Nabors Industries Ltd (NBR) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to your second 2006 Superior Well Service earnings conference call. My name is Jean, and I'll be your conference coordinator today. At this time all lines are in listen only mode and toward the end of the conference call we'll be taking questions.

[OPERATOR INSTRUCTIONS]

At this time we'll turn the call over to your host Mr. David Wallace, Chairman and CEO.

Thank you, Jean. It is my pleasure to welcome everyone today to our Superior Well Services second quarter 2006 conference call. This marks our first anniversary since the [inaudible-technical difficulty ] IPO on July 29, 2005. So we'd like to thank all those who own ownership in our company. Joining me today is Tom Stoelk, Chief Financial Officer.

Our agenda is as follows, Tom will begin today's conference call by giving an overview of our financial for the second quarter 2006. Following his presentation, I'll give a review of operations for each region, and then we will entertain question 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 August 23rd, by dialing 888-286-8010 and referencing the conference ID number of 56492614. Webcast will be archived for replay on the company's website for 15 days. Additionally, our Form 10Q will be filed later today. And once it is filed it will be posted to the company's website.

Before I begin comments on the second quarter's 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 opportunities, future earnings, cash flow and capital expenditures are forward-looking statements within the meaning of 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, expected future developments and other factors it believes are appropriate in 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. The 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, let's get started discussing our second quarter results for the three months ended June 30, 2006, revenues, operating income, net income, EBITDA all reached record levels. Revenues totaled 54.6 million that was an 84.5% increase over the same period in the prior year. Sequential growth from the first quarter was 6.9 million or approximately 14.5%. Operating income increased 134% over the same period in the prior year and reached 10.7 million. Sequential growth from the first quarter, it was up approximately 2.9% or 307,000.

Net income for three months ended June 30, 2006, totaled 6.4 million, while diluted earnings per share increased to $0.33. That's approximately $0.20 higher than last year's diluted earnings per share adjusted for pro forma income taxes. As many of you know, last year prior to the IPO, the financial statements were the combined partnerships, they weren't subject to taxation when you pro forma the impact of income tax they were approximately 154% higher than a year ago.

EBITDA on non-GAAP measure increased 94.5% over the same period in the prior year to 14 million, sequential growth in EBITDA was 3.1% when you compare it to last quarter.

Revenue for the three months ended June 30, 2006, totaled 54.6 million which was a 25 million increase over the same period in the prior year. Each operating region had revenue increases over the same period in the prior year. Revenue by operating region when compared to the same period last year increased 11.9% in the Appalachian Region, 6 million in the Southeast Region, 4.6 million in the Mid Continent Region and 2.5 million the Rocky Mountain Region.

On a percentage basis increase revenue for the three month period ended June 30, 2006, versus the same period 2005 grew up approximately 74% in the Appalachian Region, 76% in the Southeast Region, 87% in the Mid Continent Region. The Rocky Mountain Region began operations during the second quarter of 2005 so its results were up 694%; it wasn't a full quarter last year.

Higher utilization levels coupled with pricing improvements led to the increases that we were seeing in 2006. At the beginning of 2006 the coupling implemented pricing increases in all of its operating regions; the net increase was approximately 5%.

On comparing the second quarter 2006 revenues to the first quarter revenues, the sequential quarter revenue growth was approximately 14%. Revenues by operating region increased 3.5% in the Appalachian Region and 1.4 million in the Southeast Region and it was 200,000 in the Mid Continent Region. On a percentage basis comparing the second quarter 2006 to first quarter sequential revenue growth was, it was 14% quarter-on-quarter in Appalachia, 12% in Southeast, 3% in the Mid-Continent Region and 154% in the Rocky Mountain Region. As many of you may recall, we had a soft first quarter due to seasonality in the Rocky Mountains so it was up and rebounded quite nicely.

Cost of revenue increased 76.2% to 37.7 million for the three months ended June 30, 2006, compared to 21.4 million over the same period a year ago. That's a 16.3 million increase. Of that 16.3 increase approximately 8.9 million was attributable to drilling activity in our existing service areas. Those are service areas that are-- that had been open for approximately greater than one year period of time.

