Oil States International Inc. Q2 2008 Earnings Call Transcript

Aug. 1.08 | About: Oil States (OIS)

Oil States International Inc. (NYSE:OIS)

Q2 2008 Earnings Call

August 1, 2008 11:00 am ET

Executives

Bradley Dodson - CFO

Cindy Taylor - CEO

Analyst

Jeff Tillery - Tudor Pickering & Holt

Stephen Gengaro - Jefferies and Company

Chuck Minervino - Goldman Sachs

John Daniels - Simmons and Company

Victor Marchon - RBC Capital Markets

Operator

Good morning, ladies and gentlemen, and welcome to the Quarter 2, 2008 Oil States International Earnings Call. My name is Nora and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, 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. Bradley Dodson, Chief Financial Officer of Oil States. Please proceed sir.

Bradley Dodson

Thank you, Norah. Welcome everyone to the Oil States' second quarter 2008 earnings conference call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer.

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

I will now turn the call over to Cindy.

Cindy Taylor

Thank you, Bradley, and thanks to all of you for dialing into our call this morning.

Oil States posted earnings in the second quarter of 2008, which were significantly above FirstCall estimates as well as our previous guidance range.

As most of you know, this is the seasonally weak quarter for our Canadian operations, primarily impacting our accommodations and rental tools resulting in earnings that are sequentially down from the first quarter. However our year-over-year growth was significant. We realized significant improvements in activity and profitability in our tubular services segment. Strong year-over-year growth in our oil sands accommodations capacity and contributions from two rental tools acquisitions completed in 2007. In addition we posted solid performance in our offshore product segment.

As we indicated in the press release, we booked a $2.7 million gain on the sale of a portion of our Boots & Coots stock during the quarter. We also had gained in the comparable quarter of last year, when you exclude this gain from our current quarter results, Oil States reported revenues of $631.4 million, EBITDA of $117.7 million. Our revenues and EBITDA were up 26% and 38% year-over-year excluding the Boots & Coots stock gains from both periods.

I'm going to transition and have Bradley take you through more details of our consolidated results and then I will conclude our prepared remarks with a discussion of each of our segments and close with our market outlook.

Bradley Dodson

Thank you, Cindy. Throughout this call we will be excluding it, from our discussion of EBITDA the $2.7 million gain in the second quarter of 2008 and the $12.8 million gain in the second quarter of 2007 related to sales of portions of our investments in Boots & Coots.

For the second quarter of 2008 we reported operating income of $91 million on revenues of $631.4 million. Our net income for the second quarter of 2008 totaled $60.2 million or $1.14 per diluted share. The comparable second quarter 2007 results were $68.5 million of operating income on revenues of $499.3 million.

The second quarter of 2008 results represented 26% year-over-year increase in revenues and a 33% year-over-year increase in operating income. These increases were primarily due to improved earnings from our Offshore Products and from our Tubular Services segments and contributions from our two rental tool acquisitions completed in the third quarter of 2007.

Depreciation and amortization in the second quarter of 2008 totaled $25.7 million compared to $16.1 million in the second quarter of 2007. This increase was due to the acquisitions and capital expenditures made over the past 12 months. D&A expense is expected to total $27.2 million in the third quarter of 2008. Net interest expense totaled $3.7 million in the current quarter compared to $3.0 million in the second quarter of 2007. Third quarter net interest expense is expected to be $3.5 million.

The effective tax rate in the quarter was 33.9% compared to 34.1% in the second quarter of 2007. Turning to do balance sheet, our net debt at the ends of the second quarter was $423 million, down from $475 million at the end of the first quarter, as operating cash flow more than offset the $75 million in CapEx spent during the quarter. As a result our debt to capitalization ratio was 28% as of June 30, 2008. At this time I would like to turn this discussion over to Cindy who will review the activities of each business segment.

Cindy Taylor

Let's start with our Well Site Services segment. In this segment we generated revenues of $209.9 million and EBITDA of $67.6 million in the second quarter 2008 compared to $265.6 million and $97.6 million respectively in the first quarter of 2008. The sequential declines in revenues and EBITDA were primarily due to the seasonal decline in activity in Canada caused by spring break-up, which impacted our accommodations business and to a lesser extent our rental tools.

We remain at full effective utilization levels in three of our four major lodges that are experiencing typical seasonally reduced demand for our mobile camp assets; our Conklin Lodge is also subject to more seasonal demand pattern.

