Layne Christensen Company F2Q09 (Qtr End 07/31/08) Earnings Call Transcript

Aug.28.08 | About: Layne Christensen (LAYN)

Layne Christensen Company (NASDAQ:LAYN)

F2Q09 (Qtr End 07/31/08) Earnings Call Transcript

August 28, 2008 11:00 am ET

Executives

Andrew Schmitt – President and CEO

Jerry Fanska – SVP of Finance and Treasurer

Analysts

Steve Ferazani – Sidoti & Company

Richard Paget – Morgan Joseph

Jonathan Ellis – Merrill Lynch

Ryan Connors – Boenning & Scattergood

John Rogers – D.A. Davidson

Steven Fisher – UBS

Michael Nicolas – Lakeview Investment

Bill Doyle – Columbia Wanger

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Layne Christensen second quarter fiscal 2009 earnings call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions on how to participate will be given at that time. (Operator instructions)

I would now like to turn the conference over to your host, Mr. Andrew Schmitt, President and CEO. Sir, please go ahead.

Andrew Schmitt

Thanks Matthew. Good morning everyone. I’m here with Jerry Fanska, our Chief Financial Officer. We would like to welcome you to Layne Christensen’s second quarter conference call. Early today, we issued a press release outlining the results for the second quarter ended July 31, 2008. Before we discuss the financial results, I would like to remind the participants that the call may contain forward-looking statements that are subject to the Safe Harbor statement found in today’s press release. Jerry will take you through the operating results and I’ll give you an overview of the division operating performance and how we see things going forward. Okay, Jerry?

Jerry Fanska

Thank you, Andy. Good morning everyone. Revenues set another quarterly record in the second quarter, up 23.8% to $269.6 million from $217.8 million in the prior year reflecting increases in all the company's primary divisions.

Water Infrastructure revenues increased 22.6% for the quarter to $196 million, driven mainly by previously announced acquisitions and increases in treatment plant construction and sewer rehabilitation revenues. Mineral Exploration revenues increased 28.4% to $59.6 million, reflecting continued strong demand in the metals markets. Layne Energy revenues increased 28.6% to $12.1 million, reflecting increased production from the company's unconventional gas properties and higher gas prices.

Selling, general and administrative expenses increased to $36.5 million in the quarter from $29.1 million in the prior year, primarily reflecting increases of about $1.8 million from acquisitions and start-up operations and compensation-related expense increases of about $2.1 million with the remainder spread across various categories. Equity and earnings of affiliates in Latin America increased to $3.8 million in the quarter from $2.4 million in the prior year due mainly to the strong commodities markets.

Depreciation, depletion and amortization increased $2.6 million in the quarter to $13 million from the prior year resulting from increased depletion in the Energy division and depreciation from property additions in other divisions. Interest expense decreased to $1 million for the quarter on decreased borrowings from the prior year mainly due to the retirement of debt from the proceeds of the company’s October 2007 public offering.

The income tax rate in the quarter was 39.2% compared to 47% in the prior year. The reduction in the effective rate is the result of the favorable resolution of certain tax audits during the year or this year reducing the effective rate to the 39%. Net income from the quarter was $15.1 million. It was up $5.5 million or 57% from the prior years. And earnings per share for the quarter was $0.78, another record for the company compared to $0.60 last year.

The company’s balance sheet at July 31, 2008 reflects total assets of $729.1 million, stockholders’ equity of $452.8 million, total long-term debt of $33.3 million excluding current maturities, and cash and cash equivalents of $14.2 million. The company provided $3.9 million in cash from operating activities in the quarter.

Investing activities totaled $31.2 million for the quarter net of proceeds from equipment sales. The investing activities for the quarter primarily included $6.7 million in unconventional gas activities, $15.9 million for other property, plant and equipment additions, and $2.5 million for the Wittman Hydro acquisition that we have announced previously. The financing activities for the quarter did include a $13.3 million principal payment on our fixed term debt.

With that, I’ll turn it back over to Andy to talk about the operations. Andy?

Andrew Schmitt

Thanks Jerry. For the last several years, the second quarter has been very strong for us and that trend continued as a combination of improving weather, solid backlog, and excellent execution on the work we had produced what is likely once again our best quarterly result for the fiscal year.

Our Mineral Exploration business led the earnings parade. Division EBIT including our Latin American affiliate earnings totaled 25.6% of revenue versus 24.3% last year. A big factor in the improved profitability was increased earnings from our Latin American affiliate. Activities by the major mining companies in that region remain very strong.

In our wholly owned operations, we did experience an early start to the wet season in West Africa that pulled earnings down somewhat as normally that our third quarter would bare the brunt of the West African wet season. But other than this event, results were excellent as overall drilling activity pretty much worldwide remains at very high levels.

Layne Energy also had a solid quarter. Gross gas production totaled 1832 MMCF versus 1526 MMCF in the prior year, up 20%.

Our average realized natural gas pricing was $8.24 per MCF in the quarter versus $7.35 per MCF in the prior year. We included our pipeline third party royalty revenue on the gas we handled there. Total gas price would average up to about $9.01.

We used the improvement in natural gas pricing everyone saw this spring to extend our forward sold gas. Since the end of the first quarter’s discussion, we have forward sold an additional 3 million cubic feet of gas at $10.50 per MCF. That effectively places the majority of our production pretty much sold through March 31, 2010. As of last week, we had about 510 wells online producing an average of 18.7 million cubic feet per day.

Finally, as Jerry mentioned, our Water Infrastructure group revenue was extremely strong this quarter, particularly in the Reynolds product lines. Revenues from Reynolds businesses, which would include design and build pipeline in our Cured In Place business was up 33.7% year-over-year and totaled over $100 million.

Our Layne's legacy water business was also up about a more modest 3.5%, still fairly impressive when you consider their water well drilling product line for new wells has had the most exposure to any declines in residential house construction. Fortunately, our Layne legacy groundwater treatment business has more than offset the backlog decline that we have seen for our new water well construction.

Notably, within the Reynolds product lines, our Cured In Place business continues to recover. Year-over-year revenue was up 18.8%, division EBIT was up 83.7%, so this is the second consecutive quarter we have seen improvement. However, we still have a ways to go. The CIPP EBITDA if you look at as a percent of revenue today is about half what it was in 2005 when we originally purchased Reynolds.

Finally, our geo-construction business is having a better year as well. They can be a little countercyclical as we have seen. Revenue was $17.5 million which was almost double last year's level and their EBIT increased over $1million. The Water Infrastructure backlog is very impressive. It is $478 million at the end of the month. It continues to grow. That is up 29% over the end of the last quarter number we gave you for the first quarter. About two-thirds of the backlog is in the municipal sector. So despite a lot of the gloom and doom served up by the financial press about that sector, at least at this point, we have not seen a lot of severe pressure for infrastructure products that we are in with the exception, as I mentioned, of the new water well construction.

Looking forward, the second half of the year has historically been more challenging for Layne Christensen. The length of the mining shutdowns at yearend and the weather are probably the two most prominent wildcards. However, we are going to enter this half with a large backlog in infrastructure. Gold and base metal prices are still strong and spending is still active, and about three quarters of our natural gas production is hedged at around $8. So, no company is going to be immune to the difficulties the U.S. and the global economy is experiencing, but with the diversity of the product lines that we have, our really seasoned management group and workforce, and our balance sheet being unlevered, we have some pretty good advantages compared to a lot of companies. This strength served us pretty well, when we closed our 18th quarter of year-over-year improvement so we can't complain at this point.

Now, if anybody has got any questions, we will be happy to try to answer them.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Steve Ferazani from Sidoti & Company.

Steve Ferazani – Sidoti & Company

Good morning. Just trying to figure out – significant sequential improvement in the margin on the Water side, I know last quarter you talked about seasonality being an issue and some problems getting some projects started. But, can you give a little more color here about why it was such a nice jump?

