Nabors Industries Ltd (NBR) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2006 Superior Well Services Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

At this time, I will turn the call over to your host, Mr. Dave Wallace, Chairman and Chief Executive Officer. Sir, please proceed.

Thanks, Jeanne. Good morning, everyone. I would like to welcome everyone to the Superior Well Services fourth quarter 2006 earnings call. Joining me today is Tom Stoelk, our Chief Financial Officer. I would like to remind all of those participating on the call today that a replay of our conference call today will be available to listen to through February 28 by dialing 888-286-8010 and referencing the conference ID number 84267593. The webcast will be archived for replay on the Company's Web site for 15 days.

Before I begin with comments on our third quarter operating performance, I would 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 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 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 statements.

Let's begin. Superior Well Services had an outstanding year in 2006 and I would like to highlight some of the accomplishments. Our goal for 2006 was to continue to grow our Company in revenue and profits, which we accomplished through increasing our geographic footprint and customer base, and providing more sales and technical support. We have been extremely successful in reaching and exceeding our goals as our year-over-year growth demonstrates. On a year-over-year basis, our 2006 revenues increased 86% from $131.7 million to $244.6 million. Our operating income increased 124% to $53 million. EBITDA grew 107.7% to $67.6 million, and earnings per share grew 232.7% to $1.63 per share.

A highlight for the year was our improvement in efficiency and cost control. We realized a 370 basis point improvement in operating margins to 21.7%. This represents our concentrated commitment toward revenue growth in both new and existing centers, which serve to increase margins. Our newer service centers are continuing to mature, showing improved revenue and profitability. We continue to maintain the focus of growing our business organically with the addition of four new service centers. Additionally, we used selective acquisitions as an entry in the new markets and new service lines, which added two new service centers for a total of six. Overall, two of these additions were based in Appalachia, one in Mid-Continent, one in the Southwest, and two in the Rocky Mountain region.

As a result, as compared to year-end 2005, our service crews increased 48% to 117 service crews. We grew our personnel by 65.3% to include 1,068 total employees, and we expanded our horsepower to 153,000 horsepower. We also increased our technical and customer focus with the opening of our cement and fluid testing lab in Alvarado, Texas, and the opening of three city sales offices in Houston, Oklahoma City, and Denver. We've added a Wichita sales office in first quarter 2007 with the ELI acquisition.

The testing lab will be used to pretest special cement blends prior to pumping the slurry on deeper hotter wells. We will also use our lab to test stimulation fluids, optimized pump times, and fluid characteristics, such as viscosities and break times. We have outfitted this lab with the modern equipment needed to meet the higher-tech market demand.

Our customer list has grown as we work for a major portion of the largest E&P companies in the U.S. As we establish a reputation for excellent services and response with these customers at a fair price, our revenues with them continue to rise. During 2006, the gas market gave many investors in the overall sector jitters. However, larger independents do not adjust their budgets on day-to-day fluctuations in gas prices, partly due to their hedging trends, we believe, and partly due to the overall term bullish picture for gas. Thus we benefited from the 20% growth in year-over-year rig count, despite the softening oil and gas environment. Obviously, such a positive rig count scenario helped Superior accomplish its goal. But we also believe cost pressures in the industry, our reputation and the value of our work were instrumental in our success. We clearly had a significantly outstanding year and I would like to thank all of our Superior employees who helped to make it exceptional.

Turning now to the fourth quarter results, we recognized another excellent fourth quarter. During this time, we set a new company record for revenue, operating income, EBITDA, and earnings per share. Our revenue was $75.1 million, up 82% over 2005 and up 12% sequentially over last quarter. Operating income was $16.6 million, up 120% over 2005 and 9% sequentially. EBITDA was $21 million for the fourth quarter, up 111% over 2005 and 11% sequentially. Earnings per share were $0.49, up 113% over 2005 and up 2% sequentially on a higher share count due to our December 2006 follow-on offering. Consequently, we were exceedingly pleased with the quarter.

Our three new service centers located in Alvarado, Texas, Farmington, New Mexico, and Trinidad, Colorado made great strides adding to our sequential revenue gain and showed improved financial results. Despite the normal holiday, hunting season and weather delays in the regions that softened our results, we maintained very good revenue growth. We continue to see strong -- receive strong positive feedback from our customers concerning their spending budgets entering 2007.

