Oil States International Inc (OIS) 2003 Q2 法說會逐字稿

Good morning. Welcome to the Oil States International second quarter earnings conference. My name is Caitlin. I'll be your coordinator today. At this time you are all in listen-only mode. There will be a question and answer session following your presentation. You will receive instructions on how to ask questions at that time. If at any time during the call, you require assistance, please key star zero. An operator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. At this time I would like to turn the program over to your host, Mr. Brad Dodson [ph]. Sir, Please go ahead.

Thank you. Welcome to Oil States International second quarter 2003 earnings conference call. Our call today will be led by Douglas Swanson, Oil States' President and Chief Executive Officer; and Cindy Taylor, Oil States' Senior Vice-President and Chief Financial Officer. Before we begin, I would like to caution listeners regarding forward looking statements. To the extent remarks today contain information other than historical information, we are relying on the safe harbor protections afforded by federal law. Any such remarks should be weighed in the context of the many factors that affect our business including those risks disclosed in our Form 10-K and our other SEC filings. I'll now turn it over to Doug.

Thank you for joining us today. We're pleased to announce that Oil States Industries completed the second quarter of 2003 with strong operating and financial results led by a recovery in the North American land drilling activity, strength in our Offshore Products Group, and the impact of acquisitions completed during the third quarter of 2002.

Our EBITDA during the quarter was up 30.1% to 22.1 million compared to 17 million in the second quarter of 2002. Net income was 21 cents per share compared to 17 cents reported in the second quarter of 2002, an increase of 23%. The effective tax rate in the current quarter was 26.4%. That compares to 22% in the second quarter of 2002. Our performance was strong despite weaknesses in the Gulf of Mexico and deep gas drilling coupled with an extended breakup in Canada. However, with the exception of our workover asset, asset utilization was strong during the quarter. The US rig count was up 14.6% from the first quarter to 1,028 rigs. This is a 27.3% increase over one year ago. The Canadian rig count was down sequentially due to normal seasonal patterns, but was up in the second quarter of 2002 by 37.8%. Despite this strong utilization of our assets, revenues and profitability were not as robust as they could have been due to lack of pricing power, which was caused by the mix of drilling activity, where was a concentration on shallow drilling rather than offshore and deep land gas drilling.

At this time, I'll turn the program over to Cindy Taylor to discuss our financial results.

Thanks Doug. Good morning. For the second quarter 2003 we reported operating income of $15.2 million on revenues of 163.6 million. Our EBITDA totaled 22.1 million in the current quarter. These results compared to 11.4 million of operating income on revenues of 150.8 million for the second quarter of 2002. Our second quarter 2002 EBITDA totaled 17 million. That made our current quarter performance reflect an 8.4% year-over-year increase in revenues and a 30.1% improvement in EBITDA. Sequentially, our revenues were down 11.9% and EBITDA was down 17.4% due primarily to the seasonal nature of our Canadian operations.

Our net income totaled $10.2 million or 21 cents per share for the second quarter 2003. This compared to 8.2 million or 17 cents per share for the second quarter of 2002. The second quarter 2002 net income was benefited by a 22% effective tax rate, while our second quarter '03 earnings do reflect a 26.4% rate. This low tax rate in both periods is due to the partial utilization of our net operating loss carry-forward. We re-looked at our tax rate for the year 2003 and came up with a rate that approximates 28%. You will see that 28% in Q3 and Q4 going forward. The 26.4% rate in the current quarter picks up the adjustment for the first quarter to get to that annualized effective tax rate.

As Doug mentioned, our second quarter results reflect the benefits of improved North American drilling activity, continued strong performance from our Offshore Products segment, as well as contributions from the acquisitions that we successfully completed in the third quarter of 2002. Our balance sheet remains very strong with a net-debt-to-capitalization ratio of 21.6% at June 30, 2003. Our debt levels were reduced during the quarter by strong cash flow from operations, as well as, a reduction in working capital needs in Canada partially offset by an inventory build, which was primarily in our Tubular Services operation as well as capital expenditures made during the quarter. Our current cash borrowing rate remains at less than 3.5%. We have approximately $35 million to $40 million of availability under our credit facility.

At this time, I'd like to turn the discussion back over to Doug, who will go through a more detailed review of activities in each of our business segments. Then we will both provide you with our thoughts as to the market outlook going forward.

