Nabors Industries Ltd (NBR) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2006 Superior Well Services, Incorporated, earnings conference call. My name is Tawanda, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Dave Wallace, Chief Executive Officer. Please proceed, sir.

Thanks, Tawanda. Good morning, everyone. I'd like to welcome you to the Superior Well Services third-quarter 2006 earnings call. Joining me today is Tom Stoelk, our Chief Financial Officer. I'd like to remind all those participating on the call today that a replay of our conference call today will be available to listen to through November 22nd by dialing 888-286-8010 and referencing the conference ID number of 22431250.

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. A copy of the 10-Q is now posted on the company's website. Before I begin with comments on our third-quarter operating performance, I'd like to make the following disclaimer regarding our call today.

Except for historical information, statements made in this presentation, including those relating to acquisition or expansion opportunities, future earning, 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 Security Acts 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 its management experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Such statements are subject to a number for assumptions, risks and uncertainties, many of which are beyond Superior's control, which may cause Superior's actual results to differ materially from those implied or expressed by the forward-looking statements. These risks are detailed in Superior's Securities and Exchange Commission filings. The company undertakes no obligation to publicly update or revise any forward-looking statement.

Okay, let's get started discussing our third quarter. We released our third-quarter information this morning and Superior had an outstanding quarter, setting new records in revenue, operating income, EBITDA and earnings per share. We continued the business strategy of our company expanding our operational footprint and customer base through out the US while improving the strong financial position of our company. Some of the highlights of the third quarter include revenues totaling 67.2 million were up 92% over 2005 and 23% sequentially over second quarter 2006. Operating income was 15.2 million, representing an increase of 148% over 2005 and 42% sequentially over second quarter 2006.

Net income was 9.4 million, while diluted earnings per share were $0.48, up 45% sequentially over second quarter 2006. EBITDA totaled 19 million, up 126% over 2005 and 36% sequentially. Our business environment continues to be very strong, despite the concerns of falling commodity prices, gas storage levels and the flattening of the growth in US rig count. As many of you know, the US rig count is approximately 20% higher year over year. I'd like to point out that the third quarter's operating income was reduced by approximately 1.6 million, from our new service centers located in Alvarado, Texas, and Farmington, New Mexico, which did not commence operations until late in the third quarter due to delays in receiving equipment.

We're excited about the opportunities these new centers will provide as we move forward into the future. On October 2nd, we announced the acquisition of Patterson Wireline in Trinidad, Colorado. With this acquisition, we increased our down-hole surveying equipment by an additional 30% and gained a very experienced workforce that primarily works in the Raton Basin.

This becomes part of our Rocky Mountain region and the first addition of down-hole surveying services to this region. Additionally, our employee count grew to 980 employees, 14.8% sequentially for the quarter and we're over 1,000 employees today when you take into account the 25 employees that joined our company with the Patterson Wireline acquisition.

Our truck count increased 12.5% sequentially to 541 units. Our CapEx to date is 54.1 million, which includes 9.3 million in deposits for future equipment, which is in line with our spending plan. Overall, the demand for our services remains significantly strong, as we witness a shortage of equipment and the pressure pumping and down-hole survey markets in which we participate.

We still see additional drilling rigs being added, while our customers and competitors continue to announce CapEx budget increases for 2007. Presently, we are not seeing rig count reductions in the markets where we work.

Turning now to each of the regions. Appalachia continues to be a steady performer, with revenues of 31.6 million, up 12.8% sequentially over the second quarter. This is the first quarter that Appalachia has dropped to less than 50% of our total revenues.

Coming out of our second-quarter seasonality, we had noticeably high equipment utilization in this region for the quarter and continued to recognize the need for additional equipment at this point. Our new service centers in Buchanan and Norton both had excellent quarters. Along with the conventional workload, we continue to see increased shale-development activity in this region and anticipate expansion throughout the region, providing additional future growth opportunities.

Our Southeast region had a 16.5 million revenue quarter, which represented a 19.7% sequential increase over the second quarter. All of our locations in this region had an extremely high equipment utilization and revenue performance.

Superior's customer base continues to expand in Mississippi and Bossier with the addition of some large E&P companies added to our customer mix. Development of the Floyd Shale in Alabama continues to expand, and we continue to monitor this activity for an opportunity to add additional equipment.

It is worth noting our mid-continent region bounced back from a sluggish second quarter for an 18.6% sequential growth in revenues to 11.7 million. All of our locations showed improved performance for the quarter. We expect this region to continue to grow with the increased activity in the Fayetteville and Woodford Shale plays. Our Van Buren operation continues to witness improved performance, along with higher utilization, benefiting from more participation in the shale activity drilling.

Also, our Rocky Mountain region continues to grow. This region has 5.7 million revenue for the quarter, 101% sequential gain from the second quarter. The addition of cementing services in Vernal has achieved the expected result and added to our stimulation business. Farmington generated a small amount of revenue at the end of the quarter, as we started our stimulation and nitrogen operations. This location is behind expectations, mainly due to delays in equipments.

We have assembled an excellent, experienced workforce in Farmington and expect to benefit in a quick operational transition with improving results. We have opened a Denver sales office during the quarter. Many of our larger E&P customers in the Rockies have offices in Denver. This complements our business strategy of expanding our physician with larger regional E&P customers.

Onto our Southwest region, which started generating revenue in the late third quarter. Equipment delays for this location put us almost 60 days behind expected startup. We didn't receive all the equipment planned for Alvarado until recently in the fourth quarter. Consequently, this reduced our job capabilities during the third quarter, which caused a loss of about 1 million operating income for the quarter.

We utilized this equipment that we received during the third quarter to assist other locations in all of our other regions until we could begin generating local revenue. We're expecting to see an improvement in fourth quarter as we increase our capabilities and utilization rates. Customer interest is significantly high, as we expect to work for most of the largest E&P companies in the Barnett Shale play. This continues to be a very exciting addition to our company.

With the [Petit] Wireline acquisition in the second quarter and the Patterson Wireline acquisition in October, we have become more active participants in the acquisition market. We continue to look at acquisitions as a tool for entry into new markets, along with a way to expand our equipment and product lines.

We're seeing more acquisition opportunities to review and the pricing appears more in line with our expectations. At this time, I'll turn it to Tom for some financial highlights.

Thanks, Dave. As Dave mentioned in his opening comments, the company set new records in revenue, operating income, net income, earnings per share and EBITDA. Revenue for the three months ended September 30th, 2006, totaled 67.2 million, which was 32.3 million, or 94.2%, increase over the same period in the prior year. Approximately 24.3 million of this increase was attributable to an increase in the drilling activity of our existing locations that are greater than one year old and the remaining 8 million of our revenue increase was attributable to the establishment of our new service centers.

Each operating region had revenue increases over the same period and the prior year. Revenue by operating region, when compared to the same period last year increased by 12.3 million in Appalachia, 7.6 million in the Southeast region, 6.3 million in the Mid-continent regions and 4.5 million in the Rocky Mountain operating areas.

The Southwest region commenced operations late in the third quarter and generated a total of 1.6 million for the quarter. On a percentage increase basis, revenues for the three month period ended September 30th, 2006, versus the same period in 2005, Appalachia was up about 63%, Southeast region was up 85%, 116% increase in the mid-continent region and 360% increase in the Rocky Mountain region.

Higher utilization in the new service center locations, coupled with pricing improvements, led to the increases in 2006. When comparing the third quarter 2006 revenues to the second quarter revenues, the sequential quarter revenue growth between quarters was approximately 23%. Revenue by operating area increased by 3.6 million in the Appalachian region, 2.7 million in the Southeast region, 1.8 million in the mid-continent region and 2.9 million in the Rocky Mountain region.

On a percentage basis, comparing the third quarter versus second quarter, sequential revenue growth by area was 13% in Appalachia, 20% in the Southeast, 19% in the mid-continent region and 101% in the Rocky Mountain region. Looking at revenues by service type for the third quarter 2006, stimulation revenues accounted for 58.7% of the revenues, nitrogen accounted for 10.1%, cementing accounted for 21.1 and down-hole surveying accounting for 10.1% of those revenues. Cost of revenues increased 87.7% to 45.2 million for the three months ended September 30th, 2006, compared to 24.1 million for the three-month period ended September 30th, 2005. Of the 21.1 million increase, approximately 14.4 million of this increase was attributable to an increase in the drilling activity of our customers in our established service centers, those centers that have been open for greater than a year.

The remaining 6.7 million of the increase was attributable to the establishment of our new service centers. The increase in the dollar amount of these costs was due to the fact that these costs vary with revenues and higher activity levels. These costs include labor, material, repairs and maintenance and depreciation, just to name a few. However, as a percentage of revenues, these costs decreased primarily because of increased utilization levels, pricing increases and the ability to leverage the fixed component of these costs over a higher revenue base.

As a percentage of revenues, these costs decreased to 67.2% for the three months ended September 30th, 2006, from 68.8 for the three-month period ended September 30th, 2005. Selling, general and administrative costs were 6.8 million for the three months ended September 30th, '06, compared to 4.7 for the quarter ended September 30th, 2005. That's an increase to 43.6% or approximately 2.1 million.

The increase was primarily due to increased compensation and other expenses associated with higher activity levels. The portion of labor expense included in SG&A increased by 1.6 million to 4 million in the aggregate in 2006. Approximately 1.1 million of this labor increase relates to the establishment of our new service centers in West Virginia, Virginia, Oklahoma, Arkansas, Texas and New Mexico.

Labor increases related to our existing facilities over the same period grew by $0.5 million. Labor expenses increased because we hired additional management, sales and administrative personnel to manage the growth in our operations, as well as additional incentive compensation, which is consistent with our higher profitability levels.

However, as a percentage of revenues, these costs decreased primarily because of increased utilization, pricing increases and, once again, our ability to leveraged the fixed-cost components of these costs over a higher revenue base. As a percentage of revenue, the portion of labor expenses included in SG&A decreased from 6.7% in 2005 to 5.9% in 2006.

Operating income was 15.2 million for the three-month period ended September 30th, 2006, compared to 6.1 for the three-month period -- quarter ended September 30th, 2005. That's an increase, as Dave mentioned, of a little over 148%, or 9.1 million, in the aggregate. Operating income as a percentage of revenues increased 5.1% to an operating income as a percentage of revenues of 22.7% for the third quarter ended 2006 when compared to 2005. Operating income grew by 4.5 million from the second quarter of '06 to the third quarter of '07, and that's about a 3% increase in operating income as a percentage of revenues. The primary reason for these improvements was increased utilization, pricing improvements, coupled with the opening of our new service centers.

Operating income and loss by region, Appalachia increased by 5.4 million, Southeast 3.2 million, mid-continent 1.3 million, Rocky Mountain increased by 0.4 million and the Southwest region, which was the new Texas location we opened up late in the third quarter had an operating loss of 1.2 million. Third quarter 2006 operating income was reduced, as Dave mentioned, by approximately 1.6 million, related to the operating losses of our two new service centers opening late in the third quarter.

All new centers, taken as a whole, reduced third-quarter operating income by approximately 200,000. Net income for the three-month period ended September 30th, '06, totaled 9.4 million, while diluted earnings per share increased to $0.48. David mentioned, that's up about 15% from the prior quarter. As you think about performance year to year, please keep in mind that last year's earnings per share amounts include an $8.6 million non-cash tax adjustment to record deferred taxes that existed at the date of the company's reorganization, which occurred on the date of its initial public offering. Prior to becoming wholly owned subsidiaries of Superior, they were partnerships that weren't taxable for federal and state income taxes, so we took an $8.6 million charge last year to establish the deferred taxes at the date of the reorganization.

