Nabors Industries Ltd (NBR) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen. We thank you for your patience and welcome to the first quarter 2006 Superior Well Services, Inc. earnings conference call. My name is Bill, and I'll be your conference coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to your host for today's presentation, Mr. Dave Wallace, Chief Executive Officer. Please proceed, sir.

Thanks Bill. Good morning, ladies and gentlemen. I'd like to welcome you to our Superior Well Services first quarter 2006 conference call. Joining me today is Tom Stoelk, our Chief Financial Officer. Tom will start today by giving an overview of our first quarter 2006 financial performance. I'll next give an overview of operations, and we'll follow with questions and answers. Tom?

Thanks Dave. I'd like to remind all those participating on the call today that a replay of our conference call today will be available to listen through May 24 by dialing 888-286-8010 and referencing the conference ID of 83181642. The webcast will be archived for replay on the company's website for 15 days. Additionally, our Form 10-Q was filed this morning shortly after the earnings release, and a copy of the 10-Q should be now posted on the company's website.

Before I begin my comments regarding the first quarter's operating performance, I'd like to make the following disclaimer regarding the call today. Except for historical information, statements made in this presentation, including those relating to acquisitions or expansion opportunities, future earnings, cash flow, and capital expenditures are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E 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 based on management's experience, perception of historical trends, current conditions, and expected future developments as are factors that it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks, and uncertainties, which may be beyond Superior's control, and which may cause Superior's actual results to differ materially from those implied or expressed by these forward looking statements. These risks are detailed in Superior's Securities and Exchange Commission filings. The company undertakes no obligation to publicly update or revise any forward-looking statements.

Okay. We're going to get started and talk a little bit about the first quarter results. We had a pretty good quarter. For the three months ended March 31, 2006, revenues, operating results, net income and EBITDA all reached record levels. Revenues totaled $47.7 million. That was approximately 83% above the comparable period in 2005, and sequentially, it was about 16% higher than last quarter. Operating income was 94% higher than the same period last year. It reached $10.4 million, and it was 38% higher than the fourth quarter of 2005 on a sequential basis. Net income for the three months ended totaled $6.4 million. And diluted earnings per share increased to $0.33. EBITDA, non-GAAP financial measure, increased 95% over the same period in 2005. It reached $13.6 million. And it was 35% higher than the fourth quarter EBITDA amount. Revenues for the three-month ended March 31, 2006 totaled $47.7 million. And it was a 21.7% increase over the same period in the prior year.

Each of the operating regions showed increases over the prior year. Revenues by operating region increased $9.2 million in Appalachia, $4.9 million in the southeast region, mid-continent region was up $6.5 million, and the Rocky Mountain region increased $1.1 million. On a percentage basis, revenues for the three-month period ended March 31, 2006 versus 2005 were up approximately 60% in Appalachia, 64% in the southeast region, and 109% in the mid-continent region. The Rocky Mountain region didn't have any operating results in the first quarter of 2005. We opened that service center up in the second quarter of 2005. So, its results were up 100%.

Really, higher utilization levels, coupled with pricing improvements led to these increases in 2006. At the beginning of 2006, the company implemented pricing increases in all operating regions. After implementation of these increases, the company estimates that the net increase to sales was approximately 5%, after implementation.

When comparing the first quarter 2006 results to the fourth quarter 2005, sequential quarter revenues were up approximately 16%. Revenue by operating region increased by $3.7 million in Appalachia, and by $2.4 million in each of the southeast and mid-continent operating regions. The Rocky Mountain region was $2 million lower in 2006, versus the fourth quarter in 2005, primarily due to seasonal slow downs in that area. The fourth quarter amounts in the Rockies we've benefited quite a bit by higher activity levels producers who are trying to get a lot of the work completed before the seasonal shut ends.

