Nabors Industries Ltd (NBR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter, 2008, Superior Wells Services, Inc. earnings conference call. My name is Erica. 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 at the end of this conference. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Dave Wallace, Chairman and Chief Executive Officer. You may proceed, sir.

Thanks, Erica. Good morning, everyone, and welcome to Superior Well services third-quarter 2008 earnings conference call. Joining me today is Tom Stoelk, our Chief Financial Officer.

I would like to remind all those participating on the call today that a replay of our conference call will be available to listen to through November 18th, 2008, by dialing 888-286-8010, and reference the conference ID number 880-502-96. The webcast will be archived for replay on the company's web site for 15 days.

Additionally, our form 10-Q was filed this morning, and will be posted on the company's Web site.

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 acquisitions or expansion opportunity, 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 fact, included in this presentation that address activities, events or developments that superior expects, believes or anticipate 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 reception of historical trends, current conditions, expected future development 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 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 Security and 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 third-quarter operation. The third quarter was very strong, and we generated a new quarterly revenue record of 146 million, a 22% sequential increase over the second quarter, and a 55% increase year over year.

Third quarter EBITDA was 35.6 million, a sequential increase of 37% over the second quarter and a year over year increase of 39%.

And in response to increasing commodity prices in the first half of the year, many of our customers significantly increased their drilling budget, driving demand higher for well completion and stimulation services, increasing utilization, and spreading fixed costs over more jobs.

The U.S. land rig count increased 12% from the fourth quarter 2007 to the third quarter this year. But the biggest increases occurring in our core market. On the cost side, we were also successful in passing along material cost increases and fuel surcharges, helping to alleviate some of the pressure of cost increases on margins that we experienced over the past few quarters. Operating margins were 17% for the third quarter, up 320 basis points sequentially from the second quarter of 2008.

Our stimulation job count for the quarter is up 46% year over year. Higher overall activity, improved pricing, stronger utilization, maturing of our new service center, and high service quality throughout all of our locations, combined to improve profitability.

Although, the overall pricing environment has improved from earlier this year, each market is different, depending on job type and competitive factors. In response to lower natural gas prices and the credit crisis, some operators have announced reductions in their drilling budget, and we're expecting a reduction in the overall rig count, although we believe some regions will be softer than others.

As a result, we anticipate a reduction in this industry demand and the potential for near-term pricing pressure.

However, we believe our current operational footprint is good exposure to the most profitable and technical plays in the country, which plays to our strengths and competitive differentiation, regardless of the cycle. We have made significant strides in improving our capability for completing and stimulating deep high-pressure wells. Today, we don't believe there is any customer that we could not work for capably.

Investments in new and reliable equipment, coupled with our technical fluids pumping expertise, gives us an edge in the more technical plays that are seeing significant increases in activity.

I will now briefly run through some operational highlights by region, and then turn the call over to Tom, for a financial overview.

In Appalachia, the third quarter is tradition traditionally the strongest quarter in terms of revenue for Appalachia. Our home market and this year is no exception.

This quarter, Appalachia contributed 37% of total revenues. Revenues in the region are up 18% year over year and 17% sequentially. Activity in the emerging Marcellus shale continues to pick up, and we see no indications that activity associated with that play is going to slow anytime soon. We began catching Marcellus jobs in the first quarter of 2008, and our job count keeps increasing. Our work in southern Appalachia continues to grow steadily.

Our existing presence in the region with cost-savings infrastructure gives us an operational edge here.

Revenues in the southeast region are up 21% year over year and 4% sequentially, as a result of increased drilling activity in the Cotton Valley trend and the emerging Haynesville Shale place.

Based on the initial data we've seen, the Haynesville Shale place has excellent well economics, and we expect activity in this play to be resilient to resilient to softer natural gas prices. The Haynesville is tailor made for us as it requires technical pumping expertise for stimulating deeper, hotter and higher pressure formation. These wells demonstrate the move in our industry toward applying more technology and services to each completion to maximize the productive capacity of a well and its reserve.

They use a multistage frac and specialized fluids for stimulation means the average revenue per well for Hayneville work is above average. High strength prop and shortages have been an issue in the Hayneville and (inaudible) plays, and has limited our ability to increase our share of this market.

