Oil States International CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: Oil States (OIS)

Oil States International, Inc. (NYSE:OIS)

Q2 2011 Earnings Call

August 2, 2011 11:00 a.m. ET

Executives

Patricia Gill

Cindy Taylor – President & CEO

Bradley Dodson – VP, CFO & Treasurer

Analysts

Victor Marchon – RBC Capital Markets

John Daniel – Simmons & Company

John Lawrence – Tudor Pickering

Arun Jayaram – Credit Suisse

Marshall Atkins – Raymond James

Blake Hutchinson – Howard Weil

Ryan Fitzgibbon – Global Hunter Securities

Daniel Burke – Johnson Rice & Co.

Doug Garber – Dahlman Rose

Ashish Gupta – GB Capital

Operator

Welcome to the Oil States International second quarter earnings conference call. My name is Monica, and I’ll be your operator for today’s conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now like turn the call over to Patricia Gill, Ms. Gill, you may begin.

Patricia Gill

Thank you, Monica. Welcome to Oil States’ second quarter 2011 earnings conference call. Our call today will be led by Cindy Taylor, Oil States’ President and Chief Executive Officer and Bradley Dodson, Senior Vice President, Chief Financial Officer and Treasurer.

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

I will now turn it over to Cindy.

Cindy Taylor

Thank you, Patricia, and thanks to all of you for joining our call this morning. Our businesses provided strong results for the second quarter of 2011, with notable contributions coming from our growing accommodation segment, due to organic RIM count expansion and last year’s acquisitions of the Mac and Mountain West.

Activity for our well site services and tubular services segment remains robust, as horizontal drilling and completion activity continued to increase in the oil shale regions in the United States, which tend to favor our high-end and proprietary equipment.

On the hills of a 17% increase in the first quarter of 2011, backlog at our offshore product segment increased 25% during the second quarter to reach a new record level of $519 million as of June 30, 2011.

During the second quarter of 2011, Oil States generated earnings of $1.34 per diluted share on $74 million of net income, $161 million of EBITDA, and over $800 million in revenue.

At this time, Bradley Dodson will take you through details of our consolidated results and financial position, and then I will conclude our prepared remarks with a discussion of each of our segments, and we’ll give you our thoughts as to the current market outlook.

Bradley Dodson

Thank you, Cindy. During the second quarter of 2011, we reported operating income of $115 million on revenues of $820 million. Our net income for the second quarter of 2011 totaled $74 million or $1.34 per diluted share.


The comparable second quarter 2010 were $58 million of operating income on revenues of 595 million. Second quarter 2010 net income totaled $37 million or $0.71 per diluted share. The year-over-year increases in profitability were broad based, including higher contributions from each of our business segments, along with the contributions from the three acquisitions closed in the fourth quarter of 2010.

During the second quarter of 2011, we completed a $600 million high-yield offering and used those net proceeds to re-pay off any borrowings under U.S. and Canadian revolving credit facilities, as well as for general corporate purposes. The notes were issued at par yielding 6.5% with a 8 year maturity.

The quarterly interest expense will be approximately $18 million going forward, with the additional interest expense from these notes. This quarterly interest expense forecast is expected to continue through the end of 2012.

We recently also increased our Australian loan facility to $150 million Australian, on substantial to stand terms and conditions. We plan to use the added borrowing capacity to fund announced expansion of our Australian accommodations business.

In terms of third quarter 2011 expectations, we forecast depreciation and amortization to be approximately $47 million, and net interest expense, as I mentioned, to approximate $18 due to the full quarter interest expense associated with high-yield notes. Diluted shares are expected to total 55 million shares in the third quarter of 2011.

We currently estimate our effective tax rate for the third quarter of 2011 to be flat to slightly down when compared to the second quarter of 2011.

During the second quarter 2011, we reported cash flow from operations of $60 million, offset by a working capital increase of 70 million and capital expenditures of 138 million. Our net debt at the end of the second quarter totaled $954 million and our debt-to-cap ratio is approximately 37%.

As of June 30, 2011, the company had $808 million of combined availability under our credit facilities, and a cash balance totaling 123 million. We currently expect to spend approximately $650 million in capital expenditures in 2011.

At this time, I’d like to turn the discussion back over to Cindy, who will review the activities in each of our business segments.

Cindy Taylor

Thank you, Bradley. I’d like to lead off with our accommodation segment. Our major oil sands lodges in Australian villages enjoyed strong occupancy levels during the second quarter of 2011. Accommodations revenues increased 66% year-over-year and EBITDA increased 102% year-over-year.

