Oil States International Inc (OIS) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Oil States First Quarter 2004 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 presentation. If at any time during the call, you require assistance, please press "*" followed by "0" and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's call, Mr. Bradley Dodson. Please proceed sir.

Thank you. Welcome to Oil States' first quarter 2004 earnings conference call. Our 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 our listeners regarding forward-looking statements. To the extent, our 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 other SEC filings. Now, I'll turn it over to Doug.

Thank you Bradley and good morning and thank you for joining us. We are pleased to announce that Oil States International completed the fourth quarter of 2004 with strong operating and financial results in our Well Site and Tubular Services segments, led by continuing strength in our Canadian operations, North American land drilling activity, and the impact of acquisitions during 2003 and 2004. These results were reduced in part due to weak activity in our Offshore Products segment. Our Offshore Products segment was down sequentially and year-over-year due primarily to low levels of activity created by timing delays in major projects construction. These low activity levels resulted in a lack of cost absorption in several of our product lines. However, we are optimistic that these low levels are temporary due to the fact that our backlog increased 23% in the first quarter to 76.9 million.

Overall, our net income for the first quarter was 32 cents per share including a tax benefit recorded in the quarter compared to 27 cents recorded in the first quarter of 2003. The pricing environment for our Well Site Services and Tubular Services segments is beginning to improve. We are continuing to focus on our business plan and growth strategy and during the quarter we spend 8.9 million on capital expenditures and completed five small acquisitions for a cash consideration of 32.9 million. At this time I would like to turn the agenda over to Cindy Taylor to go through the financial results and then I will go through some operating highlights after that. Cindy.

Thank you, Doug. For the first quarter of 2004, we reported operating income of $19.1 million on revenues of 204.2 million. Our EBITDA for the quarter totaled 27.8 million. These results compared to 20.3 million of operating income on revenues of 185.6 million for the first quarter of 2003. The first quarter of 2003 EBITDA totaled 26.9 million for our comparison purposes. Our current quarter performance represents a 10% year-over-year increase in revenues and a 3.4% improvement in EBITDA. Sequentially, our revenues were up 3.5% and EBITDA was up 32.6%. Our net income totaled $16.2 million or 32 cents per diluted share for the first quarter of 2004. Our first quarter tax rate was reduced to 8.6% thereby positively impacting our earnings. This rate reduction resulted from a 5.4 million decrease in the allowance applied against our net operating losses.

We have now recognized the cumulative benefit of 44.2 million of our 63.2 million of available net operating loss carryforwards. This 8.6% effective rate in the quarter compares to previous guidance of 33%. Had our earnings been taxed at the higher 33% rate, we would have reported net income of roughly $11.8 million or 24 cents per diluted share. Our effective tax rate for the full year 2004 is now estimated at approximately 30% with a full tax rate of roughly 38%, estimated for Q2 through Q4 of this year.

On an operating level, as Doug mentioned, our first quarter results reflect the benefits of improved North American drilling activity and contributions from acquisitions that were completed in 2003 and early 2004, which yielded year-over-year growth in our Well Site Services EBITDA of $4.2 million or 21.7%. In addition, our Tubular Services segment did very well during the quarter due to the impact of increasing prices for oil country tubular goods as well as improved product demand. Our Tubular Services EBITDA was up $2.8 million or 227% year-over-year. This growth was offset by weak contributions from our Offshore Products segment where revenues and EBITDA were down 27.3% and 80.5% respectively on a year-over-year basis.

I'll just hit some highlights of our balance sheet. We continue to have a very strong position with debt-to-cap ratio of 27.1% at the end of the quarter. Our debt did increase modestly during the quarter due to 8.9 million of capital expenditures and net amounts paid for acquisitions of $32.9 million. In addition, our working capital increased roughly $15 million as it typically does in the first quarter largely due to seasonality of our Canadian operation. Our current cash borrowing rate remains at less than 3.5% and we have approximately 50 million of availability under our credit facility.

At this time, I am going to turn the discussion back over to Doug. He is going to hit some highlights of each of the business segments, and then we will close quickly with some thoughts as to the market outlook as we move forward through the balance of the year.

