Superior Well Services, Inc. Q2 2008 Earnings Call Transcript

Sep.21.08 | About: Superior Well (SWSIP)

Superior Well Services, Inc. (SWSI) Q2 2008 Earnings Call August 7, 2008 11:00 AM ET

Executives

David Wallace - Chairman and Chief Executive Officer

Thomas Stoelk - Vice President and Chief Financial Officer

Analysts

Jeff Tillery - Tudor Pickering & Co. Securities

Stephen Gengaro - Jefferies & Co.

Joe Agular - Johnson Rice & Company

Victor Marchon - RBC Capital Markets

Operator

Welcome to the second quarter 2008 Superior Well Services earnings conference call. (Operator Instructions) I would now like to turn the call over to Dave Wallace, Chairman and Chief Executive Officer.

David Wallace

Joining me today is Tom Stoelk, our Chief Financial Officer.

I'd like to remind all those participating on the call today that a replay of our conference call will be available to listen to through August 22, 2008 by dialing 888-286-8010 and referencing the conference ID number 72871353. The webcast will be archived for replay on the company's website for 15 days.

Additionally, our Form 10-Q will be filed later today and will be posted on the company's website.

Before I begin with comments on our second quarter operating performance, I'd like to make the following disclaimer regarding our call today. Except for historical information, statements made in this presentation, including those relating to acquisition or expansion opportunity, future earnings, cash flow and capital expenditures are forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Act of 1934.

All statements other than statements of historical facts included in this presentation that address activities, events or developments that Superior expects, believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions made by Superior's - based on management's experience and reception of historical trends, current conditions, expected future developments and other factors that are believe appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond Superior's control, which may cause Superior's actual results to differ materially from those implied or expressed by the forward-looking statements. These risks are detailed in Superior's Securities and Exchange Commission filings.

The company undertakes no obligation to publicly update or review any forward-looking statements.

I'll now provide an overview of our second quarter operation.

After experiencing a few tough quarters, increased drilling and well completion activity, coupled with an improved pricing environment, resulted in a strong second quarter. I'm pleased to report that we set new company records for quarterly revenues and EBITDA. The company posted a 41% year-over-year growth in revenue and a 15% year-over-year growth in EBITDA.

We also experienced sequential improvements in utilization during the second quarter as customers increased their activity and reset their capital budgets higher in response to strong commodity prices.

While earlier in the year it was predicted that E&P capital expenditure budgets would be up 3.5% in 2008, the midyear update of the E&P Spending Survey issued in June by Lehman Brothers upwardly revised this number to 15%.

With the U.S. rig counts up 9% year-over-year and 6% higher than the previous quarter, the fundamentals point toward continued growth as we forecast demand for our services for the rest of 2008 and into 2009.

Although second quarter performance improved from the first quarter, gains were uneven across our operating region. We experienced the strongest increases in activity and utilization in the Southwest, Appalachia and Rockies regions. We continued to prepare operations serving the emerging Haynesville and Marcellus plays in anticipation of an increasing workload.

Our existing service centers located near these plays already have established relationships with many of the leading operators, providing us with a competitive advantage. We are strategically increasing our presence in these markets by moving people and equipment into these areas in preparation for servicing the need of both new and existing customers.

Importantly, our margins continue to improve. Operating margins were 14% for the quarter, up 840 basis points sequentially from the first quarter of 2008. Increasing stimulation work is driving most of the profit improvement. Our stimulation job count for the quarter is up 41% year-over-year. Higher overall drilling activity, the maturing of our new service centers and the improved service quality throughout all of our locations are all helping to improve profitability.

In previous calls we discussed our take on the then-difficult pricing environment. Rationality seems to have returned to most of the pressure pumping market as other players have realized that returns cannot be ignored indefinitely in favor of market share. That said, we continue to experience pricing pressure in low-tech markets, where an oversupply of capacity persists. In most of our high-tech and super high-tech markets, however, conversation with customers are changing from what's your lowest price to can you get the equipment there on time? A rising tide raises all boats, but not all boats are equally desirable, and time will tell which markets prove to generate the highest returns.

Our focus on service quality continues to differentiate us and our performance is winning us new customers and more business with existing ones. We believe continuously improving quality and performance is the best way to develop a lasting market preference for our services regardless of the business cycle.

We have not been able to insulate ourselves completely from industry cost inflation, and costs continued to rise this quarter. Although we have been successful in passing through fuel surcharges in some areas, higher sand, chemical and cement costs, as well as transportation expenses to deliver materials, have increased the cost of revenue overall.

