Nabors Industries Ltd (NBR) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2008 Superior Well Services, Inc. earnings conference call. My name is [Demali] and I will be your operator for today. At this time, all participants are in listen-only mode. We'll be facilitating a question-and-answer session toward the end of today's 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 conference, Mr. Dave Wallace, Chairman and CEO. Please proceed, sir.

Thanks Demali. Good morning, everyone and welcome to Superior Well Services fourth quarter and year end 2008 earnings call. Joining me today is Tom Stoelk, our CFO. I would like to remind all of those participating on the call today that a replay of our conference call will be available to listen to through March 18, 2009, by dialing 888-286-8010 and referencing the conference ID number 80522467. The web cast will be archived for replay on the Company's web site for 15 days. Before I begin with comments on our 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 facts included in this presentation that address activities, events or developments that Superior expect, 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 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 uncertainty. 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 & Exchange Commission's filing. The Company undertakes no obligation to publicly update or review any forward-looking statements.

Our call agenda is simple. I will first provide an overview of our operations, and then turn the call over to Tom who will review our financial results. After Tom's review, I'll provide some closing remarks and open up the call to Q&A. I'll now provide an overview of our operations. Revenues in 2008 increased 49% over the prior year to $520.9 million, marking our 11th consecutive year of revenue growth. Operating income also increased, rising 12% over 2007 to $69.1 million. Net income was $38.8 million, a $1.1 million increase compared to 2007. Revenue increases were primarily driven by increases in activity, particularly in the mid-continent and Rocky Mountain regions.

Before moving on, I would like to take a few minutes to discuss our acquisition of assets from Diamondback Holdings. We announced this transaction in September and provided color on the purchase price in financing in mid November. In the time between the initial announcement and the closing, much had changed both in the competitive landscape and the Capital Market. Let me explain the strategic rationale behind the acquisition and why we believe it was a good purchase for us. As we've grown our national presence, we've consistently experienced start-up periods of about two years before a new service center ramps up to profitability and begins contributing positive cash flow.

What we saw in Diamondback was a company that had been around for a few years and was beginning to get past the growing pains of a start-up company. We also viewed the Diamondback acquisition as a means with which to create cost-saving efficiency such as in our sand contracts, apply our business processes and expand our geographic reach. We intend to leverage Diamondback's fluid logistics and rental tool businesses into some of the shale plays where we currently have existing service centers, further enhancing our product offering. Several of these new shale plays, [Marcellus] in particular, have fluid logistic issues and we can see where that business is expandable and a good bolt onto our existing operations in our home market. Rental tools is a logical fit for us. We've already begun adding this product line to additional markets.

From a strategic perspective, the Diamondback acquisition strengthens our competitive position in key markets and enables us to quickly extend our range of services. In his financial review, Tom will provide more detail on the financing package. We have seen tremendous volatility in commodity prices over the past 12 months. This time last year, natural gas prices were about $9 per M and reached a peak during the summer of $15.38 per M of July 3, 2008. After which commodity prices began to fall. Now, natural gas is priced in the low $4 range and operators have been aggressively laying down rigs as a result of deteriorating well economics in all but the most profitable plays. In fact, the rig count is down nearly 40% from its peak in the third quarter of 2008. Consequently, pressure pumping and other well completion services had to lower prices in order to maintain utilization, driving discounts higher and margins lower.

We are not immune to these macro fast forces. However, we have prepared for a downturn and believe we are well-positioned to endure this current down cycle and emerge a stronger Company. Some of the things we have done to maintain competitive advantage and cope with the current cycle include negotiate a better pricing for materials and transportation, mobilize equipment from service centers with declining demand to areas where demand is stronger to optimize utilization and retain our best people. Committed to a long-term [fract] sand supply agreement, providing us with substantial cost savings for this important material. Establish four specialized sales teams, each with specific expertise in developing completion solutions for some of the most attractive plays in the country. These teams have enabled us to differentiate Superior Well Services as a true solutions provider for maximizing the economic value of each well, further distancing ourselves from our low tech competitors. I will talk more about these teams in the overview of each region. We've also invested in technology and innovations to maintain and build on our technical fluids expertise which I will focus on later in the call also. Strategically aligned ourselves with core customers that intend to remain active throughout the downturn.

