Executives
Greg Rosenstein - VP of IR
Terry Hall - Chairman and CEO
Analysts
James Rollyson - Raymond James
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
Joe Agular - Johnson Rice
Robin Shoemaker - Citigroup
Mark Brown - Pritchard Capital Partners
William Sanchez - Howard Weil
Superior Energy Services, Inc. (SPN) Q2 FY08 Earnings Call July 31, 2008 11:00 AM ET
Operator
Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Superior Energy Second Quarter Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions]. This conference is being recorded today, Thursday, July 31st of 2008.
Now, at this time I would like to turn the conference over to Greg Rosenstein, Vice President of Investor Relations. Please go ahead, sir.
Greg Rosenstein - Vice President of Investor Relations
All right. Good morning and thank you for joining today’s conference call. Joining me today are Chairman and CEO, Terry Hall; President and Chief Operating Officer, Ken Blanchard; and our Chief Financial Officer, Robert Taylor.
Before I turn it over to Terry, let me remind everyone that during the call management may make forward-looking statements regarding future expectations about the company’s business, management’s plans for future operations of similar matters. The company’s actual results could differ materially due to several important factors including those described in the company’s fillings with the Securities and Exchange Commission. Also during the calls, management will refer to EBITDA, which is a non-GAAP financial measure and in accordance with Regulation G, the company provides a reconciliation between net income and EBITDA on it’s website.
With that I will now turn the call over to Terry Hall.
Terry Hall - Chairman and Chief Executive Officer
Good morning, everyone. Thanks for your attention. Before I get into this quarter, I would like to reflect a moment on a little bit of history. The Q that we filed in connection with the current quarter is the 50th that we have filed as a public company. That calls me to go back and look and see what things look like 50 Qs ago or for the quarter ended March 31, 1996.
In that period of time, we recorded and reported revenues of $4.6 million, net income of $720,000, earnings per share of $0.04 with a weighted average share outstanding of 17 million. The stock closed at $2.50. So, we had a market gap of about $42 million 50 quarters ago.
Compared to that to today where quarterly revenue was $457 million, EBITDA was $164 million, net income of $73.9 million or $0.89 diluted earnings per share, net income of $84.7 million or $1.02 diluted earnings per share when you exclude the gain from losses we mentioned in our press release.
From an overall operating perspective, I am pleased to report that we have successfully replaced volume and earnings from the oil and gas business with revenue and earnings from our traditional products and services lines, activity improvement in several areas and we expect further growth going forward.
Also, when you exclude SPN Resources and the gains and losses that impacted both the first and second quarters, you will see that our overall margins improved in the second quarter primarily due to the higher volumes of work and utilization.
Looking to some of the factors that led to this performance, first, we had a full quarter of activity from work on the wreck removal project. Progress continues to be on track. We are executing very well. I have no significant changes to report on the status or scope of the project.
[inaudible] increases in Gulf of Mexico activity across all segments. Compared to the first quarter, well intervention revenue in the Gulf of Mexico was 63% higher. In rental tools, it was 9% better and in the marine segment, Gulf of Mexico revenue increased 13%.
Third, international revenue increased 13% compared to the first quarter to a record high of $86 million. International well intervention revenue was up 19% due in part to well control project in the Middle East. International rental tools revenue increased 6% due to higher demand for stabilizers and drill pipe.
Revenue increases in those geographic regions were partially offset by a 9% decrease in domestic land revenue with well intervention down a 11% and rental tools down 5%. However, there was some one-off projects in the first quarter that skewed the numbers a bit. For instance, in well intervention we had a 30% decrease in well control activity and in rentals we had a 9% decrease due to the fact that we completed the sale of accommodations in the first quarter as part of the accommodation [ph] project in the Rockies. The well control this year is [inaudible], we had a large well control project in the first quarter. We didn’t have one in the second quarter.
Though several products and services has shown sequential growth, 1 million and well intervention coiled tubing revenue grew 12%, pumping and stimulation increased 3% and electric line services increased 2% and in rental tools, stabilizer rentals increased 5%.
Looking at the Well Intervention segment, revenue was $296 million, income from ops was $78.2 million, which represents growth of 27% and 54% respectively as compared to the first quarter. We benefited from the higher activities in the Gulf of Mexico for electric line, pumping and stimulation, hydraulic workover/snubbing, and plug and abandonment services, and a full quarter of wreck removal contract.