Thank you Cindy. What I'd like to do is go through our three business segments and focus on the sequential comparison to show you the actual growth in our operations. In our Well Site Services, revenues were 96.1 million, up 41.8% from the fourth quarter. Our EBITDA was 23.8 million, up 74% from the fourth quarter of 2003. Because of the seasonality, I'll give you a comparison with -- of the business in Canada, I'll give you a comparison with the first quarter of 2003. On a first quarter basis, our revenue in 2004 was up 22% over last year and our EBITDA was also up 22%.

The sequential improvement in revenues and EBITDA resulted primarily from our strength in our Canadian operations and contributions from the rental tool acquisitions completed in the last six months.

Comparisons were strong in Canada on a year-over-year basis due to the strong winter drilling season and contributions from an international catering and facility management contract. Revenue and EBITDA in Canada was up 21% over the first quarter of 2003.

Our rental tool showed significant increases in revenue and EBITDA largely due to the impact of acquisitions, while our workover operations improved despite continued weakness in the Gulf of Mexico and Venezuelan activity.

Our land drilling operations increased sequentially in both revenues and EBITDA and our daily cash margins for the quarter were $2,400 per day, this compares to $2,500 per day in the fourth quarter. The decline in the cash margin was primarily due to higher operating costs in Ohio, which had difficult operating conditions due to the winter weather. Our utilization in the first quarter for our drilling rate was 92% compared to 91% in the fourth quarter of 2003.

Looking at our Offshore Products business segment, revenues were 41.9 million, down 15.9 million from the first quarter of 2003. EBITDA was 1.5 million, down 5.3 million from the fourth quarter. Our EBITDA margins declined year-over-year in a sequential basis due to weak activity levels resulting from timing delays in major construction projects. To put it in perspective, our EBITDA margin in the first quarter is 3.5%, that margin for the full year 2003 was 15.4, 2002 it was 17.6, and 2001 a weak year it was 10.2.

The margin reductions occurred in most product lines due to lower cost absorption resulting from these activity reductions. Our backlog of 76.9 million was approximately – went up 23% from the 62.6 million at December 31 and down 4 million from the 80.9 million one year ago.

Looking at our Tubular Services business segment. Revenues, we had a strong performance in the first quarter. However, revenues were 66.2 million, down from the 71.7 in the fourth quarter of 2003. We had some unusual sales in the fourth quarter. Our EBITDA for the first quarter was 4 million compared to 2.1 million in the fourth quarter and 1.2 million a year ago and our gross margins in the first quarter were 8.9% compared to 5.6% in the 2003 fourth quarter. And our EBITDA margin was 6% compared to 3% in the fourth quarter. Our inventory at the end of the quarter was 59.3, down from the 64.5 inventory level at the end of the fourth quarter and the tons shipped during the quarter was 67,300 compared to 81,700 in the fourth quarter and 56,600 in the first quarter of 2003. Year-over-year improvements in volumes and gross margins were due to improved demand and the impact of OCTG price increases. Sequential revenue decrease was again due to this large order that we had in the fourth quarter of 2003.

Our order book strengthened significantly during the quarter due to both program awards and spot market orders. Our order book at the end of the first quarter was 70.7 million. That compares to 59.3 million one year ago and 61.8 at December 31. Again our inventory declined by 5.3 million during the quarter due to strong sales and tight OCTG supplies.

Our purchase prices increased during the quarter due to mill price increases and surcharges, our average purchase price -- average cost of our inventory was $886 a ton at March 31 and that compares to $844 a ton at December 31, reflecting a 5% increase in the cost of our inventory for this period of time. We are currently holding 2 to 3 months of the inventory based upon current sales levels. Approximately 75% of our current inventory is committed to customer orders at the end of the quarter. Industry inventories increased during the first quarter with mill shipments outstripping consumption; however, we still believe there are approximately 4.6 months supply on the ground.

In looking at the balance of 2004, again the key drivers for our company will be North American natural gas drilling activity and deepwater infrastructure development. About 85% of our revenues are attributable to North America.