Now, let's turn the focus to our five operational regions. Our Appalachian service centers support the Marcellus, Huron and Chattanooga shale plays. Revenues in the Appalachian region are down 4% for the quarter year over year and down 18% sequentially. Seasonality always factors into this region, and we witnessed the typical drop in rig count through November and December. However, the rig count has continued to fall into the new year. Natural gas prices settled down near $4.50 per M level despite a cold winter in the Northeast which is below economic levels for EMP operators without hetch positions. Several large producers are still talking about large projects involving shallow development even with prices at current levels. We expect the Marcellus to have a good year in 2009 due to strong economics in that play, but our margins will be softer due to higher discounts.

During 2008, we established our Marcella shale team, make customer presentations throughout the US and they favorably impress everyone that they meet. This team has specific experience in the play and can help our customers maximize recoveries and ensure that they're getting the highest rate of return on their investment. Revenues in the Southeast region are up 72% for the quarter year over year and 28% sequentially. As a result of increased activity in the Haynesville, Cotton Valley and Floyd shale plays. In December, we completed our first Haynesville track job with excellent results, and we expect the operator to provide with us additional work. The supply of ceramic profit is still inconsistent, but we've seen improvements over last quarter as new supplies enter the market and its operators experiment with other materials. In fact, we're currently working with a US supplier to bring in profit from China.

With our Diamondback acquisition, we acquired a few new business lines. And we'll be adding rental tools and a water transfer business to the Southeast region in 2009. We've seen the big three downsize or close operation in a couple of small markets in this region, which should boost 2009 activity a bit in those markets. In addition to the increasing activity in the Haynesville. We have also organized a Haynesville technical sales team to demonstrate our proficiency in performing high quality completions and high pressure, high temperature down-hole environments like those found in the Haynesville. These are expensive wells to drill and complete, and our expertise is an excellent fit with the requirements, which means better well performance and preservation of economic returns to the customer.

Revenues in the Southwest region are up 216% for the quarter year over year and 55% sequentially. This region includes the Barnett shale. The Diamondback acquisition added two new service centers in this region. Tolar and Cresson, Texas. Cresson was the best performing location for Diamondback. As the rig count drops in the Barnett, we expect utilization and pricing will continue to soften. We will continue to monitor the situation and mobilize crews and equipment to stronger markets if necessary. Ours is a cyclical business and we'll make adjustments to position our people and assets not only for the downturn, but also with an eye towards making the most of the eventual recovery.

Our Artesia, New Mexico service center has continued to show improvement and had a profitable fourth quarter. We expect its location to continue to improve despite a softer environment in 2009. The year in the fourth quarter were very strong in the Mid-continent region. Although we expect 2009 to be difficult with the heavy drop in rig count in the region, revenues in the mid-con region increased 162% for the quarter year over year and 34% sequentially. Most of our work in the quarter was from the Anadarko, Woodford and Sarcoma basin although we did some work in the Fayetteville. We recently leased a staging area in the Fayetteville at the request of several large customers in order to get our resources closer to the field. With the Diamondback acquisition, we added new service centers in Marlow, Elk City and Countyline, Oklahoma and this makes us the second largest cementing fleet in the Mid-continent region.

With the addition of a new service centers as part of the Diamondback purchase, we decided to close our [Enid] Wireline line operations and consolidate a crew from Enid to another pressure pumping location in the region. We also established an Anadarko base and technical sales team to raise awareness of our expertise in the deep Woodford and other high temperature, high pressure plays. Revenues in the Rocky Mountain region have increased 149% for the quarter year over year and are down 10% sequentially. Operating income improves substantially in this region as we saw better results from our Brighton and Vernal service centers. In the fourth quarter the cement plant we installed in Rock Springs as part of our cost control efforts became operational. Our [bocken] activity has held up despite weak oil prices but as prices stay below $50 per barrel for an extended period, we anticipate activity to soften in 2009. Our plan is to continue preparing our infrastructure in Williston, North Dakota for sand and cement handling as we see the boken as a strategic long-term opportunity for us. We plan to keep our presence in the basin low until activity begins building once again. I'll now turn the call over to Tom for a review of our financial results.

