NPK International Inc (NPKI) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Newpark Resources First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ken Dennard. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Newpark Resources conference call and webcast to review first quarter 2018 results.

With me today are Paul Howes, Newpark's President and Chief Executive Officer; Gregg Piontek, Chief Financial Officer; Phil Vollands, President of The Fluids Business; and Matthew Lanigan, President of The Mats Business.

Following my remarks, management will provide a high-level commentary on the financial details of the fourth -- first quarter and outlook before opening the call up for Q&A.

Before I turn the call over to management, I have a few housekeeping details to run through. There will be a replay of today's call. It will be available by webcast on the company's website, which is newpark.com. There'll also be a recorded replay available until May 11, 2018, and that information on access is in yesterday's release.

Please note that the information recorded on this call speaks only as of today, April 27, 2018, and you're, therefore, advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management 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 Newpark's management. 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 or reader is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand certain of those risks, uncertainties and contingencies.

The comments today may also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP measures are included in the quarterly release, which can be found on Newpark's website.

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

Thank you, Ken, and good morning, everyone.

We're very pleased to report another solid quarter for both businesses with consolidated revenues increasing 11% sequentially to $227 million in the first quarter of 2018, generating EBITDA of $25 million and net income of $0.08 per diluted share. Overall, the first quarter operational performance was relatively in line with our outlook, as discussed on the February call.

In fluids, I'm pleased to highlight that we are continuing to make meaningful progress in the execution of our long-term strategy. Last quarter, we noted that our Kronos system was being used for the first time in an offshore drilling application, an important step in our commercialization efforts to penetrate the deepwater Gulf of Mexico. I'm pleased to report that this project was completed successfully during the quarter. And based on the performance of our Kronos system, we now have a second well underway with this independent operator.

Following this initial success, we also have our Kronos technology now running with 2 additional customers, including the Woodside project in offshore Australia where we are partnering with Baker Hughes GE. And more significantly, we recently been awarded our first deepwater well with a major IOC in the Gulf of Mexico using the Kronos system. While the deepwater market conditions have remained challenging, we are very pleased with the efforts of our team and the achievements of this major milestone.

Turning to the segment's operational performance. First quarter fluids revenues came in at $177 million, reflecting our highest quarterly revenue since 2014. The 9% sequential growth in revenues was largely driven by the seasonal strength in Canada, which contributed $9 million of sequential revenue growth while our U.S. business tracked fairly in line with market activity. Internationally, despite the anticipated pullback in Brazil, revenues increased by 5%, benefiting from strength in Romania and Kuwait as well as the start of the Woodside project in offshore Australia. With the stronger revenue contribution, the fluids operating margin improved to 6%. While this is a step in the right direction, we also recognize that there's more work to be done.

Turning to the Mats business. I'm pleased to report that the Well Service Group and Utility Access Solutions integration is progressing very well and hitting all targeted milestones. To that point, I'd like to thank all of our employees that have worked diligently over the past 6 months to ensure an efficient integration with our legacy rental and service business while also maintaining their focus on working safely and providing superior service quality for our customers. Our innovation and diversification strategy in the Mats business remain firmly on course and our execution within the business is strong. The first quarter represents a milestone for the segment, achieving revenues of $50 million and maintaining a solid EBITDA margin. With our first full quarter post acquisition, our Mats segment revenues are now well-balanced between exploration and nonexploration markets. This diversification not only provides an unprecedented level of stability to the business, but also provides a solid foundation for growth.

We are continuing our efforts to develop industry-specific strategies to build our market share, expand geographically and develop next-generation and complementary products to further differentiate Newpark from our competition.

Last quarter's acquisition expanded operational footprint and service capabilities across industries, enabling us to set the standard for superior customer service and execution. In addition, the demand from customers seeking to purchase our Dura-Base mats are strengthening and our expanded manufacturing facility and geographical footprint has provided us with outstanding capabilities to respond to our customers' needs.

