Complete Production Services, Inc. Q2 2008 Earnings Call Transcript

Complete Production Services, Inc. (CPX)

Q2 2008 Earnings Call Transcript

July 24, 2008 8:30 am ET

Executives

Mike Mayer – SVP & CFO

Joe Winkler – Chairman & CEO

Brian Moore – President & COO

Analysts

Jim Rollyson – Raymond James

Theresa Fox [ph] – Stone Harbor [ph]

Stephen Gengaro – Jefferies & Co.

Mike Drickamer – Morgan, Keegan & Company

Kevin Pollard – JPMorgan

David Anderson – UBS

Joe Agular – Johnson Rice & Company

John Daniel – Simmons & Company International

Anthony Ayofino [ph] – Newsanik and Company [ph]

Douglas Becker – Banc of America Securities

Pierre Conner – Capital One Southcoast, Inc.

Jim Crandell – Lehman Brothers

Dan Pickering – Tudor Pickering & Co.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Arun Jayaram – Credit Suisse

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2008 Complete Production Services Earnings Conference Call. My name is Fab and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) As a remainder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Mike Mayer, Chief Financial Officer of Complete. Please proceed.

Mike Mayer

Thanks, Fab. Good morning. Thank you for joining us this morning as we host our second quarter 2008 earnings conference call. Before we begin the discussion of our financial results, please note that some of the statements we make during this call may contain projections and estimates, including comments about our outlook for the Company's business, which are forward-looking statements within the meaning of the Securities Acts of 1933 and 1934. These forward–looking statements are based on limited information as of today, which is subject to change. These forward-looking statements are further subject to risks and uncertainties and actual results may differ materially. You should not assume that these forward looking statements remain valid beyond the current quarter. I refer you to our various documents filed with the Securities and Exchange Commission for a more detailed discussion of some of the risk factors that might impact our business.

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

Joe Winkler

Thanks, Mike, and good morning to all on the call. We appreciate you have taken the time to join us especially at this early hour. In addition to Mike and I we also have with us this morning Brian Moore, President and Chief Operating Officer, and Jose Bayardo, our Vice President of Investor Relations and Corporate development.

Quarter two was another busy and productive time at CPX. We accomplished a lot thanks to the hard work and efforts of our people. Activity levels, but for the seasonal Canadian break-up, continued to be very good throughout Q2 as the momentum gained in Q1 carried forward. Our customers continue to execute their drilling plans within the resource plays and have been very busy announcing new resource play opportunities.

Reviewing our performance, we reported revenue of $441.1 million, net income of $39.8 million, and fully diluted earnings per share of $0.54. All of the numbers referred to will be based upon continuing operations.

First, from a sequential perspective revenue was up 6%, or $23.9 million. North America rig count was down 11% as the Canadian decline offset the 5% increase in the United States. EBITDA of $118.2 million was down slightly and EBITDA margins of 26.8% was down from 28.7%.

Within our Completion and Production segment, revenue was up $17.1 million, or approximately 5% as the impact of acquisition, investment growth CapEx and increased activity levels in U.S. overcame the decline in our Canadian operations due to the seasonal break-up period. EBITDA and EBITDA margins declined due to the normally high incremental impact in connection with the Canadian drop off, startup costs associated with our pressure pumping operation into the Bakken, a significant increase in fuel cost, and cost along with launch revenue due to a well control problem in Mexico. These more than offset the EBITDA increases due to acquisition and organic growth within this service line.

Our U.S. coiled tubing business performed well in spite of the temporary delay in the coiled tubing drilling project we discussed last quarter.

Our well service also turned in another good quarter and our related rental business improved its margin on slightly higher revenue.

Pressure pumping turned in another good quarter as revenue was up significantly due our acquisition in April. And the impact of organic growth. Although EBITDA was up, margins, as expected, were down due to startup cost associated with our entry into the Bakken Shale, the integration of Frac Source, and higher fuel cost.

Fluid handling volume was up slightly but margins were down due to some mix shifts, but primarily because of the rapid increase in fuel prices during the quarter.

Drilling Services segment performance improved with increases in revenue, EBITDA, and margins.

Our drilling rig business continues to steadily improve with slightly higher EBITDA and margins from higher utilization and lower cost.

Our rig logistics businesses also generated higher revenues and margins. In both cases, the efforts of our change to improve their performance along with the current market conditions are beginning to have effect.

Now, onto the year-over-year review. Revenue increased 20%, or $74.3 million while the growth in the U.S. rig count was up 6%. EBITDA increased $7.8 million, or 7%. However, margins were 26.8% as compared to 30.1%. Completion and Production segment revenue increased $64.4 million, or 22%. Approximately two-thirds of the growth is attributable to organic efforts with the remainder through acquisitions. EBITDA of $107.5 million was up 8% while margins declined to 29.2% from 32.9%.

Although it varies by service line and geography the forces impacting the Completion and Production segment year-over-year margin performance can generally be described as follows – inflationary impact, especially fuel; slightly lower utilization in some service lines - coiled tubing, well service rental; lower pricing levels in some service lines – coiled tubing, pressure pumping, rental; and improved performance with our Canadian operation. Both well servicing and fluid handling delivered excellent revenue growth.

Drilling services revenue was up $3.9 million, or 7% and EBITDA was down slightly with EBITDA margin of 27.1% versus 31.1%. Higher volumes primarily in our drilling rig business were more than offset by lower pricing and impact of inflationary forces.