During the second quarter of 2008, we continued to expand our Wapasu Creek Lodge which now has over 2,000 rooms, up from approximately 1,280 rooms at year end 2007. Our rental tools generated $84.6 million of revenues and $25.2 million of EBITDA in the second quarter of 2008, compared to revenues of $82.5 million and EBITDA of $25.5 million in the first quarter of 2008. Our rental tool results reflect a seasonal decline in our Canadian operations due to break up, almost fully offset by sequentially higher contributions from our U.S. operations.

Our drilling revenues and EBITDA were $44.4 million and $16.4 million respectively, compared to $36.8 million of revenues and $11.2 million of EBITDA generated in the first quarter of 2008. The sequential improvement in revenues and EBITDA was primarily the result of improved utilization in our Texas and Rockies operations.

Our overall utilization increased to 84.2% in the second quarter of 2008, up from 74.5% in the first quarter of 2008. Our average daily revenues were up $800 per day sequentially and our cash margins per day increased $1,500 per day as our cost absorption improved with the higher utilization levels.

In our offshore products segment, we reported revenues of $139.9 million, and EBITDA of $27.8 million, compared to revenues of $126.9 million and EBITDA of $24.1 million reported in the first quarter of 2008. Revenues improved sequentially by 10.2% due primarily to increased after market service work and deliveries of our highly engineered products. Our backlog grew slightly to $385.8 million, compared to $383.5 million at March 31, 2008.

Our Tubular Services generated record quarterly revenues and EBITDA of $281.6 million, and $29.2 million respectively during the second quarter of 2008, compared to revenues of $208.8 million, and EBITDA of $10.1 million in the first quarter of 2008. Our 34.9% revenue increase was due to both higher volumes shipped and price increases implemented by the domestic OCTG mills during the quarter.

In the second quarter of 2008 we shipped 146,200 tons, up 15% from 127,100 tons shipped in the first quarter of 2008. Gross margin percentage improved significantly to 11.6% in the second quarter of 2008, up from 6.1% in the first quarter of 2008.

Now I'd like to give some summary comments as to our outlook as we move forward. Within our Well Site Services segment we continue to see significant growth opportunities for our accommodations business in the oil sands region. In the second half of 2008, we will continue to execute our previously announced organic growth plan. Our rental pool contributions are expected to improve sequentially in the third quarter of 2008, given favorable trends in the North American rig count which should positively impact completion services activity. Land drilling utilization improved in the second quarter despite a slower recovery in the Rockies than initially expected, due to weather. We are projecting further improvement in utilization in this region in the third quarter.

Overall, we are forecasting utilization of approximately 90% in the third quarter, up from 84% in the second quarter.

In our offshore product segment, our backlog position remains at strong historic levels overall and product mix and margins within backlog remain consistent with recent levels.

In our guidance range we continue to forecast strong quarterly revenues and EBITDA margins somewhere in the mid-teens, which can vary due to product and service mix as well as timing of shipments.

We have made significant strides during the second quarter at our new ship channel facility. Additional workers have been hired, machinery and tools have been added, and we have moved several significant projects to this facility for completion.

As to Tubular Services, industry OCTG inventory levels have continued to decrease on a month of supply basis and additional price increases have been announced by the major domestic mills to be effective July 1. The demand environment is robust, resulting in our third quarter outlook for Tubular Services being more optimistic. We expect our margins in the third quarter to be at or above second quarter levels and our revenues should grow as these price increases take effect. Our investment in inventory is also expected to increase as the entire mill prices take effect.

Given all the above factors, our earnings guidance range for the third quarter 2008 is estimated at $1.19 per share to $1.24 per diluted share. We continue to execute on our strategic growth plan as our results indicate. We remain very positive about the long-term prospects for our company, given the strong industry fundamentals.

That concludes our prepared comments. Nora, would you please open the call up for questions and answers at this time?

Question-And-Answer Session

Operator

Thank you very much. (Operator Instructions) Your first question comes from the line of Jeff Tillery. Please proceed.

Jeff Tillery - Tudor Pickering & Holt

Hi, good morning.

Bradley Dodson

Good morning, Jeff.

Cindy Taylor

Good morning, Jeff.

Jeff Tillery - Tudor Pickering & Holt

Cindy and Bradley, could you talk a little bit about how you achieved the volume growth in the Tubular Services business? Is that a new mill arrangement? Is that taking share? Could you just provide a little color on that, in terms of sustainability of those volumes?