The remaining 7.4 million increases in the cost revenues was attributable to the establishment of our new service centers. During the second quarter we opened up the Norton Virginia Service Center which finaled the opening of the Buckhannon, West Virginia Center that was opened up late in the first quarter. Second quarter cost of revenues included approximately 700,000 in the connection with the establishment of two new service centers in Texas and New Mexico.

And cementing operations in Utah that haven't began generating revenues, but we expect to generate revenues in the third quarter. As a percentage of revenue cost of revenue decreased - - as a percentage cost of revenue decreased to 69.1% for the three months ended June 30, 2006 from 72.3% a year ago. The decrease is primarily due to proportionally lower labor and material costs, which was partially offset by higher depreciation on increased capital expenditures. As a percentage of revenues labor was approximately 19% aggregate labor expenses increased 4.9 million to 10.4 million.

Employee count during the quarter increased approximately 15% with a majority of employees being hired and trained to staff the new locations in Texas and New Mexico that we expect to begin operations in the third quarter. We ended the quarter with approximately - - well we ended the quarter with 858 employees, that's up about 33% from the first of the year.

As a percentage of revenues, material costs decreased approximately 3.2% from the 2005 levels. And that's really due to, I think, just increased utilization, increased productivity and the impact of the 5% price increase in January of 2006. Aggregate material costs increased 8.6 million to 19.4 million in 2006. Depreciation increased to approximately 3.1 million in [2001] on increased capital expenditures.

Selling, general and administrative costs were 6.2 million for the three months ended June 30, 2006, which compares to 3.6 million for the three month period ended March 31, 2005. That's an increase of 71.6%. The force and labor expenses included an SG&A increase 1.4 million to 3.4 million in 2006, approximately $0.5 million labor expense increase relates to the establishment of our new service centers, service centers operating less than one year. Labor expense increases related to our existing facilities in corporate grew approximately 600,000 and 300,000 respectively.

Labor expenses increased because we hired additional management and sales administrative personnel. We expanded our sales and technical staff this quarter by adding city sales offices in Houston and Oklahoma City as well as adding additional sales support in the Mid-Continent Region. Also reflective in labor expense is the non-cash compensation expense of approximately 400,000 related to the awards out of our stock incentive plan.

As a percentage of revenues, the portion of labor expense included SG&A decrease from 9.4% to approximately 9.1% in 2006. Other components of the increases between periods, Sarbanes Oxley complaint expenses, increased legal and professional expenses and director expenses. Sarbanes Oxley expenses compared to last year up approximately 200,000, legal and professional up about 200,000 and director expenses up about 100,000. We didn't have director's expenses in the prior 2005 prior to the IPO.

Taxes, rent and advertising and office expenses for three months ended June 30, 2006 compared to 2005 increased 200,000; 100,000; 100,000 and 200,000 respectively. SG&A between the first quarter 2006 and the second quarter 2006 increased approximately 627,000, approximately half of this increase relates to the administrative staffing added for our Texas and New Mexico facilities that we expect to begin operations in the third quarter.

Approximately 100,000 relates to sales and technical additions. The sales - - the city sales offices and additional sales individuals I referenced previously in the call, approximately 100,000 relates to increased income taxes on higher revenues and the remaining 100,000 really relates to increased public expenses. We had our annual meeting and a couple of director meetings during the second quarter period.

Operating income was 10.7 million for the three month ended June 30, 2006 compared 4.6 million for the three month period ended June 30, 2005. That's an increase of 134%. The primary reason for this increase was increased drilling activity in our existing locations, Appalachia, Southeast, Mid-Continent as well as the Rocky Mountain Regions. And to the less extent the new service centers.

Operating income and loss in the Appalachian, Southeast, Mid-Continent, and Rocky Mountain and Southwest Regions increased 3.5 Appalachia, 2.4 million Southeast, 0.5 million Mid-Continent, 0.3 million Rocky Mountain and the Southwest Region which is a start up region for us no current revenues, had an operating loss of approximately 600,000.

Approximately 1.8 million of the operating increases related to the establishment of our new service centers. The three months ended June 30, 2006 include approximately 1 million of operating costs in connection with the establishment of the new centers in Texas and New Mexico as well as cementing operations that we expect to be getting to begin operations in our Vernon Utah service center third quarter, Dave is going to comment on those during his operation remarks. The Texas and New Mexico service centers will begin probably mid-quarter of the third quarter. The increases in operating income were partially offset by the increases in cost of revenue SG&A that I referenced earlier.