On the strategic front, we accomplished a number of things. As indicated last quarter, we were in the process of negotiating the sale of certain non-core assets within our Product Sales segment, and we accomplished that task in late May. Our thanks to the various members of our team that diligently worked through the transaction while also running the rest of their business. Simultaneous and related to this transaction, we also acquired a small Barnett Shale based well service and fluid handling operation. Net cash received in the transaction was approximately $50 million.

We successfully integrated our previously announced Barnett Shale pressure pumping acquisition. We successfully deployed our hydraulic fracing services into the Williston Basin in mid-July. Our first job included 11 stages and a cross-linked gel [ph] fluid system as stimulation for a horizontal Bakken Shale well near Sydney, North Dakota. We entered into an exclusive agreement with Sondex, an unit of GE, for the use of its new open hole formation evaluation tools in the United States. This is right down the (inaudible) strategy to expand our offering in emerging resource plays where execution and basin expertise matter and will provide a great opportunity to leverage our existing electric wireline operations.

We increased to $250 million our expected CapEx for 2008 to take advantage of several new growth opportunities, and we strengthened our balance sheet.

I will now turn it over to Mike then come back for outlook. Mike?

Mike Mayer

Thanks, Joe. Our capital expenditures for the quarter totaled about $78 million. As in prior quarters, our depreciation expense was up on a year-over-year basis with the current quarter totaling $43 million, up $10.7 million over quarter two of 2007. We expect to see depreciation continue to increase through the remainder of 2008 as we continue to wisely invest in our Company. Depreciation and amortization should increase between $2.5 million to $3 million in the third quarter of 2008 compared to the second quarter.

Balance sheet management continues to be a key area of focus for Complete. As noted, during the quarter we invested in capital expenditures as well as the strategic acquisition of Frac Source and sold off some businesses not deemed to be core to our overall strategy. Despite the significant investments, we ended the quarter with a $25 million reduction in net debt outstanding. The lower level of debt combined with a favorable interest rate environment allowed us to reduce our interest expense during the quarter.

We ended the quarter with a leverage ratio, which by the way excludes the trailing 12-month EBITDA contribution from the businesses that were sold, of 1.74 times, and our debt-to-capital ratio was 43.5%. We expect interest expense to fall slightly in quarter three as we continue to reduce outstanding balances on our revolver.

The effective tax rate for the quarter was 34%, reflective of a slightly lower state tax rate due to the business divestitures made during the quarter. The majority of the revenue from the sold business was generated in Texas, where a state margin tax is based on revenue as opposed to profits. As a result, the level of business in Texas declined, leading to the lower rate in the quarter. On a year-to-date basis, our effective rate was 35%, and it is likely our full year rate for 2008 will also be 35%.

The divestiture activity during the quarter has been treated as a discontinued operation and all historical periods have been restated. To assist in understanding the impact of the divestiture, we have provided in our earnings release summary level income statements reflecting the discontinued operations treatment as well as summary segment revenue and EBITDA for the last five quarters.

The transaction resulted in a loss also shown on the discontinued operations line due primarily to the inclusion as part of our cost basis in the assets approximately $11 million of allocated goodwill that was generated in the September 2005 merger that created Complete. At that time we merged three companies which were under common control and used the continuity of interest accounting method to account for the combination.

Under this method, approximately $90 million of goodwill was booked in connection with the combination and $11 million of that goodwill has been allocated to the sold businesses based upon revenue at the time of the merger. In addition, the goodwill included in the transaction was not deductible for tax purposes, resulting in a tax gain on the transaction and a book loss.

We are pleases with the overall strengthening of our balance sheet thus far in 2008, and we will continue to execute our growth plans through the remainder of the year.

We think our available liquidity under our credit facility coupled with solid cash flow from operations should be more than adequate for the foreseeable future.

I will now turn it back to Joe.

Joe Winkler

Thanks, Mike. Now to our outlook. As stated last quarter, we expect activity levels in our markets to remain robust. Inflationary forces, especially fuel will be an issue. Given the level of activity and expectations in the near term, capacity, and its impact on reducing pricing will likely not be a major concern. We would describe the pricing environment in quarter two as stable and moving towards positive. We, along with many other service providers undertook additional price increase initiatives during quarter two either in the form of fuel surcharges or rate increases and we expect more to be done during Q3. Our expectation is that the environment is receptive to increases, but it will vary across the board and will be market specific.

As to our business in Q3, we will begin to see the recovery in the Canadian market. We will have full quarter impact of the first two fleets from our Q2 pressure pumping acquisition, and the benefit of two months of the third fleet. We will benefit from the deployment of our fracing services in the Bakken although it won't be until Q4 that we will hit a full run rate there.

Our coiled tubing drilling project has restarted. We expect to receive some price improvement relative to Q2. While we don’t expect inflationary forces to go down necessarily, we do expect a decrease in the rate of increase. It is unknown if there will be any significant adverse impacts to our operation from the hurricane season.

Although not to a large degree, we will be the beneficiary from the impact of growth capital deployed in Q2 and that which we will deploy in Q3. We will incur additional DD&A, as Mike indicated, as a result of our additional investment, and our tax rate will be a normal 35%.

Based upon our current view, we expect Q3 EPS to be in the range of $0.61 to $0.63.

A couple of other points to note before Q&A. In addition to our new fracing position in the Bakken, we will continue to expand in this basin with coiled tubing and e-line beyond our already existing position in well services and related rental and fluid handling operations. We will also expand our footprint in the Haynesville in which we currently have a position within well servicing and rental, fluid handling, and coil tubing, and e-line.

And as always, we will be looking to expand and grow through acquisitions that meet our strategic and financial criteria and to expand our market presence.

Thanks to our people for their efforts and contributions during Q2 and although the task in front may be difficult I am confident they are up to the challenge.

