Nabors Industries Ltd (NBR) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2008 Superior Well Services earnings conference call. My name is Latasha and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Dave Wallace, Chairman and Chief Executive Officer. Please proceed.

Thanks Latasha. Good morning, everyone, and welcome to Superior Well Services second-quarter 2008 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 will be available to listen to through August 22, 2008 by dialing 888-286-8010 and referencing the conference ID number 72871353. The webcast will be archived for replay on the Company's website for 15 days. Additionally, our Form 10-Q will be filed later today and will be posted on the Company's website.

Before I begin with comments on our second-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 opportunity, future earnings, cash flow and capital expenditures are forward-looking statements within the meaning of Section 27a 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's -- based on management's experience and reception of historical trends, current conditions, expected future developments and other factors that are believed appropriate in the circumstances.

Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the 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 exchange commission filing. The Company undertakes no obligation to publicly update or review any forward-looking statements.

I will now provide an overview of our second-quarter operations. After experiencing a few tough quarters, increased drilling and well completion activity, coupled with an improved pricing environment resulted in a strong second quarter. I am pleased to report that we set new Company records for quarterly revenues and EBITDA. The Company posted a 41% year-over-year growth in revenues and a 15% year-over-year growth in EBITDA.

We also experienced sequential improvements in utilization during the second quarters as customers increased their activity and reset their capital budgets higher in response to strong commodity prices.

While earlier in the year it was predicted that E&P capital expenditure budgets would be up 3.5% in 2008, the midyear update of the E&P spending survey issued in June by Lehman Brothers upwardly revised its number to 15%. With the US rig count up 9% year-over-year and 6% higher than the previous quarter, the fundamentals point toward continued growth as we forecast demand for our services for the rest of 2008 and into 2009.

Although second quarter performance improved from the first quarter, gains were uneven across our operating regions. We experienced the strongest increases in activity in utilization in the Southwest, Appalachia and Rockies region. We continue to prepare operations serving the emerging Haynesville and Marcellus plays in anticipation of an increasing workload.

Our existing service centers located near these plays already have established relationships with many of the leading operators providing us with a competitive advantage. We are strategically increasing our presence in these markets by moving people and equipment into these areas in preparation for servicing the needs of both new and existing customers.

Importantly, our margins continue to improve. Operating margins were 14% for the quarter, up 840 basis points sequentially from the first quarter of 2008. Increasing stimulation work is driving most of the profit improvements. Our stimulation job count for the quarter is up 41% year-over-year. Higher overall drilling activity, the maturing of our new service centers, and the improved service quality throughout all of our locations are all helping to improve profitability.

In previous calls, we discussed our take on the then difficult pricing environment. Rationality seems to have returned to most of the pressure pumping market as other players have realized that returns cannot be ignored indefinitely in favor of market share. That said, we continue to experience pricing pressure in low tech markets where an oversupply of capacity persists. In most of our high-tech and super high-tech markets, however, conversation with customers are changing from what is your lowest price to can you get the equipment there on time?

A rising tide raises all boats but not all boats are equally desirable and time will tell which markets prove to generate the highest returns.

Our focus on service quality continues to differentiate us and our performance is winning us new customers in more business with existing ones. We believe continuously improving quality and performance is the best way to develop a lasting market preference for our services we regardless of the business cycle.

We have not been able to insulate ourselves completely from industry cost inflation and costs continued to rise this quarter. Although we have been successful in passing through fuel surcharges in some areas, higher sand, chemical, and cement costs as well as transportation expenses to deliver materials, have increased the cost of revenue overall. Our new bulk material handling facilities are also having a positive impact by improving operational efficiencies and strengthening our service responsiveness.

Our new service centers opened late in 2007 are gaining footholds in their markets as customers become more familiar with our people and service quality. Every job our crew works on is an opportunity to prove our value and develop relationships and most new centers are outperforming our original expectations.

I will now briefly run through some of the operational highlights by region and then turn the call over to Tom for a financial overview. Appalachia continues to be our strongest region and this quarter it contributed 38% of total revenues. Revenues in the region are up 30% year-over-year and 28% sequentially. And we expect to see growth in this region for some time based on expectations of an increasing development of the Marcellus shale play.