Cindy Taylor

Absolutely, and it's a great observation that our volumes have grown at a rate in excess of the rig count growth. What we obviously think is that we are taking market share in this environment. We are, although it's a fragmented market, one of the leaders as it relates to OCTG distribution is not the leader. We have great mill arrangements and support from those mills and we feel like an environment like this when it's so tight on inventory, that having strong call on those mill allocations has helped us from a market share perspective.

Jeff Tillery - Tudor Pickering & Holt

I think you guys were looking at some additional international mill relationships. Could you just update us on the progress there?

Cindy Taylor

We continue to look at all sources for our mills. We have historically distributed some product - if our customers desire that - from international mills. And that really remains the same today as would you expect.

Jeff Tillery - Tudor Pickering & Holt

So if we see the rig count continue to increase here in the third quarter, do you believe the relationships give you the ability to increase volumes as well from the second quarter level?

Cindy Taylor

Right now, we are working in very close communication with all of our customers as well as the mills. I think it's fairly evident that the U.S. mills are pretty much running at near capacity. So it's critically important that we plan appropriately. We've got great dialogue with our customers and thus far we've been able to supply our customers with their requirements such that they've been able to consistently keep up or maintain their drilling and completion programs. I think it's going to be extremely challenging as we move forward. There's about 3.8 month supply of inventory on the grounds which is a very tight situation. But thus far we've been successful and we think we will be able to continue to supply our customer's needs.

Jeff Tillery - Tudor Pickering & Holt

Okay and just turning to the rental tools business, it's a little bit funny and then we have got Canada declining at detrimental margins and the U.S. improving. Can you talk about if you separate out Canada did the U.S. rental margins improve sequentially?

Cindy Taylor

Well, I'd have to look in total to be on -- I feel like they were probably a little improved but frankly I don't know that I have a sheet in front of me that answers that question with it split out. We not only have rentals in Canada, we have other international contributions as well. I have it for my break-outs for the second quarter but I don't have it compared on that basis on a sequential analysis basis. But I think just maybe getting to the heart of your question, the second quarter -- there was some ramp in activity but I would say it was more towards the mid to latter portion of the quarter. We expect sequential improvement Q2 to Q3 probably at a rate, more in excess of what we saw going from Q1 to Q2.

Jeff Tillery - Tudor Pickering & Holt

Okay, and my last question for Bradley, could you just provide the revenue and EBITDA for the oil sands accommodations business in the quarter?

Bradley Dodson

The revenues for oil sands were $58.5 million in the second quarter with EBITDA of $24.2 million

Jeff Tillery - Tudor Pickering & Holt

Okay thank you very much.

Cindy Taylor

Thank you, Jeff.

Operator

And you next question comes from the line of Stephen Gengaro of Jefferies and Company. Please proceed.

Stephen Gengaro - Jefferies and Company

Thanks good morning. Back to the Tubular side, can you tell us, I mean going into the quarter and just looking at the margins, I mean how much, and I know you talked about the sustainability of margins in the neck quarter, but how much of the margin improvement had to do kind of with inventory gains as opposed to just higher volumes and higher prices? Can you break that out at all?

Cindy Taylor

You really can't. We are consistently turning that inventory anywhere from probably 3 to 4.5 times, so just realize how fast that moves from our -- in our inventory. There may be a handful -- low percentage of pipe that has a longer life. But in reality you've got to look at it at as a fast turning business out there. My way of thinking there's not much of inventory holding gain, however it's clearly evident when you're in a ramping price environment, you have a lower inventory base than your forward price. Mills' announced about a $500 per ton increase effective July 1. That $500 per ton is not yet baked into my inventory. It's certainly ramping. And so I don't look at it as one time inventory gains. You've just got to realize that in a favorable price environment, our margins have a tendency to expand. They did expand faster than what we guided you to at the end of the first quarter because prices went up quicker, number one. Two, our market share improved, which is a favorable environment. Its kind of a combination of things and just the balance of program and spot business worked fairly well in our favor as well.

Stephen Gengaro - Jefferies and Company

Thanks. As we've heard quite often that Tubular's are about as tight as they've been in a long, long time. So, you definitely see that and it definitely has impacted, you think your market share because of your ability to get product?

Cindy Taylor

Yeah absolutely. And of course, I've been associated with the business a long time but more importantly the people that run our operations have made this their life time career and they would tell you it's about as tight as we've ever seen it but for third party independence verifications you can go to OCTG situation with all of that logic and think that would confirm that on a month supply basis, its about as low as it's been historically.