On a sequential basis, revenues and average available rooms for our major lodges and villages, both increased 8%, while total revenue per available room was slightly lower quarter-over-quarter due to seasonal occupancy declines in Canada, associated with spring breakup.

In our offshore product segment, we generated 132 million of revenues and $22 million of EBITDA in the second quarter of 2011, compared to 128 million of revenues and $20 million of EBITDA in the first quarter of 2011. This sequential improvement in revenues was due to higher production in subsea activity, partially offset by lower rig equipment revenues.

We booked $236 million of new orders during the second quarter of 2011, resulting in a sequential backlog increase of 25% to a new record level of 519 million as of June 30, 2011.

Significant awards during the quarter included a contract for FlexJoint still can’t [inaudible] terminations and receptacle assembly’s for the Gorelova, offshore Brazil, along with additional content on jack site [inaudible] and various deck equipment orders.

Our well site services segment generated revenues of 154 million and EBITDA $47 million in the second quarter of 2011. Improved performance in our drilling business created the large majority of the sequential increases in EBITDA.

Revenues from our rental tools segment increased 5% when compared to the first quarter of 2011, and EBITDA increase 4%.

These sequential improvements were attributable to the continued increases in U.S. completion activity, and support of horizontal drilling and complex completions in the shelf life, which led to improvements in pricing and service mix. These sequential gains were partially offset by weather delays in the Bakken, as well as some customer permitting issuing in the Hainsville.

Revenues and EBITDA from our drilling segment increased 24% and 57% respectively on a sequential basis due to higher rig utilization, attributed to seasonal improvements in the Rockies during the second quarter, along with pricing improvements.

Day rates increased by 8% while cash margins increased 31%.

In our tubular services segment during the second quarter of 2011, we generated revenues of $332 million and EBITDA of $18 million compared to revenues in EBITDA of 294 million and 14 million respectively in the first quarter of 2011.

Tubular services OCTG shipments increased 12% sequentially to 173,300 tons from 154,400 tons shipped in the first quarter of 2011.

Gross margin as a percent of revenues improved to 6.5% during the quarter, primarily due to strong demand and modest mill price increases over the past 12 months.


The company’s OCTG inventory increased 7% to $378 million at June 30, 2011, in response to increasing customer orders for drilling programs in the second half of 2011.

I’d like to transition and give you come comments as to our outlook as we go into the third quarter of 2011. Starting with our accommodations business, customer demand for our remote site accommodations in all of our major markets remains strong.

We expect our average available rooms to grow from 14,020 rooms available in the second quarter of 2011 to approximately 15,500 average rooms available in the third quarter of 2011, which represent an 11% expected sequential growth rate.

Accommodations revenues should total 210 to $220 million in the third quarter of 2011, with sequentially flat EBITDA margin.

In our offshore product segment, we booked an impressive $236 million in orders in the second quarter and reached a new record backlog level. The orders that we currently have in backlog provide us with good visibility for a strong second half of this year as well as good positioning for 2012. We project third quarter revenues to total 150 to 155 million with EBITDA margins ranging from 17 to 18%.

As it relates to well site services, our rental tools business is closely tied to U.S. Completion and Production Services activity, with particular leverage to high-end multi-stage completion, and will generally track movement in shale drilling and the horizontal rig count.

We expect to see continued sequential improvement in our rental tools business, as additional equipment purchased through this year’s expansionary CapEx program goes to work in the field.

We should see further improvements in our drilling business during the third quarter of 2011, as we expect our fleet utilization to increase and our cost structure to benefit from incremental cost absorption. Accordingly, well site services revenues should approximate 155 to $160 million in the third quarter of 2011.

The OCTG market has been very active and the supply demand balance has tightened with approximately 4.8 month supply of inventory on the ground. Imported products has increased recently and represents approximately 50% of the market. Our OCTG sales generally follow trends in the U.S. rig count, with premium grades in high demand due to strong activity in the U.S. shale play.

Recently, we had begun to see signs of increased activity offshore from both deepwater and shale’s areas, and we hope to benefit from our customers’ requirements to use heavier and more complex strength of pipe.

We expect our gross margins to remain in the 6 to 6.5% range and anticipate tubular services to generate revenues of between 365 and $370 million in the third quarter of 2011.

In conclusion, the first six months of 2011 have produced record results for a number of our business segments, due in part to our acquisitions that closed during the fourth quarter of 2010, coupled with strong operational execution and a supportive macroeconomic environment. Current oil prices remain at level sufficient to incentivize our customer spending plans, and we are optimistic about further growth in each of our business segment.