Focusing now on our regions, Appalachia had revenues of $34.8 million, up 66% over 2005 and 10% sequentially over third quarter. We continue to observe rig count growth in this region and see the value of adding more equipment. Our two newest locations in Buckhannon, West Virginia and Norton, Virginia maintain high utilizations and point towards future opportunities in which to expand our crews and equipment. The southern part of Appalachia represents an area that we are under-equipped in relation to the demand in the area. This issue will be a focal point for 2007. We will expand the Buckhannon area by adding technical pumping equipment to our mix of services, which support the wireline operations already in place.

Our Southeast region had revenues of $15.7 million, up 59% over 2005. We saw a 5% sequential drop for the quarter and some of our customers ended their 2006 budgets early, taking a longer holiday break. This was the only negative effect we have seen in 2006 directly related to weaker gas pricing. Entering 2007, we have several major customer wins with sizeable E&P operators in this region, such as Houston Exploration Company, EOG, Cabot, and Energen. As a result, we are increasing cementing and stimulation crews during the first quarter 2007 to meet this demand, and thus expect to be back on track in early 2007 in the region.

Our Mid-Continent region had a 70% revenue increase over 2005 and a 4% sequential increase over third quarter despite ice storms during the quarter causing slowdowns and lost workdays. Van Buren operation continues to become busier. Van Buren is positioned particularly well geographically for the Arkoma, Fayetteville and Woodford shale hotspots. Van Buren is currently doing cementing work for new fields in Southwestern, and stimulation work for Hallwood. The location is maturing to the point that we are expanding additional equipment and crews to meet the increasing demand. Likewise, we have expanded our sales and technical support personnel in the Fayetteville and also in Western Oklahoma markets to meet growing customer activity needs and future expansion plans.

Notably, the Rocky Mountain region had revenues of $7.1 million, up 131% over 2005 and a 25% sequential increase over third quarter. Total revenues were up for the quarter, but most of our revenue increase came from increased activity in Farmington, along with revenues from our new location in Trinidad, Colorado. Despite Farmington not receiving equipment until late third quarter, they continued to see more activity and improved revenues and utilization throughout the quarter. Farmington is still waiting for extra nitrogen equipment that was delayed, which will arrive during the first quarter 2007.

We are also placing cementing equipment in Farmington during the first quarter 2007. This will help us package our cementing and stimulation service. Our customer acceptance continues to increase as we are working for a larger base of customers. We are also performing some small jobs for some large independents, which we hope to be able to grow to larger jobs as their comfort level increases. Farmington is acting like a typical startup location, which usually takes 12 to 24 months to meet Company revenue and margin expectations.

Our newest service center in Trinidad, Colorado has seen a positive start. Trinidad revenues were slightly lower for the quarter as the December snows stalled all activity for the Raton Basin in December, but the margins remained strong. We are in the process of discussing technical pumping services to customers in this basin, along with the possibility of packaging pumping and wireline service. This location is in line with our current expectations.

Vernal has expanded its customer base going into first quarter 2007 and does not expect to see a slowdown similar to first quarter 2006. Packaging of cementing with stimulation has been highly effective in Vernal. We are progressively working on our pricing and cost control to improve our margins in the Rockies. Overall, in this region, we are a very small participant but will continue to add more equipment and personnel in 2007.

The Rocky Mountain region is one area that is well cost-sensitive, but it appears that this has actually enhanced our business as customers strive to cut costs. Many customers receive a lower gas and oil price in the region. On the gas side, this is due to the distance from the consumers and takeaway capacity; and on the oil side, competition with oil imports from Canada. Some of the black crude oil prices are $12 to $14 per barrel below the NYMEX price. Due to cost pressures, we are seeing customers look to trade out old, inefficient drilling rigs for the newer faster rigs. Cutting days of drilling time is a big economic shift that E&P customers are trying to optimize, which in turn could lead to more wells being drilled per year. Switching to Superior from the big three is also cost saving new opportunity, so we are receiving increased calls.

Alvarado, Texas in our Southwest region made great progress in the fourth quarters. Revenues were $5.2 million, up 225% sequentially over third quarter. Each month continued to show improvement. We are performing stimulation work for the four most active operators in the Barnett Shale, Chesapeake, XTO, EOG and Devon. The equipment needed for jobs along with material handling logistics are larger than we implement in other regions. Consequently, we are continuing to become more comfortable with job designs and execution.

