Nabors Industries Ltd (NBR) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Superior Well Services, Incorporated Earnings Conference Call. My name is Shamika and I will be your coordinator for today. (Operator Instructions.) I would now like to turn the presentation over to your host for today's call, Mr. Dave Wallace, Chairman and Chief Executive Officer. Please proceed.

Thanks, Shamika. Good morning, everyone, and welcome to the Superior Well Services Second Quarter 2009 Conference Call. Joining me today is Tom Stoelk, our CFO. 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, by dialing 888-286-8010. The conference I.D. for the replay is 44327690. The webcast will be archived for replay on the Company's website 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 acquisition or expansion opportunities, future earnings, cash flow, and capital expenditures, are forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Act of 1934. All statements, other than statements of historical facts included in this presentation, that address activities, events, or developments that Superior expects, believes or anticipates will or may occur in the future, are forward-looking statements.

These statements are based on certain assumptions made by Superior, based on management's experience and perception of historical trends, current conditions, expected future developments, and other factors 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 Securities and Exchange Commission filings. The Company undertakes no obligation to publicly update or review any of the forward-looking statements.

Our call agenda is as follows. 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.

Energy market fundamentals continued to deteriorate during the second quarter with U.S. land rigs bottoming in the middle of June. The decline in gas rigs, which bottomed in July, was offset by a consistent and steady rebound in oil rigs from the middle of June to today. Our activity levels followed these rig trends with job counts bottoming in May, followed by an up tick in June. Our revenues were consistent with our activity levels as monthly sales bottomed in May and improved in June.

While it is a challenge to pick the bottom in any cycle, based on our preliminary July revenue numbers, which were better than June, it appears as--it appears we may be moving up from the bottom of the trough with respect to activity levels and sales. Some competitors appear to have changed their strategies from market share growth, regardless of the impact on financial performance and cash flows, to reducing expenses, closing locations, retrenching to core areas, and stacking and moving equipment. We anticipate that this market retrenchment will provide some benefit to us in certain locations and areas given our footprint.

We see the pressure pumping market rebalancing over time. Some of our larger competitors have commented on moving 10 to 15% of their horsepower internationally. Older, less efficient, and less reliable horsepower is being retired. The equipment is being moved out of basins and stacked. The combined effect of these trends is that pressure pumping capacity in North America could decline significantly, which would go a long way toward improving the supply and demand fundamentals in this market.

I would like to note that the majority of Superior's fleet is newer and has been built between 2005 to 2008. During the quarter, we accelerated the speed and depth of our headcount reductions and focused on reducing other costs to align our cost structure with current and anticipated activity levels. Our primary focus is return to profitability and generate positive cash flow. That said, because we know many customers choose us because of our service quality, reliability, and safety record, we continue to maintain our equipment to our traditional high standards and develop unique technologies and processes for enhancing returns and reducing risk for our broad and diverse customer base. We still have the industry leading expertise on our team, which our customers and investors have come to rely upon in both up and down cycles.

Revenue in the second quarter of 2009 was $90.5 million, that's a sequential decrease of 26% from the $122.3 million reported in the previous quarter ended March 2009, and a 24.4% decrease from the $119.7 million reported in the second quarter of 2008. Operating loss for the second quarter, excluding a $33.2 million non-cash, non-recurring, pre-tax goodwill impairment charge, was $26.1 million as compared to $19.1 million of operating loss reported in the previous quarter and $16.6 million of operating income reported in the second quarter of 2008.

The year over year revenue decline was a result in the decline of activity levels resulting from lower industry demand for well completion services, coupled with increased price competition, which in turn led to higher sales discounts across our operating region. The lower demand for our services was partially offset by revenues from the Diamondback asset acquisition and increased activity levels in new service centers that were established within the last 12 months.

As a percentage of gross revenue, sales discounts increased 14.3% in the second quarter of 2009, compared to 2008, and increased 7.3% sequentially compared to the March 2009 quarter. All of our operating regions experienced higher sales discounts for the second quarter of 2009 compared to 2008.

While we can't control commodity prices or our clients' CapEx budgets, we can control our cost structure and how we approach this market. We continue to respond proactively to the current market environment by reducing costs, focusing on maintaining high service quality, bringing new services and technologies to market, and seeking operational efficiency.

