NPK International Inc (NPKI) 2011 Q3 法說會逐字稿

Welcome to the Newpark Resources third-quarter earnings conference call.

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

Following the presentation, the conference will be open for questions.

(Operator Instructions) Today's conference is being recorded October 28, 2011.

I would now like to turn the conference over to Ken Dennard with DRG&L.

Please go ahead.

Thank you, Alicia, and good morning, everyone.

We appreciate you joining us for the Newpark Resources conference call today to review 2011 third-quarter results.

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

Before I turn the call over to management, I have the housekeeping details to run through.

For those of you who did not receive an e-mail of the release yesterday afternoon and would like to be added to that distribution list, call our office at DRG&L at 713-529-6600 and provide us your contact information and we will get you on that list.

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

It will be available via webcast through the Company's website, www.newpark.com, and there will be a telephonic recorded replay available for the next week, which that information is in the press release.

Please note that information on this call speaks only as of today, October 28, 2011.

Therefore, you are advised that time-sensitive information may no longer be accurate as of 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 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.

Listeners are encouraged to read the Company's 2010 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.

With all that behind me, I'd like to turn the call over to Newpark's President and CEO, Paul Howes.

Thank you, Ken.

Good morning to all.

We would like to thank you for joining us today for our third-quarter 2011 conference call.

With me today are Bruce Smith, President of our Drilling Fluids business; Jim Braun, our Chief Financial Officer, and Gregg Piontek, our Chief Accounting Officer.

As you know, we recently announced that Jim would be leaving Newpark to take a CFO position with another company.

Jim has been a tremendous asset to Newpark since he came on board in fall 2006 and has played a critical role in helping us build Newpark into the strong organization it is today.

His work ethic, enthusiasm and energy will be missed and we appreciate all of his accomplishments here at Newpark.

I know I speak for the entire Newpark family in wishing Jim the very best in his new endeavor.

As previously disclosed, Jim's responsibilities will be transferred to Gregg Piontek effective November 1.

Gregg has been with us since 2007 and his experience and in-depth familiarity with Newpark's operations make him highly qualified and a natural choice to take on the role of CFO.

We congratulate Gregg for his well-deserved promotion.

Now turning our attention to the third quarter.

We are pleased to report continuing record quarterly levels of revenue and earnings as total revenues for the third quarter of 2011 were up 13% sequentially to $261 million and up 46% from a year ago.

Operating income was up 24% sequentially to $39 million, doubling the $19.5 million in operating income earned a year ago.

Our net income per diluted share for the second quarter was $0.23 compared to $0.19 in the second quarter of 2011 and $0.09 a year ago.

Our worldwide fluids business continues to grow at a healthy pace, reporting a 13% sequential increase in revenues to $216 million.

North American revenues were up nearly 12% sequentially to $157 million, driven partially by a 5% gain in the US, but more so by the strength in the Canadian market where revenues increased sequentially by $10 million.

Based on our data and recent Spears and Associates estimates, we believe that Newpark is now the third largest drilling fluids company in North America in terms of revenue, having surpassed Baker Hughes.

Revenues from our international fluids business posted strong growth as well, increasing nearly 17% from the second quarter to $59 million.

Most of the incremental gain was driven by improvement in our Mediterranean business which was up 16% sequentially to $30 million.

There was also a 12% growth in our Brazilian revenues along with 30% growth in our Asia-Pacific business.

Turning to our Mats and Integrated Service business, the segment's revenues were up 9% sequentially to $30 million.

The expected decline in mat rental revenue in the Northeast region was more than offset by increased sales of our composite mats during the quarter.

Operating margins were 48% in the third quarter, down sequentially from 53% in the second quarter.

In our Environmental Service business, revenues were $15 million in the quarter; up 26% from the second quarter.

Similar to Q2, we saw market share gains and an increase in disposal volumes coming from state waters and inland locations.

With respect to the federal waters in the Gulf of Mexico, we continue to see the lingering effects of government restrictions and delays in issuing new permits.

