NPK International Inc (NPKI) 2011 Q1 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen.

  • Thank you for standing by.

  • Welcome to the Newpark Resources First-Quarter Earnings Conference Call.

  • During today's presentation, all parties will be in a listen-only mode.

  • Following the presentation, the conference will be opened for questions.

  • (Operator Instructions).

  • This conference is being recorded, Friday, April 29, 2011.

  • Now, I would now like to turn the conference over to Ken Dennard, of DRG&L.

  • Please go ahead, sir.

  • Ken Dennard - DRG&L - Dennard Rupp Gray & Easterly, LLC - IR Contact

  • Thank you, Brittany, and good morning, everyone.

  • We appreciate you joining us for Newpark Resources' conference call today to review 2011 first-quarter results.

  • We'd also like to welcome our Internet participants listening to the call, as it is being simulcast live over the Web.

  • Before I turn the call over to Management, I have the normal housekeeping details to run through.

  • For those of you who did not receive an e-mail of the earnings release yesterday afternoon and would like to be added to that distribution list, please call our offices at DRG&L, and that number is (713) 529-6600, and provide us with your contact information.

  • Or, you can e-mail me at the address shown on the contact section of the press release yesterday.

  • There will be a replay of today's call.

  • It will be available via webcast, and you can go on the Company's website at www.newpark.com.

  • There will also be a recorded replay available by phone, which will be available until May 6, 2011, and the dial-in information is in the release yesterday.

  • Please note that information reported on this call speaks only as of today, April 29, 2011, and, therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening.

  • In addition, the comments made by Management today of Newpark during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws.

  • These forward-looking statements reflect the current views of the Management of Newpark.

  • However, various risks, uncertainties, and contingencies could cause Newpark's actual results, performance or achievements to differ materially from those expressed in the statements made by Management.

  • The listener is encouraged to read the Company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and current reports on Form 8-K, to understand certain of those risks, uncertainties and contingencies.

  • And, now, with that behind me, I'd like to turn the call over to Newpark's President and CEO, Mr.

  • Paul Howes.

  • Paul?

  • Paul Howes - President and CEO

  • Thank you, Ken.

  • Good morning to everyone.

  • We would like to thank you for joining us today for our First-Quarter 2011 Conference Call.

  • With me today are Bruce Smith, President of our drilling fluids business, and Jim Braun, our Chief Financial Officer.

  • Following my remarks, Bruce will provide an update on our fluids business, and Jim will discuss the mats and environmental service businesses, as well as the consolidated financial results of the quarter.

  • I will then conclude with a discussion of our market outlook before I open the call to Q&A.

  • Now, turning our attention to the first quarter.

  • Total revenues for the first quarter of 2011 were up 4% sequentially to $203 million, and up 26% year-over-year.

  • Operating income was up 12% sequentially, to $28 million, and double the $14 million of operating income earned in the first quarter a year ago.

  • Net income for the quarter, first quarter, was $15.9 million, the highest reported quarterly net income in the Company's history.

  • On a per share basis, net income per diluted share for the first quarter was $0.16, compared to $0.15 in the fourth quarter of 2010, and $0.09 a year ago.

  • Looking at the results of our worldwide fluids business, we reported a 5% sequential increase in revenues to $170 million, which was a 25% increase from the first quarter a year ago.

  • The sequential improvement was primarily driven by strong revenue growth in North America, which included double-digit gains in the US, and seasonal improvements in Canada.

  • This strong revenue growth was partially offset by declines in Brazil and in the Mediterranean.

  • Sales from Evolution, our high-performance water-based drilling fluid system, reached $9 million in the quarter, as we continue to move the system beyond the Haynesville into other plays.

  • We continue to see strong interest in and growing acceptance of Evolution.

  • Since the end of last year, we have doubled the number of operators that have used Evolution in the US and Canada.

  • Growth has come from new formulations, as we adapt the system to meet the technical and operational requirements necessitated by geological and economic considerations.

  • Our Mediterranean revenues were down 11% sequentially, due in part to lower drilling activity in Italy, and a slowdown in North Africa, an area that is being impacted by political unrest.

  • In Brazil, we had a solid quarter, with revenues of $20 million, down from the fourth quarter of last year, as anticipated.