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

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from Victor Marchon of RBC Capital Markets, please go ahead.

Victor Marchon – RBC Capital Markets

Thank you, good morning guys, congrats on the quarter.

Bradley Dodson

Thanks, Victor,

Cindy Taylor

Thanks, Victor, good morning.

Victor Marchon

First question on offshore products, I obviously see a big jump in the backlog there. I wanted to see if deliveries were lengthening that you were seeing, you know, the order books filling out for further out in the future than what you typically see. Or is this just an indication of the increased capacity that you guys have put in place, you know, over the last 6 to 12 months.

Cindy Taylor

You know, I think Bradley’s going to do the actual math, we have this scheduled out in terms of our backlog terms. My generic answer to that right now, of course, is that we’re getting a lot of high-end equipment orders that is geared our semi-proprietary equipment, i.e. our FlexJoints and our Merlin connectors. A lot of those are tied to either SPSO applications or TLTF applications.

So my sense is that the delivery timeframes are comparable to what we’ve seen in the past with roughly, say 75% being delivered in the forward 12 months.

And Bradley’s nodding his head as conformation to that based on our expected terms in the marketplace. So the mix is a favorable high-end mix, the turns are generally expected to turn on a percentage basis, if you will, in the same general timing is what we’ve seen in past areas.

Victor Marchon – RBC Capital Markets

And just from what you guys are seeing on a – you know, from a bidding standpoint, is the mix similar to what’s in your backlog?

Bradley Dodson

On orders going forward, we still see the same overall drivers driving the inquiry market and they’re going to continue to be production infrastructure related. We are seeing some drilling product, drilling rig orders and interest, but I would say overall the outlook for inbound orders remains comparable to what we’ve got in backlog.

Victor Marchon – RBC Capital Markets

Thank you. And the second one I just had was on tubular services, and just wanted to see what your guy’s exposure pre-[inaudible] was to offshore, and where you are today. I’m just trying to get a sense as in to if activity continues to come back there, you know, what that can mean for your OCTG business.

Bradley Dodson

Sure. We had estimated when Macondo happened that we had about 5% of tubular revenues coming from offshore. And I would say that right now, we’re not back to -- we’re clearly not back to those levels. So if we were to see an improvement in the offshore market, there could be some upside.

But I would say, generally, the team over there is doing a great job, the volumes have been very strong. I thought volumes were very strong in the second quarter. I think our outlook for the third quarter is good as well. So that would be upside, but not necessary in order to drive what I would think are really good results for this market in 2011.

Victor Marchon – RBC Capital Markets

All right, great. That’s all I had, I’ll turn it back, thank you.

Cindy Taylor

Thank you, Victor.

Operator

Your next question comes from John Daniel of Simmons & Company, please go ahead.

John Daniel – Simmons & Company

Hi, guys, good quarter. My questions just focus on land drilling for a moment. Can you share with us how many rigs are working today, and how many are capable of going back to work?

Bradley Dodson

We’ve got 34 marketed rigs right now. We took two out of service at the beginning of the year. I don’t see us putting those two back to work, so I would say that for modeling purposes, 34 is what you should target.

John Daniel – Simmons & Company

At this point given the rebound in the business, are you guys looking to participate in the new build frenzy or – and also, can you update us on the contract status, to any extent, do you got any rigs with contracts beyond six months?

Cindy Taylor

I’ll just comment generally on that. We have only as you know, a small number actually on term contract with our customer base. However, we have multi-well type commitments with some of the stronger customers even in the [inaudible] albeit not contractual commitment. So you know, the ones that are actually on term contracts are about three.

John Daniel – Simmons & Company

Okay.

Cindy Taylor

So I’d have to say 10% if you will, of that marketed rig fleet. But again, we’ve got fairly continuous work with several of the other rigs in the basins that we are in.

We are seeing a tightening in the drilling business. That probably won’t surprise anybody on this call. And a lot of our customer conversations right now surround some new builds, your correct on that, as well as upgrades of existing rigs to make them more suitable for the activity that is being undertaken in those basins that we’re in.

We’re evaluating all of those, depending upon the facts and circumstances which are of course, the upgrade cost and the payback timeframes that we’re looking at with our customers. So certainly we have the wherewithal to do that, if it makes financial sense at this point in time. But more importantly, we definitely want to support the customers that have been so loyal to us over the last several years, and helped them meet their needs. And if we need to commit some capital for upgrades to do that, we’re certainly willing to do that.