Looking at Well Site Services, Canadian drilling activity was very strong during the first quarter. And we are now experiencing the normal seasonal decline during the spring breakup activity. Canadian activity in the oil sand development is also extremely promising given planned construction activity in that area, we hope to participate in the growth of that activity. Land drilling utilization is strong and should continue through 2004. Backlog visibility remains strong in both Texas and Ohio with commitments into the third quarter 2004 and again we are beginning to also see some ability to increase our pricing. Rental tool contribution should increase significantly year-over-year due to acquisitions completed, the increase in the rig count, and improvements in the capacity of our equipment.

Our workover business experienced weak demand in the Gulf of Mexico and Venezuela during the first quarter. We are now experiencing some improvements in both of these markets. In addition, we will continue to do capital expenditures in these segments to grow our business in addition to acquisitions.

In Offshore Products, we are coming off record years in 2002 and 2003. Again first quarter EBITDA margins were negatively impact by the weak activity level causing reduced cost absorption in several business lines; however, our backlog position has strengthened up 23% from December 31.

We believe that the first quarter represents the trough in our operating results for 2004. We have been and are continuing to implement various cost reduction initiatives in our home at Louisiana -- in our Houston, Texas operations.

Our outlook for 2004 continues to suggest that revenue will be down by approximately 10 to 15% over -- from 2003; however, EBITDA margins are estimated at -- and EBITDA margins are estimated at about 10% for the full year giving effect to the first quarter weak contributions.

The year 2005 continues to look very promising. In Tubular Services, improvement in rig count continues to be focused towards shallow land drilling activity requiring more carbon grade pipe. Prices increased during the quarter as mills implemented price increases in surcharge. OCTG inventories increased during the quarter, but are still at low levels. We expect to continue to realize improved revenues during 2004 with an increase in activity and with a realized -- realization of price increases.

Our margins should be strong in the second quarter of 2004 -- but I expect it to normalize in the second half of 2004. On a consolidated basis, we expect continued improvement in activity in Tubular Services and Well Site Services led by land drilling activity and rental tool acquisitions recently completed. We expect year-over-year improvement through contributions from Canadian operations given our expanded activity in the oil sands area and our Offshore Products will be down year-over-year, which should improve from the first quarter results.

I would like to provide a little guidance for the quarter and the year. Annual consensus EBITDA projections from the street are consistent with our expectations. Our DD&A totaled 8.6 million for the current quarter. We are projecting that to increase to approximately 9 million per quarter given our capital spending plans. Our tax rate was 8.6% for the current quarter. We expect to be fully taxed at an estimated 38% rate in quarters 2, 3, and 4, bringing the annual effective rate to approximately 30%. Our estimate for the second quarter is a range of 17 to 19 cents per share consistent with street expectations. The range of full year consensus EPS, earnings per share, estimates is also in line with our expectations. We'd be pleased 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 "*" followed by "1" on your touchtone telephone. If your question has been answered or you wish to withdraw your registration, then press "*" "2". Questions will be taken in the order they are received. Once again "*" "1" for any questions at this time. One moment, please. Sir, our first question is from Asif Pathan (ph.) with Goldman Sachs.

Good morning.

Good morning.

I am just following up on a couple of little items here in understanding the trend in the tubular business. Could you talk about profitability say in March compared to how profits were in January?

Well, obviously, what we saw was an increase in prices and an increase in margins because of the strong demand and the higher prices from the mills. We are -- we believe that the actual price increases that were passed -- were proposed and some of them passed through amounted to about 15 to 25% in the first quarter.In terms of price increases, as you saw, our inventory increased only by about 5 to 6% our prices, average prices. This is due to the fact that these price increases take a time to roll through into the actual inventories and sales.

Yeah, and I guess, maybe, to tag on to that [Asif], I mean, as you know most of the mills, particularly, the ERW mills initiated price increases, but the most significant ones did hit later in the quarter, which I think is what you’re asking. The announced ones were, kind of, in the $20 to $42 a ton in January. They increased to, maybe, a 100 to 125 a ton by March. So, I think your point is, you know, the progression of the increase and the impact that had on us during the quarter, which clearly -- and that tagged into what Doug has said, as well, we had increasing revenues and increasing margins as we headed through later in the quarter.

Okay. And, any sense of, say, the average selling price of OCTG, what it looks like in May compared to April?