With that, now let me turn the call over to Bruce Smith who will review the performance of our fluids business.

For the third quarter the total revenues in the Fluids Systems and Engineering segment were $216 million; a 13% sequential increase and a 46% year-over-year gain.

North American revenues continued to grow sequentially, up 12% from the second quarter to $157 million.

In the US, our Fluids revenues were up 5% sequentially to $144 million.

Canada showed a nice uptick with revenue increasing from $4 million in the second quarter to $14 million in the third quarter.

While part of the increase in Canada was due to the seasonal rebound, share gain and excellent performance of our Canadian team contributed significantly.

Our US market share remained at 15.9% for the third quarter.

The number of US rigs serviced by Newpark was up 6% sequentially in the quarter while the US rig count was up by a comparable amount.

In the important shale plays, our market share increased to 17.2% in the third quarter from 16% in the second.

Pricing remains competitive and we are continuing to work with our customers to pass on increases in select markets to help cover increased personnel and raw material costs.

One item in particular that I should point out is that we have been seeing increasing tightness in the barite market.

Barite is a fundamental raw material in drilling fluids, as well as a product we process and sell to third parties.

Tightness in this market is resulting in significant cost increases.

To help mitigate this, we are working to increase our pricing for barite, although realization of these price increases will take time and will likely lag behind cost increases.

Sales from Evolution water-based system were $17 million in the quarter, flat sequentially.

You will recall that Evolution revenues had doubled from the first to the second quarter so were pleased to maintain the increased market gain.

We expect the introduction of this new technology to continue to gain market acceptance customer-by-customer, region-by-region, so growth is not expected to be linear every quarter.

Year to date, Evolution revenue is $44 million, twice that of the revenues for the comparable period in 2010.

Through the end of September Evolution has been used in over 400 wells.

Some further items of note.

We recently finished a high temperature well in a new area, the Piceance basin, with very favorable results, where operating temperatures exceeded 300 degrees.

We believe the continued development of unique Evolution formulations that offer performance and operational advantages over traditional oil-based fluids give us a competitive advantage in the developing shale plays.

Looking ahead, we are preparing to use Evolution for a super major in the Haynesville, a first for this customer.

Also of note, we are in the early stages of discussions with customers to bring Evolution to the Conasauga shale play in Alabama.

Turning to our international fluids business, we continued to see growth overseas with revenues growing 17% sequentially to $59 million.

Much of this increase was due to nice gains from the Mediterranean region and Brazil.

Our Mediterranean business grew 16% sequentially to $30 million due to continuing strength in Romania and Tunisia.

Our largest market in the Mediterranean, Algeria, returned to more normal activity levels after the end of Ramadan and we are currently working on 3 IOC rigs there in addition to our work done with the Sonatrach contract.

Our strong fluids capability and performance has allowed us to gain work in Algeria providing fluids to integrated projects being managed by Baker Hughes and Weatherford.

Finally, as we've stated in second-quarter call, our Libyan operations have ceased and we do not anticipate restoring operations there until the situation has been stabilized.

In Brazil we achieved a 12% sequential revenue increase to $20 million as activity in our Petrobras contract continues at a steady state.

The quarter's revenues were characterized by an unfavorable mix of lower margin equipment rental versus product revenues resulting in a small loss for the quarter.

On a year-to-date basis we remain profitable in Brazil, which is a considerable improvement from last year.

In the fourth quarter we expect to see activity with 1 or more IOCs.

Since establishing our Asia-Pacific fluids business last April with the acquisition of Rheochem's drilling fluids business, results have closely tracked our expectations, with revenues up 30% sequentially to $8.5 million due to the full versus partial forward comparison.

Looking at the Fluid segment profit, we reported operating income of $25.6 million in the third quarter, which was up 23% from the second quarter and more than double the $11.8 million earned a year ago.

Overall, the operating margin for the segment in the third quarter was 11.9%, up 1 full percentage point from the second quarter and up nearly 4 percentage points from a year ago.