Thank you Cindy. At this time I would like to go through each of our business segments. The first segment would be our Well Sites Services segment. Our revenues in the second quarter were $52.9 million, up 3.9% from the 50.9 million one year ago. Our EBITDA was 11.8 million, up 37.8% from the 8.6 million in the second quarter. Our EBITDA margin in 2003 quarter was 22.4% compared to 16.9% in the second quarter of 2002. This 3.2 million increase in EBITDA on a year-over-year basis came from each of the business segments. The accommodations segment was up 1.3 million. The drilling segment was up 1.4 million. Rental was up 400,000. Workover was up 100,000. We had a decrease in EBITDA of 7.7 million from the first quarter. This was largely due to the reduced contribution from the Canadian operations due to normal seasonal factors.

In looking at our Accommodations Group, our revenues were 25.3 million in the second quarter of 2003, down from 28.7 million in the second quarter of 2002. This is an 11.6% decrease. However, our EBITDA was 5.3 million, up 34.4% compared to the 3.9 million in the second quarter of 2002. We also had a margin increase. Our margins in the second quarter of '03 were 20.8% compared to 13.7% in the second quarter of 2002. Our lower revenues were attributable primarily to the mix of business. In the second quarter of 2002 we had a significant amount of revenue from forest fire activity. This was more than offset on an EBITDA basis by the higher contribution we received from our large camps that served mining, construction, and pipeline projects in the second quarter of 2003.

In looking at the US, our US opportunities were down primarily because the Gulf of Mexico has remained fairly weak as a result of the low rig count in the Gulf of Mexico and lower overall activity in that market.

The other business line I'd like to talk about is the workover business. Looking at the workover business, revenues in the second quarter of 2003 were 8.1 million, up 5.8% from 2002. Our EBITDA was up. It was 1.5 million, up 100,000 from 1.4 million in 2002. Our margins in 2003 were 18.4% compared to 18.5% in 2002.

Sequentially, going back to the first quarter, our revenues were down 11.6%. Our EBITDA was down $1 million or 40% to 1.5 million from 2.5 million. Sequentially activity was down primarily in the Gulf of Mexico. Our utilization in the second quarter of 2003 was 31.2%. That compared to 35.8% in the first quarter of 2003 and 28% in 2002. Our day rates also suffered in the second quarter of 2003. They averaged $9,900 a day compared to $11,200 a day a year ago and 10,100 in the first quarter. Our costs were also higher. As a result we have a net margin of $2,700 a day in the second quarter compared to $3,600 a day in the second quarter of 2002 and $3,500 a day in the first quarter of 2003.

In looking at our rental tool activities, activity was strong during the quarter. We had an increase of activity as determined by the actual number of rental tickets we had. During that period of time, our rental tickets were up 30% year-over-year. However, we had a lack of pricing power with this increase due to the mix of activity, which was concentrated more on shallow land drilling than deep land drilling and Gulf of Mexico. We had increased activity and our revenues were up 28% to 10.4 million compared to the 8.1 million in 2002. Our EBITDA was up also 400,000 to 2.5 million, a 21% increase from the 2.1 million in 2002. However, because of the mix of business, our margins were 24.4% compared to the 25.9% in the 2002 quarter.

Looking at it sequentially, we were impacted by our mix of business. This is shown in the sequential comparison in that the second quarter of 2003, our revenues were down 3.8% from the first quarter. Our EBITDA was down even greater, 9.8%. EBITDA was 2.5 million compared to 2.8 million in the first quarter of 2003. Our margins in the second quarter were 24.4% compared to 26.1%. Again, we were impacted by the mix of business. It was mainly the less quality-type rental items that we had for shallow drilling rather than deep gas drilling and offshore drilling.

In looking at our drilling segment, we had significantly improved results on a year-over-year basis. Our revenue was up 40.7% to $9 million from 6.4 million. Our EBITDA was up 113% to 2.6 million from 1.2 million. Our margin was 28.8% compared to 19% in the 2002 year. We also had significant improvement sequentially. Our revenues were 9 million, up 19.6% to 9 million from the 7.6 million in the first quarter. Our EBITDA was up $1 million or 63% over the previous first quarter. Our margin was 28.8% compared to 21% in the first quarter.