Crude utilizations for both cementing and stimulation continued to improve. Additional equipment for both of these services is being evaluated for 2007. We are also planning to add wireline to the area in 2007, which is in short supply and which will help the packaging of services. Alvarado is in line with expectations for 2007.

On February 1st, we announced the acquisition of ELI out of Hays, Kansas. This is our first location in Kansas and our 20th location overall, and will be grouped with our Mid-Continent operations. ELI works for a large group of independent customers in Kansas, Oklahoma, and Nebraska. This acquisition also helps to diversify our business into more oily markets and offers the opportunity to add technical pumping services in the region. With this acquisition we will increase our down-hole surveying fleet by 21% to 47 units. All of this equipment is eminently compatible with current equipment.

ELI is also a major supplier for sonar evaluation of cavern storage wells throughout the U.S. With this new service, we will be able to package additional technical pumping opportunities. The ELI acquisition also adds a city sales office in Wichita, Kansas to better align with our customer-focused goals. This accretive acquisition fit our strategy of adding companies at a good price to expand our footprint while adding new services to our mix of services. In fact, we have paid just over three times the EBITDA for ELI, which we believe is an excellent value in today's market.

As we enter 2007, we still recognize a high demand for our services. With the recent cold weather in the East, gas prices have recovered, helping to relieve concerns of our high storage capacities, which could have caused low gas prices and dropped rig counts during the summer. This is supporting the need for E&P companies to have larger drilling budgets in 2007 to meet declining gas reserves. All these issues point to a continued overall shortage of equipment in our mix of services and opportunities for Superior to continue to execute our business model.

We also notice additional pricing momentum in 2007. We have initiated a price book increase of about 8% before discount on February 1, 2007. This may meet some resistance in certain locations but we expect see an above inflation positive impact overall.

In 2007, we will concentrate on organic growth and continue to expand our footprint in four to six new locations, mainly targeting the Mid-Continent, Southwest and Rocky Mountain regions. After our follow-on offering in December, we have a strong balance sheet and will be looking to capitalize on additional expansion or acquisition opportunities. We will expand our technical staff and capability in our city sales offices and will focus increased attention to expanding our workload with the large E&P customers in the US, while entering markets with the major oil companies in our areas of overlap. Our goal at Superior Well Services is to continue our pursuit of becoming a higher-tier service company in our industry.

At this time, I will turn your attention 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. Revenues for the year ended December 31, 2006, totaled $244.6 million, which was $112.9 million or an 86% increase over the prior year. Each of our operating regions had revenue increases over the same period of last year. This was due to really increased activity levels and pricing improvements in 2006.

Revenues by operating region increased in 2006 by $47.3 million in Appalachia, $24.2 million in the Southeast region, $22.5 million in the Mid-Continent region, $6.8 million in the Southwest region, and $12.1 million in the Rocky Mountain region. Approximately $56.5 million or approximately one-half of the revenue increase was attributable to new service centers. New center revenue by operating region increased in 2006 by $17.5 million in Appalachia, $11.9 million in the Southeast region, $8.2 million in the Mid-Continent region, $6.8 million in the Southwest region and $12.1 million in the Rocky Mountain operating region.

Revenues from our technical pumping services increased by approximately 84.2% to $219.6 million for the year ended December 31, 2006. That was up from $119 million in 2005, approximately $51.6 million was attributable to new centers. New center revenue by operating region in 2006 increased by $15.8 million in Appalachia, $11.9 million in the Southeast region, $6.7 million in the Mid-Continent region, $6.8 million in the Southwest region and $10.4 million in the Rocky Mountain operating region. Technical pumping revenues accounted for 89.8% of total revenues and the breakout of technical pumping revenues by service type was 58.4% for stimulation, 10.4% for nitrogen and 21% for cementing.

Revenues from our down-hole surveying services nearly doubled in 2006 and reached approximately $25 million for the year ended. Revenue by operating region in 2006 increased by $5.9 million in Appalachia, $0.4 million in the Southeast, $4.5 million in the Mid-Continent region and $1.7 million in the Rocky Mountain region. Approximately $4.8 million of that revenue increase related to new centers. Revenue related to the new centers in 2006 was $1.7 million in Appalachia, $1.4 million in Mid-Continent, and $1.7 million in the Rocky Mountain operating region.