And before I turn the call over to Gregg, I'd like to have Phil Vollands, President of our Fluids business, provide a brief update on the recent developments in this business. Phil?

Thanks, Paul, and good morning, everyone.

As I approach my first anniversary as President of the Fluids Systems business, I'd like to take a moment and discuss our long-term fluid strategy, highlight some of the recent developments and provide my thoughts on the near-term and longer-term priorities.

As we've discussed in the past, we intend to take the actions necessary to become a recognized player in deepwater drilling and completion fluids markets.

During the cycle, our conviction didn't waiver. We completed our capital investment project in Fourchon, and we remain committed to new technology development, launching Kronos, our Low ECD fluids system, developed specifically to meet the needs of the operators in the deepwater Gulf of Mexico.

Although this market remains challenged, we have made steady progress towards our vision. Our industry-leading facility has been used by multiple IOCs over the past year, allowing us to demonstrate the facility's capabilities and performance. Meanwhile, we've made steady progress in qualifying our Kronos fluids system. The system was first deployed in a complex P&A operation last year and has now drilled its first well in the first quarter. During this time, we've also been working diligently with major IOCs through the arduous qualification process for our brand-new offshore fluid. This has no doubt been a painstaking process, but a very necessary component to ultimately gain customer acceptance.

And as Paul touched on, I'm proud to announce that we are starting our first complete well in the Gulf of Mexico using the Kronos system with a major IOC. This well is anticipated to be completed by the end of the second quarter and contribute $3 million to $5 million of revenue. As we've discussed in the past, given the high regulatory and rigorous qualification standards, we see our first deepwater contracts as the most challenging to obtain. With each well, we're given an opportunity to demonstrate our service capabilities and the performance of our innovative fluids systems. Through successful execution, we'll build upon our reputation and credibility to gain additional opportunities in this important market.

And while we are making progress on multiple strategic fronts, I think it's important to highlight that these long-term investments have provided a modest headwind to our operating margins. Throughout the downturn, we've discussed our decision to limit organizational reductions, protecting our core capabilities, which we viewed as critical to achieving our long-term vision. And as the recovery began, we've added capabilities to our organization to support product line expansion and penetrate the deepwater Gulf of Mexico. We're starting to see tangible benefits of this approach.

Revenues in the most recent quarter are up 30% from a year ago, achieving a revenue level we haven't seen since 2014. Yet while we've continued to make progress in our market share expansion efforts, particularly in the U.S., we remain acutely aware that we also need our margins to ultimately return to levels achieved prior to the downturn. In order to accomplish these margin objectives, we must execute on several fronts. First, the optimization of our global footprint, expanding into key markets, such as the deepwater Gulf of Mexico while at the same time, reevaluating the long-term potential for some of our international markets. Second, the continued expansion into adjacent chemistries. We must build upon our leading drilling fluids position and infrastructure investments in order to leverage expansion into adjacent product lines. And third, pricing. While we've made some progress to improve pricing over the past year, we must continue our efforts to leverage our superior customer service and technical capabilities to drive improved pricing, particularly in the North American market.

I'd also like to take a moment to provide an update on a few of our international opportunities. As highlighted in yesterday's press release, we're currently engaged in the bidding process related a Sonatrach's restricted tender, which is expected to be finalized in the second quarter. As a consequence of changes in Sonatrach's procurement process, which limit the number of lots available to major service providers, we currently expect that our revenues from Sonatrach under the new award will approximately be $125 million over the 3-year term, which would result in a reduction of approximately $25 million per year as compared to recent activity levels. While the process is not complete, the impact of the new award could begin as early as the fourth quarter of 2018 as work transitions from the 2015 contract to the final contract awarded under the 2018 tender.

I'd also like to note that in Brazil, Petrobras has recently initiated their tendering process, which is expected to cover fluids products and services for 3-year term beginning in the fourth quarter of 2018. Bids associated with this tender are due next month.