  • We are pleased with the profit of $500,000 in Brazil for the quarter, which we have previously stated has been a focus for the Company.

  • As we recently announced, we closed our Rheochem acquisition in Australia, giving us a presence in the growing Asia Pacific region to support continued international expansion of our drilling fluids business.

  • We also acquired the Rheochem brand name which is well recognized in Asia Pacific and we'll continue to operate the business under that name.

  • Our mats and integrated service business performed extremely well in the first quarter, growing revenues 12% sequentially to $23 million, driven by strong mats sales, as well as ongoing demand of for-rental of our composite mats systems in the Northeast.

  • We are also seeing interest for our composite mats in other parts of the US, with high levels of drilling activities, such as the Bakken and the Eagle Ford.

  • Revenues from environmental services were $9 million in the quarter, down 18% sequentially, and down 16% year-over-year.

  • This is in line with our expectation, due to lower activity in the Gulf of Mexico, resulting from drilling restrictions of the US government.

  • However, in spite of the significant lower revenues, the business remained profitable with an operating margin of 18%.

  • And, finally, before turning the call over to Bruce, I would like to mention another important industry recognition received by the Company.

  • In the most recent EnergyPoint Research benchmark study, Newpark rated number one in the category of health, safety, and environmental policies and practices among all oil field suppliers in their recently published 2010 Oil Field Service Survey.

  • To this, this is among the most important recognitions a service company can receive from its customers.

  • Today, more than at any time in the past, E&P operators are expecting and demanding the highest level of performance in the areas of health, safety, and environmental, from the service companies, and Newpark is proud to be recognized for that high level of safety performance.

  • Not only does Newpark have superior product technology and people, we also have the safety culture that the industry expects.

  • I will now turn over the call to Bruce Smith, who will review the performance of our fluids business.

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • Thanks, Paul, and good morning.

  • In the first quarter, revenues in the fluids systems and engineering segment were $170 million, a 5% sequential increase, and 25% year-over-year.

  • We saw solid growth in our North American revenues, which were up 14% sequentially to $124 million.

  • Our US business improved 12% sequentially, on a quarterly rig count increase of 2%.

  • We saw improvement in most all of our regions, driven by the operators' interest in the oil- and gas-rich liquid plays, such as the Bakken, Eagle Ford, and Woodford shales, and within the Permian Basin.

  • In addition, the stronger drilling and production activity in Oklahoma benefited not only our drilling fluids business, but also our fluids handling, tank rental and well flow-back services.

  • The first-quarter revenues in the dry gas areas of East Texas and North Louisiana, which includes the Haynesville, were comparable to the fourth quarter of last year.

  • Our Canadian business turned in another solid quarter, with seasonal factors contributing to a 58% sequential improvement.

  • On a year-over-year basis, Canadian revenues were up 24%.

  • As Paul mentioned, we are continuing to expand the geographic reach of Evolution.

  • In the first quarter, Evolution revenues reached $9 million, compared to $6 million in the previous quarter, as we continued to move the system into other areas beyond the Haynesville.

  • The system was initially designed for high-pressure, high-temperature environments like the Haynesville.

  • As we moved into other areas such as the Bakken and Barnett shales, the system has been modified to meet the unique geological and economic challenges of each new play, both ensuring that Newpark and Evolution are differentiating themselves, and we believe, creating positive value for our customers.

  • For example, in the first quarter, we ran Evolution on 12 wells for a client in the Barnett.

  • Over these wells, we were able to decrease their average drilling time by more than 10 days per well, in comparison with their recent experience with conventional water-based fluid systems.

  • Additionally, during the quarter, Evolution was successfully introduced to Canada and West Texas.

  • At the end of the first quarter, the Evolution technology has been used by 44 operators, compared to a total of 22 that had used the system as of the end of last year.

  • Like any new technology, one of the keys to growth is getting customers to try it for the first time.

  • This doubling of customers in just the last three months demonstrates that Evolution is continuing to garner market interest and should serve as the basis for future growth.

  • In addition to adding these new customers, it has now been used in almost 200 wells.

  • We believe that the value proposition offered by the system, including reduced drilling costs from faster penetration rates, lower disposal costs, and the environmental and safety benefits, will continue to offer growth opportunities for the technology.