Our new bulk material handling facilities are also having a positive impact by improving operational efficiencies and strengthening our service responsiveness. Our new service centers opened late in 2007 are gaining footholds in their markets as customers become more familiar with our people and service quality. Every job our crew works on is an opportunity to prove our value and develop relationships, and most new centers are outperforming our original expectations.

I will now briefly run through some of the operational highlights by region, and then turn the call over to Tom for a financial overview.

Appalachia continues to be our strongest region, and this quarter it contributed 38% of total revenue. Revenues in the region are up 30% year-over-year and 28% sequentially, and we expect to see growth in this region for some time based on expectations of an increasing development of the Marcellus Shale play. We pumped about 35 Marcellus stimulation jobs in the second quarter compared to zero in the quarter one year ago. Although the pace of development of this play is still being determined due to infrastructure and water disposal questions, we expect increasing activity in the Marcellus to drive our growth in this region.

In the Southeast, revenues in the Southeast region are up 34% year-over-year and 31% sequentially as a result of increasing drilling activity in the Cotton Valley Trend and the emerging Haynesville Shale play. We reported last quarter that competitors had moved equipment into the area in anticipation of increasing Haynesville work, which created a temporary oversupply of capacity in the region. With the rig count in the area jumping by 40 rigs during the second quarter, we expect that supply and demand equation will come back into balance.

Many of our existing clients in the Bossier market have existing acreage positions in the up-and-coming Haynesville, and we look for this market to be a good match for our technical abilities for working in deeper, hotter, and higher pressure environments. We have an excellent record of performing both stimulation and cementing services in the demanding conditions of the Haynesville and plan to leverage our existing service centers in this area to move up market into this more technical and more profitable high-tech play.

In the Southwest region, revenues in the Southwest region are up 57% year-over-year and 5% sequentially. Most of our work in this region is associated with the Barnett Shale. Despite being able to win new business by focusing on service quality, reliability and responsiveness, the low-tech market for slick water fracs in the Barnett continues to see strong price competition.

Activity in the Artesia, New Mexico market has been building, and there is a potential for us to work on more technical jobs in this area. We received the necessary permit for a cement and bulk plant in Artesia late in the second quarter. Construction was completed and the facility placed into operation in late June. Once fully operational, we expect the facility to improve operating efficiencies and margins.

Revenues in the Mid-Con region have increased 59% year-over-year and 27% sequentially. Activity in the Anadarko and Arkoma Basins has kept our crews busy while our technical group has been instrumental in positioning us for jobs in the nearby Woodford Shale. Our cement plant in Clinton, Oklahoma was still under construction during the second quarter and was placed into operation in July.

Revenues in the Rocky Mountain region have increased 54% year-over-year and 63% sequentially. Activity at our new service centers in the region is ramping up as our service quality becomes better known and increasing customer acceptance. Utilization is picking up in Vernal and Brighton, but our Farmington service center has been underperforming based on our expectation. The Farmington market is tough and geographically confined, but we will continue our efforts to secure more opportunities with operators in this area.

At this point I will now turn the call over to Tom for a review of our financial results.

Thomas Stoelk

Net income for the second quarter of 2008 was $9.6 million or $0.41 per diluted share compared to $10.2 million or $0.44 per diluted share in the second quarter 2007 and $2.4 million or $0.10 per diluted share sequentially for the first quarter of 2008.

Second quarter revenue was $119.7 million and that was up 41% year-over-year and was up 28% sequentially. Approximately $14.3 million or 41% of the total increase in year-over-year revenues was attributable to new service centers opened in 2007 with the balance related to increased activity levels at existing service centers. The sequential increase in revenues can be attributed to seasonality as well as increased activity at our centers.

Stimulation, nitrogen, cementing and down hole surveying revenues amounted to 64%, 7%, 18% and 11% of the revenue in the second quarter of 2008, respectively.

Cost of revenues increased to $92.4 million and that was up 55% from the second quarter of 2007 and was up 17% sequentially. Approximately $14.7 million or 45% of the total increase in year-over-year costs was attributable to the establishment of new service centers, with the balance related to higher material, labor, fuel and transportation expenses that could not be passed through to our customers as price increases because of the current competitive environment.