John Daniel – Simmons & Company

Okay. Fair enough. Well, I’ll turn it back over for others. Thanks guys, good quarter.

Cindy Taylor

Thanks John.

Bradley Dodson


Thanks.

Operator

The next question comes from John Lawrence, of Tudor Pickering. Please go ahead.

John Lawrence – Tudor Pickering

Hey, good morning guys, congrats on a great quarter.

Cindy Taylor

Thanks, John.

Bradley Dodson

Thanks, John.

John Lawrence

Just, a question on accommodations margins, nice uptick quarter-over-quarter here. Could you just talk about [inaudible] going forward. I mean, it sounds like that 40% plus is sustainable.

Bradley Dodson

Yes, as Cindy made the comment in the prepared remarks, we think that margins in this 40% range, EBITDA margins in the 40% range are sustainable for the third quarter. Really, where we saw the upside on the margin versus guidance was quite frankly the team’s execution. We saw good occupancy gains in Australia, which coming out of the flooding that we experienced in Q1.

Canada, I thought did a very good job. This is usually the seasonally down quarter in Canada with breakup. We basically had good occupancy levels on a seasonally-adjusted basis in the lodges. We also had some benefit from firefighting camps supporting the Alberta Firefighters as they were fighting the forest fires there in the second quarter which helped offset this spring break up from the mobile camp business. The U.S. business and accommodations continued to do well, basically on the back of good base results as well as the pickup from Mount West.

John Lawrence – Tudor Pickering

Okay, that’s good color, thanks. And then, as far as 2012 capacity has, I realize ’11 is a big year, but do you think in ’12, could you guys add another 3 to 4,000 rooms on top of what – what you’ve already announced?

Bradley Dodson

What we’ve – what we said is that we think that there are – while not specifically identified, they’re going to be at least 1,500 rooms of available growth in both Canada and Australia in 2012. Australia, I think they’re going to be – there are some big opportunities for larger villages. Those are primarily L&G and iron-ore driven, in [inaudible] and Glaston areas. But then they’re also going to be some nice tack-on expansion opportunities to the existing [inaudible] and basin villages.

So I think that 1,500 rooms in that market is achievable with potentially some upside from there. In Canada, they’re bigger opportunities, they tend to be a little bit lumpier. We’ll continue to expand the facilities that we – the lodges that we have, and look for additional opportunities. But I think 1,500 rooms there is also achievable.

John Lawrence – Tudor Pickering

Okay, that’s great. Thanks a lot guys, and congrats again.

Cindy Taylor

Thanks John.

Operator

The next question comes from Arun Jayaram of Credit Suisse, please go ahead.

Arun Jayaram – Credit Suisse

Yeah, good morning. Bradley, I just wanted I guess a little bit of a follow up. As you know there’s a pretty large pipeline of new oil sands project, and in particular I want to talk about some of the Sun Core projects; Fort Hills, Joslyn, Voyager. Have – have any of those projects moved to the point where they’re asking operators such as yourself to bid and I just wanted if you’d provide some color around some of those key Sun Core projects?

Cindy Taylor

You know, I can just a little bit, Arun, but I still think it’s a little bit early. We’re in dialog, constant dialog with Sun Core and others. But I won’t say that they have really defined their approach on each of these projects, sufficient to say that you’ve got a RFQ in places, more dialog, broad-base dialog about overall needs, and they are material and significant. I think we’ll see this evolve over the next 6 to 12 months in terms of bidding activity, and I will call it refinement of what their needs are and how they’re going to approach these projects. But to say that they have really an outlined concrete plan at this stage, they don’t quite yet I would say. But we’re in active dialog and discussions with them.

Arun Jayaram – Credit Suisse

Okay. Fair enough. Cindy, what do you think your room capacity is in terms of constructing new units in Canada and Australia?

Cindy Taylor

Well, you know, you know we’ve got two manufacturing facilities in Canada and just to update you, we’ve kind of – we’re going to have two running in Australia as well. Generally speaking, you know, we’re going to put out probably 1,500 to 2,000 rooms in each of these market. But however there is, certainly we can outsource to other third-party’s if there’s available capacity in the market, and we’ve done that. So we’ve kind of been able to add and flow that baseline manufacturing. Again, depending upon the demand environment and also you know, whether we’re just building rooms or some of the more complex infrastructure needs such as kitchens, rec rooms, workout facilities, and all the insulation work that goes around that. But, generally speaking, I just kind of look to that level of about 1,500 to 2,000 in each market.