Stephen Gengaro - Jefferies and Company

Thanks and then one final question and you're back to the margins on the rental tool side a bit, but have you, what have you seen from a pricing trend on the rental tool side over the last quarter or two and what are you thinking going forward on that front?

Cindy Taylor

Well I'm going to -- I will lead off and I'll see if Bradley has any additive comments. Again, really activity hasn't, if it ramped, it really ramped a little bit lighter in the second quarter and, of course, a lot of our rental tools are focused on completion production services activity which is going to lag the rig count just a little bit although we are drilling wells so quickly today, it's not as much as maybe it used to be, but I didn't sense that we had too much pricing increase power during the quarter. I think our outlook may improve if the rig count expands as we think it will, in the second half of this year.

Stephen Gengaro - Jefferies and Company

Great. Thank you.

Cindy Taylor

Thank you, Stephen.

Operator

And your next question comes from the line of Chuck Minervino of Goldman Sachs. Please proceed.

Chuck Minervino - Goldman Sachs

Hi, thank you. Just wanted to touch on OCTG again. Wanted to -- given how tight the inventory levels are right now, I was wondering if you could touch on what you're saying in terms of the imports at this stage and how that's going to factor into, how long it takes for this market to really balance itself out.

Cindy Taylor

The last information I saw on imports show that import market share remains about 47%. That's no real change from where we have been. The first quarter I think was a little thin on imports which led to us such kind of a dramatic correction in month supply on the grounds. But the macro factors are that there's a strong international demand environment, the dollar has weakened as a currency over the course of the last 12 months, which make it less attractive than it was and in addition to that transportation costs have increased. So, with all those factors it's a little difficult for me to think that the import market share moved significantly from where it is today. However, what's happened over the last three years has really been the improvement in import market share that's really helped supply our customers product because, again, the U.S. mills are functioning at very high levels of utilization right now. However, each and every one of them is making concerted efforts to look at their internal processes, their assembly; the mix of product to help leverage that capacity. And I think one, I believe they will do a good job and I think it will be necessary in order to support expanded drilling activity in North America.

Chuck Minervino - Goldman Sachs

And also just on pricing going forward here, we've had very sharp pricing increases in OCTG. And given the tightness of the market, are you anticipating further substantial price increases here going forward?

Cindy Taylor

Well, I got to be honest. The rate of increase, the first six months have been ahead of what we expected. I think OCTG prices have doubled pretty much from the beginning of the year to where we are today. With that backdrop, I don't think that they are going to continue at this rate. Obviously, there is a lot of issues to deal with on a global basis that I don't have probably any better insight on than you do in terms of raw materials sourcing. But just again on the backdrop of where we stand otherwise six or seven months, I would think there may be further increases, but at a lower model. That would be our thinking today.

Chuck Minervino - Goldman Sachs

Okay, and also just one last question, I in your guidance for 3Q, can you just talk about what you're thinking around in terms of cash margins per ton?

Bradley Dodson

We can't say.

Cindy Taylor

No, we don't have that in front of us. I'm sorry. I think you could probably back into where we were in the second quarter and just use our guidance, but we think our margins will be at or above where they were in Q2 and come up with a very reasonable estimate.

Chuck Minervino - Goldman Sachs

Okay. Thank you.

Cindy Taylor

Thanks.

Operator

And your next question comes from the line of John Daniels of Simmons and Company. Please proceed.

John Daniels - Simmons and Company

Good morning.

Cindy Taylor

Good morning, John.

John Daniels - Simmons and Company

How are you guys doing?

Cindy Taylor

Good.

John Daniels - Simmons and Company

I'd like to ask a quick question on your drilling business. A lot of people have been talking about new billed and new construction. Do you guys have any rigs under construction right now?

Cindy Taylor

At this particular time we have one rig under construction and would be evaluating additional; and again, if you'll recall, we build our own rigs. We do use components from some other manufacturing suppliers. Of course, but we build our own rigs. So we've got a good crew out there ready now to initiate activity if we decide it's strategic to do that.

John Daniels - Simmons and Company

Okay. And then just a follow up. I know you've got a good position in the Rockies and the Permian. Any thought of moving to new regions here in '09?