On a percentage basis, comparing the first quarter of 2006 versus the fourth quarter of 2005, sequential revenue growth was approximately 18% Appalachia, 24% in the southeast region, and 34% in the mid-continent region. Cost of revenues increased 82.6% to $31.7 million, compared to the three month ended period in 2005 of $17.4 million. Approximately $8.7 million, or 61% of that increase between periods is attributable just to an increase in drilling activity to customers in our existing service centers. And the remaining $5.6 [million that increased in cost revenue] is really related to the establishment of our new service centers.

As a percentage of revenues, cost of revenue decreased slightly to about 66.6% in 2006. It was 66.8% in the prior year. And it was 66.6% in the fourth quarter of 2005. So, it was fairly flat. The percentage decrease was primarily due to lower labor expenses and material costs, which was partially offset by higher depreciation charges from the additional equipment that we placed in service.

At the end of the year, we had approximately 646 employees. During the quarter, our head count grew approximately 100 employees. Now we have 747 employees as of March 31.

As a percentage of revenues, material costs decreased 0.9%, 2006 versus 2005. And aggregate material costs increased $8.6 million to $19.4 million in 2006. Depreciation increased 28% - oh I'm sorry - to $2.8 million. It was roughly about $1.4 million in 2005.

Selling, general and administrative expenses were $5.5 million for the three months ended March 31, 2006. That compares to $3.3 million in the similar period in 2005. That's an increase of 68.4%. The portion of labor expenses included in G&A increased about $1.2 million to $3 million in the aggregate in 2006. Approximately $400,000 of that labor increase relates to the establishment of our new service centers in Utah, Michigan, West Virginia, Louisiana, and Arkansas. Labor expenses increased because we hired additional personnel - both on the sales and administrative side, as well as the management side to manage growth in those operations. .

Also reflected in the labor increase is a non-cash stock compensation of expense of approximately $400,000, which was related to awards under our stock incentive plan. As a percentage of revenues, the portion of labor included in G&A increased to 6.9% in 2005. In addition, legal and professional expenses increased to about $600,000 when you compare '06 really to the three-month period in '05. When you take a look sequentially, our G&A went down. It went down approximately $674,000 from the fourth quarter run rate. Primary reason for that is that we had a large amount of incentive bonuses in our fourth quarter of '05 because our performance was so good a lot of the incentive measurements and benchmarks were reached, and it increased our fourth quarter accruals by approximately $700,000 in the fourth quarter of 2005.

So, operating income was $10.4 million for the three months ended March 31, 2006. That compares to $5.4 million in 2005. And that's an increase of a little over 94%. Operating income increased approximately 38% from the fourth quarter of 2005. It was about $2.9 million increase. Primary reason for the improvement was higher revenues, due to increased activity levels at new and existing service centers, coupled with the pricing improvements I mentioned earlier. This increased operating income was partially offset by cost of revenue, and SG&A as described above. EBITDA reached $13.6 million for the quarter. It was an increase of 6.6, or about 94% from last year. EBITDA, as I mentioned previously, increased 35% sequentially from a 2005 quarter.

During the quarter, the company's capital expenditures were approximately $14 million. Increase was due to higher amounts of capital expenditures due to the opening of new service centers, as well as the addition of equipment at existing locations. At the end of the year, we had about 386 vehicles. Our truck count is approximately 425 vehicles now. So, we're up about 10% in total trucks. As previously announced, the company has budgeted approximately $53 million in capital expenditures, in 2006 with about two-thirds of those expenditures budgeted for high pressure equipment.

At this point, I'm going to turn the call over to Dave to discuss some operational highlights.

Thanks Tom. As Tom said, we had an excellent first quarter. We've reached new quarterly records for revenue, operating income, EBITDA, and earnings per share. This quarter compared to first quarter 2005, revenue was up 83%, operating income 94%, EBITDA 95%. Our growth momentum continues as our sector continues to look strong and our new service centers continue to develop and produce with the additions of new equipment. Our revenue growth outpaced the 20% year-over-year increase in U.S. rig count, with the impact of new service centers, market penetration, increased equipment utilization, and pricing momentum. Other than the Rocky Mountain region, which saw a seasonal slow down, our other regions had double-digit improvement over first quarter 2005 and sequentially over fourth quarter 2005. Most of these regions took advantage of a lower seasonal slowdown than previous years in improved utilization and pricing.

Our Appalachian region benefited from continued steady performance from a mature service centers. The addition of new service centers and equipment, and EMP companies wanting to drill through the slow season to maintain their drilling rigs, and spend their large 2006 capital budgets. Appalachian revenues were up 60% over 2005, and 17% sequentially over fourth quarter 2005.

Our new service center in Gaylord, Michigan continues to increase utilization and revenues. And our activity in West Virginia was very high, and less impacted than previous years due to seasonal slowdowns. We started catching open hole logging jobs from our new service center in Buchanan, West Virginia. And while [case hole] perforating in place in second quarter 2006.

Our new service center in northern Virginia was adding personnel and equipment in the first quarter, and will start generating revenue in April. Because the extremely high increase in drilling in southern Appalachia, northern Virginia will enter second quarter with expected utilization rates at close to 60%, which is above our normal new service center start-up utilization rate of 25% to 30%. Appalachian is in line with 2006 expectations.

Our southeast region saw an increase in revenues of 64% over first quarter 2005, and a 24.7 sequential increase over fourth quarter 2005. Most of this was due to increased utilization of our existing locations, and a continued development of our new service center in Bossier City, Louisiana. With the addition of extra simulation horsepower to Bossier at the end of 2005, Bossier has continued to improve its monthly revenue and utilization. We also see some market share gains in Mississippi. Our down-hole surveying services in Alabama have completed staffing and will start generating revenue in second quarter. Packaging of down-hole surveying services in Alabama will give us a stronger marketing position and help to maximize our utilization of [stimulation] crews.

Our mid-continent region experienced largest year-over-year improvement. Revenues were up 209% compared to first quarter 2005. We generated a sequential increase of 33.8% compared to fourth quarter 2005. Mid-con benefited from increased utilization pricing at existing locations, and the addition of equipment at our new service center in Van Buren, Arkansas. We did not see the rainy season slow downs as we did in 2005, as the area suffered through a drought in first quarter 2006. Our new location in Van Buren, Arkansas has both cementing and simulation crews operating all quarter. Our cementing and simulation crew utilization are continuing to increase in Van Buren. Our down-hole surveying operations in this region benefited from the no-rainy season, and had a 217% increase in revenues over first quarter 2005.

After an extremely robust fourth quarter in Rocky Mountain region, we witnessed a large seasonal drop-off in activity for this region. We benefited from high fourth quarter utilization prior to the seasonal closure areas, but were negatively impacted in the first quarter. Many of our customers were affected, which lowered our first quarter revenues and utilization. We see this as part of our 12 to 24 month new location start-up learning curve, [inaudible] business, and this assists us in pinpointing where we need to plan improvement. We sent underutilized equipment from Vernal to our other regions to help support the busy regions.

We're still adding cementing personnel and equipment to Vernal, and will be generating revenue in the second quarter. Consequently, this will also create additional simulation work as we can package the two services. Our new service center in Farmington, New Mexico continues to progress. We're currently putting our infrastructure in place, and plan to be generating revenue in third quarter 2006. We've seen some equipment delayed for stimulation and nitrogen equipment for this location, which will push our start-up from second quarter to early third quarter.

In the southwest region, our new service center in Alvarado, Texas to service the [Barnett Shell Play] continues to progress on schedule. We're preparing our infrastructure and staffing additional personnel. Our equipment is still on schedule to arrive in third quarter. This area continues to be extremely busy, and we see additional drilling rigs coming into the basin. As a result, we're receiving more and more customer calls looking forward to our opening in the third quarter. We also opened a sales office in Houston in April. Many of the largest CMP companies in the U.S. have offices in Houston, and this will benefit all our regions with increased coverage. Our sales manager is a former account leader for one of the Big 3, has worked in Houston for the last 11 years.

As Tom mentioned, we've spent $14 million of a planned $53 million in CapEx during the first quarter. We increased our number of units to 425 versus 386 at the end of the year. We're seeing a few delays, but for the most part our equipment is staying close to schedule. We continue to look for the long lead items and find ways to offset any negative impact.

As far as personnel, we continue to effectively build our workforce, and our new expansion service centers, and existing service centers, where we will add additional crews. We have grown our workforce 15.6% over December 31, 2005 total in preparation for our 2006 business increases. We've initiated employee stock plans in January 2006 to give incentives to key management, sales, and technical personnel. We continue to be very effective in meeting our personnel needs for our new and existing service centers.

We continue to see inflation for our equipment, materials, and personnel. We initiated a price book increase in January to offset these. This increase was approximately 10% to 12%, book price increase, and about 5% to 6% to the bottom line. We are seeing pricing momentum in our high utilization markets. We're seeing some reductions in discounts for these areas. Our January price book increase was passed along to the majority of our customers. We'll continue to monitor inflation as the need for additional price book changes.

As evidenced by the 20% increase year-over-year in drilling rigs, and our 83% revenue growth, we think our customers continue to be very bullish on the market. At this time, there appears to be little customer concern over the short-term drop in gas prices, as most of our customers continue to see the industry as a very strong multi-year cycle. Most of our operating regions have long-term producing wells and reserves, and our customers expect gas prices to continue to fluctuate. We continually monitor each of our regions to maximize our opportunities in the busy spots and determine if it's necessary to ship resources. First quarter also showed that many customers are continuing to drill through the muddy season instead of giving up their drilling rigs.

In closing, I'd like to thank our employees, customers, and suppliers who are all very important part to the success of our company.

Bill, I'll now turn it back to you and will entertain questions.

Thank you very much, sir. [OPERATOR INSTRUCTIONS]

And our first question comes from the line of Kim Pacanovsky of KeyBanc Capital Markets. Please proceed.

Hi gentlemen. Good morning.

Hi Kim.

Good morning, Kim.

How much of the improvement, or I should say the non-seasonality that you saw in Appalachia, was simply due to a warm winter versus other non-related, non-weather related factors?

Usually a warm winter impacts in that there's a little more freeze and thaw, where it has more negative impact on the road - versus when we get a heavy freeze and everybody stays active right up until the thaw break up. I think we saw more of people wanting to drill through the muddy season versus an impact of a milder winter.

Okay. In the big picture in the Rockies can you tell us what you see coming down the pipe? I think that you and I had spoke about this previously, about the Rockies just coming in, the seasonality was responsible for some weakness there. But it was a little bit more seasonal, I think, than we had expected. Is that simply due to the fact that you guys haven't been through a winter there before, and you kind of didn't know how deep the seasonality would be? Or were there any one-time factors that affected you?

We did see that. That it's our first winter in the Rockies, and probably a little slower than expected. Another thing we saw is one of our more active customers for that region has been doing a lot of reworks where we actually had stimulation doing additional zones. They concentrated their service rigs on doing more rod and tubing jobs, just to maintain production on current wells during that time period. Now they're starting to shift those rigs back to the reworks.

Okay. Would you care to make any kind of a projection for what revenue in the Rockies is going to be in the second quarter?

We saw the low of quarter was February. And we saw improvement in March. And we continue to see improvement from there.

Okay. Could you break out what the March revenue was?

March was about -

Four hundred and something thousand. Low in February was $200,000, and we jumped up to $450,000, and then April's showing improvement from there.

Okay. Have you continued to see equipment orders stretch even further than maybe what you talked about a quarter ago?

I think we're seeing that we need to order quicker for '07. And we're currently reviewing our CapEx for '07. But as far as what we had on '06, most of the equipment is staying pretty close in line with what was expected. We take an opportunity to - the high-pressure pump is still one that's longer term. We take opportunities to pick up additional units of those just to help continue our build and keep it on cycle.

Okay. Could you give me the three largest customers in the mid-continent?

It would be Chesapeake, Newfield, and Lane Energy.

Lane?

Right.

Okay. What has your activity level been with Chesapeake up in Appalachia?

We're starting to do a little bit of work for them down in southern Appalachia, where they did the CNR acquisition. Our activity level is extremely strong down there. As we mentioned, Norton's coming on at lot higher utilization, which is just current accounts that we were working for. It continues to pick up. We're pretty booked up down there right now.

Could you go through what the utilization was for your different geographical regions just based upon existing offices?

Sure. Estimate for Appalachia was probably 70%. We still had some weather gaps in there, but we saw the spring slowdown up in Michigan hit. In southeast, probably close to about the same 70%. And, probably Alabama was a little bit off based on permits being a little bit slow down there. But the other two areas were actually a little busier than probably expected, which is Mississippi and Louisiana. As far as mid-con, it was probably closer to 60%. And Cleveland, Oklahoma was fairly active. Van Buren was still picking up a little book. And then, as you can tell, from the Rockies, we were pretty soft there.

What was the utilization of, if you look at a year ago, for Appalachia and the southeast?

Appalachia would have been a lot softer because, again, southern Appalachia pretty well shuts down [inaudible] northern Pennsylvania. It was probably more like 50% to 55%.

Wow. So that was a big improvement.

Yes. And, again, this was our first winter in Michigan. So, we kind of had to work through it to see when frost laws were going to hit in.

Okay. Alright. I think that's all I had for now. Thank you so much.

Thanks Kim.

Thank you very much, ma'am. [OPERATOR INSTRUCTIONS]

Our next question comes from the line of Scott Gill, Simmons & Company. Please proceed.

Yes. Good morning, gentlemen.

Good morning, Scott.

Good morning, Scott.

Dave, I was wondering if you could help us understand the Appalachian business a little more here. If we looked at the rig count - I'm looking at a sequential progression here - just the [Baker Hughes] rig count showed rig count to be flat sequentially, Q4 Q1. Yet you and one of your primary competitors posted 17% sequential revenue growth. Can you just walk us through the drivers of Appalachia and how we can perhaps better understand revenue progression in that part of the country with respect to pricing activity and any type of secular change taking place?

One thing, a lot of the rigs in Appalachia are real small rigs and they don't make the Baker Hughes rig count. So, there actually has been addition of rigs in this region. And they usually don't hit some of the big rig count guys. But there has been additional rigs. Probably there has been pricing improvement. The price increases that we've had have been passed along. Probably the biggest jump though is just the increased utilization. And northern Appalachia has stayed fairly consistent as far as year-over-year utilization, slightly up. Probably the biggest jump is in southern Appalachia where in previous years they - just because the freeze thaw and it's so hilly down there that they haven't worked in the past. Where this year, again, they kept the rigs going and stayed a lot busier than normal.

Dave, is there some change also going on with the type of jobs that are being prosecuted in that part of the country? Or, are your customers contracting your equipment even though there's down time associated that maybe they weren't doing in the past?

We're not doing any type of contracts as far as mid-stage where they can pay for that, any time of on-call time or anything like that. The job size probably has increased some. One because there's probably additional stages, which means incremental revenue adds per well on those. So we're seeing additional stages being added.

Okay. I guess for you, Tom, on the SG&A expense line item, can you give us any sort of guidance how that should progress for the balance of 2006?

We don't give guidance Scott, but let me attack the question this way. We've got new service centers, four start ups going in this year that we've announced. We had G&A will go up as a result of that. Historically, when we've looked at some of our service centers of similar size, it's been roughly around $50,000 per service center, per month when we do that. So, if you do the math on a monthly basis, you're probably looking at $150,000. Something like that. And then we've got - David mentioned we'll staff up. He talked about the Barnet. We've indicated that's going to be in the third quarter, as well as Farmington is going to push to the third quarter.

We will staff those up beginning harder in the second. Little bit more in the third. And heavier in the fourth as far as layering those costs. But because of the new service centers going in, you've probably got $150,000 to $200,000 a month once we get fully staffed in those locations. And it will trend up to kind of get to those levels if our historical relationships stand there.