Arun Jayaram – Credit Suisse

Okay, fair enough. And last question, you guys, are the Mac Services group submitted a development applications at, I believe it’s [inaudible] Creek, to service I guess the coal industry. Can you give us perhaps, if you do get approval for that, what the timing of that lodge could be, and how quickly could you ramp to 1,500 rooms there?

Bradley Dodson

So that’s for the – that’s for the Gunnedah Basin, and you know, that was – that’s something that is really not going to impact us until 2012, so I would say – I would look for us to have roughly 200 rooms, plus or minus as a starting point. And as we enter into the market, that the announcement for [inaudible] Creek was really – is quite frankly, consistent with our strategy and the Mac strategy before we owned them, which is land banking, trying to get the necessary approvals in place, secure the land in areas that we think over the long term will have good demand for accommodations so that we can be very responsive to customer needs and have that first-mover advantage. Because often times, customer needs materialize faster than development approvals than rooms can materialize.

Arun Jayaram – Credit Suisse

Right.

Bradley Dodson

And, so we think that this consistent with our strategy, it’s the right move forward, but I don’t think it’s a 2011 story, it’s more of a 2012.

Cindy Taylor

Agreed.


Arun Jayaram – Credit Suisse

Okay. Thank you very much.


Cindy Taylor

Thank you, Arun.

Operator

Our next question comes from Marshall Atkins of Raymond James. Please go ahead.

Marshall Atkins – Raymond James

Good morning. You guys, just about across the board, beat what we thought you would do and your guidance next quarter looks to be better. The only exception I guess this quarter was the rental tool business. So of course, that’s what I’m going to ask about.

The margins, you know, were not as high as we thought, give us a little more color on what, I mean, it sounds like, you know, the Bakken weather got you a little bit, but maybe some other stuff in Haynesville from what you said in the comments, but just give us a little more color on what’s going on there and what we should expect going forward.

Cindy Taylor

No, I’d say that kind of sums it up, and probably the only other thing is spring break up in Canada. So if you think about kind of those three elements, a little bit of below-margin expectations is not surprising there. Now, clearly, the Bakken is incredibly strong. We’re still seeing some delays, and realize, we all work for different customers in these market place, so this may be more specific to a handful of our more significant customers in the Haynesville. I didn’t know if you’ve heard that elsewhere, but we’re beginning to see some recovery there, but it’s not like off the charts in terms of the activity in the Haynesville. Clearly right now, the Permium, the Eagle Ford, the Pennsylvania area are doing exceedingly well. So it’s all going to be a mix, but the way I look at it, you know, the – we’re through Canadian breakup, weather issues in the Bakken have cleared, we’re still a little slow on some of the permitting in the Haynesville, so it feels pretty good going into – it’s a very active market, as you know. So I wouldn’t take anything necessarily from these minor sweeps, if you will, in the second quarter.

Marshall Atkins – Raymond James

Right, okay. It sounds like more than one-time stuff. Second question on CapEx, you bumped it up a little bit. Give me kind of a, if you could, kind of a rough breakdown on where you’re focusing that spending, and number one. Number two, you know, early look at ’12, you know, with what you see right now, you know, do we equal that CapEx next year as well?

Bradley Dodson

So the current 2011 guidance is kind of toward the top end of our adjusted range. We’ve kind of been in the 625 to 650 range given some of the announces post first quarter. And about 95 million of that is in well-side services with the majority of that going to rental tools. So that’s fairly consistent quarter over quarter. We had a slight increase at the top end of the range in accommodations, so from 2011, we’re expecting CapEx in accommodations of roughly $500 million. The majority of that going to the Canadian business, but also a fairly significant, actually record expansionary CapEx for the Mac as well.

Then the rest, there’s about 8 million in tubulars and then about 50 million in offshore products.

Marshall Atkins – Raymond James

Okay. And as, you know, obviously, you guys don’t have a real clear view on ’12, but with what you know right now, kind of the same breakdown next year and same magnitude?

Bradley Dodson

I would say generally in that range. I would – my initial number is kind of around 600 million, plus or minus, maybe 625. I think as we talked about, we’ll have growth opportunities in the accommodations business. If the U.S. rig count stays where it is, we’ll need to add equipment in rental tools. Offshore products, we had a fair amount of capital allocated this year to facility expansions both in Singapore and in the U.K. I don’t know that they’ll be that high next year, but there’ll probably be other opportunities, particularly in markets like Brazil.

So I would say generally in that level, plus or minus, but I think the earnings and the cash will support that level of spending.