We pumped about 35 Marcellus stimulation jobs in the second quarter compared to zero in the quarter one year ago. Although the pace of development of this play is still being determined due to infrastructure and water disposal questions, we expect increasing activity in the Marcellus to drive our growth in this region.

In the Southeast, revenues in the Southeast region are up 34% year-over-year and 31% sequentially as a result of increasing drilling activity in the Cotton Valley trend and the emerging Haynesville Shale play. We reported last quarter that competitors had moved equipment in the area in anticipation of increasing Haynesville work which created a temporary oversupply of capacity in the region. With the rig count in the area jumping by 40 rigs during the second quarter, we expect that the supply and demand equation will come back into balance.

Many of our existing clients in the Bossier market have existing acreage positions in the up-and-coming Haynesville. And we look forward this market to be a good match for our technical ability for working in deeper, hotter and higher pressure environments. We have an excellent record performing both stimulation and cementing services in the demanding conditions of the Haynesville and plan to leverage our existing service centers in this area to move up markets into this more technical and more profitable high-tech play.

In the Southwest region, revenues in the Southwest region are up 57% year-over-year and 5% sequentially. Most of our work in this region is associated with the Barnett Shale. Despite being able to win new business by focusing on service quality, reliability and responsiveness, the low-tech market for slick water fracs in the Barnett continues to see strong price competition.

Activity in the Artesia, New Mexico market has been building and there is a potential for us to work on more technical jobs in this area. We received the necessary permit for our cement and bulk plant in Artesia late in the second quarter. Construction was completed and the facility placed into operation in late June. Once fully operational, we expect the facility to improve operating efficiencies and margins.

Revenues in the MidCon region have increased 59% year-over-year and 27% sequentially. Activity in the Anadarko and Arkoma basins has kept our crews busy while our technical group has been instrumental in positioning us for jobs in the nearby Woodford Shale. Our cement plant in Clinton Oklahoma was still under construction during the second quarter and was placed into operations in July.

Revenues in the Rocky Mountain region have increased 54% year-over-year and 63% sequentially. Activity at our new service centers in the region is ramping up as their service quality becomes better known and increasing customer acceptance. Utilization is picking up in Vernal and Brighton, but our Farmington service center has been underperforming based on our expectations. The Farmington market is tough and geographically confined but we will continue our efforts to secure more opportunities with operators in this area.

At this point, I will now turn the call over to Tom for a review of our financial results.

Thanks, Dave. Net income for the second quarter of 2008 was $9.6 million or $0.41 per diluted share compared to $10.2 million or $0.44 per diluted share in the second quarter of 2007 and $2.4 million or $0.10 per diluted share sequentially for the first quarter of 2008.

Second-quarter revenue was $119.7 million and that was up 41% year-over-year and was up 28% sequentially. Approximately $14.3 million or 41% of the total increase in year-over-year revenues was attributable to new service centers opened in 2007 with the balance related to increased activity levels at existing service centers. The sequential increase in revenues can be attributed to seasonality as well as increased activity at our centers.

Stimulation, nitrogen, cementing and downhole surveying revenues amounted to 64%, 7%, 18% and 11% of the revenue in the second quarter of 2008 respectively. Cost of revenues increased to $92.4 million and that was up 55% from the second quarter of 2007 and was up 17% sequentially. Approximately $14.7 million or 45% of the total increase in year-over-year costs was a attributable to the establishment of new service centers with the balance related to higher material, labor, fuel and transportation expenses that could not be passed through to our customers as price increases because of the current competitive environment.

As a result of these cost increases, total cost of revenue as a percentage of revenues increased to 77% for the second quarter of 2008 compared to 70% in the same quarter last year. Sequentially, cost of revenues as a percentage of revenues -- of revenue decreased 720 basis points from the first quarter of 2008 due to better utilization on a higher revenue base.