Cindy Taylor

Well, we've kind of had a rig flip in and out of the Barnett. We'd really like to get a more established position in the Barnett Shale and ideally if we could get equipment in either the Fayetteville or the Haynesville I think that would be strategic as well. At this stage, we are not looking for new markets. We would expand in the Rockies as well if the opportunities present themselves on an attractive basis.

John Daniels - Simmons and Company

And I guess my final question then, Cindy, is of the rigs how many are locked up in terms contracts?

Cindy Taylor

Typically, we are essentially a spot market provider albeit we commit to multiple wells at a time because we drill wells so quickly with the type of rigs that we have. Where we do have term contracts is generally in the Rockies. And that is two to three rigs kind of order of magnitude.

John Daniels - Simmons and Company

Okay. Thank you very much.

Cindy Taylor

Thank you.

Operator

And your next question comes from the line of Victor Marchon of RBC Capital Markets. Please proceed.

Victor Marchon - RBC Capital Markets

Thank you. Good morning.

Bradley Dodson

Good morning, Victor.

Victor Marchon - RBC Capital Markets

First question I have is just on Conklin. Is that -- was that generating revenue in the month of July? Is that all up and running?

Cindy Taylor

Before July, there was some headwind power in there but it's somewhere in the 100 million range. And the difference there if you'll recall, the Conklin Lodge is situated more in the south and it's more in support of Sag B type drilling in contrast to our other three lodges who are in support of construction of the upgrading and processing equipment, which is more year-round fully utilized permanent. Again the Conklin Lodge is more seasonal in nature. It supports more seasonal activity. So it is contributing revenue, but it's at a lower level given breakup.

Victor Marchon - RBC Capital Markets

Okay. And switching two of your products, the new ship channel facility, is that -- are expectations at third quarter you'll start running some standalone revenue through the facility?

Cindy Taylor

Yes, I think if we're moving that way, it could be the third quarter or the fourth quarter. Right now we've got quite a lot of backlog that we are debottlenecking through this facility, so I don't know if you call it standalone or not. The point is, it's been booked for awhile and we are aiding our customers with deliveries by having that facility. So it really is incremental revenue, because we couldn't put it out as quickly in our South Houston operations after having the ship channel facility.

But the longer-term goal as you know is to build a standalone facility. You don't do that overnight. It's going to take some time. But we've got it up and running very well from a labor perspective as it relates to operations. Over time, I envision it could likely have its own, probably share common engineering; but purchasing all of your back office support functions, quality control, et cetera. Right now we are essentially sharing out of our South Houston operations. But if the market continues as we think it will, it will evolve into a complete standalone facility. I don't know whether that is end of this year or early next year.

Victor Marchon - RBC Capital Markets

And the last one I have is just on the land drilling business. When you look at what you guys are expecting for on a utilization side, just on the operating costs, would you expect that number to continue to trend down on a per day basis or more of a flattish type of number?

Cindy Taylor

You know, I would say flattish right now. A key -- costs are clearly not going down for anybody from material cost to R&M, fuel to the extent that it impacts what our operations, labor, et cetera. However, as we ramp our utilization, that effective cost per day does improve, which you saw in the very strong -- I think our incrementals were about 75%, our EBITDA incrementals this quarter. Part of that is increases on the revenue line but a lot of it is leveraging that cost as well.

Victor Marchon - RBC Capital Markets

All right. Great. That's all I had. Thank you.

Cindy Taylor

Thanks, Victor.

Operator

And your next question comes from the line of from (inaudible) from Credit Suisse. Please proceed.

Unidentified Analyst

Good morning.

Bradley Dodson

Good morning.

Unidentified Analyst

Bradley, I was wondering, or Cindy, if you could comment if you are still on track while pursue to get to 2300, that's by year end?

Bradley Dodson

Yes, we are.

Unidentified Analyst

And if you could just comment on what your future expansion plans are in the accommodations business?

Cindy Taylor

There's lots of opportunities right now - bidding and quoting activities is strong, quite frankly as it's ever been and there's a lots more projects that are going to have manpower needs and we will plan obviously to address those needs of our customers. I don't see any of our organic growth strategies changing with respect to our operations in the oil sands. As is typical if we get a material type change we will announce that separately.

Unidentified Analyst

Just from a volume perspective, are you seeing just from an industry basis growth from a volume perspective in the double digits?

Cindy Taylor

What period are we talking about exactly?

Unidentified Analyst

'09, '10, next couple of years.

Bradley Dodson

Yes, I think we can continue to grow the accommodations business particularly as it relates to the lodge and oil sands operations by double digits.