Internationally we saw more activity for hydraulic workover and snubbing services in Continental Europe and Venezuela in addition to the well control increases I mentioned earlier.
On the domestic land side, several of our core services experienced higher activity and better results, including coil tubing, electric line, and pumping and stimulation. The improvement in those businesses is largely utilization driven in some of the unconventional resource plays.
Costs such as fuel and labor have increased and with the rising costs we have fuel surcharges in place in some markets and we have also passed some third-party charges to customers where it is possible.
We do expect our rates to increase in the second half of the year as activity ramps up, especially in some of the unconventional resource plays. We’ve already started to experience this in a couple of areas as demand increases and people and equipment become more difficult to find. We did raise rates 10% for services such as mechanical wireline and plug and abandonment in the Gulf of Mexico, but those increases are largely offset by rising fuel and labor cost.
In our Rental Tool segment, revenues was $134.8 million, income from ops was $47.5 million, a 3% increase in revenue and 4% increase in income from ops. Demand for stabilization equipment, which is one of our leading indicators of future activity levels, increased in all three major market areas, Gulf, domestic land and international as the rig count grew, especially for horizontal land directional drilling.
We also experienced an increase in drill pipe rentals and specialty tubular product rentals in the Gulf of Mexico and internationally in Colombia and Venezuela. Activity increases in the Gulf also led to higher demand for our connecting iron, accommodations and mechanical cutting tools.
In the back half, the first quarter gain on sale of the business was $3.3 million, the operating margin increased to 35% from 32.5%. Again, this is primarily a function of volume. We did see some small price increases, maybe as much as 5% in some of the land international markets for high-end specialty items like tubulars and stabilizers. The international customers have generally more of a separate price increases than domestic customers.
I think price increases going forward will also [inaudible] higher steel cost, which is the largest cost to drill pipe and stabilizers. Steel price has flattened in the second half of ’07 and early ’08, but they are clearly on a fairly dramatic rise again.
From an activity standpoint, we think the Latin American markets offer the greatest opportunities for near-term growth, especially for drill pipe rentals in Venezuela, Colombia, Brazil and Trinidad. We also expect Eastern Canada and Alaska to be strong markets during the second half of the year. Domestically the new resource plays represented excellent opportunity for stabilization, drill pipe and accommodations.
In the Marine segment, revenue was $26 million, income from ops was $1.4 million. Revenue was up 13% and our income from ops declined significantly due to higher operating costs, some of which are one-time in nature. Our maintenance cost early in the quarter were extremely high and utilization was extremely low.
On the activity side, utilization increased to 57% from 49% in the first quarter. Utilization increased each month during the quarter. In June, our utilization was 69%, but more importantly utilization for June for our large liftboats, 200-foot leg or greater, was 92%. Also in July, our utilization was up to 80% across the entire fleet. So, we are seeing some strong activity levels for liftboats.
From a day rate standpoint, there has been a lot of time and energy ensuring that we can maintain high rates for the larger boats. We have been successful in doing that. Larger liftboats are seeing day rates at the peak ’07 levels and we feel strong that the day rates for the 200-foot class and larger boats will increase over the remainder of the year. Raising rates on smaller boats remains a challenge given the number of small boats in the fleet.
In the second quarter, our cost of services increased 22% due to a sharp increase in maintenance expense as well as higher labor cost. Labor increased as we had to staff up to prepare to take the levy of our second 175-foot class new build and move onto the 265-foot class liftboats that we expect to be delivered later this year. As new vessels are delivered and go to work, the incremental labor cost will be absorbed.
In late June, we took delivery of the 175 class new build. So, we will have a full quarter of performance from it in Q3. We now have 29 liftboats in the rental fleet. We think the increase in boat maintenance expense is largely behind us as we had some significant hull repairs to make in the second quarter. Based on our July performance the Marine margins are improving.
SPN Resources and Beryl Oil and Gas, this was our first full quarter where we accounted for our remaining interests in SPN Resources as an equity method investment. That line item includes our remaining 25% interest in SPN Resources and our 40% interest in Beryl Oil and Gas. Excluding the non-cash unrealized hedge loss of $19.9 million, we would have had earnings from equity method investments of $12.1 million. The $19.9 million non-cash unrealized losses are share losses associated with the mark-to-market changes in the value of outstanding hedging contracts put in place by SPN Resources.