I'll now turn the call over to Jim Braun.

Thank you, Bruce, and good morning, everyone.

As you know, I will be leaving Newpark at the end of the month.

Over the past 5 years it's been my pleasure to work with Paul, Bruce and the rest of the team in increasing the value of Newpark and turning it into an acknowledged leader in drilling fluids, mats, and environment well services.

I'm proud to have played a part in the growth and success of the company and am confident that Newpark's future remains bright.

In closing, let me recognize the people of Newpark who continue to make this organization a truly unique and exceptional company in the oilfield service industry.

I thank you for letting me be a part of the team and best of luck in the future.

Now it's my pleasure to introduce to you Newpark's new CFO, Gregg Piontek.

Thank you, Jim.

As Bruce discussed the Fluids business, let me now provide color around the Mats and Environmental Services businesses before concluding with our consolidated results.

The Mats and Integrated Services segment reported $30 million in revenues in the third quarter, a 9% sequential increase and a 66% increase over the same quarter a year ago.

During our second-quarter call we mentioned that we expected a $6 million to $7 million sequential decrease in rental revenues in the Northeast as our largest customer informed us of their plans to reduce their mat footprint at each drilling site.

The Mat returns came in slower than originally expected and, as a result, the actual impact was a $3.7 million sequential reduction in rental revenues in this region.

Improving rental activity in other regions, including the Rockies and the Gulf Coast, along with a $4.8 million increase in composite Mat sales more than offset the declines in the Northeast, resulting in a $2.4 million sequential increase in revenues.

We are still in the process of moving and redeploying those mats both within the Marcellus and to other markets and we expect to see a modest decline in rental revenues in the fourth quarter.

Our composite Mat sales continue to see strong demand with revenues up 52% from the second quarter to $14 million, our strongest quarter in Mat sales ever.

Demand has remained strong from our oilfield customers in the international markets while the third quarter also benefited from strong domestic sales to customers outside of the oilfield industry.

Looking at the profitability for the Mats business, we achieved operating income of $14.5 million in the third quarter, down about 2% from the second quarter but up 69% from a year ago.

Operating margin in the quarter was 48% as compared to 53% for the previous quarter and 47% in the third quarter of last year.

Going forward, we do expect to see some margin compression due to the lower rental day rates in those areas outside of the Marcellus where the mats are being redeployed.

However, the segment should continue to generate attractive operating margins at current activity levels.

Moving on to the Environmental Services business, revenues were approximately $15 million, up 26% from the second quarter and up 15% from the same quarter a year ago.

While we still have not seen any meaningful recovery in the federal waters of the Gulf of Mexico due to the continued permitting uncertainty, we were able to gain share in oilfield waste disposals from state water and inland locations.

The third quarter also benefited from large disposal projects which contributed $2.2 million of revenue to the quarter.

Operating income in the Environmental Services segment was $5 million compared to $3 million in the second quarter and $3.9 million in the same quarter a year ago.

Operating margin for the segment was 33%, up from 25% in the last quarter and 31% a year ago.

Now moving on to our consolidated results.

For the third quarter of 2011 we reported total revenues of $261 million, an increase of 13% from the second quarter and up 46% from a year ago.

Operating income was $39 million in the quarter, up 24% sequentially and double the $19.5 million earned a year ago.

Net income in the quarter was $23 million or $0.23 per diluted share as compared to net income of $19.3 million or $0.19 per diluted share in the second quarter 2011 and $8.2 million or $0.09 per diluted share in the same quarter a year ago.

For the third quarter our tax rate was 36.5% as compared to 35.7% in the second quarter, in line with our expectations for the full year.

Now let me discuss our balance sheet and liquidity position.

At the end of the third quarter our cash balance was $63 million.

Capital expenditures during the quarter were $11.3 million and depreciation and amortization expense was $7.6 million.

We expect our 2011 capital spending to be between $35 million and $40 million in addition to the $27 million that was spent Rheochem acquisition.