Unidentified Analyst

Okay. That's helpful. And secondly on offshore projects -- products pardon me, the book-to-bill about one to one in the quarter. Could you comment maybe, Cindy, what you're seeing in terms of deepwater opportunities, potential to expand the book-to-bill?

Cindy Taylor

Well, like everybody else, I think the major projects on the subsea side are being led in West Africa and Brazil and we are actively trying to participate on those, in those markets. I guess it was first quarter where we announced participation with Exxon Mobil and (inaudible) on Block 15 in West Africa. We are active and trying to meet the requirements to increase our contributions from Brazil as well. Obviously incremental rigs will help us also -- again, a lot of those are probably forced from the Brazilian market as well. So, I don't see any trend line change at this stage in terms of our activity. We don't see today too many large new FPSO packages or TLP packages that are imminent, although there we never have more than one or two going on at a time. So, I don't think that there is any negative trends that I see at this stage but just a lot of money being spent and a lot of resources being thrown into effort and we are doing everything we can to maintain or increase our market share in this environment.

Unidentified Analyst

Okay. Last question in terms of CapEx -- what are some of the priorities in terms of some of your growth CapEx and in particular can you comment on what kind of investments you are doing on the rental tool side?

Bradley Dodson

Well, I think for the year we forecasted in the Q for $344 million, $343 million of CapEx for 2009, the large majority of that is going to be accommodations business. On the rental tool side, we are actively expanding active regions, we are expanding our location and in the Fayetteville, we are expanding our location in the Barnett, we are expanding in the Rockies. We've opened new locations up in Appalachia and in the near Balkhan and so a lot of our spending in rental tools this year is driven by location, expansion and additions, as well as really rolling out equipment for the businesses that we acquired in 2007. They had more of West Texas, New Mexico, South Texas presence and really rolling them out to the Conway area and Arkansas into the Rockies, strengthening their position in the Barnett. So, those are the major drivers behind our spending and rental tools this year.

Unidentified Analyst

Thanks a lot.

Operator

And your next question is a follow-up question from Stephen Gengaro. Please proceed.

Stephen Gengaro - Jefferies and Company

Hi, thanks. As a follow-up, Cindy, when we look at the sort of parameters you gave for the third quarter, and your earnings guidance, can you help us, is there any -- but you are looking at some of the -- by using what you told us basically what would you think about as the debits and credits in the third quarter versus the second quarter? Are there things which you think could get sequentially worse -- I'm struggling to kind of use your parameters and stay within your numbers?

Cindy Taylor

Well, the only comment there that -- we're obviously we are going to get sequential improvement in the accommodations business. Q3 is historically a better quarter than Q2. That would go on the debit side. Again in our guidance range, it tampered our offshore profit margins a bit because we are looking at historical trend lines, not necessarily any specific content; although there is a little here and there we got some pass through revenues at very low margins included in our forecast for Q3. But the reality is that those margins are highly dependent upon our product and service mix as well as the timing of our deliveries. So when we build our range, we tamper those just a little bit, right or wrong. We'll see what happens as those numbers come out. And obviously we are looking at some growth in our drilling because we told you our utilization is expected to improve from about 84% to 90%, as well as a little bit of growth in our rental tools, but I'm looking to Bradley just to see if...

Bradley Dodson

Well, and also I think if you're working off of the $1.14 actuals for Q2, there's a $0.03 gain in there that won't be repeated for Boots & Coots sales spot. And then also the conversion of our accounting for our remaining Boots & Coots investment from equity method accounting to marketable securities held for sale accounting also has an impact that is being offset by the growth in drilling and accommodations and tubulars.

Stephen Gengaro - Jefferies

Okay. That's very helpful. And then on the rig side, does that cash margin, do you think with inflationary pressures that cash margin is sustainable given the utilization rates and absorption?

Cindy Taylor

Oh, yes. We think they are sustainable. We haven't really built in much in the way of increases at this stage.

Stephen Gengaro - Jefferies

Okay. That's very helpful. Thank you.

Cindy Taylor

Thank you, Steven.

Operator

You have no further questions at this time.

Cindy Taylor

Thank you so much. We appreciate it. I know it's a very busy earnings season and this is a particularly busy week, so we appreciate all of you taking the time to dial into the call. We are excited about the business and look forward to visiting with you again in connection with our third quarter call. Thanks so much.

Operator

Thank you very much. Ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a great day.

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