The loss was due to significant increases in natural gas and oil prices during the second quarter. After we sold our 75% of our interest in SPN, the majority put in hedge is locking in about 45% of production at $97.13 per oil and $9.49 [ph] for natural gas.
The hedge volumes decreased over time and hedging contracts expire in 2012. So, if we continue to see dramatic swings to commodity prices there is a potential to experience these non-cash losses or gains going forward. The contracts are revalued after each month. For example, in July, we worked out a gain of about $10 million as commodity prices decreased through the month. From an operating standpoint, both SPN Resources and Beryl Oil and Gas had excellent results in the quarter.
Net to our interest, daily production at SPN Resources averaged 2,512 Boe while daily production of barrel averaged 33.69 Boe. In addition, subsequent to the quarter end, we received $17 million in capital distributions from SPN Resources.
On the CapEx front, expenditures during the second quarter were $120.1 million. Expansion in CapEx represented about 90% of these expenditures and includes our previously announced investment in 265-foot class new build boats of about $30 million. We expect CapEx in the third quarter to be about $120 million to $130 million.
The G&A side, during the second quarter, G&A was in line with our expectations.
We expect third quarter G&A to be in the range of $66 million to $68 million. We believe DD&A of $43 million to $45 million is a good run rate for the third quarter due to higher liftboat utilization and CapEx.
Looking at the balance sheet, at the end of the quarter, we had approximately $715 million in debt. The breakdown is as follows. $400 million in convertible notes, $300 in senior notes, $15 in Myriad. Debt to EBITDA at the end of the second quarter was 1.07, debt to total cap is 38%.
As you can probably tell from our commentary regarding each segment, we are very positive on the outlook for the remainder of the year. To summarize, we have seen activity increases across all segments. In Well Intervention, we expect to see opportunities for some price increases in certain domestic land markets. In Rental Tools, international pricing should continue to get better with domestic pricing improving for certain high-end products. And in Marine segment, utilization is already significantly higher than June and we expect price increases for our large liftboats while maintaining rates on our smaller boats.
That’s all I have. We will open it up for questions now.
Question and Answer
Operator
Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. And our first question is from Jim Rollyson from Raymond James. Please go ahead.
James Rollyson - Raymond James
Good morning, Terry, guys.
Terry Hall - Chairman and Chief Executive Officer
Good morning, Jim.
James Rollyson - Raymond James
Terry, if you might expand a little bit on the idea, your well intervention revenues posted a very nice sequential improvement and obviously it sounds like part of that was the BP job kicking in and it also sounds like you benefited from the well control work you mentioned and that historically has tended to be lumpy. So, you always caution us to not to extrapolate some of the growth rates sometimes. Trying to get a sense of how you think the sequential move in well intervention might look in terms of revenues.
Terry Hall - Chairman and Chief Executive Officer
Jim, again we can't predict [inaudible] type activity. We had some of that in first quarter. We didn't have much of it in the second quarter. So, that can see your margins and change things and that's going to... the story that's repeated itself in many, many quarters. So, we really can't predict it, but I think that the kind of activity levels that we have gone on currently I expect to improve over time. We expect to see a little end markets as well certain of the rental items on the land market. So you just kind to have to understand that blowout activity is really not something we can predict but over time it tends to level out. It is significant, contributed to our bottom line, but it's difficult to predict on a quarter-by-quarter basis. This gets better on land and they are getting better in Gulf of Mexico and I think that's really the story here.
James Rollyson - Raymond James
Okay. And then just as a follow-up, maybe thoughts on expansion opportunities onshore U.S. into some of these shale plays and what not, just kind of where you guys are targeting?
Terry Hall - Chairman and Chief Executive Officer
We've done some expansion over time, we don't like to talk a lot about it to tell all of our competitors where we are, but we've got... we've moved into Pennsylvania. We've got some equipment out there, we are probably going to expand our presence up there a little bit. There seems to be some pretty good demand, we have got a couple of a pretty good marks up there. So we think that opportunity looks good for us there. We moved some more equipment into the Rocky Mountains, coiled tubing equipments. We are moving things around that's the nice part about this business on land [inaudible] one area to another where you can see an opportunity and so we try to be opportunistic and move those assets where we think we can do the best with.