Fab will now open it for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And your first question will come from the line of Jim Rollyson with Raymond James. Please proceed.

Jim Rollyson – Raymond James

Good morning guys.

Mike Mayer

Good morning

Joe Winkler

Good morning.

Jim Rollyson – Raymond James

Joe, you talked a lot about fuel cost this morning. Can you maybe – you mentioned obviously prices kind of -- either fuel surcharges or prices going up – do you suppose that the rise in pricing at this stage is mostly to offset those costs or do you think you are headed towards a margin expansion?

Joe Winkler

Well, I would hope that we are headed to expansion. I think we’ll start with expectation that will cover the impact on our cost and go from there. It – as you know, it moved rapidly during Q2, and I don’t know that we got ahead -- pretty confident we did not get ahead of it and we’ll get behind the curve. So we’ll be looking to get some of that back.

Jim Rollyson – Raymond James

Do you guys ever do any hedging with fuel?

Joe Winkler

No.

Jim Rollyson – Raymond James

Okay. In the Product Sales group obviously it looks like margins went up as you sold off the non-core business. Can you maybe talk about how you expect those trends to look going forwards because they were certainly notably higher than they had been in the past?

Joe Winkler

I think we can expect that maybe some slight ups and downs but in essence flat line.

Jim Rollyson – Raymond James

Alright. And last question from me, you increased CapEx to $250 million. May be talk about where that’s headed.

Joe Winkler

New growth opportunities. We told you guys at the beginning of the year, we’d be opportunistic and be flexible and this is what we are doing, and we’ve got some thoughts and ideas and a couple of those basins we talked about we are heading there.

Jim Rollyson – Raymond James

Fair enough. Thanks guys.

Operator

Your next question will come from the line of Theresa Fox [ph] with Stone Harbor [ph].

Theresa Fox – Stone Harbor

Thank you. Could you give me your cash balance and your revolver draw please?

Mike Mayer

We had – I think it was $17 million of cash at the end of the quarter and today, as we sit here today, we’ve got $120 million drawn on the U.S. revolver and we’ve got approximately $12 million drawn on the Canadian revolver.

Theresa Fox – Stone Harbor

Okay. Thank you.

Operator

And your next question will come from the line of Stephen Gengaro from Jefferies.

Stephen Gengaro – Jefferies & Co.

Thanks, good morning, gentlemen.

Joe Winkler

Good morning.

Mike Mayer

Good morning.

Stephen Gengaro – Jefferies & Co.

I guess two things. One, in your sort of forward guidance expectations, are you thinking – it seems like you are already thinking in terms of kind of flattish type margins sequentially?

Joe Winkler

Sequentially, no. Margins will improve sequentially. I think we are thinking more like getting back to perhaps where we were in quarter one.

Stephen Gengaro – Jefferies & Co.

Okay.

Joe Winkler

We start getting the – as we come out of the Canadian break-out -- we won't get back to quarter one, but as we come out of the Canadian break-out, we get there, and we get a few other things going on. Pricing, as we said, we think will be better in Q3 than in Q2. So, I mean I would expect margins to improve—

Mike Mayer

Just the Canada piece will be part of that.

Joe Winkler

Yeah.

Stephen Gengaro – Jefferies & Co.

Okay. And then the second question, when you look at your customers and obviously people are getting panicky as you can tell by the equity action recently about the gas prices. Are you – how do you view this I mean are you – do you think there is any kind of slowdown possible from customers given I mean I modeled that word about it but you know when you look at your customer actions, are you still seeing them pretty aggressively growing activity in these resource plays and do you think there is any kind of a breakpoint we should worry about?

Joe Winkler

Steve, based upon where we are and what we see it at the moment, and we mentioned on the commentary, we expect activity levels to continue to remain robust. That doesn’t mean as we go down the timeline that there might not be some adjustments in that should we get along natural gas, but if we do we think that’s temporary. We think that the long-term fundamentals are rock solid sound in the space that we are in. But in the near term, based upon everything that we see today, indications are customers are executing to their plans.

Stephen Gengaro – Jefferies & Co.

Thanks. And then actually just one final one. When you look at your strategy and I am not sure how much you want to say, but are there areas that you see holes, either geographical and/or Product Service line that you want to fill or do you – or is it sort of more of the same of what you have done?

Joe Winkler

I think as we look around I mean we say it for we like the service lines we are in and we could do a little bit more in certain places, and as we mentioned in our commentary the couple of near areas, the Bakken, the Haynesville, I think both of those provide some opportunity near term to expand our position both the greater amounts of that which we already are doing and as well as some additional of our services that we already have but we are not in those basins. So – and we’ll continue to -- as our customer announce new areas, take a look and see if we ought to be there and if so what’s the best means by which we should get in, should we.

Stephen Gengaro – Jefferies & Co.

Okay. Thank you.

Joe Winkler

We like where we are. We like what we have, and we have some opportunity.

Stephen Gengaro – Jefferies & Co.

That’s helpful. Thank you.

Joe Winkler

Thanks Stephen.

Operator

Your next question will come from the line of Mike Drickamer from Morgan, Keegan.

Mike Drickamer – Morgan, Keegan & Company

Good morning guys.

Mike Mayer

Hey Mike.

Joe Winkler

Hey, Mike, good morning.

Mike Drickamer – Morgan, Keegan & Company

Joe, can you come in on how the quarter progressed as far as earnings were concerned? Did you see sequential improvement every month or was there one month that really stood out?