When comparing fourth quarter 2006 to third quarter 2006 revenues, a sequential revenue growth between quarters was approximately 15%. Revenue by operating region increased by $3.2 million in Appalachia, $0.5 million in the Mid-Continent region, $3.6 million in the Southwest region, $1.4 million in the Rocky Mountain region. As David mentioned, the Southwest region was approximately $800,000 lower due to longer holiday shutdowns by our customers.

Looking at revenue by service type in the fourth quarter of 2006, stimulation accounted for 59.6%, nitrogen accounted for 9.2%, cementing accounted for 20.6% rather, and down-hole surveying accounted for 10.6% of those revenues.

Cost of revenues increased to 83.8% to $165.9 million for the year ended December 31, 2006, compared to $90.3 million in 2005. The increase in the dollar amounts of these costs was due to the fact that these costs vary with revenue and higher activity levels. These costs include labor and materials, repairs and maintenance and fuel, just to name a few. However, as a percentage of revenues, these costs decreased between periods primarily because of increased utilization levels, pricing increases and our ability to leverage the fixed cost component of these costs over a higher base of revenue.

As a percentage of revenue, these costs decreased to 67.8% for the year ended December 31, 2006. That was down from 68.5% for the year ended 2005. Approximately $40.7 million of the increased costs relate to the new centers. New service center cost of revenue by operating region increased in 2006 by $10.1 million in Appalachia, $6.2 million in the Southeast, $6.8 million in the Mid-Continent region, $6.9 million in the Southwest region and $10.7 million in the Rocky Mountain region.

Labor expenses as a percentage of revenue decreased from 18.5% in 2005 to 18.2% in 2006. Aggregate labor expenses increased to $44.5 million in 2006. Cost of revenues as a percentage increased from 67.2% in the third quarter to 68.2% in the fourth quarter 2006. Approximately one half of the 1% increase between quarters relates to increased labor expenses. During the fourth quarter of 2006, we began increasing our technical pumping staff in the Appalachian and Southeast regions to prepare for equipment deliveries expected in early 2007. The remaining increase between quarters was primarily due to increased material costs for sand, cement and chemicals.

SG&A expenses were $25.7 million for the year ended December 31, 2006 compared to $17.8 million for the same period in 2005. That's an increase of $7.9 million or 44.4%. Approximately $7.1 million or the majority of this increase was attributable to the newer service centers. New service center SG&A cost by operating region increased $1.9 million in Appalachia, $0.7 million in the Southeast region, $0.9 million in the Mid-Continent region, $1.8 million in the Southwest region, and $1.8 million in the Rocky Mountain region.

We hired additional personnel in 2006 to manage the growth in operations. As a result of this growth, labor increased approximately $5.2 million, office expenses approximately $0.4 million, rent approximately $0.5 million and insurance costs were up approximately $0.5 million also. Additionally, our legal and professional and business taxes or other taxes, franchise primarily. increased. Legal and professional costs were up approximately $600,000. That was due primarily to increased cost in connection with Sarbanes-Oxley implementation and franchise taxes, business taxes were up on increased -- increased revenue activity. As a percentage of revenue, the portion of labor included in SG&A declined slightly from 7.1% in '05 to 6% in '06. Aggregate labor expenses in SG&A were approximately $10.3 million in 2006.

When comparing the fourth quarter of 2006 SG&A to the third quarter SG&A amounts, the sequential increase between quarters was approximately $400,000. Approximately 40% of this increase related to our Trinidad, Colorado wireline acquisition that Dave referenced earlier in the comments. That acquisition was made in the beginning of October. So, no SG&A was reflected in our third quarter numbers and approximately $164,000 -- $165,000 was in our fourth quarter numbers. Additionally, other taxes increased approximately $200,000 in the fourth quarter on higher activity levels.

SG&A as a percentage of revenues declined approximately 0.5% to 9.6% in the fourth quarter, as a percentage of revenues in '06. Operating income was $53 million for the year ended December 31st, '06 compared to $23.7 million for '05. That's an increase of 124%. Primary reason was just increased revenue activities that we have discussed earlier. These increases in operating costs were partially offset by increased cost of revenues in SG&A, as I've described.