Now, you know, every mill has a little different mix in terms of of what they're looking at, but we've kind of reviewed that with our business people actually within the last few days. And as Doug mentioned, there's probably a range of anywhere to 15 to 20% of an increase that is effect kind of end of March, early April timeframe, which is what you're talking about. Most of the mills have indicated there will be further increases, but because of the lot -- lag time, those are likely to hit more in the June timeframe.

You know, and just evaluating that, you know if these increases are passed through, we think, let’s say, in the end of the second quarter, third quarter that the prices would be up maybe 25 to 40% for tubular goods from year end. And again, these price increases are based upon shipments in June and July and things like that. So, they are really pushed out for the actual consumer.

Okay. And given this environment, Doug, what's your inventory strategy in second quarter?

Well. Right now, as there is a tightness in supply and we are taking as much inventory as we can get.

Okay. And just on well side, in terms of guidance, how much does Canada come down sequentially, 30%, 40%?

We'll kind of calculate that. Historically it has been in the 40% to kind of 50% ranges on revenues. I've got to kind of pull out some numbers, but typically it has been roughly, I would say 45 to 50%. And I don't foresee any change here in terms of order of magnitude going into normal breakup as we payout. However, on the more positive note, you know, clearly our first quarter was significantly improved year-over-year to first quarter last year. Our outlook is that every quarter this year will be better on a year-over-year basis, in terms of both revenues and EBITDA; actually progress through the year. So, on an absolute basis, I'm thinking that the relationships are similar, you would just get a much higher base in each and every quarter.

Great. Okay. And final question on the Offshore Products. The backlog was up nice, but could you talk about the mix, what's going into the backlog; and also what your expectations from margins are for the second quarter? You gave a full year guidance.

I can kind of speak to that, and I'll ask Doug to kind of tag in, Asif. You probably haven't followed us as closely during the last year, when we announced really, I guess, every quarter since the first quarter result that we were progressively having a weakening of our backlog position; both in terms of absolute numbers and mix throughout the year. We believe and continue to believe that was really timing delay. There's no permanent trend in the marketplace that suggests that there's a negative there, and clearly the build in our backlog is confirming of that. And what I mean by that, we just had such a wealth of activity that ramped up in '02 and benefited us in '03 largely with premier projects; [Narrow Horn], West Seno, [Kasamba], the Mardi Gras project. And we kind of had a lull now, as we migrate towards additional projects, but right now I'd say our mix is flattish to where it was in the fourth quarter but improving, and that one of the major new projects specifically Unocal's West Seno is moving forward, just moving forward at a little bit delayed basis from what we had hoped last year at [inaudible] projects are examples of ones that we have now booked into our backlog, so the quality is beginning to improve. There is also a lot of significant potential projects out there that we have high expectations for participating in.

Thanks. That's very helpful.

And our next question comes from Bill Herbert with Simmons and Company.

Thanks. Good morning.

Good morning Bill.

Hi Bill.

Cindy. Walk me through what's going on with the tax rates here, because if we are going to ask for --?

I'm glad you asked her to do that.

Yeah. I will do that. What we've had since going public obviously is a fairly low tax rate. There was a wealth of NOLs out there available to us. But the literature required a number of things one of which is a demonstrated trend in creating U.S. taxable income before you can benefit those. And as we have matured as a public company, we've been able to pretty much, as we create taxable income recognize the benefit and so it's been a smoother tax rate. There comes a point in time, where we had consistent generation of profitable earnings, U.S. taxable income that suggest its time to recognize that benefit.

And what we did essentially in the first quarter is take that full -- we didn't take all of NOLs but a large majority if you will, and the benefit. We took a one-time rate reduction to benefit those, because we feel very comfortable that those NOLs will be realized for profitable operations going forward. You know, as we said we expected the rate to be 33% it's still going to be right at 30% for the year. There has just been an acceleration of the recognition of those NOLs which is required by the literature that's kind of the short story on it.

And Bill I just might add you know, I always spend a lot of time going through this. But this wasn’t an arbitrary decision [inaudible] based upon the facts and circumstances, as they were at the end of the first quarter.

Sure and the --.