I'd also like to highlight that as part of our continued expansion efforts in the Middle East, we've recently received an award to provide drilling fluid technical services in Saudi, representing our first entry into this country. While this initial award is expected to contribute only modestly to our revenues, we view the opportunity as having much greater strategic value as it provides a foundation to expand our presence in this important market. To support this award, we will invest $2 million to construct a fluids blending facility in-country, and we'll have Newpark technical services personnel on site working with the customer's drilling teams, providing additional opportunities to understand the customer's challenges and gain valuable insights into the ways in which our innovative products can provide unique value.

And with that, let me now turn the call over to Gregg, who will review the financials for the quarter.

Thanks, Phil, and good morning, everyone.

I'll begin by discussing the details of our operating segments before finishing with our consolidated results.

The Fluids Systems segment generated total revenues of $177 million in the first quarter of 2018, reflecting a 9% sequential increase from the fourth quarter and a 30% improvement year-over-year.

In the U.S., revenues were $92 million, up 3% sequentially, relatively in line with the 5% increase in U.S. rig count. On a year-over-year basis, U.S. revenues have increased 41% from Q1 of 2017, outpacing the 30% improvement in average rig count.

In Canada, although, we began to see the impact of spring breakup late in the quarter, first quarter revenues were $23 million, reflecting a 70% sequential improvement from Q4, significantly outpacing the 32% increase in rig count over the same period.

On a year-over-year basis, revenue has improved by 17% despite the 9% year-on-year decline in market rig count. The strong performance relative to market activity levels is primarily driven by elevated mud losses as well as growth in stimulation chemical sales.

Turning to our international regions. Revenues in the Eastern Hemisphere were $54 million in the first quarter, reflecting an 11% improvement from Q4. The sequential comparison primarily reflects the impact of strong performance from our Romanian operation, which benefited from complex wells completed by a key customer as well as ongoing product sales to a large integrated service company in support of their offshore project with Total. In addition, the region benefited from a $2 million contribution from the startup of the Woodside project in offshore Australia as well as a modest lift from currency rates. On a year-over-year basis, revenues from the Eastern Hemisphere improved by 29%, primarily benefiting from stronger activity levels in Romania as well as a $3 million lift from currency rates.

In Latin America, first quarter revenues were $8 million, down $3 million from the fourth quarter as the prior quarter benefited from a well using our Deepdrill water-based system. On a year-over-year basis, the Latin America region declined by 13%, primarily reflecting lower Petrobras activity. At the consolidated segment level, with the $15 million sequential increase in fluids revenues, operating income increased by $3 million, improving the segment operating margin to 6%.

Turning to the Mats business. The first quarter results were in line with our expectations discussed on February's call. Total segment revenues were $50 million for the quarter, representing an $8 million sequential improvement from the fourth quarter. As anticipated, revenues from mat sales pulled back modestly from the seasonally strong Q4 result, coming in at $10 million for the first quarter. Meanwhile, rental and service revenues came in at $40 million, reflecting a $10 million improvement from prior quarter. This improvement is largely attributable to the full quarter impact of our acquisition last November as well as an increase in nonexploration markets, both in the U.S. and Europe.

From a market mix perspective, as Paul touched on, our revenues are now fairly evenly split between exploration and nonexploration markets. Comparing to the first quarter of last year, Mats segment revenues more than doubled, increasing by $27 million. Rental and service revenues increased by $20 million over this period, reflecting the impact of the acquisition along with strong contributions from our legacy operations while revenues from mat sales increased by $7 million. With the full quarter contribution of the acquisition, the segment operating margin came in at 24% for the first quarter compared to 28% in both the fourth quarter and the first quarter of last year. Consistent with our discussion on last quarter's call, the decline in the segment's operating margin is largely the result of the acquisition impact. Due to the high concentration of site services as opposed to product sales and rentals, the acquisition is accretive to the segment's operating income but serves to reduce the operating margin.