  • And, finally, on the subject of Evolution, I am pleased to announce that next Monday, at the offshore technology conference here in Houston, Newpark's Evolution drilling fluid system will be presented with the Hart's E&P magazine special meritorious award for engineering innovation.

  • Now, in its 41st year, this award is one of the industry's oldest and most widely respected, and annually honors the world's best new tools and techniques for finding, developing, and producing hydrocarbons.

  • We are honored to receive this award.

  • Now, moving on, internationally, our Mediterranean revenues were down 11% sequentially to $27 million.

  • The decrease was due in part to the unrest in key North African countries such as Libya, and to a lesser extent Tunisia, but also due to the timing of customers' drilling plans in Italy.

  • We experienced a strong quarter in Romania, helping to offset some of the decline.

  • In Brazil, after reaching $25 million in revenue in the fourth quarter, first-quarter revenues were down sequentially to $20 million.

  • As we stated on our last call, we completed work on two IOC wells early in the quarter and, therefore, revenues and operating profit were lower.

  • Despite the decline in revenues, Brazil achieved an operating profit of $500,000.

  • I would also note Petrobras is actively using DeepDrill, another of our high-performance water-based technologies to great effect.

  • Continued use of this system helps highlight and differentiate our technology and capabilities, with Petrobras in particular, but also with all operators in Brazil.

  • Looking at the overall fluids segment, we reported operating income of $19.2 million in the first quarter, compared to $16.8 million in the fourth quarter, and $12.4 million a year ago.

  • The operating margin for the segment in the first quarter was 11.3%, up from 10.3% in the fourth quarter, and 9.1% a year ago.

  • With that, I will now turn the call over to our CFO Jim Braun.

  • Jim Braun - VP and CFO

  • Thank you, Bruce, and good morning, everyone.

  • I would like to start by discussing our mats and integrated service business, and then our environmental services segment, and conclude with a discussion of our consolidated results.

  • The mats business reported strong first-quarter revenues of $23.1 million, a 12% sequential increase, and a 69% increase over the same quarter of last year.

  • Sales of our composite mats contributed $7.4 million of revenue in the first quarter, a 36% increase from the previous quarter.

  • Our mats sales have moved up nicely over the past several quarters, benefiting from an improving global economy.

  • Our mats rental business continued to grow, with first-quarter rental revenues increasing 3% over the previous quarter, driven by strong mat rentals in the Marcellus shale, offset by declines in other areas.

  • The mat segment had operating income of $11.8 million in the first quarter, up 14% from the fourth-quarter operating income of $10.3 million, and substantially higher than the $2.7 million earned a year ago.

  • Operating margin in the first quarter was 51%.

  • This compares with the 50% operating margin in the previous quarter, and a 20% operating margin in the first quarter of last year.

  • While we expect to see competition attempt to enter the mat rental market in the Northeastern US, we believe that our composite mats systems offer exceptional operational and environmental advantages over competing product.

  • In addition to increasing demand for mats in the Northeast, we are starting to see interest coming from other areas.

  • For example, a large US operator drilling in the Bakken formation has 700 of our composite mats on a trial basis.

  • Our mats manufacturing facility is operating at capacity, and we are looking to increase that capacity in order to meet the demand for our product.

  • Now, moving to our environmental services business, where revenues declined as we expected.

  • Revenues in this segment were $9.1 million, down 18% from the $11.1 million reported in the previous quarter, due to a $3 million decline in waste cleanup volumes associated with the Deepwater Horizon oil spill.

  • In the first quarter, there were negligible amounts of spill cleanup revenue.

  • Compared to a year ago, which was prior to the Macondo incident, revenues in the quarter were down 16%.

  • Operating margins in the segment held up well under the circumstances, with operating income of $1.6 million, compared to $2.6 million in the fourth quarter, and $2.7 million in the same quarter a year ago.

  • Our first-quarter operating margin was 18%, down from the 23% margin we achieved in the fourth quarter, and 25% in the year-ago quarter.

  • And, now, moving on to our consolidated results.

  • For the first quarter of 2011, we reported total revenues of $203 million, an increase of 4% from the fourth quarter, and up 26% from a year ago.