Marshall Atkins – Raymond James

And we have heard that you’re not real big in the drilling – there’s a lot of drill pipe moving out. You know, you guys aren’t big – refresh me on kind of what your big rental tool items are.

Cindy Taylor

Yeah, we really are not heavily exposed to the drilling guys at all in the rental equipment business, it’s very much on the completion product services side. So wirelines support equipment [inaudible] equipment, high pressure flow back and well testing are probably the larger elements, [inaudible] tubing support equipment, but really think about completions or flow back through production testing.

Marshall Atkins – Raymond James

Great color, thank you.

Cindy Taylor

Thank you, Marshall.

Operator

Our next question comes from Blake Hutchinson of Howard Weil. Please go head.

Blake Hutchinson – Howard Weil

Good morning.

Cindy Taylor

Hi, Blake.

Blake Hutchinson – Howard Weil

Just a couple question around the OCTG business here. You know, the volumes have picked up noticeably here and you know, if you go back and just kind of compare it to prior periods. I feel like if you could just talk a little bit about what’s missing to help you get margins increases along with the volume increases here. Is it simply a more frenzy pricing environment? Is it you taking a little bit more risk with kind of inventory committed, or is this simply kind of getting on – getting on new programs to the back half? How do those three kind of drive your margin thoughts from here?

Cindy Taylor

Well, you kind of hit on a lot of the major points there. But always a starting point is going ot be inventory on the ground. And as you see, even though we’re at high levels of absolute inventory given the expansion and the rig count, the month’s supply on the ground at 4.8 is a decent improvement from where we exited the first quarter. So that’s always a starting point. And once you get into like [inaudible] or supply environment, if you will, then that leads to pricing increases. We kind of have characterized what we’ve seen over the last 12 months as modest price increases. There really haven’t been any significant movements up, and you say why is that, and I’d say generally speaking, you’ve got the U.S. mills at fairly high levels of productivity compared to where they were in 2010. And in addition to that, the imports have picked up to a level that they’re really kind of filling that void, such that we call it kind of just-in-time inventory as being [inaudible] in the field. It’s a very healthy environment, but it’s not a rapidly increasing price environment. We’ve also told you and disclosed in our public filings that our margins do tend to benefit in a rising price environment, particularly in an ascending market, strongly ascending market like we saw in the first half of 2008.

So you kind of say, what is missing? I’d say we’re getting there, you’ve seen our margins expand generally over the last 12 to 18 months as we’ve come out of that excess supply environment coming out of the global financial crisis to where we are today. And any, you know, tightening that we’re seeing now, we’re still not projecting a significant ramp in price largely because of the new capacity that’s going to come on into the market in the United States, particularly later this year. So again, I think we see a strong market, very high volume level of activity, some firmer pricing for the meals, but not off-the-chart-type pricing increases.

Blake Hutchinson – Howard Weil

And so if we look at inventories at the end of the period, what was your percent of committed for sale if you have that?

Bradley Dodson

It was a little less than 9%

Blake Hutchinson – Howard Weil

So that hasn’t really, really changed much since say yearend, and I would assume that that stays kind of in the same ballpark if you don’t think pricing’s moving, and it also puts you in a position where if price does move, you’re not necessarily going to be in an optimal position to capture the spot market moves. Is that correct? So even though volume’s moving, we shouldn’t really be building too much in in terms of, you know, gross margin improvement here?

Bradley Dodson

I wouldn’t think so.

Blake Hutchinson – Howard Weil

Okay.

Bradley Dodson

I mean, I think what we saw – we’ve basically been somewhere in the 85 to a little over 90% committed range through the last probably two full years, dating back to mid – well, actually three full years, mid-2008. So I would say that this is fairly comparable. We – what happened, you know, Blake, is really hard to imagine it would happen again. We’re certainly in a good supply and demand balance with a less-than-five-months’ supply on the ground. But if you’ll recall, the ’08 situation was basically a four-month’s supply on the ground with – we have additional capacity or the market has additional capacity and there’s more coming on. So I think that while pricing is firm, I don’t see the kind of rapid price increases possible at this point that we saw in ’08, and that’s what’s really going to drive the margin, regardless of how much we have it committed.

Blake Hutchinson – Howard Weil

Okay. Great. Thanks so much for the color. I appreciate it.

Cindy Taylor

Thanks, Blake.

Operator

Our next question comes from Ryan Fitzgibbon of Global Hunter Securities.