We have taken steps to try to secure additional supplies, but we expect this will be an issue for us and other pressure pumpers until additional product is brought into the country and/or increased production capacity is placed online.

Revenues in the southwest region are up 129% year over year and 43% sequentially. Most of our work in this area is associated with the continuous development of the Barnett shale. We continue to see strong price competition in the low tech market, but work has been steady, although activity can drop if operators lay down rigs here as a result of low natural gas prices.

Our Artesian Service Center had a very good quarter with revenues up 89% over the second quarter. We made operational efficiency improvements over the past few quarters in this area, and we should start to benefit from those if we can maintain your utilization here. Revenues in the mid continent region have increased 100 million% year over year, and 27% sequentially. We service the Anadarko and Arcoma basins, as well as the Woodford Shale from the five service centers in this region.

While high price differentials has caused some operators in this region to lay down rigs, we have yet to experience a significant reduction in demand for our services. We've been using one of our crews from our Van Buren, Arkansas Service Center to assist us in the Marcellus, when needed.

Revenues in the Rocky Mountain region have increased 190% year over year and 36% sequentially. Despite seasonally soft regional gas prices, we have continued to pick up new work in the Rockies. We are very happy with the performance of our new service centers in the region and are working to commission our cement bulk plant in Rock Springs sometime in the fourth quarter. I'll now turn the call over to Tom for a few of our financial results.

Thanks, Dave. Net income for the third quarter of 2008 was 14.9 million or $0.64 per diluted share compared to 11.6 million or $0.50 per diluted share in the third quarter of 2007 and 9.6 million or $0.41 per diluted share sequentially from the second quarter of 2008.

Third quarter revenue was 146 million. That was up 55% year over year, and up 22% sequentially. The sequential increase in revenues can be attributed to strong activity increases in our stimulation and cementing services. Approximately 25.2 million or 49% of the total increase in year over year revenues was attributable to service centers that have less than one year of operating activity with Superior. Stimulation, nitrogen, cementing and down-hole serving revenues amounted to 65%, 8%, 18%, and 10% of revenue in the third quarter of 2008, respectively.

Cost of revenue increased to 109.7 million, that was up 66% from the third quarter of 2007, and up 19% sequentially. Approximately 20.8 million or 48% of the total increase in year over year cost was attributable to the establishment of new service centers, with the balance related to higher material, labor, fuel and transportation expenses that cannot be passed to our customers as price increases because of the current competitive environment.

As a result of those increases, total cost of revenue as a percentage of revenue increased to 75% for the third quarter of 2008 compared to 70% in the same quarter last year, but it was down from 77% in the second quarter of 2008.

Here's some additional information on those costs. Material costs as a percentage of revenues increased 5.5% in the third quarter of 2008 compared to the same quarter last year, and 1.1% sequentially due to higher profit, chemical and cement costs, as well as, transportation expenses associated with the delivery of those materials.

Labor expenses as a percentage of revenue decreased 2.4% in both the third quarter of -- in both the third quarter of 2008 compared to the same quarter last year, and sequentially due to increased utilization on a higher revenue base. Diesel prices as a percentage of revenue increased by 2% in the third quarter of 2008 compared to the same quarter of last year and decreased 0.7% sequentially.

As a percentage of revenue non-cash depreciation expense increased 0.1% in the third quarter of 2008 compared to the same quarter of last year due to the investments we made to expand our national fleet. Depreciation expenses as a percentage of revenue decreased 0.8% in the third quarter of '08, compared to the second quarter of 2008 as a result of spreading the fixed cost component of these expenses over a higher revenue base.

Increased capacity and increased competition in certain operating areas resulted in a downward pricing pressure on surface prices. As a percentage of revenue, sales discounts increased by 6.1%. In the third quarter of 2008, as compared to the same period of 2007.

During the third quarter of 2008, we saw the positive impact from fuel surcharges, negotiated with several of our customers earlier in the year. Discounts remain relatively steady when compared to the second quarter of 2008.

Our margins improved significantly over the second quarter, but we still have some room for improvement. As not all of our service centers opened in 2007 are operating in the black yet. Although, they are all showing improvements.

SG&A expenses increased to 11.4 million, up 22% as compared to the third quarter of 2007, and up 7% sequentially. Labor increased 1.5 million in the third quarter of 2008 compared to the third quarter of 2007. The majority of that increase is really due to the hiring of additional personnel to manage the growth in our operations and service centers.

Operating income for the third quarter of 2008 came in at 24.9 million compared to 18.9 million a year ago and 16.6 million in the second quarter of 2008. This translates to increases of 32% and 50% respectively. EBITDA for the third quarter of 2008 came in at 35.6 million, an increase of 10 million or 39% from the same quarter last year. Net income for the third quarter of 2008 increased to 14.9 million. That's an increase of 3.3 million from the third quarter of 2007, due to the increased activity levels I've just described. We ended the quarter with approximately 72 million of working capital. Total debt at the end of the quarter was approximately 51.6 million in the company's debt to book capitalization was 15%.

At September 30th, 2008, we had approximately 194.4 million of availability under our syndicated credit facility. Capital expenditures for the quarter were approximately 30.9 million, and 81.5 million on a year to date basis.

Presently, we have approximately 19.8 million of capital expenditures commitments for 2008 or 2009 equipment orders that have been placed, but the equipment has yet to be delivered. At this point, I'm going to turn the call back over to Dave for some additional comments.

At this point, I'd like to give an update on our acquisition of certain assets from Diamondback Holdings, which we announced in the middle of September. Both companies are working diligently to get the deal closed as soon as possible.

Despite the you turmoil in the financial markets, the deal's strategic rationale still makes sense with its potential to significantly expand operations without adding industry capacity. Diamondback's high quality assets and people will fit well with our organization an enhance our operational fingerprint in an accretive way. We hope to make an announcement before the end of this month.

To summarize the quarter, an upswing in commodity prices brought an increase in drilling activity and greater demand for our services. The result was higher revenues, margins and operating income. Our new service centers open in 2007 continue to mature nicely and show improvements in customer acceptance, utilization and now starting to contribute to the bottom line.

New and more technical plays are beginning to show strong increases in development drilling activity, further driving demand for our technical fluid, pumping expertise. While we can't predict where natural gas prices will go, we like where we are sitting today. Our large and diversified geographic fingerprint gives us added flexibility to weather a downturn or take advantage of an upswing. Even with the growth we've exhibited over the past few years, we still have locations that are asking for additional equipment and people, and we plan to cautiously backfill those needs as 2009 comes into greater focus.

We are strategically positioned in the most attractive development drilling markets in the country, and will continue to focus on maintaining high service quality for earning more, higher tech, higher margin completion work.

We are currently performing deeper, higher pressure, higher temperature jobs in the Iraqis, mid-con and southwest regions, and we expect to add the southeast region to this list before year end.

Our crews continue to build our reputation one job at a time, and I'd like to take this opportunity to thank our people for all of their hard work.

Our internal goal in 2005 was to achieve 500 million in revenues by 2010. We are well on our way to achieving that goal ahead of schedule.

Despite the uncertainty about the economy, commodity prices and rig count, we believe we have the right people, equipment, operational fingerprint and technical fluids expertise to be the provider of choice for the best customers, regardless of the cycle.

That concludes the prepared remarks, and now I'll open the call for questions. Erica?

And your first question comes from the line of Byron Pope from Tudor Pickering Company. You may proceed.

Good morning, guys.

Good morning.

I wanted to get your thoughts. Particularly, given the strength of your Q3 revenues across regions. Your thought on where you guys generally are in terms of equipment utilization, because it's obviously a fluid with what's beginning on with North America Natural Gas.

I was hoping you could give us a feel of where you guys are in terms of equipment utilization, as we try the dial in numbers over the next several quarters.

Okay. Obviously we had a very strong quarter. The biggest impact was the ramp-up in our new service centers from 2006, 2007, that we've added.

So they're not quite as full capacity, the new centers, but they're getting pretty close. So when we look at the overall utilization for the quarter, it was probably in the 75 to 80% range.

Okay.

And we usually shoot for 85% roughly. Actually some service centers were even higher than that, and then, again, our newest -- newer service centers have made great progress in picking up their utilization. And there's still a little more to pick up with those places, but a very strong quarter.

O kay. And then based on your commentary, fair to say probably the Barnett shale is one region -- there was the one region where pricing is still touch. Not really seeing that in the other regions at this point?

I think we see, again, it's kind of back to areas that we see that kind of get commoditized. Then it's slick water jobs, and there's a lot of competition there. There's still pricing pressure there. Just a matter of how active they got, how much they ramped up. Once rig count started picking back up. And then if there's a little supply imbalance in those areas, then pricing is a little stronger.

Okay. And then last question for me. Sounds like you guys are holding off on answering detailed questions about Diamondback; is that fair?

Yes, that's fair.

Okay.

Basically what Dave said in his comments is really where it's at. We continue to negotiate and we see a lot of value in the transactions, but since the transaction hasn't been fully negotiated, we really can't publicly comment on it.

Okay. So then, last question for me would be for you guys to stand alone. How do you think of '09 CapEx?

You mentioned roughly the 20 million that is still to be spent, but trying to get a feel for '09 CapEx for stand-alone Superior, as you all are thinking about it now?

We've had 50 million preapproved. We have not placed all these orders yet, but we're kind of waiting to see how the market shapes up.

We see that lead times have dropped off, and therefore, we can pick up equipment a little faster than in the past. So we're staying cautious at this point, and so we'll know more here in the next month.

Okay. Thanks, guys. Appreciate it.

Thanks.

Your next question comes from the line of Stephen Gengaro from Jefferies & Company. You may proceed.

Thank you. Good morning, gentlemen.

Morning, Stephen.

Can you give us a sense -- if you were to look at the regions s right now, can you give us any sense for two things?

One, just how -- what you're seeing, kind of in October from an activity level perspective, if there are any changes that have occurred or that you would expect. And then, two. How should we think about pricing on region regional basis? I'm assuming places like Hayensville, we should assume things will be stronger and on a more commoditized markets, potentially softness. Can you add any color to that?

October looks like it's going to be, again, a real strong month. Rig count, we've seen a little bit of a dropoff, but very minimal at this point.

Usually what we see in the fourth quarter is a strong October, first half, November stays strong, and then we start seeing a little seasonality, holiday, hunting season, weather related, people kind of catching up on their CapEx. So we usually see a little dip in the second half of the fourth quarter. But the first half, we expect to be really strong.

As far as pricing by region, I think you pretty well hit it. Again, we've got some nichy areas that are isolated from other markets that pricing diffientiates there. When you get into Barnett shale, some of the slick water areas, it can get pretty high discount, pretty low margins. The higher the tech, we still continue to see it. You may still have to have a higher discount to do it, but the margins are still better, even in those areas.

So as we mentioned earlier, we've performed superhigh tech jobs in three regions so far, rocky, southwest and mid-con. We expect southeast, Hayensville, fourth quarter, and there's really where we're focused. We continue to move up the ladder. We can work in deeper, hotter, higher pressure. And really, our service quality has been really strong, and we feel comfortable that we can work for just about any operator in the U.S. at this point.

Thank you. And then just as a follow up, the complete production acquired a company up in Appalachia, I think it was in Allegheny Well Services. Does -- how do you think about the -- some of the other kind of maybe larger players getting involved and how that could potentially impact you in that large market in Appalachia?

It's obvious that Marcellus is getting a lot of interest these days, because it's very large geographically, and there's a lot of western companies looking to expand in this area. So we expect that there's going be interest from other service companies. The advantage we have, again, is, we have the home court advantage. We've been here a long time. We have a very good infrastructure system in place.

Our job quality, service quality is second to none in this region. And there's other people that are going be trying to enter the market, but they are going go through a learning curve. It will take one to two years to get through the debugging process. So we still see we have a home court advantage.

Very good. Thank you.

Thanks, Stephen.

Thanks, Stephen.

Again, if you would like to ask a question, please press star 1. (OPERATOR INSTRUCTIONS) Your next question comes from the line of Victor Marchon from RBC Capital. You may proceed.

Thank you. Good morning, guys.

Hey, Victor.

First question, just had on the cost side. Just wanted to see on the profit tightness, the supply tightness for profits. I wanted to see if that was in any other regions outside of the two that you had mentioned, the Woodford and Hayensville. Is that more broad in the lower 48, or is it pretty much regulated the those two areas?

It's really -- those areas require the high strength, ceramic or bachite type materials, and there's a supply and balance for that material at this time. With the ramp-up in those areas and that conventional sand hasn't been strong enough, they've needed to go to the higher strength. It's really didn't the supply out of balance at this point. So we see the suppliers for this are ramping up.

There's more product coming in from international sites, and there's just a little short fall at this point that it's going to take to catch up with that. As far as the sand guess, we've talked about that in the past that we've had really good sand contracts.

We've probably had a few logistics, maybe delayed a few jobs during the third quarter just for sand, but we have a really strong position with the sand suppliers. And this has been a strength for us.

Okay. And you guys locked in pretty well on the sand side looking out into '09?

Yes. Looks pretty well beginning into '09.

Okay. Just wanted to follow up on the pricing side and maybe ask -- ask a question this way. Is there a way to define, how much of your business you would say is exposed to the pricing weakness or potential pricing weakness going forward on the lower end type of work?

It's back to -- it's a bidding process -- usually it's annual bids for a lot of this stuff. We have some contracts already in police, but we know this time of year, that we're going be negotiating for pieces of activity plans for 2009.

We expect at this point, as typical years, that you gain some contracts, you may not get as much of certain contracts as you had previously just due to pricing.

But if you look at our track record in the softer market years, 2002, 2003 and 1999, we've actually grown our revenue, even in the down-cycle years. Margins may dip a little bit. So we may have to give up a little pricing power to maintain volume. But as a general rule, we've shown that we can continue to grow our revenue base, even in the soft markets.

And the last one, just as it relates to the CapEx that you have on your books now. That is all for existing centers, correct? There is no new centers on the books, or plans?

No. We -- as, I think, Dave mentioned in his comments, we're opening up Rock Springs in the fourth quarter, but that's -- that's been an existing center. We've just delayed the opening of there center a little bit.

Of course, an example could be, like the Debaukin in Williston, North Dakota, where we bought a wireline company, established a presence there, and then it's -- we're going to backfill with pressure pumping equipment in that region. So it's kind of new business as far as the pressure pumping side goes, but we had considered an established location there we're backfilling with extra services. There will be some of that. We're focused on backfilling first, and then, expanding our fingerprint second.

Okay. Great. That's all I had. And congratulations on the quarter.

Thanks.

Well, thanks Victor.

You next question comes from the line of Jack Aydin from Keybanc Capital Management. You may proceed.

Hi, Dave. Hi, everybody.

Good morning, Jack.

Good morning. The question I have is -- what percentage of your revenue is basically your business comes from high tech and superhigh tech.

Well, we announced that, at the end of '07 it was about 50/50, and we thought 2008 would probably dip and it would be more like 40% high-tech, superhigh-tech, and then a little increase in the lower-tech part. And we think that it's probably not been that much of a shift, if anything. We seem like we're picking up more momentum in a higher tech -- superhigh tech part of the business. So we see that as growing a little more.

So it's probably still closer to 50/50. And if anything, we're seeing it starting to shift more to the superhigh tech and higher tech part. So we expect 2009 to actually shift higher in the upper-end of the scale.

Dave, regarding the profit -- somebody -- you know, I was talking to an EMP company that said about 90% of the property is basically controlled by the prop C-4 companies, and then the 10% is basically available for everybody else. Is that what your impression, or is that easing a little bit more, or are you doing something more to increase your share?

It's really tight, even for the top guys, but we see the shifts starting to occur. We think it's going to take a few months to actually for the prop guys to expand their capabilities. So it's pretty tight right now. But we see in the next quarter or so that it's going to start shifting to where we can have access to even more of that.

The final question for me. You hear companies talking about laying off rigs. I mean, I hear anywhere from to 200 up to 500. Let us assume that we get rigs late -- about 300, 400 rigs down next year. What kind of impact will it have on your business?

Well, it's -- it's hard to tell because we don't see that the rig count drop will be uniform; and, again, our expanded footprint really gives us the opportunity to kind of shift resources. I mean, we see some areas that we expect to see increase rig count. Marcellus activity, we see that ramping up. That's an area in our backyard that we think we'll continue to increase. And we'll look at -- again, trucks have wheels. We talked about that before. But we will shift resources from one area to another.

We talked about Van Buren as assisting Pennsylvania with the Marcellus work going on right now. We can see some of our other locations shifting resources, assisting with personnel and equipment to really help the busy spots in the future. So hard to get a good handle on there right new, Jack.

Yes. Thanks.

Thank you.

Your next question comes from the line of Joe Agular from Johnson Rice. You may proceed.

Thank you. You all have covered a lot of ground already. I'll ask a general question.

If we think back two years ago, towards the end of 2006, there was a lot of concern over the market heading into 2007 with respect to natural gas drilling, specifically. Obviously we're in that same position right now.

I was just wondering if you had any thoughts on the differences maybe between then and now either in terms of capacity. The type of market you're serving today versus then. And everybody is trying, I guess, to figure out exactly where this thing is heading, but I was wondering if you had any thoughts on that sort of overview of the general market today versus a couple of years ago?

Yes. We hear all the discussion right now. A lot of that is due to the financial markets and a tightening of credit, and it will impact our EMP guides. We look at it, the the gas price now versus a year ago actually is a little higher. We look at the storage level is actually a little lower than a year ago, and probably the biggest driver is just the depletion rate of a lot of these shale wells.

And they decline really rapidly, so we think that there's going to be some dips. And it's probably going to be more customer focused, maybe versus basin focused. And again, that's due to the ability to raise capital.

But we think that it's going to be a short-term dip. And again, once they stop drilling, gas reserves start dropping off, and then gas price starts going back up, and then there's a need to ramp back up to get the gas levels back up. We feel like we're sitting a lot better than we were two years ago. One, we've done -- been very aggressive the last two years, expanding our foot print, and now we're at the point now that a lot of these service centers are really starting to mature. Our service quality is good, and they're starting to have a real impact.

The other thing we see, too, is, two years ago, we were really viewed as a fairly small regional service company. Now, with our footprint, our fluids, our equipment, we're really viewed as a large service company that can work for majors as well as super, large independently, and also the small independent.

So we're a lot more attractive to a lot larger customer base, and we're in a lot more regions. So we really like our position going into this year, despite the choppiness that you hear and maybe EMP cut backs.

So it sounds almost like we shouldn't really use what happened in 2007, 2006, 2007 as a roadmap for you, because that was at the point in which you all were still building out and had a lot of up-front costs associated with your growth? Whereas, today you're -- you know, you have everything in place, and maybe the economic economics are going to be a little bit different this time around for you?

Yes. Utilization is a lot better. We made pricing improvements and utilization improvements in our new service centers. And that's part of the maturity process that they go through. When you look at us fourth quarter last year, we just had four new service center coming online . It is pretty challenging when they are coming online in a tough environment. Now, the service centers have been online for about a year. Their activity levels are up.

As Tom mentioned earlier, they're starting to contribute on the revenue and contributing profit to the company. So they're sitting in a better position now, and customer acceptance is really good. So we're a little less growthy. As we mentioned, our CapEx is going to be focused more for backfill, existing service centers, and new start-ups is kind of a secondary

Okay.

It should be better going into it.

And just, again, the other thing that I just was wondering if you had an opinion on, was obviously, 2007 was the year of everybody sort of ratcheting down their capacity expansion.

We entered 2008 with less new equipment coming into market, and then we had the big run in gas prices earlier in the year. Maybe there were some thoughts of even adding more capacity; but this has changed pretty quickly. What's your take overall on the industry wide situation with capacities specifically? Thank you.

There was some capacity adds this year, 2008, but a lot less than we saw in 2007. The other thing is, you're starting to see a few consolidations occur. And again, it puts more resources under one company, less competitors out there to kind of chase some of those low economic markets. So we see a tightening effect with all this that's occurred.

Okay. Great. Thank you.

Thanks, Joe.

Your next question comes from the line of Mike Mizar from BMO Capital Markets. You may proceed.

Hey, good morning, guys.

Hi, Mike.

Hi, Mike.

Just kind of a quick strategic question, I guess. Just given kind of your focus on the unconventional plays and your expertise there and the way you've kind of grown the business with that model. Any thoughts on expanding outside of the U.S? Specifically, I guess, I'm thinking about pier -- the (inaudible) more river type plays, or is it a question of kind of being too late to that game?

We're pretty focused on the U.S. at this point. I mean, we've looked at Canada probably more through a strategic acquisition than maybe organic startup. Because there is a lot of competition in Canada at this point.

Right.

So we've been pretty focused on the U.S. We can continue to grow here. We're a very small part of the U.S. market, but we still have a lot of opportunity here. But we kind of keep our eye on that market, and think that we can enter through a strategic acquisitions over there.

Sure. Okay. That's great. Thanks.

Thanks.

Your next question is a follow-up question from the line of Stephen Gengaro. You may proceed.

Thank you. Gentlemen, I'm not -- I'm back to the -- I'm going back to the margin question. But last year, you had a first quarter which was very impacted -- I believe it was by heavy rains, and you had a lot of inefficiencies, I think, in your core market in Appalachia.

If I sort of ignore that first quarter level and I look at -- look at this going forward, can you give us any framework to think about from a margin perspective? I mean, is it -- on a gross margin level? If you can -- if we said you were going to lose 300 rigs in the U.S? Any sense for how far margins might get for a couple of quarters?

You know, Stephen, it's really hard to kind of project that, because what Dave was trying to answer on one of them is that that dip isn't going to be uniform across all of our different operating segments and things like that. So it's a question that's real difficult. If it impacted and it was perceived to be a long long-term drop in rig count, you'd see us take actions, like reduced head count and things like that with respect to it. Our view right now, I think, is that it's -- it looks like there's going to be a rig drop on the horizon. It's just a question of how long it's going to be, because the reserve of placement ratios continue to go up -- continue to go up.

So, I guess, at least it's our thinking right now that it's not going to be real, real long. But given a number of dynamics, plus what's complicating it a little bit now, is the turmoil in the credit markets. And right now, David mentioned, in October, we're not really seeing a decline in our activity, and we're starting to head into where you're going to have some seasonal holiday kind of shut-downs. And I think it's still going to be -- the visibility is still going to be difficult, because we won't know at that point, whether it's maybe customers not having the CapEx budgets, whether it's declined pricing, or whether it's just seasonality to really be able to project that. I'm not trying to side step your question. I just don't think there's an easy answer to it.

Okay. No, no. I understand that. I know it's not -- it's not an easy answer. Is there -- are you willing to guess if '09 is up, down or flat?

Well, I think that -- I mean, if '09 were kind of flat, I think that you're going to see our margins continue to increase because there's a fixed cost component, depreciation. Our SG&A and things like that.

You saw SG&A, like in this quarter, you saw it as a percentage of revenues, a fairly significant drop in that, and I think you'd continue to kind of see that impacted in our numbers. The other -- the other -- we talked about the potential Diamondback asset purchase, and that obviously, will have an impact on us, too, if we're able to consummate that transaction, just as we kind of transition for the first couple of quarters. But I would think, if we're -- all things being equal, sitting the way we are now, and if it was just steady, I think you'd see an improvement in operating margins, because we'd have the ability to spend it over a larger revenue base.

I mean, we're not fully utilized at all of our centers. We're -- as David mentioned, our job mix is continually changing. He mentioned in his comments that three of the regions perform superhigh tech work. That's our focus. There's higher margins in that type of work. I don't know if you have anything to add. Yes. I think also, one thing we look at, too, is where the rig counts are going to dip. And with our expanded footprint, we think there's still some areas that we'll still have very good margins, and they're looking for backfill crews at this point.

So at this point, the decision may be made to reduce CapEx, and then shift resources from some of the areas that are just super low margins to markets that have better margins.

So, again, just our past track record says that we've been able to grow revenues even when there's been dips in rig count, and sometimes you take a little margin drop, but usually earnings have been staying pretty steady.

Thank you. And just one final small follow-up.

Can you give us a sense for the range of margins on a low-end job today versus the higher end jobs.

They can vary quite a bit, based on a couple of things. One, the maturity of a service center has a big impact on that, too.

Okay.

So if they're 20, 30% utilized initially and then ramp up to 70% utilization over a year period, that can be a 30% increase in margin, just mainly due to better utilization of people, equipment and starting to get the cost structure kind of into place. It's different regionally, too. A lower tech job in Appalachia, a Medina sands-type deal is, you've got a higher price market there, and your op margins vary by region, too. Even though, it's on the lower tech side.

Okay. Thank you.

Thanks, Stephen.

This concludes the question-and-answer portion of the call. I will now like to turn it back over to Dave Wallace for closing remarks.

Thanks, Erica. Well, I appreciate everybody joining us today, and we look forward to our next call in the fourth quarter. Thanks.

Thank you for your participation in today's conference. This concludes the presentation.

You may now disconnect and have a wonderful day.