EBITDA reached 14 million for the quarter, its 6.8 million or 94.5% increase over the same period. Sequential EBITDA increased from first quarter was 3.1%. During the first half of 2006 the company's capital expenditures were 27.9 million due to increased capital expenditures to open up our new service centers as well as additional activity in our existing centers. The company presently has budgeted 53 million in capital expenditures in 2006, with approximately two-thirds of that slated for higher pressure and pumping equipment.

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

Thanks, Tom. As Tom mentioned, we've had an excellent quarter. This quarter in comparison to 2005 revenue was 85%, operating income increased 134% and the EBITDA was up 95%. The 85% revenue increase demonstrates that we continue to execute our growth plan expanding our footprint with additional service centers and continue to make added market penetration in our existing service area.

Our 85% revenue growth out-paced the red count increase year-over-year of 22% and the 10 to 12% pricing improvement we have achieved in the last 12-months. Our continued improvements in operating margins show that we are not only focused on revenue growth, but the operating income that goes with it. Despite the concern of softening gas prices and higher than average gas storage volumes, we do not see any signs of slowdown among our customers and review our sector remaining strong. Consequently, we continue to see market expansion opportunities and the demand for further equipment.

Our second quarter is known as our startup quarter. In previous years we've tried to most of startups in the second quarter to take advantage of our seasonal softness. We utilize experienced personnel from our effected locations to help train personnel at our new locations and to have new crews and equipment in place for the busy third and fourth quarters. This provides the short-term dampening on our margins with location staff and personnel trained with little revenue generation. But has proven successful in helping our company continues to expand operations.

This year was slightly different. Many of the normal muddy season locations stayed more active, as customers didn't want to give up their drilling rates. We expedited hiring a new service centers to allow for more training time. Subsequently, we couldn't count on loaning personnel from our established service centers, which didn't slow down and would also be very busy in the third quarter. As Tom mentioned, this added 1 million operational costs for the second quarter from Alvarado, Farmington and cementing operations in Vernal, but have better staffed and trained at these locations for activity when it begins in the third quarter.

Looking at the regions. Our Appalachian Region which contributed 51% of our revenues continues to be a steady performer. Revenues for the quarter were up 74% over 2005. We benefited from less muddy season slowdown than previous years. With Kimball and Norton starting to produce, high utilization of equipment and better pricing. April was a little sluggish with holidays and muddy season for several locations, but these locations gained momentum after April. Norton, Virginia came on line in second quarter and we added more equipment to Buckhannon, West Virginia.

Equipment utilization for both of these locations was within the 60% range. These utilizations will improve with the maturing of our operations. Our location in Gaylord, Michigan was a little sluggish coming out of the [road restriction season], but has since picked up. We benefited from a large increase in activity from Sampson Resources in Michigan, and we expect higher utilization to continue for the remainder of the year. We've added some resources to Northern Pennsylvania to meet the increased demand for high oil prices. Overall, we're very pleased with the performance in Appalachia and expect the region to continue to remain busy with additional drilling rigs being added to this region.

Turning to the Southeast Region, which contributed 25% of our revenue for the quarter, we witnessed strong performance. Our mature operations in Alabama and Mississippi continue to have significant utilization and results. We initiated packaging our wire lines services in June in Alabama and has proven to be a success. The [Floyd Shell] activity in Alabama is currently being tested and shows increased activity and it may add incrementally to this basin. Our [Butcher City] operations is maturing and producing great results. The Northern Louisiana, East Texas market is expanding with additional drilling rigs being added. That's keeping our equipment very busy. As a result, we are further developing our customer base in this area.

Activity in the Mid-Continent Region has grown, but was a little lighter than expected. April was a wet month in this region and softened our revenue and margin, but shared improvement in both May and June. This region accounted for 18% of our revenue for the quarter. Our Van Buren operation continues to go through the new service center inconsistency, but has expanded its customer base and job mix mainly in the conventional part of the Arkoma basin. They've recently started working for Southwestern Energy.