We had strong utilization during the second quarter. Our overall utilization was 90% compared to 89.5% in the second quarter of 2002 and 80.7% in the first quarter of 2003. In looking at our utilization by geographical area, we had effectively 100% utilization where our Texas rigs were operating. However, the four rigs in Ohio suffered from the wet weather conditions and had a lower utilization, that brought our utilization down. We had a significant increase in our average day rates during the quarter. Our average day rate in the second quarter was $7,400 a day. That compared to $6,500 a day in the quarter one year ago and $6,900 a day in the first quarter 2003.

In looking at this increase-[and] our margins accordingly increased. Our cash margins per rig were $2,300 a day in the second quarter compared to $1,400 a day one year ago and $1,600 a day in the first quarter of 2003. To understand this insignificant increase, it should be noted that we operate on a footage basis. Our rates per foot had very little increase in their pricing-what we were able to do because the high level of activity affects more efficient operations-more cost-effective operations and enabled us to have a significantly higher effective day rate. Looking ahead, utilization and backlog visibility remain strong, both in Texas and in Ohio. Our drilling commitments are into the fourth quarter. We have seen, and are now experiencing, some improvement in day rates going forward. We have expectations that our average effective day rate should increase in the third and fourth quarters.

In looking at our Offshore Products segment, our revenues in the second quarter were 57.2 million, up 22.9% from the 46.5 million in the second quarter a year ago. Our EBITDA was 10.5 million, up 23.7% from the 8.5 million in the second quarter. Our margins in the second quarter were 18.3% compared to 18.2% a year ago. In looking at our first quarter of comparisons, our EBITDA was up $3 million on basically the same sales from the first quarter of 2003. Our margin increased from 13% in the first quarter of 2003 to 18.3%.

Our backlog at the end of the second quarter was 80.2 million. That compares to backlog at the end of the first quarter of 80.9 million-it was essentially flat,and 98.3 million a year ago. It should be noted that we had one significant lost job in our Offshore Products Group. A sea pipeline job incurred a $1 million loss in the first quarter. In addition we had another $400,000 loss that was recorded in the second quarter applicable to that project. We do not anticipate any further losses in that area. Our backlog was essentially flat with the end of the first quarter. We expect that more than 80% of our backlog to be shipped during the last half of 2003.

Our last business segment is our Tubular Services segment. Our revenues in the second quarter of 2003 were 53.5 million, the same as the 53.5 million a year ago. Our EBITDA was 1.4 million compared to 1.2 million in the second quarter of 2003. Our gross margin was 5.9% compared to 5.7% in 2002. In looking at it sequentially, we had a slight increase in revenue in the second quarter compared to the first quarter. Our revenue was 53.5 million compared to 49.2. Our EBITDA was $200,000 better. Our gross margins were the same in both quarters, but our EBITDA margin in the second quarter of 2003 was 2.6 compared to 2.3% in the first quarter of 2003.

Our inventory increased during the quarter. Our inventory at the end of the quarter was 72.6 million. That compares to 65.1 million at the end of the first quarter and 38.3 million one year ago. In looking at the tons shipped, we shipped 60,900 tons in the second quarter. That compares to 57,000 tons in the first quarter and 60,700 tons in the second quarter of 2002.

Our order book has increased significantly during the quarter. At the end of the second quarter we had orders for $66.8 million worth of product. That is up from 59.3 million at the end of the first quarter of 2003 and 49.5 million one year ago. Quoting activity is increasing. We did build our inventory during the year. Our bookings have increased significantly. Approximately [62]% of our inventory is committed to customer orders that were outstanding at the end of the year.

In looking at the market conditions going forward, we have seen in the last quarter the improvement in rig count has been focused primarily in shallow land drilling activity requiring more carbon-grade pipe. Prices are at low levels. Mills have implemented price increases. We have seen some impact from that going forward.

In summary, in reviewing the quarter, we maintained high utilization of equipment and facilities during the quarter. We realized improvements in our Well Sites Services operation driven by these increases in drilling activity. Our Offshore Products Group had a strong quarter in terms of sales, margins, and bookings. Our Tubular Services Group realized sequential growth despite slow Gulf of Mexico drilling and deep land drilling. Lastly, our acquisitions that we completed in 2002 are being integrated successfully and are positively contributing to 2003 results.