Joe Winkler

I’d say I mean that’s so hard to judge with the Canadian break-out. It – and I have to think in terms of backing that out. I don’t know – we talked about it in quarter one. We started off a little bit slow. It improved as the quarter played out, and ex the impact of the Canadian break-out I don’t know if it – probably not dissimilar.

Mike Mayer

(inaudible).

Joe Winkler

And the other thing for us and I am sure you guys realize given the divestiture in the quarter having to check the numbers our restate them for disco operations, makes it extremely difficult for – to look that side. It’s hard to say, Mike.

Mike Drickamer – Morgan, Keegan & Company

Okay. Mike, can you then quantify perhaps what the impact maybe relative first quarter the spring break-up had in Canada as far as your earnings were concerned?

Mike Mayer

Revenue was down approximately $17 million and it had about $9 million of EBITDA, decremental [ph] EBITDA and that’s pretty much historically kind of the relationship we’ve seen historically in the fall of Q2.

Mike Drickamer – Morgan, Keegan & Company

Okay. Alright guys, that’s my questions. Thanks a lot.

Joe Winkler

Thank you.

Operator

The next question comes from the line of Kevin Pollard from JPMorgan.

Kevin Pollard – JPMorgan

Thanks. Good morning guys.

Joe Winkler

Kevin, good morning.

Kevin Pollard – JPMorgan

I guess I’d like to follow up in the Canadian question just real quick. Of the $9 million of EBITDA you lost, about how much are you expecting to get back in Q3, about half of that back or will be more than that?

Mike Mayer

About a third of it.

Joe Winkler

We get it back a third. Yeah. Traditionally we get about a third back.

Kevin Pollard – JPMorgan

Okay. Okay thanks. And then—

Joe Winkler

It will test your faith, but we’ll get it back.

Kevin Pollard – JPMorgan

Okay. The – and then on the pumping side between Frac Source and the delivery of your last two units up in the Bakken now you have basically doubled your frac capacity in the last kind of quarter or so and I am wondering if you could quantify for us the combination of integration cost on the Frac Source side and presumably with the Bakken being a new area for pumping there were a quite a bit startup costs that would probably be beginning to taper off here in the coming quarter. I am wondering if you can comment on that a little bit.

Joe Winkler

Yeah, first I think it’s – particularly in Frac Source as we get that in it’s startups and integration and the like and I think what we said last quarter and I think based on what we have seen during the quarter two, it’s probably a couple of million bucks. Is it more than that now? Probably not. So, a million or two, something in that range all in. And you are right. As we go down the timeline, we’ll be overcoming that. And as you said, we expect to be up in the Bakken at a full run rate some time in quarter four. And I think the question was asked last quarter at that point what do you – based on where you are today, what’s your run rate in that business? We think it’s in the range of $300 million a year, give or take.

Kevin Pollard – JPMorgan

Okay. And of the – so that $2 million kind of startup integration costs should be used fully – behind you by the fourth quarter you would say?

Joe Winkler

Yes.

Kevin Pollard – JPMorgan

(inaudible) around the timeline?

Joe Winkler

Yes.

Kevin Pollard – JPMorgan

Okay. And then in terms of your – you talked a little bit about your expansion in the Haynesville, in the Bakken, and I am wondering probably more specifically the Haynesville, are you happy with your existing footprint in terms of the facilities and you just need to put some additional service lines, and you mentioned coiled tubing and things like that or – particularly in the Hayneville are you – do you feel like you need to maybe acquire footprints further into the Northern Louisiana side of the play and such?

Joe Winkler

As we have always said in an area and of course we are in that play already and as you know it’s rapidly developing beyond where it was. And our stated strategy has always been to the extent we could we’d love to acquire something that give us a bigger, broader footprint to accelerate our growth timeline and to mitigate some of the risk and -- but – whether we can get that done or will do it to be determined, but that’s clearly our stated strategy and preferred objective.

Kevin Pollard – JPMorgan

And is it fair to say that the $80 million sort of delta in your CapEx is targeting the specific play you’ve highlighted and equipment there or is more broad based than that?

Joe Winkler

It’s targeting some of those -- there are some other issues as well, opportunities in our already existing areas, but it’s targeting those areas we highlighted.

Kevin Pollard – JPMorgan

Okay. Thanks guys.

Operator

The next question comes from the line of David Anderson from UBS.

David Anderson – UBS

Good morning guys. Just want to clarify real quick here. So, if we added back in that Product Sales, which I didn’t have in my numbers, I don’t think anybody else did – your numbers should have been two to three pennies higher than the $0.54, is that right?

Joe Winkler

In the range but probably two, maybe 1.5 to 2—

David Anderson – UBS

Okay. I just wanted to clarify that.

Joe Winkler

(inaudible) plus or minus. And we covered fuel.

David Anderson – UBS

Right, right. That’s true. And sounds like by your comments that your margins in Completion and Production Services, it sounds like a low watermark here in the second quarter.

Joe Winkler

We would hope so, yes. Yes that is correct.

David Anderson – UBS

I was surprised in the Drilling Services side the margins were quite a bit better than I was looking for. Do you think you are sustainable here, just how?

Joe Winkler

That were kind of – our team has worked very, very hard both in our drilling rig business and our rig logistics business, and beginning to see the benefit from their effort. Market is improving where it’s just a little bit better market condition than we had before. So, we are cautiously optimistic that that carries forward.

David Anderson – UBS

Okay.

Joe Winkler

I know they would certainly be disappointed if it didn’t. They worked very hard.

David Anderson – UBS

Let me ask you the CapEx question in a different way.

Joe Winkler

Okay.

David Anderson – UBS

If you look at say pressure pumping, coiled tubing, what not, what do you see as being the lead time out there? (inaudible) for you guys, let’s just say industry wide, let’s keep it at that level. Where do you think the lead time is for various types of equipment right now?

