Oil States International Inc (OIS) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Oil States International earnings conference call. My name is Carlo and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during this call you require assistance, fell free to press star zero, and a coordinator will be happy to assist you. It is now my pleasure to turn the presentation over to your host for today's call, Mr. Brad Doddson. Please proceed, sir.

Thank you. Welcome to the Oil States' fourth quarter 2003 earnings conference call. Today's call 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 we would like to caution listeners regarding forward-looking statements. To the extent the remarks today contain information other than historical information, we are relying on 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. Doug?

Thank you, Bradley and thank you for joining us this morning. Oil States' International completed the fourth quarter of 2003 with strong operating financial results in our well site services and our tubular services segments, led by continued strength in Canadian operations, North America land drilling activity,and the impact of acquisitions completed during 2002 and 2003.

Our offshore products segment was down from the record results it posted over the previous six quarters, due to lower margins. Our performance reflected a flat Gulf of Mexico market, and lower margins realized in our offshore products division. Net income was 19 cents per share, compared to 23 cents per share in the fourth quarter of 2002 and 23 cents in the third quarter of 2004.

Due largely to the mix of drilling activity where the predominant activity was shallow land compared to the stable Gulf of Mexico offshore market and deep land gas drilling, we continue to lack purchasing power during the quarter. However, we still had a 9.2% increase in EBITDA combined in our well site services and our tubular services segments.

During the quarter, we continue to focus on our growth plan for our company and spent 14.5 million on capital expenditures and completed four small acquisitions during the quarter. In addition on January 2nd, we completed the acquisition of several related Texas rental tool companies for cash of 34.7 million. At this time I'd like to turn over the program to Cindy Taylor, who will go through our financial results.

Thanks, Doug. I'll spend a few minutes just going through our consolidated results for the quarter, then we'll go back to divisional review and give you some thoughts as to our outlook going forward.

For the fourth quarter of 2003, we reported operating income of $12.9 million on revenues of 197.4 million. During the quarter, our EBITDA totaled $21 million. These results do compare to 15.8 million of operating income on revenues of $160.8 million for the fourth quarter of 2002. The fourth quarter 2002 EBITDA totaled 22 point 8 million.

This current quarter performance represents a 22.7% year over year increase in revenues, but a 7.9% reduction in EBITDA. Sequentially, our revenues were up 11.4%, and our EBITDA was down 12.3%. For the quarter, our net income totaled $9.6 million or 19 cents a share. Included in our fourth quarter results was a 2 1/2 cent per share charge related to the writeoff of unamortized debt issuance cost associated with our prior bank credit facility. Excluding this one-time charge, our EPS totaled 22 cents a share during the quarter.

However, our fourth quarter tax rate was reduced to 9.5%, bringing our annualized effective rate to 24.25%, thereby positively impacting our earnings by approximately 4 cents per share. This tax rate reduction resulted primarily from statutory rate changes in Canada and state tax planning measures that we implemented here in the U.S.

As Doug mentioned, our fourth quarter results reflect the benefits of improved North American drilling activity, and contributions from the acquisitions that we completed both in 2002, and 2003, which resulted in year over year growth in our well site services EBITDA of $2.3 million or 20.1%. This growth was offset by reduced margins in our tubular services and our offshore products segments. We'll go over those segments in more detail in just a couple of minutes.

Our capital spending totaled $14.5 million during the quarter, bringing our total annual spending to $41.3 million for the year. Our balance sheet continues to remain strong with a debt to capitalization ratio of 23.2% at December 31st of 2003. Our debt increased slightly during the quarter due to capital expenditures, again 14.5 million, and also amounts paid for acquisitions which totaled 14.7 million during the quarter.

Our current cash borrowing rate remains at less than 3 1/2%, and we have about $59 million of availability under our new credit facility. As we mentioned on our prior conference call, we did close a new credit facility during October, and that was done to provide expanded availability and additional term for us. The facility is structured as a four-year commitment, extends to October of 2007. Commitments available are $225 million and there is a $25 million accordion feature tied to that. At this time I'd like to turn the discussion back over to Doug, who will review summarized activities in each of our business segments, and then we'll close with some thoughts as to the market outlook going forward.