We have reduced headcount by approximately 1,130 employees, a reduction of 44%, to approximately 1,460 as compared to 2,589 employees at the beginning of 2009. We were reduced across all of our operating regions and administrative functions to better align our headcount utilization with activity levels. While reducing headcount is never our preferred course of action, these steps have lowered our monthly personnel costs by approximately $6 million. The full benefit of these reductions will not be realized until the third quarter, as 75% of these reductions occurred in March through July.

We have also reduced our number of service centers located--by consolidating operations in certain areas and closing centers located in weak markets that are not expected to make a strong recovery as the environment improves. Reducing our exposure to markets rendered unprofitable in this market environment will also result in increased cost savings at Superior. We have implemented additional cost savings initiatives that Tom will review.

We recently announced that Superior was selected by Marathon Oil Corporation for the EXCAPE Completion Process license. The EXCAPE Completion Process can increase reserve potential by strategically targeting discrete pay intervals with perforating guns mounted outside the casing and integral valves inside the casing for zonal isolation. We are well positioned to provide high quality cementing and fracturing stimulation services in support of the EXCAPE process for Marathon and other customers across our operating region.

Now, let's turn the focus to our five operational regions. Our Appalachia service centers support the Marcellus and other shale plays. Revenues of $28 million in the Appalachian region were down 39% for the quarter year over year and down 8% sequentially. Frost laws impacted activity levels in April and May for most of our locations in Northern Appalachia and Michigan. Shallow drilling activity continued to drop as the E&P operators shifted their CapEx dollars to drilling wells in the prolific Marcellus Shale play. Our Marcellus Shale team--sales team continues to make progress with new customers as confirmed by the increased diversity of our customer base and the increase of our Marcellus job count.

Our solution focused Marcellus Shale technical team has specific industry experience in the play and it has helped our customers maximize recovery and ensure that they're getting the highest rates of return on their investment. From an innovative perspective, our technical team has developed our exclusive gamma frac slickwater system that reuses 25% to 50% of a customer's flow back water, thereby reducing the amount of fluids that need to be disposed and lowering our customers' fluid disposal costs, further enhancing their returns. We are aggressively marketing this system to all of our shale customers, including those in the Marcellus, where fluid disposal is a significant regulatory and cost issue. Competition continues to increase in this area as other companies move equipment and crews into Appalachia in an attempt to pick up market share in the Marcellus.

Our expertise in helping leading E&P operators increase recovery rates and generate stronger returns on dollars invested combined with our consistently demonstrated high job performance and our reputation for excellent service quality helped us maintain a strong competitive position in our backyard. We also remain to be the conventional well leader in Appalachia.

Revenues in the Southeast region of $12.1 million were down 46% for the quarter year-over-year and down 44% sequentially. Reduced activity levels in our Alabama and Mississippi markets along with aggressive discounting in the Haynesville Shale play, led to the revenue decline. During the second quarter, we saw a number of competitors who were pricing below cost to gain market share. We decided to not participate in a number of these jobs and focused our efforts on improving our economics in this region. Our Haynesville technical team continues to demonstrate our proficiency in performing high quality completions in high pressure, high temperature down hole environments, like those found in the Haynesville.

Similar to the Marcellus team, our Haynesville team has specific industry experience in the shale. They continue to provide innovative solutions that translate to better well performance and the preservation of economic returns to our customers. For example, they are also introducing our gamma frac slickwater system developed in the Marcellus to our Haynesville customers and are developing alternative profits for the Haynesville market that offer improved high temperature stability and better crust strength at lower cost than traditional profits.

Counter to the falling drilling activity in the rest of the nation, the rig count in the Haynesville Shale play continues to increase. We remain focused on providing high tech cementing and stimulation solutions to existing and new customers that are required in this high pressure, high temperature play.

On the material side, we're working with a sand coating firm that is resin coating our sand, resulting in significant all-in lower resin coated sand costs.