Joe Winkler

Brian, you want to answer?

Brian Moore

Yes. Pressure pumping is nine months. Coil, we have got plus in Q1 and which we are getting delivery in nine to 12 months.

Joe Winkler

Yeah.

David Anderson – UBS

And you say 12 months in coiled tubing.

Joe Winkler

Nine to 12.

David Anderson – UBS

Nine to 12. And how does this compared to say in prior quarters this kind of been about that same level for a while here or--?

Brian Moore

Just a little shorter.

David Anderson – UBS

Just a little shorter?

Joe Winkler

Yeah.

David Anderson – UBS

Okay. Last question. That Sondex agreement is pretty interesting. Can you expand upon that a little bit, Joe? I mean how – what was the genesis of this? Is this is just a Bakken thing here or is there more opportunities here with Sondex?

Joe Winkler

Let me kick that one over to Brian. Brian?

Brian Moore

Well, the agreement that was entered into through Complete integrated production services division provides Complete with exclusive rights to Sondex’s Ultrawire Formation Logging Tool product line in the United States through 2009 provided certain conditions are met in our ability to deploy those assets. Additionally, Complete will have the first right of refusal on new products developed by Sondex in its open hole product line in the U.S. during the exclusivity period. So, obviously, we are really excited about entering into this agreement with Sondex and the reputation that they bring. The Ultrawire Formation Logging Tool allows us to provide formation evaluation services to our resource plays and focus on customers using state-of-the-art tools and get the research ability of Sondex and GE. So, previously the level of the service and technology of these tools was limited to a pretty small number of competitors that had made heavy investments in developing their own tools. So, we are really happy that GE Energy has selected Complete as the partner to deploy its latest tools in this space, and I think it’s an acknowledgment of our ability to deliver services and solutions to our customers.

David Anderson – UBS

Is there like a certain number of tools here that we are talking about and how does that number – or if you don’t like any specifics, maybe just tell me where you expect those number of tools to go say from a year from now? Is that like up like I don’t know like 20%, 30% or some like that or I don’t know how to look at that.

Brian Moore

I think it is over two year – I’d say that the sets of tools is around a dozen, over a couple of year, maybe a little more than that.

Joe Winkler

David, in terms of the impact on our business over the next couple of quarters I wouldn’t describe it as huge in aggregate. I think it’s more the statement our capability particularly within the resource plays to continue to execute a strategy and team up with a partner that has a lot of confidence in CPX.

David Anderson – UBS

Great. That’s very helpful. Thanks, Joe.

Joe Winkler

Okay.

Operator

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

Joe Agular – Johnson Rice & Company

Thanks. Yeah, I was going to ask the Sondex question as well. Joe, how many wireline units do you all have presently?

Joe Winkler

In the 60s. 66.

Joe Agular – Johnson Rice & Company

And some are just – some are e-line and some are just split [ph] line, correct?

Brian Moore

No, those are all e-line.

Joe Winkler

Those are all e-line.

Joe Agular – Johnson Rice & Company

They are all e-line.

Joe Winkler

That’s why I have these other guys. They are the experts in this.

Joe Agular – Johnson Rice & Company

Right, okay. Okay, and I don’t know if this is a fair question or not, but when you look at your startup cost for moving into the Bakken is there any way that you could quantify that or maybe--?

Joe Winkler

I think we indicated that’s – it’s difficult because with so many service going on and we think we indicated aggregate couple of million bucks.

Joe Agular – Johnson Rice & Company

Couple. I am sorry I missed that earlier.

Joe Winkler

Yeah.

Joe Agular – Johnson Rice & Company

Okay. And then just one other – it seems like with your kind of your third quarter guidance that given what you all did in the first quarter but taking into account the rig count increase that we’ve had since the beginning of the year that maybe you all have been a little conservative at least you know when it comes to activity levels certainly are higher. Is it just your – I want to make sure that your – some of these new things that you are doing you are taking into account that you are adding some cost here and there and you are not up to your full run rate yet?

Joe Winkler

That’s a good question, Joe. And as you look at how progressed down the timeline, the big issue here that concerns is inflationary forces. And we are very confident in the activity level outlook particularly in Q3. All signs are that’s going, momentum will continue to carry forward. The issue of the day is will the inflationary forces continue to have the same impact that they had on us in Q2 and move quickly. And what can we do and can we out run the effect of that through fuel surcharges, price increases, et cetera. And that always takes a little bit of time to implement and see the impact of it. So, but there – if there is a little bit of caution, that’s perhaps why.

Joe Agular – Johnson Rice & Company

Okay. So, to the extent that you can offset some of these inflationary pressures, you know, will you be more optimistic, let’s say?

Joe Winkler

Yes. And we said it in quarter – last quarter call that that would be an issue to wrestle with. When we talked about it a quarter ago it was at a different level than it ended up being and so it moved on as very quickly as the quarter played out. And we are not alone in that. Our colleagues are doing the same thing, but it’s a lot easier to say than it is to do. And I think we used the words last time we have been told no in some cases we are going to go try. And we are doing it. We are getting some. It just takes a while to work through and that frankly as I think about quarter three, one of the big variables in our ability to meet or exceed those estimates. Do you guys agree with that?

Brian Moore

Yeah.

Joe Winkler

Yeah.

Joe Agular – Johnson Rice & Company

In talking to another company that’s in the pressure pumping business I mean it sounds like they are have been some E&P companies who were trying to get a little bit longer term contract in place. Have you all had anything like that happen to you?

Joe Winkler

Yes.