Thank you, Cindy. At this time I'd like to go through our business segments with you. We're changing our format from our prior conference calls, and what we'll highlight on today is the sequential progress in the company from our third quarter of 2003. This is -- we're doing this because a lot of the information going back to a year ago is not relevant due to the significant increase in the rig count. We have provided in the press release all of the detailed data for our business segments, in addition it's available in our 8-k filings.

At this time I'd like to go through the major highlights in each of our business segments on a sequential basis. In the well site services, our revenue was 67.8 million, up 19.8% from the third quarter. Our EBITDA was 13.6 million, up 1.1 million or 9.1%. Our margins, however, were down to 20.1% from the 221% in the third quarter of 2003.

The improvement in revenues in EBITDA primarily resulted from strength in our Canadian operation. It increased North American land drilling activity. Sequential comparisons were strong in Canada, due to the start of a very strong winter drilling season, and contributions from our activities in the oil sands regions.

Our land drilling operations increased sequentially in both revenues and EBITDA. Our daily cash margins per rig totaled $2500 a day, versus $2100 per day in the third quarter. We completed building two additional rigs, the first one started late in December, and the second one will commence operations in the next week.

Our rental tool group showed a small increase in revenue in EBITDA during -- from the third quarter, while our workover operations were down sequentially due to continued weakness in the Gulf of Mexico activity.

With respect to our offshore products group, revenue was 57.8 million, down 2.5% from the third quarter of 2003. Our EBITDA was 6.8 million, down 37.9% from the 10.9 million in the third quarter of 2003. And as we indicated earlier, there's a significant decrease in our margins. Our margins were 11.7% in the fourth quarter compared to 18.4% in the third quarter.

Our EBITDA margins declined on a year over year basis, and on a sequential basis due to adverse product mix and integration costs incurred during the quarter. These margin reductions occurred in most product lines but was greatest in our lifting and mooring equipment lines. The impact of integrating our elastomer acquisition in the quarter in consolidating our Houston manufacturing operations resulted in a charge of approximately $800,000 on a pre-tax basis.

Despite these declines in margin in the fourth quarter, our EBITDA margin for the full year was 15.4%, which has been higher than our historical target of 15%. Our backlog at the end of the year was 62.6 million, down approximately 14% from the 72.9 million at September 30th and down 37.5 million from the 100.1 million at December 31st, 2002.

In looking at our tubular services group, revenue was 71.7 million, up 17% from the third quarter. EBITDA was 2.1 million up 9.7%. Our margins, both our gross margin and EBITDA margins were slightly lower in the fourth quarter than the third quarter. Our inventory at the end of the quarter was 64.5 million, compared to 72.7 million at the third quarter. Our turnover rate increased to 4.0, compared to 3.2 in the third quarter. And the tons shipped in the fourth quarter was 81,700 tons compared to 69,800 tons at 17% increase.

Our sequential revenue improvement was driven by volume increases rather than pricing. We had year over year improvements in volumes as well, but gross margins declined in the current quarter, due to higher margin sales in the fourth quarter of 2002. Our order book at the end of the year was 61.8 million. That compares to 70.7 million at the end of the third quarter, and 59.3 million one year ago.

As we indicated, we reduced our inventory by 8.2 million during the quarter. This was in response to the flat rig count we saw in the Gulf of Mexico and also for ad valorem tax planning purchases. Purchase prices increased mildly during the quarter, due to limited price improvements at the mill. We're currently holding three to four months of inventory based upon current level of sales. And approximately 58% of our inventories are committed to customer orders at the end of the quarter.