James Rollyson - Raymond James
Excellent.
Terry Hall - Chairman and Chief Executive Officer
The fact that we've got the newest fleet and the largest fleet in the industry right now when you look on coal side.
James Rollyson - Raymond James
Thanks for that. Great work.
Terry Hall - Chairman and Chief Executive Officer
Thanks, Jim.
Operator
Thank you. Our next question is from Dan Pickering from Tudor, Pickering, Holt. Please go ahead.
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
Good morning, Terry.
Terry Hall - Chairman and Chief Executive Officer
Dan.
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
How are you?
Terry Hall - Chairman and Chief Executive Officer
Good.
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
Great. Terry, could you talk a little bit about acquisitions that I didn't see if you did any in the quarter, but generally what's the environment out there, valuations, etcetera, [inaudible] and what's you appetite?
Terry Hall - Chairman and Chief Executive Officer
Well, we still have a very strong appetite to make some acquisition if we could do them at a reasonable price. Pricing right now is very difficult, you have still got some private equity money to tide them fast and it's difficult to compete with. So, we been planning to our strengths, which is we have got a strong balance sheet, we've got a lot of cash, we've been doing a lot of organic growth and we are pretty aggressively seeking some opportunities, particularly on the international front, but it is really hard to do anything right now in a pricing market, it is still difficult. And that would be anywhere near accretive. The numbers you see, and Dan I know you do, I mean they are very hot. People are paying nine, ten, 11 times EBITDA and we can't sell EBITDA for that numbers, at least we can't right now. So, it is pretty hard to pay it.
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
And Terry, how I guess as my follow-up, how do you think about share repurchases, you have done some in the past are the organic growth opportunity is better than buying back stock right now?
Terry Hall - Chairman and Chief Executive Officer
Yes.
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
And thank you. I will re-queue.
Terry Hall - Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question is from Joe Agular from Johnson Rice. Please go ahead.
Joe Agular - Johnson Rice
Thank you. Terry, you mentioned in your comments the opportunity for pricing increases it's sounded like both in well intervention and rental tools, well intervention is anything… in any particular product line that you think is more opportunity than the other?
Terry Hall - Chairman and Chief Executive Officer
It may well be a more of a regional story than a product line story.
Joe Agular - Johnson Rice
Okay.
Terry Hall - Chairman and Chief Executive Officer
So, I think we are going to have opportunities to move the pricing up. We are going to clearly try to put assets in those areas where we think we can get the best pricing and the best utilization. Steel is big issue, I wouldn't want you to model in price increases and imply that that's going to have a dramatic impact in the bottom line because I think reality is cost is going up, labor is going up, steel is going up. We have got... we are still holding to some fairly nice margins and certainly think we will be able to hold our margins, but I would hate to see anybody get out there and start modeling dramatically improving margins based on price increases because I think in the type of market we are in and areas where we think there is going to be some price appreciation there is also going to be some cost appreciation.
Joe Agular - Johnson Rice Company
No, I understand, I just kind of more from a commentary, if you would, on the tightness in the market, which it sounds like it is?
Terry Hall - Chairman and Chief Executive Officer
[inaudible] purchase steel or anything given that the weak dollar we have those prices are moving up.
Joe Agular - Johnson Rice Company
Right. Let me, maybe as a follow-up, ask something else along the same lines. You have shown a lot of money on expanding your Rental Tool fleet, is there any measurement or any way you can tell us sort of utilization or maybe not being specific, but how much of your equipment is deployed right now or is there opportunity for further deployment of which you have been adding to your inventory over recent quarters?
Terry Hall - Chairman and Chief Executive Officer
Joe, in any given time, we have got an awful of iron on the shelf that we can deliver. That's just the nature of the business, several of our subsidiaries in that group are… they have got activity levels now that are almost a record high, so particularly company like [inaudible] for example. I think the money we are spending is generating some very nice returns on capital. Do we have the ability to get more iron out that we have iron on the shelf to day, yes, we do. And that's probably always the case. Do we have an inordinate amount of iron on the shelf more than we have had historically, the answer is, no. But we have got… we could certainly… the revenue number could jump dramatically just by taking things of the shelf and getting them out there, if you can get them in the right market. I think that answers your question.