As a result of these cost increases, total cost of revenues as a percentage of revenues increased to 77% for the second quarter of 2008 compared to 70% in the same quarter last year. Sequentially cost of revenues as a percentage of revenue decreased 720 basis points from the first quarter of 2008 due to better utilization on a higher revenue base.

Here's some additional comments and information on those costs. Material costs as a percentage of revenue increased 570 basis points in the second quarter of 2008 compared to the same quarter last year due to higher sand, chemical and cement costs as well as transportation expenses associated with the delivery of those materials. Material cost as a percentage of revenues decreased 330 basis points sequentially due to increased utilization on higher revenues from new and existing service centers.

Labor expense as a percentage of revenues increased 70 basis points in the second quarter of 2008 compared to the same quarter last year due to wage inflation and lower personnel utilization at our new centers. Labor expense as a percentage of revenues decreased 180 basis points sequentially due to increased utilization as described for the material costs.

Higher diesel prices as a percentage of revenue increased by approximately 290 basis points in the second quarter of 2008 compared to the same quarter last year and approximately 20 basis points when looking at the increase sequentially.

As a percentage of revenues, non-cash depreciation expense increased 90 basis points in the second quarter of 2008 compared to the same quarter last year due to the investments that we made to expand our national fleet. Depreciation expense as a percentage of revenues decreased 130 basis points in the second quarter of 2008 compared to the first quarter of 2008 due to the ability to leverage the fixed cost component of those costs over a higher base of revenue and higher utilization.

Although pricing has improved from the first quarter of this year, higher sales discounts had the effect of both reducing net revenues and increasing total costs as a percentage of revenue in the second quarter of 2008 compared to the same quarter last year.

Margins continued to be hampered by a cumulative pricing environment as some regions are still dealing with excess capacity.

As a percentage of revenue, sales discounts increased by 640 basis points in the second quarter of 2008 as compared to the same period in 2007, and it increased 70 basis points sequentially.

SG&A expenses increased to $10.7 million. That was up 20.8% as compared to the second quarter of 2007 and it was up 11.9% sequentially. Labor expense increased $1.5 million in the second quarter of 2008 compared to the second quarter of 2007, which accounted for the majority of the increase and that was due to really the hiring of additional personnel to manage the growth in our operations in service centers. Approximately $700,000 of the year-over-year increase is attributable to the establishment of these new service centers.

Sequentially, SG&A expenses rose $1.1 million in the second quarter of 2008 as compared to the first quarter of 2008, due in part to increased travel expenses in connection with these new centers as well as increased incentive compensation earned on improved second quarter performance.

Operating income for the second quarter of 2008 came in at $16.6 million compared to $16.5 million a year ago and $5.1 million in the first quarter of 2008. This translates into increases of 80 basis points and 224.6% respectively. New service centers reduced operating income by approximately $1.1 million in the second quarter of 2008.

EBITDA for the second quarter of 2008 came in at $26 million, an increase of $3.4 million or 15.1% from the same quarter last year. Sequentially, EBITDA increased $12.6 million in the first quarter compared to the second quarter of 2008.

Net income in the second quarter of 2008 declined to $9.6 million. That was a decrease of approximately $600,000 in the second quarter as compared to the second quarter of 2007 as a result of the increased cost and higher sales discounts mentioned earlier. Sequentially, net income increased $7.2 million from the first quarter of 2008.

We ended the quarter with approximately $55.7 million of working capital.

Total debt at the end of the quarter was approximately $36.5 million, and the company's debt-to-market capitalization on that date was less than 5%.

Capital expenditures for the quarter were approximately $23 million, and that brings us to approximately $50.6 million for the year. We recently increased our 2008 capital expenditure budget to $75 million. That's an increase of $10 million from the previously authorized levels. These additional planned investments will be targeted to continuing the capabilities - to increasing the capabilities of existing equipment for working in deeper and higher pressure environments.

At this point I'll turn the call back over to Dave for some additional comments.

David Wallace

To summarize the quarter, increased drilling activity helped balance the oversupply of horsepower that existed in some markets. We've been watching the new shale plays heat up, have been strategically moving equipment and personnel to existing service centers in the areas we forecast to see an increased demand as the plays develop. Utilization has improved, and our newer service centers opened late in 2007. And we expect to drive growth through the next few quarters by selectively adding additional equipment to existing service centers, where demand for our services is building. Although costs are up, we're taking steps to improve efficiency and our return.