In looking at the full 2003 results, revenues were up 17.3%. Our EBITDA was up 9.5 -- 19.5%. Our net income was up 12%. And this reflects a 2% higher tax rate in 2003 than in 2002 In addition, we accomplished many of our growth objectives during the year, growing all of our business segments through capital additions or acquisitions.

Looking at the year 2004, the key drivers again for our company, our North American natural gas drilling activity and deepwater infrastructure development, about 85% of our revenues are attributable to North America.

In looking at the outlook for well site services. Canadian drilling activity is very robust. We're looking at a very strong first quarter. Activity in the oil sands is also very strong, and we will benefit from that from our activities in that area. Land drilling utilization is strong today and should continue through 2004. Backlog visibility remains strong in both Texas and Ohio, with commitments extending well into the second quarter of 2004.

Our rental tool contribution should increase significantly on a year over year basis, due to acquisitions completed, rig count improvements, improvements in our capacity of our equipment. Pricing should improve if there is an increase in the Gulf of Mexico activity and deep gas drilling.

Workover demand was weak in the Gulf of Mexico during 2003. We expect some improvements in 2004. We will continue to grow our well site services group through capital expenditures and acquisitions when accretive and economically viable. In looking at our offshore product segments, we're coming off back-to-back record years in 2003 and 2002. In looking at the past year, our fourth quarter EBITDA margins were negatively impacted by product mix and integration costs associated with facility consolidation and an acquisition completed in 2003.

Our backlog position has weakened throughout 2003, both in absolute numbers and the mix of our product. Our quoting activity has slowed for major deepwater production facilities for the major projects that are out there, but has increased for sub-sea pipeline work. As a result, 2004 looks to be weighted to smaller projects and lower margin work instead of higher margin, large offshore development projects. The outlook for 2004 suggests that revenue will be down from 2003 for approximately 12 to 15%, and EBITDA margins will be down 2 to 4% from 2003, due to product mix. Again, we're continuing to look at areas to improve our operations, and we'll be spending capital expenditures to improve our efficiency and to expand our product line.

With respect to our tubular services segments, the improvement in rig count continues to be focused towards shallow land drilling activity requiring more carbon grade pipe. Prices remain at low levels but mills continue to implement price increases and surcharges. Overall the industry inventory declined at the end of 2003.

For 2004, we expect to realize improved revenues with an increase in activity, and price increases. Gross margins should approximate, approximately, 6%. On a consolidated basis for 2004, we expect to significantly improve contributions from our Canadian operations. We expect continued improvements in activity and the results in our tubular services and well site services segments, led by high drilling activity and the rental tool acquisitions and capital expenditures completed recently. Our offshore products group will be down on a year over year basis given its backlog position. In addition, EBITDA margins will be reduced, from 11 to 13%.

Overall, our 2004 outlook still remains strong. The extent of our growth in 2004 will be dependent upon the strength of our Canadian and North American land operations, from our well site services and tubular services group, in relation to the expected reductions in activity in our offshore product segment. We'd be glad to answer any questions you might have.

Thank you, sir. Ladies and gentlemen, at this time if you wish to ask a question, please press star one on your touch tone telephone. If that question has been answered or you wish to withdraw your registration, then press star two. Once again, star one for questions at this time. One moment, please. Sir, our first question is from Bill Herbert, with Simmons & Company International.

Thanks. Good morning.

Hi, Bill.

Good Morning, Bill.

Cindy and Doug, when I was sort of playing around with the model here, as you guys were giving some of the parameters for 2004, it looks like, you know, assuming Oil State revenues -- sorry, offshore products revenues, down 12 to 15%, EBITDA margins, 11 to 13%. The other businesses, for the most part, especially the ones most associated with North American land activity, showing reasonable increases in prosperity. You get an earnings number, which is close to, call it 90 to 95 cents, at least I did. I was just curious to whether you would be willing to share any sort of specific earnings parameters for 2004?

Bill, it's so early in the year with the visibility the way it is, we are not providing guidance at this time. However, you know, what we indicated in our comments was that we expect improved results in our tubular services group, and our well site services segments. From an EBITDA basis, hopefully will offset the reductions in activity in the offshore products group.