I would like to note that in 2011 Newpark has become a cash taxpayer in the US as we've utilized our federal net operating loss carry forward and we have now made a total of $21 million in tax payments, both US and foreign, through the end of September.

Our total debt at the end of the third quarter was $175 million, with resulting debt to total capitalization ratio of 27%, which matches our debt ratio at the end of the second quarter.

Now I'd like to turn the call back over to Paul for his concluding remarks.

Given continuing record revenues and earnings in the quarter and solid fundamentals both domestically and internationally, we are optimistic for the fourth quarter and for 2012.

The drive for oil- and liquid-rich plays continues in the US and despite volatility in commodity prices during the third quarter we have not seen any material decline in customer spending, although some E&P companies are discussing lower capital spend in 2012.

For the longer term, we remain bullish about our business and the overall fundamentals of the industry and will continue to invest in our business domestically and internationally where we can differentiate ourselves through technology and outstanding value-added services.

Speaking for a moment about outstanding customer service, we are pleased to announce another recognition award from Energy Point Research, an independent firm that specializes in the rating of oilfield service companies.

In September we received a number 1 customer satisfaction rating for US shale plays among all oilfield service companies.

We would like to thank our customers for their business and our employees for their dedication to Newpark and their customers.

Looking at the international markets, we will continue to develop and expand our presence in the Mediterranean, Latin America and the Asia-Pacific region.

We are pleased with the strong results coming from our Mediterranean business despite the ceasing of our Libyan operation.

Latin America will continue to be a growth region as we look to do more business with IOC and Petrobras in Brazil.

To that end, we have recently established a presence in Peru as we look to leverage our water-based technology into that country in the latter part of 2012.

Our Mats business should see gains from composite Mat sales in the fourth quarter; however, we expect some compression in rental revenues and margins over the next quarter.

Finally, our Environmental Service business continues to perform well with volume and market share gains.

In closing, on behalf of us at Newpark, let me once again offer our best wishes to Jim and congratulate Gregg on his new role as CFO.

With that, we will now take your questions.

Operator.

Thank you, Sir.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions) Michael Marino with Stephens.

Good morning, guys.

Good morning.

If I could just drill down little bit on the basin level results of Evolution in the quarter.

I guess you guys started up in the Eagle Ford, so if you could address that operation?

Also, the Barnett has been a big market for you guys, if you could -- has that continued to trend in the right direction.

Then also, timing on the Marcellus, if there's any update there.

In all areas the Evolution is still going well, but it is a customer by customer, region by region approach.

One of the things that we are doing now is speeding up our training of our personnel because we cannot roll it out any faster than we have trained personnel to be able to run the system efficiently and effectively.

So, we are speeding up the training process and trying to roll it out as quickly as we can, but it's still going very well in the Barnett and still going well in the Eagle Ford.

The Marcellus to this point we've had some operational delays that have prevented us from launching it there, but we expect that to happen shortly.

But in all areas still going very well.

And the one thing too, Bruce, that you mentioned was that in the Haynesville shale, which is the high-temperature, high-pressure play in the US, so it's a dry shale.

We are actually going to be running Evolution with 1 of the super majors, which is really our first in road to a new account that area.

Okay.

And then as a follow-up, Bruce, could you give a little more color on the timing of maybe some of the IOC work down in Brazil?

Is that early Q4, or late Q4 into Q1 of next year?

I just want to understand.

Some of the IOC work has already begun in the quarter now.

So, we are at the early stages of picking up some of the IOC business there for the fourth quarter.

The IOC work is consistent in regard to timing when it occurs, but some of it is happening now.

Okay.

Great.

Thanks.

Thank you.

Marshall Adkins with Raymond James.

Please go ahead.

Good morning, guys.

Good morning, Marshall.

I never thought I'd be asking questions on Mats and Environmentals, as you guys just absolutely crushed our estimates, so let me jump in on those.

Obviously, we were looking for a pretty big fall off in the Mat business.