Now turning to our consolidated results. First quarter 2018 revenues were $227 million, representing an 11% sequential improvement and a 43% increase year-over-year. SG&A costs were $27 million, reflecting a 9% sequential decrease but a 6% increase year-over-year. As a percentage of revenue, SG&A costs came in at 11.9% in the first quarter compared to 14.5% in the fourth quarter and 16% in the first quarter of last year. As discussed on February's call, the fourth quarter included acquisition-related expenses. Comparing to prior year, the increase is primarily attributable to higher spending in the Mat segment, including the impact of the recent acquisitions and the elevated patent enforcement costs.

Total corporate office expenses were at $8.7 million in the first quarter compared to $9.3 million in the fourth quarter and $9 million in the prior year. As highlighted last quarter, our fourth quarter included $700,000 of acquisition-related costs, which did not recur in Q1. In addition, performance-based incentive compensation declined sequentially. However, this decrease was largely offset by an increase in costs associated with the ongoing implementation of the U.S. tax reform. Consolidated operating income was $14 million in the first quarter compared to $10 million in the fourth quarter and $4 million in the first quarter of last year.

First quarter interest expense netted to $3.3 million, up modestly from the $3 million in the fourth quarter and $3.2 million in the first quarter of last year. The modest sequential increase in interest expense is primarily due to increased borrowings. The provision for income taxes for the first quarter of 2018 was $3.1 million, reflecting an effective tax rate of 30%. As discussed on last quarter's call, with the completion of our acquisition in November, we issued 3.4 million shares during the fourth quarter. With the full quarter impact of the issuance in our share calculations, the average outstanding share count increased to 91.7 million shares in Q1.

Income from continuing operations for the first quarter was $0.08 per diluted share compared to $0.09 per diluted share in the previous quarter and a loss of $0.01 per share in the first quarter of last year. As noted last quarter, the fourth quarter of 2017 included a $0.03 per share net benefit from the impact of tax reform, partially offset by acquisition costs.

Turning to cash flow. During the first quarter, cash provided by operating activities was minimal as $22 million of cash generated by operations was offset by a net increase in working capital, including higher receivables to support the elevated revenues as well as the Q1 payment of our annual performance-based incentive programs for 2017.

Investing activities used $24 million, including $14 million to fund the settlement of our discontinued operations dispute last quarter. Capital expenditures were $11 million, including $7 million of capital investments in the Mats business, the majority of which reflects investment in our mat rental fleet to support growth and expansion efforts.

We ended the first quarter with a total debt balance of $187 million and a cash balance of $60 million, resulting in a total debt-to-capital ratio of 25% and a net debt-to-capital ratio of 19%. Substantially, all of our cash on hand is held by our foreign subsidiaries, a portion of which we anticipate repatriating back to the U.S. in 2018.

Now turning to our near-term operational outlook. In the Fluids business, we expect near-term revenues to pull back modestly from Q1 levels, driven by the impact of spring breakup in Canada where the current rig count stands more than 60% below the average Q1 level. We anticipate that the seasonal decline in Canada will be partially offset by growth in the U.S. where we expect land revenues to track fairly in line with market rig activity while our offshore operations benefit from the deepwater well now underway in the Gulf of Mexico.

Internationally, we expect revenues will be fairly stable where anticipated declines in Romania should be partially offset by a higher contribution from the Woodside project in offshore Australia. From an operating margin perspective, we expect to see a modest pullback from the level achieved in Q1 but remain above Q4 levels, driven primarily by the lower revenue expectation.

In the Mats business, as Paul touched on, we expect the second quarter to benefit from strong purchasing demand, which we anticipate will drive revenues for mat sales back to the level we saw in Q4. Meanwhile, although the soft natural gas prices remain a potential longer-term headwind for our Northeast region, we continue to experience solid near-term rental and service demand benefiting from our diversification efforts. With the stronger contribution from both rental and service as well as mat sales, we anticipate the total segment revenues in Q2 will be in the mid-$50 million range. At this revenue level, operating margins are expected to remain in the mid to upper-20s range, depending in part on the timing of certain expenses. We expect corporate office expenses will remain relatively stable in the near term.