In looking forward to the balance of the year, the key drivers again are the deepwater infrastructure development and North American natural gas drilling. Approximately 85% of our revenues are attributable to North America. In our Well Sites Services business segment drilling rig utilization has been strong. And rate improvement should occur in the second half of 2003. Canadian drilling activity experienced normal seasonal declines in the second quarter. We expect that it will pick up during the summer season. We are looking for a strong third and fourth quarter. Our rental tool contribution increased year-over-year due to acquisitions completed in 2002. We had significant increase in actual ticket activity and billings. We have increased the capability of our equipment. We expect that pricing going forward should improve with an increase in Gulf of Mexico activity and deep gas drilling. Our workover demand was very weak in the Gulf of Mexico during the second quarter and could remain weak in the third quarter, however, we do anticipate a pickup in activity in Venezuela where we have a fairly large presence. In our Offshore Products Group we have a strong backlog position despite strong sales in the first and second quarters. Quoting activity has slowed somewhat for deepwater production facilities and equipment, but it has increased significantly for subsea pipeline work. We're looking to maintain our EBITDA margins in excess of our target of 15%.

In Tubular Services we expect to realize improved revenues during the remainder of 2003 with an increase in Gulf of Mexico activity and deep gas drilling. Gross margins should exceed 6% going forward. On a consolidated basis, we expect continuous improvements in the Tubular Services and Well Sites Services segment with the expected increases in the Gulf of Mexico and deep gas drilling. However, these improvements could be moderated by tropical storms in the Gulf of Mexico. The balance of 2003 should be strong for our Offshore Products segment given its backlog position. Our consolidated outlook is continuing to improve. However the extent of our growth in the second half will be dependent upon improvements in the Gulf of Mexico drilling and deep gas drilling activity. Given these above factors, we estimate the range in earnings for 2003--our annual earnings for 2003 will be between 90 cents and $1 per share.

We would be pleased to answer any questions you might have.

Ladies and gentlemen, if you wish to ask a question at this time, you may do so by keying star one on your touch-tone phone. If your question has been answered or you wish to withdraw it, please key star two. Questions will be taken in the order received. Please key star one to begin. Your first question, sir, comes from Mr. Will Foley [ph] of Sidoti.

Good morning. The question I have is regarding the offshore Gulf of Mexico--the lack of activity that we have seen thus far relative to the onshore. I am curious about your thoughts or insights in terms of why that is happening. Are if you seeing any signs that we will see a pickup in the offshore Gulf of Mexico in the second half?

With respect to why we've had the slowdown, everyone has their own opinion. To address the other half of your question, we have seen indications of a pickup in Gulf of Mexico activity. The rig count has picked up - two rigs in the last week or so. As we indicated, we had a buildup in our bookings in our Tubular Services Group. A portion of that we do attribute to Gulf of Mexico drilling and deep land drilling. Secondly, in the last week or two we've seen significant increase in the plans in our Rental Tool Group with respect to activity in the second half of next year. I think we view both of these as positive indications that the hoped for and anticipated return of activity in the Gulf of Mexico actually may materialize.

OK. That's all I had. Thank you very much.

Your next question, sir from Bill Seawell [ph] of Simmons & Company.

It's actually William Herbert. Doug and Cindy, you mentioned the impact of the Gulf of Mexico hurricane or tropical storm that we had earlier in the quarter - Claudette. Could you possibly quantity that impact on your third quarter results.

I'll give you some kind of a random ballpark. We have not done a literal quantification of what has occurred so far. We have talked to our business group at this point. The estimate--where it most impacts us when a storm comes in like that, is our rental tool operations, our workover operations, and the accommodations. That is largely because all of that is callout work. When they see an indication of a storm beginning, they delay the callout of that work. It tends to have more of an exacerbating effect than the actual duration of the storm itself. The view that our people have is that in July we lost 10 to 12 operating days due to the storm that came in during that period. As I recall-and this is off-the-cuff, we lost about a penny a share last year on about half as many days. There is no magic to this quantification other than based on estimated days lost. I'd say you are talking about roughly two cents a share at this stage without a mechanical calculation being applied to that. We are looking for growth sequentially. The comment there is the existing storms that we have incurred plus the potential for future storms could moderate that improvement.