Right. So I mean, -- so basically on a year over year basis, you're essentially looking at something which is close to a flat performance. Is that fair.

Yeah, I think that's pretty much what we're looking at.

Great. Secondly with respect to offshore products, trying to get a handle as to whether we're in a period of transition here, and visibility overall for 2005, recognizing that it is early, although the offshore products group does get a window in the long lead time projects, which our other segments don't. But the last time -- see backlog hovering at about $63 million. And last time the backlog was this low, call it second quarter of 2001.

And so a couple of questions here. Backlog, does it likely continue to bleed here? If so, for how long? And I realize that it's tough to answer with any precision, but your expectation and visibility setting up for 2005, recognizing that its early?

Let me address that. Let me point out what's really happened. You characterized 2004 as a transition-type year, and that's what it is. What we had seen in 2002 and 2003 was several, quite a few, significant major projects that the industry and our offshore products group participated in. Just to give you the name of a couple, Thunder Horse Mardi Gras project, the Magnolia project, the Marco Polo project. the Xikamba a, the Xikamba B, [inaudible]. We do not see in the near term projects of this magnitude, which were significant driving of our results in 2002 and 2003. What we're seeing are smaller-type projects, and as we indicated, an increase in sub-sea pipeline activity.

Yeah.

So we think that this is a transition year. We don't think that the dynamics have changed at all, in that there will be continued tremendous growth and expenditures in deepwater Gulf of Mexico, but there is, say, a lull in deepwater projects. With respect to our backlog, at $63 million, we don't see a significant -- we don't see an increase in our backlog in the near term, due to the visibility we have there. But at the same time, we don't see, necessarily, any significant reduction in the backlog. Cindy, do you have anything to add to that?

The only thing I might tag on to that, there's obviously been recent announced success in deepwaters. We don't think the macrotrends have changed. There is a lot of press around the pushback of the west African projects which we are experiencing as well. There are projects on the drawing board that have yet to be drawn to light. In addition to that, there have been new recent successes in deepwater. The outlook on a long-term basis we think continues to look very promising.

I guess navigating from where we are right now, which is sort of in a State of Purgatory here for offshore products, to a period hopefully that's going to re-visit some of the quarters you've had here in recent past, are you satisfied with your cost structure on the offshore products' front?

As we indicated, we took a charges in the fourth quarter for a re-structuring of our Houston manufacturing facility. So we actually have been working on our cost structure all this year. We've actually implemented some of the cost saving measures. We are working on that. We will continue to work on that. We don't think the EBITDA shortfall in margins was a result, necessarily, of our cost structure, other than those one-time charges, but just rather a reflection of the product mix we had, where it was more heavily weighed towards the lower margin products, and also due to underperformance on some of those lower margin projects.

On PTI, I'm not sure if you guys discussed the fourth quarter results. If you did, I missed it. It struck me that EBITDA margins, I think, were kind of high teens, which was a little bit lower than the third quarter. Big sequential lift as is always the case from a revenue standpoint but margins lower. What's going on there? Is it just a mix issue?

Margins were modestly lower in the fourth quarter. I would say that there's a couple of things that went on, part of which, we had an early start to the winter, which is a favorable thing overall. But, what it does cause us to do, is incur startup and mobilization of cost of your camp in early December, a little bit of preparatory work involved. That group has also done exceedingly well relative to their plan. So there was some variable-based pay accruals included in there as well. And certainly, you know, mix plays a part. But I would say in general it's probably timing, largely timing of costs associated with camp startup operations. But on a total basis, that's a good thing.

Okay.

It didn't hit us until January of last year, as you will recall, but that was exacerbated because we got a late start to the winter and they were much higher. But this was a discipline mobilization of camp with an early start to the winter. So we feel good about the total operations there.