Then of course in the second same [bar] you've seen our tax rate in previous years has jumped about over the place, and are obviously that some of that was due to the NOLs that were taken and now we'll have a more predictable tax rate.

Okay. Now you mentioned the remaining NOLs but I miss that, what was the number?

I got it let me glance through my press release, there were total available NOLs of 63.2 million at the end of the year, through the end of the first quarter, with this reduction we recognized the benefit of 44.2 so there is roughly 19 or 20 whatever the spread there is available to us in future years. So, yes we will likely have some little favorable rates off and on but they won't be as dramatic as what we've seen in the past. But the positive news stepping through all that is, we've got a good shield to our earnings in the United States going forward, and we're just recognizing if there is an asset there that needs to be reflected on our books.

Okay. Great. Thank you. And then the second question, I'm sure you covered this in the press releases at the time but again I didn't catch it. The acquisition that you consummated, I think you consummated eight of them in the quarter?

There was actually five that were closed January 2. I think there was maybe three in fourth quarter. If you come up with the number of eight or thereabout, let’s say in the last six or eight months. Then --.

Fine, so there is nothing really new on that front?

Not, not since January. We did have -- not since January.

Okay. And then the next question is with respect to the gross margins that sooner obliviously a dramatic uptick for reasons expressed. How sustainable do you think the close to 9% margins are?

We tried to give you some guidance on that. We think that our margin will be strong in the second quarter. I think we'll experience strong margins in the second quarter. We've some weakness as a reduction in pricing estimates and price forecasts, and so we're expecting normalized rates in the last half of the year.

Normalized meaning, what like 6%?

Yes.

Okay. And finally pricing, with respect to the rental tool operation, what kind of pricing are we seeing there if any?

Where are we, I guess the most immediate one of course is the land drilling operations, which we tend to follow some of the larger companies. And I know you have seen increases coming from there, but I'd say those increases will be in the 5 to 7% range and will hit us in kind of Q3, Q4 and as you know, we tend to carry a fairly expensive “backlog” or commitment such that we won't have an ability to raise prices to any degree in Q2, but in the latter half we clearly would have an ability.

To put it in perspective, you know, our margins -- cash margins declined slightly to $2400 per day from 2500 in the first quarter.

Yeah.

In the fourth quarter, our revenues actually went up on a per day basis as you saw to $7,900 a day from I think $7,600 a day. We had higher cost primarily in Ohio that reduced our margins. Looking forward our margins at $2400 a day compares to the peak margin we had in 2001 of approximately $3,400 per day per rig. And what we will do is, we will be riding under the umbrella of the larger drilling contractors as they realize higher day rates, we will, obviously, be pushing our day rates to increase also. And again, at the full rate that we grabbed actually, it will realize during the peak rig count of 2001 was about $34,000 a day.

Okay. And I do have one last question, I am sorry. Doug, if I understood you correctly, you mentioned appropos guidance and estimates for 2004, that you were comfortable with the range of estimates for 2004?

That's correct.

Okay. That's a fairly wide range. We are talking to kind of low 80 cents to about a $1.15; can you narrow that for me?

I guess, we saw -- I thought our range was like 86 to 96, Bill, on a current basis.

And so, you're -- So, you are comfortable with mid 80s to 90s?

In the range. Yes.

Okay. Great. Thanks a lot.

And again, Bill that's taking into consideration, the new tax rate and the depreciation, and some people , they have been off on our depreciation.

Yeah. I certainly was. Thanks.

Our next question comes from Stephen Gengaro with Jefferies and Company.

Thank you. Good morning, everybody. Just to follow-up quickly on that last question, did -- that the range is that off of the 33 cents first quarter?

Yes. Yes.

Okay.

And so, it's reflective of the 30% effective tax rate. What we are saying, we are comfortably in that range with all of our -- our estimates are comfortably within that range.

Okay. That's helpful. Just a follow-up on the tubular side. Have you -- do you have concerns, as far as your inventory build or your willingness to buy what you can get your hands on. What are you just hearing from your customers as far as willingness to pay the higher price and are you getting commitments as you take on the inventory or is there a shot you are going to be left with some expensive type on your hands?