  • Operating income was $27.9 million, up 12% sequentially, and double the $13.7 million in the first quarter of last year.

  • Net income in the first quarter was $15.9 million, or $0.16 per diluted share, compared to net income of $14.8 million, or $0.15 per diluted share in the fourth quarter of 2010, and the $7.8 million, or $0.09 per diluted share in the first quarter a year ago.

  • The first-quarter 2011 tax rate was 38%, in line with our expectations for this year.

  • And, now, let me discuss our balance sheet and liquidity position.

  • During the quarter, we generated cash from operations of $18 million, using $6 million of that to fund capital expenditures.

  • The balance was added to our cash position, where we ended the first quarter with cash of $95 million.

  • We expect that total 2011 capital expenditures to be $30 million to $40 million, in addition to the $25 million we spent last week on the acquisition of the Rheochem drilling fluids business.

  • Our total debt at March 31, 2011, was $173 million, resulting in a debt-to-total-capitalization ratio of 28.3%.

  • And, now, I'd like to turn the call back over to Paul for his concluding remarks.

  • Paul Howes - President and CEO

  • Thanks, Jim.

  • I would like to summarize the quarter with a few key points.

  • First, this is a record net income quarter for the Company, an accomplishment that reflects the efforts of every single employee.

  • Second, the recent industry recognition that Newpark is one of the highest-rated oil field service companies when it comes to our programs on health, safety and environmental.

  • Third, the continued successful commercialization of our Evolution technology, which we believe is setting a new standard of drilling performance in the industry.

  • And, lastly, the continued implementation of our strategy to grow our international business, specifically the acquisition of Rheochem, which provides a presence in the growing Asia Pacific market.

  • With respect to our mats business, we are extremely pleased with our outstanding performance in bringing a value-added product and service to E&P operators.

  • We believe our unique matting system provides our customers with a solution unrivaled in the marketplace.

  • To date, we have not seen a competitive product that offers similar value, including the protection of the environment.

  • We expect our environmental business will continue at its present levels until drilling activities pick up in the Gulf of Mexico.

  • In summary, we remain encouraged by the continued strength of the US drilling activity, specifically in the oil and gas liquid basins, which we believe will provide an environment for continued growth as we look to the end of 2011 and into 2012.

  • We also believe that the international markets will provide us opportunities for growth in places like Brazil and Asia Pacific, but we remain cautious on the impact of the political unrest in North Africa.

  • With respect to the Gulf of Mexico, we're optimistic that activity levels will begin to increase over the next several quarters, which should add incremental revenue to both our environmental and drilling fluids businesses.

  • With that, we will now take your questions.

  • Operator?

  • Operator

  • Thank you, sir.

  • We will now begin the question and answer session.

  • (Operator Instructions)

  • Our first question comes from the line of Jim Rollyson with Raymond James.

  • Please go ahead.

  • Jim Rollyson - Analyst

  • Good morning, guys.

  • Good quarter.

  • Paul Howes - President and CEO

  • Thanks, Jim.

  • Jim Rollyson - Analyst

  • Paul, I guess just to start out on the mats side, you guys have been worried about competition coming into the market, and maybe causing margin deterioration, which so far hasn't happened.

  • When you talk about going out to places like the Bakken and the Eagle Ford, et cetera, are you seeing the same level of competition kind of vying for getting mats into those markets or are those kind of virtually untapped markets at this point?

  • Paul Howes - President and CEO

  • Yes, those are certainly developing markets, I think, where E&P operators are looking at providing a new level of protection for the environment, so those are really in the early stages.

  • There is obviously some competition there, but very early stages.

  • Jim Rollyson - Analyst

  • And I guess, as a follow-up, related to the potential expansion of your production capacity on the mats side, any kind of color on potential costs and timing of that?

  • Paul Howes - President and CEO

  • Yes, we're looking at making some capital investments there, probably in the range of $5 million, plus or minus, that could add up to maybe 10% to 15% of additional capacity.

  • Time frame roughly to do that, probably upwards of 9 months.

  • Jim Rollyson - Analyst

  • Okay.

  • I will get back in the queue.

  • Operator

  • Thank you.

  • Our next question comes from the line of Neal Dingmann with SunTrust.

  • Please go ahead.