With regard to 2018 full year capital expenditures. We are raising our expectation to approximately $30 million to $35 million, primarily reflecting elevated investments to expand our rental fleet to support our expansion efforts in the Mats business, both in the U.S. and international markets. In addition to funding the required capital investments, we expect our operating cash flow generation in the near term will also drive a reduction in debt levels, particularly as we move into the second half of the year.

Last quarter, I mentioned 2 particular areas of focus in our efforts, including foreign cash repatriation and receivable DSO reductions. With the passage of the U.S. tax reform, we expect we'll begin repatriating excess cash from our foreign subsidiaries back to the U.S. parent company, which will help facilitate a reduction in third-party debt. Regarding receivables, we're making progress in our DSO reduction efforts, which helped reduce the working capital requirements related to the growing revenue. These efforts will continue over the next several quarters, which should provide additional operating cash flow generation for the year.

We expect our full year 2018 effective tax rate to be in the mid-30s range. Despite the lower tax rate in the U.S., our effective tax rate remains heavily weighted to foreign operations. With that said, our U.S. profitability remains a key driver to reducing our consolidated tax rate going forward.

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

Thanks, Gregg.

2018 is off to a good start with both businesses delivering solid performance in the first quarter. Is there more work to be done? Absolutely. But our strategy remains unchanged and our performance is driven by our strength of focus.

In fluids, that focus has enabled Newpark to capture global share and expand our relationships with customers both in North America and around the world. We are particularly pleased with our continued relationship building with IOCs as well as the progress made in expanding our technology portfolio with the acceptance of Kronos by a large IOC for a deepwater well in the Gulf of Mexico. A long time coming, but a significant milestone for Newpark in its goal of being a recognized technology leader in deepwater. Also, we are building upon our reputation for service quality, a characteristic that continues to be recognized through independent customer satisfaction metrics. As a result of our focus and our efforts, we now stand as the #3 drilling and completion fluids provider in the world. I believe we are on the right path and gaining momentum.

In our Mats business, our focus and strategy remains unchanged. We continue to grow the business, diversify revenue streams, expand into new market segments and drive innovation. This focus is key to unlocking new potential, improving operating efficiency in the field, providing a one-stop approach utilizing product lines acquired in the acquisition and enhancing our customer service capabilities. And with the recent acquisition of Well Services and Utility Access Solutions, we are seeing our customer base expand, providing new opportunities to solve problems and bring innovative access solutions. Acquisition integrations are difficult and challenging, but when they are done successfully, it takes the business to new level of performance. Our strength of focus is solidifying our position as a leading provider of access solutions across multiple industries.

I also like to close the call by thanking our employees for their hard work and dedication to Newpark. But most importantly, I'd like to thank them for their continued focus on safety.

With that, we'll now take your questions. Operator?

(Operator Instructions) Our first question comes from the line of Praveen Narra with Raymond James.

I guess if we could start on the international fluids side. Certainly, we've seen oil prices improve, and it sounded like there are some more tendering opportunities now. But can you give a sense as to how your customers and how tendering is -- you expect -- do you expect that to kind of roll forward at higher paces as your customers get more comfortable with the oil price or -- and are you seeing any signs of that today?

Praveen, it's Phil here. Yes. I think that's a reasonable assumption. Currently, tendering activity is fairly strong. And I'd say regionally, Middle East continues to show some favorability and Eastern Europe as well.

Okay. Okay. Perfect. I guess turning a bit to the mat side in the T&D -- rig focusing on the T&D side. You guys certainly seeing your T&D market share or T&D sales stayed very stable over the past several quarters. So can you give us a sense, is this growth in the number of customers? Is this more related to current customers taking on more mats? How do you think about that? And if you could, are there any regional pockets of strength? Or is it more broad-based across your fleet?