Approximately $8.7 million was attributable of the SG&A -- or I'm, sorry, operating income increase was attributable to new centers. New center operating income by region increased $5.5 million in Appalachia, $5 million in the Southeast, $0.5 million in Mid-Continent. We had operating losses in our newly opened Southwest region center in Alvarado, Texas of $1.9 million for the year and the Rocky Mountain operating loss for the year and we had a late fourth quarter -- later third quarter Farmington opening and that was $400,000.

Net income for year ended December 31, 2006, totaled approximately $31.9 million, while diluted earnings per share increased to $1.63. As you think about performance year-to-year, please keep in mind that last year's per share amounts included an $8.6 million non-cash tax adjustment related to deferred taxes that existed at the Company's date of reorganization. The Company, at the end of its initial public offering, took an $8.6 million non-cash charge that impacted 2000 diluted earnings per share by approximately $0.45. So, after you adjust that, it was approximately $0.94. Comparatively, 2006 diluted earnings per share compared to the adjusted 2005 EPS for the non-cash tax adjustment increased approximately 73.4%. When comparing the fourth quarter net income to the third quarter net income, the sequential net income growth was up approximately 11.4%.

EBITDA increased to $35.1 million in 2006 and reached $67.6 million. That's an increase of 108% over 2005's EBITDA. When comparing fourth quarter 2006 EBITDA to the third quarter, the sequential growth in EBITDA was up approximately 11.4%. EBITDA for the fourth quarter reached $21.1 million.

Turning to the balance sheet for a moment, we ended the quarter with approximately $84 million of working capital. Total debt at the end of the year was approximately $2 million, which was related to some building and equipment financings that we had. At December 31, our debt-to-capital was approximately 1%.

In December 2006, the Company completed a follow-on offering of 3.7 million shares of its common stock. Proceeds to the Company net of underwriting discounts and offering expenses were approximately $88.6 million. After completion of the offering, the Company has approximately 23.4 million shares outstanding. Proceeds of the offering were used to repay outstanding debt under our working capital and standby credit facilities.

Capital expenditures for the year totaled $75.1 million. That compares to $39.9 million for the similar period in '05. Increased capital expenditures were due, as Dave referenced in his comments, to opening up four new service centers, we had two asset acquisitions of wireline companies during the year and just additional equipment at our existing locations. The Company presently has budgeted approximately $84 million in 2007 for new equipment with approximately two-thirds of those amounts slated for high-pressure equipment.

At this point I am going to turn the call back to the operator to open up the lines for Q&A.

[OPERATOR INSTRUCTIONS] And we will take our first question form Victor Marchon of RBC Capital Markets.

Thank you. Good morning guys. The first question I have is just on the pricing. Realizing that it's been the pretty recent but just want to get a sense on two things. One, is there any regions that you are seeing a better ability to push through the pricing, and two, aggregating it, how should we look at it from a net perspective, somewhere between 2% or 3%. Would that be fair?

As you mentioned, Victor, we are still a little early in the process. It seems like each of the regions is going to vary based on the time that we have been there, also the activity levels. Appalachia is probably one that's going to get the biggest impact because we have been there a lot longer and then our newest service centers will get the least amount of impact. I think it's still little early at this point to know what kind of impact, total impact we are going to get. But feedback so far is -- it's a negotiation process and nobody wants price increase but they understand that our increases in material and labor and part of that's going to have to be passed to.

Sure. And just on the new service centers that you guys are planning this year, can you give a sense as to timing, how we should think about modeling it from a first half versus second half?

In the past, we have tried to open most of our new service centers in the first half of the year to take advantage of the busy third quarter and fourth quarter. Something we saw last year is the equipment got pushed out a little longer; therefore, third quarter saw a couple of service centers kind of kick in. I think that also showed us that the equipment is probably going to get stretched just a little bit longer and we need to allow for that. But the second quarter is going to be our most active time period to get the new centers going.

And you guys had said between 4 to 6 this year. Did I get that right?

That's correct. And we are actually counting Hays as one of those 4 to 6, that we just did the acquisition.

That's all I had. Thank you.

Thanks, Victor.

And we will take our next question from Joe Agular of Johnson Rice and Company.

Hi, good morning. It's actually Michael Marino of Johnson Rice. My question on the pricing, 8%. I think -- remind me that's a little higher than you all got, I guess back in August and then last January, is that correct?