Revenues from the Southwest region of $27 million were up 83% for the quarter year over year, and down 25% sequentially. The Southwest region has been impacted by the decline in gas rig count in Texas, in the Permian Basin, and utilization and pricing has softened. We've seen an up tick in activity in the oily Permian markets in June and July and feel we are well positioned to capture additional jobs as the market improves.

We've reduced our cost structure in the Southwest and will continue to monitor the situation and further reduce costs as needed.

Revenues in the Mid-Continent region of $21 million were down 6% for the quarter year-over-year and now 19% sequentially. Similar to the Southwest region, the Mid-Continent region has also seen drilling activity levels fall dramatically and has been challenged by utilization and pricing weakness. We maintain our position as one of the premier providers of technical pumping services for the deep high pressure wells in Western Oklahoma and in the Woodford Shale. This position allowed us to develop our relationship with Marathon that led to the EXCAPE Completion Process license. To increase our efficiency in the Mid-Con, we have closed unprofitable locations, moved crews to other basins, and continued to reduce costs.

Revenues from the Rocky Mountain region of $2.3 million were down 84% for the quarter year over year and 72% sequentially. Our activity levels bottomed in the Rockies in May and we've seen improvements in June and July. Activity in the Bakken oil shale play in North Dakota has improved and we're continuing to expand our presence in the active oil area while many competitors have exited this region.

Our new Williston methanol plant is operational and we've begun servicing new and existing customers with cement services in this region from our Williston and Rock Spring bulk plants. We reduced our headcount significantly in the Rockies to help improve profitability.

I'll now turn the call over to Tom for a review of our financial results.

Thanks, Dave. As Dave mentioned, revenues were $90.5 million for the second quarter of 2009, which was a decrease of 24.4% as compared to the same period last year and a 26% sequential decline. Revenues from our technical pumping services, which include stimulation nitrogen and cementing accounted for 85%, or $77.1 million of our total revenues, down hole surveying, completion services, and fluid logistics were responsible for 6%, 4%, and 5% of revenues, respectively.

Revenues by operating region in the second quarter were $28 million in Appalachia, $12.1 million in the Southeast region, $27.1 million in the Southwest region, $21 million in the Mid-Continent region, and $2.3 million in the Rocky Mountain region. Revenues during the second quarter of 2009 were impacted by a continued rapid decline in drilling activity in each of our operating regions. The decline in overall industry demand caused an increase in competition among service companies competing for a smaller universe of work. As a result, sales discounts increased significantly year over year.

As Dave previously mentioned, company wide discounts increased 14.3% between the second quarter of 2009 compared to the second quarter of 2008. All operating regions experienced sequential quarterly increases in discounts and on a company wide basis discounts increased 7.3% sequentially compared to the March 2009 quarter. The cost of revenues increased 11% or $10.2 million for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. As a percentage of net revenue, cost of revenues increased to 113.4% for the second quarter of 2009, from 77.2% for the second quarter of 2008, due primarily to increased sales discounts on materials, lower labor utilization due to the drop in drilling activity, and higher depreciation expenses. Discounts and pricings fell faster than material costs and personnel reductions--or faster than the materials and the personnel reductions, which compressed our margins.

As a percent of net revenues, material costs, labor expenses, and depreciation increased in the second quarter of 2009 compared to the second quarter of 2008 by 11.8%, 8%, and 11.7%, respectively. The year over year increase in material costs as a percentage of net revenues was due to higher sales discounts on materials. Labor expenses as a percentage of revenues increased 8% to 27.6% in the second quarter of 2009 compared to the second quarter of 2008 because of lower utilization due to rapidly declining service demand.

Depreciation increased 11.7% in the second quarter of 2009 as compared to the second quarter of 2008 due to additional assets acquired in the Diamondback asset acquisition, as well as an overall in equipment utilization due to the drop in demand for our services. Additionally, the higher level of sales discounts during the second quarter of 2009, compared to the second quarter of 2008, impacts the comparability of the year over year increases from materials, labor, and depreciation.

SG&A expense increased 30.6% or $3.3 million for the second quarter of 2009, compared to the second quarter of 2008. As a percentage of revenue, SG&A increased by 6.5% to 15.4% for the second quarter of 2009 from 8.9% in the second quarter of 2008. During the fourth quarter of 2008, we completed the Diamondback acquisition, which increased SG&A expenses in the second quarter by approximately $3.6 million compared to the second quarter of 2008. It's worth noting that our cost reduction steps decreased SG&A. That's reflected in our second quarter results as we realized a sequential decrease of $2.1 million in SG&A or a 13.1% drop from the $16.1 million reported in the previous quarter ended March 2009.

In the second quarter of 2009, we recorded a non-cash, non-recurring charge totaling $33.2 million for the impairment of goodwill associated with our technical services and fluid logistic business segments. We determined that a triggering event had occurred, which under GAAP requires us to perform interim tests or assessment of our goodwill. Based on the assessment results, we recorded a non-cash impairment charge net of tax, increased our current net loss by $20.2 million or $0.87 per diluted share during the quarter.

Operating loss was $26.1 million before the goodwill impairment and $59.2 million after the goodwill impairment charge the second quarter of 2009 compared to operating income of $16.6 million for the second quarter of 2008. Approximately 78% of the total operating losses before the goodwill impairment charge for the second quarter of 2009 were generated by the Mid-Continent, Southwest, and Rocky Mountain regions, which were the most impacted by declining activity levels and pricing erosion.

As discussed earlier, lower activity levels, higher sales discounts, and lower labor utilization were the primary contributors to the operating loss. Adjusted EBITDA decreased $33.9 million in the second quarter of 2009 compared to the second quarter of 2008 to a negative $7.3 million. Net income before the goodwill impairment charge decreased $27.3 million to a net loss of $17.7 million in the second quarter of 2009 as compared to the second quarter of 2008 due to decreased activity levels as previously described.

As Dave mentioned, we have reduced our headcount aggressively to align our cost structure with current and expected activity levels and to help improve profitability in response to this down cycle and current competitive environment. To further reduce costs, we have closed four unprofitable service centers, initiated a 10% to 15% reduction in executive salaries, which was effective April 15, discontinued our employer match in our 401(k) plan, which was effective May 1, amended our healthcare and other employee insurance programs, which became effective June 1, and are cutting additional overhead costs.

We've also initiated a furlough program effectively July 1, which consists of unpaid leave for our workforce. Depending on which program you're in, it's either off one out of every eight weeks or one out of every 10 weeks. In addition, we are focusing our efforts on reducing material, repair and maintenance, and fuel costs, and have cut nearly all discretionary spending. We are asking for and receiving price concessions from our vendors and will continue to focus on maintaining the performance of our relatively new fleet while seeking ways to improve profitability and productivity.

We believe that the actions that we have taken will result in significant cost savings in the near term and had all our cost savings initiatives been in full effect for the second quarter we believe Superior would have pushed adjusted EBITDA into the positive territory. In addition, we expect to implement other cost saving measures during the remainder of 2009, including further reductions in our cost structure.

Turning to the balance sheet, our working capital increased $7.6 million to $95.4 million at June 30, 2009, compared to the year end amounts at December 31, 2008. The changes in working capital were primarily due to a $21.3 million decrease in accounts payable that resulted from decreased activity levels. In addition, the income tax receivable increased $18.5 million for tax refunds expected to be realized for the carry back of operating losses generated in 2009. The increase was partially offset by a decrease in trade accounts receivable of $37.2 million due to collections of our receivables. On a sequential basis, working capital decreased $7.9 million from $103.3 million at March 31, 2009 to $95.4 million at June 30, 2009. I'm sorry. It decreased from $103 million March 31, 2009 to $95.4 million at June 30, 2009. Trade accounts receivable sequentially declined approximately $30.6 million from $96.5 million at the end of the first quarter.

Our inventory levels were relatively flat sequentially from the first quarter to the second quarter. We have focused on reducing inventory levels and have positive results with chemicals and cement, each down about 20% sequentially. These declines were offset by increased sand inventories necessary for the increased shale work, which requires larger amounts of sand per job, and for the resin coating process for the sand used in our deeper basin work.

Total long term debt at the end of June was approximately $229.6 million with $149 million outstanding on our $250 million syndicated credit facility. Total long term debt less cash at June 30 was $221.5 million. Currently, we have approximately $141 million outstanding, leaving us with approximately $102 million of availability under our credit facility after accounting for our letters of credit.

Our facility matures in March 2013 and we are currently in compliance with our debt covenants. While we fully expect to see improvement in our adjusted EBITDA, if our adjusted EBITDA maintained its current levels, we project we would violate the covenants in our credit agreement evidencing our credit facility as of the end of the third quarter of 2009. In order to address this situation, we have begun discussions with our lenders and our credit facility to amend the facility, so that covenants are more in line with our current operating results.

For the second quarter of 2009 we made capital expenditures of approximately $8.5 million. We plan to continue to focus on minimizing our discretionary spending, limiting our capital expenditures, and managing working capital to maximize liquidity.

At this point, I'd like to turn the call back over to Dave for some additional closing comments.

Thanks, Tom. We built Superior Well Services into the fifth largest pressure pumper in the U.S. and even in this downturn we're actively working to improve our competitive position. Creating our three basin specific technical sales team has positioned us as one of the leading high tech players in the most active basins where our expertise is needed to maximize recoveries and returns. We believe that our strength, our reliable equipment, high service quality, and technical expertise in the key unconventional shale plays combine to help reduce risk and maximize returns for our customers as we consistently deliver results based on demonstrated performance and sound technical expertise.

Our management team is experienced and has successfully weathered several down cycles in the course of our careers. Although we have made the difficult decisions required to improve profitability, we're not sacrificing service quality or innovation. Our plan to endure this down cycle and emerge as a strong, competitive--strong competitor remains the same. We will aggressively cut costs at all levels of the organization to align our cost structure with the realities of the current market environment, provide the highest levels of service quality and results to our diverse base of strong customers and acquire new customers on the basis of competitively priced high quality service.

Maintain our disciplined approach to managing liquidity and cash flow, strengthen our presence in the markets where we have a clear competitive advantage in high tech completions in the plays with the most durable economics; prioritize capital investment to maintain the performance of our relatively new fleet, ensuring high levels of service quality, safety, and reliability; continue to innovate and build on our technological advantages; and maintain and strengthen our technical sales team.

Last year, we established three basin specific shale play technical sales teams to position us as the market leader for high tech and super high tech work in the most profitable U.S. resource plays. These teams have been very successful in pushing our high tech fluids into the horizontal shale plays, building relationships with new customers, maintaining relationships with existing customers, and securing work in plays offering long term potential for activity and growth. By working together, these teams are also instrumental in deploying our technologies, techniques, and best practices across all of our regions and customers.

As a result, we believe Superior Well Services is well positioned for when the market eventually turns back up. Ours crews have built a quality reputation one job at a time and I would like to thank all of our employees for their hard work, continued dedication, and professionalism during this difficult quarter. I would again like to mention that our primary focus is to return to profitability and generate positive cash flow. Ours is a cyclical business and we'll continue to 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.

While it is challenging to predict the movements and extent of this cycle, demand for our services increased modestly in the month of June as compared to May, and revenues for the month of July were higher than June. As Tom mentioned, had all of our cost savings initiatives been in full effect for the second quarter, we believe Superior would have generated positive adjusted EBITDA in the second quarter.

This concludes our prepared remarks. I will now turn the call over to Shamika to help coordinate our question and answer session.

Thank you. (Operator Instructions.) You have a question from the line of Joe Hill at Tudor Pickering Holt. Please proceed.

Good morning, gentlemen.

Good morning, Joe.

It sounded like you made some good progress in the quarter on the cost savings plan. And you could've been EBITDA positive if everything had been kind of set in place at the beginning of the quarter. So I would imagine that the third quarter probably looks EBITDA positive in and of itself. But given the improvements you're seeing in the market, maybe in terms of utilization plus the cost saves, do you guys think you might have a shot at being EBIT positive in the third quarter?

It's still a lot of pricing pressure out there, Joe. And as we continue to see pricing improve and utilization improve, it's going to take a little time to work through that. So I think we're encouraged by the progress that it's making, but we're not optimistic that third quarter is going to make that kind of recovery.

Okay. And just kind of to follow up on that thought, what was your average utilization for stim in the second quarter versus your exit rate, and then kind of what the rate is today?

We--part of that is based on we continue to downsize crews. So when we look at our utilization for the quarter it was roughly 40% to 45%, which would've been down from first quarter, but again, kind of based on the downsizing of our crews it would've been not too far off from what we saw in first quarter. We feel like we're very well positioned. We know our utilization is a little soft in second quarter, but again, we've maintained some really high quality crews and we can see the utilization picking up so we feel like we're in a strong position to ramp up with that.

Okay. Can you give me a sense of the order of magnitude of improvement you're seeing today relative to your second quarter average?

I think it's still a little early to tell that. We did see, again, July was up kind of a nice little sequential bump as far as activity over June. And right now our outlook for August appears to be potentially a little stronger.

Great. And finally, could we get some help on the tax rate guidance, the CapEx guidance, and maybe SG&A for the third quarter?

Effective tax rate, probably looking at about 38%. The CapEx we're trying to manage as much discretionary spending as we can, probably another $4 million or $5 million in the second--or I'm sorry, rather, the third quarter. What was the third question you asked, Joe?

SG&A.

With the impact of the furlough program and the reductions that we made, most of the reduction you saw in SG&A quarter over quarter was about $2.1 million and it was mostly labor. Looking probably at--with the furlough and the full quarter impact, probably about $1.5 million on the labor side, if that helps.

Okay, that does help. That's it for me. Thank you.

Thanks, Joe.

Your next question comes from the line of Victor Marchon of RBC Capital Markets. Please proceed.

Thank you. Dave, just on your comment about seeing some competitors price jobs below cost, was that specific to the Haynesville or is that more broad based amongst other markets as well?

I would say it was a lot of the western markets. When you look at Mid-Con, Texas, Permian, again, there was pretty dramatic rig count drops in those areas and there's a lot of capacity in those areas. So the initial moves was try to keep the crews busy, no matter what, just keep walking the cost down with it. And those areas, basically, they got to the point that they were pricing below cost in those areas. But not only Haynesville, but also some of the western regions as well.

Now, is that still--are you still seeing that today? Is it a similar order of magnitude? Has it gotten a little bit better?

I would say the pricing in those basins have started stabilizing and part of it is due to a little bit of increase in activity, especially the oily areas. But it's probably--there's still some one-off that are still below cost, but it's starting to balance out a little better.

Okay. So add--from the improvement in activity that you've seen in June and July and seemingly what you're seeing at the beginning of August suggests that from a pricing standpoint things should be stabling out around here, given where activity direction is going?

That's what we hope. So initial indications are--is that it's starting to hit the bottom and may be flattening out.

And if I could just on--guidance on the DD&A side going forward, Tom. Anything you can give us there?

I'd take the run rate that you saw in the second quarter and I wouldn't push it much more than maybe $100,000, $200,000 each of the remaining quarters. You're not too far off I don't think doing that.

And I'm sorry, I missed the CapEx number that you gave for the third quarter.

Approximately $5 million I think is what I said, Victor.

Okay, great. Thank you, guys. That's all I had.

You have a question from the line of Jack Aydin of Keybanc Capital Markets. Please proceed.

Hi, guys.

Hi, Jack.

Hey, Jack.

Dave, if you look at the second quarter, what was the lowest month in terms of revenue and utilization? Which one was that?

May would've been the bottom of our activity as far as lowest revenue utilization month. And part of that would be, again, seasonality is still in effect in Appalachia. But--and us kind of saying pricing is getting too soft in some of these basins and we're just going to pass on some of the bid. But May is what we see as kind of the bottom of the trough.

Dave, what kind of utilization do you need basically to get to a breakeven on average?

We're thinking that when we started getting up close to 60% that basically pricing is improved, utilization is improved, and we should be getting close to where we need to be to start making some money.

This is a comment. We were visiting a lot of E&P companies and basically all they were telling us that the major three or four companies were trying to discount so severely that they want the smaller service companies out of business. And that's why they were keeping the pressure. Is that the impression you're getting or--and how are you really dealing with it?