We didn't see it.

How much of those sales were one-time?

What I'm trying to get to is how repeatable was the performance in the Mat business, given how much we thought it would fall off?

Marshall, this is Paul.

On the Mat sales, we had sales internationally and domestically of the composite Mats.

We expect to see some pretty -- I wouldn't say, strong sales going forward but pretty comfortable with the sales forecast as we look into the fourth quarter on sale of our Mats.

So, no big fall off in other words?

I wouldn't see any significant fall off.

Some modest.

Yes.

I would say we continue to see pretty strong demand for the product.

Obviously, with the third quarter being a record quarter, I wouldn't necessarily expect to that level, but we expect it to continue to be strong in the fourth.

The other thing too, Marshall, in the rental revenues although we do expect a modest decline going into the fourth quarter, we've been successful in redeploying those Mats that were laid down both into the Rockies, the Bakken, as well as a fairly large project down in the Gulf Coast.

That was the other part of that.

How much of that expected decline from that one customer did we realize in this quarter?

And how much carries through in Q4, et cetera?

As we framed it up last quarter, we were expecting a $6 million to $7 million decline in that region that is still in line with our expectation, as we had noted what we had seen here in the third quarter was a $3.7 million decline.

So, the rest of that from that region I would expect to see in the fourth order.

Now, as Paul had mentioned, we are moving these Mats and redeploying them to other project.

So, that should offset a portion of that, but the real question mark is, the timing of the transportation and getting them on to customer sites and getting them under contracts is a bit of uncertainty and that could impact that estimate favorably or unfavorably.

Perfect and last question for me on the Environmental side, best quarter we've seen in a long, long time there.

How sustainable is that or was this a one-off deal?

It doesn't really feel much like a one-off deal.

It's sustainable from my perspective.

We did have one larger project that came in that Gregg mentioned, one larger one, one smaller one.

So, I would expect to see sustainable revenue in that area, maybe a modest decline.

But remember, too, the one thing historically, this business has been very strong in the deep water Gulf of Mexico where we've traditionally owned up to 50% marketshare there.

We're still seeing very slow active out of the deep water.

Again, as we move into 2012 the deep water recovers, we could see even stronger revenues coming.

Great job guys.

Thanks.

Thank you.

Neal Dingmann with SunTrust.

Please go ahead.

Good morning, guys.

Good morning, Neal.

I'd like to add too, Jim congratulations.

First, a question overall on Fluids.

Just wondering if you could give me an idea.

Assuming that the horizontal rig count does continue to progress the way it does, let's assume it's up 10% or 15% next year.

What kind of -- based on something like that, what Fluid growth overall could you tend to see next year, and then wondering within that Fluids what kind of pricing are you seeing in Evolution versus your generic Fluids?

Certainly we're trending with the market, so if the market goes up, I fully expect we will trend along with it, and hopefully grab some additional market share.

So, the fundamentals for the Drilling Fluids Company are still very strong.

We are increasing our customer base, we're increasing our rig count, the types of wells that we're involved in haven't lost any complexity.

So, fundamentally things are good there.

In terms of pricing of Evolution compared to other things, we're somewhere in the 500 to 700 basis points difference, higher with Evolution wells as opposed to other more conventional systems.

All right and just wondering, total customers on Evolution, I know you were around 66, I think, at the end of last quarter, is that continuing to increase slightly?

It is continuing to increase, that's correct.

And then just lastly if I could.

Just on the Mat, following up on what I think Marshall had asked.

On the rentals or the composite, Paul, is that just going to be continued on the composite?

It sounds like international continued to do very well.

Is that current customers or will you continue to reach out to more customers internationally, more so on the sales side?

Yes, I mean we certainly did pick up some new customers internationally, some existing customers we have had.

As we've talked longer term about our Mats business and providing more sustainable revenues and profitability, we talked about looking at Eastern Europe as a potential rental market.

So, in the future we would also look at going in that direction.