Thanks, Dave. As previously mentioned, net income for the year was $38.8 million or $1.64 per diluted share. Full year revenues were up 49% in 2008 to $520.9 million marking the 11th consecutive year of revenue growth. Approximately $26 million or 5% of the increase over 2007 amounts was contributed by the Diamondback acquisition. Comparing the full year revenues for 2008 versus 2007, revenue by operating region increased by $20.3 million in Appalachia, $26.3 million in the Southeast region, $45.3 million in the Southwest region, and $49.5 million in the Mid-continent region, and $28.7 million in the Rocky Mountain region. Revenues from our technical pumping services, that's stimulation, nitrogen, and cementing, accounted for 89% or $463.3 million of our total revenue. Down-hole surveying services, completion services and fluid logistics were responsible for the 9.4%, 0.4% and 1.2% of 2008 revenues respectively. Gross profit for the year was $114.8 million, that's up 17% from 2007.

Discounts are greater than they were in 2007, due to lower utilization, caused by poor weather during the first quarter of 2008 in the Appalachia region as well as increased cost during 2008 for materials and fuel that could not be passed on to our customers via price increases because of the current competitive environment which has affected our margins. EBITDA reached $113.3 million in 2008, that's a 26% increase over 2007. SG&A expenses were $45.7 million in 2008 compared with $36.4 million in 2007, an increase of 26%. As a percentage of revenues, SG&A was down 9% or approximately 160 basis points from last year, as we were able to leverage the fixed cost component over a higher revenue base. Cost of revenues was up 61% to $406 million and a percentage of revenues, cost of revenues increased 78% for 2008, as compared to 72% in 2007. This percentage increase between periods is primarily due to cost increases and material. We paid higher costs for sand, chemicals and cement as well as transportation expenses to deliver those materials and additionally, our mixed changed during the year where we started performing more jobs out in the Mid-continent and West where we have a higher material content. Fourth quarter revenues were up 70% year over year to $161.7 million, up 11% sequentially.

Without the Diamondback acquisition, fourth quarter revenues would have been down sequentially, which was not unexpected given the seasonal slowdown of weak commodity prices and a difficult Capital Markets environment for our customers. Revenue by operating region in the fourth quarter was $43.8 million in Appalachian, $30 million in the Southeast region, $17.5 million in the Rocky Mountain region, $32.7 million in the Southwest region, and $37.7 million in the Mid-continent region. Compared to the fourth quarter 2007, fourth quarter revenues in 2008 were down 4% in Appalachian, up 72% in the Southeast region, up 149% in the Rocky Mountain region, up 216% in the Southwest region and up 162% in the Mid-continent region. Sequentially, fourth quarter revenues were down 18% in the Appalachian region, up 28% in the Southeast region, down 10% in the Rocky Mountain region, up 54.5% in the Southwest region and up 34% in the Mid-continent region.

Revenue from technical services was up 68% over the fourth quarter of 2007 and up 8% sequentially to $142.4 million. Down-hole surveying revenues for the quarter were up 6% year over year and down 26% sequentially to $10.9 million. For the fourth quarter, completion services was approximately $2.2 million and fluid logistics revenues was approximately $6.3 million. Operating income for the fourth quarter came in at $22.5 million compared to $12.2 million a year ago and $24.9 million sequentially. That translates into an increase of 84% over the same period last year and a decrease of 10% as compared to the most recently completed sequential quarter. Margins were again compressed by competitive pricing environment as pressure pumpers sought to maximize utilization to the point of break even in some cases.

EBITDA was $36.4 million in the fourth quarter of 2008. That's an increase of 79% over the same period in 2007 and was a 0.3% increase sequentially. SG&A expenses increased to $14.1 million, that's up 44% compared to the fourth quarter of 2007 and was up 24% sequentially. A large portion of that increase was the Diamondback acquisition. As a percentage of the revenue, SG&A expenses decreased to 9% for the fourth quarter of 2008, down from 10% in the fourth quarter of 2007, and up from 8% revenue sequentially. Cost of revenue increased to $125.1 million, up 72% for the fourth quarter 2007 and up 14% sequentially. Increase was primarily due to the acquisitions that we made obviously, as well as increased costs for materials and labor. For the quarter cost and materials, cost of revenues, labor expenses-- percentage of revenues decreased 290 basis points year over year to 18.5%.

Turning to the balance sheet, we ended the year in a strong financial position with approximately $87.8 million of working capital. Total long-term debt at the end of the year was approximately $208.2 million. Our capital expenditures for new build equipment for 2008 was approximately $90.4 million, which was invested to equip new service centers, to add equipment to existing service centers, and for general maintenance. During 2008, we also purchased certain assets of [NewEx Wireline] and Diamondback Energy Holdings, LLC for a preliminary purchase price that totaled approximately $241 million. Our capital expenditure budget for 2009 is significantly scaled back from 2008. We're keeping an eye on our commitments -- we're keeping our commitments as light as possible to maximize liquidity. We have the ability to cancel or push back several of our orders into the late quarters. With a current outlook, we expect to build CapEx somewhere in the neighborhood of approximately $20 million and maintenance CapEx is expected to add another $10 million to $15 million on top of that number.

Turning briefly to the Diamondback acquisition, we were able to put together an attractive financing package despite the chaos in the Capital Markets. The Diamondback transaction was announced at $225 million. The components of that was $70 million in cash which we drew from our credit facility. $80 million in five-year notes which have an initial interest rate at 7% and escalates 1% a year as a five-year note. It is pre-payable without penalty. And the last component of that was $75 million of convertible preferred notes that are perpetual with a conversion price of $25. Given the recent debt deals in the industry, -- have been quite a bit higher, we felt very comfortable with the terms and composition of the financing to support this strategic acquisition. At this point, I would like to turn the call back over to Dave for some additional comments.

Thanks, Tom. We have built Superior Well Services into the fifth largest pressure pumper in the US, and even in this downturn, we are actively working to improve our competitive position. Creating our three base and specific technical sales teams has positioned us as one of the leading high tech players in one of the most profitable and active basins. In addition, we are actively targeting the major oil companies with our newly-formed strategic corporate sales team to focus exclusively on securing more business from the majors. By the end of 2008, we had performed what we classify as super high tech work and four out of our five regions and there isn't a job on shore for which we can't compete.

Our geographic reach and ability to deploy high-quality crews to any location in the onshore US, along with supporting them with the technical fluid experts, help us establish a position in this market. Even in this challenging market, we're not standing still, and we continue to see opportunities for growth. For example, the new service centers opened in 2007 are now beginning to contribute cash flow. Right on time as expected. In the third quarter of 2008, 18% of our operating income came from these centers, and that percentage grew to 26% in the fourth quarter. As these centers mature in their customer acceptance, their activity levels continue to increase. In addition, we're adding new offerings to our existing service centers, including tubing convey perforating, rental tools and fluid handling. In a downturn, these offerings become more important as operators turn their emphasis from drilling new wells to recompletions and work overs. These new offerings diversify our business and give us new ways to grow even the current market environment.

Our expanded geographic reach enables us to shift resources from low demand to high demand areas, allowing us to optimize utilization and retain the best and most qualified personnel. Our capital structure is built for durability and flexibility during the market cycles. We will continue to focus on maintaining and improving operational efficiencies from our investments in infrastructure and other initiatives. One focus in 2009 will be on making improvements in fuel, freight and material costs. Material costs have begun to fall with the exception of high strength profit which we had discussed earlier in the call. Although we haven't discussed this much in the past, technology is a vital element in maintaining and building our competitive advantage of technical fluids expertise, safety and performance. We have four cement testing labs in proximity to our most active technical plays to ensure quality and performance. We hold two patents for specialized fract fluids used in high tech and super high tech jobs.

Our team has developed and refined specialized chemicals for reusing fract flowback and acid mine drainage water which is increasingly important in the Marcella shale plate. Our satellite communications network enable us to bring the oil field to our customers' offices by streaming light data and images. Thereby increasing the productivity and quality for large multi-well programs over an extended geographic region. These technologies and innovations separate us from the competition, and we have no plans to slow down our efforts in developing new solutions for improving service quality and performance. Our crews build our reputation one job at a time, and I would like to take this opportunity to thank our people for all of the hard work during the quarter. We expect 2009 will hold challenges for our industry, however, I believe we have the right strategy, assets and people to both weather this downturn and emerge a stronger Company. This concludes our prepared remarks. Now, we'll open the call. Demali, I'll turn it over to you.

(Operator Instructions) Your first question comes from the line of John Daniel with Simmons & Company. Please proceed.

Good morning, guys.

Hey, John.

Good morning, John.

A couple of questions, the first one on profits. I think you mentioned that you're look at some experimental types of propanes. Can you elaborate on that? I think you mentioned you're starting to use Chinese propane from a US supplier. Can you tell us who that supplier is?

I probably won't give you that information. The one thing we are seeing is propane is definitely starting to loosen up.

Ok.

And there's a combination of more ceramic, hire-strength material coming online and also a shift maybe from part of these materials to more of a resin-based type material also. But one thing we've seen just like with fract sand in the past, is we've been able to build our position there. We're very confident we can build our position with the high strength materials.

Have the propane vendors at this point started lowering price?

We're definitely seeing a lot more availability which is the first line of being a little more flexible on pricing.

Ok.

So, we can say that we're starting to see some improvement there.

Ok. Good. Question on the fluid services. You mentioned a desire to take trucks up to Appalachia. What would be the timing on that? And doing so, do you need to drill a disposal well or how will you dispose of the fluids?

Currently, there's no disposal wells in Pennsylvania. They go through treatment plants or they haul it across the border into other states. We would utilize the other resources that are currently in place and just use the transportation part to help support that.

Ok. Just one final if I may. You talked about moving some of your assets to stronger markets to maintain the utilization. In doing so, is there any reason to expect that there might be some facility closures in 2009?

We continue to look at that. We talked about the Enid closure and one thing we didn't mention on the call is we have adjusted crews and some of the multiservice locations. We've been able to shift some resources out of that. But we've picked these locations on a long-term basis. We've basically identified some strong markets that have long-term backgrounds and therefore, our goal at this point is to maintain a presence in those regions.

Ok. Great. That's it for me. Thanks, guys.

Thanks, John.

your next question comes from the line of Stephen Gengaro with Jefferies. Please proceed.

Thanks, good morning, gentlemen.

Good morning, Stephen.

A couple of things. I guess to start with, as you look at the various regions, can you give us kind of a trip around the US as far as what you're seeing as far as pricing and the severity of pricing declines, even if it is on a relative basis by region as opposed to absolute, if you could.

We're definitely seeing pricing reductions in most of the basins. And a lot of that goes with the intensity of the rig count reduction. We're look at that as kind of a barometer in how we fit into certain areas. Tom, I think you have some specific information.

Yeah, I mean I think the -- from a pricing perspective, Stephen, the region that has been least affected has really been Appalachian followed by the Southeast. We had strong revenue, strong markets in both of those. We're seeing kind of the Mid-con and the Rockies with a fairly dramatic decline with rigs, with pricing, kind of following. That's been the markets that have been most dramatically impacted. And the Barnett is -- as you've heard on I think on a number of calls, this earnings season, has been impacted by the softness as they continue to lay down rigs there.

The other thing just to add to that is we're focused on the value-based pricing and again, that's part of the initiative of these strategic sales teams. We're seeing--particularly like in the Marcellus, we have a fluid system that we can re-use a high percentage of fract fluids. Therefore, there is a value benefit there other than just a straight job cost. So, taking advantage of this fluid system, where they can save a lot of money because that's a big cost in these wells when you start looking at fluids, disposal, things like that. That reusing the fract fluid has had a big economic improvement that our customers can take advantage of.

So, you think it is -- I know it is tough to say, you think it is reasonable to think that in some of the higher end areas, you actually -- there is some value to your expertise versus some of the commoditized services which are out there?

Absolutely. When you start looking at all of the different factors that you can do to imprint the total well cost, improve the productivity that comes out of those wells, it is not just bottom line job cost that customers are now starting to look at. And again, this fits right into our expertise. We've now reached the national presence that customers recognize us as a solution person. As somebody that can improve their wells and bring other alternative methods to how to make them better wells at a lower cost than just being a regular pressure pumper.

Great. That's helpful. Thank you.

Thanks.

(Operator Instructions) Your next question comes from the line of Victor Marchon with RBC Capital Markets. Please proceed.

Thank you. Good morning.

Good morning, Victor.

I just had a follow-up question on the pricing. I wanted to see if you guys could give us an order of magnitude as to what you've seen today on the pricing side relative to last year's high and also put it in context, between the high tech jobs versus the more commodity type of work.

Just so I understand your question, Victor, you're asking for discounts is what -- from a high of last year to kind of what we're seeing now?

Yes, yes.

Ok. Well, kind of an order of magnitude, Appalachia -- I'm going to kind of give you low single digits, high single digits type stuff as-- is about all I'll be able to give you. But Appalachian has been the region that has been least impacted with respect to that. And that's low single digits from kind of the highs that we've seen. Southeast is probably number two with respect to least amount of impact on conventional markets there. In kind of the mid single digits in that market, you get into the Mid-con regions, those are high single digits, really Mid-con, Rocky, Southwest, are really all pretty much high single digit discount markets as far as percent of increase year over year.

Part of those are matching up with the heavier drop in rig count areas. And as we talked about, our mix of services is we're seeing it more on the pressure pumping than we are on cementing and nitrogen and some of the other product lines. So, when you talk about a slick water job in some of the heavily competitive areas, discounting is starting to get pretty aggressive in some of those basins.

So, it is the numbers that you guys just walked through was more reflective on the stimulation side or is that sort of an average as to all of the product lines.

The one I was giving is more of an average across all product lines. Stimulation would be higher.

Ok. And the second one I have is just on the M&A side, I wanted to see if you guys can speak to what you're seeing as to the number of opportunities as well as your appetite here in '09 and as well as what you're seeing on the [BIDS] spreads for the businesses that you are seeing available.

I think we're starting to see that there are opportunities popping up again, when things were pretty strong, people enjoyed riding the upside. Now that things have started tightening up, when you start seeing some companies that are really focused in some of the lower tech, high discount areas, now they're starting to really feel a lot of pressure. We're seeing the opportunities pop up that we could take advantage of on some of these companies now becoming available.

So, the asking prices have come down to closer match what the bid levels are, would you say, over the last two or three months?

I think that they're really starting to soften up.

All right, great. Thank you, guys.

Thanks, Victor.

your next question comes from the line of Jack Aydin with KeyBanc Capital Markets. Please proceed.

Hey, guys.

Good morning, Jack.

Utilization, I don't know, I apologize if you mentioned it. What is the utilization rates right now? Going on. What was in the fourth quarter and what is -- what direction you're seeing in the first quarter.

When you look at fourth quarter, I mean third quarter was probably our maximum utilization. We were really getting close to full out utilization during that time period. It stayed at that level into October and then we started seeing the holiday seasonal drop down which, you look, we were probably 75%, 80% third quarter and fourth quarter, that probably dropped to 65% and I think we're going to see along with our seasonality and first quarter, we're going to see that continue to dip with the rig count dip and also just a seasonality in the Appalachia and the Rockies.

Ok. If you look at the fourth quarter revenue, with the growth and everything, if you strip out the acquisition, what was the -- what was the growth on the basic -- without acquisition?

Well, the acquisition was roughly $26 million so that's the Delta you basically kind of want back out of that. And in our -- in the numbers that we reported, Jack, that acquisition would have impacted primarily the Southwest and Mid-con regions for us. If that's what you're looking for.

Ok, yes. Thanks a lot.

Thanks, Jack.

your next question comes from the line of Mike [Mizar] with BMO Capital Markets. Please proceed.

Good morning, guys. Most of mine have been answered here. Just a quick question. Can you walk us through your debt covenants?

Primarily, we have two, Mike. One is a kind of a maximum leverage ratio. It is essentially --as defined by the agreement, kind of a 3 times EBITDA type of coverage ratio. We were roughly in 1.3 to 1 range. We had a lot of room with respect to that. The other is a fixed charge covenant which we have to have greater than 1.75 times coverage on that. Again, we were roughly about 2.95, 2.96 times. So, fairly good shape with respect to that.

Perfect. Thanks very much.

Thanks, Mike.

your next question is a follow-up from the line of Stephen Gengaro with Jefferies. Please proceed.

Thanks. Gentlemen, two follow-ups. One is back to the price. When you gave those numbers currently, are you seeing the pace of price erosion accelerate currently versus six to eight weeks ago? Is it about the same?

I think it is in that kind of aggressive time period right now. One because when we look at it, rig counts have gotten pretty aggressive as far as how fast they've been dropping but we think they're getting to the point that they may be getting ready to bottom out. Everybody is trying to take advantage of that negative downward energy and then trying to get the best price they can and lock in some low pricing before the rig count actually starts bottoming out. We look at the rig count. We've actually started seeing a few areas that we work starting to increase, flatten, and increase, which tells us that we may be getting ready to see the bottom of the pricing and start seeing things go the other way.

That's helpful. Go ahead.

I think that, again, it is kind of -- they're hitting their window right now, trying to get the most out of it. But we think it is getting ready to turn. Again, most of that, as we mentioned earlier, has been on stimulation in some of the slick water type areas. When you look at cementing and nitrogen, we're not seeing the erosion there that we are in some of the other stuff.

Great. And then as a follow-up, when we think about margins and -- I take it if the market slows, you're going to do your best to control costs, how should we think about your -- the impact or the timing of the impact of cost reductions on margins if prices are falling? Does it take a couple of quarters before you see that impact? Will it be sooner? I'm trying to get a sense for the potential pace of how margins fall and maybe when they sort of stabilize.

I think that one thing I would look at is we have a little bit of seasonality. If you take a look at fourth quarter last year '07, we had gross profit of around 23% and in the first quarter, you saw it drop. We had weather in Appalachia but you saw it drop almost 7.4 percentage points. You're going to have some seasonality with respect to that, Stephen. The other thing you're going to have is that a lot of these cost reduction initiatives, when we're looking at trying to right size the activities for current demand, where David had commented about moving equipment around to more active areas and things like that, those will impact more heavily, I think your first quarter and have some impact in the second quarter as we kind of continue to push those cost initiatives through but when you move equipment around, you right size locations and things like that which we have been doing in the fourth quarter, we're going to have much more margin -- or our expectation rather is that kind of as we currently see it, and this is a pretty fluid market. It will be heavier I think in the first quarter and the second quarter and then I think you'll actually see it flat a little bit in the third and fourth quarter.

Just to add to what Tom is saying, we didn't have a lot in the fourth quarter. We were trying to be responsive and not overreactive. We could see the rig count drops coming, but it was hard to get strong visibility on which areas were going to see the biggest impact. So, we've been slow to respond in the fourth quarter. A lot more reactive than to -- than the first quarter and again, when you start look at shifting equipment around, just to move 30 piece of equipment from the Rockies to Appalachia, you might be look at $2,000, $2500 a unit just in transportation costs. So, when we start shifting a lot of resources around, it can get pretty expensive pretty quick. So, we're trying to take a little longer term look. We know some areas that we definitely want to beef up, (inaudible) Marcellus, but some of the other areas we're trying to give it a little more realistic, longer look to make sure we're making a long-term correct decision.

Thank you. That detail is very helpful.

your next question comes from the line of Joe Agular with Johnson Rice. Please proceed.

Thanks. This is Joe Agular with Johnson Rice. I guess you've addressed a lot of the questions we had. But could you make help us on -- now that the acquisition's complete and you have a full quarter of it here in Q1, some of the kind of more mundane stuff like depreciation, interest expense, SG&A, what you expect that to look like for the full quarter?

Well, the rate on our credit facility and we had approximately $127 million outstanding at the end of the year. We're probably about $10 million higher than that right now as we had to fund out some of the Diamondback. We didn't get a lot of working capital in Diamondback. We got a little bit. We purchased assets. We got a little bit of inventory. And incurred or assumed some capital leases and an ARO liability. So, effectively, their first 60 days of operations were pretty much funded. Meaning funded by either our cash flow or draws on the credit facility but that is a -- a [LIBOR] for us. LIBOR plus about 1.75 right now to run the map or prime. So, probably around 3.25.

The $80 million note is an escalating note under GAAP what you do is you use the average rate so it escalates from 7% to 11% over a five-year term so what you would want to do is model that at roughly around 9%. Depreciation for the year based on our current run rate kind of layering in CapEx and we're going to be fairly prudent with CapEx because we're look at liquidity fairly strong is probably somewhere in the neighborhood of around $68 million, $69 million. That's going to include amortization of a couple hundred thousand bucks a month. You've got about $2.5 million of amortization in there with the rest of it being depreciation. Does that help?

Yes, yes. SG&A, any guess on that?

We're still working with that. One of the things that the Diamondback transaction was done late in the year, 11-18. So, we're fooling around, still a little bit with respect to redundancies. On the SG&A line, just on pure corporate, because of the elimination of the duplication of just -- duplication like charges of legal and professional accounting and things like that, you're probably looking at $1.5 million, $2 million of pure corporate which doesn't count the SG&A from the redundancies at any of the operating levels and things like that. And does that help?

Yes, yes. Ok. Thank you.

Your next question comes from the line of Sean Boyd with West Cliff Capital Management. Please proceed.

Thank you. David, I just want to go back to a little more on one of the questions a little while back on terms of pricing. You indicated that we were at a point where the customers are trying to get the maximum amount they can off of momentum of the drop in the rig count but you see some areas flattening and picking up a little. Can you give us more detail on that?

Part of it is we know there's seasonality always in Appalachia and the Rockies. So, part of the rig count we see for first quarter is not just due to low gas prices but also seasonality. And when we look at Appalachia, we're starting to see Pennsylvania, West Virginia rig counts actually bottom started coming up a little bit. Same way with Utah. It looks like it is starting to come up a little bit. Fayetteville, Balkan flattening out. Maybe getting ready to -- when we look at Balkan, it definitely has a weather effect there. It may turn into more of a warmer weather type operation where they operate six, eight months versus trying to do it 12 months because it is too intense in the winter season. So, we're starting to see a few of those areas that look like they started kind of flattening out and turning up a little bit. So, based on that, -- and again, we'll monitor that to see how much they do jump but based on that, we can kind of determine that maybe pricing may do the same thing.

Sure, sure. So, right now, given where we are on the calendar and these particular areas could mostly be seasonality but it could also be a little bit of more of a bottom as well.

Yeah, because there's two players out there. There's the checkbook player that looks at gas prices that are still a little bit soft to start getting aggressive. But then you have some of the larger players that are -- have nice hedge positions, still can deliver gas. Are in areas where they want to continue to expand their field. And I think some of those guys are going to start shifting the other way. They have a lot of work to get done and they want to get into it when the weather is right.

Got it. Thanks for the additional color.

Thanks.

Since you have no further questions, I would now like to turn the call back over to Dave Wallace for closing remarks. Please proceed.

Thanks, Demali. I appreciate everybody being on the call today. We look forward to talking to you at the end of the first quarter. Thank you.