Here are some additional comments and information on those costs. Material costs as a percent of revenue increased 570 basis points in the second quarter of 2008 compared to the same quarter last year due to higher sand, chemical and cement costs as well as transportation expenses associated with the delivery of those materials. Material costs as a percentage of revenues decreased 330 basis points sequentially due to increased utilization on higher revenues from new and existing service centers.

Labor expense as a percentage of revenues increased 70 basis points in the second quarter of 2008 compared to the same quarter last due to wage inflation and lower personnel utilization at our new centers. Labor expense as a percent of revenues decreased 180 basis points sequentially due to increased utilization as described for the material costs. Higher diesel prices as a percentage of revenue increased by approximately 290 basis points in the second quarter of 2008 compared to the same quarter last year and approximately 20 basis points when looking at the increase sequentially.

As a percentage of revenues, non-cash depreciation expense increased 90 basis points in the second quarter of 2008 compared to the same quarter last year due to the investments we made to expand our national fleet. Depreciation expense as a percentage of revenues decreased 130 basis points in the second quarter of 2008 compared to the first quarter of 2008 due to the ability to leverage the fixed cost component of those costs over a higher base of revenue and higher utilization.

Although pricing has improved from the first quarter of this year, higher sales discounts had the effect of both reducing net revenues and increasing total cost as a percentage of revenue in the second quarter of 2008 compared to the same quarter last year.

Margins continued to be hampered by a competitive pricing environment as some regions are still dealing with excess capacity. As a percentage of revenue, sales discounts increased by 640 basis points in the second quarter of 2008 as compared to the same period in 2007 and it increased 70 basis points sequentially.

SG&A expenses increased to $10.7 million. That was up 20.8% as compared to the second quarter of 2007 and it was up 11.9% sequentially. Labor expense increased $1.5 million in the second quarter of 2008 compared to the second quarter of 2007 which accounted for the majority of the increase and that was due to really be hiring of additional personnel to manage the growth in our operations and service centers. Approximately 700,000 of the year-over-year increase is attributable to the establishment of these new service centers.

Sequentially SG&A expenses rose $1.1 million in the second quarter of 2008 as compared to the first quarter of 2008 due in part to increased travel expenses in connection with these new centers as well as increased incentive compensation earned on improved second-quarter performance.

Operating income for the second quarter of 2008 came in at $16.6 million compared to $16.5 million a year ago and $5.1 million in the first quarter of 2008. This translates into increases of 80 basis points and 224.6% respectively. New service centers reduced operating income by approximately $1.1 million in the second quarter of 2008. EBITDA for the second quarter of 2008 came in at $26 million, an increase of $3.4 million or 15.1% from the same quarter last year. Sequentially EBITDA increased $12.6 million in the first quarter -- in the first quarter compared to the second quarter of 2008.

Net income in the second quarter of 2008 declined to $9.6 million. That was a decrease of approximately $600,000 in the second quarter as compared to the second quarter of 2007 as a result of the increased cost and higher sales discounts mentioned earlier. Sequentially, net income increased $7.2 million from the first quarter of 2008. We ended the quarter with approximately $55.7 million of working capital. Total debt at the end of the quarter was approximately $36.5 million and the Company's debt to market capitalization on that date was less than 5%.

Capital expenditures for the quarter were approximately $23 million and that brings us to approximately $50.6 million for the year. We recently increased our 2008 capital expenditure budget to $75 million. That is an increase of $10 million from the previously authorized levels. These additional planned investments will be targeted to continuing the capabilities -- to increasing the capabilities of existing equipment for working in deeper and higher pressure environments.

At this point, I will turn the call back over to Dave for some additional comments.

Thanks, Tom. To summarize the quarter, increased drilling activity helped balance the oversupply of horsepower that existed in some markets. We've been watching the new shale plays heat up and have been strategically moving equipment and personnel to existing service centers in the areas we forecast to see the increased demand as the plays develop.

Utilization has improved in our newer service centers opened late in 2007 and we expect to drive growth through the next few quarters by selectively adding additional equipment to existing service centers where demand for our services is building.

Although costs are up, we are taking steps to improve efficiency and our return. We continue to believe that our business strategy based on high service quality and increasing our market share of more technical work is the right one for growing long-term shareholder value.