Andrew Schmitt

Well, you remember last quarter, Steve, we talked about the big construction problems we had because of the wet weather. And that really just – it really has a big impact and that was probably all of the impact. I’m not aware that the mix changed too much. But when we get slowed down like that, we end up with this situation in our business where you got all this fixed costs in the short run and you really can’t lay the people off just because it’s raining, so it really puts us in a bit of a box. So when the weather improves like it does in the second quarter, we really get a running start on these projects and they make up a lot a ground.

So it’s a big swing, but that’s always a problem and I think we said last time that February, March, April period according to the US weather forecasters said been one of the wettest, if not the wettest on record. So that was really excessive. And as soon as things dried out, I guess we're able to go back to work and we had a good backlog. And typically when you do go back to work you’re behind, so everybody is in a mode to really execute on a very efficient way because you typically have now fallen behind on these projects. Some of these projects have charges to you when you got a time frame to finish these projects into, so you typically have sufficient motivation to get it done, so you don’t run into damage charges.

Steve Ferazani – Sidoti & Company

Moving forward, seeing the backlog is still very strong, can we look at this sort of profit level as being reasonable barring seasonal factors?

Andrew Schmitt

Yes, I would think so. Typically, the third quarter is not bad for us weather wise either. You simply deal a little bit with some slowdown sometimes at the end. But for the most of part, second quarter last couple of years, we used to say it was a toss up between the second and third quarter and that was historically true. Since we’ve owned Reynolds, the second quarter seems to be the better of the two parts, but by and large, when you look at the infrastructure group, they've got the backlog in the business, they execute, we don't have any problems on job. Typically, it's not going to be too much difference.

Steve Ferazani – Sidoti & Company

Okay. Just on the Energy side, any idea what’s the trend now with daily production, where do you think it will be at the end of the quarter?

Andrew Schmitt

It’s steady and moving up. We’ve got a number of well completions we'll bring on. The weather hurt us there in the first quarter or two, we sort of stepped it up. The gas is hedged. I wouldn't expect a lot of change in Energy. The spot prices that were higher for the gas that we had on spot price which is not a lot, maybe about 15% to 20%, they’ve come down as people have seen the pull back in gas prices. We were a little bit amazed that the gas prices particularly late spring went up as high as they did and you can see from our forward-selling gas that last hedge for gas, we move on that Southern Star line at $10.50s, pretty amazing. So we were glad to lock that down. But we should be – and that will be reflected in next year’s average price.

But it should be pretty steady in Layne Energy infrastructure. The weather should be good. We will deal with the balance of the wet season's tail end of it maybe because it started early in minerals in the third quarter. It’ll end early but the guys are pretty busy there as well, so it typically would not be as good as the second quarter and historically in recent years has not for whatever reason, so just a cautionary note to maybe look at recent history. We have the second quarter like that. You roll over particularly with the strong July and we had a strong July and you roll over into August, things are not going to be quite as good in August and then it's sort of depends for the quarter. Generally for us that last month of the quarter makes a big difference, improves a little bit, September and then October historically has been a pretty good month.

Steve Ferazani – Sidoti & Company

Great. Thanks Andy. Thanks Jerry.

Andrew Schmitt

Okay, Steve.

Jerry Fanska

Thank you, Steve.

Operator

Thank you. Our next question comes from Richard Paget from Morgan Joseph.

Richard Paget – Morgan Joseph

Good morning guys.

Jerry Fanska

Hi Richard.

Andrew Schmitt

Hello Richard.

Richard Paget – Morgan Joseph

I wondered if we can kind of circle back to some of your comments and I think in the press release you said that as well, I mean you acknowledged that the economy has been getting more challenging and it might have some impact on the company. Nonetheless though, the backlog is up pretty strong, numbers look good. I mean have you started to see some of the projects come out and the bid gets lower or are you just being – putting out some precautionary statements out there?

Andrew Schmitt

The only thing we’ve seen, Richard, is that I would finally and it’s taken quite a while for our business to reflect, say the economy as it is come down in certain sectors, the water well – drilling of new wells which is all set by replacement wells that have to be done, that at this point if you look into that legacy backlog, you’d see that that water well drilling has come down about 30% in terms of backlog.

And if you look at the (inaudible) in revenue, you’d see that we did about $31 million in revenue in water well drilling. Probably most of that is new well construction. And last year we did 40. So when we talk about a decline, it’s all relative, it’s about probably north of 20% plus. But we have not seen that for the longest time. We expected to see it and historically we hadn’t had, not that we do residential wells, but as you know, anytime you have expansion of cities, the suburbs, new mud districts, new wells developers that are building in Las Vegas, building around Phoenix, places like that, we’d benefit from that. It took the longest time, this is first time we’d actually seen it reflected in the backlog and it was reflected in areas that you spec [ph] like the West, where the Colorado, Arizona, and California markets are big markets for us.

As I said, that between this time and the last couple of downturns that we’ve seen in the economy, is we have the water treatment product line this time for groundwater treatment in that legacy business and we didn’t in the past. So when you add up the total backlog, assuming that water treatment business turns over in a similar fashion, then you can’t see it in total either, so the legacy backlog is flattish to maybe up just a little bit, and the bulk of the backlog is in Reynolds.

We said last call that we had not put it on the books yet. We've been given a verbal indication that we’ve picked up a large job at Colorado for the company we bought last November, Tierdael, and we did pick up that job and it was about $55 million, that’s a big portion on that backlog. We’ve been given a verbal on another project out in Colorado area as well which would be a Tierdael project. Again, it’s not on inked on the books yet, but it’s in the $10 million range. So these larger projects, when you’re not chewing into that backlog or replacing what you’ve got, and then you occasionally pick up a couple of big projects, it’s sort of in the Reynolds products line, certainly gives you a nice buffer.

So, we have seen in my comments on the economy or just maybe more general in nature, just given what’s the backdrop which we’ve all seen in terms of reported declines in economic growth both in the US and globally. And clearly, we’ve seen some reports on the mining side of the business where project costs have gone up quite a bit for the miners. I think a recent article is about BHP on the nickel project in Australia.

So when you start to see those things, you may know sooner or later that should roll into your business, but at this point other than water well drilling, we really can’t see it. We’ve seen some junior miners, or maybe heard is a better word, that has had difficulty raising money because of the credit crises, but most of what we’ve heard about are the guys that don’t have the good projects. They probably didn’t find what they were supposed to find, didn’t have encouraging results come back from their lab work. So, as money becomes more discriminating, those guys are not going to be able to just go back in the Toronto or Australian market and raise money.

So, we don’t work for a lot of juniors probably between board long air [ph] major drilling in ourselves, we probably have the least amount of exposure to the juniors. But when you hear about rigs being shut down here that it tends to be junior miners that couldn’t go back to refresh their funding. And at the heart of it, typically it's the project may not be that exciting which is actually healthier for the industry anyway – as I say, money discriminates and it goes to better projects, but nothing really specific that I could point to that we see. As you say, the backlog is good, minerals business is still active, Layne Energy is hedged, so not really a lot at this point, but more just a general comment that we know the economy is getting challenged in the US, we see it in Western Europe, see it less so probably in Asia, but I mean, eventually it rolls around.

Richard Paget – Morgan Joseph

Okay. And then on the acquisition front, how has – anything changed there, are there less buyers or sellers expectations have been reined in?

Andrew Schmitt

We think that they’re – definitely that sellers are little more grounded than we certainly saw them a year ago. There is – we’re still looking at, I think, we've got a legacy, what we will call a bolt-on opportunity we are looking at. It sees more reasonable than the last time, the last couple of times we missed that opportunity, I think that’s the reflection of people just being a little more grounded in their expectation. We have one on the Reynolds product line, one that is very similar to Tierdael. It’s in a market that has a lot of long-term growth, one where we feel very strongly about that if you can look past the current slowdown, in this particular case it’s in Florida, still lots of people, lots of water issues that has a bias towards the treatment side, which we don’t think is going away given both the regulatory and environmental needs. So, we are still looking at a couple of bolt-on. On the commodity side, we would look and wait till that rolls over as we’ve discussed.