  • Neal Dingmann - Analyst

  • Good morning, gentlemen.

  • Great call, there.

  • Say, for Bruce or Paul, if you could drill down a little bit on Evolution.

  • It really sounded like with the 44 operators in the new areas, could you give us an idea of just the type of growth that you are maybe forecasting for the remainder of this year and next year?

  • Particularly interested, when you said the Bakken, West Texas, and some of those newer areas, and maybe what you think the opportunity is maybe in the Marcellus or Eagle Ford, some other areas you maybe haven't mentioned yet?

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • This is Bruce.

  • I will take at least the first part of this, anyway.

  • As we've changed the formulations of the system to better be able to handle the geological differences and the economic differences of the areas, obviously that's opening us up to a different customer base than we had previously, a far larger customer base obviously than we had previously.

  • So as we begin to develop these formulations and move it out into these other plays, we feel and expect we will continue to pick up more customers within these areas.

  • And as the system becomes more and more successful, obviously, that will feed on itself and we hope that growth will continue.

  • The Eagle Ford shale, we haven't done anything on the Eagle Ford yet with Evolution, but we expect to, at some point during the second quarter, start some wells in the Eagle Ford, so that will be a new frontier for Evolution.

  • In terms of growth at the moment, it is very hard to say exactly how quickly the growth will come and where it will come, as we're still in the rollout phases, and still taking opportunities as they arise, and as we formulate different system types.

  • So it's a bit early to say exactly how the growth will go.

  • But in terms of the benefit to the Company from a margin perspective, wells where Evolution is running is somewhere on average between 500 and 700 basis points higher than wells that are not running Evolution.

  • So we have high hopes for the system in the future.

  • Neal Dingmann - Analyst

  • Bruce, would this work international offshore just as well?

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • Yes it will, with some changes to the formulations for international, it will work equally as well there.

  • It will also work equally as well in oil plays, as we seen, up in Canada in the carbonate formations.

  • So we can adapt the system to work in all environments.

  • Paul Howes - President and CEO

  • Yes Neal, just to follow up on that, to Bruce, too, you mentioned offshore.

  • Certainly, that is an area that we think could be very attractive to the Company in the future.

  • That's a program that we're working on in the R&D side.

  • But clearly, anything that's offshore is probably at least 12 months to 24 months away.

  • Neal Dingmann - Analyst

  • Okay.

  • And then last question, just on that, and I'll return back to the queue.

  • As far as just capacity, Bruce or Paul, do you have plenty of capacity either with the lab, with personnel, with the equipment, et cetera, to continue to push this expansion or are you going to have to add, I don't know, personnel or supplies or what have you?

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • We do have the capacity.

  • But we also are adding some more lab personnel and more lab facilities, bigger facilities, better facilities, to take [care] of what we are hopefully going to do in the future.

  • Neal Dingmann - Analyst

  • Very good.

  • Thanks, guys.

  • Great color.

  • Great quarter.

  • Paul Howes - President and CEO

  • Thank you.

  • Operator

  • Thank you.

  • Our next question coming from the line of Stephen Gengaro with Jefferies and Company.

  • Please go ahead.

  • Stephen Gengaro - Analyst

  • Thanks.

  • Good morning, gentlemen.

  • I guess two things.

  • The first I will start with is, sequentially, your incremental margins are actually pretty good despite the drop-off you saw in Brazil.

  • Is this -- as I sort of think about this going forward from an incremental margin perspective, could this accelerate as we go forward?

  • And sort of as maybe part of that question, what color can you give us on sort of the pace of growth coming out of Brazil, as we go through the next several quarters?

  • Jim Braun - VP and CFO

  • Stephen, let me take a crack at part of that.

  • Specifically as it relates to Brazil, you know we've been working hard over the last year to try to bring the cost structure into line, to get that thing organized, that we could be profitable at these levels.

  • So I think you will continue to see us make some incremental margins there, as the business goes up.

  • In terms of the rest of the business, we would think that second-quarter incrementals should be similar to what we saw in the first quarter.

  • We've continued to operate at a lean structure.

  • We add people in the field where we need to, to assist on the revenue side.

  • So we've got expectations that these incrementals should continue.

  • Stephen Gengaro - Analyst

  • Okay.