Ryan Fitzgibbon – Global Hunter Securities

Hey, good morning, Cindy and Bradley.

Bradley Dodson

Good morning.

Cindy Taylor

Good morning, Ryan.

Ryan Fitzgibbon – Global Hunter Securities

A quick question first on rental tools. I think the guidance for 155 to 160 million with drilling services up sequentially, same with rental tools. It only looks to be up about 5 million quarter on quarter. Is there something in July that kept rental tools, I guess, [inaudible] that would keep that guidance up just slightly sequentially?

Bradley Dodson

Well, I think that what we’re doing to a certain degree in rental tools is that we had a really nice uptick in the first quarter, particularly in earnings out of rental tools that makes it a tough comp going forward. And I would say that when I look at kind of revenue proactive rig or other metrics, I don’t see very strong levels. Right now, I don’t see any issues with the rental tool revenue mix.

Ryan Fitzgibbon – Global Hunter Securities

Okay. I guess moving forward, so that exceed the growth in the rig cap given it’s leverage to completions in your opinion?

Bradley Dodson

It’s really a potential, but I think a lot of that’s kind of already shaken out.

Ryan Fitzgibbon – Global Hunter Securities

Okay. And then I guess hopping over to offshore products, another excellent quarter in orders. A lot of them seem to be smaller ticket items, maybe not 5 to $10 million range. Is it reasonable to assume, I guess a run rate of 150 million in orders moving forward based off these small ticket items that you guys continue to get?

Cindy Taylor

Well, now, we get some – I’m not sure of the mix of your questions there. If there’s an inference that we only had small ticket orders in this quarter, I wouldn’t necessarily agree with that. We’ve made a separate announcement of the project in Brazil and that was in excess of 30 million. We point to some deck equipment orders that are fairly significant and then follow-on work on Jack St. Mylo as well. So we did have some significant orders in this quarter.

This is a very difficult business to try to say there is a run rate level of awards that come in quarter by quarter. You know, if you’re saying is there a baseline of 150 absent any of these larger awards, I’d say it’s possible, but these are very much project oriented and we do have a lot of, you know, in and out every quarter that you say is the baseline. So it’s hard to answer your question specifically to be honest with you.

Bradley Dodson

But I do think that we will continue to maintain a book-to-bill over one for the of the year. I think Cindy’s saying that basically the orders can be lumpy, I mean, in a given quarter, and we’ve had some very strong order levels having book-to-bills in the somewhere between ½ to 1.8 for the last two, three quarters. So I don’t know that we can sustain that level of order intakes, but we should have a book-to-bill over one.

Ryan Fitzgibbon – Global Hunter Securities

Okay, that’s helpful, Bradley. Then one last one, on the U.S. mobile camp side of the business, any possibilities in expanding I guess upon the Mountain West acquisition, the Bakken as well as potentially going into the Eagle Ford by year end?

Bradley Dodson

That’s certainly the goal. It’s a little early for us to say anything right now because those plans are in process. I would hope that by the yearend, we’d have something we could talk about.

Ryan Fitzgibbon – Global Hunter Securities

Okay. All right.

Bradley Dodson

That’s certainly the goal and the intent. We need to get those, we need to execute on that so I guess the answer is yes, but we don’t have anything that we can announce right now.

Ryan Fitzgibbon – Global Hunter Securities

Okay, but [inaudible] is in progress?

Bradley Dodson

That’s right.

Cindy Taylor

Yes.

Ryan Fitzgibbon – Global Hunter Securities

Okay. Thank you.

Operator

Our next question comes from Daniel Burke of Johnson and Rice. Please go ahead.

Daniel Burke – Johnson Rice & Co.

Thank you for taking my call. I wanted to stay with a topic just visited there and better understand a little bit about the composition of your inbounds. Could you talk about what you saw in the second quarter in the deck equipment side? Was it FPSO related and sort of, what’s the outlook there getting away from the highway proprietary, you know, Merlin FlexJoint side of the business?

Cindy Taylor

Again, a lot of demand for our FlexJoints and our Merlin connectors, but fortunately in addition to that, in our [inaudible] facility, we manufacture Moering systems, deck equipment and cranes than some of the orders that we have gotten related to the Moering systems has come from Chinese shipyards associated with development in that market. But we enjoy those levels of activity as well because we don’t manufacture FlexJoints and Merlins in all of our facilities and the [inaudible] products line, we have enjoyed some increased in backlog in that facility during the quarter, which will really help us overall from a throughput standpoint.

Daniel Burke – Johnson Rice & Co.