Stephen, as we pointed out, our average price of inventory has only gone up 5% during the last quarter. We are seeing strong demand out there for OCTG. And we believe that the market is accepting these prices right now. We do not think that we'll be in a situation where we will have any inventory exposure on the downside.

Yeah. And I will just tag on to that a couple of comments there. Number one, our inventory was down roughly 5 million from the end of the year, that was not our preference, that was simply because the OCTG supplies were so tight. I'll also kind of point out and have you recall from our notes on the conference call that we had a substantial build in our bookings that has occurred. And so, you had a little bit of a disconnect there, obviously, big build in your bookings, but you had a reduction in your inventory because of tightness of supply. Our customers have been and continue to be concerned about getting supply period. And they have been paying the prices. Now we are very cognizant that, you know, in a rising price environment, you got to be careful about how much you hold. Clearly, and I'll also point out too our committed inventory increased from being 58% committed at the end of the fourth quarter and now at 75%. Those are all indicators of the strength of the market right now that we're witnessing. And that we expect to see continued tight supplies in the near term, such that Doug comment is, right now our bookings are outstripping our ability to "build that inventory." But in doing so, we will be very careful in terms of taking too much price risk down the road, if we feel like this market is flattening out.

And then I realized that the average price, so far, hasn't gone up, but recent pricing is higher are you concerned or what do you -- can you give us a sense for the impact on working capital needs?

Again, you know, right now, we are working capital targeted because we have a reduction in our inventory. And again, with the tight situation, we are one of the bigger suppliers and we are getting mill allocations, but we are not seeing it, and we are not projecting a substantial build in that inventory. We are just trying to get enough to supply our customer's needs right now. And I don't see that changing to too great a degree on our current run rate of business. Now, if demand increases substantially through new customers or through just increased activity then yeah, you know, we would have to build some inventory.

Obviously, if you look at it -- that the amount of available inventory we have has actually -- is uncommitted, it has decreased, because our inventory is down and the percentage of committed has gone up, so we have less exposure actually right now than we did at year end. And going forward, you know, we would like -- we would actually if we had more available we would take more inventory, because we know we can sell it. And we have seen that by the fact that our order book has increased from 61.8 million to 70.7 million during the quarter. And in that we are still seeing strong demand and a build in that order book.

Okay. Great. Thank you. And then just one final question on the Offshore Products side you had a strong build in your backlog sequentially. Beyond that, can you give us a sense for what you're seeing now, as far as inquiry levels or any anecdotes, which sort of point toward a continuing of that trend?

Well, I mean we obviously have had strong quoting and inquiry levels as well that goes along really, when you have a backlog build, it tends to be that type of market environment generally. We track our major offshore project, and create an activity report that shows the status of all the major projects. And that has also shown a build and a positive trend, consistent with the buildin our inventory and that's why we feel, and continue to believe that the near term is improving and that 2005 should be a strong year. And again ours are -- its tracked by project and potential sanction on that project, the timing of -- you know, that come in to order as well as our probability of winning it on the various elements that we provide to the market. And that is the kind of an intangible suggestive thing, but it is a more comfortable feeling than what I had in the fourth quarter.

Stephen, I think the fundamentals for deepwater have not weakened maybe has strengthened in the last 3 to 6 months in the sense that you know, we have these higher oil prices. We got this problems in other international areas that -- and the reserve revisions by some of the major oil companies, because they're going to continue to have new deepwater developments. What we experienced was we had a high level of activity in major production facilities TLPs and SPARs in 2002 and 2003, which is the construction period -- some of these are now being installed. We have what we believe we have a lull now in some of these major developments, but the overall activity level is strong and we think will build again in major developments in the deepwater arena.

Very good. Thank you.

And we have a question from Victor Marchon with RBC Capital Markets.

Thank you. Good morning everyone. The first question I have was just on the Tubular Services again here. I am just trying to get a sense, have you guys gotten any indication from any of your customers, who are able to get supply are they taking on any more than what they currently need for their near-term drilling plants where they could be holding on to some inventory themselves, instead of seeing at the distributor level? You know, due to the fact that they are concerned about getting additional supplies over the next month or so?