Joe Agular – Johnson Rice & Company

Okay. Have you entered into any?

Joe Winkler

Not beyond where we were in quarter two, which we can't do that—

Joe Agular – Johnson Rice & Company

Right, okay, thank you very much.

Joe Winkler

Thank you much.

Operator

Your next question comes from the line of John Daniel from Simmons & Company.

John Daniel – Simmons & Company International

Can you guys provide some more color on the well service acquisition made during the quarter, specifically how many rigs and trucks were acquired and what price?

Joe Winkler

Yeah, small, was about four rigs – yeah, four rigs, and within the other ten what--?

Brian Moore

(inaudible) ten.

Joe Winkler

Ten, yeah, something like that. So, a small one.

John Daniel – Simmons & Company International

And then the last one. You talked about the lead times on pumping and coiled tubing equipment. Any changes to wireline and well service lead times?

Brian Moore

Well service maybe a little – cone down a little bit.

Joe Winkler

Yeah, yeah. As Brian was saying, well service may have come down a little bit from the last—

Brian Moore

Month or two.

Joe Winkler

Month or two, so—

John Daniel – Simmons & Company International

Okay. Great. Thanks.

Joe Winkler

John, thank you.

Operator

Your next question will come from the line of Anthony Ayofino [ph] from Newsanik and Company [ph].

Anthony Ayofino – Newsanik and Company

Just a good question on the – regarding the new budget for CapEx and the capacity expansion that you have already had. Just wondering what would you guess is the Company’s base level of sort of maintenance capital spending at this point excluding expansions projects.

Joe Winkler

In the current market environment and we have always said it depends on the environment that we are in, but I think we estimated in the original number that we put out about $75 million of our CapEx we estimated would be maintenance. In the $250 million it’s probably upper shade the growth the increase are primarily for growth. So, maybe the $75 million is $85 million to $90 million now, something like that, give or take. Now, what that number would be in a really tough market environment is a whole another issue.

Anthony Ayofino – Newsanik and Company

I understand. So, your best guess is $85 million to $90 million and that I guess takes into account somewhat the larger size and inflation.

Joe Winkler

Yes.

Anthony Ayofino – Newsanik and Company

Thank you.

Operator

Your next question will come from the line of Doug Becker from Banc of America.

Douglas Becker – Banc of America Securities

Thanks. Joe, you mentioned that you are expecting a few more deliveries of capacity just in the various pipeline. Just wondering if you can give a little more detail what you are expecting over the next six months?

Joe Winkler

Well, in terms of – think we mentioned kind of we’ll have the third fleet with the frac that will be deployed in August 1, so we get that. We will be the beneficiary of getting to work full out in the Bakken with what we have up there. I think we have a – one drilling rig yet to come in and we have a coil spread or two yet to come. One? One. And I would say a couple of well service rigs over the course of the next quarter or two and things of that nature, Doug.

Douglas Becker – Banc of America Securities

Okay.

Joe Winkler

Yeah.

Douglas Becker – Banc of America Securities

So, relatively minor compared to—

Joe Winkler

Yeah.

Douglas Becker – Banc of America Securities

You past year. And then if you could talk about the fuel – the sensitivity to rising fuel cost in your various product lines and maybe a little bit about the mechanics of how you are going about trying to recapture those costs. And maybe – just getting little bit of more of a feel, if we actually start seeing crude prices come down and diesel prices come down, does that actually end up being a benefit for your?

Joe Winkler

Well, it depends on from what point we measure. But, it’s one of those things that we now watch almost on a daily basis, and le me start with the first, how do we get it back. We started in Q2 attempting for price increases, fuel surcharges, rate increases, et cetera. And that effort is continuing and it will vary whether you do it one way or the other. It depends on the market and conditions within that market and so. In terms of the impact, what did we estimate? Diesel, on a per gallon basis is up Q2 to Q3 24%, 25%?

Brian Moore

Correct.

Joe Winkler

Or something of that nature. And we consume a lot of fuel in our operation. As the price comes down with the price of oil I don’t know that we get to the point, Doug, where we get to an average price below quarter two. That may be difficult although if oil continues to come down and rapidly decline we might. But I don’t see that. Perhaps in Q4 we might get that. So, as we think about our business in Q3, our expectation is unless there is a huge movement in the price we are probably at best equal to Q2 in terms of that cost, maybe slightly up.

Douglas Becker – Banc of America Securities

Fair enough. Thank you very much.

Joe Winkler

Okay. Thanks.

Operator

Your next question will come from the line of Pierre Conner from Capital One Southcoast.

Pierre Conner – Capital One Southcoast, Inc.

Good morning, gentlemen.

Joe Winkler

Hi, Pierre, good morning.

Pierre Conner – Capital One Southcoast, Inc.

Actually Doug was right in line with where I was headed in maybe the fuel surcharge versus the rate increase question. Is one more sticky than the other, i.e., if you get a rate increase on an hourly basis and fuel comes down, do you keep that? If it’s a surcharge, are you going to get pressured to get that taken off?

Joe Winkler

Yeah, I mean, typically that would be the case and it would also depend upon what was going on in the market forces as well that might otherwise place pressure on the pricing, but your assessment is correct. And it just varies by market what you can do and you know the fact of the matter is we are not alone here.

Pierre Conner – Capital One Southcoast, Inc.

Sure.

Joe Winkler

Is that that thing moved pretty quickly in Q2 and we were not able to get ahead of it. We were able to do it a better in quarter one, but it didn’t move as rapidly. And so we’ve got little ground and catch up.

Pierre Conner – Capital One Southcoast, Inc.

And that gets to the question the expansion from here and you indicated margins could improve sequentially although not necessarily Q1 levels where you got your surcharges in the terms of this quarter. Do we end up at an exit rate in 4Q with margins back in line with where we were? I mean is that – I know we are stretching another quarter out in your outlook, but is that reasonable expect you can recover back to those 1Q level?

Joe Winkler

Pierre, given our view of the outlook in the market activity wise and things that are going on, no that’s not an unreasonable expectation at al..

Pierre Conner – Capital One Southcoast, Inc.

Okay.

Joe Winkler

And if we were sitting here with a more uncertain view of activity levels and the like I would say no, but I think based upon what we see today, the robustness in the activity, the indications from our customers both in their words and in their actions, there are not reason to think that’s not doable.

Pierre Conner – Capital One Southcoast, Inc.

Okay.

Joe Winkler

In fact I expect it to be the case.

Pierre Conner – Capital One Southcoast, Inc.

Good. And lot of talk about Hayneville opportunities although maybe in the last day or two less. Do you – you know and I think outlook still is very positive, but I wonder if you could – why don’t you go down a little bit on specifically kind of how you see that expansion starts out initially some opportunities with frac. We understand certainly much higher pressure, treatment pressures. Do you have that kind of capacity? Do you need to add it or capability that is. And then is it coil and lastly related to that question (inaudible) is at what point do you think – have you talked to operators that given the completion is on, they move the rigs off and let you come in with service rigs to do completion work or is it still using the drilling rig?

Joe Winkler

Well, let me comment on the first part of your question and say that I think from a capability perspective we have the equipment and the expertise and are capable of doing what needs to be done in that market as we know it today and as we anticipate what it to be like tomorrow. Now, the question is do we have the capacity to do that given other options and opportunities and that’s what we’ll be wresting with. There is others as well is that do we move things around, do we bring additional equipment in to be able to take advantage of the opportunity. So, we have the capability. The real question will be how do we best meet that need. As to the techniques, Brian, I don’t know in terms of what our customers will be doing allowing the service rigs to come in. I don’t know--

Brian Moore

I think that will come.

Joe Winkler

Yeah.

Brian Moore

I mean you can build it if they’ve got and (inaudible) pressure equipment (inaudible).

Joe Winkler

And I think as time plays out as it has in all the others though work crew figure things out and I think -- and that will happen sooner rather than later because of the learning curve that’s already known by virtue of some information they have and as well what they have learnt from other basins.

Pierre Conner – Capital One Southcoast, Inc.

Okay. Great. A lot of information. Thanks gentlemen.

Joe Winkler

Okay. Thank you.

Operator

(Operator instructions) Your next question will come from the line of Jim Crandell from Lehman Brothers.

Jim Crandell – Lehman Brothers

Good morning.

Joe Winkler

Hi, Jim, good morning.

Jim Crandell – Lehman Brothers

Joe, my first question is about the frac business. Faster demand growth, lot’s of competition, prices more volatile than other markets. How do you feel about the effectiveness of the business relative to the other ones you are in given sort of those characteristics.

Joe Winkler

Well, we said before, we like the business. We think that long term it’s a great business to be in. We think that the growth in the horizontal wells, the multi-stage fracs, the service intensity and horsepower intensity required is right down the strike zone of what we like to be doing. And yes it’s – gets competitive from time to time and that can create opportunity and that goes with the nature of the high margin businesses. It’s the good news about high margin business they are and when it gets a little tough you suffer from it. But long term we think it’s right down our strike zone. It’s a business we like.

Jim Crandell – Lehman Brothers

Okay. And how would your characterize pricing conditions relative to other businesses that you are in, in the basins that you operate today in pressure pumping?

Joe Winkler

Well I think from our perspective describe it as we come out of quarter one and quarter two as stable with perhaps some potential for upside because as we go down the timeline a couple of points to note here. Number one, as I said, the increased level of activity in horizontal drilling and multi-stage fracs. We think that will suck up some capacity and demand services and then two is the ability to properly do the job. And we said that for some time now and not everybody gets to participate equally. It’s not like it was two or three years ago where you had the catch you will work. Now you must be able to perform. You must be there and be able to do the job, otherwise you are going to be spectator. So I would be say from a price perspective our view and keep in mind that our view is rather limited from the overall market. We are not everywhere in that business and it’s very Barnett and surrounding areas oriented although now Bakken we would describe it as stable with some potential increase as the year plays out.

Jim Crandell – Lehman Brothers

Thanks, Joe, and my second question is that you could take the major basins that you operate in today and characterize them in terms of relative strength of activity currently and outlook over the remainder of the year.

Joe Winkler

Okay, let me just think my way through and the order of magnitude here given the size of each of these but the Barnett we just see it continuing to rock along. The Bakken will rapidly accelerate. It’s not off a huge base as the Barnett but the outlook is very good. Up in the Rockies, activity levels have been good and I think long term it’s got some great potential. You get seasonality related issues out there, but there is this huge potential in that market. So I describe it as good. And across the mid-con, I would give it the same –Arkoma, give it the same marks. So, it – then we get to the Haynesville, it’s been a good market for us. It’s obviously heating up a bit and have some rapid opportunity to accelerate here but to be determined how it plays out. It’s still early on, lot of activity, lot of customers doing things. And so, as – from a short-term growth perspective got a lot of potential. To be determined whether that plays out. Am I missing anything guys?

Brian Moore

(inaudible) Marcellus but watching that market.