Praveen, it's Matthew. I'll answer that. Look, I think in answer to the first piece, it is both. I think we are expanding our customer base pretty much across the U.S. And with that comes instrumental opportunities for specific projects. So we're seeing more mats on the ground with more customers is how I'd clarify it. With respect to geographies, I think it is broad-based across most of the U.S. at this point.

Okay. Perfect. And I guess one last one. You guys seem like you're on pace to generate some pretty solid free cash flows move through the back half of this year and into 2019. Can you talk about how you think about that capital allocation strategy as we move into that? Do we prioritize further growth in acquisitions? Do -- are share buybacks on the table? Is it debt reduction? How do you guys think about that?

Sure. It's Gregg. I'll take that. Your -- Yes. You're correct in terms of as you look at the back half of the year, the free cash flow profile is -- does look strong. As we prioritize it -- first of all, we do have an opportunity to reduce our debt. Currently, we have over $100 million on the ABL. That would be the first priority is reducing that a little bit. Obviously, we talked about the capital needs of the business. CapEx expectation has increased and it's more heavily weighted on the mat side and really supporting the growth strategy there. Beyond that -- again, the M&A, that's always something that's on the horizon, always something that's open, and you evaluate the opportunities. But again, the -- it has to have a very clear strategic fit and then you get to the -- last element there is to the extent that you're able to fund all of your needs as well as maintain a comfortable capital structure, that's when you would then revisit the whole thought of share buyback.

Our next question comes from the line of Jacob Lundberg with Crédit Suisse.

Phil, to start off in the Fluids business, you guys have talked about adjacencies the last couple of calls. So I assume you're predominantly preferring -- referring to incompletions fluids. But I was just wondering if you could, in general, talk about how you guys are thinking about some adjacencies in that business, timing, potential breadth of offerings and maybe initial geographies that you would look to step into.

Sure. Happy to take that, Jacob. You're right. There are -- there's some natural adjacent technologies from drilling fluids into completions fluids and then beyond that to stimulation fluids, stimulation chemicals, in particular. We've started to build some organizational infrastructure around that and defining our portfolio and so on. In terms of timing, I'd say that realistically, it's more of a 2019 time frame to see some meaningful revenue there.

And then in terms of focus, this is Paul, on the completions, certainly, we do some work today in the EMEA region in completions. But we certainly see an opportunity in the deepwater Gulf of Mexico being able to bundle our drilling fluids, completion fluids together. With respect to stimulation, in terms of focus, obviously, the North American market is the one that we'd be focusing on.

Okay. Got it. And then I guess sticking on fluids. In light of your comments kind of referring to during the downturn, you maintained some of the cost structure there in order to prepare for the upturn. If we see sort of increased traction in the Gulf of Mexico, which it seems like momentum's starting to build there. What sort of incremental margins do you think we could potentially see going forward maybe in 2019 when you kind of have a full year of momentum there? In some years in the past going predownturn, you showed some very strong year-over-year incremental margins. I guess how are you guys thinking about that?

Yes. This is Gregg. I'll take that. In terms of the incremental margins on the deepwater, I think you kind of hit a key point there, it's as you get going into 2019. I think as you look out that far, that's where you see the incremental margins more in the range of what our typical experience is. There are typical ranges in that 20s, and I would expect that to be no different. You -- there's an important subtle point there. As you're first getting, going, there's some natural costs that go into the early work that cause those early incremental margins to be a little on the weaker side. But over time, you'd think you'd get a little more economy.

Got it. And then last one from me on the first deepwater well in the Gulf of Mexico with the IOC. Is that sort of a trial well, a one-off tieback? Or is this part of a larger program?