Looking forward, market fundamentals point to a strengthening in most pressure pumping markets as production decline curves steepen, operators look for ways to increase recovery and the search for oil and gas requires greater technical expertise.

That concludes our prepared remarks and now we will open the call for questions. Latasha, I will turn it back to you.

(OPERATOR INSTRUCTIONS) Jeff Tillery, Tudor Pickering.

Good morning. The improved sequential revenue out of most of the regions was really impressive, kind of thinking especially about the Southeast, the Mid-Continent and the Rockies. Can you talk about what flipped the switch from a utilization standpoint and drove that increase as well as where you are now from a utilization perspective in terms of how fully utilized you are?

When we look at the quarter compared to first quarter, we were below 50% in first quarter and coming out of our seasonality in multi-locations -- multi-areas definitely helped start driving that plus our new service centers again kind of gaining -- they are picking up utilization just to being there for a while getting through their shakeout period and all that. If we looked at the second quarter, our utilization for the quarter probably was closer to 70% when you look at all the areas. We still had a little bit of seasonality in the Northeast in the early part of second quarter but again, they balanced out and ramped up from there. And our other regions continued to increase all during that time period.

Okay. That is helpful. You started off the call mentioning an improved pricing environment. Are you talking about the rationality returning and the lack of price discounting or are you talking about actual price improvement during the quarter?

I think the big thing is we saw the erosion stop, which was the first thing we had to see and then also some of the inflation areas between fuel, some of the material transportation, we did a good job in the quarter working on those to try to get some of those minimized and had some success there. A combination of activity improvement in all the different areas, maybe shifting some equipment from higher discount areas to little lower discount areas might have made a little more impact there also.

But we are just seeing a combination of the market picking up, the efforts that we have made to make an improvement there. Those are all starting to come through for us.

My last question is how are you guys thinking about incremental CapEx from here? You spent a fair amount of time talking about the Marcellus and the Haynesville and it looks like you are spending a little of money to adapt some spreads for work in deeper hotter environments. But how are you thinking about approaching -- adding true incremental spreads?

We won't say anything else added this year as far as -- it starting to get late in the year as far as trying to ramp that up at additional capacity. We are still reviewing our 2009. Tom mentioned the extra CapEx for this year. It is really to continue to ramp up in the super high-tech markets. We've talked about that before that this is a transition year for us as far as a lot of our business was going to be lower tech, middle tech and then moving up to the super high-tech.

What we are saying is is that we've had really good customer response and it's actually moving up a little faster. So instead of actually adding much equipment for this year, we are basically expanding the capabilities of current equipment to participate in more -- in that super high-tech part of the business.

All right, thank you very much.

Stephen Gengaro, Jefferies.

Thank you. Good morning, gentlemen. When we look out and I know you have given some good information. When we look out at the back half of this year, would you expect that net net the pricing gains you are seeing in the higher end -- or I said pricing gains -- but the potential pricing gains or expected improvement, would yield higher companywide margins offsetting kind of the pressures on the cost side and then maybe on the pricing side in some of the lower-end markets?

We are still seeing a lot of inflation out there. So we are still trying to battle the part of how do we get the inflation shifted where we can actually not see erosion in our margin. So that is probably the first thing we challenge. And we expect increased inflation even through the second half of the year.

But we do see a little more positive pricing environment. We feel like again, discounts shifted down slightly during the second quarter. That was probably more mix of services and again, we are doing a lot of -- we are still doing a lot of the slick water business which are large jobs fairly high discounts. So we see that mix shifting a little bit and we feel like we can get a little more pricing gains from that.

Also our utilization is a big one too. When you looked at -- we went from sub 50% first quarter to 70% in the second quarter, we saw a lot of this drive just based on increased utilization of our equipment and a lot of that is from the new service centers. Tom talked about it. We both talked about it. They came on late '07. They are now just starting to get on their own two feet and really make a contribution to our numbers.

Okay and then when you look at the areas -- well particularly be Marcellus and the Haynesville, are you seeing in the Haynesville, are you seeing just a couple of people able to compete -- you are truly seeing the benefits of your technical expertise relative to the smaller players?