We continue to believe that our business strategy based on high service quality and increasing our market share of more technical work is the right one for growing long-term shareholder value. Looking forward, market fundamentals point to a strengthening in most pressure pumping markets. As production decline curves deepen, operators look for ways to increase recovery and the search for oil and gas requires greater technical expertise.

That concludes our prepared remarks, and now we'll open the call for questions.

Question-and-Answer Session

Operator

Operator Instructions) Your first question comes from Jeff Tillery - Tudor Pickering & Co. Securities.

Jeff Tillery - Tudor Pickering & Co. Securities

The improved sequential revenue out of most of the regions was really impressive. I'm kind of thinking especially about the Southeast, Mid-Continent and the Rockies. Can you talk about kind of what flipped the switch from a utilization standpoint and drove that increase as well as kind of where you are now from a utilization perspective in terms of how fully utilized you are?

David Wallace

When we look at the quarter compared to first quarter, we were below 50% in first quarter. And coming out of our seasonality and multi-areas definitely helped start driving that. Plus our new service centers, again, kind of gaining  they're picking up utilization just being there for awhile, getting through their shakeout period and all that.

If we looked at the second quarter, our utilization for the quarter probably was closer to 70% when you look at all the areas. We still had a little bit of seasonality in the Northeast in the early part of second quarter, but again, they bounced out and ramped up from there. Then our other regions continued to increase all during that time period.

Jeff Tillery - Tudor Pickering & Co. Securities

And then you started off the call mentioned an improved pricing environment. Are you talking about kind of the rationality returning and the lack of price discounting or are you talking about actual price improvement during the quarter?

David Wallace

I think the big thing is we saw the erosion stop, which was the first thing we had to see. And then also some of the inflation areas between fuel, some of the material transportation, we did a good job in the quarter working on those to try to get some of those minimized and had some success there. And, you know, a combination of activity improvement in all the different areas, maybe shifting some equipment from higher discount areas to a little lower discount areas might have made a little more impact there also.

But we're just seeing a combination of the market picking up, the efforts that we've made to make an improvement there. Those are all starting to come through for us.

Jeff Tillery - Tudor Pickering & Co. Securities

And my last question is how are you guys thinking about incremental Capex from here? You spent a fair amount of time talking about the Marcellus and the Haynesville and it looks like you're spending a little bit of money to adapt to spreads for working in deeper and hotter environments, but how are you thinking about approaching adding true incremental spreads?

David Wallace

We won't see anything else added this year as far as, you know, it's starting to get late in the year as far as trying to ramp that up, add additional capacity. We're still reviewing our 2009. Tom mentioned the extra Capex for this year. It's really to continue to ramp up in the super high-tech markets.

We've talked about before that this is kind of a transition year for us as far as a lot of business was going to be lower-tech, middle-tech, and then moving up to the super high-tech. What we're seeing is is that we've had really good customer response, and it's actually moving up a little faster. So instead of actually adding much equipment for this year, we're basically expanding the capabilities of current equipment to participate more in that super high-tech part of the business.

Operator

Your next question comes from Stephen Gengaro - Jefferies & Co.

Stephen Gengaro - Jefferies & Co.

When we look out - and I know you've kind of given some good information - when we look out at the back half of this year, would you expect that net-net, the pricing gains you're seeing in the higher end - I said pricing gains, but the potential pricing gains or expected improvement - would yield higher companywide margins, offsetting kind of the pressures on the cross side and maybe even on the pricing side in some of the lower end markets?

David Wallace

We're still seeing a lot of inflation out there, so we're still trying to battle the part of how do we get the inflation shifted where we can actually not see erosion in our margin. So that's probably the first thing we challenge. And we expect increased inflation even through the second half of the year.

But we do see a little more positive pricing environment. We feel like, again, discounts shifted down slightly during the second quarter. That was probably more mix of services. And again, we're still doing a lot of slick water business, which are large jobs, fairly high discounts. So we see that mix shifting a little bit, and we feel like we can get a little more pricing gains from that.

Also, our utilization is a big one, too. When you look at that, we went from sub 50% first quarter to 70% in the second quarter. We saw a lot of this drive just based in increased utilization of our equipment. And a lot of that's from the new service centers. Tom talked about it. We both talked about it. They came on late '07. They are now just starting to kind of get on their own two feet and really make a contribution to our numbers.

Stephen Gengaro - Jefferies & Co.

And then when you look at the areas, well, particularly the Marcellus and the Haynesville, are you seeing, in the Haynesville, are you seeing just a couple people able to [compete with you]? You're truly seeing the benefits of your technical expertise relative to a smaller player?