Well, I think it's fair to say that we take this 1 well at a time. And for us to be successful in a market such as this, which is fairly flat still, for us to take share it really is 1 well at a time. So we're focusing on this well. So far, things are going well, and we'll go from there.

Got it. And just to be clear -- I wasn't very clear there. Referring more for -- on -- from the operator side.

On the operator side, yes...

Yes. This is a development well, certainly. And if things go well, we would expect to get a second well.

Our next question comes from the line of George O'Leary with Tudor, Pickering.

On the Fluids guidance side for Q2, I understand the Canadian seasonality definitely impacts Q2 numbers consistently. But it sounds like U.S., you'll expect to see some nice growth, and we just look at headline rig count if it stops growing today, you'd be up 5% on average quarter-on-quarter. International, kind of flattish. I guess are you expecting a more pronounced spring breakup? Or did spring breakup start a little earlier than expected? Any color on that, the magnitude of the dip in Canada would be super helpful.

Okay. It's Gregg. I mean, in terms of the activity that we're seeing in Canada, I don't think there's anything particularly unusual about the spring breakup. Right now, you look at the rig count, again down a little north of 60% from Q1 levels. That's pretty consistent with what you typically see. And so we're not noticing anything that's out of line with kind of the historical seasonality.

Yes. I think it would lean slightly towards a better breakup. We're holding a reasonable rig count. I think the bottom of the breakup, if I can say that, is in the rearview mirror now. And we'd start to climb our way out of it now.

Okay. Okay. Yes. I was just -- it seems like there's some tailwinds on the fluids side, and we are modeling the quarter down slightly. But the incremental color there is super helpful. And then on the international side, it sounds like bidding and tendering activity is up. In discussions with customers, I guess could you frame how that pricing discussion is going? It seems like some of the larger peers just broadly for international services work might be being a little bit aggressive, but I don't know if that translates into the fluid side. So how do you characterize international bidding activity from a pricing perspective for you all?

Yes. It remains a competitive environment. And so we continue to promote new technology wherever we can to overcome that.

Yes. I think that's the real key, right? Our whole focus is to try to compete on differentiated technology, driving operating efficiency. And so we'll continue to do that as we bid on tenders.

Got it. And I'll sneak one more in if I could. The Saudi data point, while it sounds like it's smallish in the near term is certainly an encouraging one, given that would be an area you'd expect to see at least stable activity. And you can take market share and probably nothing else on the gas side, increasing activity in that market. So maybe any color on through time, how big that market could potentially get for you? Or what you view as the overall market opportunity and then we can make our own market share assumptions. I realize it's a longer-dated potential earnings upside, but just kind of framing that opportunity would be great.

Yes. It's tied to the size of the lot, really, in terms of what we would realize there. It's premature to offer additional insight.

Yes. I mean -- Saudi, as we all know, is the largest market in the Middle East. And so we would hope that again, as we begin to penetrate that country, we would be able to emulate some of the success we've had in Kuwait where historically, we've gone head-to-head against the large service companies so...

That's helpful. And maybe just -- what the overall drilling and completions fluids market is there, just to frame the overall market. Obviously, I'm not going to assume you guys take a -- the lion's share of that or anything but...

Yes. In Saudi, you're talking about specifically?

Yes.

Yes. I don't think that there's -- I don't recall any data on that. But certainly, you can look at the number of rigs that they're drilling with and give you a comparison to countries like Kuwait. It's significantly larger.

(Operator Instructions) Our next question comes from the line of Ken Sill with SunTrust.

You guys spent a fair amount of the -- a good portion of the press release talking about the Sonatrach award and how that's -- they're limiting the size. I'm just wondering if you could give us maybe a little bit more color on is Sonatrach planning to kind of split this up and have more providers so the odds of you at least getting a piece of this are pretty good? Or -- I guess the risk is what are the odds that you might lose the whole thing. I know that's a tough question to answer but looking for some color there.