We've increased sales personnel for this area by adding a city salesman to the Tulsa and Oklahoma City market and also a salesman in Western Oklahoma. We continue to grow our wire-line operations in this region with the purchase of assets from [Pettit] wire-line located in the Enid, Oklahoma. Our new Enid wire-line operation becomes our third location in Oklahoma and our 18th location overall. Enid will place resources closer to the busy Western Oklahoma market.

After a soft third quarter, our Rocky Mountain Region bounced back. Vernal, Utah revenues increased sequentially 153% over first quarter and contributed 5.2% of our revenue. This was also up 694% from 2005 revenues. We continue to develop new customers and increase our utilization fertile. Submitting operations began in July, and we are now packaging this with our simulation services. We are receiving more calls with dropping gas prices. This is a region that can be affected by lowering gas prices to challenged well economics.

Customers see us as an option to lower their well costs, which keep their projects economical. One customer who recently switched to Superior announced in their earning report that we have good products, equipment and personnel at a lower price. And this is a way to improve their project economics. Our motto is "same technology at a lower price". Our second location in Rockies is Farmington, New Mexico is nearing operation. Farmington is expected to generate revenue in the third quarter from stimulation in nitrogen services.

Staffing is going very well and equipment is being added. We expect this to be a typical start up with 25 to 30% local utilization. Farmington is expected to pick up additional overflow work from Vernal to improve their utilization. The addition of nitrogen pumping services to Farmington will be our first in the Rockies region, which eliminate the need to support our nitrogen services from our Mid-Continent Region. Customers in Farmington are requesting we add cementing service to this location. This location is right in line with our expectations.

In the Southwest Region, Alvarado, Texas is close to generating revenue. This is one of our largest startup locations due to the amount of people and equipment needed. We are close to fully staffed on personnel and have been training them throughout the second quarter. This preparation will allow us to begin generating jobs in the third quarter. Equipment deliveries at this point are inline with expected timing. We continue to be very excited about this location, we see additional drilling rigs coming into the Barnett play and the drilling activity continues to off pace the expansion of service equipment.

We expect to enter with high utilization of our crews and equipment. Customer acceptance is extremely good for this startup as we have worked for most of the largest Barnett operators in other regions. This location is strategically positioned to cover other basins besides the Barnett. There are approximately 250 drilling rigs within 150 mile radius of this facility, which grants us flexibility in pursuing high profit activity.

We had a total 481 units at the end of the quarter which is 13% sequential increase from our first quarter truck count. As Tom mentioned, we spent 28 million of our 53 million 2006 Cap Ex budget. We continue to see most equipment arrived as anticipated. Our additions for the third quarter will be large since most of the equipment for Alvarado and Farmington projects will be arriving at that time. We currently ordered about 74% of our 2007 Cap Ex of 82 million.

We are now evaluating our suppliers for price and time limits of delivers to decide if we need to adjust our orders differently to meet 2007 plans. Most of equipment suppliers are dependent on others to meet their equipment schedules. If we observe ongoing delays from certain suppliers we may ship some orders to others who have been prompt in deliveries to better schedule or additions in 2007.

As far as personnel, clearly we continue to effectively build our workforce. Our personnel increased 15% sequentially over first quarter. With most of the personnel being added to our new operations in Alvarado, Farmington, Enid and Vernal Smiting. We started staffing earlier for these locations in order to have them trained when the equipment arrives during the third quarter. In the past we have planed on the startups in the second quarter, which allows us to send experienced personnel from other locations. These personnel will be busy during the third quarter and we needed to hire and train the new location personnel earlier.

We continue to see inflation for equipment, fuel, personnel and materials. To offset this we've initiated a price increase effective August 1, 2006 net of discounts of about 5% to the bottom line. In most of our areas we also observe a shortage of equipment, high turndown rates from our competition and pricing momentum. We will actively monitor each of regions for utilization versus pricing to secure the most profitable mix.

At this time we are not noting a material shortage to be as dramatic as in the past. Additional cement and frac fan supplies have been added and we continue to add to our rail cart fleet to reduce the expense of reporting long haul trucking of material. Any hurricane disruptions in the gulf can have a negative impact on materials and pricing. As evidenced by our strong second quarter performance, we do not see any drop off by our E&P customers in drilling plans. We continue to monitor drilling rig count which is up 22% over 2005 and additional drilling rigs are being added.