The big three are there, the big three work in the super high-tech part of the market and then. But again, a lot of the smaller players, it's over their head. It's a little more challenging fluids, the job designs are higher pressure and just a little more than what they are used to working with. So the number of competitors definitely drop off when you move up the pyramid on the super high-tech type environment.

Okay, great. And then just a final question. Obviously you have had the big worry over the last couple of weeks as everybody has gone from loving natural gas to hating natural gas as far as the short-term is concerned. Are you -- when you look at it are you looking at any thresholds or even more general terms, are your customers still on track to be -- is their behavior increasingly towards more activity despite the fact that gas fell back here near term? Are you seeing any kind of impact here? Would you expect to see any kind of impact here from the softness in gas prices on your business anywhere?

At this point we don't. Part of that is again, it's kind of a long-term play. Our customers have been ramping up their budgets. We've seen the drilling side ramping up so it usually takes a prolonged drop in gas prices to get customers to change their mentality. At this point, I think they are all thinking that it's just a short-term spike and that long-term outlook is still very bullish.

One thing that helps us though is having a national footprint. We have done a good job over the last several years really expanding our footprint throughout the US and it really positions us in a lot of different basins and we know there's going to be some better pricing basins and some softer pricing basins. Having that national footprint really gets us positioned now that we can shift equipment between basins where the margins may be a little better. So at this point though as far as E&P budgets, we are not seeing any shift other than continuing to stay very strong.

Very good, thank you.

Michael Marino, Johnson Rice.

This is actually Joe Agular. My question is, obviously you all gave some fairly upbeat comments regarding the direction of the market right now particularly on the high end. Pricing has stopped going down; in some cases, it may be going up. Your new service centers that you have opened up over the last year or two -- over the last year or two are ramping up. My question is, given the backdrop of the market right now, do you think that you will be able to get your margins back up to where they may have been say in 2006 and early 2007 heading into 2009?

It is hard to say where we can get them to. If anything, our margins in that time period may have been a little dampened just due to '06, '07 were very growthy periods for us. If you look at our outlook right now, we still have some areas that we want to do vertical expansion as far as new service centers. But we are a little less growthy than we were in the last couple of years and we are more focused on service quality, really improving our cost structures, and really more focused on getting our margins up.

There is still some areas that again, we would still like to expand to but we are starting to do a lot more backfilling which means the horizontal growth, add additional crews at the service centers that are performing very well, bring in additional service lines at existing service centers where we already got the infrastructure in place. We've already got a good customer base and again, we can leverage off of that and provide multi-services to the same customer. It all depends on gas price, rig count, things like that. But our focus is definitely on improving margins and a little less geographic expansion.

Joe, one thing I would add to that I guess is that it's going to depend really on the mix of revenues. In the second quarter, you took a look at Appalachia, it was about 38% of the total. And as our mix starts -- as our newer centers which have predominantly been Mid-Continent, Southwest and in the Rockies, as they continue to take up a larger and larger percentage of that revenue, those are a little bit higher discount markets and that will have a little impact on it. But it is a much, much bigger market, much, much bigger tickets revenue size with respect to it.

Okay. To follow on a comment you just made, Dave, that was the vertical integration service centers -- you all right now for example, I think in the Bakken are not running any frac crews there, correct?

That is correct. We entered the Bakken last year through a wireline acquisition and again, that area is ramping up pretty rapidly. We actually are looking at initiating pumping service into that region right now maybe through cementing first, stimulation second. But it looks like there's an opportunity for our pumping services in that area.

With regard to the Haynesville area, you all are -- how many crews or would you have available there now and what do you anticipate going to?

We have two in Bossier City. And then when you look at -- we have several locations really close to that area. When you start looking at our location in the Barnett Shale, we have a couple of crews there. We have some crews in Arkansas, Mississippi and all those are within about a five- or six-hour driving range. So we really look at -- we have a lot of resources really close to the Haynesville. And we are going to continue to watch it and again, our expectations are that is going to be a market that ramps up pretty quickly.