Actually in the past, we have been doing about 10% to 12% book increase less discounts. So, this one's just slightly lower than the ones we have done in the past.

Okay. But on a net basis, you all still see some increase 2 to 3%, is that fair or -- ?

That's a fair assumption. Again, early in the process, each region's going to be different. So, the weighting between the region, two to three is probably somewhat of a good assumption.

And then I guess a follow-up on the capacity additions, you all are adding capacity in a bunch of different regions but I was wondering if you could break it down a little bit more for us on what regions you see getting the most, I guess by horsepower or maybe help us kind of --?.

One thing, we know of this. We have kind of spread that out. So, we are not really saturating the area. One thing we tried to do in the past is on our new expansion locations, we tried to do like one per region per year just to stretch it out, so we don't tax the local management. Again, the more we go out West, which is our focus, Mid-Con, Rockies, and Southwest, higher horsepower is going to take a little more capital to initiate there. But it's fairly even -- you look in Appalachia is still going to be about 20% of our growth and then the other regions are going to be very similar, be a little bit heavier in the Rockies and probably Southwest, but fairly even.

Okay. If we look at your competitor's pricing versus your pricing, where does BJ and Halliburton and Schlumberger stand as it relates to your current prices?

Again, it would kind of vary by region. You look in the areas where we have been established for a while and they have been established for a long time, our pricing is fairly close but we are probably still 5%, maybe 10% less than those guys. When you get into our areas where we are the newer player, there may be a little bigger differential than that. One, they may have been charging more of a premium because less competition. We may come in, leave a little money on the table initially and then start working our way up.

Also, another thing that can impact pricing is how many days it takes to catch a job. If - they're looking at multi-zone stimulation jobs and we can get it done a day quicker, because we're a little more responsive than some of those guys and that's a big savings to the customer to reduce that extra day. So, there is -- it's not always book price less discount, there are some other factors in there too as far as efficiency of a crew. So, we can see a little -- more positive impact from that. So, I hope so.

Okay. And just one last question on, you said Q2 will see a ramp in new facilities. Should we still think of Q2 seasonally being the -- a decline in margins in Q2?

You are going to see that due to the ramp up also. Again, the seasonality factor is always tough for us because we know we do have some frost laws where the roads start getting shut down in different areas like in Appalachia and also the Rockies. So, as a general rule in the past, Q2 has been probably one of our softer quarters for the year.

Yes. If I were modeling, I would drop my margins in Q2.

Okay. That's all I had. Thank you.

All right. Thanks.

We will take our next question from Poe Fratt of AG Edwards.

Good morning, Tom and good morning, Dave.

Good morning, Poe.

Hey, Dave, you sort of intimated that you thought that there might be some pushback in certain regions. Could you highlight which regions you are a little more concerned about as far as the latest price increase?

Probably, for us, it would regions where we haven't been established this long. Rockies would be one. We have really only been in the Rockies less than two years. Vernal has been there less than two years and then Farmington is fairly new. So, we will be able to pass the price book through, but we are still basically working at pricing below the competition. Also, in that area, I see the Rockies as really the, probably the most price-sensitive area right now just because again, the gas price to oil price that they get for their products are -- is lower than we see like in Appalachia just because they are farther away from the main markets. So, that could be an area. But, again, we have been, as new entrants in the markets, we are kind of a discount below the competition and we are usually trying to start working that differential up as we get our utilizations up.

Yes. And then, looking at the Southwest, it sounded like you lost about $1.9 million from an operating standpoint?

Right.

When do you expect that region to be profitable or that region to be profitable or that service center to be profitable?

We actually started seeing it in November, they turned their first profit and then December, and it actually improved from there. So, most of that was, we did a lot of staffing early in the year. We started staffing that location early second quarter, anticipating that we were going to get our equipment early third quarter and then we got pushed out about 60 to 90 days. So, we knew that since it was such a big location, we wanted -- and then, it was going to take more people than normal, we wanted to get people a lot quicker and get them trained before the equipment came. So, we had a pretty large staff and then, the equipment got delayed another 60 days. So, that was the main reason for the loss for the year, but it's starting to turn the corner now.

Got it. I think I did hear you say that each month did improve.

That's correct.

Over the course of the quarter and is that fair to say that January was a decent month there too?