You know, there might be a little bit of that, but as we said we do believe that -- you know, we track this based on independent reports like everybody else and we did say that we thought there was a build in industry inventory. We are one of the largest distributors. We didn't get that build, so that suggests that maybe the customers are holding a little more. However the overall level of industry inventory is still very low and we use the OCTG situation report they estimate that to be about 4.6 months of supply, which is in the low end of, kind of, recent history in terms of industry supply. So, I guess on a side note, yes, I think there maybe modest build there but traditionally in the United States our customers don’t hold inventory, but they might be buying just to be sure that the next month or so is covered.

Okay. And just regarding our margins in the second half of this year, I believe Doug had mentioned that driving somewhat normalized margins in the second half of the year is driven by -- are prices coming down? I just wondered first if I heard that correctly and secondly what's that driving that assumption?

Well you heard it correctly. And what we've seen is, that there are reductions in some of the prices and surcharges on the tubular goods and, so we think that conservatively we don't think we can expect to sustain these high margins in the second half. And we do think the second quarter will experience high margins, as we did in the first quarter, but it's hard to predict what's going to happen in the second half of the year with respect to the pricing.

And maybe I can tag on to that. What benefits us is kind of two-fold. The first of all, if you carry a low-cost inventory in a rising price environment, we get margin expansion, as you sell at those higher prices. We also get kind of our normal margins on a higher base. In other words, instead of 800 at a time possibly $1000 a time, which benefits our EBITDA margins since we have a fairly fixed cost structure. Now I guess what we're saying is our inventory value only increased about 5% despite the fact that today we believe story being announced, you know, the mill announcement we track -- we follow them as well as obviously they are our supplier, but their prices are up today anywhere from probably 15 to 25% depending upon which mill it is. So we've got you know and there is some built in profit in our existing inventory that flows to our benefit in the second quarter. We believe that we've seen a flattening of that price environment and we know -- we're not carrying as much inventory as we would like, so if that role could assist them in the second quarter then you're at normal margins, albeit, at normal margins applied to a higher per ton level that benefits our revenue and therefore it benefits our EBITDA margin.

Okay. Thank you. The only other question I have was just on Well Site Services. You had mentioned the opportunities that could be happening regarding the oil sands and I just wanted to see if you can give can some gauge on timing and to what extent it could impact you guys?

Well, there are several major construction projects up in the oil sands area. These projects will require additional accommodations and catering services for the workers up there. We think that we will -- we can, we'll see some of the impact of that in the latter part of the second quarter and it will impact the third and fourth quarters of this year and again we're, we will we feel fairly confident that that will happen. In addition to that we are bidding on several other major projects that would benefit us primarily in later periods.

So that's starting up later part in the second -- in the latter part of the second quarter that we'll be able to offset some of the sequential decline typically seen in the second quarter with Well Site Services due to Canada or is it just so late in the quarter it really won't have a material impact?

We don't think it will have a material impact in the second quarter.

Okay, great thank you very much.

You have a follow up questions from Stephen Gengaro.

Thank you, two more quick items please. The first is could you -- are you willing to share with us on the first quarter Well Site Services what percentage of that roughly was Canada?

Yeah, we'll grab that. You know we do have that press release supplement in the back but it does combine a kind of a small component of our Gulf of Mexico accommodations business. Bradley is going to do a quick calculation. Historically that Gulf of Mexico contribution has kind of been 20% of the accommodations paid but I am going to let him just give you the actual numbers.

In the first quarter the Gulf Coast, Gulf of Mexico accommodation business had a very poor quarter due to the low activity levels in the Gulf, and so they were down from the prior year whereas we had a nice increase out in Canada during that period of time.

Okay.

For the first quarter, Canada Well Site Services revenues were 62%.

Okay. That's very helpful, thank you. And then just as a follow-up. You mentioned again back to tubulars, but the second quarter, can you give us a -- an expected range of margin to look for? I mean it sounds like it's going to be up sequentially before sort of flattening?

What was that and which segment?

On the Tubular Services?

I am sorry, what we had kind of 8.9% margins in Q1 on average, we do expect to see an enhancement to that in Q2. You know, we don't know what it is, but let's say it's in the 10% range.

Okay. Very good. Thank you.

And we have no further questions at this time.

Well thank you very much for joining us and good afternoon.

Thanks everybody.

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