David Wallace

The big three are there and the big three work in the super high-tech part of the market. But again, a lot of the smaller players, it's over their head, you know? It's a little more challenging fluid. The job designs are higher pressure and just a little more than what they're used to working with. So the number of competitors definitely drop off when you move up the pyramid on those super high-tech type environments.

Stephen Gengaro - Jefferies & Co.

And then just a final question. I mean, obviously you've had the big worry over the last couple of weeks is everybody's gone from loving natural gas to hating natural gas as far as the short term is concerned, but when you look at it, are you looking at any thresholds or even in more general terms, are your customers still on track to be  is their behavior increasingly towards more activity despite the fact that gas has fallen back here near term? I mean, are you seeing any kind of impact here? Would you expect to see any kind of impact here from the softness in gas prices on your business anywhere?

David Wallace

At this point we don't, and part of that is, again, it's kind of a long-term play. Our customers have been ramping up their budgets. We've seen the drilling side ramping up. So it usually takes kind of a prolonged drop in gas prices to kind of get customers to change their mentality. At this point I think they're all thinking that it's just kind of a short-term spike and that long-term outlook is still very bullish.

One thing that helps us though is having a national footprint. We've done a good job over the last several years really expanding our footprint throughout the U.S. and it really positions us in a lot of different basins. And we know there's going to be some better pricing basins and some softer pricing basins, and having that national footprint really gives us a position now that we can shift equipment between basins where the margins may be a little better.

At this point, though, as far as E&P budgets, we're not seeing any shift other than continuing to stay very strong.

Operator

Your next question comes from Joe Agular - Johnson Rice & Company.

Joe Agular - Johnson Rice & Company

My question is obviously you all gave some fairly upbeat comments regarding the direction of the market right now, particularly on the high end. Pricing has stopped going down; in some cases, it may be going up. Your new service centers that you have opened up over the last year or two are ramping up. My question is, given the backdrop of the market right now, do you think that you'll be able to get your margins back up to where they may have been, say, in 2006 and early 2007 heading into 2009?

David Wallace

It's hard to say where we can get them to. If anything, our margins in that time period may have been a little dampened just due to '06 - '07 were very growthy periods for us. If you look at our outlook right now, we still have some areas that we want to do vertical expansion as far as new service centers, but we're a little less growthy than we were in the last couple of years, and we're more focused on service quality, really improving our cost structures, and really more focused on getting our margins up.

There's still some areas that, again, we would still like to expand to, but we're starting to do a lot more backfilling, which means the horizontal growth and additional crews at the service centers that are performing very well, bring in additional service lines at existing service centers where we've already got the infrastructure in place, we've already got a good customer base. And again, we can kind of leverage off of that and provide multi services to the same customer.

So, you know, it all depends on gas price, rig count, things like that, but our focus is definitely on improving margins and a little less geographic expansion.

Thomas Stoelk

Joe, one thing I'd add to that I'd guess is it's going to depend really on the mix of revenues. In the second quarter you took a look at Appalachia, it was about 38% of the total, and as our newer centers, which have predominantly been Mid-Continent, Southwest and in the Rockies, as they continue to take up a larger and larger percentage of that revenue, those are a little bit higher discount markets and that'll have a little impact on it. But it's a much, much bigger market, much, much bigger tickets revenue size with respect to it.

Joe Agular - Johnson Rice & Company

To follow on a comment you just made, Dave, that was sort of the vertical integration, I mean, your service centers. You all right now, for example, I think in the Balkan are not running any frac crews there, correct?

David Wallace

That's correct. We entered the Balkan last year through a wireline acquisition, and again, that area is ramping up pretty rapidly. We actually are looking at initiating pumping service into that region right now, maybe through cementing first, stimulation second. But it looks like there's an opportunity for our pumping services in that area.

Joe Agular - Johnson Rice & Company

And with regard to the Haynesville area, how many crews would you have available there now and what do you anticipate going to?

David Wallace

Well, we have two in Bossier City, and then when you look at - we have several locations really close to that area, when you start looking at our location in the Barnett Shale. You know, we have a couple crews there. We have some crews in Arkansas and Mississippi. And all those are within about five or six hour driving range. So we really look at we have a lot of resources really close to the Haynesville. And we're going to continue to watch it. And again, our expectations are that's going to be a market that ramps up pretty quickly. So we have a lot of stimulation equipment real close to that area that it's easy to service, shift over and service on the peak capacity days.