Joe Winkler

Yeah, watching the Marcellus. That we think -- that has some great potential as well. We’ll likely take a lot longer to play out in some of these other areas due to various complexities. Canada, we think Canada will – we had a relative to prior year a good quarter two and cautiously optimistic that that market improves as the year plays out. I mean the recovery and the normal seasonality, but to a level perhaps higher than last year. What else guys? In Mexico, we’ve got it for us not a huge operation but a very important one that performs very, very well. But we think Mexico will continue to perform well. So that’s how we see it, Jim.

Jim Crandell – Lehman Brothers

Okay. Good run down. Thank you.

Joe Winkler

Thank you.

Operator

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

Dan Pickering – Tudor, Pickering, Holt & Co.

Hi it’s Dan Pickering and Jeff here.

Joe Winkler

How are you doing, Jeff?

Dan Pickering – Tudor, Pickering, Holt & Co.

Joe and Mike, you guys have clearly hit the big time. I remember when your quarterly conference calls lasted 15 minutes.

Mike Mayer

I won't be disappointed. I haven’t heard the Tudor Picker thing mentioned, so—

Dan Pickering – Tudor, Pickering, Holt & Co.

Yeah, we are here. So, I have one question, Jeff has a couple. Mine is just around your kind of portfolio optimization here. You sold some things during the quarter. Have pretty much all the non-core things now been divested? Are you still looking at the portfolio? Just what are you thinking there on the divestment side?

Joe Winkler

Yeah, I mean the one we did that was one we said for some time that while it was a good business it really wasn’t core to what we do and so we did that and we will continue to look at things performance wise, fit, not fit, but there is no sense of urgency at this stage on any of the remaining service lines. Clearly, our strategic focus is within our Completion and Production segment. That doesn’t mean we are going to ignore the others that we have. To the contrary we are going to run them and run them well.

Dan Pickering – Tudor Pickering & Co.

Okay.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Hi, Joe and Mike, it’s Jeff here. I just wanted to get a little more color on what you guys are doing now on the Bakken in the pressure pumping business. How many spreads kind of is there a contract sort of lock-in utilization? Can you just give us some color on the startup there and kind of what the circumstances around--?

Joe Winkler

Well it is – no, we are in the market. We do not have a contract. So we are up there. We are earning the right to do it everyday based on our performance and so far so good. And in terms of the capacity up there at—

Brian Moore

About 30,000.

Joe Winkler

30,000 horsepower give or take. And if you – (inaudible) we can move things around. It’s a long way to go, but that’s where we are today.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Alright. Thank you very much.

Joe Winkler

Okay. Thank you.

Operator

Your next question will come from the line of Arun Jayaram from Credit Suisse.

Arun Jayaram – Credit Suisse

Yeah, good morning, Arun Jayaram, Credit Suisse. Just wondering if you could--

Joe Winkler

Arun, good morning.

Mike Mayer

Good morning.

Arun Jayaram – Credit Suisse

Yeah, good morning. I was wondering if you could comment on what you are seeing in the fluid handling business?

Joe Winkler

Well, we – quarter two for us as I said from a volume perspective was fine. We did have some mix shift due to seasonality, but the big story in that business is the impact that the fuel had on our cost structure. And the business other than that did reasonably well. And so I have no reason to think that based on what we see today that that performance does not continue. And the issue there is going to be is to recover the impact of some of the fuel.

Arun Jayaram – Credit Suisse

Got you. I got you. And, Joe, you obviously had a very good quarter from a margin perspective in the Drilling Services segment.

Joe Winkler

Yes.

Arun Jayaram – Credit Suisse

I think margins were up 450 [ph] basis points sequentially. How much of that was just better cost control and how much of that was pricing plus volume?

Joe Winkler

I would say the two major forces in that quarter one to quarter two would be managing our cost, the efforts of our people over some period of time to improve our repair and maintenance and performance of our equipment, little better utilization in terms of the number of days. And as well a little bit of a mix shift or quality shift as we have enhanced and improved that business over time a better margin rig in lieu of the lower margin rig. And pricing in that business at least in the drilling rig business might even be flat to slightly off one to two depending upon the mix. And then in our rig logistics business I would describe that pricing one to two as being up a bit, little better utilization and a better job on the cost. So, it’s a combination of things.

Arun Jayaram – Credit Suisse

Okay. And finally in terms of well servicing and drilling rigs, have you seen any pricing against to speak of July to date? If not, when do you that to occur?

Joe Winkler

I think the answer to that question will be a yes but I am not prepared to say it at this point. Our expectation is that it’s yes.

Arun Jayaram – Credit Suisse

Okay. Fair enough. Thanks a lot guys.

Joe Winkler

Okay. Thank you.

Operator

(Operator instructions) Your next question is a follow-up from the line of Joe Agular from Johnson Rice.

Joe Agular – Johnson Rice & Company

Thank you. Just to follow-up on the Sondex thing again. Are you all committed to buying tools from them or is there another arrangement?

Brian Moore

Yes.

Joe Winkler

Yes. No, we have a commitment.

Brian Moore

Right.

Joe Winkler

Yes.

Joe Agular – Johnson Rice & Company

Okay. So, these are – you all have the exclusive to purchase this particular tool?

Joe Winkler

Over a period of time.

Joe Agular – Johnson Rice & Company

Over a period of time.

Joe Winkler

Within the United States. Correct?

Brian Moore

Correct. Within the U.S. provided we buy the tool.

Joe Winkler

Yeah, yeah.

Joe Agular – Johnson Rice & Company

Okay. Understand. Thank you very much.

Joe Winkler

Okay.

Operator

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

Joe Winkler

Well, thank you very much. We appreciate your time and attention and we look forward to your participation next quarter. Thank you very much.

Mike Mayer

Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!