There’s not a huge opportunity there, but particularly the junior mining companies get roughed up, things get a little bit tougher in that mineral exploration business. There will be some good opportunities to reach out, pick up some of the smaller companies that would be more a way to regionally consolidate the market for us which we’ve done in the past in the downturn, worked out real well. Pricing is reasonable. The nice thing this goes around is so much new capacity has been added that the equipment you’re buying, when you do that, is going to be fairly new equipment, it won’t be worn out junk that you pick up. So that will be a little bit of a plus versus previous cycles that roll over, not that we are looking forward at that, but if that happens, it happens and that’s where we’d be opportunistic.

Richard Paget – Morgan Joseph

Okay. And then finally, this is a question for Jerry, how should we think about the tax rate going forward?

Jerry Fanska

I think basically, it would be more normalized as it has been in the past. I mean, in essence, we always have these recurring audits going on around the world, but we just happen to get some of those settled in this last quarter which helped us on the – to drive the rate down to 39%. I think it would be more in the low 40s probably.

Richard Paget – Morgan Joseph

Okay.

Jerry Fanska

40s to 44s, something like that.

Richard Paget – Morgan Joseph

Okay, thanks, that's it from me.

Jerry Fanska

Yes.

Operator

Thank you. Our question comes from Jonathan Ellis from Merrill Lynch.

Jonathan Ellis – Merrill Lynch

Thanks and good morning guys.

Jerry Fanska

Hi Jonathan.

Jonathan Ellis – Merrill Lynch

Wanted to maybe just touch a little bit further on the Water business. First off, I know upfront you gave some stats on revenue growth both for the legacy and the Reynolds businesses. Maybe I missed this, but I didn’t catch figures for EBIT growth for the legacy and Reynolds businesses?

Andrew Schmitt

Let’s see if I have got them separate here for the quarter. Jerry, maybe you do. Apparently just for growth rate Jonathan?

Jonathan Ellis – Merrill Lynch

That’s right, yes.

Andrew Schmitt

Okay.

Jerry Fanska

Year-over-year revenue growth?

Jonathan Ellis – Merrill Lynch

Year-over-year EBIT growth.

Jerry Fanska

Okay.

Jonathan Ellis – Merrill Lynch

You’ve given the revenue growth earlier, I think.

Jerry Fanska

Okay.

Andrew Schmitt

I’ve got them together, Jerry.

Jonathan Ellis – Merrill Lynch

Okay. It is easier – I mean if we can – it would be easier to do that offline, if you don’t have it available right now?

Andrew Schmitt

Jerry might.

Jerry Fanska

Reynolds is basically about 20%, a little over.

Jonathan Ellis – Merrill Lynch

Is it 20% higher or 20% lower?

Andrew Schmitt

21%, yes.

Jerry Fanska

And then legacy business is –

Andrew Schmitt

Is that 8% lower?

Jerry Fanska

Again, it’s lower.

Andrew Schmitt

Yes, I would guess.

Jonathan Ellis – Merrill Lynch

Okay, I assume the decline in EBIT for legacy, that’s a function of the new well drilling?

Jerry Fanska

That’s a mix, yes.

Andrew Schmitt

Well, that is a mix issue. If there is anything that we – that is hard for us to guess is when you’re trading that water well drilling decline or water treatment, the water well drilling turns over fairly rapidly, okay, and the water treatment business is certainly on the books and you can look at the absolute dollars. But that water treatment has more subcontracts in it. It is a very small version of the type of projects that Reynolds does, a smaller version. It's not very capital intensive, so if you look at the return on investment and return on assets, it is probably better than the water well drilling. It is also less risky obviously. But it might turn slower and we don’t know until that work gets prosecuted. They eked out of modest revenue increase and you can see the profit decline is down about 10% or 8% year-over-year. I couldn't tell you at this point with the detail that we have, is that because of it, did it slow down a little bit, did the water treatment take over but most of the work was subcontract, and it is 15% mark-up type margins? You really have to get into the bowls of the mix of business to determine that.

Jonathan Ellis – Merrill Lynch

Sure.

Andrew Schmitt

That would be the one caveat that I would offer Jonathan. That is a hard one to get visibility on.

Jonathan Ellis – Merrill Lynch

Okay. All right. And then just on the Reynolds EBIT, interestingly it was up you said about 20% this quarter. And I think last quarter, if I have my numbers here correct, that it was actually down about 50% during the first quarter year over year, and I think CIPP had contributed last quarter’s – I think you mentioned CIPP had improved last quarter and again obviously provided a positive contribution this quarter, but it sounds like the EBIT growth improvement in this quarter probably was almost entirely a function of some of these projects that had been held up last quarter due to weather.

Andrew Schmitt

They had been.

Jonathan Ellis – Merrill Lynch

Okay.

Andrew Schmitt

And remember that is where we had the problem on some of the design, build, construct and pipeline projects? That is where we were literally shut down and stuck in the mud.

Jonathan Ellis – Merrill Lynch

Yes.

Andrew Schmitt

So that was the biggest swing.

Jonathan Ellis – Merrill Lynch

Okay.

Andrew Schmitt

And if they have a good – they should do okay if they again have some good weather on those type projects. CIPP I think has been a little bit of a pleasant surprise. We did not see much recovery there for quite a while. More than disappointing since we bought Reynolds and CIPP was big chunk of the business, then we turned around and bought UIG after that, ran right into the teeth of a real pricing issue in that market. So, it is good to see it is getting back on its feet, but it still got ways to go compared to the margins we had when we did our due diligence in Reynolds back in late 2005.

Jonathan Ellis – Merrill Lynch

Okay. That is helpful. Just on the projects in the second quarter, I wonder – this is just my theory, I'm curious if you can validate this or not, do you think that there were some municipalities that potentially accelerated the time frame for projects, because I know a lot of municipal fiscal year-ends are June 30th, and so to the extent that new budgets were being put in place as of the beginning of July, given the economic outlook perhaps there are fewer budget dollars now than there were last fiscal year that perhaps some of your projects got accelerated to try to get them done during last fiscal year that ended on June 30th?

Andrew Schmitt

Jonathan, it is a good question, and I am not probably close enough for that. I would have to ask Greg Aluce and Jeff Reynolds which I will do. Because unless there is something (inaudible) comes up in the staff meeting, one of our executive management meetings, we just had one last week, and let us say it rises to the point that you hear that from the guys that are doing the municipal work, I don’t necessarily know that I would know that answer. So I will have to go back and ask the guys if they’ve seen anything like that, so it’s a good question. I just don’t know the answer.

Jonathan Ellis – Merrill Lynch

Okay. All right, fair enough. The backlog, could you just – I know you mentioned that Reynolds is a larger portion of the backlog. Do you – I don’t know if you have been able to quantify the mix of the backlog specifically for legacy versus Reynolds, or any other way that you would break it down numerically?

Andrew Schmitt

In terms of municipal versus industrial or types of projects, or what?

Jonathan Ellis – Merrill Lynch

Well, specifically Reynolds versus legacy or treatment versus drilling versus construction. You did mention the municipal mix, but I’m trying to get a better sense for your using specifically your end markets or types of services that you provide.

Andrew Schmitt

Yes, we would have that. I don’t know – Yes, I mean. You have more detail, I don’t.

Jerry Fanska

Of the $478 million I mean basically $340 million of that is Reynolds type of work.

Jonathan Ellis – Merrill Lynch

Okay.

Andrew Schmitt

And the remainder is legacy and geo construction.

Jonathan Ellis – Merrill Lynch

Okay. And it sounds like the bulk of – it looks like it’s about $100 million sequential increase in the backlog. You mentioned the Tierdael contract win but I imagine the balance over the other roughly $50 million of the increase sequentially, most of that did come from the Reynolds side of the business?

Jerry Fanska

It did. I can’t tell you if it’s pipeline or design and build, but it will be probably one of those two categories.

Jonathan Ellis – Merrill Lynch

Okay. All right good. Maybe we could just turn our attention to the mining business quickly. In the past, we’d talk a little bit about potentially some resistance from customers in pushing through price increases and I assume your competitors have faced this recently. And I am just curious, what are you seeing right now in terms of being able to push through price increases on your contracts in the mining business?