Sure. As a follow-on to that, Doug, quite a bit of your outlook for the second half of the year seems to be premised on a recovery in the Gulf of Mexico. Assuming that the Gulf of Mexico continues to be characterized by an intransigence on the part of the E&B companies with respect to pursuing any incremental drilling activity of any significance, how would that re-characterize your outlook for the second half of the year?

I think if you look at our performance in the first and second quarters--if you take our second quarter without an increase in the Gulf of Mexico activity or deep gas activity, we would still see significant revenue production in EBITDA from our Offshore Products Group. That will not be affected by that. Our other groups' performance would be the same. Our drillings rigs, I think, will continue to improve as we indicated earlier. Our Tubular Group I expect will improve even if there isn't an increase in Gulf of Mexico and deep land drilling because of the fact that their backlog has increased significantly at the end of the second quarter. Lastly, Canada looks very strong. Their performance should be good in the third and fourth quarters. I think we've got the increase in Gulf of Mexico activity, if any, or the increase in deep land drilling is a positive upside to us that may materialize. However, our base of operations would not be adversely affected if these two increases do not occur.

OK. Lastly, you were kind enough to provide us with guidance for the full year and implicit guidance for the second half of the year. Can we talk about the third quarter a little bit - possibly a two-cent impact from the storm. Yet we have a recovery with respect to Canada and the assumption of a general overall recovery-at least a continuation of one with respect to the domestic drilling activity. The consensus estimate, I think, is 24 cents a share. Last quarter you gave us a range of EPS for the second quarter. What is your sense as to the third quarter in terms of range possibilities?

We haven't broken down the quarters. Obviously I think there is some potential that you could have a flat sequential performance with the storm activity. I think that could possibly go as high as the 24-cent consensus depending upon market factors. I don't see it going above that.

OK, so basically 21 cents to 24 cents?

Yes.

OK. Thanks a lot.

Your next question from Ken Sill of CSFB.

Good morning. A couple questions. You are talking about a strong rebound in Canada. That is visible already. We are running very high rig counts there. Are you getting any early indications of the what the winter drilling programs are going to look like?

Our people in Canada have indicated to us that they have gotten a lot of inquiries from the drilling companies and E&B companies in Canada. They expect very high utilization of rigs and our camps during the winter season. If weather conditions are good in the sense that we have a cold fall and an early freeze, we could have significant activity in the fourth quarter. However, I'll qualify that and say that they felt the same way last year. We didn't have the cold weather. The season never materialized as we had hoped because it didn't start until early in January. The expectation is that they will have strong activity during the year. It is expected to start in the fourth quarter if weather conditions are appropriate.

I'd like to follow-up a little bit on the offshore products. You had really good margins. Even if you assume that you got--it looks like a $600,000 sequential improvement from the pipeline loss being a little bit lower. What is driving the profitability in the offshore segment? Could you give us a little feel for that?

At site we just had a very strong quarter in terms of both activity and performance. As we said at the end of our last quarter, our mix between our proprietary products and the balance of our other products and services was good going into the quarter. The key has been not only the mix, but the performance on those projects. We keep detail more by product line. Comparing the sequential performance of our bearings and connector products, which is the key to our growth and profitability this quarter, went from gross margins of 28.9% in the first quarter to 34.7% in the second. As we told you, the mix remained good going into the quarter. We also had good execution on projects that we had. You will notice or recall that our gross margins were about this level at the same quarter last year. We did suffer disappointment in the first quarter with the loss that Doug mentioned earlier.

Would you expect those kind of margins to be consistent as we move into the second half?

We're looking at-we still have the same outlook that we had at the beginning of the year based on backlog terms, which suggest EBITDA margins in the 15% to 16% range for the last half of the year, which compares to stronger margins in the second quarter. The mix that we have so far --we do very well on our subsea pipeline projects. That is where most of our backlog build is coming from right now. The gross margins have not historically been quite as high as our bearing and connector products.

OK. Thank you.

Your next question from Stephen Gengaro of Jefferies & Company.

Thank you. Good morning. Two questions. The first on the tubular side, you talk about the inventory levels in dollar terms. Can you give us a sense on a per-ton basis what the value looks like relative to what your forward sales look like? I am trying to get a sense for where the margins could go in the second half of the year.

Are you asking for the average value of our inventory? Is that what I heard you say?

