or when pricing may come through. But I was wondering if you could talk a little bit about the mix or size of jobs or complexity that helps utilization out and how that might improve your margins in the next couple of quarters?

Dave Dunlap

Well, the job size we've looked at, it's up significantly from four, five years ago. But job size was above flat quarter-to-quarter and somewhat similar in size what we had in the prior year. But as you get into these shell formations like Dave was reflecting earlier, high pressure, high temperature, then you are really getting into an area where you got bigger jobs and more sophisticated use for proprietary products and potential for kind of a step level increase in job size and margin production is quite good.

And I'd have to say that's been the case for the Haynesville, and I think after kind of tag the Bakken as a candidate for larger, better margin jobs, and Marcellus as that market develops, it's been a little slow in developing, that's been the case there. The Fayetteville would be the case also.

Alan Laws - Merrill Lynch

So are you seeing this trend right now, over the next two quarters do you think that that trend is going to affect your margins in anyway, that's what I'm trying to get at?

Dave Dunlap

Absolutely.

Alan Laws - Merrill Lynch

Okay. And then when you look at the turndowns doubling basically quarter-over-quarter, does that help you at anyway being able to select the higher margin or better job or is it just, it's all contract related, you can't really reflect it?

Dave Dunlap

Well, what it does? It just gives a notice to the customer that things are tight. And it gives you the ability and so that starts the swing from the leverage card being in the hands of the customer to the service company in terms of being able to at some point get a better price.

Alan Laws - Merrill Lynch

Excellent. Thanks for the answer there Bill. I'll turn it back.

Operator

And we will go next to Robin Shoemaker with Citigroup.

Robin Shoemaker - Citigroup

Thank you. I was wondering if you could comment on the fracing fluids and proppants you sell, what new products are addressing the shale plays that you have been describing and whether there are some important developments in that area that we haven't talked about so far.

Bill Stewart

Well, Dave can do that much better than I can.

Dave Dunlap

Well, I think the important thing is to recognize that each of these shales are showing a bit different treating characteristics. And so, there is not necessarily a common technology that is just going to flow from one shale to the next. But what I can comment on is, in particular the Haynesville, where we have seen the need for cross linked fluids. And that introduces a level of chemical technology, it's an area of cross linked fluid, you got to think about fracer technology and how those breakers are going to function under the down hole conditions. We have got friction reduction issues. We have got surfactant issues that we are learning about in Haynesville. And how all those chemicals are going to interact to give us the best results. Still a lot of learning going on there, I cannot point out, there is still very few wells that have actually been completed in the Haynesville. But I think the key point is that all of these are going to require a degree of new technology and a degree of experience in using that technology, which we feel like we are in a real good position to provide.

Robin Shoemaker - Citigroup

Okay. Just one other unrelated question, in your project in Mexico with Baker Hughes, the offshore drilling project which you are involved, is this the kind of project that you could see moreover time where you pair up with another company on an integrated project, providing either cementing or stimulation services.

Bill Stewart

I think that's absolutely on point, there are basically three countries where these integrated service projects are ongoing, Mexico, is the one that really has been very active in this area. And we've been involved as a partner. We've been involved as a subcontractor. We're involved with Baker as a quasi partner in that project. And there are some others ongoing that we're involved as subcontractors. So we've been able to fill the voids if you will. We've also been able to pull other companies together and be part of the lead effort in that concept down in Mexico. So, I think, you'll see more of a mix of participation from us in these projects as we go forward from here.

Robin Shoemaker - Citigroup

Okay. Thank you.

Operator

We'll take our next question from Pierre Conner with Capital One Southcoast.

Pierre Conner - Capital One Southcoast

Good morning, gentlemen. Wondering if I could follow-up a little bit on Robin's question, specifically to you Dave, on proppant Haynesville, could you get a little more specific on two things, one; what are you seeing as the specific proppant need there and then maybe in a bigger picture on proppant, what is the situation relative to overall demand and tightness in proppant market.

Dave Dunlap

Well I will talk about the Huntsville requirement, specifically what we have seen so far. And I'll caution you would there hadn't been not been a lot of completions then or yet, we are still going to going through a learning curve for a while. But what we've seen so far is a requirement for higher strength proppant than is required in the Barnett. I think that you are going to see some of the premium proppants used more frequently there, ceramic type proppants or perhaps even bauxite in some cases. But it does not appear that sand by itself is going to be able to serve our needs there. But if you got closure pressures and crush requirements that are going to exceed what we see we think from sand.

Pierre Conner - Capital One Southcoast

And then related to that is sand, how is overall delivery of sand proppant relative to in your other markets. Slowing down, does that part have tightness at all?