Andrew Schmitt

It is probably a little bit too early to answer that. We can give you a better answer as we get into the next quarter, as we start getting down to specific rigs, that they want – where they want them, we’ll be in discussions on next year’s pricing per meter or foot by job.

Jonathan Ellis – Merrill Lynch

Okay.

Andrew Schmitt

It’s a little bit early, but typically those discussions begin probably September or October, they don’t wait too much longer than November. So we probably would be able to give you a better color on that when we talk to Eric Despain and he sort of tells us where we’re getting pushed back or where we’ve agreed to hold the price flat. We’re not insensitive to the articles and our customers' costs rising as rapidly as they have. I mean we’ve seen minerals pricing for gold based metals, I'll say it sort of stalled. For a while, we thought gold might be headed back up. Clearly with the strength in the dollar, it has affected gold and to the lesser extent the commodities. So we are not even sensitive to that and we will get comments from our customers. And in many cases they will share with us just the kind of cost increases they've had on this mining sites, of which we are part of that cost increase.

Our labor cost is going up and the equipment costs (inaudible) said in their press release that was out – it may have been last week that the new rig backlog for them was up 40% compared to a year ago. Australia finished their full year midyear reporting. So clearly you can bet that the costs to do equipment is not going down or any other parts or consumables. But, you can't be anticipate [ph] of the fact that these mining companies are facing some really big cost, steel, they’ve had some big, big end prices.

So it will be a trade-off, it will be a little bit of – but clearly you won’t see the kind of double digit price increases that you’ve seen in the last few years. It’s been coming down each year. We got them in this year as a real arm wrestling match. It will be tougher going into next year, my expectation, because their costs are going up faster than our costs, the bottom line. There is no question about it and we understand that.

Jonathan Ellis – Merrill Lynch

And just to be clear, most of your contracts in terms of the repricing, did they coincide with your fiscal year end or a calendar year end?

Andrew Schmitt

I think mainly it is calendar. They are talking about next year’s program.

Jonathan Ellis – Merrill Lynch

Okay.

Andrew Schmitt

These customers by and large are talking in calendar years, even if their fiscal year differs, even if they are typically down the year. They want that rig and they want a price and they want it fixed for the year.

Jonathan Ellis – Merrill Lynch

Got it.

Andrew Schmitt

But remember now, we pushed a lot of the things that have gone up in price on them, fuel, the labor cap, lot of things that they traditionally have not pay for, they have to supply or they have to pay the increase. So you can imagine, it’s not just our labor rate and rig rates, a lot of that terms have moved on to their side of the ledger. Commodity cycle turns down, some of that stuff will come back and they'll be in a position to insist that we supply and we take the risk on the price but its not the case now and hasn't been for a couple of years .

Jonathan Ellis – Merrill Lynch

Okay. Just the last question on the mining business, do you have, Jerry, the net impact from foreign currency on revenue and earnings?

Jerry Fanska

Not really. We don’t track that necessarily, I mean we don’t have a lot of FX exposure. For the most part, it would be Australian dollars in Africa because we have expatriates in Africa. But since the commodity is in dollars, I try to get the guys to hold US dollar bank accounts around the world, so we don’t convert to local currency until we need it and we control that pretty well.

Jonathan Ellis – Merrill Lynch

Okay, great.

Jerry Fanska

I mean, other than what you see in the financial statements, I mean that’s about it.

Jonathan Ellis – Merrill Lynch

Okay. And then just on the Energy division, how many new wells did you hook up during the quarter?

Andrew Schmitt

Good question. I am about to look and see. I just have to get you that Jonathan, where I’m looking at is weekly, monthly and I even have the August 17th report, but I don't have it how many we have done for the quarter. I’ll have to go back and see.

Jonathan Ellis – Merrill Lynch

Okay, no problem. And then the Cherokee basin, any progress there in terms of expanding your acreage? I know you had been negotiating a deal and that fell apart and I’m curious if you’ve gone back to the bargaining table there.

Andrew Schmitt

We’ve got a fairly active leasing program now in certain parts of the Cherokee basin, sort of extending out, but I'll tell you that so does everyone else, so the acreage there is getting harder and harder to – and to find acreage that you can get pipeline to and everything where you feel comfortable with. It’s pretty tight in that area. I would say it's hard to move the needle on much more except small increments of acreage. We began the New Albany Shale program this month and we've talked to most of the people in the shale that are producers there and they are willing to share some information where this is we get into our pilot program and we will reciprocate. So that makes it nice and we'll just have to see, we need to add another play in Layne Energy, whether it is Cherokee type work in Oklahoma, and I think we've sort of saturated Kansas pretty much except little incremental push out, or in the New Albany or the Powder River or any of the basins that's ought to fit for our type of work.

We won’t be expanding in the Haynesville Shale given the depth and the complicated work there, so we’ve got to stay within our reach and expertise. But we need to pick up another Cherokee basin type property if we are going to continue to grow Layne Energy. We are the one operator that doesn't down-space, and we know from the success that a private company (inaudible) has had and they drill on 80s and MedQuest [ph] our publicly traded company next door, has had and they drill the preponderance of their works on 80s, we are on 160s or about 90% of our work. So, we know we can down-space, pick up incremental returns that are going to be fairly attractive, so that gives us a little bit of a cushion there.

But sooner or later, we've got to reach out 50,000 to 70,000 acres. We have 50,000 in New Albany, 55,000 I think but we will see. We get into that program this year, that’s a shale play, but it’s more sort of a Layne Energy type shale play. It is shallow, 800 to a 1000 feet, El Paso has had some good luck there, Aurora [ph] works there. Quicksilver did, they sold that and they sell mostly their properties to concentrate on the Barnett. So it’s a more modest shale play, one that we think the economics favor. When we look at larger shell plays and it's getting lots and lots of press lately about shale.

Our question about the deeper larger shale plays is what kind of gas price do you have to have to make those work. And our view is that it’s a lot higher gas price than people think. And so when you read about all this gas and all this shale, and it is just a part of the ground, they are complicated in many cases, they are drilling horizontals to produce them and we think you’ve got to have pretty good gas price. In some cases, it’s going to be stark, it's going to be a low double digit price to make those play. So, we like the ones that we can drill down to 800,000 feet and go into drill horizontals for maybe $1 million, not $7 million, and see if they work. So that’s sort of what we’re looking at.

Jonathan Ellis – Merrill Lynch

Great, okay thanks. I appreciate, thanks guys.

Jerry Fanska

Thank you, John.

Andrew Schmitt

Thanks Jonathan.

Operator

Thank you. Our next question is from Ryan Connors from Boenning & Scattergood.

Ryan Connors – Boenning & Scattergood

Good morning and thanks for taking the call and then congrats to you and your employees on a great quarter.

Jerry Fanska

Thank you, Ryan.

Andrew Schmitt

Thanks very much, Ryan.

Ryan Connors – Boenning & Scattergood

I wonder if we could just – first off on the mineral exploration business, just following up on one of the things you discussed with the previous caller there, you're talking about pricing and talking about it from the opposite perspective. You've talked a lot in the recent conference calls and so forth about how you and the industry have been pretty disciplined in terms of adding new capacity. And so I'm wondering if that's still the case and what your view is when we do eventually enter a down cycle, how defensible the pricing gain that you have gotten will be and what that means for profitability?

Andrew Schmitt

Okay. I think when you look at the three major mineral exploration companies, our sales in our Latin American partners Major and Bort Longyear, you still have I think very good discipline between all three companies in terms of the amount of capacity that we've added. And in the case of Bort Longyear and Major, really they have been very aggressive in terms of acquiring companies and adding capacity that way. So, I think when you look at the three companies and you look at the percent of market share they have worldwide in their served markets, you can almost say about half of the market on the exploration side has got some pretty good discipline. When you look in the other half, you run into a lot of companies that are mom and pops and smaller companies that have grown recently mainly because 60% of the exploration is done by the junior mining companies and that's where when the market turns down, it will likely turn down first.