EBITDA reached 19 million for the quarter, which is an increase of 10.6 million, or approximately 126% over the same period a year ago. EBITDA increased 5 million, or approximately 36%, in the third quarter, when you compare it to the second quarter EBITDA amount.

Turning to the balance sheet for a moment, we ended the quarter with approximately 18.5 million of working capital and the total debt at September 30th was approximately 10 million, which included approximately 8.3 million of borrowings under our working capital facility. During the quarter ended -- during the third quarter, we entered into a standby term loan agreement. The standby term loan provides an additional 30 million of borrowing capacity that can be used to finance equipment purchases. That standby facility matures in August of '08, at which time it converts into a 60-month term loan.

At September 30th, we had no outstanding borrowings under that standby term facility. We had 20 million of borrowing capacity on the working capital facility, so in the aggregate the company has approximately 50 million of capacity. At September 30th, debt to capitalization for the company was approximately 8%. David mentioned during the first nine months of 2006 the company's capital expenditures were approximately 54.1 million, which included 9.3 million of deposits on future equipment, so approximately 44.8 million when you net out the future equipment deposits.

The increase was due to just higher amounts of capital expenditures for our new service centers, additional equipment in our existing locations and the deposits that I mentioned earlier. The company has presently budgeted approximately 53 million for new equipment expenditures. As many of you know, we made an Oklahoma Wireline acquisition and we've also -- David commented on the Patterson acquisition. Those were about $10 million worth of acquisition in addition to those new capital expenditures that the company has made in 2006.

At this point, I'm going to turn the call back to Tawanda, the operator, to open up the lines for Q&A.

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Stacy Nieuwoudt with Pickering Energy Partners. Please proceed.

Hello, Stacy?

Ms. Nieuwoudt, you may proceed.

Your next question comes from the line of Kim Pacanovsky with KeyBanc Capital Partners. Please proceed.

Hi, good morning, everyone.

Hi, Kim.

Good morning, Kim.

Hi, a few questions. First of all, could you go through the margin by region?

Operating margin by region, I gave it to you in the context of the call, but operating income and loss in the Appalachian regions was 5.4 million, Southeast was 3.2 million, mid-continent was 1.3 million, Rockies was 0.4 million, and Southwest had an operating loss of 1.2 million for the quarter.

Okay, and could you make some comments on the BJ Services turndown rate. Obviously, it took a dip down in the third quarter. It's still a big number, but I was just wondering if you could comment on just how business is changing.

They have a bigger footprint than we do, so I'm sure part of the turndown we had an opportunity to pick up in the areas that we work, but we still see our market pretty strong, and we're kind of focused on our customers in the area and continue to see our CapEx plan full speed ahead.

And could you maybe give us a little bit more color on Appalachia? You said that you have high utilization, but you need to bring in some additional equipment. What kind of equipment, and where?

We're really strong in northern Appalachia, which would be Ohio, Pennsylvania, Michigan. Southern Appalachia is one that we have two service centers. Some of our competitors have more service centers and also additional capacity. As you can see from Norton, which came online at high utilization and it's continued to grow from there. There's still opportunities in that part of Appalachia to add additional equipment. But we're seeing additional rigs, really, throughout the region.

Okay, and when you say that you're monitoring the Floyd Shale in Alabama, have you had specific conversations with anyone concerning exposure to that play, or could you just give us a little bit more color on that?

Well, you probably recently saw the Chesapeake-InterGen announcement, where they're doing a joint venture together. We actually have done some work for operators in that play and the one that we've been working for and they're in the process of testing to decide where the sweet spots are and how big of a part of their program that's going to be. But there's definitely more people looking at that area and there's going to be more testing happening in that play.

Okay, have you added any sizable new customers during the quarter?

We continue to work for more and more of the larger players, the larger independents. We've recently started working for EOG, doing a little work for Devon and XTO is somebody that we've been working for quite a bit in the last six months, so continuing to have really most of the big players out there.