Yes. January activity, again, our comfort wiht the jobs and the logistics continued to improve. So, we are seeing that first quarter's staying pretty steady.

Where do you think utilization is right now?

Probably 50% to 60%, and part of that is mainly us just kind of getting comfortable, and that's pretty typical for us with a new startup is, if we ramp up too fast, then we start having job problems. So, if we just kind of take a little more conservative ramp ups, then we eliminate the job problems and have longer term success with the location.

Yes. And you sort of talked about how you are building in a little more cushion on the staging of equipment and if it hits the markets just because of what happened last year, are people -- it sounded like in the Southwest people were a little bit of an issue in the fourth quarter, any other areas where people are becoming an issue?

Actually, probably the toughest area is the Rockies, and it's just because the town that everybody works in, it's a limited people pool. Southwest actually wasn't a problem area for us. Again, you are kind of -- towards the Dallas Fort Worth area there's a lot of people in that area. Therefore, a fairly large workforce even though the activities are up. So, probably Rockies is the toughest area.

Got you. And, just the -- I mean the sequential decline in the Southeast, I mean you are back on track there. It sounds like there was just specific to the capital budgeting cycle for the year as opposed to anything else structural?

Yes. We had two of our locations basically just between Christmas and New Years and had very little activity. So, when you start losing a week out of 12 or 13 weeks, plus you have Thanksgiving and all that, it was more just a holiday slack off.

And then Tom, do you have a horsepower number associated with your CapEx?

About 100,000, Poe, is what we are looking at for '07.

So, you should be about 253 at the end of '07?

That's right.

That's correct.

Okay great. Thanks a lot. Good job.

Hey, thanks, Poe.

And we will take our next question from Thiru Rama of Simmons.

Hey Guys.

Good morning.

In any of your geo regions have you seen either established or startup, have you guys seen any of the big three drop pricing below you guys?

Actually, we have not. I think they worked really hard to try to get their pricing power up over the last several years and the indications are they are trying to maintain their pricing levels, but we have not seen them dropped to us or below us in any area.

And have any of them dropped even with you guys now?

We don't think so, no.

Okay, great. And how flexible is your CapEx for '07? I mean how much is already committed?

About two-thirds of it is committed right now.

Yes, part of it we do in-house, so we definitely have some control there and then also, part of it we have some long-standing suppliers that we build to, keep building to and just kind of keep adding as we go. So, about two-thirds, maybe up to 17% committed at this time.

And kind of in the order queue, have you guys seen anybody, have any of your vendors come to you and said that there have been cancellations and you can get equipment faster?

We had some suppliers come to us and say that they can build some extra equipment later in the year, fourth quarter. They didn't actually say that they have had cancellations.

Yes.

Part of that would be them ramping up. I think also there's been a ramp up in the long lead time item, which was the high-pressure pump. So, I think there's been some expansion there in. And, so now they are seeing opportunities to add equipments later in the year.

That's all I have. Thank you.

All right, thanks.

[OPERATOR INSTRUCTIONS] We have a question from Byron Pope from Pickering Energy Partners.

Good morning guys.

Hi, Byron.

Just a quick question for you. I was struck by the commentary about the kind of potentially a higher well count in the Rockies because of better drilling rig efficiencies. Are you seeing that type of drilling rig efficiency in more of your regions, or in fact just the Rockies?

Appalachia, they have always been fast. We haven't seen much increase there but one thing we hear kind of the general is that some of the newer rigs coming out are knocking -- can knock quite a few days off the drilling time. And if you start going from 35 days to 25 days, then that's a pretty significant saving that customers can see. And I think that those numbers are realistic in several of the areas that we work. So, there's definitely a lot more efficient faster rigs coming on and customers are looking to flop out less efficient to take advantage of these. And I guess, the answer is yes, we are seeing it in some of the other areas also.

Okay. That's all I have. Thanks.

All right, thanks, Byron.

At this time, I am showing no questions. I will turn the call back over to Mr. Wallace for closing remarks.

Thanks, Jeanne. In closing, I would like to thank our employees who work exceedingly hard everyday to make Superior successful. Additionally, we want to thank our suppliers who assist us in providing services to our customers, our investors, who trust and support, have contributed to our growth and foremost, we want to thank our customers whom we value and recognize, and their motivation at all times to remain superior. Thanks everyone and we will talk to you next quarter.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect.