NPK International Inc (NPKI) 2002 Q3 法說會逐字稿

Good morning.

Welcome to the third quarter earnings report conference call.

All participants will be in ‘listen-only’ mode until the question and answer session.

I’d now like to introduce your first speaker, the Chief Financial Officer of Newpark Resources, Mr Matt Hardey.

Sire, please proceed when ready.

Good morning, and thank you for joining us for Newpark’s third quarter conference call.

With me today is, of course, Jim Cole, who will discuss the outlook and operations.

But first, a couple of announcements, and then I’ll go into comments on the macro picture.

First, please remember that much of today’s call is going to constitute forward-looking statements as we share with you our outlook for the fourth quarter and 2003.

These are based on our best available knowledge of business conditions and our expectations for the market, which can and do change over time.

Counsel has asked that I remind you that the forward-looking statements title within our most recent prospective should be reviewed for the nature of those risks that may affect actual outcomes.

In our comments, we’ll be talking about information contained in last evening’s earnings release and the accompanying data tables.

If you don’t have a copy of the release, you can obtain one from our investor relations page on the internet, at www.newpark.com, or of course through a number of other financial portals.

To look at the quarter from a macro standpoint, much as we said in the second quarter, we remain in a market trough between periods of higher activity.

As we commented in the guidance release earlier this month, the consequences of the low drilling activity in the third quarter, and the results, were exacerbated by tropical weather throughout most of September.

We think this has obscured some of the very significant progress that Newpark has achieved thus far this year, and I’d like to address a few of the quarterly sequential indicators of that progress.

Even net of the storming September weather, Newpark reported a second successful quarterly revenue increase this year, to just over $79m in the third quarter.

Rig activity across the year, through the third quarter, is down 4%.

So, we’re continuing to gain due to other factors, and we’re going to talk about those.

Segment operating income improved 23% from the second quarter level, principally seen in the results for the E&P Waste business, and partially offset for us by the continuing softness in that mat sales and mat rentals, particularly in the Gulf coast.

The Drilling Fluids contribution to operating income was stable.

That business continues to perform well in an increasingly competitive marketplace.

On the top of the financials, you’ll notice that interest expense appears to have increased in the third quarter.

But remember that that second quarter result that you’re comparing this to included a $1.8m benefit from an interest rate swap transaction that was settled at quarter end.

Said another way, Newpark’s earnings had to increase by $1.8m, quarter to quarter, just to stay even with the benefit of that swap transaction.

We came close.

Net income before preferred dividends declined by about $400,000 to just over $700,000 for the third quarter.

Within the business units, our Drilling Fluids unit revenue has increased 23% from the first quarter low of $42m, while the core rig count has fallen 10% compared to the first quarter levels.

But for the storm, that growth would have been to about $57m, rather than the $52m reported, which would have been a 36% increase, and nearly the level of last year’s third quarter, with 31% fewer rigs running.

The big story here is increasing revenue for average rig serviced, as we continue to move toward the premium end of the market, which Jim will address a little bit later.

In the E&P Waste business, revenue has increased in each successive quarter this year, and is up 28% from the first quarter level, while rig activity in that market has not changed materially.

Again, but for the storm, we think revenue would have been over $15m, and earnings approximately $4.5m, resulting in a 30% operating margin.

That would have exceeded 2001 results for the same quarter.

More importantly, I think that the effects of our cost reduction program launched year ago are fully visible in this quarter’s results, with an actual 27% operating margin, in line with that in its historical contribution rates.

Here also, there’s a larger story in play, driven in this case by heightened environmental regulation, with new limitations on the discharge of synthetic mud fully in effect since mid-quarter.

When the new regulations were announced a year ago, we estimated a market impact ranging from 0.5m to 1m barrels.

Early evidence at this point suggests that the results may exceed the levels we had forecast, and that’s reflected in our business.

Year-to-date comparisons in the Mat Sales and Mat Rental business makes it abundantly clear that that business unit has suffered the most in the peak-to-trough comparison.

Continued poor market conditions in the Gulf coast rental market have generated only $12m year-to-date in rental revenue, down significantly from last year, while rig activity is down about 29%.

Our installed volume in the Gulf coast market during the period is down 21% to 10.2m square feet year-to-date.

And on that reduced demand, pricing has declined by more than half to about $0.60 a square foot in the quarter, and year to date, principally because the market has moved away from the more complex deep marsh projects that are our core business in the rental side.

2001 of course the first full year for our Mat Sales business and a very successful one, generating $28m in revenue through the first nine months.

By contrast, 2002 has been very slow, with practically zero third quarter activity, and only $8m in year-to-date sales.

In the release, and to be amplified in Jim’s comments in just a minute, we shared with you our belief that there is an improving outlook for Mat Sales in the fourth quarter, and for the whole business in 2003 generally.

Let me address liquidity for just a moment.

During the recent quarter, Newpark produced EBITDA of just under $10m.

After $900,000 in cash taxes, $1.4m in working capital and about $1m in cash interest payments, and finally, $4.9m of capital expenditures, we generated $1.7m in free cash flow.

Now, I think we have done a reasonably good job of controlling working capital increased during the year, and maintaining good liquidity throughout the corporation.

Our total dollars in accounts receivable have increased during the year, that’s true, in part due to the second quarter acquisition and, in general, slowness in the industry, which tends to slow payments when activity declines.

We’ve completed a thorough review of all the balances and receivables in connection with our quarterly review process.

We found no unreserved exposure to loss, and we’ll continue to monitor that.

The most significant balance sheet change, of course, is in the inventory account, with growth concentrated in Drilling Fluids, related to revenue growth, and of course Composite Mats.

Now, we’ll be determining next year’s production rate for the Composite Mat facility during the fourth quarter, and that will be guided in large part by the sales we achieve in this period, and our expectations for next year.

Newpark ended the quarter with $38m drawn on its $100m bank credit facility, and over $45m of additional cash advances available if required.

We believe we enjoy a very good relationship with our bank group.

And as we adjusted our earnings projections for the quarter, we’ve negotiated modifications to the financial covenants that the bank group has in order to ensure continued compliance throughout next year.

The documentation of that will be complete and filed in advance of filing the 10-Q.

With that long summary, Jim will now cover the business outlook for you.

Thank you, Matt.

The results would indicate that there's been minimal progress within Newpark.

Like Paul Harvey often says, the rest of the story will come out now, because we have made significant progress.

In fact, the reason why we’re going to actually go into more detail is that I’ve made a number the participants, or management, of our company say, ‘how soon can we tell the progress we’ve been making?’, because it is substantial.

I believe that no time in the history of this company have we made more progress than we’ve made over the last nine months, with little apparent results.

So, let’s talk about the rest of the story.

I’ll start first with Newpark Drilling Fluids.

And in the press release, we said that we thought that the ... we’re not looking for any increase ... material increase in activity in the US market over the next three quarters, until the middle of next year, and we’d like to think that it’s going to pick up in the middle of next year.

We have reason to believe it should, but I’ll leave that for the analysts that are watching these indicators much closer.

However, in a flat environment, we believe that we will grow the revenues of Drilling Fluids in excess of 10% sequentially per quarter.

Basically, there are three bases for that.

One is the Gulf of Mexico, Western Canada, International, those three areas, and let me first address the Gulf of Mexico.

In the last two quarters, we’ve had the greatest success with deep drill than we’ve had in the last several years.

The last several years really set the table of what we’ve done recently. [Real arch] oil companies, two in the last quarter, achieved success using this new system.

And I can go into more detail in that, but it had, but they’d had ... one, we completed a well that was completely stymied with a synthetic fluid, displaced a system.

Another, we displaced a company and systems, and had success where they had previously not had success.

These were such major events, not only for Newpark.

We’ve got a pretty good group of companies now reviewing this to have ... that had similar problems.

So, we feel we’ve made major strides with that, with the product, the system.

Now, importantly, these are leading to major projects that will come into the fourth quarter, first and second quarters of next year.

So, we will see tangible revenues and income generated by what we’ve done over the last, particularly, second and third quarter of 2002.

In the International market, most of you know in May of this year we acquired a small company called Albet that’s been in business for over 50 years.

Albet needed the technological support and financial support of a larger company.

It’s been a very wonderful experience.

They have brought new technical ideas to us, and we to them.

They’re a very, very highly regarded company.

In the third quarter, Newpark [Habor] was awarded a major offshore contract that is underway in the fourth quarter, a substantial multi-year contract.

In the fourth quarter, we will start a second contract offshore Africa.

Both those first two contracts are for major world-wide integrated companies, two of the largest six in the world.

We have a ... in the fourth quarter, we will be awarded another major contract with a national company, and in the first quarter, there is a strong possibility with another major company, another contract.

Our International operations are not limited at this point by revenue; we’ve actually ... we’ve turned down opportunities in significant markets because we wanted to do it on a unique niche basis.

We have to digest all this work, but we can do it very profitably.

Deep Drill is a major component for one, and we hope two of these companies as they are looking to convert their sales projects to this performance service.

And we’ve actually done projects for that company; now we’ve gone to Europe and had further discussions with them, and they’re picking projects as we speak for this system.

We believe we’ve made great strides internationally.

We’ve made great strides with Deep Drill in the Gulf of Mexico.

We do expect, additionally, that Western Canada will pick up in the fourth and first quarter, and be better in 2003 than it has been in 2002.

That may not be the overstatement, it hasn’t been real strong this year.

However, additionally, we’ve picked up several other North American contracts and we have several pending that will impact both US and Canada if we’re successful.

There’s no assurance; however, we are a finalist in these, and we’ve done those, not on a pricing basis, but on a technological basis.

We keep on looking for performance.

We won’t be for everyone but a niche, but we believe there’s a niche at the performance end of it, and we’ll see growth in the new part ... in the Drilling Fluids area.

We’ve made more progress in this company than we’ve made at any point, probably with less tangible results in the down market, but you’ll see the benefit as we going forward over the next several quarters.

And you’ll really see the benefit as people pick up rigs.

We’ve been told by a number of companies “we’re down to one rig or no rigs, but we go back, they come back with you guys” as a participant.

So, there’ll be a more tangible result as we go forward.

The second operation I’m going to talk about is our Environmental company.

We’ve been telling people for the past year that this company was going to make some material improvements.

This quarter was the breakout quarter.

Unfortunately, whatever, you can never complain about the weather when you work in the weather.

As you work in the Gulf Coast, you shouldn’t complain about storms because it happens.

But it did have an impact, and I don’t want to beat it to death because that’s just the way life is.

We had four years without storms, so let’s not complain about one year with storms.

But the internal changes you see in your numbers ...

I would like to cut through and [hand it to the floor] at this point.

The total market for Drilling Fluids and the E&P Waste business for Newpark was down 25% if you take the prior year versus this year, and the rig count fell 28%.

So, the rig was down 28%; we were down 25%.

Our market share had declined from 72% to 63%, that’s barrels received.

That’s fixing a change.

The total market in barrels was down 12% against the 28% rig activity, and if you adjusted that for the storm, which we calculate we had a few thousand barrels on that, about 6%.

So, with a Gulf Coast rig count that was down 28%, the market was down 6%.

Something’s changed.

We cut this market ...

We keep very long-term and accurate analyses of this market; we are not a casual participant after 20 years, having created this business.

We believe that the August 19 synthetic regulation, when it went into effect, has impacted the annual market by approximately 1.5m barrels a year.

We were at one time, we thought it could be as high as 2m barrels, but we thought it could be at least a 1m.

So, it’s in range at this point.

Internally, the Newpark Environmental Services made a significant change and break-out as we look to a 27% margin in the quarter.

Again, we’d have done but for the storm, but let’s quite alibi-ing about that.

However, sequentially, we did $1m on 12.2% in the second, and we did $3.8m on 14.2%.

We had $2m more revenue and $2.8m more profit.

Sounds like a good operating leverage to me, and you’re going to see even more improvement.

I believe you’re going to have to wait a quarter because the impact of the storm is more significant in the fourth quarter ... in the last quarter, as the damage offshore and the delays pushed on through most of October.

We are currently back at about normal run rates, but we’ve only been there for about the last five days.

So, we lost more time in October.

However, don’t cry for us.

It’s coming.

The more significant in that business is that, I don’t believe we’ve ever seen a time when the market is changing more rapidly.

In Drilling Fluids, as a reference point, the performance is getting much more significant.

In this market, service is becoming more significant, and financial capability.

Now, let me go back to the new regulations.

It added ... if there was 1.5m barrels of waste, and they did as high as 2m when we sort this market change out.

That’s probably adding somewhere between $80-100m a year to the operators in the Gulf of Mexico, very substantial cost.

They can absorb it;

I’m not here to debate that issue.

Law’s are there, and we’re happy to [stick] to it.

But it basically has changed the dynamic of this industry, as something that was historically [fit] pass overboard is now has to be dealt with, either on the rig or taken ashore.

The effect of that is that the offshore market that has historically, in Waste received, about 28-30% of the market is now 50%, that’s 52-53%.

The major shift in the dynamic of the market, the offshore market is the most capital-intensive and service-intensive part for the industry.

It’s the premium.

That’s an area that Newpark has historically and plans to, in the future, dominate.

It also requires the most rapid turnaround, the most integration and service component.

And they will happily pay for it because these vessels and equipment are so expensive, and the rig time is so costly, that they’re not going to pay for amateur hour or a learning curve.

As we saw this market developing over the last two quarters, Newpark in the third quarter opened the Galveston which was instantaneously profitable.

We expanded our service capability at [Beauchamp], which is the primary deep-water port.

We’ve integrated new cleaning methods for rapid turnaround at our docks, very good results, new revenue stream, stay tuned.

And we’re currently expanding our [Cameron] service by more than double to meet the growing demand.

We feel that we are positioned, we’re there and the pace of the race is increasing.

There’s another major change in the market, and that’s the financial requirement.

It’s not the capital portion of dealing with the intensity of the offshore market.

This rapid-growth area of the market is significant.

But when you hear people talk about, they’re going to go in and kick a little toosh and take names, look at the balance sheet, and look at their track record, because it is not nearly as easily done as it might have been five years ago, when you could throw out a shingle and somebody would bring you some waste.

Number 2, the bonding and permit requirements have changed dramatically, not only have they increased, but when historically people would get a bond and say, call up their bonding ... and say I need an environmental permit.

You call up today and they don’t exist.

There is no capability.

So, if you want to play, get your letters of credit ready or your cash.

But when you hear people talk about entering the market, look at their hip pocket and see how strong they are.

And I’m going to tell you, we watch it carefully, and I think it’s going to be interesting to see how anybody’s going to come to a major extent.

So, I think that if you look at market, it is changing dramatically toward the offshore, to the high-performance, more capital- and service-intensive, and the financial requirements to get there, which have stepped up materially in recent months.

Newpark is there.

We’re met them.

We have services there and we will dominate the market.

Matting ...

This is the current ugly duckling of the company.

It’s having the biggest struggle, and I’m going to break it into two components.

If they’re on the line, you’re really not ugly, guys.

Really, it’s just to the outside world.

But we know there’s lots of good things happening.

Number one, I’m going to break it into composite sales and, number 2, to the financial market.

These have been very significant historic earnings in areas for the company.

Let’s go back to Composite first.

2001 we sold 21,000 units, revenues of $33m, made $15.3m operating income.

Not a bad start.

Come 2002, we’re adjusting the market from the Exploration market.

To nine months, I think we’ve sold $5m, $8m revenues and $2m profit ... pretty disappointing.

We’ve got a lot of inventory, over 20,000 ...

Fourth quarter, we believe we’ll sell at least 6,000 with $9m [in port].

I don’t think that is something that we’re going to be overjoyed with.

However, it is a step function going forward.

Now, this doesn’t tell the whole story because while we were struggling through this year, we’ve penetrated into eight focus new markets.

We’ve listed those on our press release.

We have assigned people.

We’ve got Mats on the ground in each one of those markets.

Mats work best when people can block them, feel them and see the value, showing that seeing is believing.

And over this period, we have quietly put those Mats on the ground in all those significant markets.

I will use an example: [Stockwell in Russia], that’s three major operators, Exxon Mobil, Shell and BP head different groups.

So, interesting place, but there’s a major oil and gas province up there on that island.

There’s no substructure.

Half the year it’s muck, and half the year it’s frozen.

With the $20b+ we spent on infrastructure, the companies up there cannot afford to work half the year, and it does get ugly.

We’ve got presence there.

We’ve just come back.

We’ve got people assigned.

We put the first road in the third quarter.

It’s call affectionately by everyone on that island the Yellow Brick Road, and there’s no one up there that has not been to the Yellow Brick Road.

And now they’re planning their needs based on their experience.

We could have given them pictures for 20 years, but nothing’s worked like the Yellow Brick Road.

We’ve come back.

I think it will be an evolving market, but I think it’s a market that will one day be one of those areas where we’ll sell over time many thousands of Mats.

The second market I want to briefly mention is the Military.

We’ve talked about this so long that we’re tired of it.

It’s beyond frustration sometimes but, however, we’re shipping today the first 1,300 Mats going to a foreign military application.

We’re anticipating that the total will run 7,000-9,000 and we have reason to believe that they’re not done.

The 7,000-9,000 will be at this point in time.

The first group we looked at was the Air Force.

We didn’t even know about that order a month ago.

The second group is 101st Airborne.

And just as a side issue, we’ve talked ... our management has talked to their commander.

We’ve talked to the Pentagon.

We were there last week.

And I’m going to quote the commander, “I’ve got 370 birds.

I don’t want to lose any of them.” Those are our Mats, and they’ve made a request that we send up a truckload of Mats at their facility at the 101st so they can practice putting them together and be ready to move as we deliver them later this quarter.

Now, when they say this quarter, we believe it should be, but we’ve got to get it out of the Pentagon.

They’re faxing that order today for the final signature.

It should be this quarter.

It has been delayed, we’ve been told, because they may be expanding the order for other requirements.

We’ll have to wait and see; they’re not long on giving you information, except we know they’re working on the order.

A third major market that we’ve talked about is the Utility market.

That’s one of our focuses.

We have the Russia, we have the Military, and third is the Utility.

We just completed in the third quarter ... we 90% completed ... a major project where we combined an innovation of using wood chips for fill in a marsh to help a utility reroute lines through the marsh.

They had no environmental permit, nothing except a deposit Mat and something biodegradable.

We brought in a biodegradable fill that was first used in The Meadowlands in New Jersey.

We brought it down the ...

They claim by their numbers that we’ve saved them $9m, and believe it will take 1-1.5 months of their six-month project because of the Mats.

We’re in next week to talk about additional projects.

This will be ... because it’s in Louisiana, in the Gulf Coast market, we will use our rental fleet.

We receive a premium on this, and it’s more than twice when you get the oil field in a good market.

Very significant breakthrough.

We’ve been talking to this company for a long time.

Now, they’re believers.

That’s 4,000 Mats for six months.

Some of the other projects were substantially larger.

We’re learning as we speak.

Additional Utility in January.

We are slated to put an 8-mile road in to move a nuclear power facility.

It’s a $1b project down the beach.

And the only method that would hold them on that beach was Composite, and they’ve done all the engineering work.

They’ve been here; we’ve been there.

It’s a real project.

I’m only using these examples ...

Composite Mat is making progress penetrating world markets.

First orders are going into Indonesia.

We’ve moved orders into every key market, except Indonesia, and that should be going in in this quarter.

Rental market.

Perhaps the apparently weakest part of the company, as the 2001 average square foot went from 127 ... for the year average ... but nine months, we’ve hit $0.60.

Historically, Newpark has the ‘Saudi Arabia’ in this small, niche area, has held prices whenever possible because it certainly improves results.

We’re not doing it today.

We’re not holding up prices.

We have a strategy in which we want to change ... and I believe we should change ... how the entire industry is conducted.

It would be every place else in the world we rent mats if we rent them, we rent them on a per day basis per Mat.

Only in the historical coast do we rent them per square foot for 60 or 90 days.

We are planning to change this industry to a per day per Mat method.

To do that, we are allowing the attrition of the industry ... inventory.

Two years ago, it stood at almost 250,000 Mats.

Today it’s half that.

We [offer] 70% of the Mats.

Ours are in good condition.

We do a monthly inventory of the competitors and are conditioned.

Trust me: they’re running out of wood, and it drops quickly when it’s rotting.

So, we’re allowing a market to be attritioned for a purposed.

We believe that this market will begin to recover in mid-2003 and will recover with very limited inventory.

And we plan to change the methodology of renting that.

It’s a strategy we’ve been wanting to do for a number of years.

It is the right time.

And basically, we don’t have to charge more.

We can change the Utility, and the Utility is more significant on a Mat than is the price.

The profitability and returns will substantially change as we come up into the next cycle, and the profitability of this rental market will be ... should be greater than it’s been in past cycles.

I wanted to tell you the story ...

There’s a story behind the weakness in that.

And basically, we’re not taking an historic stand of popping up the price.

We’re letting the price go down.

We’re starving the cash flow, starving the inventory for a purpose, and that will come up in 2003 and become apparent.

We’ve not talked about this, but I think it’s time to tell you there’s a plan.

In summary, we believe that Newpark Drilling Fluids is better positioned today, more acceptance of deep-drill.

You’ll see that show up quarter by quarter, and you’ll really see it when the wind hits the sails as the market turns.

And even in the down market, you’ll see results.

Thus, it’s begun to show results.

Our position will be stronger in the synthetic and offshore.

You’ll see better results as you go into 2003.

Composite Mat sales are very focused; we’ve got them down on the ground.

You’ll see increased sales in 2003.

And in the Rental market, stay tuned.

That will be the second half of 2003 and then 2004, which you will see very substantial improvement if we’re able to pull off this strategy that we’ve discussed with you.

And with that, I’ll open it for questions.

I hope follow the rest of the story.

There’s more to this story than meets the ‘apparency’, as you see in your financial statement.

At that point, we’re glad to take questions, if you’ll open the call to questions.

At this time, we would like to begin the question and answer session.

If you would like to ask a question, please press * 1 on your touchtone phone, and you will be announced prior to asking your question.

To withdraw your question, please press * 2.

And once again, if you would like to ask a question, please press * 1.

And for our first question, it’s from Mr. James Gartland.

Good morning, guys.

Good morning, JJ.

How are you doing?

Alright.

How are you doing?

Good.

Good.

Could you discuss with us a little the potential impact or the benefit to Newpark because of this venture between K1 and [Macmorand]?

You’re saying, what would the benefit be for us?

Or the impact?

Well, any impact, whether it be a benefit or whatever against you guys.

It has zero.

If they believe they can be an environmental facility.

We talked ...

We looked at that for six months, and if that’s open as an environmental facility, tell me what the tax loss is.

Okay, thank you very much.

If anyone has any further questions, please press * 1.

Our next question is from Kristy Parson.

Parson, you’re online Ma’am.

Hi.

Sorry about that.

Could you comment just to help us figure out how to look at the order of magnitude of a deep-drill contract.

I mean, you’re talking about the number of contracts you expect to add.

I mean, how do we look at that?

Do we look at it per project, in terms of revenue, or is it depending on how long it goes, do you want to look at it on a monthly revenue basis?

Just to help us put some scale around what the upside is.

It’s not that simple because what we have done is ... we have a ...

Here’s the impact: you take a company ...

I really do not want to mention company names, but Company A. We work deep-drill in the Gulf of Mexico.

We’re awarded a two-year exclusive contract for all of their work.

We don’t run deep-drill on every job because not every one’s applicable, but the company has four jobs ... three jobs coming up that are in the 25,000-27,000 ft range, which we will do in 2003, probably with 15-18m because each one will have side tracks.

These are development wells that we’ve already assisted them at 27,000 feet.

So, you could look forward and say, ‘that’s a pretty significant impact’.

That same company has stated that they plan to increase their Gulf of Mexico presence in production by 3-4 times.

So, there are more projects that should be coming, but that ...

I’m giving you an example ... but it’s hard to basically say that ...

I’m just giving you an indication of what the plans are.

Now, those are always subject to change as they hit a dry hole, but these are in a development area where they’ve already got a reservoir and they’re developing it out.

Now, their Number 1 partner on that is a very substantial company, Company B. They’re their partner on that, and we’ve worked for that company, but as ... we recently converted a system to deep-drill because they were being unsuccessful.

And they have now said, Woops, wow, we want more deep-drill ... we’ve got more projects.

I think that ... it’s one of our larger customers today.

Our position in that company will substantially grow because they have a number of major projects.

Some are in as much to potentially ... again, these are not awarded, but we’re in final talks ... 9,000 ft of water.

It’s very substantial projects where there ... historically ...

I don’t know without the success from the other well, as partner we would have been awarded on deep drill basis.

But because of that success, we converted a system and finished a well that they were in trouble with.

Company C is a major oil company that had had three years of very poor performance on a major project development.

And they’d ... and we basically ... out of frustration probably more than anything ... they were looking for answer, and we took one of their difficult wells and completed it in very good fashion with deep-drill, and that displaced not only a system but an operator.

They awarded us for that work going forward, and now are expanding that into other venues, even potentially worldwide, but we’re going to be careful right here in the Gulf of Mexico.

It could have a ... the size of their work is so material that it could, by itself, have a marked effect on the entire company.

It is that substantial, deep-water and shelf.

And if you’re looking at what your potential market is, is it well, you know, 15,000 ft and deeper, or would you use it on anything shallower than that?

Well, the well we did for Company C was actually only 4,000 feet.

We went down to about 7,000 feet.

But it was so difficult a ... because it was at such an angle, and with such complexity, they had been unable to do it with other Fluid systems successfully.

So, it isn’t always deep-water, but because of certain characteristics, it has an advantage, but it can take, when you need to play the hole properly, when you have difficult clays, whether you get into depleted sands, which are ramped in most all these markets, it holds all that much better.

So, I won’t get into all the technical side of that, but it’s not just on Liquid deep-water, or for deep wells, which it has an advantage, but anytime you get into difficult places [shelf], which all the major basins have the same problem, whether it’s Africa, South America ... all of them have the same problems, particularly in the Gulf of Mexico.

Or depleted sand, it basically has distinct advantages, and the good news is, people are finding out that it does perform well in those areas.

So, it’s more of a system that can be used.

We just completed a very successful, along the Rocky Mountains, where other systems [subsided] couldn’t ... failed to complete the well, and we completed it in record time.

So, it has other applications in other markets; it’s not simply a one-trick pony.

Okay.

Thank you.

Our next question is from Mr Jason Theltch.

Hi.

Jason Theltch at Wanger Asset Management.

So, the Mats business, we just have to wait for some of these new markets to start ordering the material.

I notice that you did say that you shipped something to the Air Force.

Was that in the quarter, or not?

Yes.

That’s being shipped as we speak in the fourth quarter.

Okay, so was it in the third quarter numbers, or not?

No.

It’s a fourth quarter.

Okay.

But in the other two businesses, I think you mentioned that the rig count was down 32% year over year.

However, it looks like your average rig serviced in the Drilling Fluids was down 37%, which means that you, although you sold more to each rig, the number of rigs that you were on, as a percentage of the total market, declined slightly.

Is that correct?

I think we have a twist on that one.

The Canadian rig count is down more substantially, and that’s included in the rig count.

But we used the US rig count as a ... for our discussion it came down 31%.

So, the total rigs include our Western Canadian count, which is down more substantially.

Do you know if the offshore was down.

Yeah.

Offshore went from 144 a year ago to 108.

It’s down about 25%.

Now, on the Waste business, the barrels disposed of was only down 25%.

So, are you gaining market share, or is this the impact of the new regulations ... the market is getting much bigger?

Well, first of all, you have to take about 100,000 barrels and add them to the third quarter of 2002 from the storm effect.

And that’s not an exact number, but it cost us about 80,000, and it cost us ... it could be 120,000 but some amount of Waste, because as you make it apples to apples for a market comparison.

Okay.

That would take you from 900,000 to 1m.

Well, about 980,000 for us, because ... that’s about the best we can calculate.

We have run rates and stay within a range, and we ...

Okay.

So, I’d say about 980,000 and so we would have been down from 1.194m to 980,000.

That’s down 18%.

... 18%.

Our market share in the quarter, because you see we’re the predominant, because of the offshore domination of our company, we were hit more by the storm than anyone else.

Our market share was 63%, down from 72%, but with the storm effect, in fact, it’s probably more like 66%.

I’m just ...

I don’t have that number, but I’ll bet in within 1% on that.

So, our market share has declined.

We’re actually internally thinking we’ll go back to around 70%.

We’re going to have competitors, but we don’t believe we’ll be ... or that the competitors will be that involved in the more service- and capital-intensive part of the offshore market.

But I think we’re looking at the high 60s to 70% market share going forward.

Okay, so if your actual market share declines, but your barrels disposed of declines less than the market, than the number of rigs, then that means that the amount of Waste per rig has increased.

And how much has that increased year over year?

On an annualized basis, the historic effect of the market, the number of barrels with a ...

The Gulf Coast, 28% reduction in rig count, the amount of barrels declined by 6%, and that difference is the new synthetic regulations.

There’s a pony in that pile.

Okay.

Great, well, that means that when the rig count recovers, the profitability of that entity should be a lot better, right?

Even as a fixed cost business, and incremental margins are something huge?

They’re very high incremental margins, Number 1.

And Number 2 ... and also, Jason, don’t forget that the competitive landscape is going to be ... that’s going to get shuffled here pretty quickly.

Okay.

Favorably, or unfavorably?

Oh, favorably.

We’ve been waiting for this sucker a long time.

We didn’t ride in on a pony last week in this business.

We’ve been waiting for this one.

Okay.

Thank you.

If anyone has any final question, please press * 1.

Sir, we do have a follow-up question from James Gartland.

Hi.

This is actually Michael Kominsky at ...

Good morning, Michael.

How are you?

Just fine.

Given the fact that there’s been some insider buying, yet your tone is somewhat upbeat, and analysts continue to estimate some type of recovery mid-next year, and a $0.30 EPS, I guess is the First Call estimate that’s out there, if you were able to achieve those goals, and you clearly you seem like you think there’s significant value in the company today.

You entertained merger discussions a while ago.

Do you think that you’ll be more proactive if the stock is in this range, and you’re earning $0.30, that you’ll do something to actually increase the shareholder value.

The merger of Newpark at anything close to this price?

No, but doing something ... ?

How about we just do what I just told you.

How about we just perform.

Do you have any financial flexibility, given where debt to cap is, to actually buy in the stock yet?

It’s been discussed, but basically we have the business lines here that will double the book revenue of this company.

We’ve invested a lot of money in those, and they have not really played out, except for a very brief period.

We’re going to stay pretty focused on performing what I’ve put on that sheet today.

And that’s what ...

We’ve been out to everybody.

Everybody’s focused on it, and that’s what we’re going to do.

If our view of that, Michael, changes we certainly would be required to make some proper announcement on it.

But I think that, historically, benefits to the shareholders is served long term, as Jim said, by performing.

And if there’s anything else we can do in the short term, as it becomes possible, we will let you know.

Well, what has actually changed since you guys sold stock at $8.50 in May?

Actually, in a lot of respects, operationally, things have improved.

With respect to the litany of things we just went through, I think that you can see there’s been plenty of progress throughout the company, from a customer acceptance standpoint, from many of the market indicators that we have told you about coming to pass.

So, from our perspective, nothing adverse, and a lot of positive things have, in fact, happened inside the corporation.

I’ll think there’s another point that we’ve had people track that every time we somebody comes along and claims that they’re going to leap into the environmental business, it’s had an adverse effect on our stock.

And if you look at this ‘on phase’ for all the people that are talking about doing what they’re going to do.

Look at their capability and experience and track record, and then draw your conclusions.

Okay.

Thank you.

Our next question is from June Gereau.

Good morning.

Jim can you comment, we’re hearing people, including yourself, being optimistic that we’re going to see drilling pick up sometime mid-year 2003.

Can you share with us kind of generically if your conversations with the producers show that, you know, they are actually making plans to that or if you have a sense for that they are not really replacing production and they are going to have to drill.

Can you, you know, throw us a line on bolstering our confidence that this is going to happen because it keeps being pushed out.

I think that there is really a ...

I read everything that people publish, and we talk to the operators and here is our take on it.

And we certainly don’t hold ourselves out to be experts.

I think that one thing that people have not focused on a lot is that the effect of the lack of performance, and those that claim different, are kidding themselves. 2002 was actually a horrendous year where everybody had to stick a hole in the ground to get some gas out at no matter what the cost.

And the equivalent finding cost sky rocketed, it went up by 70% or 75%.

Now, the effect of that is that the gas prospect that was justified at probably $2.20-2.30 per thousand cubic feet in the year 2000.

Suddenly when they examined the 2002 result, it took about $1 more.

If you began to hear our customers talk about lack of prospects, it wasn’t that they didn’t have prospects that were justified at maybe $2.50, they were not justified at $3.30, because they have to take those finding costs and that begins to set the modeling for what prospects they can drill.

So, you had a significant change in 2002, and I’ve seen some literature on this, but it was more driven.

People want to complain about rig counts and service cost, but it was driven more by lack of performance.

Let me give you an example.

We lived in there and we saw rigs go out that were not manned.

We so rigs that were so inefficient; it wasn’t the rig companies fault, everybody wanted to get a hole down so, they went up to 1,284 rigs or some incredible amount from 800.

And I’ve asked the industry to grade, when I talk to senior executives in Illinois or away from anybody else listening, how would you grade the first 800 rigs, they said A+ or A-, and these guys wouldn’t give an A to anybody.

You know, that’s not their MO.

And the second is the next 200 rigs, what do you think?

And they go ‘C’.

How about the last 200? ‘F’.

They were pitiful, and we saw with their locations and we’d be into the second or third re-run and they hadn’t moved the rig on yet.

It was really, if you look, the industry was very inefficient.

And that found it’s way into these finding costs, which had an effect of ramping up the hurdle rate for prospects.

So, the last numbers they had were very ugly.

So when you go to the Board and you go to partners and they’ve had finding cost like this, it begins to impede, and the average land job has four to five partners, and the average offshore has three or four.

So, you have partners to deal with, you have your own Board, you have your internal criteria.

So, it affected that a lot.

I think that has had a more significant effect than anything.

Then if you look at the year of 2002, you had many projectors that said that gas prices were going to collapse in the spring.

So, you that are listening remember back now, let’s be real honest about it.

Spring, now there were people who said that’s bull, and others said that it was going to happen, then it was going to happen in summer.

Then it was going to happen in the fall.

Hasn’t happened?

However, if you’re sitting there making decisions with a hurdle rate that’s in the $3.25 or $3.30 rate, and you’ve got partners that are concerned, and you’re going to have this collapse of gas price, you’re basically pulling back.

Now the good news is the industry is healthy.

Now here is what I think.

This is me, and everyone can laugh afterwards.

I think everybody is going to want storage.

I think we’re not going to see it pick up until two events.

One, they are going to see whether we’ve got a winner.

We’re the old Missouri school of show me.

We’re going to see a winner.

That doesn’t mean we’re going to shut down, but I don’t think we’re going to see a major impact.

Number two, they are going to get the 2002 drilling finding cost results and you’re going to see a substantial reduction to cause inefficiency we’re back to good rigs, and efficiency you’re going to see a drop back in that.

About spring, they’re going to have the 2002 numbers and they’re going to have whatever this winter provides us in the way of storage.

And I think at that point, when all the people say, you know, when the market sits at $3.50 or $4.00 on gas and they feel comfortable with that, and their finding cost are down, cost structure are back on the board, and then it will take three or four months to gear up.

And that’s why we think it will be in the middle of the year.

Now if we have a Bermuda shorts and short-sleeve winter across North America, then we’ve got a longer fight and depletion is still laying there.

It won’t be justice denied, it will be justice delayed.

And the most likely scenario is it will come mid-year next year, but it could be later.

And in the interim, we’re going to keep on trucking.

Jim, you’ve done, and Matt, a fabulous job laying out the progress that you’re making, despite the tough fundamentals.

I think everybody should be clear on that, and we’re just hopeful watching you and some of our other investments that we can see the service industry enjoying some business.

Well you stay close to your E&P analyst when that finding cost report comes out.

The contrast between 2002 and 2001 period, and I think that will be a good leading indicator, as Jim said.

The good news is that we’ve got a very healthy industry with reserve cash, so it when it kicks up it will be ready to go.

Thanks for giving me the time.

Our next question is from Mr. John Freeman.

Hi guys.

Hi, John.

Y’all did a great job laying everything out and basically hit on all my questions.

The only thing I had left was just taking into account the effect, the carry-over effect from the storms and the impact it’s had on you guys in the first three weeks or so of October.

Any idea on kind of where near-term earnings should be for the fourth quarter?

I think we gave guidance at $0.05 before.

I didn’t know if that was going to be maybe lower due to the adverse effect of the weather.

I think we can hold it.