Yes.

We closed the quarter with an average value per ton of about $780, which compares to 788 at the end of December 2002. We've had a slight reduction due to mix in the average cost-per-ton of our inventory. We feel like we have a very strong inventory in terms of quantity. We also think it is valued very well for the market going forward. The mills have announced steady price increases throughout the year. We don't see the cost of inventory going down. We feel very comfortable with our inventory position at the end of the quarter.

I will point out that our average cost is less than it was at December 31. This price level is the average price that we had in early 2000. We have a relatively inexpensive or cheap inventory.

OK. As far as the inventory that is currently committed for sale, does that imply higher margins than you posted in the first half of the year in Tubular?

I think in our comments we commented that we expected our gross margins in the last half of the year to exceed 6%. That would be a fair statement.

OK. Second, Doug, just to clarify this. You talk about 90 cents to $1 for the full year. I was a little unclear. Does that include a recovery in the Gulf of Mexico? Do you view a recovery as putting you at the top end or possibly even over the top?

It includes what we think is a more gradual or more modest recovery in Gulf of Mexico and deep gas drilling. It particularly will impact Tubular Services. It will also impact our US Well Sites Services to a certain degree. I think the key is that possibly the rate of that increase, or our sense of that rate of that increase, has been moderated throughout the last month to six weeks. We do see improvement. We are expecting improved volumes in our Tubular Services Group. We are not seeing the type of volume increases that would necessitate or lend to us the ability to increase pricing. We have had virtually no capacity to put through price increases in virtually any of our business lines in the first half. We see that being moderated or limited in the second half due to activity levels.

An increase in the Gulf of Mexico activity and deep land drilling primarily affects just two product lines that we have. That is rental tools and our Tubular Services. It has a modest effect on accommodations. Those two would be the business segments or product lines that would benefit most significantly from an increase in activity.

Thank you. That is very helpful.

If there are any further questions at this time, press key star one now. Your next question, sir, from William Herbert.

A follow-up. You mentioned escalating costs in the workover segment of the Well Sites Services unit, which contributed to the sequential erosion in cash margins. What took place there?

It is predominantly the lower utilization that we experienced led to some inefficiencies on a operating cost-per-day. We've done nothing to increase our cost structure there.

We have a high fixed cost there. When utilization goes down, we don't have significant reductions in workforce or things like that. Our average cost per unit or per day goes up.

Let me ask you a broader question about the Gulf of Mexico-getting back to that subject. Assuming that we witness an improvement in activity, but it isn't heroic and it doesn't come close to retracing back to prior levels, are you satisfied with your cost structure as it relates to the Gulf of Mexico and your activities there?

Yes. We're still doing well. We're still showing--we have increased activity in these business segments and the cost structure we think is appropriate for the levels we've experienced the last half of the year. We can--if there is an increase in activity, we can handle that increase without any increased costs. If it doesn't materialize, I would not envision any implementation of any cost reduction programs.

Last question with respect to deal flow, how would you characterize it right now from an acquisition standpoint?

We have talked about it. We didn't have too much activity at the end of the first quarter. We have taken a lot more proactive measures ourselves. Deal flow--I don't know whether it is virtue of the market or virtue of our activity levels. It has improved. The primary areas that we see deal flow in and that we look at day-in and day-out for these pull-through type private company acquisitions are in our rental tools fleet, the accommodations area, as well as offshore product-type add-ons. I would say that the deal flow has increased quite a bit since the end of the first quarter.

Thank you.

Your next question from Terry Yarling [ph] of Goldman Sachs.

Thanks. I want to follow-up on the Tubular Services side. Doug, I'm trying to get a sense for what your plans are in terms of the inventory level as you move through the back half of the year. Do you anticipate that number coming down or remaining static. What other color can you offer us?

It will not increase. I think we'll keep that inventory level for a while. I don't see an increase in it. It has been our experience that we try to analyze the whole drilling activity and the rig count going forward. In the past we've been successful in reducing the inventory prior to the decrease in rig count. I think at some point in time in the future--I don't know when that would be at this time, we would reduce that inventory. Right now we are very comfortable with it; 60% of it is committed. It is pipe that is easily moved. We don't think we are at any risk with that inventory. We would not want to increase it significantly.

OK. On the offshore products side, a couple questions. First, the backlog - I was expecting that to come down in the quarter. That held up nicely. Can you add any color? Secondly, my impression from prior conversations was that you saw the acceleration in your Offshore Products business from deepwater development activity as more second half '04 - '05 type of story. Has the visibility on the first half of '04 for that business changed at all over the last three months to four months or so?

Terry, I'll try to respond to that as best I can. I think you are recalling correctly. At the end of our first quarter and on our conference call we cited that we thought Offshore Products backlog was likely to decline modestly by the end of the second quarter. That was based on the level of floating activity that we were seeing at the time. It did come in effectively sequentially flat, which was a pleasant surprise for us. Part of that, I think, is the timing of the orders, but also the character of it. A lot of the major PLPs, when we're doing the flex joints and the semi-connectors, have longer lead times in terms of visibility and quoting activity. That is why we developed the sense that we did. We didn't see the big major projects on the horizon that were dramatically going to move that backlog. We've had significant increases in subsea pipeline-type activities, which is a little bit lower lead-times such that you can get that in a month or two, even though you hadn't seen it three months ahead. We've got good activity there. We've had good activity in some of our other business lines as well. That doesn't have the lead time that some of our bearings and connectors do have. We can get bearing and connector orders quickly too. In terms of '04 visibility, right now I wouldn't say there is anything we see dramatically changed at this time. A lot of that is based on industry studies that we get, '04 still looks to be very good and '05 looks to be extremely strong at this stage. I'll let Doug add anything to that.

To quote a research report I read the last two weeks about FMC's decrease in their backlog. They say they attribute it to being lumpy--business is lumpy. We have seen that there is no predictability to when these orders will be released. We're pleased that our backlog remained at the 80 million level. Predicting backlog on a quarter-to-quarter basis is a very difficult thing to do because it is dependent upon spending plans of the oil companies, which we are highly confident that they will do. When they release the contracts is the big factor.

OK. I need to come back to the Tubular Services side with another question. It looks at face value like your average revenue per ton was up sequentially. It is hard to discern what is going on with mix and any other items in there. If we were to think more on an apples-to-apples basis, whether you think you did see some higher price realizations and/or what impact you might be seeing on your prices currently from the price increases put through by the OCTG manufacturers themselves.

We are impacted somewhat by the price increases. However, we do have low-cost inventory. We indicated to you that we expect margins to exceed 6%. With our low-cost inventory, if there is an increase in the prices of the pipe, we will see higher margins going forward. As one of the largest distributors, we do have good purchasing power. We're able to get decent pricing.

OK. Last question. On the opportunities you see to make incremental investments-whether it's with organic cap ex or with acquisitions - within your business segments, what do you see are the best return opportunities at this point?

We've seen the increase in activity. We would anticipate both organic growth and acquisitions going forward. We see organic growth in our rental tool area by adding equipment that has greater capabilities and will generate higher revenue for us. We see growth in the accommodations group. We see opportunities to add equipment that will be beneficial to us in the long term if there is a McKenzie pipeline and any increased activity up there. We also see growth in the drilling rig area. With respect to acquisitions, I think the acquisitions would be primarily in our rental tool area and maybe in our accommodation area. We're always looking for additional products to add in our Offshore Products Group, which could be either organic-come through organic growth or acquisitions.

OK. Thanks Doug.

Your next question from Ken Sill of CSFB.

Two quite follow-ups. One, SG&A was down a little bit from where I though it would be second quarter. Do you have any guidance from that on the second half?

SG&A was fairly flat sequentially. We talked about that. We had been forecasting a level more like 15 million per quarter, which I think is what you're referring to. The play is largely due to our variable base pay from our incentive program. That explains-we would leave guidance in that $15m range for Q3 and Q4 as it relates to the total company SG&A.

OK. Could you comment on the Canadian activity? Do you have a feel for what kind of gas price sensitivity there is in Canada? It looks like they are getting good pricing up there right now. I don't know if any of the forecast prices would impact what you think activity could be this winter.

We don't have a strong opinion that way. I wouldn't consider our group to be that knowledgeable to give you something that we would want to hang our hat on.

OK. Thanks.

If there are any further questions or comments, please key star one now. At this time, sir, it appears that there are no further questions.

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Ladies and gentlemen this concludes your program for today. You may now disconnect.