Dave Dunlap

Well sand is in high demand, not only in the Haynesville, but all throughout the country. And we are working very closely with our suppliers. Most of these little suppliers are small independent sand suppliers. And we are working with them. We are providing commitments, long-term and short term. And we are also developing options for particular jobs that would utilize more readily available sand, so its kind of mix of our efforts and their efforts and to meet the current demand. And up till now we have been doing okay, I mean everybody is stretched all the way across the board and all other things that they provide in this very active robust market. It's just another one of those, elements in the puzzle that's in high demand.

Pierre Conner - Capital One Southcoast

Okay, another technical question. You spoke a little bit about sort of the bifurcation in the complexity in the completions and I wanted to know, Dave may be, is there any ability to take more commodity type equipment and upgrade it for use in the Haynesville. I know that obviously to get the higher horsepower we just need more trucks. But to get to that 15,000 Psi treatment pads, I mean is that an upgrade that with some capital it can be done on existing equipment or something just something has to be built new.

Dave Dunlap

Well, it's I mean it's to certain degree of function of the type of equipment that you bring out. But more importantly it's a function of a type of maintenance programs that you have in place. The units that we build are capable of handling that type of pressure from the start and they do frequently require different form of fluid that they use normally. But more importantly what you got to have in dealing in those types of pressures is that you got to have a maintenance program. You got to have a quality of standard practices that allows you count on the reliability of that equipment, holding up those pressures time after time after time. And that's clearly an advantage that we think we have as a result of the maturity and sophistication embedded within our maintenance and standard practices efforts.

Pierre Conner - Capital One Southcoast

Okay.

Bill Stewart

Also, like Dave was saying, more sophisticated frac designs and frac fluids, from what I understand, even in parts of Haynesville will vary from well to well to well. So it's more of a at this point a customization issue than what clearly is the case of the Barnett Shale.

Pierre Conner - Capital One Southcoast

Okay, sure. And then my last one is just to double check on the clear fluids business I'm assuming that the driver there as you pointed out its lumpy but its really all in the offshore side of the business, are there any deep land completions requiring bromide or anything of that nature to drives that number?

Bill Stewart

That's very seldom required.

Pierre Conner - Capital One Southcoast

Okay. So it's really driven by what offshore rigs happened to be completing at what time?

Bill Stewart

That's right. That's a function of fluid density that they require.

Pierre Conner - Capital One Southcoast

Okay. Thanks gentlemen.

Operator

And we go to Thomas Curran with Wachovia.

Thomas Curran - Wachovia

Good morning, guys.

Bill Stewart

Good morning.

Thomas Curran - Wachovia

Sorry if I missed this early in the call, but could you just give us an update on industry wide what you think the lead times are running right now for an order placed today?

Bill Stewart

For equipment?

Pierre Conner - Capital One Southcoast

Yes.

Bill Stewart

It's about nine months.

Pierre Conner - Capital One Southcoast

About nine months. And if and as the market dynamics improve over the next six months, as expected, how would you expect the manufacturers to respond and what impact would you expect it to have on lead times?

Bill Stewart

You mean if demand for the equipment increases how will they respond?

Pierre Conner - Capital One Southcoast

Yes. Should utilization and margins evolve as you expect over the next six months on average for the market, how would you expect the horsepower manufacturers to respond and what would be the associated impact on lead times?

Bill Stewart

Well I think the response is going to come from the customer. Right now we've got a nine months delivery time and that's at a level which is moderate significantly from the demand placed on them a couple of years ago. I don't see demand being placed significantly higher, as we move into next year than what exists today. It was lot of things that supported that idea. We've got a US business back a couple of years ago that was generating 40% plus margins, that was like a magnet to attract competition. And today you've got a US business, last quarter it was 18%, 19% margins, and this quarter just infinitesimally improved over that. So, the whole outlook is not dramatically different today than it was last quarter. So I think that you are jumping to this big conclusion that there is all of a sudden a draw to bring capacity into the market, when in fact I don't believe that will be the case. Low margins support that idea. And the credit markets are not here, so borrowing money is going to be very difficult for those guys. And when you talk to suppliers and they don't hear any orders coming through. So, the foundation for capacity adds is significantly diminished compared to a year, two years ago.

Pierre Conner - Capital One Southcoast

Right. And I do understand your expectations and outlook and thank you for that overview, that's helpful. I was more just trying to get a read on how much available roofline there is slack capacity to add additional hydraulic fracturing equipment, should the demand surprise you to the upside? And whether or not you know of, say, (inaudible) that's in for example that's currently in the process or waiting, with an ability to add new manufacturing capacity relatively quickly.

Bill Stewart

I don't think there's going to be many manufacturing capacity add.

Pierre Conner - Capital One Southcoast

Okay. That's helpful. I'll turn it back. Thanks, guys.

Bill Stewart

Okay. We'll take one more question.

Operator

Actually, that concludes the question-and-answer session today. I'd like to turn the conference back over to you, Mr. Stewart for any additional or closing remarks.

Bill Stewart

Okay. Well thank you everyone for joining us. And we'll see you in three months.

Operator

And this does conclude today's presentation. We thank you for your participation. You may now disconnect.

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