And Major, Bort Longyear, and ourselves all work for the junior miners to the extent that it's the overflow that pops out the rigs that you have. So we won't feel it immediately, though we will feel it, the pressure from the small drilling companies that all of a sudden customers have ran out of funds or don't have access to the credit markets. So that's sort of the natural progression that you would think would happen.

And our large major customers will look at the rigs that have come available and say, “You know guys, we really like you, but we can't sit here and take this kind of price increase or pay these kind of prices when I have got ABC company with five rigs they can give me tomorrow.” And that will be the scenario that plays out. To caveat all of that, these are major mining companies because of their demands on safety, environmental compliance, and those types of situations, they're not going to advocate those responsibilities. So it will be a tradeoff and we will have a difficult time to maintain.

It will probably do is begin to flatten out our prices and then you will see some deterioration in price. We will toughen our stand. Maybe we'll lose some work. You'll go through that normal give and take. We'll just see how much it progresses and how much free capacity comes up from the small people, because clearly Bort Longyear and Major and ourselves are not likely to give up too much market share, not give up on the business, not stack too much equipment. We will tend to defend our markets primarily with our major customers and we'll deal with the smaller junior companies on a one-to-one basis. So it's sort of interesting dynamics as you go through it. It is a hard one to call in terms of how much you will be able to maintain but you will certainly get nicked up, you will get nicked up along the way on the pricing equation. So, we'll just have to see when that happens.

If it is a modest decline, saying it won't really get too far to control and what you will have to know on the opportunistic side is the small drilling companies that are over-leveraged. Once they lose a customer, they might have five rigs working for a junior mining company in Timbuktu, and they might have a difficult time replacing those rigs. And if their safety program, records, everything is not up to speed, they will have a problem. We recently saw that in the Democratic Republic of Congo, probably the toughest market in the world to work for and to work in, and one of the major customers that is very active there. We work on one site, Bort Longyear works on the other site. There was an independent driller that's been around a long time from South Africa that recently got kicked off both sites, and the major companies split the work between Bort Longyear and ourselves. We just picked up that increment and it was all over safety.

So, the world has evolved quite a bit and it advantageously sold large very sophisticated companies in the mineral exploration business. It's just not the local driller and the local good old boy and the field superintendent’s good friend. Safety and environmental compliance are big issues any place you go in the world, and safety was a big issue in the Democratic Republic of Congo and that market is just in its infancy and recovering from years of war. But, it is a big issue and it was big enough that the largest project in that country is being drilled by Layne and Bort Longyear and no one else. So, that's going to make it a little bit different dynamic and probably makes that pricing discussion one that is not going to change as much as we've seen in prior declines in the industry. Barring some type of Asian financial crisis decline which – who knows if we went through that again, but –

Ryan Connors – Boenning & Scattergood

Okay. That is very, very helpful. And then over onto the water business again, I wonder if you could talk – you've talked in the past about the industrial side of the business being an area that you see as having not only strong top line growth potential but also a better, in many cases, better profitability on some of the projects. I wonder if you can just give us an update on where you stand in sort of going after that market. I know you’ve talked about making some internal changes to focus your people on that market. Just an update on that and it would be helpful.

Andrew Schmitt

Yes. That is one of our primary goals. We said strategically, we are going to improve the margins in our Reynolds product line as well as our Layne legacy. That’s pretty much key. We felt like the power industry would play a big role in that and we didn’t want to find ourselves just serving the industry on the water supply side, as we definitely merged it in the waste treatment, water treatment side and that was important for us to break into. I'll have to say, and we also said it was going to be a slow go, and clearly it is. We are looking at reorganizing in our treatment product lines to bring better focus to that group as opposed to be so, I'll say, sort of integrated in our day-to-day base businesses, try to give them a little bit more higher focus and concentration. So, we are shifting that from being the pull through – from having the pull through in the – always been, everything having to pull through our district offices as opposed to get a little bit of stay-on-the-line focus to that effort, and that will help us. I can’t tell, Jerry, unless you can that we’ve made much improved in that area in terms of projects. They come to my mind, outside of (inaudible) medical waste treatment continues to grow. That’s the thing and there we obviously purchased our way in as opposed to elbowed our way in, Ryan.

Ryan Connors – Boenning & Scattergood

Okay. And then finally, just on the Cured In Place type business, it seems to be an improvement there. Business seems to be performing pretty well. Obviously, there’s been a lot of news flow around your big competitor there and then internal changes to that organization. I wonder if you can just talk about either pricing and the volume and the health of that market.

Andrew Schmitt

I think on the pricing side, we said last time and that’s been the case although we’ve not seen a return to pricing in the 2004 or 2005 era. We’ve seen the crazy pricing which just got to the point that it was approaching people’s costs has disappeared. At least the craziness has gone out of the market. On the volume side, it’s surprised us a little bit that our mix has tilted towards some of the larger sewer line jobs and there’s also a mix within mix there between the smaller pipes and the bigger pipes, and that’s been a help in terms of improving that overall profitability. I don’t know that I’ve seen any rapid big jump up, big recovery. It’s just a slow recovery in pricing first and some mix improvement for us. Guys have had good execution on the jobs they've done, that’s also reflective in that number. I'd say that the US CIPP business is still sort of moving along but it’s not jumped up like we’ve seen in the Reynolds design and build projects, for instance, or the big pipeline projects. It's just sort of gradually getting better in the US, and hopefully that will continue, but it will not surprise me if we were to flatten out and stay about where we are in the balance of the year.

Ryan Connors – Boenning & Scattergood

Okay that’s all. It was very helpful.

Andrew Schmitt

I am not seeing these things and say okay, here is the next wave coming or we’re seeing more pipes, we're seeing cities with less choice on what to do, no, that's not the case yet.

Ryan Connors – Boenning & Scattergood

Sure. Well that detailed and very helpful. Thanks again for your time.

Andrew Schmitt

Yes, thank you Ryan.

Operator

Thank you. Our next question comes from John Rogers from D.A. Davidson.

John Rogers – D.A. Davidson

Hi good morning and congratulations as well on the quarter. A couple of housekeeping things, first, in terms of depreciation and amortization, I am sorry if I missed it, what was it in the quarter?

Jerry Fanska

The second quarter is $12.9 million, basically.

John Rogers – D.A. Davidson

$12.9 million?

Jerry Fanska

Yes.

John Rogers – D.A. Davidson

Okay. And then, I guess just to follow up a little bit in terms of the rate from the mineral exploration business, I mean as you go into your negotiations for calendar 2009, do those take place at the end of the year?

Andrew Schmitt

Generally in the early fall.

John Rogers – D.A. Davidson

Okay.

Andrew Schmitt

They will start. They probably have had some discussions with some of the majors now, and I used the DRC, and those discussions in that area are probably already taken place because of accessibility, customer has to know, it would be very difficult to replace our sales or abort, arrange projects, they can't take any surprises, it takes a long time to get equipment over the border, still trouble there. So you'd expect those to line up first, places where that’s not as big an issue, make them wait a little bit longer and they have to have an idea of what they can spend. So, a lot depends on the customer, big or small, you don’t know when they have the funding and they generally let us know. We’ve got budget next year, how many rigs, we’re happy with the pricing we’re currently paying you guys, and we’d like to stay there, what are we looking at?

John Rogers – D.A. Davidson

Yes.

Andrew Schmitt

So that’s going to start pretty soon, but again, a lot of times it depends on where that job is and how much lead time they need. And my guess is when you get into more difficult parts of the world, those guys will know what kind of budget they have, because they just don’t have the luxury of time to wait till the last minute.

John Rogers – D.A. Davidson

And as you think about it right now, I mean, if rates were to hold where they are right now, with what’s happening in terms of your costs, how much margin risk is there?

Andrew Schmitt

If they hold, well, we –

John Rogers – D.A. Davidson

I guess what I am asking is, your margins in that business swung pretty sharply over the last couple of years. The whole cycle's played out. I’m just trying to get a sense of, are we looking at two, three-year decline in margins there or is there – with the consolidation in the business, do you think it holds at a certain level for fuel to stop start pulling capacity out?