Okay. And given that last two first quarters for PTI generated EBITDA margins hovering at around 25%, last time we witnessed this kind of drilling activity would be kind of, I guess, Q1, '01, where margins were north of 30%. Do we think that margins get closer to the first quarter of 2001, or somewhere in between where we have been in sort of those record margins?

I think they will be between the 25 and 30%. And the dynamics are similar in terms of activity to what you had in the winter of '01. The one difference to that, we do also have a higher weighting towards catering only contracts, particularly with some of the new players that have moved into Canada. Again, you know, there's lower investment involved there, so it's very good work for us. But I'd say on a margin basis, we should blend kind of between that 25 and 30% in this quarter. Activity is exceedingly good, we expect it to be a record winter for us overall.

This the last question, acquisition opportunities, is there -- you've got a lot of spending capacity here. What's the landscape out there with respect to M and A opportunities for you?

We obviously were very busy in the fourth quarter and early first quarter, as Doug mentioned, we closed a series of acquisitions, about 35 million in January. We have, I'd say, a couple of good prospects both in the states and in Canada. But after that, we need to re-build our portfolio of things that we're looking at.

It takes a lot of dedicated effort, as you know, to do a series of a lot of small acquisitions as we've done. But I think they are still there. We had a pretty good hit rate in the fourth quarter and early this year, and we've kind of drained some of that. I think it's just a matter of us needing to re-build a portfolio of opportunities rather than them being gone.

Okay. Thanks.

Our next question comes from Neil McCaddy with Morgan Keegan.

Good morning. Doug, and Cindy, I had a question about the tubular business with a couple of things first, is on the inventory, you said 58% was committed to customer orders. I was just curious what that level was, say, last year at this time?

I think it was about the same number, in the 60% range.

We probably range anywhere from -- the very high end might be high 60s on a percentage basis. A lot of that is timing of award of program work, Neil.

Okay.

A lot of the initial program work will either come, kind of, in December or January, depending on operators and when they get their budgets finalized. They typically let that program work for the first six months of the year, then they will come back in the summertime, and they will redo the last six months of the year. So our backlog position which we spoke to earlier will vary -- we call it apparent backlog, it's obviously cancelable. But it's our visibility of work, our backlog is a good indicator. And this inventory committed is largely dependent on the timing of those program works. On a total basis, we don't see too many unusual trends, I would say, at this time.

I think all the sequential data is very helpful, but I thought in that case, given the seasonality, I was focused more on the year over year. That's the reason I asked.

Right.

Second, then, with the surcharges that the mills are putting on, I mean, is it so uniform that you really don't have any choice, A? And then B, do the end customers also understand it's so uniform that hopefully they don't have any choice when you go to them?

It's always tough to pass increases on to the customers. That's always going to be a battle. But it's something that we'll see what happens, really, whether they will stick or not Sometimes they stick, sometimes they don't, we can pass them on.

Okay. But you're not having any luck. I mean, they are getting passed on to you? Though?

We're really a middle man, it's passed onto the end customer at the end of the day. We're not going to take risks for those surcharges, or certainly not attempt to in any way. I think key for us, that's another form of a price increase at the end of the day, which normally is a favorable thing for us, because we'll just have a margin on a higher base at the end of the day.

Right. Okay. Great. Thanks.

Thank you, Neil.

And we have a question from Will Foley with Sidoti & Company.

Good morning. I have one question relating to the Canadian remote site accommodation business. I think you guys referenced in your comments that you anticipate that business to be up year over year. Is that primarily just related to the stronger winter drilling season that you're anticipating in the first quarter, or are there other items that might carry over into the remaining quarters in '04?

I'll start with that, and if Doug has any follow-on comments, I ask him to chime in. It's a combination of things, as you might expect. Clearly, as the rig count suggests, of having one, a high activity level. As I mentioned, we had a good start with camps mobilizing in late December as opposed to early January. So all that is a favorable trend. Cold winter suggests it might last. We typically hope that the rigs stay on location until mid March. If anything goes beyond that, it's an exceedingly good year. So that kind of handles, I think, the drilling rigs.

But obviously with fuller utilization, we have pricing power, which is another added benefit that is largely, obviously, is first quarter related. However, despite that, there are also very positive developments occurring in the Oil Bends area, in that Fort McMurray area, which as you know, we participate heavily in. We have some dedicated camps that we manage that are owned by our customer base. We also have our own owned camp that we make available to a multitude of customers in the area.

There is an announced maybe 50 or $60 billion of long-term projects that stand in the next decade or so in that area. It's a good growth area. It also gives us some year-round type operations, as opposed to just seasonal type operations.

In addition to that, we have had a new contract that we've worked on in 2003 that we expect some benefit from in 2004, supporting military operations in the Middle East. But the combination of all those things has led us to a very robust outlook for that piece of our operation.

Okay. Thank you.

Our next question comes from Mary Safri from Carl H. Forsheimer & Company.

I have a question about offshore products. I'm wondering if the deep-shelf gas, if some of the wells that are drilling now come through, like the shark or something. How much of an impact would that have on you, if the deep water you don't have too much visibility? Can you benefit from --

Our offshore products group is primarily in the ultra-deep-water, not the shelf deep gas. What we're driven by is drilling and water depths primarily below 1500 feet of water. In the big fields we've been servicing are in the 3,000 to 7,000 feet. This the principal area that would impact us.

Okay. So it wouldn't really do too much for you.

We'll get benefit, but it wouldn't be as significant --

Exactly.

As the deepwater type.

Could I just ask you also, what do you anticipate your tax rate to be in '04?

We're still looking at a 33% rate right now. I talked to my tax folks. We had modestly lowered our rate in Q3, and felt like we might have a further reduction.

That was just an anomaly?

Again, if you recall my comments, it was related to statutory rate reductions in Canada. We don't foresee additional rate reductions. That had an impact on our deferred tax balance. And also some state tax planning that we had done, effective rate reductions in the states. So those are kind of black and white kind of changes to tax rate. Any further reduction from our projected 33% tax rate would likely come because of the mix of our international versus -- the typical types of changes. So at this time we're staying with the 33% rate. But of course, with our NOL position, that can vary quarter to quarter. We'll just update you as any new information comes available.

Okay. Thanks very much.

Thanks, Mary.

Our next question comes from Terry Darling, from Goldman Sachs.

Good morning

Good morning, Terry.

I wanted to follow up on the rental tool segment in the quarter, and try to understand to what extent was there any impact from acquisitions that was not there previously and then the number I'm looking at is the implied, you know, pricing levels there. Are we seeing pressure there, or is there a mix impact on that?

I'll start, and I'm going to ask Doug to help me out here. We had a very weak October and November in the rental tool division, kind of across the board. Largely weak Gulf of Mexico activity, but even a little bit of a pause in some land-based activity December was a better month, and January has been even better than that. So we've seen some recovery.

Throughout the year, that segment has actually experienced pricing pressure. And here again, you've got a lot of large independents that had a lot of power in the marketplace. We didn't have the offshore work that we had hoped for, which led to underutilization of assets. It really wasn't a very good environment, certainly not a great environment, for that piece of our business.

We have seen it improving, both in December and January, and if you get any improvement in the Gulf of Mexico activity, you'll have a pretty dramatic impact on that segment, because the weighting is toward higher margin work to start with, obviously if you can get better utilization of equipment, we would hope to return some amount of pricing power to us.

You talked about acquisitions. Again, we closed, during the fourth quarter, only about 15, 15.7 million, I think, in terms of value acquisitions. About maybe half or slightly more than half were in that rental tool division. And that was closed in I think late November. So that acquisition really didn't have, for that segment, that much of an impact during the quarter. We'll have a greater impact from that acquisition plus the acquisitions that we did in January on our 2004 results.

And Terry, as you indicated, on a sequential basis, the rental tool business was basically flat from the third to the fourth quarter. This was despite, as Cindy pointed out, extremely weak October and especially November with a major recovery in December.

Given a lot of moving pieces on the acquisition side, can you tell us, you know, in terms of ranges, to be looking for for the first quarter, if we load in the acquisitions, and we assume that the January improvement is representative of what we're going to see over the balance of the quarter. Should the revenue run rate bump up into the 14 or 15 million range?

Yes, right on.

Okay. And then, you know, obviously there are a lot of moving pieces on a margin side as well. Is there anything about the acquisitions that were made, you know, that would suggest the margins should be different from what has historically been the levels there, excluding any of the pricing and mix issues as you just talked about with regards to the results for Q4.

Q4 margins, Q3 and Q4 were reasonably good margins. We're looking for those to gradually escalate up. Mix does help us a little bit, because these are more oriented towards offshore operations, which normally is higher. And you say, well, offshore operations is weak. I agree with you. We paid multiples off historical earnings, and under the presumption that our forward earnings would envision a flat Gulf of Mexico environment. If it just performs at status quo, we should get some average margin lift because of the mix of products that they have, if that makes sense. If we get activity increases, then we do even better.

Okay. Shifting to offshore products, was the charge non-cash, or was it cash, or was there a mix there?

In offshore products? I mean, it's cash. Basically, in particular, excuse me, the lifting and mooring equipment has pretty much break even margins on three projects, compared to bid margins in the 20% range or thereabouts. It's just lost opportunity but clearly cash. As it relates to the integration cost, of course. That was largely the acquisition we made. We bought equipment and had to re-locate that into our existing facilities, get it setup and to start up operations here in the first quarter.

So those are moving type and setup type costs, again, purely cash. The facility consolidation, here again, was largely moving and setup type costs.

Okay. And I guess it's just not clear to me, exactly what beyond the facility consolidation, what else has been done to restructure the business. Can you get into some detail there a little bit for us? And might there be additional charges as we progress for 2004?

Well, you know, we've done several acquisitions over the last year and a half in the offshore products group. What we've done, as we indicated, is we consolidated our two manufacturing operations here in Houston, we consolidated those in the last half of last year. In addition, we had two manufacturing facilities in Houma, Louisiana. All during the year, last year, we've been working to consolidate those, and will continue to do so. We don't see any restructuring or consolidation charges in 2004.

So --

We are constantly working on our organization and our cost structure to improve results, but we don't see any charges.

Okay. At this point, you know, Doug, just trying to get a sense for your level of confidence that you've got, you know, you've got any cost issues largely behind you at this point.

You know, we don't feel that we have any structural problems with costs that we need to address, other than these continuing programs to consolidate these facilities. The major impact on our offshore products group is the volume of activity we have, the amount of offshore development, and the type of development we have. Obviously the major projects, like the Thunder Horse, Mardi Gras, Magnolia, Marco Polo, things like this, have a major impact on our company. The more of those, the better off we'll be, because we generally participate in all those major projects.

Great. And lastly, review with us in a little more detail the capital spending program for '04, in terms of which business segments are getting the focus there.

Right now we haven't completely finalized our CapEx budget for '04. We're still addressing some extensionary projects. We're kind of in the range of about $35 million of expected total spending. And the majority of that, as you've seen in the past, will be weighted towards well site services and offshore products. I'd say that probably envisions somewhere in the neighborhood of $7 million of expansionary projects, some of which is in our offshore products division. So we want to carefully evaluate the longer-term market as you talk about, and be sure that capital spending is warranted.

But I will say in addition to what Doug has said, we talk about what other kind of cost saving measures have we done in the past, part of our capital spending has been machinery upgrades over the last couple of years as well, which should lead towards increased productivity and efficiency. So it's been a combination of facility consolidations, but also equipment upgrades that we've done on a fairly routine basis that's taken the company public. We are evaluating a few more this year. But that's pretty much where we look to be. Of course, we'll give you a more clear update on our capital spending at the end of the first quarter.