Okay, so presumably that will be, while those might not your highest margin products, getting the throughput up [inaudible] should be accretive to your overall margin run rate with offshore products. Is that a good way to think about it?

Cindy Taylor

Absolutely. Yes, because of cost absorption just to be more specific on that. I mean, we’ve got multiple manufacturing facilities around the globe and to the extent that a given facility or two does not have sufficient backlog or throughput they can provide a drain on the otherwise strong contributions from some of our other operations. So it’s clearly something that we have been focused on and were pleased to see.

Daniel Burke – Johnson Rice & Co.

Okay, great. Then, one on the accommodation side. It looks like, based upon the disclosures you provide on the performance of your fourth quarter ’10 acquisitions that as you alluded to, the EBITDA margins at the MAC approved sequentially by a decent amount. Maybe, Bradley, if you could revisit and discuss-it looks like that was partly due to cost as well as improved revenue performance-is it easier to see the weather impact now that we’ve got two quarters in the books this year?

Bradley Dodson

The weather impact from the first quarter?

Daniel Burke – Johnson Rice & Co.

Correct. Versus the second quarter.

Bradley Dodson

Yeah, we saw a nice up kick sequential in [inaudible] at the Mac, and part of that was occupancy, and I think part of it was the fact that in that market we did have some contracts roll over and did get some pricing improvement there. Then, also, I would say generally we were trying to be fairly conservative in our cost forecasting until we got a handle on the business in the second quarter. Really, we started to see that’s how we had a little bit better performance and cost control than we though.

Daniel Burke – Johnson Rice & Co.

Okay, thanks for the help.

Cindy Taylor

Thanks Daniel.

Operator

(Operator instructions).

Our next question comes from Doug Garber of Dahlman Rose

Doug Garber – Dahlman Rose

Good morning guys. My first question is on the land rig upgrades you’re doing. What equipment are you using for the upgrade, and what are the lead times on that equipment?

Cindy Taylor

I think what I mentioned on the call is that we are discussions with our customers about potential upgrades, as opposed to actively upgrading our fleet at this particular time, just to be clear, but generally speaking, when we are doing those types of upgrades, it might be taking any of the existing low sub rigs to high subs, where you’ve got work on the rig itself, and horse power is an issue, possibly, going from 500 horse power to 750 horse power pumps would be an issue. I would say lead times for upgrades at this type is in the six month range.

Doug Garber – Dahlman Rose

Okay. Are you also talking about new bills, or just upgrading the rig? Is there a tradeoff there?

Cindy Taylor

We are in discussion with customers on both front, just to see what’s in the market place, so there are some opportunities for both, but we are not announcing either at this particular point in time.

Doug Garber – Dahlman Rose

All right, thank you.

Operator

Our next question comes from Ashish Gupta with GB Capital

Ashish Gupta – GB Capital

Hey, Cindy and Bradley.

Cindy Taylor

Hi Ashish.

Ashish Gupta – GB Capital

Quick question. If we look out beyond 2012, can you discuss at all how many rooms you have contracted, or any offshore backlog that extends beyond 2012?

Bradley Dodson

We do have backlog that extends beyond 2012 in offshore products and I’d have to look at where we were on the rooms. I haven’t gone past 2012.

Cindy Taylor

Yeah. If you go back to the earlier comments about 75% of our backlog turns in the forward ’12 months, which means 75% is eroded by June 30th of 2012, so, even though some will fall beyond the year 2012, it won’t be a huge amount. We can certainly put our quantities around that. In our investor presentations, I think we typically only go two years out in terms of our room commitment, however, as you know, we do have some longer term commitments particularly in Australia, that go five years on some of these villages, so there is contracted backlog that extends beyond 2012 there, and the major contract in the oil stands with one of our largest customers up there goes through March 31st of 2013 which in there are options beyond that, so, as we move throughout 2011, and in to 2012, I think I can confidently say you’ll see incremental firming of both long-term contracts in both Canada and Australia for accommodations going in to 2013, and we will continue to build backlog accordingly, but historically, that backlog has been, again, more of a twelve month to eighteen month kind of forward backlog.

Ashish Gupta – GB Capital

Great, thanks guys.

Cindy Taylor

Thanks.

Operator

(Operator instructions).

I’m showing no further questions in the cue, at this time.

Cindy Taylor

Well, great. Thanks so much for joining in our call, this morning. We were very pleased with the quarter, and look forward to sharing the next one with you and hope it’s equally successful and glad that earnings season is over. I know you are too. Thanks so much.

Operator

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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