Andrew Schmitt

If the business stalls out, one of the big issues has been labor. And if the business slows down a little bit, rigs become available, become stacked. Our people understand with the kind of wages we’ve been paying and kind of increases we’ve incurred, the kind of bonuses we played, that’s going to come down as well. We try to keep as much as possible the cost very variable and the expectations will be a little bit grounded there. I think there will be a certain percent. When you look at that margins, could you slip down from the current 25% and all of a sudden see 2% or 3% declines in that area in the cost that go up for us and we can't pass on. Yes, definitely, I think you could definitely see some movement back in that area along those lines because, you've got a labor component, you've got a benefit component, you've got a security component, you've got the cost of the camps, the cost of food. There are certain things that if we couldn’t pass on to the customers and at least cover that, you’d see that reflected in our margins, no question about it.

We've been pushing the people on the rigs pretty hard. So when you talk about efficiency, that’s hard to reach out and get greater efficiency improvement. So, the capital cost, until the guys that are supplying the capital goods backlog starts to weaken, they’re going to be in the driver’s seat in terms of pushing through price increases. We all know the steel cost is going up, things like that. So we could see on the capital side and the consumable goods side, a situation where we’re paying for rigs and consumables that if we can’t push those through to the customers, we may be out of source there a bit as well. So those will be the two issues I think to look at.

But clearly, you can see some return given where we are right now the margins are as high as they have historically ever been, I dare say that’s true for Major and Bort Longyear and any number of companies operating out there. And they’ve moved up to the point that they’re over and above the last boom that we saw, the 1995, 1996, 1997 it peaked, and they’re above that now. So, clearly we’re covering our cost and then some worldwide and you would give up. Would they come back down to a 20% level? I think that’d take a pretty good decline. It would almost take a change in terms too.

In other words, we’d have to be hooked, on the hook for the fuel and things like that. You'd have to see price in terms move back in our side of the ledger, so not impossible. I think at this point too, one of the things we would look at is if the decline does come like that, you’d probably see Layne more acquisitive. So, you’d see something you have to scratch your head over and take a deep breath and so with our Board and when we say, "You know what, things are not as good as we thought they were going to be in minerals and that’s bad news, but the good news is we’re getting ready to pick up the driller in this location or that or this." So that’s where your longer term view of how strong for how long and in this case, what kind of downturn and those type of dynamics come into play. So, there’s a side of me that doesn’t look forward to that day but also know that there’s more than a silver lining when that happens.

John Rogers – D.A. Davidson

Okay, that’s very helpful. Thank you.

Operator

Thank you. Our next question is from Steven Fisher from UBS.

Steven Fisher – UBS

Hi good morning.

Andrew Schmitt

Hi Steven.

Steven Fisher – UBS

Hi, Andy, on the MinEx, I mean, the affiliate income was significantly above the trend. I’m wondering how much of the trends you’ve just discussed in terms of kind of flattening pricing and some volume weakening over time, I mean of how much is relevant to Latin America and can you sustain the run rate that you had in this quarter?

Andrew Schmitt

You probably can there, Steven, because they have bigger projects, they’re locked in for longer periods of time, the mines that they work on are by and large bigger. And if you look at the historical, that business historically, that business did not recover as quickly as our wholly-owned business because our contracts are shorter and our philosophy is we don’t lock up for very long, so we have more volatility in our wholly-owned component.

By the same token as the longer-term contracts, which from the last downturn weren’t very attractive to our partners, when they finally did shed all of those, they end up with a more stable, profitable base. And I would give you the best number to look at of all in the last decline which was brutal and lasted five years and saw almost 80% of the market literally disappear at debt. They never lost money.

So, you can see there’s a lot more stability in that component, so it’s slower to rise and they tend to be late stage, they tend to last longer and they’ve got good contracts, good work in place. So this time, as opposed to suffering longer after the last decline, they will probably benefit longer than our wholly-owned business. So that’s typically the way it goes and the bigger mines and their customers want to see the longer contracts, (inaudible) and those types of projects. So that’s typically the way it works and I would not expect any different this go around either.

Steven Fisher – UBS

Okay, that’s helpful. In terms of the water business, it sounds like we’re going to see a shift in the mix away from legacy into the Reynolds side, how would that be likely to affect margins going forward?

Andrew Schmitt

The Layne legacy business on total is only, if you looked at it on a fully allocated cost basis, it’s only a couple of percentage points when you look at operating income, higher than the Reynolds business when you have typical mixes for both of those business. So if his legacy sags and Reynolds grows by the same amount, you might see a 1% in operating income, 1.5% delta to the bottom line by the time you get to Layne Christensen’s numbers. So overall, it'd be a big negative shift when you look at it from an operating income line.

The Reynolds advantage of the Reynolds products is by and large when their business declines, their costs are more variable and they will not suffer as much and didn’t historically when we looked at their historical numbers prior to the acquisition as much as Layne legacy. Layne legacy is a little bit more like mineral exploration in that their cost structure is a little higher fixed cost, because of the drilling and that becomes more difficult for them to shed costs. So, if the thing comes down, when you look at the three businesses we have or four, Layne Energy, they have hedges so they are not going to have a difficult time. Bottom line is that is a big luxury being able to hedge.

Mineral Exploration, tough time. High stakes as well as variable cost business of our service businesses. When that business starts to come down, those guys will really tighten fight an uphill battle. Reynolds, probably have the easiest time of them, margins aren’t as big, costs are more variable, business comes down, they lay off people, they are never staffed up even though the business is almost double in size. And Layne legacy will fit somewhere in between it.

So that will be the way it tilts. Minerals is tough to offset, Layne legacy halfway tough to offset, Reynolds easiest to deal with, and then Layne Energy, our philosophy has been to hedge, so we tend to take a lot of the risk out of that. This is the way it plays out.

Steven Fisher – UBS

Great. Just a couple of quick ones on the energy business. How long do you think it might be before you have some good sense of the production potential at the New Albany Shale?

Andrew Schmitt

I would tell you really next year. We are only going to drill five vertical wells, we won’t try to drill any horizontals. We've talked to a couple of the operators, both Quicksilver that left and they have said, "We will share our information with you.” We’ve talked to El Paso and they have said, 'We’ll share our stuff. You guys tell us what you found." And so that will help us improve our overall knowledge, even over and above our pilot program. We’re in an area that is essentially undrilled in the New Albany Shale, it is more shallow than where the drilling has occurred. The shale takes a while to analyze what you got. It is a tougher code to crack, so if we get started September, we get our five wells drilled, go to the lab, look at the work, experiment, probably try a couple of different techniques, go back to some of the operators and scratch our head a little bit, so maybe sometime in the first quarter next year will have some indication of either we’ll be hopelessly confused – took us a while to figure out Turkey basin to make it productive too. I mean we went through – it was a year before we figured the thing out, so I think New Albany is tougher.

Steven Fisher – UBS

Okay. Lastly, I am not sure if I miss this but any further thoughts on the Chilean acreage?

Andrew Schmitt

We’re at NAPE as we speak, second day of Summer NAPE down there with our project as an exhibitor and talking to a lot of people based on the report I had yesterday about looking at a partner if they want to do some resharing with us, going forward as we move from the core data and the information with geological information to the pilot program stage. The bigger show at NAPE down in Houston is February, so – and you get a lot more people on the international side at that show. Right now, Summer Nape is still well attended in today’s world but we’re probably one of only a handful of – maybe the only international project down there. So we probably expect to be back in February and Summer NAPE as well. We need to make a decision in April vis-à-vis the acreage and our contract with the government as to whether we want to put up a letter of credit to basically lock down next year’s drilling program. Our preference would do for two reasons, we get a partner, share some of the risks going forward as we get into the pilot program which is more expensive and also find a partner that brings some operating skills to the table as well, so the entire burden doesn't sit on Layne Energy which as you know is a pretty small organization. So we’re busy in Cherokee and we are busy in New Albany. It really, really stretches us if we have to do that whole pilot program ourselves in Chile by ourselves.