Okay. That makes good sense. And then, lastly just where we see depreciation in '04 up a little bit, I would presume.

Right.

29 million, something in that range.

I'm sorry, what did you say, Terry?

29 million, something in that range, or a little bit higher?

It's probably slightly more than that. We've got a combination of the acquisitions that we completed in January, of course. Then we're going to have to pick up DD&A on the expected capital expenditures. You're running at probably seven-two, at Q4 is what it looks like. You can escalate that to somewhere in the high sevens to eight range for the initial --

For Q1. Okay. Very good. Thanks so much.

We have a question from Allan Brooks, with CIBC World Markets.

Good morning.

Hi, Allan.

Two quick questions. One is on the cost of your bank debt.

Yeah, we actually -- we got what I think is a good renewal, particularly, to get a four-year facility in place. It's flexible based on our performance as it was in the past. We're currently borrowing at LIBOR plus two. That looks like it will go down about 25 basis points, based on our EBITDA generation. But in kind of order of magnitude it's LIBOR plus two, LIBOR is about 1.1 right now, just to give you a feel.

All right.

And tack on to that the noncash amortization of debt issuance cost, which you traditionally have. And if I recall, it's about $750,000, I think, a year.

Okay. Thank you. The second is the province of British Columbia is working very hard to spread drilling out over 12 months. And I'm wondering, one, whether you're providing many camps in that area. And secondly, just conceptually, if more of the industry does go to 12 months drilling in Canada, what that does to the accommodations business?

We do some. We have some facilities that we utilize in British Columbia. It's not a majority, by any means. Obviously it would have an impact on us. The more non-winter drilling we have that we can actually do, will benefit our activity. The problem is that, you know, most of those locations are such that they -- because of the environment there, the tundra, that you can't drill in the summertime. So you're going to have to develop means to get in and out of those locations with either roads or mats or some other matter. But it would benefit us, but not to a significant degree.

Okay. Thank you.

And we have a follow-up from Bill Herbert from Simmons & Company International.

Bill?

Hello? Hello?

Our next question comes from Stephen [Gingaro], with Jefferies.

Good morning, Doug and Cindy. Can you follow up and maybe add some more details on the offshore product side. If you looked at the lifting and moorings business and you sort of normalized it, could you give us a sense for what the margins would have looked like, and sort of where we can look at this, on a going forward basis?

As I recall, Stephen, you know, I'm always reticent to say what normal margins are in any product line. If we had achieved bid margins, which were more around kind of the 22% range, 20, 22% range as I recall, we probably would have had EBITDA , additional EBITDA of 1.8 million. So it had a fairly significant impact on the total company basis, not just a segmental basis overall. I haven't backed into what 1.8 million would have meant to our margins. But intuitively that sounds somewhere around 2 1/2, 3%.

Okay. That's helpful. And can you add any commentary on the comfort level that the issues are behind you.

Well, I think that we manage our projects fairly well. I think everybody that does major fabrication work is at risk for some of your projects being break even or nonprofitable. Fortunately for us, the size of our projects and the quality of people we have, I don't think we get significant negative surprises like some companies have, that could really just destroy a segment or destroy a quarter. We really don't have that.

We're talking about a series of three projects that are largely winches and kind of drilling equipment related. Here again, we made on those three kind of break-even results, we didn't incur dramatic losses, we just didn't make our bid margins. I'd like to say that that never happens, but it can, depending on project execution. And so many times we're relying on third-party suppliers, that, you know, issues can occur. I'm not going to be one in a position to say it will never reoccur. I just think that we do a good job of assessing project risks before we accept them, so if you were to have a blip it should not be too terribly traumatic.

Very good. Thank you.

And we have no further questions at this time.

Well, thank you very much for joining us. We'll look forward to talking to you at the next conference call. Thank you.

Thanks.

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude your presentation, and you may now disconnect.