Most have decided at this point that they will continue to drill despite lower gas prices. We still see the development work areas continuing to grow and this is were we are positioned. The development area fitter strategy as customers are trying to optimize their well costs. Our strategy of same technology at lower costs fits nicely with their customer strategy of lowering their E&P costs for MCS. Customers realize if they give up their drilling rigs their spot with their service company, someone else will pick up the equipment and they may not get their rig back and be able to meet their drilling goal. We continue to be bullish on this sector.

We continue to look at acquisition candidates but remain extremely selective. We are very comfortable growing our company organically as we look at acquisitions as more of a tool for entry to new markets and our main growth strategy. We consider most acquisition candidates to be a little pricy in this environment and we won't buy foolishly. At this time we want to offer special thanks to our employees who work consistently every day to make our company successful. Our vendors who assist us in providing services to our customers and our customers who we value and recognize as our motivation to remain superior.

We will now entertain questions.

[OPERATOR INSTRUCTIONS]

We have a question from Scott Gill with Simmons.

Yes, good morning gentlemen.

Good morning.

Dave, you just talked about your most recent price increase effective first of August, you said 5% net of discount for the bottom line. Is that 5% to impact the revenue or were you talking about 5% on the operating income line?

That would be 5% added to the revenue part.

Okay, thanks. And I guess with the Mid-Continent you talked about April was a very wet month, you saw recovery in May and June. If you kind of neglected April, would May and June be a sequential improvement May and June be more or less in line with what you say in Appalachia and Southeast. In other words kind of up ward 15% sequentially?

Yes, that's pretty close to that Scott.

Okay and I guess my last question here, one of the tough things about modeling your company, you always have these startups which kind of make forecasting lumpy, but as we look into the third quarter, you talk about increasing your work force by 15% that are now fully trained. Are you looking at Q3 to be up sequentially to be as strong as what you saw in Q2 versus Q1?

Q3 revenues?

Correct.

We should see the other two locations coming online, Farmington and also Alvarado, we're going to see a little impact in July where they have the people but no revenues, but we'll start generating revenues in August for both of those.

Okay, but the company in total, should we see kind of the same type of strength sequentially?

It's looking like a pretty busy quarter for us.

I would imagine with Appalachian coming out of the spring thaw that should be very strong as well.

Yes.

All right. Thank you.

Thanks, Scott.

And we'll take our next question from Kim with KeyBanc Capital Markets.

Good morning, Kim Pacanovsky.

Good morning, Kim.

Hi Dave. Hi Tom. I was on that Gasco call and heard the nice things they said about you. It was nice to hear. Who else are you working for in the Rockies right now?

El Paso was the one that started us in the Rockies. So we're doing some work for them. Since we've added so many, a company called [inaudible-microphone inaccessible] Fidelity is given us a larger program and a lot of the regional independent Elk, Marion, we're doing some work for Pioneer. Also Dominion, so it's kind of a mix bag.

Okay and I know it's hard to supply any kind of guidance with a start up, but can you lead us to some kind of a number for third quarter for the Rockies?

[Inaudible-microphone inaccessible] continues to get a little busier and we're right on the edge of getting Farmington going. So, not sure I have a good guidance number for you.

Okay, we'll take our best shot. And Norton, the first quarter was about 60% also on the utilization, does that -- those numbers serve me correctly, so you're flat there?

Actually Norton didn't start until second quarter.

Oh it didn't, okay.

Yes, it started second quarter at about 60% utilization.

In its first quarter?

In the first quarter of [inaudible].

Wow.

Right.

Okay and so is it making positive margin with that kind of utilization?

Yes, it is.

Yes, I would imagine so. And for the Houston office, are there jobs that are signed, sealed and delivered and ready to go when you're fully both staffed and have all your equipment in?

Yes, for Alvarado?

Yes.

Yes, that's looking really good. Again, there are more rigs coming in all the time. The customers in that area talked about the backlog they have of activity and they just keep saying, when you guys are going to be ready for your first job.

Okay and in the third quarter do you expect more personnel being added or are you pretty much fully staffed right now for the new offices?

We'll be adding some additional personnel but we are in pretty good shape for most of our current operations.