The effect of the weather is greater than we thought at that point; it’s taken longer.

But at this point, we’re going to hold the nickel, and I think we’ve got some off-set ...

I think some off-set will be improvement in the foreign Mat and the foreign Fluids, some impact there with the contracts kicking in.

And the other would be ...

We’ve got a reasonable shot at additional Mat sales because they are in process now.

And so, I think we can ...

There is always a chance it could ...

I’ll be honest with you ... a chance it could go up a little bit, but I think we’re going to hold on to the nickel at this point.

Okay, fair enough.

I appreciate it, you guys.

Thank you.

And our final question is form Mr James Gartland.

Hi, guys.

This is Rich Lamont.

How are you?

Fine, Rich.

How are you?

You guys own ...

Insiders own about 5% of the company.

We’ve now gone through the down part of the cycle.

Do you have anything in place to protect ourselves if someone does come in to make a hostile bid at this ridiculously price, and we don’t get to enjoy the upside which you recently laid out.

I would say we really do not.

There are two things that occur with that.

Most service companies do not understand the environmental business.

They say the words, but they don’t understand it.

Those that may be closer are more involved in the Chemicals and Fluids, and most of them would be prohibitive.

Baker Hughes, I don’t think would buy it because the mud business has never been a favorite son of theirs.

And “B” the other two big companies would be prohibited by the Federal Trade Commission because of their historic market share.

It would take somebody off-the-wall to do this.

The historic companies that we would blend with would be more difficult, based on either Federal Trade Commission or their own corporate culture.

I think it’s not likely, but it’s always possible, but our defense is really, we do not have all those built-in defenses to hold somebody off.

What we really need to do is perform, as Jim laid out, and let the market understand that the value is greater than is apparent right now.

One other real quick question.

Your numbers for next year of $0.30-0.33, does that depend on a flat rig count?

Our numbers at that point were a +5% on rig count, 2003 over 2002.

Thank you so much.

A little higher.

It will 15% up in Canada, but US 5% up.

Thank you.

You bet.

We do have one more question from Mr Jason Theltch.

Just getting back to that M&A story, you have the Fluids business in this company, and it’s a business that’s apparently taking market share.

I mean, if you compare your numbers with, say, the Smith’s Fluid numbers that were just reported, you’re doing a lot better than they are.

However, you’ve got these other divisions which nobody is interested in.

So, you know, you’ve got your profitability up and your stock up, etc.

The most optimal way of selling your company would be some kind of a friendly deal where you can split up the company into various different pieces.

And is that something that you would ever consider doing?

What you don’t realize ...

The answer is: not likely, because the integration, one of our most powerful drivers in the Fluids business, is the integration of performance services, and that we’ve set that up also.

Every place we work in every market has that combination, and as the oil companies staffing has decline, and the environmental regulations have increased in every venue.

I mean, trust me, whether it’s Canada or the Rockies or Oklahoma or West Texas, the environmental regulations are tightening.

They have more interest in us managing the entire flow and so, if you look at MI, that’s an area that they are trying to push very hard in their company, and they think it’s one of the growth areas for their company.

We know it’s very powerful and we’ve spent 20 years developing a real environmental presence, and separating that from Fluids would be very, very near-term thinking.

The Matting business has historically been a very strong integrator with our environmental business also.

And so, maybe we haven’t done a good job of selling the power of the integration of these units, but we were in Lafayette yesterday discussing major projects with environmental and with the Matting company, which made us unique in getting that major business.

Yeah, I didn’t realize how inter-related your divisions were because you used to discuss the results of integrated services and I hadn’t even seen that in a while.

So, ...

Well, in a down market like this, it’s the more performance held that require it, and they’ve kind of gone on a little holiday here for a few quarters but ...

Okay, so there is a greater level of inter-relatedness than I had thought.

Thank you, Jim.

We do have one more question, sir, from Mr Russell Faircheck.

I just have one quick question.

The question’s been answered.

You know, I think you guys have done a pretty good job, and you hung in there.

How have you guys been able to buy stock in front of earnings?

Every company we’ve talked to are scared of buying their own stock, 45 days, 50 days, 90 days in front earnings.

How do you guys manage to ... and I applaud you for it, by the way ... we’re shareholders and I applaud you for it.

Your name is, sir?

Russell Faircheck.

What’s your firm?

[Counter Partners].

Shareholders ...

It’s more a question.

I figured, you know, you’ve answered all our business questions, but that’s the one issue that’s coming up with some of our companies.

They are afraid to go near their stock anywhere around earnings, and you have managed to do that ... which I applaud you for, by the way.

We give it prior guidance, and based on the guidance and where we were, we basically, Counsel felt that we were operating within the regulations.

Thanks

Sir, we have no further questions

We thank you for your patience and listening to, as Paul Barbary would say, the rest of the story.

And I think that the fourth quarter, as we’ve set guidance on that and we’re excited about what we see going forward.

And each one of our businesses have a strategy, we’re following it and we’re going to stay focused on performing it.

And there is never an assurance it will happen, but I want to say we’ve never had the tool nor the resources to basically build the company.

And if you look at Newpark’s track record over the years, when we go, we perform at the top end of the market field.

This is the only time in our history we’ve been at the bottom side, and I’m not complaining about it, we haven’t performed, but these products I think will drive us to the top side of the industry. and that’s our story, we’re sticking to it, we’re going to play to it.

Thank you very much for joining us.

This concludes today’s conference call.