We have definitely seen some pretty aggressive pricing in some of these markets and the big three have been trying to pick up market share. One, they have a more diversified product mix that may help them. But it really gets down to pricing and service quality. When we see our cost structure, we still think that we have a lower cost structure than the big guys. And our service quality in many basins is better. So a combination of continuing to modify, oversee our cost structure, and maintaining that high service quality, we'll start winning in the long run.

We're seeing--we're starting to win projects now just because we're seeing some people that they may have bid low but they couldn't perform and now they're kicking those guys off the projects and bringing people like us in because we have proven that we have such really high service quality in areas.

Tom, on a G&A run rate, we should look at this G&A going forward, the--like the $13 million or $14 million down a little bit more, [about another million too], or this is a run rate that we should look at going forward?

No. I think, Jack, what I was trying to answer on the first question was we're expecting a sequential decline in labor expense in G&A. And I think I said $1.5 million and that's about where I would target it. Most of the decline--because we've cut a lot of discretionary spending in the SG&A area during the second quarter, so the bulk of that is going to be labor driven. And so, that's kind of--that's going to be certainly the majority of what we expect the sequential decline to be. But I think we're--it's going to reduce. I mean, clearly, because--.

--So if you look at the year end, what kind of exit rate G&A would be?

We really don't provide guidance on that, but I think you'll basically see it trend down into the $4 million level kind of on a monthly basis. And then, it's just at some point you may have to cut again. I mean, we're starting to see an up tick a little bit in activity certainly in July and June for us. So hopefully it's stabilized, but I would guess about $4 million a month after we get out of the fourth quarter--or third quarter rather.

Thanks a lot.

Your next question comes from the line of [Eric Parchmen] of Morgan Stanley. Please proceed.

Hey, Dave and Tom. How are you doing?

Good morning, Eric.

A couple of clarifying questions on the cost side or cost cutting efforts that you guys are going through right now. On the labor costs, you gave a number of $6 million per month. I seem to remember that being $4 million last quarter. Has that gone up a little bit or is this kind of including the health care and some other things?

No, it's definitely gone up, because the headcount reductions--I mean, the total labor for us in Q2 was about $44.9 million. And in Q2, it was about $35.6 million. It was about $11.3 million in change and about $2 million of that was on the admin side and about $9.3 million of that was on the cost of goods sold side. But it's definitely increased.

Okay. So on those numbers it sounds like you probably have another $7 million or $8 million to go in 3Q to get to the total $18 million, right?

I think--yes. I think that seven may be on the high side.

Okay.

But I think it's probably over $5 million. Somewhere between $5 million, $6 million, $6.5 million, something like that, but $7 millions might be a little high. But you're right, there's more to go.

Okay, sounds good. On the non-labor cash cost of sales, going from 1Q to 2Q, it looks like as a percent of revenues, it kind of--it crept up a little bit. Looking forward, kind of do you see any--and you kind of qualitatively talked about this. But do you see any kind of cost saves on the materials side that can bring you back down to 1Q levels as a percentage of revenues?

Well, we've said it's--what we tried to communicate I think during the dialogue of the script, if you will, was the fact that most of the impact when you look at materials as a percentage of net revenues was really driven by the discounting. I mean, the discounting went up sequentially about 7.3%, so the amount that we were able to recover out of those gross revenues was obviously less. Material costs were on a gross revenue type basis fairly flat. I do think you'll see some improvement there if we get discounts and pricing to behave a little bit it's probably a slow climb, probably maybe 1%, 2%, kind of in that neighborhood, as far as a reduction as a percentage of net revenues, if that helps.

Okay, yes, very much so. One last question on the industry. Dave, you were saying equipment is three to five years old. Kind of talking about the Haynesville and some of the other high intensity shale plays, is there certain ages of equipment where customers just kind of won't take capacity anymore, like getting up to around eight to 10 years, can it just not even find work anymore?