You won't see the increases like you saw in the first [inaudible].

Okay, that's what I'm getting at.

Yes.

Okay, great. And in the Mid-Continent you said you started working for Southwestern, what type of jobs and how many have you done for them and can you talk about that a little bit more?

Yes, we're doing a lot of pumping work, smaller jobs. Then we've also been doing some simulation work on some of their conventional rework stuff. And this was a good way for them to start getting us involved.

Yes.

And that's kind of -- pretty typical, started small and then keep adding to us from there.

Okay, great. Last question, you mentioned the acquisition environment and said that things are still looking pricy, with the downswing in gas prices that we saw, which is now thankfully moving in the opposite direction, you haven't seen anything attractive out there?

We continue to look. One thing we are seeing is there seems to be little more stuff popping up, but there's some people out there a little hungrier than we want to be compared to what we can do by just organically growing the business. We feel like our best money is spent organically growing it.

Okay, great. Thanks a lot guys, nice quarter.

Thanks, Kim.

I'll take our next question from [Kurt Muller, RPF].

Good morning.

Good morning.

Good morning.

I apologize, I was on the call late I think you gave this before I got on. What was the sales increase in existing service centers during the quarter?

Revenues increased from existing service centers, let me look that up. Just a second. I believe it was a 11.9. Do you have another question, let me double check that from - -.

Sure

--I've just misplaced what I wanted.

While you're checking that, I was curious, you mentioned you had not seen a decrease in your activity from your customers despite the decrease in natural gas prices at abnormally high levels, why do you think you have not seen a decrease in demand in your customers, why not?

Well, one thing we see is-- a lot of the plays we do are resource plays which are going to be longer term, long-life projects. I think their expectations are is that the gas price is going to fluctuate, but it's a long-term play. And where they don't see a quick flush production, therefore they have to kind of base their project on that.

Okay.

14.6 was from existing and that centers that are operating approximately greater than one year is how that number is derived.

Right. And you mentioned a 5% price-- list price increase for August, is that correct?

It would actually be about 10% book price increase, 5% after discounts to the bottom line.

And that affects the revenue line.

Right. So clearly the demand has continued to out stripe supply despite the capacity that you and other folks have added.

One of the things when you look at our company, is we are about 50% Appalachia and that's a basin that is characterized by long-life reserves. It's got a high gas, high price market. A lot of the E&P players in that area hedge that production out for a number a years. So kind of the short-term volatility that happened in June doesn't affect those players near as much as like gulf coast type player.

Okay, thank you very much.

Thanks.

I'll take our next question from Victor Marchon with RBC Capital Markets.

Thank you. Good morning everyone.

Good morning, Victor.

Just a follow-up to the prior question regarding the revenue from existing service centers, that up 14.6% that was a year-to-year, correct?

That was year-to-year and then it was 14.6 million I think is the number I gave him, Victor.

Oh, I'm sorry. And just from the pricing side the 5% net that you guys are looking at, can you break that down as into what the means on offsetting the cost [creep] that you guys are seeing? Or is that a full 5% drop to operating income or is that somewhat offset by inflationary pressures.

No, it's going to be offset by-- that's just impacting the revenue line, so when you have increases in your material costs or labor and things like that it's not going to drop all the way to operating income. We've seen 1 to 2% increases probably in materials in the last two to three months, nothing real dramatically actually. A lot of the new labor--we've increased our labor force about a third since the first of the year, so a lot of those people have been hired recently so the labor expense creep isn't going to be as quite as dramatic for a company like ours.

And just on the margin-- from the margin trend standpoint, looking out into the third and fourth quarter versus the second quarter with the ramp up of the new centers that you guys have in the third quarter, can you give us a sense as into the margin trends from the second quarter for the third and the fourth? Now there's going to be a certain element of ramp as these facilities start generating revenue, but its going to be from a start up standpoint. Are you going to see margins trend higher in the third quarter to levels seen in the first?

I think that's our expectation. Probably the best place maybe for you to look is look back at 2005, if you're trying to build something Victor. When you look back there, David mentioned that the second quarter is usually the quarter that we do a lot of startups. So a lot of our operating income is impacted by the startup costs, because we don't have those centers all producing revenues or producing significant amounts of revenues.