We have a lot of stimulation equipment real close to that area that it's easy to service, shift over and service on the peak capacity days. Also same way with cementing. Again, we have lots of cementing crews in that area and again, will help support the growth in that area from these other locations.

That particular play -- how does that -- is that not one of the highest technical pumping service markets?

We see it as a high-tech super high-tech kind of environment. They are running more sophisticated fluids, cross linked fluids, again, deeper, hotter, higher pressure. And it is just matter of us watching how it materializes and matching up with the needed resources in that area.

Have you all been hired for a job there yet? Or do you have customers who are trying to line you up for future jobs?

We were getting -- one thing we talked about was the increase in CapEx which was expanding the number of high-pressure, super high-pressure fluid ends we need and that is what we are doing. We actually have jobs on the board in this quarter and we expect to catch our first one late August, early September. But we do have work starting to line up for that area.

Thank you very much.

(OPERATOR INSTRUCTIONS) Victor Marchon, RBC Capital Markets.

Thank you. Good morning, guys. First question I had, Dave, I think you had talked about this previously as to just the split that you guys were looking at between high-tech and low-tech. What you are going to be running at this year and then how would we look at that for 2009 as you start adding this high-tech and super high-tech equipment?

We talked about in previous calls that we thought 2008 would be a transition year for us that what we would be about 50-50 between low-tech activity and then combination of high-tech, super high-tech with the majority of that being in the center part of that triangle.

One thing we are seeing is if anything our pace is probably expanding a little quicker than we expected. We anticipated adding high-pressure equipment to start working in the super high-tech part of the activity plays. We are currently doing that in the two of our regions, Southwest and also in the Rockies. What we are seeing is this quarter that we are going to be working in two more regions and that would be Mid-Con and then that Haynesville area which we call the Southeast part.

Even though a big part is still the lower tech, we are ramping up very nicely into the higher tech, super higher tech part of it. We always talked about '08 as a transition year. It's transitioning -- it's probably transitioning a little faster and we are moving up the scale a little quicker on that.

Does that look like a 2009 like a 60/40 split high-tech or is it possibly like a 70/30?

I think we'd still say 60/40 just because again even like the Marcellus, we consider a lower tech play. So there's still a lot of lower tech plays that we are involved with, have service centers with and it will still be a big part of our work. But our focus is definitely to keep working up the chained to the more sophisticated job types.

Okay. The second question I have is just on the percent of your work that is term work versus call out work. Is that a number that you guys track or have?

I don't think we have a good number for you there. Probably one we don't really lay out that well.

Okay. And then just the last one is on utilization. You mentioned you guys were close to 70% utilization. I just wanted to get a sense as to where you guys had peaked out back in '06? And how that may look as we make it through the second half of this year?

We counted a fully utilized service center as about 85% utilization. And the mature service centers back in '06 were hitting that. Then you have the mix of the new service centers coming online and then it's just kind of a general ramp up to get to that 80%, 85% utilization. As we mentioned earlier, we thought we were about 70% for second quarter and reason for that is coming out of the seasonality. Also our newer service centers are really starting to mature, really starting to get very active. So we think we are going to have a very high utilization in the third quarter this year.

Okay. Great, that is all I had. Thank you.

Stephen Gengaro, Jefferies.

Thanks, gentlemen. Just a quick follow-up. Just to kind of get your views, when you look at the whole domestic pressure pumping business, do you think we will see consolidation either -- particularly some of the smaller mom and pops -- do you think we are at that stage over the next 12 months or do you think you are more likely to see some of these smaller guys continue to try to grow out their own capacity?

Probably my personal opinion is there's a lot of challenges with the small mom and pops. One, there is bigger players getting into their market and a little extra competition maybe than what they have seen. So our thoughts are is it kind of gets to a point they may not enjoy it anymore and maybe looking for an exit strategy. We expect to see some consolidation and not sure at this point how much that might be.

Okay, that is helpful. Thank you.

I would now like to turn the call over to Mr. Wallace for any closing remarks.

Thanks, Latasha. We appreciate everyone joining us today and we are looking forward to talking to you next quarter. Thank you.

This concludes the presentation and you may all now disconnect. Good day.