  • And then is there a -- can you give us any sense for the magnitude of the impact of the North Africa unrest, and how that kind of weighed on you?

  • Jim Braun - VP and CFO

  • Sure, in the quarter, and as we said, the largest, or excuse me, the country impacted the most was certainly Libya.

  • It wasn't one of our largest companies.

  • We've got very little revenue in Libya for the quarter.

  • The other countries that operate there, Tunisia held up well, Algeria's held up well, but on an annual basis it's probably about a $10 million revenue impact.

  • Stephen Gengaro - Analyst

  • Okay, very good.

  • Thank you.

  • Operator

  • Thank you.

  • Our next question comes from the line of Mike Harrison with First Analysis.

  • Please go ahead.

  • Mike Harrison - Analyst

  • Hi, good morning.

  • Paul Howes - President and CEO

  • Good morning.

  • Mike Harrison - Analyst

  • I was wondering if you could talk a little bit about what you're seeing in terms of your competitors' offerings in the water-based fluids space.

  • Are there other fluids providers out there with sort of me-too type products that might offer a similar value proposition and performance to Evolution?

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • There are certainly competitors out there with their high-performance, water-based mats, but frankly I think we're very much the leader in this regard in the high-performance water-based mats and I think they are already struggling currently to catch up with what we are achieving.

  • Mike Harrison - Analyst

  • And have those competitors' offerings, have you seen those just mostly in the Haynesville or have you seen them also roll out in other shale areas?

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • We've seen them in every shale area we've gone to.

  • So yes, it's everywhere, but in each area where Evolution is, head-to-head, versus our competitor systems, we are winning pretty much all the time.

  • Mike Harrison - Analyst

  • All right.

  • And then I wanted to ask also about SG&A costs.

  • Last year's Q1 showed sequentially lower SG&A on higher revenues, and then that happened again from Q4 of last year into this quarter.

  • Can you give us any guidance on SG&A costs for next quarter, and looking out for the rest of the year?

  • And maybe also explain sort of what happens that drives that sequential step-down that we've seen over the past 2 years.

  • Jim Braun - VP and CFO

  • Mike, I think as we go forward, around that $16 million level of SG&A on a quarter basis is good.

  • When you look specifically at the fourth quarter to the first quarter, certainly the incentive compensation plans impacted that in the fourth quarter, and then lower here in the first quarter.

  • But going forward, the $16 million should be a good run rate.

  • Mike Harrison - Analyst

  • All right.

  • And then last question I had was on the Gulf of Mexico.

  • If you could just give us some thoughts on what you're seeing currently there in terms of the number of rigs you're working on, and maybe any sense on when we might see you get back to a more normal level of revenue from that area, in both fluids and in your environmental services business?

  • Paul Howes - President and CEO

  • I will take a start with that, and then I will have Bruce add some additional color.

  • Certainly we've seen some increased permitting in the Gulf of Mexico, so we do see the activity level picking up.

  • We are not currently on any deep water rigs with our drilling fluids business.

  • However, we're starting to see some additional volume for our environmental business, as you would expect, because we are the market leader in terms of environmental services in the Gulf.

  • So our hope is that the permitting process, the issuance of new permits, will continue to accelerate as we move into the second, and maybe more the third, the fourth quarter.

  • Annually speaking, I think roughly, we historically have done about $15 million in the federal waters Gulf of Mexico in our drilling fluids business.

  • So our hope is that by the end of the year, we will start to gear back up.

  • The environmental business, again, believe that business should strengthen as we move into the later half of this year.

  • Bruce, would you want to add any more color to that?

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • No, I think you covered it, Paul.

  • I would just add one bit to what you said initially.

  • We are, in fact, on one deep water rig now, that just began.

  • But it's coming back slowly, as Paul had mentioned.

  • So we don't expect anything magnificent coming back this year, but slowly, slowly, it does appear to be gaining some traction.

  • Operator

  • Thank you.

  • Our next question comes from the line of Joe Gibney with Capital One.

  • Please go ahead.

  • Joe Gibney - Analyst

  • Thank you, good morning.

  • I just wanted to follow up a little bit on your North Africa business, as relative to the impacts there and the unrest.

  • Did you disclose, I'm sorry if I missed it, what the operating profit was, off that $27 million revenue number?