If you took a look at last year you probably saw a margin jump up a couple percents in third quarter and then you saw it jump another percent or so in the fourth quarter. And that's about - that's probably where I would look is just look at what we've done historically. The only thing that's a little bit different about New Mexico and Alvarado, Texas is maybe just the size of them compared to what you've seen us do size wise in the past.

Okay, that's great. Thank you.

[OPERATOR INSTRUCTIONS]

We'll take a question from Poe Fratt with AG Edwards.

Good morning.

Good morning, Poe.

You answered the margin question I think pretty well, because I was a little disappointed when the second quarter came in, but I think the staffing of the service centers obviously had an impact. Can you talk about just the turndowns that magnitude the turndowns that you are seeing? And then also if you look at over the next 12 months sort of what you think the potential for Alvarado and also Farmington might be from a revenue perspective.

Turndown varied by each area and we have some turndowns, also we look at what the competition turns down and what we pick up. And we are seeing a lot of turndowns which mean, shortage of equipment, ramp up in activity, versus what we see out there. As far as Alvarado and Farmington, we expect them to be larger than normal activity level and revenue growth. In Alvarado, job ticket sizes depending on rate, how much - - what are materials are running. The small jobs are in the 100,000 per day range. The larger jobs are in the 200,000 per day range. As far as what to expect.

So we are looking at - - we'll have equivalent to one large crew or two small crews operating in that region. So, it doesn't take that many job days to start generating a couple, three million bucks a month. And then cementing will be on top of that. Farmington, it will be more of a typical startup, probably similar to what we've seen in Vernal in 2005.

One thing that will help Farmington is we expect he utilization to be a little light starting out, there will be some overflow work from Vernal - - being close to Vernal. And Vernal is getting extremely busy will give them some excess work, which will kind of help boost them over what Vernal did a year ago.

Okay. And then you mentioned oil related activity was picking up in Appalachia is that meaningful, can you quantify that?

Our operation in Bradford in Northern Pennsylvania is a combination of gas and oil, but there are some really oily areas up there. So we've actually shifted some extra equipment to that part of the basin just because we've seen a little stronger push in that area.

And that helps to offset some of the potential seasonality up there too?

Yes, normally they go through a fairly soft in the of first-- second quarter and their utilization is a lot higher than normal.

And how much - - you bought a small you said wire line company called Pettit?

Right.

What - - how much do you spend on that and when did it actually close?

We spent 900,000, 450 of that was in notes to the seller. So it was 450 cash and then financed 450 with that. That closed very late 6/15 closing so we had less than 15 days of revenue activity. Didn't impact us a whole lot in the second quarter.

Tom, would you happen to have the last 12 months revenue figure for that operation?

You know I - - about 700, would that's close, but I don't have it at my finger tips any more precisely than that.

Okay, but its fairly small?

Yes.

Okay.

What it does for us is it expands our footprint, Poe, a little bit and gives us an opportunity, it's a wire line and like you've seen in the past, the company had entered Oklahoma a while back where they purchased wire line. And it's an opportunity, low-cost of entry to bring in your stimulation assets and grow the revenue base from there.

That's one of the things that besides getting additional wire line assets that will create positive margins that we think are attractive, it's really the available to bring another service set into an area and increase our footprint in Oklahoma, which is fairly active.

Okay and then you talked about, I think you said you ordered about 75% of your 2007 Cap Ex at this point in time?

That's correct.

What kind of - - I'm not sure I heard it if you said it, but what kind of cost increases are you seeing from that side of the business? Or from the equipment side?

Probably 7 to 10% overall is what we are seeing.

Yes, it depends kind of on the type that we are building, but that's probably a pretty good number, I was going to say 5 to 7 is probably.

The high pressure pumps have again; ramped up a lot over the last year and a lot of our equipment for '07 is for stimulation. So, it's kind of had a heavier impact just due to the high pressure pump, pumping up so much.

Okay, great. Thanks a lot.

Thanks, Poe.

Hey, thanks, Poe.

[OPERATOR INSTRUCTIONS]

I'm showing no questions at this time. I'll turn the call over back to the presenters for closing remarks.

Well, we'd like to thank you for joining us today and we look forward to talking to you again the end of third quarter.

Thanks.