Mike Harrison with First Analysis.

Hi.

Good morning.

Good morning.

Congratulations to Gregg and Jim on your new roles.

Thank you.

Wanted to ask a question about the barite business.

You mentioned that you are seeing some tightness.

To what extent are you guys back integrated there or are you sourcing all of your ore there from external suppliers?

Just maybe give us a little bit of a sense, as you guys lag in pricing, what kind of margin pressure could we see on that business?

Several parts.

Let me take them a bit at a time.

The tightness in the barite market is affecting everyone.

It's affecting the whole industry.

Historically, we all can't source from the same geographical locations.

One of the things that we are doing when there is tightness in the market, go find other sources, go find other places.

So, we are actively seeking the other areas where we might be able to bring in barite and reduce that tightness, and therefore, reduce the cost pressure that has been coming recently.

We are trying wherever possible to pass on the cost increases that we are receiving, to our customers.

But that can lag 60 to 90 days by the time we get through all our customers and get some increase from those that are willing to do so, and help us.

In some instances we have contractual obligations that are somewhat more difficult to pass on increases.

We are also trying to pass those on as and when we can, but we expect the tightness in the barite market to continue for some time until other sources come on stream from different geographical locations.

Historically, about maybe up to 90% of the barite ore that's been moved, that's been used in the US comes from China and there's been a lot of changes in the regulatory climate in China.

There's more demand domestically for barite ore in China, both for their oilfield service customers as well as other industries.

So, we will continue to bring ore in from China but, as Bruce suggested, we are also looking at other geographies and have brought ore in at times from places like India.

But we are no different than any other of the drilling fluids companies in North America in terms of importing barite ore.

Any sense for ability to quantify how much margin pressure you saw this quarter in Fluids or going forward?

Market pressure in terms of --?

Margin, on your operating margin.

There certainly was some pressure during the quarter.

Fortunately, with Evolution and some other things we were able to still report a healthy margin for the quarter, but there was some pricing pressure for sure.

We expect that to continue but, as I mentioned, we expect also to be able to push some of these costs through to our customers and hopefully maintain or raise our margins as we go forward.

Bruce, is there any way you can talk a little bit about the strength that you're seeing in the Fluids market in Canada?

Is that really just a seasonal ramp we are seeing or is there a sustainable improvement in the market?

Is your share there meaningfully different than what you have in the US?

Several parts again to that one.

The third quarter is partly seasonal.

Canada always begins to come back in the third quarter, fourth quarter and first quarter.

But in the third quarter we certainly performed better than we have done historically during this period.

That's really down to a very focused team, a very confident team that we have up in Canada, and we have gained market share between the second and third quarters.

So, we're growing against the market certainly as well.

Chris Enright with Weeden and Co.

Good morning, guys.

Good morning.

Quick follow-up on the Canadian question.

Do you guys have an expectation of what -- how big that market could be ultimately for you?

It's a difficult one because there is a seasonal element to it.

So, it's always difficult to predict what may or may not happen there.

Certainly we expect it to be stronger for us going forward than it's been at any time in our history.

Several reasons for that -- one, the strength of our team there, who are performing very well.

Secondly, we're introducing Evolution in Canada which will also help drive our market share and our profitability in that region.

Okay.

Great.

Unrelated follow-up, returning to the Mat segment.

You noted the ability to put more Mats to work in the Rockies and in the Bakken, Mats that were laid down out of the Marcellus.

Have you had any success in redeploying Mats within the Marcellus or maybe the Utica, for example?

We have redeployed a small portion of them, in the Marcellus.

For the most part, though, the Mats that have come back have been redeployed to the Rockies area, Bakken, as well as the Gulf Coast.

A good portion of them have come back to the Gulf.

So as we stand today, we are quite a bit more diversified with our Mats between the Northeast, the Gulf and the Rockies regions.

Quite honestly, we were looking to try to spread that concentration out some that was in the Marcellus to other regions.

We locked in on a large contract down in the Gulf Coast.