As far as the legal and professional and other expenses and things like that, the fourth quarter of '05 is pretty similar to what the first quarter of '06 looks like. We had a lot of - because we were a new public company coming out of the IPO at the end of July and August, we utilized a lot of professional assistance in that third and fourth quarters of '05. And when you compare those quarters, they're small increases, but not real significant.

Okay. And the only other thing I guess, Q4 versus Q1, was bonus -

That's right. We had a lot of - as I mentioned in the call, I think I used a number around $700,000.

Right.

There were a couple of different things going on there. One is you had a new company that was public. So, you didn't have things like compensation committees and boards meeting on [inaudible] plans and things like that. In the fourth quarter, because of revenue targets on the operating side, as well as bonuses with executive management and things like that, increased SG&A approximately $700,000. So that was a change in estimate. They hit some performance targets, and all of a sudden once they hit that hurdle, then the incentive compensation kind of went up.

Okay. Are you accruing for that presently this year?

Yes. We were accruing last year for it too. It's just this year I think we have better visibility because the company's been operating. You have a board that's more familiar with the company, and the company's more familiar with processes and things like that.

Okay. Thank you.

You bet.

Thanks Scott.

Thank you very much, sir. [OPERATOR INSTRUCTIONS]

Our next question comes from the line of Poe Fratt of A.G. Edwards. Please proceed.

Hi Dave. Hi Tom. I apologize I am on a cell phone too. So, hopefully I'm coming through clearly. I just had three quick ones. I think you talked about pricing in the first quarter, or at least it'd be you had some other price increases - about 5% first quarter. Can you talk about the future plans? And then if there's any difference as far as geographically where you're seeing better pricing than other areas? And then secondly, if you could talk about whether the pressure pumping markets having any impact from the amount of equipment that's being added from an industry standpoint? And then thirdly, are you getting concerned enough about equipment availability to accelerate forward some of your purchasing plans for 2007?

As far as pricing goes, the last two years we've had price increases in January and in August. We will currently monitor our position and also our cost structure and determine if we're going to follow a similar path. As far as pricing between regions, we usually see more of the newer service centers have less pricing impact, because we're still trying to build up our utilization versus mature service centers, where we're very busy and there's little more pricing momentum going there. It's kind of two forms. There's book price increases and also discounts. So, in our stronger areas, we're seeing some improvement as far as discount reduction associated with the very active areas.

I guess CapEx was one just with the stretch out in equipment [inaudible]

We have some ongoing relationships with some of our suppliers, and they keep us in the build schedule for '06 and also '07. If we ramp things up, we may need additional build spots. And we will currently look at our [inaudible] for '07 and determine if we need to plan on additional spots for these guys.

We are though clearly looking as those equipment times slide out whether we need to get some, get going on '07 equipment orders. No doubt.

[inaudible] could you give us a flavor for if you sense any impact of the additional equipment that you and others are adding to the pressure pumping market?

At this time, usually where you see the impact is additional discounting and lowering of prices. Or you start losing jobs to guys that already have extra crews in the regions. At this time, I don't think we're seeing much of that. Their pricing's staying fairly strong, and also our utilization staying pretty strong. Again, some of our newer locations we're continuing to add utilization. But, for the most part, it seems like the market has grown faster than the people adding additional equipment There are certain parts - we work in the several categories of service. On our technical pumping, nitrogen cementing, stimulation, and certain regions we may be cementing and nitrogen, higher demand that may drive the total package. At this time, the market's continuing to outgrow the build.

Great. That's helpful. Great job.

Thanks.

Thank you very much sir. [OPERATOR INSTRUCTIONS]

At this time, we have no further questions.

Well thanks, Bill. Again, I'd like to thank everyone for joining us today. And we look forward to speaking with you next quarter. Thank you.

Thank you very much, sir. And thank you, ladies and gentlemen, for your participation in today's conference call. This concludes your presentation and you may now disconnect. Have a good day.