Also the same way with cementing. Again, we have a lot of cementing crews in that area and, again, will help support the growth in that area from these other locations.

Joe Agular - Johnson Rice & Company

That particular play, how does that rank? Is that not one of the highest technical pumping service markets?

David Wallace

We see it as a high-tech, super high-tech kind of environment. They're running more sophisticated fluids, crosslink fluids, again, deeper, hotter, higher pressure. And it's just a matter of us watching how it materializes in matching up with the needed resources in that area.

Joe Agular - Johnson Rice & Company

And have you all been hired for a job there yet or do you have customers who are trying to line you up for a future job?

David Wallace

We were getting - one thing we talked about was the increase in Capex, which was expanding the number of high pressure, super high pressure fluid ends we need, and that's what we're doing. We actually have jobs on the board in this quarter, and we expect to catch our first one late August, early September. But we do have work starting to line up for that area.

Operator

Your next question comes from Victor Marchon - RBC Capital Markets.

Victor Marchon - RBC Capital Markets

The first question I had, Dave, I think you had talked about this previously as into just the split you guys were looking at between high-tech and low-tech, you know, what you're going to be running at this year, and then how would we look at that for 2009, you know, as you start adding this high-tech and super high-tech equipment?

David Wallace

Yes, we talked about in previous calls that we thought 2008 would be a transition year for us, that we would be about 50/50 between low-tech activity and then a combination of high-tech, super high-tech, with the majority of that being in the center part of that triangle.

One thing we're seeing is, if anything, our pace is probably expanding a little quicker than we expected. We anticipated adding high-pressure equipment to start working in the super high-tech part of the activity play. We are currently doing that in two of our regions, Southwest and also in the Rockies. What we're seeing is this quarter that we are going to be working in two more regions, and that would be Mid-Con and then that Haynesville area, which we call the Southeast part. So even though a big part is still the lower-tech, we're ramping up very nicely into the higher-tech, super higher-tech part of it.

So we always talked about '08 as a transition year. It's transitioning. It's probably transitioning a little faster and we're moving up the scale a little quicker in that.

Victor Marchon - RBC Capital Markets

Does that look like a 2009, like a 60/40 split, you know, high-tech, or is it possibly like a 70/30?

David Wallace

I think we'd still say 60/40 just because, again, even like the Marcellus we consider a lower-tech play. So there's still a lot of lower-tech plays that we're involved with, have service centers with, and it'll still be a big part of our work. But our focus is definitely to keep working up the chain to the more sophisticated job types.

Victor Marchon - RBC Capital Markets

The second I have is just on the percent of your work that is term work versus callout work. Is that a number that you guys track or have?

David Wallace

I don't think we have a good number for you there. Probably one we don't really lay out that well.

Victor Marchon - RBC Capital Markets

And then just the last one is just on utilization. You mentioned you guys were close to 70% utilization, and I just wanted to get a sense as into, you know, where you guys had peaked out back in '06 and how that may look as we make it through the second half of this year?

David Wallace

We found a fully utilized service center is about 85% utilization, and the mature service centers back in '06 were hitting that. Then you have the mix of the new service centers coming online and then it's just kind of a general ramp up to get to that 80% - 85% utilization.

As we mentioned earlier, we thought we were about 70% for second quarter, and the reason for that is coming out of the seasonality. Also, our new service centers are really starting to mature, really starting to get very active. So we think we're going to have a very high utilization in the third quarter this year.

Operator

Your next question comes from Stephen Gengaro - Jefferies & Co.

Stephen Gengaro - Jefferies & Co.

Just a quick follow up to kind of get your views. When you look at the whole domestic pressure pumping business, do you think we'll see consolidation, particularly some of these smaller mom and pop's? Do you think we're at that stage over the next 12 months or do you think you're more likely to see some of these smaller guys continue to try to grow out their own capacity?

David Wallace

Probably my personal opinion is there's a lot of challenges with the small mom and pop's. You know, one, there's bigger players getting into their market and a little extra competition maybe than what they've seen. So our thoughts are it kind of gets to a point that they might not enjoy it anymore and maybe looking for an exit strategy, so we expect to see some consolidation. I'm not sure at this point how much that might be.

Operator

I would now like to turn the call over to Mr. Wallace for any closing remarks.

David Wallace

Well, we appreciate everyone joining us today, and we're looking forward to talking to you next quarter. Thank you.

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