It's about a year-long contract for the Mats -- for just over 7,000 of those Mats that were laid down.

So we're very pleased that we could get some of those under a long-term contract as well.

Matt Beeby with Global Hunter Securities.

Thank you.

Good morning, everyone.

Just to keep with the Mats, and I apologize if you addressed this earlier.

Is there a component of the sales of Mats that was accelerated by returning some of those Mats back to you?

Was that a driver to the sales business in the quarter?

No.

The Mat sales in the quarter were completely unrelated to the return Mats that we had on rent.

Historically, I'm not aware of selling used Mats if that's what you are referring to.

All the Mats that we sell are new Mats coming off our production line.

Okay.

Can you quantify the backlog maybe how far out you have visibility on the Mat sales, and maybe what you're looking for to, once again, consider increasing that capacity?

Yes, as you know we did increase capacity back late in the first, second quarter.

In terms of backlog, we certainly do have some backlog, the plant's running pretty hard right now.

Small backlog going in to the fourth quarter, but visibility into 2012 is probably a little less clear right now.

But, again, we feel pretty good about it.

Okay thank you guys.

Doug Garber with Dahlman, Rose & Co.

Good morning, guys.

Good morning.

My first question is on Brazil.

I think about 3 years ago you signed a contract for lot B and it was a 3-year contract.

I'm curious, your expectations going forward and if we should continue to expect you to participate in Brazil given the margins have been very low, at least in the offshore market, and if you would just comment on that?

Yes.

The lot B contract was for a 5-year term, so we are more than two-thirds into it.

As Petrobras picks up additional rigs into the marketplace, which they are doing now, those rigs get split between the 3 lots in the ratios upon which the lots were granted.

So, lot A was 50%, lot B was 30%, lot C was 20%.

So, we will pick up 30% of additional rigs that come in to the market, and they are coming in all the time.

We spent, quite honestly, the first year or so of the contract trying to figure out how to deal with Petrobras.

Very complex company, very difficult to deal with just because of the levels of bureaucracy.

We are beginning to understand how it functions now and how it works.

So, we are hoping, now, to see increases on margins going forward down there.

We are hoping to see increases in revenues not only with Petrobras but with the IOCs.

We're doing everything we can at the current time to keep our costs under control as we put the other pieces in place.

In earlier discussions on other calls we talked about our strategy after we came out of the losses in 2010, was to resize the organization down there to break even, on the Petrobras business as we were receiving in 2010.

Then really start to lay on the IOCs where we expect to make better margins and to move up the entire margins of Brazil.

We've seen that, when we run with Exxon Mobil and deep water down there as we did late in 2000, in 7,500 feet of water the margins improve.

But they're more in an exploratory phase and if a couple of those IOCs go into development, then I think we are well positioned to see very strong improvements in the margin.

Have you had success converting to the deep drill which I believe is higher margin down there?

Yes.

Deep drill is going quite well.

We're still using it.

It varies depending upon what the operational requirements are, but we have had as many as 4 and 5 rigs running at any given time.

But again, timing is the thing.

There are certain wells where they use it and certain wells where they don't, for operational reasons and for environmental reasons.

So, we are at the whim really of the operational requirement, but it is still going well, very successful.

We haven't had any problems while running it and, in fact, it's all been very positive.

The other thing there, too, is that Newpark is the only company that has a water-based drilling fluid approved for offshore drilling.

Bill Dezellem with Tieton Capital.

Thank you.

First of all, you had mentioned in your opening remarks that you saw some reduced spending potentially coming in 2012.

Would you please expand on those comments?

Yes.

As I mentioned, some E&P customers have talked some about looking into 2012 and their capital budgets, again, looking at the overall economics, where the price of oil was.

So it was just a general macro comment.

Not our customers in particular, just the overall industry.

And then, circling to the Fluids business, one of the things I am a little confused about, hearing that pricing is under pressure with the Fluids business but yet feeling like you can pass along the barite cost increases.