So I told the group, find somebody who is in E&P operator to bring some skills to the table, some people to the table so we don’t have to shoulder that burden ourselves. So let's see – our expectations with the number of attendees you have in Summer NAPE is not that high at February, but this is a good dry run for us, we will see where we shake out. We can hold the concession another – through April of 2009 or 2010 if we want to go ahead and just put some money that backs up our drilling program. We always have that option.

Steven Fisher – UBS

Okay, great, thanks a lot.

Jerry Fanska

Thank you.

Operator

Thank you. Our next question comes from Michael Nicolas of Lakeview Investment.

Michael Nicolas – Lakeview Investment

Hi gentleman, congratulations on a great quarter. One question that I have Andy is it relates to a longer-term strategy in the energy division, would there be any consideration or intention of potentially spinning off this asset as the market is obviously not giving you full credit and somewhat of a holding company or conglomerate discount for that specific segment and obviously there is a market for that asset and as you see – as you mentioned before, some of the competitors that are in that space and if you look at the constellations of the QRCPs of the world, and maybe the lack of synergies for the most part relative to some of the other business segments that Layne has, would that be an intention of management at some point in the future?

Andrew Schmitt

I don’t know if it’s an intention, I mean, the energy property is probably the easiest one in terms of benchmarks or M&A values, asset value – so from the standpoint, if you just wanted to go ahead and get out of that product line, it is probably one of the easiest ones to do just given the transaction nature and how fluid that whole energy market is. I’d tell you it is a little bit probably in terms of the robustness of that market given away the gases prices, it has sort of changed in the last 90 days quite a better or probably I don’t know. I think we had $11.42 gas price July 1 in Southern Star; today’s price is about $6.90, so when you look at those kind of swings, probably not – everybody has gotten sobered in the space of about two months.

So I don’t know if timing-wise, that would make a lot of sense. I think the decision would be if we could not grow that business, add something to it, like another Cherokee or make an acquisition, then that would definitely be something this company has to consider because you are right, we may or may not be getting the value and so it’s hard with Layne with our multiple product line to gauge that. The company has traditionally has tried to – Layne Christensen is pretty good – when we have earnings, the Wall Street tends to reward us. So we have less risk in terms of – given the – if you say conglomerate or multi-industry business, Wall Street seems to look at it, add it all up, put a multiple on it. We've got pretty long history now as a public company so when we've had earnings, we’ve always been able to look at where the company typically trades, so we typically get pretty good value for earnings and Layne Energy has higher return on capital than we can normally achieve in water or even minerals when you look at it over time.

So it is pretty good return, pretty good money for us but we have to do something that’s not a business with decline curves and not picking up perspective acreage that you can sit on your hands. Let’s say we have the luxury of down spacing but we are not sitting on all ours because of that. And if you look at some of the small and big companies, we just had a Board meeting, we talked about this in terms of when you look at opportunities in water, we certainly get a lot of press; minerals, that has certainly driven earnings for us. But when you look at energy and you look at some of the smaller E&P companies, publicly traded for sure, as this market gets tougher and tougher, there appears to be more and more value there and some have had some notable problems in the recent times and you are probably familiar with them. So when you look at it on the other hand of that equation, you will say, boy, Layne with its multiple-industry model is different than most energy players but when you get into the smaller energy players that we have the same competitive advantage with earnings coming from multiple streams, multiple products on an unlevered balance sheet. So when we discussed at our Board meeting, we looked at potential opportunities and deals out there. There were actually more on the energy, both public and private side, than were any of our businesses. Now, part of that is because if you look at the market, as we said, there are lots of transactions. There are plenty of people at NAPE in the Summer show and there will be whole, whole bunch here in February, particularly if these gas prices stay down. So we tend to look at some of that opportunity with a different side of brain and say, we do get a little bit tweaks [ph] in between and we don't lose sight of that and so – but I do not think it is an intention. It’s always a possibility given the many options we have on the energy business.

Michael Nicolas – Lakeview Investment

In terms of potential drilling locations on the undeveloped acreage today at 160 acres basin, how many potential locations do you see, around 1000 or 1200?

Andrew Schmitt

We have 214,000 I think acres in Cherokee. We have got 510 [ph] some odd wells. We have got about 80,000 – call it 82,000 drilled and you got 214,000 acres there. So if you were to divide that by just 160 and say they were all drillable, you've got about 132,000 acres on 160s, it will be about 825 locations. We drill about 90 to 100 wells a year.

Jerry Fanska

If you went to 80 acre spacing –

Andrew Schmitt

You’d double it if you went to – about 90% of that going to be on 160s, so yes, you'd double it if you want 80. And the pace we go at, they are much more aggressive people in terms of the amount of drilling they do. But again, we allocate capital in the multiple industry, so I mean that’s always going to be the case with us. We are going to allocate it. It will all be pretty evenly balanced when you look at it, Michael.

Michael Nicolas – Lakeview Investment

Okay, thanks guys.

Operator

Thank you, our next question comes from Bill Doyle from Columbia Wanger.

Bill Doyle – Columbia Wanger

Hi. On Chile, right now, your ownership of the property is 50%?

Andrew Schmitt

We have 85% in Layne Energia that has the concession, Bill.

Bill Doyle – Columbia Wanger

Okay, so it is at 85, so you have plenty of room to farm down if you could find –

Andrew Schmitt

Oh, yes, and our partners would do what we want to. They have the other 15%, but it's – our Latin American partners are the same partners. So if we said, we'd like to give up 30% or 40% and bring in this partner, they would not be an impediment either; they would say fine. This operating partner would go along for the ride.

Bill Doyle – Columbia Wanger

And this is focused on CBM?

Andrew Schmitt

It’s CBM; there is no shale play. We do have the rights to the conventional gas, ENAP drilled deeper wells in the '70s; I think about five. The Chilean National Oil Company, they had one producer. They abandoned the other four, again that was in the '70s. So if you ask me, did they use all the modern and complete technique, no, no, no. That is pretty much an unknown in the Rafo [ph] basin. But most of what you see in the conventional opportunity in Chile tends to be way far south or offshore in southern Chile and there you see BP and Shell, some of the bigger interest. The Rafo, in terms of conventional gas, we have the rights to it but it’s pretty much an unknown and our focus, given our expertise, is not conventional gas; it is CBM at this point. And most of that gas is going to be found in the 700-meter range, maybe 1000 meter range, so that is where you find your CBM. But no shale that we saw on the cores that we would consider to be shale that you could develop.

Bill Doyle – Columbia Wanger

How did the gas in plays look on the cores you drilled?

Andrew Schmitt

It’s varied from – well, you can imagine the location. We went from south to north over 720,000 acres. So it varies but when you look at the better cores that we had standard, cubic feet per ton was about 200. We're about 110 in Cherokee, so about double Cherokee. One of the real issues on that property though and we knew coming in, but I think even as you get down there and start working in the environment, the bigger issues is infrastructure and the oil and gas service support structure. And that is the Schlumbergers, the Halliburtons, the Baker Hughes. That whole oil and gas service structure is not in place anything like it is in the Cherokee Basin or some of the big basins.

So two big challenges. Probably the bigger challenge if the gas was there would be the cost of the infrastructure, and then the oil and gas services that are not established in those parts of the world. They don't exist in a real established way in the more conventional part – the deep part of southern Chile. But if those guys find something that will be big enough to attract Halliburton or Schlumberger and those type of service companies on a regular basis, the question in coal bed methane more modest is would you really or would you have to expect that you would have to establish that service network or do it yourself. We used to do that in Layne. We did our own fracing, perforating, drilling, so we used to handle a lot of that. So we're probably pretty well positioned to take on that project. If you ask me, would I want to do that again, the answer is no. I'd rather get somebody else. But if you ask me if I have the frac pumps sitting in Chile, the answer is yes, they are there. So we've built them at our operation in Italy. So we have forgotten how to do it Bill, but I'd rather get somebody else to do it.