Yes. Thanks for the question. The big packages have been opened. Hence, our indications. But -- so we do expect to win an award. There are multiple lots. The sizable lots, the first 3 lots, the winners of those can only win a single lot. So the process is still playing out. We expect to win, although, there are still, obviously, no guarantees as the process plays out.

And I would just add to that. Again, going back to the commentary in the press release, the big change is that under the previous tender, we had 2 lots, lot 1 and lot 3. And the approach that they followed here for the procurement process has limited the major service providers to a single lot.

Okay. That actually is very helpful. It helps us kind of quantify that. Another one. We've had a very cool damp snowy spring so far in the Midwest. I'm wondering if that -- holding over into April or if it continues in May, June. I mean, what kind of impact could that have for you guys considering the integration of the new operations up in Midwest?

Yes. Ken, it's Matthew. Look, I think it kind of piggybacks off Praveen’s earlier question on our penetration into the T&D markets. I think that's a particular region where there's substantial opportunity, and we're looking to continue to leverage new customer relationships and projects that are on in that area to grow share.

And certainly as it relates to whether, when it's -- wet weather and rain that certainly helps the rental revenues. So we'd see that as some uplift.

Is there a particular part of the region that we should kind of be more -- have on our radar screen, so to speak? Or is it pretty much the whole Ohio River valley area?

I don't think it's -- it could be limited. I think the projects are propping up growth throughout the network based on what we're seeing at this point, Ken.

Our next question comes from the line of Bill Dezellem with Tieton Capital.

I'd actually like to continue the Sonatrach discussion, if we may. Would you help us understand what their logic was for only awarding 1 lot?

Yes. It's really hard to say how -- why they'd go in the direction. I mean, it's not unusual for NOCs to change their bidding practices as they go forward in time. So I -- we just see this as a standard change that they're going through.

And then secondarily, on the last call, it felt like you were being a bit cautious on the Gulf of Mexico opportunity simply due to the lower level of activity, and this quarter, it seems as though maybe you're feeling a bit more favorable. Is that due to market share gains and further anticipated gains? Or are we simply misinterpreting your view?

Well, the award of this first well with this major IOC really is good news. And the duration and rigor of the testing over the last 18 months that they've put our fluids through has been significant. But it now serves us very well. Both the fluid and operations have -- as a result, their credibility has increased in the eyes of other operators. And so yes, you're sensing an increased sense of optimism.

And this particular well that you're -- or this rig that you are on, what is the duration of the program that, that rig is anticipated to complete?

We said in the script that we expect the well to be finished within the quarter. But it's a deepwater well and there's uncertainties around such operation.

Yes. I mean, the rig is deployed to this IOC. I don't know what the length of the contract is. I don't think it's a short-term contract. But again, as I mentioned that -- we've got the 1 well. If done successfully, we believe that there will be a second well behind that.

Put well. And the reason I was posing the question as I did is if understand correctly that -- there are some real switching costs if -- to take you off of the rig. So if you do a good job that as long as that rig is running, you are likely going to stay on the rig. Is that a correct interpretation?

Yes. Yes, within reason. And so it's great that this IOC has switched to us and that we're taking off this well with them.

Yes. I mean, it certainly doing a good job is what we do everywhere we operate. But again, with our new Kronos technology, we think there's some really unique value in terms of the low ECD. So we'll do an outstanding job servicing the account, and we're hoping that the customer really sees the value of the new technology and wants to continue to run with it and expand.

Actually, Paul, for those of us who are neophytes, would you please share with us what those advantages are?

The key there is the low, what I'd call, ECD, or equivalent circulating density, right? So those are the big things, especially with the new regulatory climate in the deepwater Gulf of Mexico. And so that's the key. Do you want to add some comments, Phil?

Yes. So it limits pressure surges down hole when you're drilling in very tight, narrow pressure windows.

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Sure. Thank you once again for joining us on the call and for your interest in Newpark. And we look forward to talking to you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.