Would you please pull those 2 together for me and help us understand how you feel like you can raise prices when prices are under pressure?

Yes, that certainly is not what we are looking to convey.

We are not under pricing pressures in our Drilling Fluids business, it was really more around passing through the increases from our cost of barite.

And again, what Bruce was commenting on that it just takes time.

There is a lead lag there in terms of when you can pass that through to your customers.

I think the word pricing was used, but we are referring to the cost, both of personnel and the raw materials.

That's the pressure we're seeing.

That's very helpful.

Thank you.

One additional question, I have to apologize for my ignorance here, but to what degree is barite used in Evolution versus your oil-based Fluids?

With any water-based system you tend to use slightly more barite than you would with an oil-based fluid because of the recyclability of it, but it's really no different from any other system.

Evolution in terms of barite use is really no different from anything else.

Great thank you all.

Thank you.

(Operator Instructions) Rob Norfleet with BB&T Capital Markets.

Good morning.

Most of my questions have been answered, but just a couple.

If you look at Evolution in the quarter, I know you probably don't have the exact breakdown on this.

But what would the ratio look like in terms of the higher sales versus existing customers using the product versus new users, who you obviously just introduced the product to?

That's a difficult one.

I guess the best way for me to answer that is that we still have retained pretty much all of the customers that we've had historically, are still using Evolution.

What changes is the drilling programs.

Sometimes they are drilling, sometimes they are not, sometimes they're moving rigs, so we're not using it.

We really haven't lost any of our existing customers to Evolution that we have gained historically, and each quarter we gain new customers.

So, I feel very comfortable that things are going well with Evolution and it has a very bright future.

But one of the things that we are -- not fighting but having to deal with are, as we roll it out to different geographies and more and more customers, we have to train more and more personnel and that takes a little bit of time.

You can't just throw someone out onto a rig and say run Evolution.

There is a training program that has to be done.

To give a little insight, we are now over 400 wells drilled using Evolution.

I can't recall the last number we gave you on the call, but we are now over 400 wells, which is significant.

Another significant milestone would be we've now drilled over 2 million feet of hole with Evolution which is a very large number, a major milestone.

So, we are gaining traction every day, really.

Great.

That was insightful.

Thank you.

Just lastly on the Mat side of the business.

I know you discussed in the past of replicating your rental model that you use here domestically in the international markets.

Can you talk about -- discuss this opportunity and maybe what the potential for that would be?

Again, I know that is not something we're doing right now but something we potentially could do in the future.

Yes.

Certainly as we have looked at how we have rebranded the Mats from soil stabilization to environmental protection, that instantly brings in the European Union, right?

What's going on in Eastern Europe and Poland, in terms of the shale play, and their desire to protect the environment there.

So, that's the catalyst that's pushing us in that direction.

Really, in terms of potential, that's probably going to be more defined by how well the companies that are over there, their drilling programs go in the exploratory phase.

We'll be positioned hopefully, to enter that market quickly as it starts to take off.

Okay.

Great.

Thank you.

Chris Enright with Weeden and Co.

Hi.

Thanks.

Just a quick follow up.

Dealing with US Drilling Fluid, in particular, you mentioned activity was up 6%, revenue was only up 5%.

Can you break down the effective pricing and mix in there?

Really, our uptick was market driven in the quarter.

And really, the mix of where you are on a given well, at any time, determines what the revenues will be.

So there's always a mix issue which part of the well you are on at any given time, but really it was a market driven uptick in the third quarter.

Okay.

So pricing and mix were relatively unchanged --

That's correct.

-- give or take from 2Q?

Okay.

Great that was it for me.

Thank you.

Thank you.

I show no further questions at this time.

I'd like to turn the conference back to management for closing remarks.

I'd like to thank you once again for joining us on this call and for your interest in Newpark Resources.

We look forward to talking with you again after the conclusion of the fourth quarter.

Thank you.

Ladies and gentlemen this concludes the Newpark Resources third quarter earnings conference call.

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