We're saying anything that's probably six years and older horsepower wise would have had kind of the older model engines and pumps on the back end. And it's not as durable for working in some of those basins. A lot of that stuff is what we expect the competition to stack out in their excess yards or potentially move abroad. But--so it's going to take a lot of the older fleet off projects like that. And the other thing about like a Haynesville project is it's a lot higher pressure than even like the Barnett and the Woodford and some of those areas. So some of those areas where maybe you used 20,000 horsepower to stimulate the well, you're going to look at a treating pressure that's probably double in the Haynesville. So you're going to be looking at--to achieve the same rates you're going to be looking at probably 40,000 to 50,000 horsepower for a job just to stimulate those wells.

So a good--the Haynesville is a good example of you may have several crews running, but the horsepower per crew is probably going to be double what we've seen in some of the other basins. So a lot of that excess horsepower would just be used and needed on these higher pressure jobs.

Okay. That's all I have. Thanks so much.

Thanks, Eric.

Thanks, Eric.

Your next question comes from the line of Waqar Syed of Tristone.

Hi. I have a couple of questions. First, on the CapEx, you mentioned that it's about $5 million for Q3. Is that kind of a maintenance level CapEx and if we're forecasting in the future, should we consider $5 million to be kind of the minimum level that you can spend in a quarter?

Actually, that $5 million, it's probably going to be two to three. New equipment that was ordered in 2008 that hasn't been delivered yet. But we do have some items coming in in third quarter. And then, the run rate on maintenance CapEx is probably going to be $2 million or $3 million a quarter, something like that. And again, depending on--some of these jobs, they are a little more intensive, so our goal at this point is not to rob parts off existing units, but to keep all the units functional. We've got a newer fleet, and therefore, we want to keep that fleet operational because of we see that activity in our opinion has kind of turned a corner a little bit. And we want to have that equipment ready to handle the extra activity coming up.

Sure. And then, you mentioned that June was ahead of May in terms of revenues and July was ahead of June. But when we compare that to April, could you say how June and July are stacking up with the month of April?

June and July are below April, but kind of approaching April's levels. I mean, when you looked at the quarter, April would be probably the high month coming in. And as Dave had answered in one of his questions, the large activity declined for us actually in May with coming out of the frost in Northern Appalachia and some areas, and then picked up in June and picked up again in July. But it would be slightly lower than the April levels.

So what was the kind of like magnitude of decline in revenues between April and May?

About $9 million.

About $9 million.

$8.5 million.

That's all I have. Thank you very much.

Thank you.

You have a question from the line of [Brent Dido] of Hilliard Lyons. Please proceed.

Thank you. A question regarding the Clean Water Act. Does it pose a threat and if so, what impact does it have for Superior?

It is definitely something that is being reviewed by the federal government and something that we continue to monitor. We've actually been dealing with this in certain states. Alabama has adopted this for quite a few years. We've been in Alabama since 2002. To get approved in Alabama, we had to have green fluids that were preapproved to meet the U.S. federal drinking standards. So we see it as just a part of doing business.

Yes. And I think also just another comment with that is we're joining with others kind of in the industry just to make sure that our legislators are kind of informed about what the actual amount--and things like that, a lot of the cementing and things like that, is to actually protect ground water and stuff like that. So just trying to, to the extent we can, join with others in the industry to make sure at least that individuals making those decisions are as well educated on the matters as they can be.

We think we're also ahead of the learning curve for some of other smaller competitors just because, again, we have worked in states already where that's been a requirement. So we've got our fluids preapproved and know that they're certified to work in these other basins as well.

Is there a threat of having additional costs that--can that be passed on? Because I've read something where they wanted to make for each well has to have an additional $100,000 for the project just so they can test it and know that the fluid is not hurting anything or give away the secrets that you all have of the fluid. Is there any--can they pass on that cost or--to make it where other people can--.

--Well again, looking at the example of Alabama that we gave earlier, we actually--that's what we did upfront was got all our fluids pretested and precertified that we could use them on treating those wells. So then, in the--when we designed to do a job in Alabama, we just gave a list and the quantities of the materials that we were going to use on those wells, again, and they were already precertified. So we're expecting probably a similar process at this point in some of the other states. So we think there could be some upfront costs but probably potentially minimal after that.

Thank you.

Thanks.

You have no further questions at this time. I would like to turn the call back over to management for closing remarks.

Thanks, Shamika. I appreciate everybody being on the call today and we look forward to talking to you at the end of third quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.