  • Jim Braun - VP and CFO

  • We didn't, but if you look historically, the business in the Mediterranean has generated between 15% and 20% operating margins.

  • Joe Gibney - Analyst

  • And that was substantially impacted in 1Q relative to some of the disruptions in Libya or not really?

  • Jim Braun - VP and CFO

  • I wouldn't say it was significantly impacted at the operating income level.

  • Joe Gibney - Analyst

  • Okay.

  • It was more of the $10 million revenue impact is how we should be thinking about it more on the top-line side.

  • Jim Braun - VP and CFO

  • Right.

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • That's on an annual basis.

  • Joe Gibney - Analyst

  • Sure.

  • And one other question.

  • Good to see the core North America fluids business turn here.

  • Evolution aside, just in your core fluids business, it sounds like Bruce, your Haynesville flat.

  • I was just curious, as you sort of stem the tide here, of chasing rigs out of the Haynesville, where are you getting the most traction in your core base fluids business with the shale play shift?

  • Is it shifting more Eagle Ford?

  • Is it shifting more Bakken?

  • I am just curious where that mix shift is getting a little bit more traction, it sounds like.

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • Yes, it's moving in several directions.

  • Certainly the Eagle Ford and South Texas is picking up quite a bit.

  • So we've seen a bit of a shift going in that direction.

  • The Western Oklahoma and the Texas Panhandle area is becoming increasingly more busy.

  • The Barnett is becoming increasingly more busy, the Bakken, increasingly more busy.

  • So really, in all areas we're picking up.

  • I'm very pleased with the way the Company's moving, the direction we're going, and the volume of work that we're currently picking up.

  • Although the Haynesville is flat, I'm quite pleased with the pickups we're having in other regions.

  • Operator

  • Thank you.

  • Our next question comes from the line of Michael Marino with Stephens.

  • Please go ahead.

  • Michael Marino - Analyst

  • Good morning.

  • I wanted to drill down a little bit on Canada, and understand, maybe, the potential seasonality there coming into Q2.

  • What was -- I don't know if you want to disclose on a total revenue basis what Canada was in the quarter, but I also want to understand if Evolution was a big component of that, so we know what to look for, Q2, on Evolution, just given what I think will be a decline in Canada?

  • Jim Braun - VP and CFO

  • Yes, the Canadian revenues in the quarter were about $11 million.

  • As you know, this is the high quarter for the year.

  • We'll typically see a fall-off from Q1 to Q2 of $4 million to $5 million.

  • Evolution -- we did have a number of wells running up there, but its overall impact to the Canadian revenues wasn't that large.

  • This was increased drilling activity, gaining some share up there, that helped a strong quarter.

  • Michael Marino - Analyst

  • Okay, that's helpful.

  • To follow up one on Evolution.

  • I'm trying to get a better understanding for your customer base as it evolves.

  • You talked about 44 operators using it.

  • How many of those would you consider habitual operators, or habitual users?

  • And how many do you think you could maybe go to new basins with?

  • Are you getting pulled by the customer into new basins, or is it more of selling to the basin right now?

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • I think on the 44 customers that I mentioned, with the results we're seeing to date, we fully expect to keep them all, and to add to that number.

  • That's our hope, and that's where we think we are currently.

  • So the customers that are using it like it.

  • They're using it again.

  • And several customers, of course, we are using it with the same customer in various locations.

  • So there's some pull-through going on from that into other regions.

  • But we fully expect the 44 customers to be held, and to grow as we go forward.

  • Michael Marino - Analyst

  • How many full systems are you running, versus just components of the system?

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • Well they're all full systems.

  • They just vary in formulation.

  • Some formulations require less than others, others require more.

  • But they're all full systems in terms of, at some point or another you use all the different components, but they may be in smaller quantities, and only in certain sections, and so on.

  • I'd categorize it more, they're all full formulations, but different concentrations and different usage factors.

  • Paul Howes - President and CEO

  • And one of the keys certainly is in the Haynesville.

  • That particular formation was a higher-pressure, higher temperature one, so that formulation was certainly different than the ones we're using in the Barnett or up in the Bakken and out in the Permian as well, right now.

  • Operator

  • Thank you.

  • (Operator Instructions)

  • Our next question comes from the line of Matt Beeby with Global Hunter Securities.

  • Please go ahead.

  • Matt Beeby - Analyst

  • Thank you, good morning.

  • Paul Howes - President and CEO

  • Good morning.

  • Matt Beeby - Analyst

  • With focus on the environmental improvement and Evolution being the beneficiary, can you talk about any potential negatives on the cost side for the environmental business?

  • Maybe what their upcoming issues or changes that might be coming related to disposal?

  • Paul Howes - President and CEO

  • Yes.

  • Are you referencing in terms of cost issues for the operators and having to dispose of, let's say, traditional oil-based muds and cuttings?

  • Matt Beeby - Analyst

  • Mostly, as it relates to your [active] environmental business, that's correct.

  • Paul Howes - President and CEO

  • Oh, to our environmental business.

  • Okay.

  • Yes, certainly, the more pressure there is in terms of the state governments and having to deal with these cuttings, that does and could provide additional opportunities for the environmental business.

  • That's certainly a potential for growth going forward.

  • Matt Beeby - Analyst

  • Higher costs to you would then ultimately be passed on to --?

  • Jim Braun - VP and CFO

  • No, I don't think there's an issue with respect to our cost structure or additional costs in our environmental services business.

  • Paul Howes - President and CEO

  • No.

  • Matt Beeby - Analyst

  • Okay, that's good.

  • One more then, too.

  • Can you maybe talk about the sustainability of your fluids margin and maybe how the Rheochem acquisition might affect that, maybe at least directionally?

  • Paul Howes - President and CEO

  • Yes.

  • Matt, in terms of the Rheochem business, as we've previously disclosed in 2010, they had revenues of AUD20 million, and their high point was 2 years ago at AUD36 million.

  • The margins they experienced aren't untypical of ours.

  • They should certainly be additive, but at least in the near term, I don't think you'll see our overall fluids margins move up significantly because of them.

  • But over the long term in that market, we do expect them to be a much bigger contributor than they are initially.

  • Matt Beeby - Analyst

  • Okay, thank you.

  • Operator

  • Thank you.

  • Our next question is a follow-up question from the line of Jim Rollyson with Raymond James.

  • Please go ahead.

  • Jim Rollyson - Analyst

  • Yes, just a couple quick follow-ups.

  • Paul, it's kind of related to all the other guys in the oil field have been talking, obviously, about this ongoing shift toward liquid plays, oily plays.

  • Any major differences for you guys when you see activity moving to liquids plays or oily plays, particularly on the horizontal?

  • Is it pretty much same-same versus horizontal gas from a liquids consumption or margin opportunity or are there any major differences?

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • This is Bruce.

  • I'll take this one.

  • Really, no major differences at all.

  • The same processes, the same procedures, the same drilling capacities, capabilities and procedures are all required, regardless of whether it's a gas, liquid/gases, oils.

  • So, things are pretty much the same.

  • Jim Rollyson - Analyst

  • I would have thought so.

  • At least nice to see the rig count continue to pick up overall.

  • Bruce Smith - VP and President of Fluids Systems & Engineering

  • It is.

  • Jim Rollyson - Analyst

  • Jim, maybe just a housekeeping item.

  • Fully diluted share count for the quarter?

  • Jim Braun - VP and CFO

  • Yes.

  • It's about 106 million shares.

  • You've got to assume the conversion of the converts in there, which is just short of 16 million shares.

  • Jim Rollyson - Analyst

  • Got you.

  • That's in your $0.16.

  • Perfect, thanks guys.

  • Jim Braun - VP and CFO

  • Thank you.

  • Operator

  • Thank you, and I am showing no further questions in the queue.

  • I would like to turn the call back to Management at this time for any closing remarks.

  • Paul Howes - President and CEO

  • Thank you for joining us today on the call, and for your interest in Newpark Resources.

  • We look forward to talking to you again after the conclusion of the second quarter.

  • Thank you.

  • Operator

  • Thank you.

  • Ladies and gentlemen, this concludes the Newpark Resources First-Quarter Earnings Conference Call.

  • If you would like to listen to a replay of today's conference, please dial (303) 590-3030, and enter the access code of 4426435 followed by the pound sign.

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