Bill Doyle – Columbia Wanger

So big acreage base, 720,000 acres. The cores look good.

Andrew Schmitt

Carve it up, say, about a third of it might be prospective. And that would be what you're looking it. You'd hope it would be in the northern tier, where you can push that gas to Concepcion, where the market is. There is work in the pulp and paper industry and some of the bigger industry around that area and then you would want to get into the consumer market which is well-established, but now being underserved because of Argentina's problems. Delivering gas and willingness to do it, so that's where you would have to be. You'd hope it's in the northern tier about 200,000 acres. You add to Concepcion and you serve the forest products industry.

If it was in the southern part of that property, it might be there, but you would be hard pressed to find a market. You would be pushing that gas a long way, if you were in the Lebu area and had to push it all the way to Concepcion. It's not practical. At that point, the government would have to step in and say, this is a natural resource we want to develop and it's in Chile's best interests and we will underwrite the infrastructure cost or something. We're not anticipating that. Chile is a very capitalist country and that's not historically been what the government has done. They have encouraged people, but it's not something they have undertaken and underwritten, so that's not our anticipation.

Bill Doyle – Columbia Wanger

So to bring in a partner, what would you want to do with a partner there? Just run out a bigger vertical test well program?

Andrew Schmitt

Yes, we would. We would want that partner to step forward, have an interest in paying a share – the majority share of the pilot program. We'd like to do probably upwards to 20, 25 wells. If we had early success with five or ten pilots, then we would shift our money and his money to a production orientation. And we would probably stop experimenting, so we could generate some cash and start letting the project begin to pay some of the cost itself. So we would be flexible with that and a partner and use good common financial sense. But we would like somebody to step forward and say, "Hey, we'd like five spots," and they say "Well, maybe I'm good for one or two." That would probably be okay, but we would probably be less willing to give up – the more they'd want to sign up for, the more we would be willing to say, "Okay, we would be happy to share in a bigger way the equity in Layne Energy or the working interest or whatever you work out."

Bill Doyle – Columbia Wanger

Has Chile seen natural gas price move like the rest of South America, some of the other developing countries?

Andrew Schmitt

They have and I really wonder – Chile has a couple of dynamics, some that affects southern Chile, some that don't. There are two LNG plants going into Chile, they are probably going to serve Santiago and North and Chile would probably not be at the top of the list in terms of who gets LNG if it gets allocated. So I think they are facing some tougher higher costs than they would have ever imagined. Neither one of those LNG plants is really set up to serve the southern quarter if you will of Chile, or the southern quadrant, however they set it up. So that's really not an option for the southern area. So although we look at LNG and the allocation and whatnot, we don't see LNG being a competitor for us in this area. Their opportunity in the southern part of Chile is probably number six diesel. So when the gas come from Argentina, they felt it in two ways. They now had to convert back to number six, which was environmentally not attractive, it is natural gas certainly, and was being affected by the overall cost of diesel and the oil prices. So in that sense, I mean, it's still a real challenge for the country if they want to maintain the economic growth they have enjoyed for a number of years. So it's a tough equation. And where the bulk of the need for gas is in Santiago and North, with the mines – it's still looking tough, even with the LNG plants coming in. So no real easy answers as long as Argentina is finding they need more gas than they thought years ago.

Bill Doyle – Columbia Wanger

Can I ask one MinEx question then?

Andrew Schmitt

Sure.

Bill Doyle – Columbia Wanger

Can you just go a little bit farther than what the release did as far as the big jump in pretax there, both sequentially and quarter over quarter? It looks like the biggest driver you said is the affiliate.

Andrew Schmitt

Well, they have the greatest relative change compared to the prior year.

Bill Doyle – Columbia Wanger

Yes.

Andrew Schmitt

And they had a number of contracts that, for a long time, they had been increasing but fairly modest and it was as they dropped the old contracts.

Bill Doyle – Columbia Wanger

Okay.

Andrew Schmitt

Now, pretty much what you are seeing are all the old contracts are gone. They've got new pricing. They obviously had a good run in terms of their execution as well, so they had a bigger relative change and that's not been the case versus our wholly-owned business in the past. Okay, but it took a while to work the contracts off and now they are at contracts that are more like the rest of the industry is working at. They have always been excellent at their execution; very, very cost-conscious group. And so when they get ahead of steam, they can really produce some numbers. Again, if you're looking at our share of the after-tax net income and we own about 45% to 46% of the various companies that produce that, so you can sort of do your math and look at just how profitable a business that is and historically has been too. They are at 9% after-tax net income. So –

Bill Doyle – Columbia Wanger

As a percent?

Andrew Schmitt

As a percent. Yes. If you were to look at the entire business wrapped up down to the bottom net income, that's the kind of range you're looking at, so that's a very good business.

Bill Doyle – Columbia Wanger

That helped, plus your wholly-owned gas price execution and weather, all –

Andrew Schmitt

Yes, we had trouble in West Africa. We started with the rain earlier than we expected and it was heavy in Mali, Burkina and Guinea particularly. And so, yes, it surprised us a bit. Hopefully if it comes early, it will end early, but we've found that that doesn't always work that way. So we'll just have to see. But normally, we would expect that in the third quarter in West Africa to really hit us on top of the head. Did a pretty good number of about four to six weeks of this – and we were caught off guard, so –

Bill Doyle – Columbia Wanger

But for you – just looking at the release, your revenues were up, what, 28%?

Jerry Fanska

Right.

Bill Doyle – Columbia Wanger

So that's not all price; were you putting more rigs to work?

Jerry Fanska

Yes. And we have a new operation in Canada, which is performing well.

Andrew Schmitt

Yes, that's right. We have the Canadian operation that we didn't have a year ago.

Jerry Fanska

North America, including Mexico, still performing quite well and other than West Africa, Africa performed quite well.

Andrew Schmitt

Yes, it really did. We had improvement in Tanzania; that market we had a bit of a problem with last year. And the numbers are quite a bit better coming out of Tanzania. We're running probably not more rigs, probably running less and making more money. That was a problem last year; we were running too many. And the DRC was in the startup last year.

Bill Doyle – Columbia Wanger

Okay.

Andrew Schmitt

We were still struggling to get equipment across the border, so we've got our rigs in the DRC now. So DRC, Tanzania are the reasons that it – you are showing improvement despite the decline in West Africa.

Bill Doyle – Columbia Wanger

Tanzania, is that just in drilling days where last year rigs were there but weren't running as much; you're getting paid –

Andrew Schmitt

Last year, we had all sorts of problems. Last year in Tanzania, we spent – we were scattered from pillar to post. We were trying to run 30 rigs. We took a lot of those rigs and moved them into the DRC. And we downsized the operation. And I think we're only probably running 12, 14 rigs. We were killing ourselves last year trying to satisfy every possible request we got from a customer, and it just didn't work out. You can get too scattered on these remote locations and being scattered in that part of the world doesn't work. In the DRC, we were on one location. We recently moved to another but for the same customer at their request. We just can't get too scattered out there. You've got to concentrate your efforts. We forgot the lessons that we should have learned five times over.

Bill Doyle – Columbia Wanger

But the revenue change there though, there has to be some kind of – you are getting paid in part based on activity; it's not like it's just a quarterly revenue run rate, right?

Andrew Schmitt

Yes, you are looking at the pricing that's probably in effect this quarter and the balance of the year in terms of the price and you're looking at the rig utilization. I think the bigger issues for us going forward is twofold, execution and weather.

Bill Doyle – Columbia Wanger

Okay. Thanks for all the time. I appreciate it.

Operator

Thank you. Gentlemen, I currently have no other questions in queue.

Andrew Schmitt

Okay, thank you, Matthew. Thanks, everybody. I appreciate your interest, time, patience and we will see what the third quarter brings, and again, we will give it our best shot. Thank you much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This conference will be available for replay after 1 PM Central Time today through September 4, 2008. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 and entering the access code 957446. International participants, please dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 957446. This does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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