Okay, and just a question concerning crews. If you have to move people around, how amenable are your crews to long-term relocations and do you have any issues with telling a crew that's based in location X to go to location Y for some amount of time? Can you talk about the people issues with that?

Our company culture is that we may have to ship you out for certain periods of time, and people that don't like that usually want to find a different industry that doesn't want them to be mobile at certain times. But most of our workforce really enjoys kind of seeing something different, to try a new area for a while. And we're getting enough capacity now, people-wise and equipment, that we can rotate the different crews around so that we don't burden one set of people all the time.

Okay, and I'm just going to ask one more quick question and then I'll let somebody else take the helm here.

Sure.

It's interesting, when you look at the percent of revenue by service type, technical pumping, this, it looks like it's stayed very, very steady through time. With your planned buildout, do you anticipate that that will stay as steady as it's been?

Stimulation is definitely going to be a bigger part of our future investment, and the [stim] numbers are pretty high. You have to go through that choppy season of 12 to 24 months, but, as they continue to mature, we're going to see the margins for that and the numbers for that increase.

And, finally, Dave, I know I said I was done, but I lied. As you look toward '07, I mean, you basically said you're going to add a service center in each region. Have you firmed up those plans and locations and --?

We have the scout teams out now doing the evaluations, and we have several that we currently really like that we haven't announced yet, so we'll probably announce that by the next call.

Great, okay, thanks a lot, guys. Nice quarter.

Thanks, Kim.

Your next question comes from Michael Marino with Johnson & Rice. Please proceed.

Good morning, gentlemen.

Good morning, Mike.

My question is if you look -- you mention that you haven't seen any slowing in your activity levels to date, but maybe if we look out and we assume next year looks a lot like Q3 in terms of activity levels and rig counts and, based on the capacity additions, do you see any reason that there would be a slowdown based on that whereas capacity would come in and create any kind of slowdown? I guess my question is, do you see too much capacity coming onto the market going forward?

I think in our line, the pressure pumping, down-hole surveying, with the announced rig count addition, we still see the demand for this being very strong. We think the right count is going to help pay the increase in our service line. And, again, with the plays they're doing now are more the resource plays. It requires a lot more equipment, a lot more horsepower, a lot more frac dates to complete wells than it has in the past. So we don't see the saturation points in the markets that we work out there today.

Okay, and I guess your customers aren't signaling to you in any way that they aren't going to need your services next year?

If anything, with the dip in gas price, we started getting more customer calls. Again, kind of our niche in the market is same technology at a lower price, and we mainly work in development plays, so we're a very attractive option for them when they're trying to fine-tune their costs in the development play. We've become a very attractive option to help get their costs in line, so we think we're going to get more calls during this time period.

And from a pricing standpoint, do you see yourselves continuing to push pricing over the next several months?

We still see pricing momentum. If you look at the last two years, we've had price increases in January and August. We just passed one through in August and in our established areas, minimal pushback, in our newer areas, we just have to work that into our package as far as pricing below the competition to get our utilization up.

So there's pricing momentum there because if there job performance improves and as our utilization gets up, we can improve our pricing there. Also, we keep adding incremental crews to existing locations and these are places where we can get good pricing and quick returns by adding that equipment, so we still see some momentum out there.

And have you gotten most of your August price increases through, already?

The majority are through, again, for the established locations. We had price escalators worked into the pricing that we did for customers and, again, the newer ones, we went ahead and we implemented the price book, but we may have to adjust pricing just to meet our strategy for those areas.

Okay, thank you, you guys. I'll turn it over to somebody else.

Thanks, Michael.

[OPERATOR INSTRUCTIONS]

And at this time, there are no further questions in queue. I would now like to turn the call back over to Mr. Dave Wallace for closing remarks.

Thanks, Tawanda. In closing, I'd like to thank our employees who work exceedingly hard every day to make our company successful, additionally, our suppliers, who assist us in providing services to our customers and our customers, whom we value and recognize as our motivation to at all times remain superior. So thanks, everyone, for calling today and we'll talk to you next quarter.

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.