Joe Agular - Johnson Rice Company
It does. I guess what I was trying to ask was the CapEx that you have been allocating to Rental Tools, if it's fully shown up yet in the numbers for this segment in the quarter or should we expect some improvement going forward?
Terry Hall - Chairman and Chief Executive Officer
I don't think so, Joe. No, it hasn't fully shown up. And the reason we spend the money we do in that area is in part related to your earlier question. This is an area where you can usually cap if you buy largely, you can deploy and put it into markets where the labor issues are very tight, it was very challenging to be profitable on the service side and still do very well on the rental side because in fact it’ just not labor intensive. So that's the other side of this. We always try to be sure that we have got a significant component of overall business just within the rental market. It's a nice place to be.
Joe Agular - Johnson Rice Company
Great. Thank you very much.
Terry Hall - Chairman and Chief Executive Officer
Thank you, Joe.
Operator
Thank you. Our next question is from Robin Shoemaker from Citigroup. Please go ahead.
Robin Shoemaker - Citigroup
Yes. Good morning, Terry.
Terry Hall - Chairman and Chief Executive Officer
Hi, Robin.
Robin Shoemaker - Citigroup
Wanted to ask you…go back to the platform removal contract that we talked about in January and this was your first experience with a large fixed price contract for your own account and I just wanted to ask you about that in context of some of these cost increases that you are seeing and whether or not anything has gotten strayed of your initial expectations with regard to the cost of completing this contract, the time frame or anything related to that that you could share with us?
Terry Hall - Chairman and Chief Executive Officer
No, really hadn't... we have been able to really, I think, avoid any negative impact from price increases. We are using some different assets at times and we have planned, we had modeled using some more expensive vessels and in fact we have been using NN [ph] on the large items. We had locked in pricing for contract duration that kind of protected us from any big swings in price. So, on that one our team did a very good job of protecting us from the influence of rising prices, from volatility in some of these markets on high-dollar items. We got that locked in and then in other areas again we had modeled using one technique and we found we have been able to do it a little bit lesser and cheaper technique. So, overall prices increases that are generally impacting the industry have not been a factor in the execution of that contract.
Robin Shoemaker - Citigroup
Okay. And also in respect to that contract, I think you said you kind of expected the project to be kind of evenly spread over three years. So, is the kind of revenue contribution that you got from that in the second quarter, kind of what we would expect on a quarterly basis or is there a... I mean obviously not the same every quarter, but is that representative?
Terry Hall - Chairman and Chief Executive Officer
I think it’s just representative of that quarter, I think that can vary dramatically as we place more attention or less attention on the project given demands, we have elsewhere for our services and those people. So, I think that project is moving along very, very nicely. We have set all along to… we expected to make certain margins, we expected it to go with a certain pace and as long as we are making those margins or better and we were on pace or ahead of schedule that would be about all we would say and that if we go behind or so probably tell you. So thus far we are on schedule or ahead of schedule, the margins we are achieving are equal to or better than those that we modeled or gave you guidance on and we still expect the project to conclude in three years or less. And it could be substantially less than three years just depending on how fast we move. But based on what see now, I mean, we have the potential to conclude the project certainly in less than three years, but we could also…we could have demand for our services and people and attention that would cause us to slow down a little bit and still get it done within three years. So, I can’t… I don’t want you to necessarily make a fix bet here. Whether could have an impact, we could get very busy hurricane season and have to back off of the attention of that project a little bit for a while, that's just one thing. I guess you could have some severe winter weather that might cause us to slow down a little. So, I would just caution you to say that everything is going to be just like this quarter that this is going to be a nice even stream. We will try to keep it that way but there is no way that we can guarantee that. But having said that also I am saying we are on or ahead of schedule achieving margins equal to or better than we expected model and gave guidance on.
Robin Shoemaker - Citigroup
Okay. Just one final question on that. Has the project commenced and you are engaged in it? Has it drawn the attention of some other operators who have platform de-commissioning ahead of them? I think you suggested that this might a precursor to other large projects of this type. Are those... is that meeting your expectations?
Terry Hall - Chairman and Chief Executive Officer
It has drawn quite a bit of attention. There is a lot of people that have ferocious about it. The approach we have taken with the MMS was unique. People find it attractive. I think they are watching our performance. I think they are impressed. We've got several other projects under consideration, none of them are the size of this one, but they are of size, good size, and I fully expect that we will be doing some more of these projects in the future. We don't have an appetite to take on another big one right this moment just again because the demands we have for our people and service already. But we would not mind to have a few more as we go forward and we certainly wouldn't mind seeing up a couple of more over the next 12 months and I think it’s likely that we will.
Robin Shoemaker - Citigroup
Okay.
Terry Hall - Chairman and Chief Executive Officer
But it’s not likely that any of them would be of $750 million nature, but they will be of significant size.
Robin Shoemaker - Citigroup
Okay, great. Thank you.
Terry Hall - Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question is from Mark Brown with Pritchard Capital Partners. Please go ahead.
Mark Brown - Pritchard Capital Partners
Hi, Terry. Wanted to ask about your 265-foot liftboats that you are having delivered this June to late next year. Are you expecting to put those in the Gulf of Mexico or are you considering other international markets as well?
Terry Hall - Chairman and Chief Executive Officer
We are hoping to place those boats internationally. We are using them in the Gulf of Mexico, but I think they have a sort of a [inaudible] design they will be uniquely, I think attracted to international markets and we certainly hope to place some… while we had thought we would get two of them by year-end, it looks like only we are going to get one of them by year-end and then the second will come early in '09. So, we fully expect to have one of them by year-end and our intent is to try to work those in international markets.
Mark Brown - Pritchard Capital Partners
Okay. And I was wondering on the cost side in your Marine segment if you feel that some of the maintenance expenses and other expenses that drove up your costs sequentially at least, if you think those are non-recurring or more I mean maintenance, is that going to ongoing maintenance for different reasons that we could see higher levels of costs stay on an ongoing basis?
Terry Hall - Chairman and Chief Executive Officer
I think that maintenance was extremely high in the quarter. I don't believe this going to be that high going forward or could be, but I don't believe it will be… the labor cost is going to with this, again, given the labor shortages that we see out there, you get a change to accrue these vessels, you accrue them well in advance it’s actually having the vessels that you have got crew sitting around, but you try to work within your fleet and nevertheless we carried a crew for that 175 or recent delivery up a quite a while. Now it’s out there working. We’ve already got a crew for 265 that we won't see till the year-end. So, the increased labor cost I think is going to be with us. I think the labor… the maintenance cost for the quarter were exceptionally high and we look to bring those down and the other thing about it is, it’s just… it’s a business with a very high fixed cost nature. First two months of the quarter utilization was really slow. June was significantly better than April and May and July have gotten better. So, the margins are improving daily as we speak and it’s just one of those things where once you cross again to cover your fixed cost and you begin to throwing up a lot to the bottom line as you’ve seen in prior quarters. So, we've just been below that line or just getting over that line in this quarter and now we're beginning to get into where you start to see significant contribution at the bottom and the margins improved fairly dramatically. It never fails. Whenever utilization is low and you're boats are around that’s when your maintenance costs go up and squeeze everything. You’d like not be doing maintenance when you have higher demand for your boat. So, it's just a circumstance this entire year. From January on, demand for liftboat, particularly the smaller ones, has been very, very week and so, you go ahead and you got them and you work on them, your maintenance costs swing very high during those periods.
Mark Brown - Pritchard Capital Partners
Okay. Thanks a lot Terry.
Terry Hall - Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. [Operator Instructions]. And our next question is from Bill Sanchez with Howard Weil. Please go ahead.
William Sanchez - Howard Weil
Thanks. Good morning.
Unidentified Company Representative
Good morning, Bill.
William Sanchez - Howard Weil
Terry, just to circle back on the rental tools business to understand, is... if we think about it domestically versus internationals, domestic still pretty much a story right now of kind of volume growth based on higher rig counts, both shelf and onshore U.S. and then pricing basically being offset by higher costs, and then absolute net pricing increases in the international markets in addition to volume increases, is that how we should think about that?
Terry Hall - Chairman and Chief Executive Officer
That’s it.
William Sanchez - Howard Weil
Okay. That's straightforward.
Terry Hall - Chairman and Chief Executive Officer
Well done.
William Sanchez - Howard Weil
What about... how do you margins you think continue to look in rental tool business here going forward? I mean you're almost back to the levels we saw in the third quarter of last year. Margins should continue to be going up, I guess, in that environment, should they not?
Terry Hall - Chairman and Chief Executive Officer
Yes, I think margins will improve modestly, clearly there is a... I don't expect them to get better than they were during our sort of peak periods, but I'm certainly expecting to get there.
William Sanchez - Howard Weil
Okay. Thanks Terry.
Terry Hall - Chairman and Chief Executive Officer
Always impacted, the other thing, remember Bill, you’ve got a mix situation in that business and from time to time you will see swings in margins that are related just to product mix. And that’s something that you just have to pay attention. And we've got a lot of different moving parts and pieces and things within that rental group and as we use disparity between margins you might get on your rental of accommodations as opposed to margins or heavy weight drill pipe and stuff. So, just… that’s the other thing that can move around pretty good.
William Sanchez - Howard Weil
Okay. I guess as one follow-up again on Marine. Are you able to just quantify the magnitude of the improvement you expect to see in margins? Is it back to what we saw in the first quarter or you're running just north of 30% or could we expect to see things creep up closer back to where we were in the back half of ’07 at some point?
Terry Hall - Chairman and Chief Executive Officer
We would like to see getting there, it’s going to be somewhere in between and hopefully approaching what we saw on '07. A lot of it is going to depend on what happens on the small boats. I think on the big boat side, the margins are going to get back to where they were than if not better. The small boats, just so many of them, it’s hard to predict. I mean we significantly reduced our exposure to that small boat at least some time ago that I think that the larger boats, we really been able to depend the pricing there. I expect that to go up. Small boats, don’t know, what will happen there. Again, it’s going to be a big boat story going forward and most of our fleets are 200 foot and larger and we do expect those margins to improve to get up to where to approach equaling the nice margins we saw in late ’07. And [inaudible] I don't what's going to happen on the small boats and clearly we don’t know what may happen from a weather standpoint. But absence some sort weather involvement, I think you are going to see the margins improve very nicely on that Marine side.
William Sanchez - Howard Weil
Thanks Terry for the color.
Terry Hall - Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question is from Neil Macqite [ph] from Redwork Partners [ph]. Please go ahead.
Unidentified Analyst
Hi, Terry.
Terry Hall - Chairman and Chief Executive Officer
Good morning, Neil.
Unidentified Analyst
How are doing?
Terry Hall - Chairman and Chief Executive Officer
I'm good.
Unidentified Analyst
Well, listen, I guess I met with you back in June of 97 after you had your full quarters out and you sort of laid out of plan where thought you are going to be five, ten years down and you’ve done pretty much, I mean pretty much what I think you laid out then. So, I was just curious you know 50 quarters from now where do you think you are going to be?
Terry Hall - Chairman and Chief Executive Officer
Well, I hope I am not doing a the conference call, Neil.
Unidentified Analyst
Yes, I hear you. Well, I thought that was your favorable part of the whole business.
Terry Hall - Chairman and Chief Executive Officer
Well, it is, it is. Actually it’s not bad, but it’s just I hope I didn’t bore everybody with that, but I just thought it was an interesting historical prospective, in connection with our 50th full quarter to look back on how far we have come.
Unidentified Analyst
That's fine. You come a long way.
Terry Hall - Chairman and Chief Executive Officer
You have been there all the way, so thank you.
Unidentified Analyst
I was, and Joe. I think Joe has been there longer than I have but, maybe I am the second longest.
Terry Hall - Chairman and Chief Executive Officer
That’s right.
Unidentified Analyst
But...do you think I mean it's clearly international is going to be a part is that 40% or 50% you think in the next three or four years?
Terry Hall - Chairman and Chief Executive Officer
Well, our sure hope is 33% or more. A lot of it will just depend on our ability to expand our service offerings internationally and again from an acquisition standpoint that's difficult. We are going to be able to grow the rental side very dramatically and we’ve got some plans in place and I think a strategy in place that will allow us to get into that sort of side… and generate some revenues, significant revenues even if we aren’t able to make a significant acquisition. So, I think you will see some significant growth internationally out of the company over the next couple of years.
Unidentified Analyst
Good. And congratulations on –
Terry Hall - Chairman and Chief Executive Officer
Sitting around the same well, we couldn’t make a service acquisition, so we couldn’t do it. We have got another approach in mind and another strategy in place and one way or another we are going to get into that. We are going to expand our presence in the service side internationally.
Unidentified Analyst
Okay. All right, well congratulations. Keep it up.
Terry Hall - Chairman and Chief Executive Officer
Thank you, Neil.
Operator
Thank you. Our next is from Dan Pickering. Please go ahead with your follow-up question.
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
I'm back guys. Terry was there any impact from Hurricane Dolly?
Terry Hall - Chairman and Chief Executive Officer
Probably, $1 million worth not any great significance. I mean clearly it put our boats in the bank for a few days and some things happened and some crews came down, but it wasn’t a significant… but it could have been as much a $0.01, if not a bit more.
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
Okay. And then you talked about… you mentioned several times with boat size, maintenance cost were exceptionally high as you look to a more normal third quarter with the activity and utilization higher I mean how much would you expect the delta in maintenance cost to be in the third quarter?
Terry Hall - Chairman and Chief Executive Officer
Don’t know, Dan. I don't have that number. I mean, we are doing fewer hull inspections in the quarter so it should go do down.
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
Okay, just from an order of magnitude to expect, I mean are we talking $10 million, $5 million, $1 million?
Terry Hall - Chairman and Chief Executive Officer
I think it'll be 20% or 30%, whatever that number is. If you call back…?
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
I'll follow up with that.
Terry Hall - Chairman and Chief Executive Officer
It could be… Dan, it’s really a function and just think about it. It’s true in any business line we have. If that service activity slows down you got all the hands on payroll, they end up going around to shop and your maintenance costs go up when your activity is down. It's the same thing in the boat arena, the minute utilization is off you start putting your boats and things and doing maintenance on them, the maintenance cost goes very high when you got low utilization. So as percentage it squeeze everything, but it is just function of when the market gets weak invariably your maintenance goes up and typically when the market gets strong you try to get them down because your trying to get your boats up because you can generate revenue with them. So I think that market is improving and I think those maintenance costs will be down in this quarter and hopefully they will be down in succeeding quarters. Now, again any number of things going can happen, but we do expect it to go down. If you call back we'll try to give you a little more detail on it. Just try to lock in what we think that delta might be.
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
Thanks. I will indeed follow up on that. And then as we look Terry, I think second quarter your overall revenues were up about 4% versus the prior quarter, do you think that…you think that given a liftboat pickup and just the market in general, do you think sequentially your revenues will factor in that 4% number?
Terry Hall - Chairman and Chief Executive Officer
We're not projecting that, Dan, but my gut tells me they will.
Dan Pickering - Tudor, Pickering, Holt & Co., LLC
Thanks. That is all I have. Thank you.
Terry Hall - Chairman and Chief Executive Officer
Thanks.
Operator
Thank you. [Operator Instruction]. And our next question is from Mark Brown. Please go ahead with your follow up question.
Mark Brown - Pritchard Capital Partners
Hi, Terry. You mentioned the price increases are as much a regional question as a product question. Just was wondering what region do you think will have the most likelihood of seeing prices increase over the second half of the year?
Terry Hall - Chairman and Chief Executive Officer
Well I think all these unconventional plays is that activity heats up, there is going to be more and more demand in place, trying to find labor, trying to find equipment, trying to get into the right place. So, I think that the pricing volatility is going to be greatest in those areas.
Mark Brown - Pritchard Capital Partners
Okay. And just one another question. In Latin America you said that was a near term growth opportunity. Is that primarily on the rental tools or --?
Terry Hall - Chairman and Chief Executive Officer
Yes, I was referring to that... those comments came in sort of my dialog in the Rental segment but I think that near-term growth opportunities for rental is probably the best in Latin America and they're also quite good in Canada and other areas. But this new term… new movement in kind of growth is going occur in Latin America near term for the Rental Group.
Mark Brown - Pritchard Capital Partners
Okay. Thank you.
Terry Hall - Chairman and Chief Executive Officer
Thank you.
Operator
Thank you. And management there are no further questions at this time. Please continue with any closing remarks you may have.
Terry Hall - Chairman and Chief Executive Officer
Well Thanks everyone for your confidence and thanks for listening to us. Stay tuned.
Operator
Thank you sir. Ladies and gentlemen, this concludes the Superior Energy's second quarter conference call. This conference will be available for replay after 2 PM Eastern today through August 8th at midnight Eastern Time. You may access the replay system at any time by dialing 303-590-3000 and entering the access code of 11116473 pound. Thank you for your participation. And at this time you may now disconnect.
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